Is selective distribution an effective strategy against grey goods?

1 Mar 2022 , 4:04am

Andrew Maxwell and Simon Barker, of Freeths, discuss the issue vis-a-vis the European Commission's investigation of Pierre Cardin's licensing and distribution practices

On 31 January 2022, the Commission announced the launch of a formal investigation into the licensing and distribution practices of Pierre Cardin and its trade mark licensee. This followed a dawn raid last June, conducted by the Commission, alongside the German competition authority, at the German premises of a company active in the sector of manufacturing and distribution of garments.

The Commission has now intimated that Pierre Cardin and its licensee Ahlers may have breached Article 101 of the Treaty on the Functioning of the European Union (TFEU) by restricting the ability of Pierre Cardin's licensees to sell Pierre Cardin-licensed products cross-border, as well as to specific customer groups. These restrictions allegedly affected offline and online sales of consumer goods such as garments, shoes, and accessories in the EU.

In short, the Commission is investigating whether Pierre Cardin and Ahlers have developed a strategy against parallel imports and sales to specific customer groups of Pierre Cardin-branded products by enforcing certain restrictions in the trade mark licensing agreements.

The problem of parallel imports / grey goods

Unlike counterfeits, grey goods are authentic goods diverted from official distribution channels and sold without the trade mark owner’s consent in a different country; usually because a price difference between countries means the goods can be sold at a lower price in the destination country.

Trade mark owners cannot object to the resale of goods in the EU or the UK (for now at least [1]) of goods first put on sale in the EU by the trade mark owner, or with its consent [2]. The trade mark rights are said to be ‘exhausted’ in those two situations. This can lead to significant loss of revenue. Luxury brands will be familiar with the impact of grey goods on brand value and perception too; particularly where goods are sold through the wrong channels, in the wrong packaging, destined for different markets, or they end up in the mass-market.  

Where goods leak from a distribution network, this can also result in complaints from distributors in affected countries; where grey goods undercut them or undermine their business. And so, there is an inherent motivation for brand owners to restrict distributors on where and how to sell goods, and the channels through which these goods can be sold.

Operating a selective distribution system (SDS) can assist in combatting grey goods, provided it complies with EU/UK competition law.

The significance of selective distribution

In an SDS, the brand owner can limit its distributor network by permitting only dealers who meet selective criteria and forbid them from reselling to anyone other than consumers or other authorised distributors who also meet the selective criteria. In the case of luxury brands, these might include having suitable premises, trained staff, or after-sale services.

However, as with EU-wide exhaustion of rights, the European Commission is at pains to maximise cross-border sales within Europe and minimise restrictions on parallel trade. This flows from its ‘single market objective’, and so competition law rules on selective distribution aim to avoid agreements that could disrupt cross-border competition within the EU (contrary to Article 101 TFEU).

Unlike exclusive distribution (where you may have one distributor for each territory; or splits for particular groups of customers), distributors are not allocated a protected territory (or customer group). Within the territory covered by the SDS, selective distribution may currently only be combined with exclusive distribution if dealers are not restricted from actively seeking to sell outside their allocated territories (or customer groups), and where cross-sales are permitted between authorised distributors (even if in different territories within the SDS).

Selective distribution may benefit from a ‘safe harbour’ from both EU (and still UK) competition law under the Vertical Agreements Block Exemption Regulation (VABER) provided the parties’ market shares are ≤30% and the agreements don’t contain certain ‘hardcore restrictions’, including:

  • resale price maintenance – broadly, restricting a distributor's freedom to set its resale price;
  • territorial or customer restrictions – with certain exceptions, restricting territories where, or customers to whom, a distributor may sell the contract goods or services; and
  • online sales restrictions – restricting online sales, including complete bans on a distributor having a website and/or selling online.

Dealers must generally be selected against qualitative criteria: e.g., a requirement to sell the goods in a specialised shop or in a self-contained department and requiring separate display in an attractive setting. A website must be allowed, but this can be subject to ‘overall equivalent’ quality criteria in respect of online sales.

While the VABER is due to be replaced in the EU from 1 June 2022 and, post-Brexit, the UK will simultaneously adopt its own Vertical Agreements Block Exemption Order (VABEO), the hardcore restrictions will broadly remain unchanged in both regimes, but it will become easier to combine selective and exclusive distribution even within the territory covered by the SDS.

Outside of the VABER/O (e.g. where market shares exceed 30%), a number of considerations apply in assessing whether an SDS complies with EU/UK competition law, including:

  • The nature of the goods means that such a system is a legitimate requirement (the principle of necessity). Commission decisions and European court judgments clarify that luxury goods, such as perfumes and high value cosmetics, fall within this category.
  • The requirements for admission to the SDS must be applied objectively and without discrimination (the principle of non-discrimination).
  • Restrictions on distributors must not be excessive in relation to the product, i.e. only what is essential to market and sell the product effectively (the principle of proportionality).

As the Pierre Cardin case demonstrates, luxury brands should take great care to avoid arrangements that breach EU/UK competition law or risk being investigated and sanctioned. Both the Commission and the CMA in the UK have the power to impose fines of up to 10% of global group turnover. Yet, appropriate arrangements, such as selective distribution, can assist in combatting grey goods. In addition, brand owners need to have appropriate systems for monitoring, tracking and enforcement.

This article was co-authored by Freeths LLP partners Simon Barker (Simon.Barker@freeths.co.uk), Head of IP & Media, and Andrew Maxwell (Andrew.Maxwell@freeths.co.uk), Head of Competition. 


[1] The UK Government consulted recently on the UK’s future exhaustion of intellectual property rights regime (https://www.gov.uk/government/consultations/uks-future-exhaustion-of-intellectual-property-rights-regime). A decision is awaited.

[2] Brand owners can assert their trade mark rights in respect of goods originating outside the EU.