Paradigm shift in distribution networks: freedom to approve now the rule, obligation to approve, the exception.

The 21 March 2018

Twenty years ago suppliers who refused to reinstate a terminated distributor still meeting the criteria for approval within their qualitative and/or quantitative selective distribution networks were almost always unsuccessful in the courts. Today, under French law, Rolex and other brands can win their cases and the courts even accept their prerogative to refuse to approve new candidates meeting the selection criteria within purely qualitative networks. This silent legal revolution reflects a major paradigm shift: the freedom to approve is now the rule, the obligation to approve, the exception.

In his 1962 book, The Structure of Scientific Revolutions (p. 175), Kuhn argues that for each era a dominant paradigm provides the conceptual frame of reference within which scientific disciplines progress, with the “flip” from one paradigm to the next coming about by means of a scientific revolution. Kuhn’s theory has been applied to the economic sciences (Saraceno, L’économie à l’épreuve des faits, 2017) with a view to explaining the conflict of macro-economic ideas and the move from the neoclassical paradigm to the Keynesian revolution, attacked by the neoclassic counter-revolution, and the new consensus itself under assault since the 2008 crisis. It is possible to apply Kuhn’s theorem to the law: new developments appear in case law which are incompatible with the dominant paradigm when it proves unable to explain the reality of positive law, thus upsetting established legal precepts. This is the scenario we have been experiencing over the last 20 years in relation to access to distribution networks.

I – The classic paradigm: the obligation to approve

  1. The Golden Age of the classic paradigm.

From the 1950s to the 1980s, a supplier could practically never refuse to integrate a candidate within its network if the selection criteria were met. The prohibition of refusals to sell and discriminatory practices between professionals provided rejected applicants with a formidable legal arsenal: refusing a candidate amounted to a refusal to sell or discrimination. In a qualitative selective network, any candidate fulfilling the selection criteria was accepted ipso facto. In an exclusive network, as soon as a concession became available, it had to be filled. A refusal could only be justified by misconduct (fault) in the earlier relationship by the candidate (Court of Cassation, commercial chamber, 28 Sept. 2010, LawLex101061; 19 Sept. 2006, LawLex061929) or failure to meet the selection criteria.

  1. The quantitative argument.

The classic model of the obligation to approve candidates started to be challenged in quantitative selection systems. The challenge first prevailed in the area of exclusive distribution, strongly marked by intuitus personae. Moving with great caution, the Court of Cassation eventually acknowledged a right to refuse approval and the freedom of choice of the exclusive dealer as long as suppliers respected the criteria they had themselves laid down (Court of Cassation, commercial chamber, 7 April 1998, LawLex025121). Later, in the area of qualitative and quantitative selective distribution, after much hesitation and debate, the courts finally accepted the possibility to refuse approval based on the numerus clausus defined by the supplier without any requirement to justify the legitimacy of such grounds, on condition that the criteria be “specified” (CJEU, Case C-158/11 Auto 24 SARL v Jaguar Land Rover France SAS, Judgment of 14 June 2012, LawLex20120000961JBJ). This new quantitative-based flexibility however did have the disadvantage of being limited to networks with market shares lower than the thresholds provided for in the block exemption regulations (40% or 30% market share depending on the case).

II – Reconsideration of the classic model: the freedom to approve becomes the general rule with limited exceptions

  1. The liberal revolution.

The liberal revolution came about progressively to repeal the foundation of the obligation to approve candidates. The prohibition of refusals to sell between professionals was repealed in France in 1996. Supporters of the obligation to accept any candidate fulfilling the network criteria then turned to the prohibition of discriminatory practices between professionals, as a substitute. Unfortunately for them, this rule was also repealed by the LME Law of 2008. In parallel, the courts upheld the freedom to contract or not to contract with increasing conviction and the principle of the prohibition of contracts in perpetuity, two pillars of the new law of contracts applicable to all agreements concluded since 1 October 2016.

  1. Enshrining total freedom to approve or not to approve below 30% market share.

Influenced by an economic analysis of the law, the courts considered that with a market share of less than 30%, the discriminatory application of qualitative and/or quantitative criteria no longer posed problems as it was no longer prohibited under any specific national rule and was automatically exempt on condition it did not constitute a hardcore or other serious restriction of competition – “black” or “red” clauses – (CA Paris, 7 Feb. 2018, LawLex18254).

  1. Fall of the final bastion

The acceptance by the courts of refusals to approve applicants in qualitative selective distribution systems with more than 30 % of the market share.

In positive law, a last bastion remained: purely qualitative networks with over 30% of the market share. The Commission’s view was that since these networks were based on qualitative criteria, defined objectively and in a non-discriminatory manner, any candidate meeting those criteria had to be approved. The courts departed from this rigid interpretation: under the general law, the repeal of all the rules imposing a forced access to networks, the general principles of contractual freedom and the prohibition of contracts in perpetuity afford the supplier the choice to accept or reject candidates to the entry in its network even if they meet the selection criteria (CA Paris, 30 Sept. 2015, LawLex151190; 19 Oct. 2011, LawLex111723). The competition law obstacle remained though: was the supplier not guilty of implementing an anticompetitive agreement by adopting a selection system contrary to the principles of qualitative selective distribution? The French courts circumvented the issue by holding that a decision to refuse approval in principle constitutes a unilateral act involving no collusion with other members of the network and therefore by definition, falls outside the rules on restrictive agreements (Commercial Court, Paris, 14 Dec. 2016, LawLex17120; 29 June 2016, LawLex161202; CA Paris, 27 Feb. 2017, LawLex17422; 13 April 2005, LawLex06366; 24 May2017, LawLex17919). Unless such refusals are systematic and not the result of isolated decisions, the French case law is consistent with that of the courts of the European Union (CJEU Case 107/82 Allgemeine Elektrizitäts-Gesellschaft AEG-Telefunken AG, Judgment of 25 Oct. 1983, LawLex200500004025JBJ). The German courts avoided the pitfall of competition law by finding that refusals to integrate applicants did not take place on the downstream market of products or services on which the suppliers may have more than 30% of the market share, particularly in auto after-sales, but rather upstream on the market for the supply and demand of contracts, e.g. authorized repairers contracts, on which no operator has more than 30%of the market share (Bundesgerichtshof – MAN and Jaguar cases).

  1. Limits to the paradigm shift.

If the new paradigm would appear to have prevailed, there are still some limits. A few stubborn decisions have refused to fall in line with the mainstream trend. The French Court of Cassation has not yet endorsed the change. Ultimately, suppliers will have to take care not to make mistakes such as systematically refusing authorizations or entering in express or tacit agreements with the network that could reopen the door to the application of the rules on anticompetitive agreements which had been avoided through the “unilateral act” concept, or subjecting candidates to calls for tenders requiring all applicants to be treated in good faith under the Civil Code (CA Paris, 24 May 2017, cited above), i.e. in a non-discriminatory manner. Despite those limits, the new legal paradigm does appear to be in keeping with reality: it is not appropriate to force people to work together against their will and it is essential to streamline networks by giving new entrants the opportunity to join them.

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