Selective Distribution and Online Sales under EU and German Competition Law

What is selective distribution?

In a selective distribution system, a supplier sells its products only to distributors selected on the basis of specified criteria, and these distributors undertake not to sell to unauthorised resellers within the territory reserved for the system. Selective distribution is common for luxury goods, cosmetics, high-quality consumer electronics, branded sporting goods, cars and technically complex products. It allows suppliers to ensure qualified advice, appropriate presentation and after-sales service, and to protect brand image.

Because selective distribution limits who may resell products and how, it can restrict competition. EU competition law, in particular Article 101 TFEU and the Vertical Block Exemption Regulation, and the corresponding German rules in §§ 1 and 2 of the Act against Restraints of Competition (GWB), therefore set limits. Online sales are the most controversial area: suppliers want to prevent discounting and image damage on marketplaces, while competition authorities want to preserve the internet as a sales channel for consumers.

This article explains the legal framework, the key CJEU judgments, the rules under the 2022 block exemption, permissible online restrictions and practical guidance for suppliers and distributors.

Legal framework

Under the case law of the CJEU, a selective distribution system does not fall within the prohibition of Article 101(1) TFEU at all if three conditions are met: the nature of the product requires such a system to preserve its quality and ensure its proper use; resellers are chosen on the basis of objective criteria of a qualitative nature, laid down uniformly for all potential resellers and applied in a non-discriminatory manner; and the criteria do not go beyond what is necessary. In Coty (C-230/16), decided on 6 December 2017, the CJEU confirmed that preserving a luxury image can justify selective distribution.

If these conditions are not met – for example because quantitative criteria limit the number of distributors – the system may still be exempted under Regulation (EU) 2022/720 (VBER), provided the market shares of supplier and buyer do not exceed 30% and the agreement contains no hardcore restrictions. The regulation applies from 1 June 2022 to 31 May 2034, and the Commission's Vertical Guidelines explain its application. In Germany, § 2(2) GWB applies the EU block exemptions to agreements that do not affect trade between Member States.

Online sales: Pierre Fabre and the hardcore restriction

In Pierre Fabre (C-439/09) of 13 October 2011, the CJEU examined a clause requiring cosmetics to be sold in a physical space where a qualified pharmacist was present, resulting in a ban on internet sales. The Court held that such a clause amounts to a restriction by object unless it is objectively justified by the properties of the products, and that a selective distribution contract prohibiting de facto the internet as a method of marketing does not benefit from the block exemption, although individual exemption under Article 101(3) TFEU remains possible in theory.

The 2022 VBER codifies this principle. Under Article 4(e), the prevention of the effective use of the internet by the buyer or its customers to sell the contract goods or services is a hardcore restriction. The exemption is lost for the entire agreement. However, Article 4(e) expressly allows the supplier to impose other restrictions of online sales and restrictions of online advertising that do not have the object of preventing the use of an entire online advertising channel. This distinction is central to drafting distribution agreements.

Price comparison websites and search advertising

Bans on the use of price comparison websites or on bidding for the supplier's brand names in search engine advertising can amount to preventing the use of an entire online advertising channel and thus be hardcore restrictions. Suppliers can, however, set quality requirements for how such channels are used. German enforcement has historically taken a strict view on blanket bans on price comparison tools.

Marketplace and platform bans after Coty

In Coty, the CJEU held that Article 101(1) TFEU does not preclude a clause prohibiting authorised distributors of luxury goods from using, in a discernible manner, third-party platforms for internet sales, provided the clause aims to preserve the luxury image, is laid down uniformly, is not applied in a discriminatory way and is proportionate. The Court also held that such a clause, in the circumstances of the case, is not a hardcore restriction under the then block exemption, because it does not prevent internet sales altogether: distributors can still sell through their own online shops and through non-discernible third-party platforms.

Under the 2022 rules and the Vertical Guidelines, the Commission takes the view that marketplace bans generally do not prevent the effective use of the internet and can be block-exempted, regardless of whether the products are luxury goods, provided the market share thresholds are met and the restriction does not indirectly prevent online sales. Outside the block exemption, the assessment depends on the individual case.

Permissible online restrictions

Suppliers in selective distribution systems can set a range of requirements for online sales. They can require distributors to operate one or more brick-and-mortar shops in addition to online sales, set quality standards for the design and functionality of online shops, require certain information and advice to be provided, set requirements for customer service and delivery, and prohibit the use of certain marketplaces. Under the 2022 rules, suppliers may also charge different wholesale prices for products intended to be sold online and offline (dual pricing), provided this does not have the object of preventing effective use of the internet.

The criteria for online and offline sales no longer need to be strictly equivalent; the Vertical Guidelines accept differences reflecting the different nature of the channels, as long as they do not have the object of preventing effective online sales. Suppliers should nevertheless ensure that criteria are justified by the nature of the products and are not a disguised way of excluding online-focused retailers.

Restrictions within the network

Members of the network must remain free to sell to end users, both actively and passively, and to supply each other (cross-supplies). Restricting sales by authorised distributors to end users or to other authorised distributors is a hardcore restriction. The supplier can, however, prohibit sales to unauthorised distributors in the territory where the system operates.

German specifics

German competition law largely follows EU law but has specific features. § 20 GWB prohibits companies with relative market power from unfairly hindering dependent undertakings, which can give distributors a claim to be supplied in certain cases, for example where a retailer depends on a brand. German courts and the Federal Cartel Office have dealt with numerous cases on online restrictions, and the authority has taken a critical view of practices that restrict online sales or price competition. Private enforcement is common: excluded retailers sue for admission to the system or for damages, and suppliers sue distributors who breach the system.

Suppliers should also be aware that German courts may examine whether a selective distribution system is "watertight" – that is, enforced consistently – when they sue outsiders for selling products obtained from network leaks. Inconsistent enforcement weakens both competition law and trademark law arguments. Our article on franchise agreements addresses related vertical restrictions.

Trademark law and enforcement against outsiders

Competition law determines what suppliers may agree with their distributors. Trademark law adds a further tool against outsiders. Once branded goods have been placed on the market in the European Economic Area with the trademark owner's consent, trademark rights are generally exhausted, and the owner cannot prevent further resale.

Exhaustion does not apply, however, where the owner has legitimate reasons to oppose further commercialisation, in particular where the condition of the goods is changed or the resale seriously damages the reputation of the mark. Case law has accepted that, for luxury goods distributed through a selective system, resale in an environment that damages the luxury image can be such a reason.

In practice, suppliers combine contractual claims against authorised distributors who leak goods to outsiders, competition-law-compliant restrictions in the distribution agreements and trademark claims against unauthorised resellers. Tracing systems, such as product codes and batch numbers, help to identify the source of leaks within the network. Enforcement must be consistent; a supplier that tolerates widespread leaks may find it difficult to rely on the system in court.

Platform cooperation

Many online marketplaces operate brand protection programmes that allow rights holders to report infringing listings. Under the EU Digital Services Act, platforms must provide notice-and-action mechanisms. Suppliers should use these tools alongside legal action, but ensure that notices are accurate, since unjustified takedown requests can lead to liability towards the affected sellers.

Practical guidance

Suppliers planning or reviewing a selective distribution system should define the products concerned and justify why their nature requires a selective approach; set qualitative criteria for brick-and-mortar and online sales; check market shares against the 30% threshold; avoid hardcore restrictions, especially on online sales, pricing and cross-supplies; and document the system and its enforcement. Distribution agreements should be reviewed regularly, as case law, enforcement practice and online sales channels evolve.

Distributors should check whether restrictions imposed on them comply with these rules and whether they have a claim to admission or supply. Where suppliers terminate distributors for online sales, the legality of the underlying restriction is often decisive. Agents and distributors should also consider their rights at the end of the contract; our article on the goodwill indemnity explains when distributors can claim compensation.

How TRW & Co helps with selective distribution

We advise brand owners, manufacturers, distributors and online retailers on selective distribution and online sales under EU and German competition law. We design and review distribution systems and quality criteria, assess marketplace bans and online restrictions, analyse market shares, advise on claims for admission and supply, and represent clients in proceedings before the Federal Cartel Office and the courts. Our work connects with our distribution and franchise, antitrust and retail and consumer goods teams. Please contact us. This article is general information and not legal advice.