The litigation over an exclusivity agreement between department store Myer and fashion designer Kym Ellery has ended following a confidential settlement reached between the parties. Ellery has publicly apologised for supplying garments to rival David Jones contrary to her agreement with Myer, although she is now permitted to supply her labels to both Myer and David Jones until the contract ends in late 2014.
The outcome appears to be a reasonable compromise. However, the case highlights the risks for suppliers of entering into supply agreements that restrict their freedom to distribute their products. Rival retailers in the position of David Jones are also exposed to potential liability if they interfere with such an exclusive supply contract.
In August 2011 Ellery signed an exclusive three-year contract with Myer stipulating that she would not supply clothing from her Ellery designer label to any other Australian retailer with 15 or more stores. In January 2013 Myer launched a court action alleging she had breached her agreement with Myer by supplying her L'America label to competitor David Jones. Myer also threatened to injunct the appearance of Ellery garments in the David Jones season launch fashion parade (held some weeks before Myer's scheduled equivalent) and in the David Jones catalogue.
In her defence, Ellery claimed that her contract with Myer did not prevent her selling the L'America label to David Jones as the brand position did not compete with her Ellery brand or, alternatively, that the restriction was not legally enforceable. The latter claim was difficult to prove as the Competition and Consumer Act 2010 does not strike down such clauses unless there is a substantial anti-competitive purpose or effect. The strength of the first claim depended on the contractual provisions, which in this case did not resolve the issue clearly.
The supply contract with Myer apparently did not oblige Myer to buy any particular volume of Ellery garments. Ordinarily the law offers no relief where a supplier has made a commercial deal that it later regrets. Therefore, the dispute should alert suppliers to the importance of negotiating a carefully considered agreement. These arrangements may also have consequences for third-party competitors, such as David Jones, who may be drawn into the dispute.
The case also shows that retailers such as Myer should consider whether exclusive supply arrangements work for suppliers, who will presumably be less inclined to enter into them if they are one-sided. Agreements that tie a supplier to a particular retailer can work in the supplier's favour by providing steady income, brand promotion and publicity, but only if the retailer is bound to provide these benefits and the conditions are clearly stated in the agreement.
When considering an exclusive supply agreement, a number of factors should be taken into consideration:
- For a supplier, an exclusive agreement equates to sacrificing other revenue streams. Does the agreement adequately compensate for this? Is there a minimum quantity to be ordered by the purchaser or retailer? If the answer to the latter question is no, other mechanisms or incentives should be considered by the supplier to ensure that benefits are realised (eg, pricing related to volume).
- Is the duration or type of exclusivity reasonable to protect the purchaser's investment in the brand? Does it overly restrict the supplier's business? Ellery shows how important it is to describe and/or limit the scope of the restricted business so that both parties are clear about their position and adequately protected. It is better to carve out expressly distribution channels and brands or product lines that may be sold elsewhere without breaching the restriction.
- Performance obligations and the options for exiting should be examined early in negotiations and the consequences of exiting the agreement early understood. Suppliers should be able to terminate the contract (or to revert to non-exclusivity) if the purchaser does not purchase the volume that would be anticipated to make exclusivity worthwhile for the supplier.
There are ways in which contracts can be drafted to meet the legitimate commercial needs of both parties and thereby avoid the problems illustrated in Ellery.
For further information on this topic please contact Penny Chalke or Elle Nikou at Piper Alderman by telephone (+61 2 9253 9999), fax (+61 2 9253 9900) or email (firstname.lastname@example.org or email@example.com).
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