The licensing of luxury goods in Europe, where a supplier sells goods to a certain approved distributor to sell on its behalf, is known throughout Europe as selective distribution. Selective distribution is an indispensable tool for luxury goods suppliers. In short, it facilitates a brand's efforts to protect its integrity by preventing unauthorised and unsuitable retailers from selling its products. It also ensures that its distributors meet certain objective standards (for example, technical training in the goods).
The law on selective distribution is complex and includes tightly drafted laws concerning restrictions imposed on the selling or re-selling of goods. Luxury goods suppliers and retailers selling in Europe will seek to rely on the protections of certain safe harbour legislation (known as block exemptions) which give special allowances when parties do not have high market shares. Some of this safe harbour legislation relates specifically to vertical agreements, these being the distribution chains required for luxury goods suppliers to resell their products through multiple retailers.
These block exemptions do not give suppliers and distributors free reign to create rules on pricing and territory but, instead, they give general allowances whilst prohibiting specific behaviours. Examples of prohibited restrictions include:
- territorial licensing restrictions within a selective distribution system, the general rule being that you cannot combine selective distribution and territorial restrictions within the EU;
- territorial licensing restrictions which prohibit distributors from responding to passive sales requests which have come outside their allocated customer group or territory;
- restrictions on a distributor's ability to determine its own prices, for example through minimum or fixed resale prices;
- non-compete obligations which exceed five years in duration; and
- an obligation not to sell competing brands in a selective distribution system.
Despite these restrictions, luxury licences and goods distribution should not be feared or dodged. With competition law conscious drafting, luxury goods licencing and distribution agreements can be utilised as valuable tools in any international expansion or globalization strategy, through which brands can gain access to and expand into EU markets.