A Framework of Selective Distribution Agreement in India- A Clarion Call

[By Vridhi Kashyap & Tanisha Mishra]

The authors are students at the National Law University and Judicial Academy, Assam. 

Introduction

Selective Distribution Agreement (SDA) is one of the facets of vertical agreements. It allows the company to select retailers based on some pre-determined criteria, upon the fulfilment of which the outlet becomes the authorised distributor of the company. This arrangement allows the company to maintain sanctity in its distribution channel, as non-authorised dealers are not allowed to deal with the company’s product. It is an attractive mode of distribution because it allows the company to protect its brand image and intellectual property by selecting only a few authorised outlets. The outlets represent the company and are unique in appearance and mode of conducting business. SDA also prevents free riding and favours retailers by creating incentives for them. SDA, which is based on exclusivity, may seem anti-competitive, however, it is legal under EU regulations. The famous Metro v. Commission decision established three requirements that must be met before a company can legally have an SDA. The conditions are threefold: first, the firm must deal with a product that necessitates a special distribution agreement; second, the qualitative criteria must apply to all potential retailers without any discrimination; and third, any restriction imposed in view of having a restricted circle must not go further than it is objectively necessary.  The firms that usually fulfil these criteria are the tech know-how companies that require skilled personnel in the outlets, branded companies, especially those dealing with luxury products or cosmetics, and newspapers, which have a short life span and need careful distribution.

In the Indian context, Competition Act, 2002 (Act) doesn’t take note of SDA, however, under 3(4)(b) and 3(4)(c) of the Act, exclusive distribution and supply agreements can be anti-competitive if they cause Adverse Appreciable Effect on Competition (AAEC). While the Act is absolutely right in incorporating that, recently there have been many companies, which fall under the category luxury and tech know-how businesses who feel the need to indulge in SDA, and the Act fails to address these concerns. This article argues that laws on SDA must be formulated in India because of the lack of uniformity and stability in the precedents.

Tracing the Precedents: An Analysis

The deliberation on SDA was initiated and highlighted in Ashish Ahuja v. Snapdeal and Anr.  (Snapdeal case)  which emerged in 2014, where Ashish Ahuja, the informant, moved the court under Section 19(1)(a), and alleged that Snapdeal and SanDisk Corporation had colluded to restrain the informant from selling SanDisk products on the e-commerce platform of Snapdeal. SanDisk further required the informant to be its authorised dealer and to procure materials from its authorised distributors in India, to be able to deal with its products. The Competition Commission of India (CCI) held that SanDisk wasn’t abusing its position in the market by having authorised distributors, as it could do so in order to protect the sanctity of its distribution channel. By this judgement, the CCI upheld SDA and the liberty of a company to select whom it deals with.

However, in Shamsher Kataria v. Honda Siels Cars India Ltd. and Ors., (Kataria judgment) CCI held that the spare-parts market was a relevant market, and it observed that companies like Honda Siel cars, Volksvagen and twelve other car manufacturers, supplied spare parts to their authorised dealers only, while restricting and hindering the businesses of non-authorised repairers in the open market. It was found that the Original Equipment Manufacturers (OEMs) had charged exorbitant prices for spare parts and also restricted the access to such spare parts, resulting in denial of market access to the independent repairers. Therefore, CCI held the manufacturers were liable under Section 3 and 4 of the Act and imposed fines accordingly. While the conclusion is laudable and precise, CCI failed to discuss the SDA provisions which it upheld in the Snapdeal case. In a similar case in the EU, the Friedrich Grohe Armaturenfabrik GmbH & Co. (Grohe), a manufacturer of plumbing fixtures, formulated rules for its authorised dealers regarding their dos and don’ts. One of the criteria was to restrict its authorised distributors from the resale of the products in the open market, in defence of which they argued that their products were semi-finished and needed technical and professional assistance in installation, which the authorised dealers were capable of. The commission examined the case along the lines of SDA and nonetheless held such practices to be anti-competitive. Therefore, adopting SDA doesn’t mean the company can indulge in anti-competitive arrangements and such a narrative in the Indian context through the Kataria judgment would have further strengthened the position and relevance of SDA in the Indian laws.

In the case of Tamil Nadu Consumer Products Distribution Association v. Vivo Communications Technology Company and Ors., the informant, which was an association to protect distributors from exploitation, alleged that Vivo had imposed unfair conditions on its distributors, in contravention of Section 3 and 4 of the Act. One of the conditions was that the distributors weren’t allowed to select their retailers, and it was under the company’s control to choose its retailers. The CCI rejected the complaint, claiming that the informant had not provided any concrete evidence to support this argument. However, the CCI should have had upheld that Vivo had the right to select its distributors and its retailers, as the commission had concluded in the Snapdeal case. By doing that, another precedent could have been added in favour of SDA.

Position of Online Sales

The manufacturer who is legally allowed to adopt SDA can impose some anti-competitive restrictions as per the EU’s guidelines on vertical agreements. One of the highly debated restrictions is the usage of online platforms.Usually, manufacturers restrict their dealers from selling accessories online, claiming the lack of control they have over online sales and delivery. Moreover, they believe that online sales do not meet the standards provided by them, through their brick and mortars, which thus impacts the brand image. Imposing such a restriction comes under Hardcore Restrictions, but it is decided on a case to case basis. In K.C. Marketing v. Oppo Mobiles MU Private Ltd., the informant, a super distributor of the company ‘Oppo’, alleged that Oppo had restricted its dealers from selling its products online inter alia, which was anti-competitive as per Section 3(4)(d). The CCI held that Oppo products were available online on e-commerce platforms like Amazon and Flipkart, and since consumers had access to Oppo products in the digital world, the restriction so imposed was not anti-competitive. However, competition law principles also include the rights of dealers, and as per para 56 of the EU’s guide on vertical guidelines, every dealer must be allowed to deal in the offline and online mode. The contention here is that the commission ignored such an unfair imposition on distributors. Further, Oppo is a branded company with tech know-how and intellectual property of its own, thus the CCI could have looked into this aspect through the lens of SDA.

A Missed Opportunity- The Hathras Case

Even before the Snapdeal case, a 2012 case called the Automobile Dealers Associations, Hathras v. Global Automobiles Ltd. and Ors. presented itself with the opportunity to introduce SDA in India where the manufacturer had all its dealers conform to certain requirements such as maintaining a service station of 1000 sq., provide excellent after-sale services, engage in local promotional activities, maintain a minimum physical paid stock for 21 days, required its staff to have adequate training etc. The CCI held that such unfair impositions were not anti-competitive because the defendant did not have enough market shares to cause an AAEC. The manufacturer here selecting its distributors on the basis of certain requirements amounts to SDA. The CCI could have introduced the concept of SDA by discussing if the defendant could restrict its product to only authorised dealers. It is so because SDA is not illegal, but the company must possess the need to have a SDA.

Conclusion

While vertical agreements in India, are decided on a case to case basis, specific laws on SDA are pertinent because of the package of advantages it brings. With intellectual property’s growing importance, many companies wish to protect their intellectual property and brand image, and therefore from the competition law perspective, SDA must be enforced. Nonetheless, companies may also misuse it and the competition law regulator must be vigilant with the adequate tools of laws and regulations in hand in order to curb such practices. In a recent complaint filed before the CCI under Section 19(a) of the Act, it has been alleged that Parle Products Pvt. Ltd. is in contravention of Section 3(4) and 4(2) of the Act by refusing to deal with Udaan (an e-commerce start-up) and opting for a selective course of agreement with its authorized distributors. CCI’s stance on this case is much awaited since it is expected of CCI to look into the aspect of SDA and make deliberations. A ray of hope exists as this matter may recognize the lacunae in the Act with respect to SDA and provide a green light to the framework for SDA in India.

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