For a brand owner, a website is a shop window, a fitting room, a stockroom, an outlet store and a customer service desk all in one. For a retail distributor, it may be the quickest route to customers, the most efficient way of clearing stock, and the best means of competing in the market.

But it can also be the case that supplier and distributor can find themselves asking the same question from opposite ends of the supply chain: who decides how the brand is sold online?

A brand owner may have sound reasons for wanting to regulate online sales. It may want products to be presented properly. It may want customers to receive suitable advice. It may want technical or specialist products to be sold by retailers who understand them. It may want returns, warranties and after-sales service to be handled consistently. But most importantly for many brand owners, it may want to avoid its products appearing on websites where the brand is stripped of context and reduced to a line of stock at a price.

All of this can matter. The way in which products are sold can affect how customers understand them, use them and value them. The distributor is a key part of the route by which the brand reaches the market. That is why selective distribution systems exist.

Selective distribution and price control

Suppliers are often concerned to control resale prices. Mechanism used can be inventive. But this is a line which must not be crossed.

A supplier cannot use brand control as a dressed-up means of stopping normal price competition. It cannot tell a distributor what resale price to charge. It cannot punish a distributor simply because it discounts. It cannot ban online selling in substance while saying that it is only regulating presentation. It cannot reserve to itself an unlimited discretion and then apply that discretion according to commercial irritation.

Deckers UK Limited v Up & Running (UK) Limited

Recently, the Court of Appeal gave judgment in an appeal brought by Deckers against Up & Running. The case concerned the distribution of Deckers’ HOKA running shoes. Deckers operated a selective distribution system. Up & Running, one of its retailers, wanted to sell excess stock through a separate discount website. Deckers objected and supply was terminated. The Competition Appeal Tribunal decided against Deckers. The Court of Appeal disagreed.

But for brand owners and distributors alike, the Court of Appeal’s judgment does not mean that suppliers can now do as they please. Nor is it that every online restriction is unlawful. Equally, it is not a case of looking at the label used. Calling a distribution system selective distribution does not save it. Calling something a restriction on online sales does not condemn it. What matters is what the restriction does, why it exists, how it is applied, and what is happening in the market around it.

That is an important distinction in commercial terms. A rule requiring an approved online sales channel may be acceptable where the rule is tied to objective standards of presentation, service, product advice, stock handling or customer experience. A rule whose real purpose is to stop a distributor selling cheaply – below the price at which the supplier would prefer – will be much harder to defend. The difficulty is that both rules may look similar on paper. As a result, the difference is often found in the drafting, the surrounding documents, the history of decisions, and the way people inside the business address the issue.

How to restrict online sales

So how should a supplier go about restricting online sales without infringing UK and EU competition laws? The starting point is the product and the market.

The supplier needs to identify why the product justifies controls on resale. That justification will be stronger for premium or brand-sensitive products or for technical or specialist products than for products where the method of sale adds little to the customer’s decision. The justification should be capable of being explained without reference to maintaining prices.

The next step is to design the distribution system before relying on it. The criteria for admission to the system, and for approval of online channels, should be clear, written and capable of being applied across the network. It follows that inventing them after the event because a particular distributor has caused pricing concern can be challenging. If approval is needed for a new website, the agreement should say so. It should also indicate what the supplier will look at when deciding whether to approve it.

Those criteria may address the identity of the seller, product information, staff expertise, customer service, use of trademarks, returns, warranty handling, product imagery, stock presentation and the avoidance of misleading or brand-damaging settings. They should not imply that approval depends on the distributor avoiding discounting.

Price

Pricing needs care. A supplier will usually recommend resale prices or set maximum resale prices, provided these do not in reality become fixed or minimum prices. But the distributor must remain free to decide its own resale price. That freedom must exist not only in the agreement but also in practice. Pressure, threats, delayed supply, withdrawal of benefits and selective enforcement can all create the problem which the agreement tries to avoid.

The importance of market position

Market position also matters. UK and EU competition laws treat many vertical agreements much more favourably where the supplier and distributor are below relevant market share thresholds and where the agreement avoids hardcore restrictions. This is not a substitute for proper drafting, but it is part of the commercial risk assessment. A supplier with limited market power, operating in a market with strong competition between brands, is in a different position from a supplier whose products customers cannot readily substitute.

The position of a distributor

For a distributor, the same points work in reverse. If a supplier refuses approval for an online channel, the distributor should ask for the criteria and the reasons. If the concern is product presentation, that can possibly be fixed. If the concern is simply that the proposed website will sell too cheaply, the position is different. The more transparent the exchange, the easier it is to identify whether the disagreement is about brand standards or price competition.

Final thoughts

The practical lesson is that online distribution controls should be built, not improvised. A supplier that wants control should create a system which explains the control. A distributor that wants freedom should determine whether it is being restricted for a legitimate channel reason or because of its pricing.

Stephen Sidkin is a partner and Lauren Hill is a trainee solicitor at Fox Williams LLP. Further information is available at www.fashionlaw.co.uk; www.distributorlaw.co.uk; www.foxwilliams.com.

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