Disintermediation
Written by Jane Elliot11 April 00
“Disintermediation” is the elimination of intermediaries from supply chains. As a result of the growth in e-commerce, more and more suppliers are looking to cut out the middleman and sell directly, whether on a B2B or B2C basis.
Distribution and agency agreements
The most common types of middlemen known to the commercial world are agents and distributors. The process of disintermediation is causing increasing concern amongst agents and distributors that there will be no longer be a role for them.
Traditional distribution and agency agreements pre-supposed that the agent or distributor would have exclusivity. This could be territorial or in respect of a specific group of customers or a certain product range. But websites offer the possibility of cutting across this exclusivity.
The use of websites by agents and distributors
The rise of e-commerce has also prompted agents and distributors to consider using websites in order to fulfil their contractual obligations to their principals and suppliers respectively. However, most of the agency and distributorship agreements currently in force make no reference to websites. It is therefore necessary to consider whether the creation and use of such websites will result in an infringement of the rights of the principal or a breach of the right of exclusivity given by a supplier to other distributors.
To establish this, the terms of the existing agency or distributorship agreement must be analysed. In the case of agency and distributorship agreements which are about to be made, consideration should be given to this issue.
In respect of agents, English law has looked recently to French law for guidance. Last year there were two cases in France concerning the ability of a retailer and agent to use the Internet in order to promote the products that they were trying to sell. In broad terms, the effect of these decisions is that failure to mention the Internet as a distribution medium in a distributorship or agency agreement will be deemed to be an implied authorisation to a retailer or agent to create a website and start electronic marketing. But it remains to be seen whether the English courts will follow the same reasoning.
The effect of the principal’s or supplier's website
Granting an agent or distributor exclusivity restricts what the principal or supplier can do. Again, it is a question of whether there is an express prohibition in the agreement which prevents the principal or supplier from creating its own website for the online sale of goods. Where there is no express provision, it is a question of determining to what extent such a restriction can be implied. One approach, common in the car industry, is where the manufacturer effectively “sells” the goods on its website and then refers the prospective customer to the exclusive distributor for the town where the customer lives in order to complete the transaction.
Active and passive selling
The distinction between active and passive selling is important. In the context of agency and distributorship agreements, active selling involves actively approaching customers. In contrast passive selling involves responding to unsolicited requests from customers.
In respect of distributorship agreements, depending on the contractual provisions, active selling might result in a breach of the agreement. On the other hand the European Commission does not regard passive selling as amounting to a breach of an exclusive distributorship agreement.
The use of a website by a principal to actively sell (or obtain orders) from a specific territory or group of customers might also breach the right of exclusivity granted to the agent. In addition an agent protected by the Commercial Agents Regulations may be entitled to commission on all passive sales made by the principal. The Regulations also provide for an exclusive agent to be entitled to commission on all sales made to customers, even if they are made online.
Competition law aspects
Article 81(1) of the EC Treaty outlaws anti-competitive agreements. In 1999, the Commission published a new Regulation exempting from Article 81(1) various categories of agreements between businesses operating at different levels of the production or distribution chain. For example, supplier and distributor.
The Regulation sets out a list of hardcore restrictions which exclude the whole agreement from the scope of application of the exemption. However, a restriction is not classified as hardcore if it is on active sales into the exclusive territory or to an exclusive customer group reserved by the supplier or allocated by the supplier to another buyer, where such a restriction does not limit sales by the customers of the buyer.
It is the view of the European Commission that this protection of exclusively allocated territories or customer groups must permit passive sales to such territories or customer groups. On this basis, a contractual prohibition on the distributor from using a website for passive selling would bring the distributorship agreement outside the safe harbour of the Regulation. The Commission also takes the view that an outright ban on Internet selling is only possible if there is an objective justification.
Generally, the Commission does not consider the use of the Internet to be a form of active selling into such territories or customer groups unless, for example, it uses banners or links in pages of providers specifically available to those exclusively allocated customers. In addition, unsolicited emails sent to individual customers or specific customer groups are considered to be active selling by the Commission.
This briefing note is for general information. Further information is available in our practical booklet entitled Disintermediation. For a free copy of our practical booklet or for advice in applying this general information to your specific circumstances, please contact Stephen Sidkin or Jane Elliot.
© Fox Williams LLP 2010