In April’s issue of agentlaw news, we looked the issue of RTVs in the context of agents and their principals. Now we consider what they mean for suppliers, distributors, and the distributor’s customers.
In the context of a distributor relationship, RTV covers the situation in which the distributor and the purchaser (often a retailer) agree on the return of goods supplied by the distributor.
Sometimes distributor and purchaser will agree at the outset that goods will be supplied on a RTV basis. In this situation the purchaser will have the right to return unsold stock to the distributor on the terms agreed. Correspondingly, the distributor will be bound to take back such RTV’d stock on the terms agreed.
Often, however, the RTV terms are not agreed before the goods are supplied. In this situation it will usually be the case that the retailer contacts the distributor and depending on the strength of their respective bargaining positions, an agreement is reached to take back stock on specified terms.
Key commercial issues for distributors considering RTVs
There are a number of commercial issues for distributors – often accentuated for those supplying a retail industry where seasonality is a key consideration – to consider when contemplating agreeing to a RTV with a stockist as follows:
- The commercial relationship with the stockist. How important is it to maintain a high percentage sell through? Will agreeing to a RTV this season, result in a better order for the next season?
- Increased administrative burden and workload. In an RTV scenario, distributors are often responsible for managing the logistics of collecting and storing returned stock.
- Higher operational costs: Managing returns according to supplier requirements can result in additional costs, such as shipping, handling, insurance, and restocking fees.
- Cash flow issues. The return of stock can have significant negative effects on a distributor’s cash flow, particularly where the distributor must refund its customers for returned stock on short notice. Furthermore, distributors taking back and storing stock will usually do so without receiving any payment for handling the logistics of doing so.
- Space and storage issues. Distributors might need additional space to store returned items, which can be another logistical challenge and costs drain.
- Inability to sell returned stock. Distributors carefully project stock levels in order maximise profits and manage stock levels. But it is possible for distributors to be in a position where they simply cannot offload the returned stock before the end of a season. Where this is the case, it might be possible for the distributor to sell-back stock to the supplier at a discounted rate, however it will only be in a position to do this where (i) the supplier agrees to this on a case-by-case basis; or (ii) the distributor and supplier have agreed that this will be possible pursuant to their distributorship agreement.
But whilst agreeing to RTVs with stockists is sometimes unavoidable, or is done in order to strengthen the relationship with customers, distributors should also think carefully about their agreements with their suppliers.
RTVs and suppliers – can restrictions be imposed on distributors?
Whilst maintaining a good relationship – and so agreeing to a RTV (possibly albeit reluctantly) – with a stockist is critical for a distributor, what of the distributor’s distributorship agreement with the supplier? Is it possible for a supplier to restrict a distributor agreeing to a RTV with a stockist?
It is the case that both UK and EU competition laws are concerned with suppliers placing restrictions on their distributors as to the price at which and where and to whom the distributors can resell the goods purchased from the suppliers. In this respect it is well known that a restriction on a distributor’s resale price will, at best, be problematic. Less well known is where there is an exclusive distributorship agreement in place the supplier can, in broad terms, restrict the distributor making what are called active sales to customers reserved to the supplier or allocated by the supplier to other exclusive distributors.
But what of RTVs?
It is possible to envisage a scenario in which a supplier restricts a distributor’s ability to agree a RTV with a stockist, which could amount to a restriction on the distributor’s ability to determine its sale price – particularly a RTV which is agreed by distributor and stockist as part of the original sale contract between them. However, usually RTVs are only agreed by distributor and stockist after the stockist has experienced poor selling conditions and therefore it is likely that such a price restriction would only emerge at this time – in other words, some time after the original sale by the distributor to the stockist. As a result:
- The relevant competition law language would need to be interpreted very widely for there to be an infringement; and
- Therefore a restriction by a supplier of the distributor’s ability to agree a RTV with a stockist would not fall foul of competition law.
In contrast if the supplier was to restrict the distributor’s ability to determine its minimum sale price when reselling RTV’d stock to another purchaser (for example, a discount retailer), this would amount to an infringement of competition law.
As mentioned, where there is an exclusive distributorship agreement in place the supplier can, in broad terms, restrict the distributor making what are called active sales to customers reserved to the supplier or allocated by the supplier to other exclusive distributors. Whilst there is no reported case law on the point, a restriction on the distributor from making active sales of RTV’d stock to customers reserved to the supplier or allocated by the supplier to other exclusive distributors should also not result in a problem under competition law. However, this highlights the need for suppliers to ensure that such restrictions are well drafted in their distributorship agreements!
Performance obligations and distributors – a termination payment?
Finally distributorship agreements usually impose a large number of obligations on distributors, in particular with regards to performance. From the supplier’s perspective the distributorship agreement should have as its objects:
- maximising the distributor’s performance;
- whilst minimising the supplier’s exposure.
In this context consideration should be given by distributors as to whether agreeing to a RTV may affect achievement of a performance obligation such as a minimum purchase requirement and, in turn, the right of a supplier to terminate the distributorship agreement and avoid being liable under:
- English law for damages for wrongful termination; or
- the laws of other countries (for example, Germany or South Korea) for a compensatory payment for the loss of the distributorship.
