Exclusive Distribution Agreements and Refusal to Sell
French Regulation of
Donald N. Thompson”
SUMMARY
French regulations on exclusive distribution agreements and on
refusal to sell -do not constitute a separate body of law, but are
included in the general body of price regulation. A small number
of articles of law have laid down the principles of regulation, and
the Ministry of Finance and Economic Affairs has interpreted the
meaning of the articles for a broad range of situations. Enforcement
procedures and legal proceedings are generally the same as those
applicable to price questions. Offences connected with price are
regarded as criminal offences, punishable by fines up to 6 million
new francs (about $1.4 million) and/or imprisonment. The possibility
of criminal proceedings has led to most disputes being settled through
conciliation, with an implicit assumption that the regulations are
being respected, and that violations are accidental. Legal proceedings
are taken only in cases of refusal to discontinue the prohibited
practices. A party injured under one or more prohibited practices
retains the right of redress through normal legal processes.
A number of practices are almost, but not quite, per se prohibited.
These may be summarized as:
1. a refusal to sell or to deal when the buyer’s request is “normal”;
2. a discrimination in price or in terms of sale which is not justi-
fiable in terms of differences in cost;
3. a restriction on the pricing freedom of the reseller, particularly
on minimum resale price (except under a Ministerial exemption,
which is rarely given);
* The writer wishes to thank Mr. George Pachelbel of the research organ-
ization Dynamar in Bazainville, S. et 0., and Mine. Boucou-Rechlieb, Chef de
Service Judicial
]a Chambre de Commerce, Paris, for their assistance. This
research was supported in part by a grant from the Marketing Science Institute,
Philadelphia, and administered
through Dr. E. T. Grether, University of
California, Berkeley.
” Associate Professor, Faculty of Business Administration, University of
Alberta.
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EXCLUSIVE DISTRIBUTION AND REFUSAL TO SELL
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4. a sale conditional on the purchase of other goods (a tying agree-
ment), or on the purchase of minimum quantities (a requirements
contract).
Thus a vendor, unless he can invoke one of the exceptions dis-
cussed in the paper, cannot refuse to sell or to deal:
(1)
If he is a manufacturer who normally sells through whole-
salers, he cannot refuse to sell at wholesale price to any purchaser
who buys in normal wholesale quantities;
(2) If he is a manufacturer who normally sells through retailers,
he cannot refuse to sell at existing retail trade discounts to any
purchaser who buys in normal retail quantities;
(3)
If he is a wholesaler who sells to retailers, he cannot refuse
to sell at existing retail trade discounts to any purchaser who buys
in normal retail quantities;
(4) If he is a retailer, he cannot refuse to sell to any purchaser
at normal terms of sale.
The obligation to allow all buyers and sellers an equal access
to trade relationships casts doubt on the acceptability of some
franchise systems or exclusive dealerships as we know them in North
America. To be legally acceptable in France, an exclusive contract
must, as a minimum:
(1) have, as a demonstrable goal, the improvement of service
rendered to consumers; and
(2)
leave the licensee totally free to set his own resale prices;
and
(3) give to the licensee an exclusive territory, the boundaries
of which are strictly defined; and
(4) be bilaterally exclusive in that the licensee agrees not to deal
in competing products of third parties.
This French regulation arises from, and is based on, a long-
standing political-economic philosophy that destabilizing movements
in the general price level are to be avoided at all costs. No such
dominant philosophy, except, perhaps, a qualified acceptance of what
Galbraith calls the “rule of competition”, has underlain North
American anti-trust philosophy, which may account for the latter’s
uncertain direction and interpretation.
It is clear that the French regulations represent a much stricter
enforcement of anti-trust law than exists in either Canada or the
United States. In fact, French interpretation is at least as strict
again, compared to U.S. law, as the latter is compared to Canadian
enforcement. Few of the exclusive distribution agreements now in
McGILL LAW JOURNAL
[Vol. 14
force in North America would satisfy all the conditions mentioned,
and thus be acceptable under French law.
INTRODUCTION
–
THE CANADIAN AND U.S. POSITIONS
These notes on French regulation concerning exclusive distri-
bution agreements and refusal to sell arose from a continuing study
of franchise systems being carried out by the writer under the
sponsorship of the Marketing Science Institute. Franchising may be
described as an arrangement whereby a firm (the franchisor) which
has developed a pattern or formula for the conduct of a business,
extents to other firms (the franchisees) the right to engage in the
business subject to a number of restrictions and controls. Two of
these restrictions, exclusive franchising and exclusive dealing, and
a related practice, refusal to sell, are discussed in this paper.
A franchisee often obtains the use of the franchisor’s name and
“formula” for doing business, along with the product or service
involved, on an exclusive franchising basis. That is, the franchisee
has the sole right to handle the product or service in a given geo-
graphical area. In return, the franchisee may agree (expressly or
by implication) to deal exclusively in the products of the franchisor
that is, not to handle the products of third parties. The result
–
is a bilaterally exclusive agreement.
In Canada, these restrictions are covered by sections 33A, 33B,
33C, and 34 of the Combines Investigation Act. 1 In the United States,
they are subject to possible constraint under the Sherman,2 Clayton,3
and Federal Trade Commission Acts. 4 It is useful to consider the
scope of Canadian and United States legislation and judicial or
administrative agency interpretation pertaining to these distribution
restrictions before looking at the French situation.
Exclusive Franchising. It is necessary to define the term “ex-
clusive franchising” with some care, because there are few concepts
in anti-trust law which have been so widely misunderstood. Exclusive
franchising is an agreement, made by a market supplier with a dealer,
that he will not sell his product to any other dealer within the
‘R.S.C. 1952, c. 314.
2July 2, 1890, c. 647, 26 Stat. 209 and July 7, 1955, c. 281, 69 Stat. 282,
15 U.S.C. 1-7.
3 Oct. 15, 1914, c. 323, 38 Stat. 730, 15 U.S.C. 12-27, 44.
4 Sept. 26, 1914, c. 311, 38 Stat. 717, 15 U.S.C. 41-51.
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EXCLUSIVE DISTRIBUTION AND REFUSAL TO SELL
6G1
latter’s territory, and will not sell there directly himself.5 Exclusive
franchising implies only a system of highly selective distribution.
It does not require the existence of a reciprocal exclusive dealing
arrangement (although this is often found), nor does it require the
granting of exclusive territorial rights to the dealer. While exclusive
franchising is normally thought of as being applied at the retail
level, it also exists at the wholesale level, even with products where
it is not used at retail e.g., with national manufacturers of beverage
syrups such as Coca-Cola, Pepsi-Cola, and Seven Up.
Most exclusive franchises are limited in duration, the time span
depending on the reason for adopting this method of distribution.
Most commonly, exclusiveness is “introductory”, that is, limited to
a period of one or two years to give the dealer an opportunity to
recoup his heavy initial investment in advertising and sales pro-
motion. At the other extreme, exclusive franchises may run as long
as ten years, or may be issued for an indefinite term, in which
case they are normally cancellable on notice.0
There is no question that exclusitivity has some anti-competitive
effects on competition. If other outlets are unable to sell the product
economically in the territory under exclusive franchise, then intra-
brand competition is effectively foreclosed. Nevertheless, courts in
Canada and the United States have held in general that exclusive
franchises are not per se illegal and that a supplier may grant rights
to use his trade name to whom he wishes. The U.S. position is more
carefully spelled out. In the absence of unfair, unreasonable, or
monopolistic conduct, a supplier is permitted to sell to some dealers
and to refuse to sell to other potential dealers in the same area to
assure those dealers of their exclusive status; and, subject to require-
ments of good faith in dealing, to drop those dealers whose per-
formance is not satisfactory.7
The Canadian position is much less well defined, although it is
certainly more permissive than the American. In a recent case invol-
5 Less extreme forms are also found. Thus, the supplier may reserve the right
to sell directly (but not exclusively) to national or governmental accounts within
the territory. Or, the supplier may grant exclusivity only to the dealer’s
particular type of outlet, reserving the right to sell to other types of wholesalers
or retailers within the territory.
6A. H. Travers, Jr., and Thomas D. Wright, Restricted Channels of
Distribution Under the Sherman Act, (1962), 75 Harv. L. Rev. 803.
7 United States v. Parke, Davis & Co., (1960), 362 U.S. 29, 4 L.Ed. 2d 505,
80 S.Ct. 503; Lawlor v. National Screen Serv. Corp., (1,957), 352 U.S. 992,
1 L.Ed. 2d 540, 77 S.Ct. 526; and Schwing Motor Co. V. Hudson Sales Corp.,
(1956), 239 F. 2d 176 (4th Cir.), cert. denied, (1957), 355 U.S. 823, 2 L.Ed.
2d 38, 78 S.Ct. 30.
McGILL LAW JOURNAL
[Vol. 14
ing collective exclusive franchising and collective exclusive dealing
agreements,” the issue concerned arrangements among seven paper
manufacturers and a number of wholesale paper merchants whereby
only the merchants would act as distributors of fine papers, and the
merchants would handle only papers made by the mills. The parties
were convicted under the Criminal Code for preventing or unduly
lessening competition. Mr. Justice Cartwright, as he then was, stated:
[T]he decisions… appear..,
to hold that an agreement to prevent or
lessen competion in commercial activities of the sort described in the section
becomes criminal when the prevention or lessening agreed upon reaches
the point at which the participants in the agreement become free to carry
on those activities virtually unaffected by the influence of competition …
that it is the arrogation to the members of the combination of the power
to carry on their activities without competition which is rendered unlawful;
that the question whether the power so obtained is in fact misused
is
treated as irrelevant; and that the Court… is neither required nor permitted
to inquire whether in the particular case the intended and actual results
of the agreement have in fact benefited or harmed the public … The relevant
question thus becomes the extent to which the prevention and limitation
of competition are agreed to be carried and not the economic effect of
carrying out the agreement.. .9
In both Canada and the United States, a supplier cannot deliber-
ately choose, as sources of supply or channels of distribution, the
suppliers or the customers of competing firms with the intention
of driving those firms out of business.10 Nor can he make his selection
of dealers as part of an unlawful boycott or conspiracy.”
Refusal to Sell. One significant question which has not yet been
answered relates to the supplier’s right to refuse to sell to dealers
as a method of controlling their purchases, customers, or resale
prices.
In Canada, it was noted as early as 1907 that the existence of
a price restriction would invalidate a refusal to sell that might
otherwise be legal. 12 Section 34 of the Combines Investigation Act,13
which prohibits the practice of resale price maintenance, makes it
an offence to refuse to deal with any other person who will not
follow established resale prices. The 1960 amendment to the Act 14
8 Howard Smith Paper Mills Ltd. v. R., [1957] S.C.R. 403, 26 C.R. 1, 118
C.C.C. 321, 8 D.L.R. (2d) 449.
91bid., at pp. 426-7 (S.C.R.), p. 473 (D.L.R.).
‘OMaryland Baking Co., v. F.T.C., (1957), 243 F. 2d 716 (4th Cir.).
‘lEastern States Retail Lumber Dealers’ Ass’n v. United States, (1914),
234 U.S. 600, 58 L.Ed. 1490, 34 S.Ct. 951.
12R. v. Master Plumbers and Steam Fitters’ Cooperative Ass’n,
(1907)
14 O.L.R. 295; 12 C.C.C. 371.
13 R.S.C. 1952, c. 314.
14 8-9 Eliz. II, S.C. 1960, c. 45, s. 14.
No. 4]
EXCLUSIVE DISTRIBUTION AND REFUSAL TO SELL
603
made some defences available to a person charged under this section
where the person supplied used the articles as loss leaders, or for
other unfair purposes. 5
Prior to 1945, virtually all U.S. cases acknowledged the supplier-s
right to refuse to sell to anyone in the absence of monopolization. 16
Cases since then have differing interpretations. The present U.S.
position seems to be that a supplier may advise his dealers with
respect to any competitive activity, and may suggest appropriate
actions. But, he may not automatically terminate his relationship
with them for failure to conform to his advice. In the United States
(although not in Canada), a large supplier is probably forbidden
per se from using a refusal to sell to control the purchases or compe-
titive decisions of his dealers. In the U.S., termination of a dealership
in order to implement resale price maintenance is forbidden not only
as an unfair act, but also as activity pursuant to implied contracts
in restraint of trade. 17 The issue is thus not whether the supplier
has the right to unilaterally refuse to sell to dealers, but whether
he and his dealers may combine to restrain competition through
resale price maintenance.
Exclusive dealing. Exclusive dealing is an agreement by a dealer
to purchase, sell, or otherwise deal only in products produced by,
or approved by, the supplier. The agreement may be express or
implied.’ 8 There are two distinct types of exclusive dealing arrange-
ments. The first is the situation where a supplier requires his dealers
not to sell products which are substitutes for those which he supplies.
Essentially all of the case law involving exclusive dealing has been
concerned with this type. The second type involves a supplier pro-
hibiting his dealers from selling products which, although not com-
petitive with those trademarked products he supplies, involve the
same issues of quality maintenance and dilution of dealer sales
efforts as do substitute products. 19
i Howard Smith Paper Mills Ltd. v. R., [1957] S.C.R. 403, 26 C.R. 1, 118
C.C.C. 321, 8 D.L.R. (2d) 449; and R. v. Master Plumbers, (1907), 14 D.L.R.
295; 12 C.C.C. 371.
16F.T.C. v. Raymond Brothers-Clark Co.,
(1924), 263 U.S. 565, 68 L.Ed.
448, 44 S.Ct. 162.
17 George W. Warner & Co. v. Black & Decker Manufacturing Co., (1960),
277 F. 2d 787 (2d Cir.).
.1 Implied agreements are achieved through the granting of special prices,
discounts, or other benefits to those dealers who do not purchase competitor’s
products or services.
19The best United States example is Susser v. Carvel Corp., (1962), 206
F. Supp. 636 (S.D.N.Y.), aff’d (1964), 332 F. 2d 505 (2d Cir.).
McGILL LAW JOURNAL
(Vol. 14
Regardless of the validity of the business purpose underlying
exclusive dealing, such arrangements may still cause anti-competitive
effects. Whenever a large or dominant market supplier obtains for
his exclusive use outlets on a lower level of distribution, there is a
serious risk that lesser suppliers will find themselves either weak-
ened or completely excluded from participation in the market. Once
a dominant supplier in a market appropriates for his exclusive use
a correspondingly large share of available outlets, he has likely
succeeded in imposing prohibitive cost disadvantages on existing or
potential rivals, since they may have to create new outlets for their
goods. The same is true where a group of suppliers collectively
(if not collusively) obtain exclusive obligations from dealers, thus
producing an aggregate foreclosure.
Nevertheless, exclusive dealing requirements have traditionally
not been per se illegal in either Canada or the United States, except
when accompanied by an attempt to monopolize or to fix prices.20
In general, a United States court will inquire into the business
conditions surrounding the imposition of exclusive dealing require-
ments and their economic effects on competitors. If there is a valid
business reason for the requirement, and if competitors are not
foreclosed from a source of supply, then the restrictions are probably
legal.21
These U.S. criteria probably also hold in Canada, although the
situation is less clearly defined. The best statement of the Canadian
position on exclusive dealing arrangements is probably that of Justice
Cartwright in the Howard Smith case.22
A recent research inquiry, under Section 42 of the Combines
Investigation Act,23 concerned the distribution and sale of TBA
(tires, batteries, accessory) items by oil companies through service
stations.24 Based on the Report, it was recommended by the Com-
mission that:
agreements or arrangements which give one or more suppliers exclusive
or preferred access to a group of outlets in return for a commission on
sales to such outlets be prohibited where such agreements or arrangements
2o Howard Smith Paper Mills Ltd. v. R., [1957] S.C.R. 403, 26 C.R. 1, 118 C.C.C.
3,21, 8 D.L.R. (2d) 449; R. v. Master Plumbers, (1907), 14 O.L.R. 295, 12 C.C.C.
371; Susser V. Carvel, (1962), 206 F. Supp. 636 (S.D.N.Y.), aff’d. (1964), 332
F. 2d 505 (2d Cir.).
21 Tampa Electric Co. v. Nashville Coal Co., (1960), 365 U.S. 320, at p. 335,
5 L.Ed. 2d 580, 81 S.Ct. 623.
22 [1957] S.C.R. 403, at -p. 426-7, 8 D.L.R. (2d), at p. 473, cited supra at p. 602.
23 R.S.C. 1952, c. 314.
24 Director of Investigation and Research, Combines Investigation Act, De-
partment of Justice, Report, (Ottawa, 1962).
No. 4]
EXCLUSIVE DISTRIBUTION AND REFUSAL TO SELL
605
are likely to lessen competition substantially, tend to create a monopoly,
or exclude competitors from a market to a significant degree…
the incentive for market access agreements would be removed by prohibition
of exclusive dealing and tying arrangements…25
The Commission recommended that exclusive dealing and tying ar-
rangements be defined and included in the Combines Investigation
Act,20 and that they be forbidden. The recommendations are at
present under consideration as part of a revision of the Act as a whole.
French Regulation. French regulation of exclusive distribution
agreements, whether carried out under franchising, licensing, or
other contractual relationships, normally comes under the aegis of
economic legislation relating to “refusal to sell”, and accompanying
legislation relating to the practice of discriminatory conditions of
sale. The regulations discussed below were studied for their appli-
cability to franchise systems. It should be emphasized, however,
that the decrees, laws and circulars involved do not mention fran-
chising or any other specific arrangements as such, and are equally
applicable to all types of exclusive distribution arrangements.
FRENCH POLITICAL-ECONOMIC PHILOSOPHY
A discussion of regulation of competition in France is best begun
with a mention of the strong link between regulation and national
economic policy, and in particular with French thinking on matters
of price. Historically, it is the extreme French sensitivity to move-
ments in the general price level 27 which underlies most French
economic legislation, including that on price.
The sensitivity to price level movement arises from a long-
standing political-economic philosophy that the standard of living
should be improved by reducing costs and prices rather than by
increasing wage levels. It is argued that increased wages and prices
produce a fear of continued inflation as well as harming the com-
petitive position of French exports and increasing the attractiveness
of foreign imports. Thus the French prohibit, a priori, any agreement
that tends to destabilize price and prohibit, a posteriori, any cartel
which abuses its position by actions liable to destabilize price.28
25 Ibid., at pp. 133-135.
26 R.S.C. 1952, c. 3K4.
27 Not only upward price movements, although these are of greatest concern,
but any movements which might have a destabilizing effect on the economy.
Where the dividing line between stable (small) and unstable (large) price
movement occurs is not clear. Apparently price reductions are more acceptable
than price increases of the same size.
28 The actual fixing of a price or markup is an offence per se only if it is
a minimum price or markup. Thus resale price maintenance is prohibited. Vendors
McGILL LAW JOURNAL
[Vol. 14
One ordinance prohibits outright: “every concerted action,
agreement, combine, (express or implied), or trade coalition in any
form upon any grounds whatsoever, which has the object or may
have the effect of interfering with full competition by hindering
the reduction of production costs or selling prices or by encouraging
the artificial increase of prices… “, and, “any engagement or
agreement relating to such prohibited practice shall be absolutely
void.” 29
All refusals to sell or to deal, with some exceptions mentioned
below, would thus seem to be prohibited. It must be emphasized that,
where exclusive agreements are forbidden, it is the implicit refusal
to sell or to deal, with its implied effect on price levels, which in
most cases constitutes the violation.
The Technical Commission, the agency charged with investigating
restrictive trade practices, has gone so far as to state that French
law is not adverse to either a cartel or a government controlled
limitation on competition, so long as the net effect on the price
level is to produce greater stability than would exist if competition
were allowed to function unhindered.30 Thus even a restriction on
normal competition may be permissible if it does not destabilize
price, and is otherwise in the public interest.
PRICE ORDINANCE 45-1483
Under French economic regulation, both the refusal to sell and
the continual or habitual practice of discriminatory conditions of
sale are prohibited under Price Ordinance No. 45-1483 of June 30,
1945, of which article 37 is of relevance to this paper.31
are free to set maximum prices which they regard as the highest figure at
which the product should be resold if stating such a maximum price does not
destabilize the existing price and if the maximum price is not intended to and
does not, in fact, become a “recommended” price.
2 9 Article 59 bis of Section IV, Part III of Price Ordinance No. 45-1483 of
June 30, 1945, as amended by decree 53-704 of August 9, 1953.
3oCommission Technique Des Ententes, Rapports Au Ministre Charg6 Des
Affaires Economiques Pour Les Anndes 1954 & 1959, (1961), p. 45.
31 Technically, these are prohibited under Decree No. 58-545 of June 24, 1958.
The legislation includes Decree No. 451483 of June 30, 1945, as supplemented
and amended by Decrees No. 53-704 of August 9, 1953, No. 58-545 of June 24,
1958, and No. 59-1004 of August 17, 1959, and by Act No. 63-628 of July 2,
1963. These are officially incorporated as Price Ordinance No. 45-1483 of June
30, 1945.
The major portion of Decree 53-704 was annuled by the Conseil d’Etat, which
rules on the correctness or ultra vires content of a law or decree. The substance
No. 4]
EXCLUSIVE DISTRIBUTION AND REFUSAL TO SELL
607
Article 37-1(a) reads:
Est assimil6 A la pratique des prix illicites le fait:
1. Par tout producteur, commergant, industriel ou artisan:
a) De refuser de satisfaire, dans la mesure de ses disponibiliths et dans
les conditions conformes aux usages commerciaux, aux demandes des ache-
teurs de produits on aux demandes de prestation de services, lorsque ces
demandes ne pr~sentent aucun caract~re anormal, qu’elles Camanent de
demandeurs de bonne foi et que la vente de produits ou la prestation de
services n’est pas interdite par la loi ou par un r~glement de lautorit6
publique, ainsi que de pratiquer habituellement des conditions discrimina-
toires de vente ou des majorations discriminatoires de prix qui ne sont
pas justifi6es par des augmentations correspondantes du prix de revient
de la fourniture ou du service.
The legal obligation to allow all buyers and sellers equal access
to trade relationships casts doubt on the licensing of franchisees or
other exclusive dealerships. The question is whether manufacturers
or wholesalers are to be allowed to choose their resellers and to
reserve exclusively for these resellers the distribution of the product
or service.
It was assumed, immediately after the appearance of article 37,
that exclusive agreements and the whole area of selective distribution
were exempt from legal challenge because of the lack of any specific
legislation or decree on the subject. Instead, jurisprudence has con-
sidered exclusive agreements from the standpoint of their implicit
refusal to sell or to deal and has allowed such agreements only
where very strict conditions are met.32
The remainder of this paper discusses the conditions in Article
37-1 (a), the legislative interpretation of French law, and the effect
of this decree was re-enacted by Decree No. 58-545 of June 24, 1958, made under
powers vested in the government under the law of December 13, 1957.
Decree No. 58-545 was originally aimed solely at the prohibition of enforced
or maintained pricing, but its interpretation has been extended to include the
areas of refusal to sell and conditions of sale even in those cases where price
maintenance is not an issue.
The difference between a decree and an act, in French jurisprudence, is one
of origin. A decree originates with the head of state, an act with a legislative
process. Both have equal force of law.
32 There are few cases available for analysis because most complaints are
resolved at the Ministry level by injunction or agreement rather than through
the courts. Since offences connected with price are regarded as criminal offences
and since the Criminal Court may impose fines up to 6 million new francs
(about $1.4 million) and even imprisonment, the mere possibility of criminal
proceedings means that an out-of-court settlement is usually reached. From
1958 to 1964, the Ministries of Economic Affairs and Trade received 648
complaints on refusal to sell or to deal, of which 484 were settled informally
and only 7 became the basis for judicial action. The remainder appear to have
been dismissed for lack of evidence.
McGILL LAW JOURNAL
[Vol. 14
of those regulations of the European Economic Community which
exist parallel to French legislation, and which modify its application
in significant ways.
INTERPRETATION AND RULINGS ON REFUSAL TO SELL
From the original wording of article 37-1 (a) through one supple-
mental act and three decrees, refusal to sell was not per se illegal.
Rather, its illegality depended on the existence of the conditions
mentioned above, which may be summarized as: (1) the existence
of the ability or capacity to sell; (2) conditions of sale corresponding
to normal commercial usage; (3) demand of a normal character;
(4) a buyer acting in good faith; and, (5) products whose sale is
not forbidden by law, or by public authority.
A full discussion of the conditions under which refusal to sell
(and hence exclusive dealing) could be justified occurred in the
“Fontanet” Circular of March 31, 1960.33 The circular has an un-
usual status. Although it is related to “legislation” by its content
and official source, it is only a commentary and is not binding on
either the courts or on private parties.34 It is, however, morally
binding on the Administration in terms of what will and will not be
enforced. Frequently, a new court decision results in a revised cir-
cular re-interpreting the law.
The purpose of the measures discussed in the Fontanet Circular
was to prohibit the imposition of minimum or other destabilizing
prices, and to encourage price competition. Price competition is felt
to be effective only where all purchasers have equal access to goods
and services. Thus, the Circular sets out two prohibitions made to
ensure such equality of access. The first prohibition is that of refusal
to sell or to deal; the second, of discriminatory prices or conditions
of sale. A breach of either involves liability both for those committing
the breach and for those inducing it.
The Circular interprets, and the courts have expanded upon, the
conditions in article 37-1 (a). The offence of refusal to sell is possible
33A circular is a detailed interpretation of the Administration, in this case
the Ministry of Finance and Economic Affairs, on what a law or decree actually
says. The Fontanet Circular followed and interpreted the Decrees of 1953 and
1958 (see supra footnote 31). The circular frequently takes the name of its
author, in this case, Joseph Fontanet, Secretary of State for Internal Commerce.
34 The Conseil d’Etat in judgments of May 5, 1961, and June 14, 1961, ruled
that the Fontanet Circular merely had the force of a commentary and not the
force of regulation, and therefore could not be challenged as ultra vires. See
Gaz. Pal. 1961. 411.
No. 4]
EXCLUSIVE DISTRIBUTION AND REFUSAL TO SELL
609
only if six of these are fulfilled simultaneously. The six conditions
arise where:
1. There is a refusal to initiate or to continue business dealings, or
an attempt to meet an order only under conditions different from
those requested by the purchaser and therefore unacceptable to
him. A vendor’s refusal to supply a branded or trademarked
product, even when he is willing to supply an unbranded
(or
differently branded) product of identical specifications renders
him guilty of refusal to sell.35
2. There is a refusal to meet an order in accordance with customary
business practice. The term “customary practice” refers to the
terms of the order, for example of credit and delivery, and not
the situation where it is customary to refuse to sell to certain
classes of dealers such as price cutters.
3. The sale of the product itself is not prohibited by law or regulation.
4. The person refusing to sell was able to meet the request –
either
he was in possession of the product requested, or he was able
to obtain or manufacture it. Under an interpretation of the
Cour de Cassation, a vendor may not refuse to sell from inventory
on the grounds of holding supplies for regular customers. He
cannot legally choose among customers, but must fill orders in
the sequence in which they are received. There can be “no dis-
tinction between a trader’s occasional customers and his regular
customers.., every purchaser has the right to obtain the goods
he needs from any supplier he chooses;” and, it is a violation
“to reserve merchandise or goods for specially selected clients.”
The final two conditions, relating to the bad faith of a prospective
purchaser and the abnormal nature of his request, are also defences
to a charge of refusing to sell or to deal. The plaintiff carries
the burden of proving the existence of the first four conditions,
while the burden of proof is on a defendant who would invoke the
“bad faith” or “abnormal request” defences. The defendant must,
if the first four conditions exist, be willing to specify and defend
his reason for refusing to sell or to deal on the basis of one of
these two defences.
5. The request is not made “in bad faith”. The most important case
is that a reseller at any level is regarded as acting in bad faith
if he systematically and regularly sells a product at a price below
his invoice price plus transportation and taxes. To claim this
35 Proc. gin. C. de cass. v. Barjolle et Soc. Biscuits Olibet, Cass., ch. crim.,
13 juillet 1961, D. 1961.2.525, Gaz. Pal. 1961.2.84, S. 1961.2.289, J.C.P.
1961.2.12241.
McGILL LAW JOURNAL
[Vol. 14
defense, however, the plaintiff must have applied the criteria
equally to all his customers, otherwise he is guilty of practicing
discriminatory conditions of sale.
A potential purchaser also acts in bad faith if he obtains
goods purportedly for processing or resale, where in fact he
intends to use the goods in a manner harmful to the vendor –
for example, to promote the sale of a competing product. Such
a purpose is, as might be expected, difficult to establish before
the fact.
6. The request is not of a normal nature. Refusal to sell or to deal
is justified and defensible:
a) if the quantity of products requested is not proportionate to
the needs of the purchaser, or is outside the quantity normally
delivered by the vendor.3 6 This defence does not include refusal
to deliver small quantities.3 Under article 37-1 (c) of Price
Ordinance 45-1483, it is an offence to make the sale of a
product conditional upon the purchase of any minimum
quantity. It is possible for the vendor to charge higher unit
prices for smaller quantities if he can show that his per-unit
expenses for such a transaction justify a higher price;
b) if the purchaser lacks the necessary professional qualifications
or physical installations. The kind of business or the business
methods used, for example, in discount selling, are not suf-
ficient to justify a refusal to sell. However, the refusal may be
acceptable when the sale of the product is outside the
purchaser’s normal business activity as registered in the
Commercial Register.
One significant case is that of the prospective purchaser who,
because of the special nature of the product or service, does not have
the professional qualifications to process or distribute it satisfactorily.
Where certain personal qualifications are required, they must be
demanded of all purchasers without exception, and the vendor bears
the burden of proving that the product or its use demand such
qualifications.
36 See Barjolle case, ibid., -and submissions of M. le conseiller Costa.
37 See the decision of the Court of Appeal of Amiens of June 17, 1965
(unreported) as discussed in aff. Brunet, Cass., ch. crim., 22 d6c. 1965, D.
1266.2.144. See also Proc. gin. C. de Douai v. Brunel, Cass., ch. crim., 9 janv.
1963, D. 1963.2.206, Gaz. Pal. 1963.1.277, J.C.P. 1963.2.13063 and aff. Nicolas
et Soo. Brandt, aff. Colin et Soc. Radio-Matiriel, and Proc. g~n. C. do Dijon
v. Brunel, all decided and reported together at Cass., ch. crim., 22 oct. 1964, D.
1964.2.753. Aff. Nicolas is also reported at Gaz. Pal. 1964.2.386.
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EXCLUSIVE DISTRIBUTION AND REFUSAL TO SELL
611
In a similar case, refusal to sell may be justified if a prospective
purchaser lacks the necessary physical facilities or equipment –
for
example, for processing or installation. Again, requirements must
be the same for all customers and the burden of proof is on the
vendor.38
Finally, refusal to sell may be justified in the case of luxury
goods which are prestige items, fashion goods, or original models
which must be offered for sale in establishments with an appropriate
sales staff and facilities.
The concepts of professional qualification, sufficient technical
facilities, and luxury goods, while appearing vague, have in fact
reached a high degree of refinement under French jurisprudence. 3
It is not possible to state absolutely how these conditions compare
to Canadian and U.S. regulations. Certainly, a defence to refusal to
sell might be offered in either country under condition (5), perhaps
under (6), and certainly under (3). Conditions (1) and (4) would
constitute offences of themselves only where a subsidiary condition
(such as an attempt to monopolize) existed, or where there was an
enforcement of resale price maintenance. Condition (2) might be
per se illegal under Sections 33A and 33B of the Combines Investi-
gation Act 40 in Canada, and under the Robinson-Patman ACt41 in
the United States. The essential difference is that, in the absence
of unfair, unreasonable, or monopolistic conduct, a supplier in North
America is permitted in the first instance to sell, or to refuse to
sell, to whom he chooses; a supplier in France is not.
INTERPRETATION AND RULINGS
ON EXCLUSIVE AGREEMENTS
The Supreme Court of Appeal, in citing the distinction between
“good contracts”, which improve the service given to consumers, and
“bad contracts”
(which, presumably, do not), has demanded of
French jurists a detailed analysis of the economic and commercial
effects of each exclusive agreement before determining whether it
38 See the statement of the Cour de cassation in Proc. gin. Lyon v. Colin et
Soc. Radio-Matiriel, Cass., ch. crim., 13 juillet 1961, D. 1961.2.530, Gaz. Pal.
1961.2.85, on the conditions determining the absence of technical competence
or facilities.
39 See the Radio-Matdriel case, ibid.; Nicolas et Soc. Brandt v. Soc. Photo
Radio Club, Cass., ch. crim., 11 juillet 1962, D. 1962.2.497, Gaz. Pal. 1962.2.132,
J.C.P. 1962.2.12799, S. 1962.2.219; aff. Nicolas et Soc. Brandt, Cass., ch. crim.,
22 oct. 1964, D. 1964.2.753, Gaz. Pal. 1964.2.386; and Soc. Guerlain v. Ministbre
public, Paris, 26 mai 1965, Gaz. Pal. 1965.2.76.
40 R.S.C. 1952, c. 314.
McGILL LAW JOURNAL
(Vol. 14
should be forbidden under “refusal to sell” legislation. It is neces-
sary, then, to define the conditions under which the implied refusal
to sell in an exclusive contract becomes acceptable. The conditions
are four in number and all must be satisfied by an exclusive contract
for it to be acceptable. In summary:
1.
2. the area assigned the licensee must be strictly defined;
3. the object of the agreement must be the improvement of service
the exclusive contract must be bilateral in nature;
to consumers; and,
4. the agreement must not have the effect, directly or indirectly,
of restricting the freedom of the licensee in pricing.
The first and most important condition is that the exclusive
contract must be bilateral, in that each contracting party must
accept restrictions on his own commercial freedom. The licensor
becomes the sole supplier of the licensee, and the licensee the sole
client of the licensor, for competing products in a given area.42 The
existence of a bilateral agreement may be invoked as a defence
against refusing to sell to a third party if the other three conditions
are also met.
A recent decision of the Court of Appeal of Paris has, however,
weakened the possibility of successful use of this defence.43 Under
the ruling, a supplier retains the right, whether he has contractually
relinquished it or not, of adding to the number of franchised dealers
in an area in order to meet changing economic or market conditions.
New dealers must agree to the conditions imposed on existing
members of the system by the supplier to assure the best promotion
of his products and/or to maintain the value of a trademark.44
Also, the licensee is not obligated, whether he has so agreed
contractually or not, to sell only the products of one supplier if it
would improve consumer welfare for him to do otherwise. He must,
however, reserve for his principal supplier the best conditions of
display, promotion, and pricing.
Finally, the Supreme Court of Appeal has clarified that the
reciprocally exclusive contract must be concluded directly between
41 June 19, 1936, c. 592, 49 Stat. 1526, 15 U.S.C. 13, 13a, 13b and 21a.
42 “Competing products” are defined as those which, however made or used,
are intended for the same purposes and may be considered, by reason of price,
as appealing to the same group of consumers.
43 Soc. Guerlain v. Ministare public, Paris, 26 mai 1965, Gaz. Pal. 1965.2.76.
44 Kusel et Soc. Hidiard-Distribution v. Ministare public, Paris, 18 nov. 1964,
D. 1965.2.792, Gaz. Pal. 1.965.2.78.
No. 4]
EXCLUSIVE DISTRIBUTION AND REFUSAL TO SELL
6.13
supplier and distributor.45 An exclusive agreement resulting from
an agreement made with a union or trade association on one or
both sides is per se inadequate to justify a refusal to sell.
The second condition for an exclusive contract to be acceptable
is that the area given to the licensee must be strictly defined. A
licensor who has assigned overlapping “exclusive” areas cannot law-
fully refuse to sell to a third party in the overlapped area. The
requirement of a strict definition of boundaries does not, however,
mean that they must be observed. The Court of Appeal of Paris
has ruled that, while a zone or area of exclusive agreement must
be carefully defined, the boundary lines may not be considered to
constitute an absolute right.46
The third condition is that a main object of the exclusive
agreement must be the improvement of service rendered consumers,
and the improvement must have some economic or technical basis. 47
Such a basis exists primarily for those products of high technical
content, or requiring special professional competence. 4 For example,
the exclusive agreement may lead to improvement in the technical
knowledge of sales personnel because of special training provided by
the licensor and not available elsewhere at reasonable cost. If this
enables the licensee to provide improved after-sales service in ac-
cordance with supplier requirements, an exclusive agreement could
meet the condition of improving the service rendered consumers.
The fourth condition is that, even where the first three require-
ments are met, the exclusive contract is still illegal if it has the
effect of restricting the dealer’s freedom to set price or profit
margins, or of leading to the imposition of a minimum price. This
condition is strictly applied to exclusive contracts because distri-
bution through exclusive dealers is felt to increase the possibility of
the licensor coercing the licensee with the threat of contract can-
cellation.
It is immaterial whether the restriction on pricing freedom is
explicit, or implicit in contract terms having a different object –
for
example the requirement to use co-operative promotional material
which contains recommended prices, or the contractual obligation
to take no action which might reduce the intrinsic value of the
articles offered for sale.
45 Proc. gin. C. do Dijon v. Brunel, Cass., ch. crim., 22 oct. 1964, D. 1964.2.753.
46 Soc. Guerlain v. Ministare public, Paris, 26 mai 1965, Gaz. Pal. 1965.2.76.
47 Proc. gin. C. do Dijon V. Brunel, Cass., ch. crim., 22 oct. 1964, D. 1964.2.753.
48 See especially Nicolas et Soc. Brandt V. Soc. Radio Photo Club, Cass., ch.
crim., 11 juillet 1962, D. 1962.2.497, Gaz. Pal. 1962.2.132, J.C.P. 1962.2.12799,
S. 1962.2.219.
McGILL LAW JOURNAL
[Vol. 14
Where exclusive distribution is used by a vendor only in those
areas where distributors have practiced price cutting, it is presumed
that the object of the exclusive arrangements is to withhold supplies
from price cutters. The only exception is where the licensor can
show that he is building up a chain of exclusive dealerships.
The exclusive agreement may not be used as a defence against
refusal to sell if it is shown that either of the contracting parties
is not respecting the clauses of the contraL 49 The obligations are
then assumed to have been waived, a fortiori, by mutual consent,
and the contract is considered a spurious agreement whose object
is to justify refusing to sell to certain distributors.
Finally, if the existence of an exclusive agreement is to be used
as a justification for a refusal to sell, the burden is on the contracting
parties to establish the existence of the agreement – most commonly,
by producing a dated instrument in writing.
Again, it is not possible to state absolutely how these conditions
compare to Canadian and U.S. regulations. It is clear that the first
condition, the bilateral nature of the contract, and the second con-
dition, the requirement for a strictly defined geographic territory,
have no parallel in Canadian or U.S. anti-trust law or practice. The
third condition, an agreement the object of which is to improve
service to consumers, might be offered as a defence for a restrictive
agreement in either country. Existence of the fourth condition, a
restriction of the licensee’s freedom in pricing, would certainly
render the agreement per se illegal in either country.
ARTICLE 85 OF THE TREATY OF ROME
Although thus far the paper has considered only French law, a
summary of French practice concerning exclusive agreements and
refusal to sell must also consider the legislation of the European
Economic Community (EEC) as contained in the Treaty of Rome.
While the treaty does not negate French legislation, it does exist
parallel to it, and modifies its application in significant ways. For
example, in several cases of exclusive agreements involving two or
more countries of the EEC, courts in France have refused to consider
cases while awaiting a decision from the European Commission on
the status of the contracts in question. 50
49Whether the decisions enabling a licensor or licensee to ignore certain
contract clauses under given conditions are relevant here is not clear. To the
best of the writer’s knowledge, this has not been tested in a French court.
5 oSt U.N.E.F. v. Etablissements Costen, Trib. comm. Seine, Z mai 1962,
[1962] Rev. int. comm., no. 73, p. 29; rev’d, Paris, 26 janv. 1963, D. 1963.2.189,
Gaz. Pal. 1963.1.157, J.C.P. 1963.2.1S103.
No. 4]
EXCLUSIVE DISTRIBUTION AND REFUSAL TO SELL
615
The Treaty of Rome, from the original draft through article 85
of the present text, has prohibited agreements which had, as an
object or as a result, any restriction of the “game of competition”
between member states.5′ According to the Commission of the
European Economic Community, exclusive contracts between parties
in two or more member countries have always been considered
agreements subject to the restrictions of part I of article 85, and to
the various rulings on its application. A summary of the content of
exclusive contracts, and of all inter-member commercial agreements,
is required in a “notification” addressed to the Commission of the
EEC.52
Article 85-3 of the treaty exempts the restrictions of 85-1 from
being applied to an exclusive agreement, resolution by a trade associ-
ation, or common practice within an industry which contributes to
an improvement of the production or distribution of products, or to
the promotion of technical progress in one or more countries, so
long as there is no elimination of competition. In two separate de-
cisions of the Court of European Justice, 53 section 85-1 has been
declared not applicable to specific agreements because of the appli-
cation of 85-3.
The Commission of the European Economic Community has con-
demned, both in the only relevant case r4 and in principle, clauses
in an exclusive agreement which result in a partitioning of markets
along national boundaries. The condemnation was upheld by the
Court of European Justice in a decision of July 13, 1966, 55 and may
be considered binding in every case where there is a partitioning
of markets for trademarked items.
A study of the treaty indicates that important differences exist
between French and EEC regulations on the subject of procedure
51 The idea of competition as a game exists in the German and Italian as well
as the French texts of the treaty.
52EEC rule 153 permits certain exclusive contracts
to be reported in a
special, simplified notification. See Journal officiel com. eur. 1962.2921.
53 Soc. L.T.M. v. Soc. M.B.U., C. just. Commun. europ., 30 juin 1066, Gaz. Pal.
1966.2.155, D. 1966.2.669; Etabl. Consten-Grundig v. Commission de la, Com-
munauti, C. just. Commun. europ., 13 juillet 1966, Gaz. Pal. 1966.2.119.
54Etabl. Consten-Grunding. V. Commission de la Communaut6, 20 oct. 1964,
Journal officiel com. eur. 1964.2545.
55 A discussion of the key Consten-Grundig case may be found at D. 1963.2.189;
the European
L. Spier, Restrictive Business Practices and Competition in
Community, (1965), 53 Cal. L. Rev. 1337, at pp. 1364-66; K. Newes, The European
Commission’s First Major Antitrust Decision, (1964-65), 20 The Business
Lawyer 431, at pp. 431-435.
McGILL LAW JOURNAL
[Vol. 14
and of violations. Coordination and reconciliation of such differences
is provided for under EEC rule 17-9-3 and under article 177 of the
treaty relating to the competence of the Court of European Justice
for interpretation.
Rule 17-9-3 states that, so long as the Commission of the Eu-
ropean Economic Community is not engaged in proceedings, the
relevant authorities of each member state have competence to apply
article 85-1, and to evaluate whether an exclusive agreement will
hinder competition within the EEC. From the point where proceed-
ings are undertaken by the Commission, national authorities must
relinquish competence and postpone any pending legislation.
A judge in a French court, confronted with the possible ap-
plication of the treaty to an exclusive agreement which is before
his court, must rule in one of three ways.
1. He may rule that the treaty does not apply because the exclusive
agreement has neither the object nor effect of altering trade
between EEC members;
2. He may rule that the exclusive agreement does come under
article 85-1 of the treaty, but that the condition involved has
not yet been the object of a procedure before the Commission.
He must then apply the text of the treaty as he interprets it.
In cases requiring interpretation he may, under article 177, sub-
mit his problem by way of interlocutory question to the European
Court of Justice. If his interpretation is not subject to procedures
of appeal through national courts, he must submit it to the Court
of Justice. The latter cannot rule on the exclusive agreement
itself, but only on the interpretation of the treaty which is sub-
mitted to it.6
3. He may rule that the exclusive contract is the subject of a pro-
cedure before the Commission. In this case, he must relinquish
competence and postpone proceedings until the decision of the
Commission is handed down. 57
5 Soc. Robert Bosch et Soc. Van Rijn v. Soc. de Geus, C. just. Commun.
europ., 6 avril 1962, D. 1962.2.357, J.C.P. 1962.2.12726.
57 Soc. nat. des gconomies familiales v. Soc. Innovation, Trib. comm. Seine,
5 mars 1963, D. 1963.2A367 and Soc. Pierre Rivi~re et Cie. V. Soc. nouvelle des
produits alimentaires, Cass., ch. civ., 12 mars 1963, D. 1963.2.367.
