The Pitfalls of Selective Distribution: Lessons from the CAT's Judgment in Up & Running vs Deckers

On 25 October 2024, the CAT delivered its judgment in Up & Running vs Deckers. The case involved a dispute between Deckers, a manufacturer of HOKA-branded running shoes, and its retail partner. Deckers distributed HOKA products under an SDS, in two sales channels: one for current season products (Main Retail Channel) and one for out of season, clearance items (Clearance Channel). Retailers had to obtain Deckers' approval to supply HOKA-branded products in either channel, whether in physical stores or online.

Up & Running was already approved to sell HOKA products (both in bricks and mortar stores and on its existing associated website), but wanted to start a new anonymised website to sell excess stock at discounted prices, due to significant stock volumes accumulated during the COVID-19 pandemic. Deckers declined to approve this second website, relying on a contractual clause which required retailers to obtain its permission to sell online, meet its website standards (as communicated from time to time) and have the website content approved. The question before the CAT was whether Deckers' refusal amounted to an object infringement of competition law.

An SDS is a distribution model where suppliers sell only to authorised distributors meeting minimum, specific criteria (e.g., quality standards or providing after-sales services). In return, the distributors commit to only supply end users or other approved distributors. The rationale for using a SDS is typically to restrict distribution to achieve a legitimate purpose, such as maintaining the supplier's brand image and achieving service consistency, while preventing free-riding by distributors who are not prepared to invest in a high quality retail environment.

It is established EU case law that certain types of SDS fall entirely outside the prohibition on anti-competitive agreements (Chapter I Competition Act 1998 / Article 101 TFEU), if they meet the criteria set out in Metro v Commission (Case C-26/76):

• resellers are chosen based on objective, qualitative criteria;
• the criteria are applied in a non-discriminatory and uniform way;
• the characteristics of the product in question necessitate an SDS in order to preserve the product's quality and ensure its proper use; and
• the criteria do not go beyond what is necessary.

If the Metro criteria are not met, the SDS must comply with competition law – i.e., not have the "object or effect" of restricting competition, unless it can exempted under either the Vertical Agreements Block Exemption (VBE) or the individual conditions in s.9 Competition Act 1998 / Article 101(3) TFEU.

In the context of the specific facts of the case, the CAT found that:

• The SDS did not meet the Metro criteria. The CAT's assessment of the evidence was that the Main Retail Channel criteria (e.g., relating to consumer experience, presentation, service and product range), were neither objective nor applied in a uniform and non-discriminatory fashion. The criteria were not meaningfully or adequately specified in Deckers' internal documents and processes, included quantitative elements (such as retailer numbers), were not transparent to retailers and left a significant amount of discretion to account managers, leading to a lack of uniform assessment. In the Clearance Channel, which was at the core of the dispute, the CAT found Deckers did not have any specific, pre-existing criteria.
• The refusal to approve the second website amounted to a "by object" restriction of competition. The judgment explicitly confirms that failing to meet the Metro criteria does not necessarily mean that a restriction is "by object" (i.e., conduct that, by its very nature, is deemed to restrict competition). However, in the absence of meaningful and consistently applied SDS criteria, the CAT concluded the only plausible aim of Deckers' approval requirements and its refusal to authorise the website was to prevent retailers from discounting on a clearance basis, and therefore indirectly from setting retail prices.
• The agreement did not benefit from VBE. Notably, although the parties' market shares fell squarely within the VBE thresholds, the VBE was not available as the arrangements nevertheless amounted to a "hard core restriction", by preventing a buyer from selling to end users (other than from an unauthorised place of establishment) and limiting their ability to set retail prices. However, the CAT's analysis on this point is cursory and raises a number of questions – it is not clear, for example, why operating an unauthorised website should be treated differently from operating from an unauthorised place of establishment.

Brand owners will take some comfort from the CAT's recognition that having criteria governing admission to an SDS (including for a separate clearance channel) or a requirement to seek prior supplier approval for specific stores or websites is not inconsistent with the overall legitimate objective of protecting the supplier's brand image.

However, the key issue here was that, in the CAT's view, the SDS was not – as a whole – particularly well-constructed and suffered from a significant number of implementation defects. As the CAT observed: "[the SDS] was incomplete and flawed in its design and operation. The criteria for admission to the system were not properly recorded or kept in writing. Those criteria were, moreover, applied inconsistently on a piecemeal basis at best and in a discretionary, if not arbitrary manner at worst. It is also striking to see the virtual absence of anything resembling the framework for treatment of separate channels". If those deficiencies had not been present, the CAT stated it would have been open to arguments that the SDS pursued a legitimate aim and should not be categorised as a "by object" restriction.

Of course, the commercial reality is that a perfectly planned and executed SDS is difficult – if not impossible – to achieve in practice, since a qualitative assessment of retailer suitability inevitably requires a degree of subjective judgment and actively managing that rigorously may be challenging for smaller brands. However, the case serves as a good reminder for suppliers to make reasonable efforts to robustly design the SDS and consistently apply the criteria, to mitigate the risk of a competition law infringement allegation – even in circumstances where the SDS could potentially benefit from the VBE. In particular:

• the criteria for selecting retailers and approving physical or online sales outlets should be sufficiently detailed, appropriately internally documented and transparent to retailers;
• internal processes and Standard Operating Procedures should be in place setting out how to apply the criteria in individual cases (e.g., by reference to a scoring system, to avoid giving account managers unfettered discretion), identifying governance steps for approving the final decisions and establishing appropriate retailer escalation and appeal procedures; and
• before communicating a refusal, legal advice should be sought to ensure the criteria were correctly applied and that the retailer is given sufficient reasons for why it failed the supplier's assessment.

Retailers participating in an SDS may wish to expressly discuss options for dealing with leftover stock with suppliers, to avoid future disputes and negative impact on commercial relationships. For example, the parties could negotiate a supplier buy-back of stock at agreed prices or specify ways for retailers clearing such stock from authorised outlets (e.g., promotional activities towards the end of the season or reselling to other authorised retailers specialising in the clearance channel).