Things manufacturers need to consider when starting direct online sales

Stationary trade restrictions due to the Corona pandemic are pushing forward digital distribution solutions. At the retail level, the closures of store locations in particular have prompted even those retailers who had previously relied solely on brick-and-mortar sales to switch to online distribution almost overnight.

Likewise, at the manufacturer level, the comprehensive restrictions on stationary retail trade is bolstering digital distribution. Such restrictions have prompted many manufacturers to pursue plans, some of which have already been in place for some time, for parallel online direct sales, as in sales in addition to their dealers’ retail sales, in order to exert greater influence on end customer business while mitigating the negative effects of the corona crisis.

Clearly, a great deal of sensitivity is required on the part of the manufacturers when tackling direct online sales due to the dealers’ already tense situation. Moreover, beyond the e-commerce-related obligations that apply to all operators of online shops (such as relating to general terms and conditions, consumer information, data protection and geo-blocking), manufacturers must also abide by special requirements under distribution and antitrust law. In this context, the following issues should be considered:

Do the contracts with the dealers even allow parallel direct sales?

Manufacturers who sell their products through independent dealers must check whether their dealer contracts even permit parallel direct sales to the desired extent. Older contracts, especially, often restrict the manufacturer's right of direct distribution to specific groups of end customers (major customers, public authorities, journalists or employees, for example). If this were the case, the manufacturer would have to conclude additional agreements with their dealers or adjust their dealer contracts, such as by means of a change notice, in order to sell their goods directly to any end customer. Conversely, were the manufacturer to sell parallel and directly without such an adjustment of the contracts, it could face claims by its dealers for injunctive relief and damages. The dealers might even be entitled to termination without notice and, as a consequence, to further compensation.

If it proves to be not possible to reach a contractual agreement on direct sales with the dealers, platform solutions could be a viable alternative: In this case, the manufacturer would merely provide an online platform for sales by the dealers, where the customers could select the product and configure as necessary. Since the dealers would be maintaining both their margins and direct contact with the end customers, such solutions are often easier to implement.

What are the requirements for setting up online direct sales?

The more the manufacturer integrates its dealers into its own sales organisation and, to the extent permissible, thereby restricting their decision-making power (e.g. through non-compete obligations as well as obligations regarding reporting, training, advertising, minimum purchases, after-sales service and stock-keeping), the more the manufacturer must take into account the dealers' legitimate market interests when pursuing its own interests.

• This may mean that the manufacturer would have to compensate dealers financially for the reduction of their sales opportunities caused by the direct sales and that the obligation to pay such compensation must be explicitly laid down in the contracts with the dealers.
• Exclusive allocations of territories or customer groups in distribution agreements favouring a dealer must be taken into account. The manufacturer may not actively deliver to these exclusive territories or customers. However, if passive sales are not expressly prohibited, the manufacturer may be able to accept orders originating from these territories or from these customer groups. This also applies to online sales, which are normally considered passive sales.
• Furthermore, especially in selective distribution systems, the manufacturer itself must comply with the same qualitative standards imposed on dealers. This means, for example, that the manufacturer must abide by the dealer standards for online sales when selling products directly online (relating to the presentation of the products in the online shop, the use of third-party sales platforms or the customer service obligations).

How can dealers be involved in the online direct sales?

Involving the dealers is an important means for sharing the benefits of online direct sales and increasing dealer acceptance. At the same time, it optimizes the services offered to end customers. Click-and-collect purchases with the option of picking up products ordered from the manufacturer's online shop from the local dealer are one example. For products requiring personal instruction and not suitable for direct shipment to the end customer, collection from the dealer may even be the only option. An after-sales service that enables customers to reach out to the local dealer in the event of questions or defects is often equally crucial.

Such options will generally require a specific contractual agreement with the dealers including compensation for the services provided by the dealers stemming from the manufacturer’s direct sales. Further, the manufacturer might be obliged not to discriminate between the dealers when involving them in the direct sales.

Is there anything else?

Through direct sales, the manufacturer becomes an (actual) competitor of its dealers on the retail market. When starting the direct sales activities, the manufacturer must be careful with market-sensitive information such as prices, sales volumes, customer names, etc. it receives within the scope of the dealers' reporting obligations. This applies even if such information transfer may have been permissible in the past, for example, for reasons of production and sales planning. Any exchange of information that is not permitted under antitrust law has to be avoided, for example, by implementing "Chinese Walls" in the manufacturer's organization.

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