The Chinese market was important to many British fashion brands before Covid-19. Given the impact that the pandemic has had on their home market and the fact that China has emerged from the crisis, it is unsurprising that the importance of the Chinese market has increased. But how best to access it?
One way that some brands are taking is to work with a local distributor and for that party to sell online to Chinese consumers.
Many British brands will have distributorship agreements that they are using in respect of markets in Europe and North America. These agreements can be adapted for use with Chinese distributors but there are a number of issues to be born in mind.
The first is the scope of the distributorship. Recognising that it is invariably easier to give than to take away, the brand needs to determine the consumer website (for example, T Mall) on which the distributor is going to sell. The alternative is to provide free rein to the distributor.
But the scope of the distributorship also concerns whether the distributor is to face intra-brand competition. If the brand is already selling direct in to the Chinese market, the decision needs to be taken whether to retain or sacrifice this right. Many brands will wish to continue to be able to sell direct and this can be easily reflected in the distributorship agreement.
But what of other distributors of the brand? There are two legal considerations. First, the terms on which other distributors act as distributors for the brand. Are they restricted by their distributorship agreements from selling outside of their markets – that is, to Chinese customers?
Second, whether the law of the distributorship agreement allows restrictions to be placed on distributors selling outside of their markets. In this respect EU competition law distinguishes between active sales (which can be restricted) and passive sales (which cannot).
It is also necessary to consider the reverse – is the Chinese distributor to be restricted from actively selling outside of China or to particular customer groups?
Often brands will appoint a distributor as a stepping stone to establishing their own operation in the relevant country. In this respect obtaining details of the distributor’s customer base is crucial. It follows that the distributorship agreement needs to provide for periodic CRM reports to be provided with relevant customer details. An adjunct to this is for the brand to have live access to the distributor’s customer database and again for this to be reflected in the distributorship agreement.
Although the latest iteration of data protection law – the GDRP and the Data Protection Act 2018 – have been in force for more than two years, some businesses are still to comply fully. Compliance with UK data protection law is one thing. There is also need to comply with Chinese data protection law and, in particular, those provisions which concern the transfer of personal data – not least as to help ensure that the provisions in the distributorship agreement will be enforceable against the distributor.
A similar issue concerns the creation and ownership of:
- intellectual property rights. For example, whilst the agreement will permit the distributor to use the brand’s trade mark in Latin character, what of Chinese characters and the Mandarin phonetic equivalent of the trade mark? Is it possible and would it be appropriate to secure Chinese copyright protection for the brand?
- Domain names, particularly those ending .cn.
Both in respect of the agreement generally and especially concerning the intellectual property and data protection, local law advice should be taken.
There have been a number of reported incidents in diverse industries as to distributors and agents being engaged in bribery. It is also the case that non-compliance with anti-bribery requirements have caused issues in China. It is, therefore, important that suitable anti-bribery provisions are included in the distributorship agreement – and complied with!
Entering a distributorship agreement is one thing. Exiting can be another. As such the distributorship agreement should provide what are to be the events of termination and, importantly, the consequences or termination. For example, will the brand want any of the consumer websites established by the distributor to cease being used immediately on termination? Can the right to use these Chinese consumer websites be transferred to the brand?
The Chinese market is there and the barriers to market entry are relatively low. With an appropriately drafted distributorship agreement there is much to go for in the world’s largest consumer market for many fashion brands