Competition law and distribution agreements

A distribution agreement is an agreement between a supplier and a distributor of goods. The supplier may be a manufacturer or may itself, be a distributor selling goods. A distribution agreement is more likely to be affected by competition law rules (eg the Competition Act and EU Competition law) than other agreements, because the supplier often imposes certain terms that affect the distributor's sale contracts with their own customers.

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Types of distribution agreement

Exclusive

The supplier agrees to sell the contract goods only to the distributor with a certain agreed territory and agrees not to appoint other distributors or sell the goods directly to other customers within the territory.

Sole

The supplier appoints a distributor as their only or sole distributor within a territory, but the supplier reserves the right to supply the goods directly to end users.

Non-exclusive

The supplier has complete freedom to sell directly and to appoint other distributors within the territory.

Competition rules

In the UK, certain competition rules apply. Anti-competitive behaviour which may affect trade within the UK is specifically prohibited by the Competition Act 1998 and the Enterprise Act 2002. Where the effect of anti-competitive behaviour extends to other EU member states, it is prohibited by Articles 81 and 82 of the EC Treaty.

Restricted activity

Anti-competitive agreements

Anti-competitive agreements are agreements between businesses that (or intend to) prevent, restrict or distort competition and which affect trade in the UK and/or the EU.

Agreements are more likely to be prohibited when they

  • Fix the prices to be charged for goods or services

  • Limit production

  • Carve up markets, or

  • Discriminate, eg between customers (for example, by charging different prices or imposing different terms depending on the customer).

Abuse of a dominant market position

This means that a business is able to behave independently of competitive pressures, eg other competitors in that market.

Conduct considered an abuse of a business in a dominant market position includes:

  • Charging excessively high prices

  • Limiting production

  • Refusing to supply an existing long term customer for no reason

  • Charging different prices to different customers, or

  • Making a contract condition on something that has nothing to do with the subject of the contract.

Vertical agreements and the block exemption

Under the EC competition rules, most distribution agreements will benefit from an exemption afforded to vertical agreements. This is known as the 'vertical agreements block exemption.'

A vertical agreement is an agreement entered into between businesses operating at different levels of the economic supply chain, eg distribution agreements (suppliers and manufacturers), agency agreements (principals and agents) and franchising agreements (franchisors and franchisees). The exemption presumes the legality of distribution agreements provided certain conditions are satisfied, namely

  • The supplier's market share is below 30%, and

  • The agreement does not contain specified hardcore restrictions.

Hardcore restrictions

If a distribution agreement includes a 'hardcore' restriction, it will not benefit from the safeguards contained under the EU competition rules, including the vertical agreements block exemption.

Hardcore restrictions include:

  • Price fixing - a supplier must not impose a fixed or minimum price at which distributors can resell the goods. The seller may, on the other hand, impose a maximum resale price or recommended resale price.

  • Restrictions concerning the territory into which, or the customers to whom, the distributor may sell - distributors must remain free to decide where and to whom they sell, however, restrictions on 'active sales' are allowed (but only where (i) there is an exclusive arrangement, ie the territories have been reserved exclusively for the supplier itself or another distributor); and (ii) the supplier is not permitted to restrict 'passive sales').

  • Active sales means actively approaching customers inside another distributor's exclusive territory or customer group by, for example, direct mail, personal visits or advertising aimed at the customer group or customers within that territory.

  • Passive sales on the other hand, refer to general advertising or promotion in media or on the internet that reaches customers in other distributors' exclusive territories or customer groups.

Failure to comply

Businesses involved in anti-competitive behaviour may find their agreements to be unenforceable and risk being fined up to 10% of their global turnover for particularly damaging behaviour. They may also expose themselves to possible damages actions from customers.

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