The new competition rules – increased flexibility for distributors?
21/03/2011
The European competition rules which regulate distribution agreements have changed. This article provides a brief outline of some of the current competition law prohibitions which apply to the most commonly used form of distribution agreement, together with a summary of the main changes introduced by the new rules.
Background
The European competition rules prohibit agreements, decisions and practices between entities which have as their object or effect the prevention, restriction or distortion of competition, with the result that any such agreements will be held void and unenforceable.
To avoid this, suppliers need to take care regarding restrictions imposed on their distributors. A limited “safe harbour” is provided for those agreements which fall within certain exceptions. These exceptions are however very limited and, as a result of recent changes, there is now arguably further scope for distributors to avoid/overcome competition restrictions.
Current Restrictions
The following restrictions, if included in a distribution agreement, will render the entire agreement void:
- resale price maintenance (also known as price fixing); and
- restricting the territories into which, or the customers to whom, the distributor may sell (subject to certain limited exceptions).
The following restrictions, whilst not rendering the entire agreement void, will be unenforceable:
- any non-compete obligation which exceeds 5 years, or is indefinite;
- any obligation preventing the distributor, after termination of the agreement, from manufacturing, purchasing or reselling the goods or services (subject to certain exceptions).
Changes introduced by the new rules
As a result of the new rules (which came into effect on 1 June 2010, though transitional arrangements run until 31 May 2011), further conditions must now be met for a distribution agreement to remain exempt from the general competition law prohibition.
Key changes
An agreement will only qualify for exemption if both the supplier and distributor hold market shares of less than 30%. Prior to June 2010, only the market share of the supplier was considered relevant. The effect of this is that fewer agreements are likely to be classed as exempt and the assessment of whether an agreement falls within the exception will be more complicated.
In principle, every distributor must be permitted to use the internet to sell goods. This requirement is undoubtedly as a result of the increased importance of the internet as a sales channel.
The following restrictions are now prohibited and, if included in a distribution agreement, will render that entire agreement void:
- requiring that a distributor prevent customers located in another territory from viewing its website or automatically re-routing customers to the supplier’s or other distributors’ websites. (Note that it is acceptable to require the distributor to display links to the supplier’s or other distributors’ websites);
- requiring that the distributor must terminate its transaction with a customer online if the credit card information supplied by that customer reveals an address outside of the distributor’s territory;
- restricting the number of sales a distributor may make online (although note that it is permissible to require the distributor to sell a specified number of products off line to ensure efficient operation of its bricks and mortar shop); or
- requiring that the distributor pay a higher price for products intended to be sold online (although it is acceptable for the supplier to agree to pay a fixed fee to support the distributor’s off line or online sales efforts).
Note that the above restrictions are designed to address passive selling outside the distributor’s allocated territory. Restrictions preventing a distributor from actively selling a supplier’s products via the internet in territories not allocated to him are still permitted. For example, restrictions on advertisements addressed to specific customers outside the territory can still be prohibited.
Recommendation
In light of the above, all suppliers with distributorship arrangements in place would be well advised to review current arrangements, and in particular take care when seeking to control online sales.
If you have any queries or questions regarding this article please contact Kerry McCorkell on 028 9055 3300, by email,
kerry.mccorkell@tughans.com or for more informatio on our
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