Types of distribution agreement
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.
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.
The supplier has complete freedom to sell directly and to appoint other distributors within the territory.
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.
Anti-competitive agreements are agreements between businesses that (or intend to) prevent, restrict or distort competition and which affect trade in the UK.
Agreements are more likely to be prohibited when they
fix the prices to be charged for goods or services
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
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 UK 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.
If a distribution agreement includes a 'hardcore' restriction, it will not benefit from the safeguards contained under the UK 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.
Impact of Brexit
From 1 January 2021, the EU competition rules continue to apply to agreements or conduct of UK companies that have an effect within the EU.
However, EU competition law will no longer be enforced in the UK. Instead, most EU competition law has been retained in UK competition law. From 2021, the Competition and Markets Authority (CMA) in the UK took over from the European Commission (EC) in enforcing competition law.
From 2021, EU authorities have lost the power to carry out on-site investigations (also known as ‘dawn raids’) in the UK. Instead, their powers of investigation are limited to making written requests for information from UK-based companies. The CMA has replaced them as the central enforcer of competition law in the UK, investigating anti-competitive agreements and any potential abuse of a dominant position.
The majority of EU competition law will be transferred into UK law. In particular, the EU block exemption will be retained in UK law beyond Brexit, meaning distribution agreements can continue to benefit from the vertical agreement block exemption.
Where a formal investigation by EC authorities was initiated before the end of the transition period, the EU has the power to continue that ongoing investigation into 2021.
Also, commercial practices conducted by companies based outside the EU will continue to be subject to potential investigation by EC competition authorities, where there is an actual or potential effect on EU trade.
For more information on the impact of Brexit on competition law in the UK, please see the government website.