Exclusive distribution arrangements can in some circumstances be subject to EU and UK competition law rules. John Schmidt and Zeno Frediani look at some of the key issues that operators in the food and drink industry should keep in mind to avoid falling foul of competition rules.
Although distribution agreements tend to be vertical (that is, between firms at different levels of the supply chain) they can affect competition between brands and between suppliers. Sometimes a distributor may make significant investments in setting up and developing a market for a particular product. To justify this investment, the distributor may look for protection from competition from other distributors or even the supplier itself. These exclusive distribution arrangements can engage the EU and UK competition provisions and are likely to be prohibited where they confer absolute protection within a territory (eg a part(s) of the UK, or a specific country). A further consideration in the EU context is that agreements that isolate national markets and try to maintain different prices in different Member States may also engage the EU competition provisions.
How do you assess an exclusive distribution agreement?
The first step is to check whether the agreement could benefit from the exemption in the Commission’s Notice of agreements of minor importance. This De Minimis Notice applies to agreements that do not contain any hardcore restrictions and are between SMEs or involve larger companies where the parties’ combined market shares do not exceed certain thresholds. If the De Minimis Notice does not apply, the next step is to identify the market shares of the supplier and buyer on the market for that product. If the market shares of the supplier and the buyer each do not exceed 30% in the products covered by the agreement, the agreement could be automatically exempt under the Verticals Block Exemption Regulation, subject to certain conditions. If one of the parties’ shares exceeds 30%, the agreement would have to be assessed individually as to whether it could benefit from an exemption. An agreement is exemptible if it contributes to improving production or distribution, promotes technical or economic progress, allows consumers a fair share of the resulting benefit, does not impose restrictions which are not indispensable to achieving those objectives, and does not eliminate competition.
Verticals Block Exemption Regulation
What usually happens in practice is that firms will try to shape their agreements so as to be able to rely on the exemption in the Verticals Regulation. An exclusive distribution agreement is likely to benefit from the Verticals Regulation provided that:
▪ the relevant market shares of the supplier and the buyer each do not exceed 30%;
▪ the agreement is not an agreement between competitors within the meaning of the Verticals Regulation; and
▪ the agreement does not contain any hardcore restrictions.
What are hardcore restrictions? Typically, setting resale prices or other terms on which the products could be on-sold amounts to a hardcore restriction. Restrictions on sales to end-users and restrictions on authorised dealers making cross-supplies to other authorised dealers can also be problematic in certain circumstances.
Distribution agreements, particularly those with exclusivity, often contain non-compete provisions. Such provisions can be allowed under the Verticals Regulation but again there are limitations, depending on the circumstances.
One issue which is becoming increasingly the focus of competition authorities is where suppliers seek to stop or reduce the sale of their product through the internet. There are only very limited circumstances in which this can be done. Moreover, it is generally not possible to restrict a seller in one country or in one exclusive sales territory from meeting orders in a different distributors sales territories, particularly if such orders are made via the internet.