Regulating Distributorship Agreements

Written by Steve Sidkin
16 September 04

Since the Treaty of Rome was signed the question of the compliance of distributorship and supply agreements with EC competition law has proved troublesome. For many years, those agreements have been exempt from what is now Article 81 of the EC Treaty by various EC Regulations. But these Regulations were seen as being over-formalistic. A few years ago, however, a new EC Regulation was introduced. Whilst it has the aim of simplifying the rules and reducing the regulatory burden for businesses, the changes that it introduces means that many existing agreements need to be reviewed.

It is important to comply with Article 81 insofar as offending contractual provisions, and sometimes the contract itself, are void and therefore unenforceable. The European Commission may fine the contracting parties up to 10 per cent. of their worldwide turnover. In addition, the parties may be sued for damages by third parties. Even worse, if the agreement fails to benefit from the exempting Regulation, the parties may be exposed to similar risks under UK competition law.

The new EC Regulation fundamentally alters the criteria for exemption. Previously, agreements were exempt from Article 81 due solely to the existence of various clauses. Now, the market share of the parties needs to be considered. To be exempt by virtue of the new Regulation, the supplier must not have more than 30 per cent. of the relevant market on which it sells the goods or services. For exclusive supply agreements, the 30 per cent. limit relates to the relevant market of the purchaser. The relevant market is determined by reference to the relevant product and geographic markets.

Even when an agreement satisfies the market share criteria, the exemption may be lost in respect of the whole agreement where the agreement has one of the following types of offending restrictions:

• a restriction on the purchaser’s ability to determine its sale price. However, a supplier can impose a maximum sale price or recommended sale price, provided this does not operate in practice as a fixed or minimum sale price.
• a restriction on the customers to whom or the territories where the purchaser may resell the goods or services. This restriction is acceptable, however, if it is in respect of active sales into the exclusive territory or to an exclusive customer group reserved by the supplier or to another purchaser. It is also acceptable if the ban is on wholesalers selling to consumers or on sales to unauthorised members of a selective distributorship system.
• a supplier cannot impose a restriction on selective distributors selling to consumers (other than in respect of the premises for the sales).
• a restriction on cross-supplies within a selective distribution system.
• a supplier of spare parts cannot be restricted from supplying to consumers or repairers not authorised by the purchaser of the spare parts.

Certain obligations will also be denied the benefit of the exemption but without prejudicing the rest of the agreement from being exempt. The exemption does not apply to a non-compete obligation which lasts indefinitely or for more than five years (unless the goods or services are sold by the purchaser from premises and land owned or leased by the supplier and the restriction does not exceed the period of occupancy). For this purpose a non-compete obligation is one where the purchaser agrees to buy at least 80 per cent. of its purchases from the seller or agrees not to manufacture, buy or sell goods or services which compete with the contract goods or services. Equally post-termination non-compete obligations will be outside the exemption unless they are limited to one year, relate only to competing goods, and come within certain criteria set out in the Regulation.

If the relevant market share on entering into the agreement is less than 30 per cent. but subsequently rises above that level, then the agreement may lose the benefit of the exemption. The exemption continues to apply for two consecutive calendar years following the year in which the 30 per cent. threshold was first exceeded. However, if the market share exceeds 35 per cent, the exemption continues for only one calendar year following the year in which the 35 per cent. level was first exceeded.

If an agreement benefits from the exempting Regulation or it would have done had the agreement had an effect on trade between member states of the EU, it will automatically be exempt from the Chapter I prohibition of the UK Competition Act 1998, which came into force on 1 March 2000. In addition, under an Exclusion Order, an agreement will not offend the Chapter I prohibition irrespective of market share where two or more firms operate at a different level of production or distribution and where the parties buy, sell or re-sell goods or services. This is provided that the agreement does not restrict the purchaser’s ability to determine its sale price.

If an agreement does not benefit from the Exclusion Order, then the parties may be fined up to 30 per cent. of their turnover in the United Kingdom, although the fine will be reduced to take account of a fine already imposed by the European Commission or another member state in respect of the same agreement. In addition, as with infringements of Article 81, third parties can sue for damages.

Many companies may wish to exploit new opportunities created by the introduction of the new Regulation. Agreements that did not previously come within the exemption from Article 81 may now do so. The exemption will also automatically mean exemption from the Chapter I prohibition.

This briefing note is for general information.  For advice in applying this general information to your specific circumstances, please contact Stephen Sidkin or any member of the Fox Williams’ agentlaw team (www.agentlaw.co.uk)