While drafting, negotiating and implementing agreements, business entities have to make sure that such agreements comply with a number of legal requirements, inter alia with applicable antitrust and competition regulations. While dealing with foreign companies, it is very important to take into account restrictions imposed by imperative rules of respective jurisdictions.
One should remember that regulations of most countries prohibit business practices and agreements which could prevent, restrict or distort competition on the market. Such violation may entail a considerable amount of fine (of up to 10 % of the annual worldwide turnover of the offending company or group of companies) in major part of the countries, including the EU member states.
Besides some special rules and exclusions may apply if particular restrictive agreements could generate objective economic benefits that outweigh the negative effects of the restriction of competition.
For instance, the EU legislation (i.e. Article 101(3) of the Treaty on the Functioning of the European Union) exempts some restrictive agreements from the prohibition, if they meet a number of criteria:
Thus, each agreement and business practice should be assessed individually taking into account peculiarities of each particular case.
On 1 June 2022 new rules, which regulate a number of antitrust and competition issues (including exclusive distribution) came into force in the European Union, namely:
The abovementioned new Regulation and Guidelines are of high importance not only for the EU, but also for other countries.
“Exclusive distribution system” means a distribution system where the supplier allocates a territory or group of customers exclusively to itself or to a maximum of five buyers and restricts all its other buyers from actively selling into the exclusive territory or to the exclusive customer group. Such definition has been recently provided in the abovementioned Commission Regulation (EU) 2022/720 of 10 May 2022.
In practice, the main reason why manufacturers and other suppliers intend to use exclusive distribution systems is to incentivise distributors:
As for distributors, they may prefer an exclusive distribution because it can enable them to secure a certain volume of business and a margin that justifies their investment efforts.
Exclusive distribution may entail a number of competition risks, in particular:
There is a number of factors which should be taken into account while assessing competition risks which may be entailed by exclusive distribution agreements, inter alia:
Suppliers may establish an exclusive distribution if it meets a number of criteria envisaged by the EU regulations, inter alia, if:
As a rule, foreclosure of other distributors does not constitute competition violation if the supplier applying the exclusive distribution system appoints a large number of exclusive distributors on the same relevant market and those exclusive distributors are not restricted in selling to other non-appointed distributors. However, foreclosure of other distributors may entail competition risk if an exclusive distributor becomes the exclusive buyer for a whole market.
An exclusive distribution agreement may be objectively justified if it meets a number of criteria, for instance:
Each exclusive distribution agreement should be assessed individually in order to identify all risks taking into account both applicable legislation as well as recent law-enforcement practice of relevant jurisdictions.
We would recommend drafting and negotiating distribution agreements carefully, while implementing a number of risk mitigation tools (inter alia, proper wording of risk mitigation clauses, respective substantiation in company’s internal documents etc.).
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