Distribution agreements

What is a distribution agreement?

A distribution agreement is a form of vertical agreement whereby a manufacturer uses third-party distributors and/or retailers to bring its products to market. For example, a manufacturer of televisions may contract with a wholesale electronics distributor, who in turn will supply the televisions to a retail outlet for sale to a final consumer. Most distribution agreements will not raise competition concerns and are likely to generate efficiencies and be pro‑competitive.

However, distribution agreements may infringe section 4 of the Competition Act 2002 (as amended) or Article 101 TFEU where they incorporate clauses or provisions that have the object or effect of preventing, restricting, or distorting competition.

What sort of provisions can make a distribution agreement anti-competitive?

While most distribution agreements are lawful, certain clauses may restrict competition and may infringe competition law, particularly where they limit the ability of distributors to compete independently.

Examples of provisions that may raise concerns include:

• Resale price maintenance (RPM)
  Fixing or limiting the price at which a distributor resells goods (e.g. setting minimum resale prices or restricting discounts).
• Restrictions on passive sales
  Preventing distributors from responding to unsolicited customer requests from outside their allocated territory or customer group.
• Market or customer allocation
  Dividing territories or customers between distributors in a way that reduces competition between them.
• Restrictions on online sales
  Limiting a distributor’s ability to sell products through online channels, marketplaces, or digital platforms without objective justification.
• Restrictions on cross‑supplies
  Preventing distributors within the same network from supplying one another, which may limit intra‑brand competition.
• Non‑compete obligations of excessive duration or scope
  Requiring distributors to purchase exclusively from a supplier for a long period, or preventing them from dealing with competing brands beyond what is necessary.

Not all such provisions will necessarily infringe competition law. Whether a restriction is problematic will depend on the specific circumstances, including the market position of the parties and the overall effects on competition.

What guidance is there so I can assess my distribution agreement?

In assessing whether a distribution agreement raises concerns under Article 101 TFEU, the CCPC applies Regulation (EU) 2022/720 – known as the Vertical Block Exemption Regulation (VBER) – and has regard to the accompanying Guidelines on Vertical Restraints. The CCPC also applies its Verticals Declaration and its Notice on Vertical Agreements to assess whether the agreement raises concerns under Section 4 of the 2002 Act.

The VBER and Verticals Declaration establish a “safe harbour” for vertical agreements that satisfy certain criteria, and do not incorporate ‘hardcore’ restrictions on a distributor’s commercial freedom that are deemed to infringe section 4 of the 2002 Act and/or Article 101 TFEU. A distribution agreement that satisfies the criteria set out in the VBER will generally benefit from a “safe harbour” and will not be subject to competition enforcement, save in exceptional circumstances where the exemption is withdrawn or disapplied.

A distribution agreement imposing restraints on a downstream entity will benefit from the VBER where the following conditions are met:

• Neither party to the distribution agreement holds more than 30% market share of their respective markets;
• The agreement does not include restrictions that go beyond what is normally accepted in distribution agreements;
• The relevant provisions do not constitute a hardcore restriction of competition; and
• The supplier is not an online intermediation service provider that competes with the downstream undertaking.

What if my agreement does not satisfy the VBER or the Verticals Declaration? Is it automatically unlawful?

If a distribution agreement does not fall within the safe harbour set out in the VBER, and does not incorporate hardcore restraints, the CCPC will first assess whether it restricts competition within the meaning of section 4 of the Competition Act 2002 (as amended) and/or Article 101(1) TFEU, and then whether its pro-competitive aspects outweigh any anti-competitive effect it may give rise to.

If you believe you have evidence of a potentially anti-competitive distribution agreement, you can contact the CCPC.