Distribution Agreements – compliance with competition law and consequences

If you are a supplier, distributor or part of a supply chain, it is very important that your distribution agreement is compliant with competition law. Failure to comply with competition law has potentially-serious adverse consequences which are set out within this article.

Is your agreement prohibited?

The default position is that distribution agreements (or so called ‘vertical agreements’ under European Law) are prohibited under competition law, unless they form part of the limited exemptions. This is because such agreements are seen to either prevent, distort or restrict competition in the UK/EU or have the effect of preventing, distorting or restricting competition.

It is therefore important that your agreement is drafted in a way that falls within one of the exemptions.

Exemptions?

A distribution agreement is exempt if it falls within either The Vertical Agreements Block Exemptions (VABE) or The Commission Notice on Agreements of Minor Importance (NAOMI).

A distribution agreement is likely to be compliant with VABE if all of the following are met:

• The market share of the supplier does not exceed 30% of the market on which it sells;
• The market share of the distributor does not exceed 30% of the market on which it purchases;
• The agreement does not contain any ‘hardcore restrictions’ as set out in Article 4 (price-fixing and territorial restrictions); and
• The non-compete obligations imposed (if any) are limited to 5 years and do not survive termination of the agreement (Article 5).

If your distribution agreement is compliant with the above provisions, it may be exempt. However, if the above provisions are not met, your agreement may still be exempt under NAOMI if:

• The market share of each party (take separately) does not exceed 15%; and
• The agreement does not contain any ‘hardcore restrictions’ as set out in Article 4.

If your distribution falls within NAOMI, it may be exempt on the basis that, the impact in the actual market is too small to amount to an ‘appreciable’ restriction of competition.

If you agreement is in a draft form, it is better to draft it compliant with the VABE rather than NAOMI.

Consequences

• Fines of up to 10% of the company’s turnover;
• Fines of up to 1% on parties who fail to co-operate with an investigation;
• Directors’ disqualifications;
• Suspending parties’ activities whilst the investigation takes place; or
• Third party claims.

It is always better to seek independent legal advice before any such agreement is signed to ensure compliance under competition law. This is a very technical and detailed area of law which is often difficult to navigate in the course of distribution agreement negotiations and drafting.

We are happy to assist you along the way and advise you on how your agreement can be amended to be compliant with competition law and what your legal position is – call 01206 700113 or email [email protected]