Commercial Practice - Distribution agreements & Competition Law

Question 1

How can a manufacturer distribute its products to customers? (4)

Answer 1

1. Marketing directly to customers.
2. Appointing an agent to sell its products.
3. Licensing another party to manufacture and sell its products.
4. Appointing a distributor to purchase goods for resale.

Question 2

How does a distributor work? (1)

Answer 2

Buy goods from manufacturer under one contract and sells the goods on at a profit to the ultimate customer under another separate contract.

Question 3

What is a distribution agreement? (1)

Answer 3

A contract under which a distributor buys goods from a manufacturer in order to sell goods on at a profit under another separate contract.

Question 4

What is an exclusive distribution agreement? (2)

Answer 4

A supplier agrees to sell its products to just one distributor in a defined territory, in which territory it also agrees not to appoint any other distributors and not itself to sell the same products directly to customers.

Question 5

What is a sole distribution agreement? (2)

Answer 5

A supplier agrees to sell its products to just one distributor in a defined territory but reserves the right to sell products itself directly to the customers within that territory.

Question 6

What is a non-exclusive distribution agreement? (2)

Answer 6

A supplier may appoint more than one distributor in a defined territory and may sell products itself directly to customers within that territory.

Question 7

What is the rationale of Competition Law? (1)

Answer 7

To facilitate a trading environment where there is a high level of competition between parties to help keep prices low so that customers receive a good deal.

Question 8

What is a vertical agreement? (1)

Answer 8

An agreement between companies which are at different levels of the supply chain.

Question 9

Is a distribution agreement a vertical agreement? (1)

Answer 9

Yes.

Question 10

What is the prohibition in S2 Competition Act 1998 against anti-competitive conduct? (1)

Answer 10

Chapter 1 prohibition.

Question 11

What is step 1 of considering if a proposed distribution agreement contravenes the competition law regime? (3)

Answer 11

Diagnose whether or not a proposed agreement is at risk of breaching the Chapter 1 prohibition in the first place. If it is then you will need to see if there is an escape route. The escape route that is most likely to assist is the VABEO.

Question 12

What is step 2 of considering if a proposed distribution agreement contravenes the competition law regime? (4)

Answer 12

Consider whether the VABEO will apply to your particular agreement by checking the terms of the agreement. There are various conditions that will need to be satisfied for the VABE to apply. If the VABEO applies then the distribution agreement will not infringe competition law. If the VABEO does not apply, owing to certain provisions of the distribution agreement, the agreement will infringe competition law, and the infringing party will be liable to sanctions.

Question 13

What is step 3 of considering if a proposed distribution agreement contravenes the competition law regime? (1)

Answer 13

Consider the specific sanctions that may be relevant.

Question 14

What is the key case for step 1 chapter 1 prohibition? (1)

Answer 14

Hasbro UK Limited.

Question 15

What do we have to consider for step 1 chapter 1 prohibition? (3)

Answer 15

1. Is there an agreement / decision / concerted practice?
2. Is there prevention / restriction / distortion of competition?
3. Is there effect on UK trade if implemented in the UK?

Question 16

Where can you find a non-exhaustive list of common types of activity that prima facie restrict competition and what are they? (5)

Answer 16

Section 2 (2) CA - price fixing, ban on passive sales, ban on active sales and territorial restriction.

Question 17

Are distribution agreement likely to fall within the Chapter 1 prohibition? (1)

Answer 17

Yes.

Question 18

What does the VABEO enable? (1)

Answer 18

A distribution agreement to be exempt from Chapter 1 prohibition as long as the agreement complies with the VABE requirements.

Question 19

What does VABE stand for? (1)

Answer 19

vertical agreements block exemption order’

Question 20

What is a block exemption? (2)

Answer 20

A piece of legislation which exempts a whole category of agreements from the general competition law prohibition and will provide an ‘escape route’ for any agreement which complies with the terms of that legislation.

Question 21

When will the VABE apply? (3)

Answer 21

1. The agreement must be a vertical agreement;
2. The parties must comply with market share threshold requirements; and
3. The agreement must not contain any hardcore restrictions.

Question 22

What is the market share threshold requirement? (2)

Answer 22

The exemption will apply if the market share of the supplier does not exceed 30% of the relevant market on which it sells goods or services AND the market share of the distributor does not exceed 30% of the relevant market on which it purchases goods or service.

Question 23

Where are hardcore restrictions listed and what are they? (3)

Answer 23

Hardcore restrictions are listed in Article 8(2) and these are terms which are so anti-competitive that an agreement containing any of them does not deserve exemption from the Chapter 1 prohibition. If the distribution agreement contains any one of the hardcore restrictions the VABEO will not apply and cannot benefit from the escape route – article 9.

Question 24

Why should the supplier not impose fixed or minimum prices at which the distributor must sell on the contract goods to its own customers? (1)

Answer 24

This would harm customers by keeping pricing artificially high.

Question 25

When are territorial restriction hardcore v not? (2)

Answer 25

Allocation of territory by the supplier to the distributor is not a hardcore restriction. Under the VABEO, territorial restrictions are hardcore if they affect what the distributor is permitted to do.

Question 26

What can a supplier under an exclusive distribution agreement do / not do in regard to bans on selling? (2)

Answer 26

The supplier must never impose a ban on passive selling by the distributor and the supplier may only ban a distributor actively selling into a territory where another exclusive distributor has been appointed

Question 27

What is active selling? (1)

Answer 27

Targeted selling – the distributor takes positive steps to seek out customers in a particular area.

Question 28

What is passive selling? (1)

Answer 28

When a customer takes positive steps to approach a particular distributor.

Question 29

How long can a supplier impose a non-compete obligation on a distributor under VABEO? (1)

Answer 29

Five years

Question 30

What does Article 10 (2)(b) state in regard to non-compete clauses? (2)

Answer 30

Non-compete clauses are not prohibited if they do not contain an indefinite duration, or remains in force for more than five years, survives termination of the agreement – known as a post-termination non-compete obligation.

Question 31

What happens if an agreement that falls within Chapter 1 prohibition and it does not benefit from the VABEO? (1)

Answer 31

It is void and no party will be able to enforce it.

Question 32

What can the CMA impose on businesses which infringe competition law? (1)

Answer 32

Fines of up to 10% of a business’ turnover.

Question 33

What can a third party which has been affected by an undertaking’s anti-competitive behaviour pursue? (1)

Answer 33

An action for damages against the undertaking.

Question 34

What can happen to a director who engages in anti-competitive activity? (1)

Answer 34

Disqualification.

Question 35

What way can fines be reduced or avoided? (1)

Answer 35

Whisteblowing.