Distribution contracts are an important part of a distribution system. They contain important obligations of the authorized dealer and serve to standardize the distribution and marketing of the contract products. A contract with the distribution obligations of an authorized dealer often occurs in a selective distribution system. However, the question of the choice of sales agents, territorial protection, sales via a company's own website, the scope of exclusivity and non-competition clauses and the limits of price maintenance and best price clauses arise in all distribution systems. These five important aspects should therefore always be taken into account when drafting an authorized dealer contract and a general distribution contract.
choice of sales agents
The decisive factor is whether the company, in accordance with its distribution policy, relies on independent authorized dealers who act on their own account and in their own name, or on commercial agents. Since the commercial agent arranges business and does not sell himself, price fixing is permissible for him, but not for authorized dealers. However, the sales risk when using commercial agents remains with the company alone. In addition, commercial agents have a legal right to compensation when the contract is terminated, but authorized dealers only have this right under strict conditions.
Different distribution systems
In particular, the question of territorial protection arises in both selective distribution and exclusive distribution. In each variant of the distribution system, the authorized dealer is subject to different limits in terms of protection against competition from other sales intermediaries. In return, he is granted different freedoms under antitrust law. The two variants cannot be effectively linked legally. It also makes no difference whether offline or online sales are affected.
Selective distribution
In selective distribution systems, the manufacturer or supplier undertakes to only sell its goods or services to dealers who are selected based on specified characteristics. The dealer is therefore authorized according to certain quality criteria. At the same time, the authorized dealers undertake not to sell the products or services to dealers who are not authorized to sell. In selective distribution, therefore, everyone stays "among themselves". The ban on supplying to unauthorized dealers may not be circumvented. Indirect or indirect supply to non-selected dealers, for example via middlemen or abroad, is also prohibited.
A distribution agreement with such a clause on selective distribution is exempt from the cartel prohibition if the dealer's freedom of distribution is otherwise guaranteed: Every selectively authorized dealer must therefore be allowed to sell to any customer who is resident in the area in which the selective distribution system is practiced. The restriction of distribution therefore takes place at the dealer level. Territorial or customer restrictions on the authorized dealer are not permitted in selective distribution. An authorized dealer cannot therefore be prevented from selling freely within the area in which the selective distribution system is in place. This also applies under the new Vertical Block Exemption Regulation 720/22.
Exclusive distribution
With exclusive distribution, the distribution system is set up in such a way that the restrictions exist at the level of the area or the customer: According to the new Vertical Block Exemption Regulation 720/2022, or Vertical Block Exemption Regulation 720/2022 for short, exclusive distribution systems are distribution systems in which the provider exclusively assigns a territory or a customer group to itself or to one or a limited number of up to five customers, i.e. dealers. Each dealer receives a specific territory alone or together with other dealers. Each provider can freely determine the respective area for exclusive distribution, for example by postcode. This also applies to the definition of customer groups. The number of dealers should be determined in relation to the assigned territory or customer group. The provider should focus on protecting the customers' investments and securing a certain volume of business.
“Sole distribution systems” or “exclusive distribution systems” are also characterized by the fact that each authorized dealer is allowed to actively market in his or her own territory. Only he or she is permitted to actively sell in this territory. Other customers who are assigned to other territories or customer groups are subject to restrictions on actively selling in the exclusively assigned territory or to the exclusively assigned customer group. Each exclusively authorized dealer is therefore protected from other authorized dealers actively advertising for customers in his or her territory. Passive sales into other territories are permitted, however.
Distribution restrictions according to the type of sale
The Vertical Block Exemption Regulation 720/2022 allows the supplier or manufacturer to allocate territories or customer groups exclusively to one or more dealers in order to restrict other dealers from selling in or to these territories or customers. In the case of selective distribution, the supplier may prohibit the buyer from selling to unauthorized dealers. When planning to restrict the dealer's sales and marketing measures, the distinction between active and passive sales must always be taken into account.
Difference between active selling and passive selling
When drafting a distribution agreement and its clauses, attention must therefore be paid to the difference between active and passive sales. Passive sales are, according to the Vertical GVO 720/2022 any sale resulting from the independent and unsolicited requests of individual customers. This includes any supply of goods or provision of services to such customers that was not triggered by advertising actively directed at the customer group or territory in question.
According to the Vertical Block Exemption Regulation 720/2022, active selling means any type of selling other than passive selling, including targeting customers through visits, letters, emails, calls or other forms of direct communication or through targeted advertising and promotion, offline or online, for example through print media or digital media, including online media, price comparison tools or search engine advertising, aimed at customers in specific areas or from specific customer groups.
Website according to the Vertical Block Exemption Regulation 720/22
The Vertical Block Exemption Regulation 720/22 provides a significant innovation. Until now, websites and web shops were always classified as passive sales. This will no longer apply in the future: If a website offers language options that differ from the language options commonly used in the area in which the retailer is established, this is generally classified as active sales. Offering a website with a domain name from a different area than that in which the retailer is established also constitutes active sales.
In the case of the online sale of goods and services, an unlawful restriction is any measure which, directly or indirectly, in isolation or in combination, has the purpose of preventing purchasers or their customers from effectively using the internet to sell their goods or services online.
Territorial Protection and Non-Competition Clauses: The Importance of Exclusivity in Antitrust Law
The antitrust law is a crucial part of competition law, which aims to ensure fair competition and protect consumers from the effects of illegal economic agreements. An important aspect of antitrust law concerns territorial protection and exclusivity. In territorial protection, companies enter into agreements to delimit certain geographical areas in which they sell their goods or services. This practice can significantly impair competition as it limits free market access and choice. Antitrust law therefore provides that such territorial restrictions are in many cases illegal and violate the principle of fair competition.
exclusivity agreement
An important form of territorial protection in antitrust law is exclusivity agreements. In an exclusivity agreement, one company grants another company the exclusive right to distribute certain products or services in a specific geographic area. Such agreements can have the effect of foreclosing competitors and depriving consumers of the benefits of free market competition. Most antitrust jurisdictions, including antitrust law in the European Union and the United States, view exclusivity agreements with great skepticism. They are usually considered impermissible unless compelling reasons can be shown that they actually promote competition rather than harm it.
– Efficiency benefits:
If a company can demonstrate that an exclusivity agreement offers efficiency advantages that benefit the consumer, this may justify its admissibility. For example, such agreements could promote innovation or investment if territorial protection also provides investment protection.
– Market share:
The market position of the undertaking concerned is an important factor. Where an undertaking has a dominant market share, exclusivity agreements are likely to be more problematic as they may restrict competition to a greater extent. This is particularly true where an exclusivity agreement has the effect of restricting market access for competitors and depriving consumers of choice due to the market position of the supplier or buyer. It will then likely be unlawful where the market share of one of the undertakings concerned is at least 40%.
- Duration:
The duration of the exclusivity agreement is another relevant factor. Long-term exclusivity agreements are likely to be more problematic than short-term ones.
Non-Compete Agreements
Exclusivity agreements can also relate to products. The buyer is prohibited from selling competing products or purchasing from third-party suppliers. In the context of antitrust law, Non-Compete Agreements in the form of exclusivity agreements is a sensitive issue. Antitrust law aims to promote competition and protect consumer interests. However, exclusivity agreements restrict free market access. Companies should be extremely cautious when entering into such agreements and ensure that they comply with applicable antitrust law provisions in order to avoid legal consequences.
Antitrust law: Distribution via own website and the platform ban
Antitrust law plays a particularly important role in today's digital economy, as many companies sell their goods and services over the Internet. One particular topic that is repeatedly discussed in this context is the platform ban on online sales.
Platform ban: What is it?
A platform ban refers to the practice of manufacturers or suppliers prohibiting distributors from offering their products via certain online marketplaces or platforms. Instead, retailers should be obliged to sell the products exclusively via their own websites, for which special requirements are issued regarding the quality of presentation. This is an issue that is particularly relevant for manufacturers of high-quality branded products and in the luxury industry who want to maintain control over the distribution of their products.
In the European Union, the platform ban in the context of antitrust law is regulated by the EU competition rules. In particular, Article 101 of the Treaty on the Functioning of the European Union (TFEU) and also Section 1 of the GWB prohibit agreements, decisions and concerted practices that restrict or distort competition. This means that a platform ban that impairs free trade can violate EU antitrust law. The European Commission has imposed heavy fines on companies in the past for violating antitrust law in connection with platform bans. These fines were imposed because such bans were considered to restrict competition and deprived consumers of the opportunity to compare and select products on different online marketplaces.
The regulations under the Vertical Block Exemption Regulation 720/2022
However, there are exceptions to the platform ban. In particular, if a manufacturer or supplier can put forward legitimate reasons for restricting sales via certain platforms, this may be acceptable under certain circumstances. For example, protecting the brand image or ensuring high product quality may be considered a legitimate reason. The guidelines on the Vertical Block Exemption Regulation 720/2022 now explicitly allow sales via platforms and marketplaces to be prohibited.
admissibility of best price clauses
best price clauses have increasingly attracted the attention of the Federal Cartel Office in recent years, and it has made increased efforts to examine the legality and impact of such clauses on competition in various sectors. Best price clauses, also known as most-favoured nation clauses, are agreements between providers and platforms that ensure that the provider cannot offer its products or services on the platform at lower prices than it does on other platforms (wide best price clauses) or in its own distribution network (narrow best price clause).
These clauses are intended to price transparency and to ensure competition by ensuring that consumers always receive the best available price on the platform.
The Federal Cartel Office, the German competition authority responsible for monitoring and enforcing antitrust rules, monitors the use of best price clauses in various sectors and examines whether these clauses could restrict competition or disadvantage consumers. If there is suspicion of abusive use of best price clauses, the Federal Cartel Office can initiate formal abuse proceedings to investigate the situation in more detail. If the Federal Cartel Office finds that best price clauses hinder competition, it can impose sanctions on the companies concerned and impose conditions to restore competition.
