Navigating UK Competition Law: Best Practices for Compliant Exclusive Distribution Agreements
Understanding the Basics of UK Competition Law
When it comes to navigating the complex landscape of UK competition law, especially in the context of exclusive distribution agreements, it’s crucial to start with the fundamentals. UK competition law is designed to protect businesses and consumers by ensuring a level playing field and preventing practices that restrict, distort, or prevent competition.
Competition law in the UK is primarily enforced by the Competition and Markets Authority (CMA), which has the power to impose significant fines and other sanctions for non-compliance. For instance, breaching UK competition law can result in fines of up to 10% of a company’s worldwide turnover for the previous business year, along with potential damages claims from third parties and severe reputational harm.
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Vertical Agreements and the New VBER
Vertical agreements, such as distribution agreements, are contracts between businesses operating at different levels of the supply chain. These agreements can be compliant with UK competition law if they meet the criteria set out in the UK Vertical Agreement Block Exemption Order (VABEO), which is aligned with the EU’s Vertical Block Exemption Regulation (VBER).
The VABEO provides a safe harbour for vertical agreements that do not contain hardcore restrictions, such as resale price maintenance (RPM) or territorial and customer restrictions. Here are some key points to consider:
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- Hardcore Restrictions: These are severe restrictions that automatically exclude an agreement from the block exemption. Examples include fixing resale prices, restricting active or passive sales to end-users, and dividing markets or customers.
- Non-Hardcore Restrictions: These can still be problematic but do not automatically exclude the agreement from the block exemption. Examples include non-compete obligations and retail parity obligations.
- Market Share Thresholds: To qualify for the block exemption, the supplier’s market share must not exceed 30%, and the buyer’s market share must not exceed 30% in the relevant market.
Avoiding Anti-Competitive Practices
One of the most critical aspects of complying with UK competition law is avoiding anti-competitive practices, particularly in the context of exclusive distribution agreements.
Price Fixing and Resale Price Maintenance
Price fixing, where competitors agree on the prices at which they will sell their products, is a serious violation of competition law. This includes both horizontal price fixing between competitors and vertical price fixing, such as RPM, where a supplier dictates the price at which a distributor can sell the products.
RPM is generally illegal except in very limited circumstances. For example, a supplier cannot pressure distributors to adhere to the recommended retail price (RRP) through incentives, sanctions, or other means. Even minimum advertised price (MAP) policies, which restrict distributors from advertising prices below a certain level, can be considered a form of RPM and are subject to scrutiny.
Bid Rigging
Bid rigging is another egregious form of anti-competitive behavior that can occur in the context of distribution agreements. This involves coordination between firms to manipulate the outcome of bidding processes, often involving price-fixing and the sharing of markets or customers. Bid rigging is a per se violation of competition law and can result in severe penalties, including criminal sanctions in many jurisdictions.
Crafting Compliant Distribution Agreements
To ensure compliance with UK competition law, distribution agreements must be carefully crafted to avoid any anti-competitive provisions.
Types of Appointment Rights
Distribution agreements can grant different types of appointment rights to distributors, each with its own implications:
- Sole Rights: The distributor has the exclusive right to distribute in the agreed location, but the supplier also retains rights. This can optimize the supply chain and reduce competition concerns for the distributor.
- Exclusive Rights: The distributor gains exclusive distribution rights in the designated location, providing a competitive edge and allowing them to set profitable prices without competition from other distributors.
- Non-Exclusive Rights: The distributor has the right to resell, but the supplier can also appoint other distributors in the same location. This is favorable for suppliers looking to expand product resale in various territories.
Protecting Intellectual Property and Confidential Information
A well-drafted distribution agreement should also protect the intellectual property (IP) and confidential information of both parties. Here are some key considerations:
- IP Ownership: The agreement should explicitly state each party’s continued ownership of their existing IP and outline whether a party can use the other’s IP for marketing and selling the products.
- New IP Creation: The agreement should define the ownership of any new IP created in connection with the products after the reseller purchases them for resale.
Compliance with VABEO and Existing Competition Laws
Ensuring that distribution agreements comply with VABEO and existing competition laws is essential.
Key Compliance Points
Here are some key points to ensure compliance:
- No Hardcore Restrictions: The agreement must not include hardcore restrictions such as RPM, territorial restrictions, or customer allocation.
- Market Share Thresholds: The supplier’s and buyer’s market shares must not exceed 30% in the relevant market.
- Termination Clauses: The agreement should include termination clauses that allow the parties to end the contract if it no longer complies with VABEO or competition laws.
Practical Advice
- Regular Review: Regularly review your distribution agreements to ensure they remain compliant with changing competition laws.
- Training and Awareness: Ensure that all employees involved in negotiating and managing distribution agreements are aware of competition law requirements.
- Seek Legal Advice: Consult with legal experts to ensure that your agreements meet all necessary criteria and do not contain any anti-competitive provisions.
Real-World Examples and Anecdotes
Understanding the practical implications of competition law through real-world examples can be highly insightful.
Example: Resale Price Maintenance
A well-known example of RPM involves a supplier of electronics who required its distributors to adhere to a minimum advertised price (MAP) policy. While the policy did not restrict the distributors’ actual selling prices, it prohibited them from advertising prices below the MAP. This was found to be a form of RPM and led to significant fines and reputational damage for the supplier.
Example: Bid Rigging
In another instance, several construction companies were found to have engaged in bid rigging by coordinating their bids for public contracts. This involved sharing confidential information and allocating contracts among themselves. The companies faced severe penalties, including fines and criminal sanctions.
Table: Comparing Types of Appointment Rights
Here is a comparative table outlining the different types of appointment rights in distribution agreements:
| Type of Appointment Right | Description | Advantages | Disadvantages |
|---|---|---|---|
| Sole Rights | Exclusive right to distribute in the agreed location, but supplier retains rights. | Optimizes supply chain, reduces competition concerns for distributor. | Supplier retains rights, may limit distributor’s exclusivity. |
| Exclusive Rights | Distributor gains exclusive distribution rights in the designated location. | Provides competitive edge, allows distributor to set profitable prices. | Limits supplier’s ability to appoint other distributors. |
| Non-Exclusive Rights | Distributor has the right to resell, but supplier can also appoint other distributors. | Favors suppliers looking to expand product resale in various territories. | Distributor faces competition from other appointed distributors. |
Navigating the complexities of UK competition law in the context of exclusive distribution agreements requires a deep understanding of the legal framework and best practices. By avoiding anti-competitive practices, ensuring compliance with VABEO and existing competition laws, and carefully drafting distribution agreements, businesses can protect themselves from severe penalties and reputational harm.
As the CMA emphasizes, “Competition law protects businesses and their customers from practices that prevent, restrict or distort competition, helping to ensure a level playing field for businesses on the one hand, and value for customers on the other”.
By staying informed and proactive, businesses can ensure their distribution agreements are not only legally compliant but also beneficial for all parties involved, fostering a healthy and competitive market environment.
