The parties generally enjoy a great deal of freedom when drafting the provisions for an international distribution agreement. Thanks to this flexibility, the distribution agreement is a very flexible instrument with which a large number of different sales relationships can be legally represented. Nevertheless, certain legal limits also apply when drafting distribution agreements. Not everything that can be agreed may be agreed. The limits of what is legally permissible are reflected in particular in provisions that are inadmissible under competition law.
The Vertical Block Exemption Regulation (COMMISSION REGULATION (EU) 2022/720 of 10 May 2022 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices) is of particular importance for vertical distribution agreements, i.e. sales relationships in which the parties are at different economic levels (e.g. sales relationships between a manufacturer and a wholesaler or between two distributors at different sales levels).
Significance of the Vertical Block Exemption Regulation for the distribution agreement
The aim of the Vertical Block Exemption Regulation is to protect free competition and to prevent structures and practices which have as their object or effect the restriction of competition. Certain agreements and regulations that may restrict competition are prohibited by the Vertical Block Exemption Regulation. However, the prohibitions do not apply without exception. For many prohibited restrictions, an exemption – i.e. an exception to the prohibition – can be considered. The exemption of restrictions is subject to various conditions. In addition to turnover thresholds and market shares of the companies involved, the specific contractual structure of the distribution relationship is also important.
Overview of prohibited clauses in distribution agreements
The following is a non-exhaustive overview of prohibited clauses. In each case, the applicability of EU competition law, in particular Section 101 TFEU, is assumed. However, some restrictions can be exempted from the prohibition if certain conditions are met.
1. Specification of sales prices in the distribution agreement
It is not permitted to stipulate sales prices for the customer in a distribution agreement. This also applies to indirect measures that restrict the customer’s ability to freely determine the sales price. In particular, the setting of minimum sales prices is not permitted.
Under certain circumstances, however, it is permissible to set maximum selling prices or (non-binding) recommended retail prices. However, maximum selling prices and price recommendations are only permissible if they do not have a coercive or retroactive effect on the customer when setting his prices autonomously and actually have the same effect as minimum or fixed prices.
2. Certain non-competition clauses in the distribution agreement
Non-compete clauses in the distribution agreement whose duration is indefinite or which exceed a duration of 5 years are inadmissible and cannot be exempted.
3. Post-contractual restrictions of the customer
Provisions that oblige the buyer not to manufacture, purchase or sell certain goods or services after termination of the distribution agreement are generally prohibited and also not exemptable. Nevertheless, Article 5(3) of the Vertical Block Exemption Regulation contains strict conditions for an exemption that allows for a corresponding obligation on the part of the buyer within narrow limits.
4 Restriction on the use of the internet as a sales channel
Provisions in a distribution agreement that prevent the customer from effectively using the internet to sell the goods or services in question are inadmissible and ineffective. In contrast, provisions for the customer in the distribution agreement that merely contain certain restrictions on online sales but do not effectively prevent them are permissible. Specifications for online advertising are also permissible, even if they have a restrictive effect. However, this only applies if the restrictions on online advertising in the distribution agreement are not aimed at generally preventing online advertising as an instrument of sales promotion.
5. restriction of the passive sale of goods and services
The prohibition of the passive sale of goods and services is also inadmissible, albeit with some exceptions
Legal consequence of non-exempt restrictions
If the distribution agreement contains non-exempt restrictions or restrictions for which the necessary conditions for exemption are not met, the provision is null and void in accordance with Section 101 (2) TFEU. In addition to other legal consequences, the nullity can give rise to a claim for damages against the contractual partner in accordance with Section 823 (2) BGB.
