Which restrictions can you impose on your distributors?
As a supplier, you might rely on third parties (distributors) to sell your products domestically or abroad. But which conditions or restrictions are you allowed to impose on them?
Within the European Union there are strict rules on free competition and, in principle, any agreement which constitutes a restriction which could have an unduly negative effect on the European market is prohibited. The Belgian Competition Authority also polices within our national borders.
However, national and European legislators turn a blind eye to distribution agreements (so-called vertical agreements) between companies which do not have a significant market share in the relevant sector (i.e. up to 30% each); although certain so-called hardcore restrictions always remain out of the question.
A few principles:
- A distributor (exclusive or non-exclusive) may be prohibited from reselling the products outside its allocated territory (e.g. at provincial, regional or country/countries level). Such a territorial restriction is only valid if the so-called 'prohibited distribution area' has been allocated to the supplier themselves or to another distributor designated by them and that distributor has an exclusive right to sell in that area. This is a hardcore restriction.
In addition, a territorial sales restriction may only relate to active sales: these are sales made at the distributor's own initiative (e.g. a targeted offer). On the other hand, passive sales initiated by the buyer (e.g. an order via a website) may not, in principle, be prohibited or restricted by a supplier. - A location clause is a provision by which the supplier prohibits its distributor from changing its statutory address to, or opening a branch at, a location outside its allocated territory. Location clauses can partially have the same effect as a ban on active or even passive sales. They generally pass the test of competition law and are therefore, in principle, permissible.
- A non-compete clause prohibits the distributor from buying, selling or distributing competing products during the cooperation. Such a prohibition is often linked to the benefit of exclusive distribution in a certain territory. Please note that in competition law the notion of a 'non-compete clause' also refers to a minimum purchasing obligation which represents more than 80% of the distributor's total purchases.
In both exclusive and non-exclusive distribution agreements such non-compete clauses may not exceed a duration of five years (from the date of entry into force of the agreement) and may not be tacitly renewed, at the risk of annulment. - Price fixing, whereby the distributor has to apply a certain fixed price or minimum price (or maximum discount) when reselling, is a hardcore restriction and is always prohibited. However, a recommended price or a maximum price (or minimum discount) may be given by the supplier, but only to the extent that the distributor can still pursue an independent pricing policy and still has sufficient leeway. Also, the prohibited price agreements mentioned above may not be imposed indirectly (e.g. via bonus, discount, delivery delays or delivery stops).
It is important to note that the penalties for invalid clauses are severe. They vary from nullity of the clause to - in case of hardcore restrictions - nullity of the entire agreement and even fines of up to 10% of the total company turnover, unless the supplier provides an adequate justification.
K law will gladly assist you in designing your distribution network.