Module Three: Overview of Distribution

This module further covers regulations 17-20 of the Commercial Agents Regulations 1993 particularly as they apply to Agency Law.

Key Terms for Distribution

Sale of Goods Terms

The following are key terms governing the sale and purchase of the goods:

Compare & Contrast With Agency

Dual Nature of the Distributor –

Position in the supply chain (co-ordinating upstream and downstream terms)
A distributor should be looked at as having a dual nature; their position in the supply chain means that it’s necessary for the distributor to manage both the upstream and downstream terms of supply and we always clients not to place too onerous a level of obligation on its distributor.

Supplier’s customer and Link to the Market

Under distribution the supplier (who may be the manufacturer of the goods for example) supplies those goods to the distributor (which purchases them in its own right) and in turn sells the goods on to a customer (which may be a wholesaler, retailer or end user of the goods, dependent on how many levels to the supply chain there are).
Ultimately, the main difference between agency and distribution is that unlike agents, distributors purchase and resell the goods in their own right.

Nothing in EU law protecting distributors (Brexit)

This is one of the reasons why unlike agency, there is little in law to protect distributors as against the principal (or supplier). The legislation surrounding distribution (or vertical agreements more generally) is geared towards protecting the ultimate consumer from anti-competitive practices.

Conflicting Objectives for Supplier

Maximise earnings from sales (to Distributor)
Enable or encourage Distributor to pursue sales
- e.g. Margins at each stage, who funds promotions?
- Whilst a business does need to protect itself, the more success that the distributor has, ultimately the more success the principal has and so for a multitude of different reasons, again we cannot underestimate the importance of having a formal written agreement in place with the distributor.

Distributors: EU Legal Issues

This next section discusses various types of clauses which you might consider implementing within the agreement we discussed in the previous video.

Some Distribution Agreement jargon

As mentioned earlier, the key legislation to consider when entering into a distribution agreement is that relating to vertical agreements and anti-competitive practices. We therefore look at the EU Vertical Agreements Block Exemption, which provides us with restrictions as to what can and cannot be done when contracting in a vertical manner. goods on behalf of and in the name of that principal…”

“Vertical Agreement” - EU Block Exemption Regulation: (Brexit?)

The vertical agreements block exemption provides that those agreements that satisfy its requirements are exempt from the prohibition on anti-competitive practices. In order for this to apply, the parties must enter a vertical agreement, the market share of each party must not exceed 3% and there must be no hardcore restrictions.

Article 4: Hard Core Restrictions include setting minimum price

Restrictions on active or passive sales; and restriction of cross-supplies between distributors

Article 4: Hard Core Restrictions include setting minimum price

Article 4 sets out a series of Hard Core Restrictions, which are illegal to impose upon a distributor in any circumstances. Examples of these include:

Imposing obligations as to the minimum price at which a distributor must sell the products;
Imposing restrictions on the distributor actively making sales into territories where the rights of someone else are not being protected;
Imposing restriction on the distributor fulfilling sales which it received passively from a third party’s territory (such as a sale over its website from a different territory where it has not sought to receive sales from outside of its territory)
Imposing restrictions on sales between distributors.

Article 5: Lesser Restrictions include prohibition on preventing distributor from competing for more than five years

Prohibiting distributor to manufacture, purchase, sell or resell goods or services, unless e.g. indispensable to protect know-how and limited to one year.

Lesser restrictions are also included and which need to be complied with including not imposing non-compete restrictions for a period in excess of 5 years.

Articles 3 and 9 – Market Share Disqualification:

Supplier’s market share must not exceed 30%
- A distribution agreement is likely to be compliant within VABE if the market share of the supplies does not exceed 30% of the market on which it sells and the market share of the distributor does not exceed 30% of the market on which it purchases (essentially to avoid the forming of ‘cartels’).
- However, if this is not met, the agreement may still be except if the market share of each party (taken separately) does not exceed 15% and the agreement does not contain any of the hardcore restrictions referred to above.
- This is deemed to be an agreement of minor importance.

Articles 3 and 9 – Market Share Disqualification:

Buyer’s market share must not exceed 30% where there is exclusive supply
Some protection for market share < 30% and then >30% but <35%.
Agreements of minor importance.

Ultimately, it is important to ensure compliance with VABE as consequences include fines of up to10% of turnover, director disqualifications and liabilities under third party claims.

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Distributors: EU Competition Law

Final Course Assessment

The final course assessment to follow contains a number of questions to provide you with an opportunity to solidify and retain the information from this course.

To access the final assessment, click the Dealing With Agents & Distributors: Final Assessment tab underneath the “Module Content” tab below.
Thereafter, on the next page – click the “Start Assessment” button to begin.
After answering each question proceed through the remaining questions by selecting the “next” button at the bottom right of each set of answers:

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