Conditions Required for Compliance with Competition Law in Exclusive Distribution Agreements

Oguz Erkan, LL.M.

Exclusive distribution agreements generally constitute violation of competition laws as they restrict effective competition in part of the market, though, they may be allowed if they meet the conditions for block exemption.

A) In General

An exclusive distribution agreement is a specialized contract between a manufacturer and a single distributor. This contract involves the manufacturer committing to supply its products exclusively to a single distributor within a defined region. The distributor, in turn, undertakes to sell these products under its own name and on its own account to boost sales. Exclusive distribution agreements are typically executed between product manufacturers and firms responsible for sales in specific territories. These agreements entail the exclusive distributor operating independently while maintaining an economic relationship with the manufacturer. The exclusive distributor acquires the products outright and sells them under its own name, setting it apart from similar commercial relations. Exclusive distribution agreements have a distinct structure compared to agency agreements and commission agreements.

B) Elements of Exclusive Distribution Agreements

To classify an agreement between a supplier and a distributor as an exclusive distribution agreement, the supplier must grant the distributor exclusive rights concerning the relevant goods and services. This exclusive right can pertain to factors such as duration, geographical region, or even the products and services themselves.

For an agreement to be considered an exclusive distribution agreement, it is crucial that the supplier's obligation to provide goods and the distributor's obligation to procure and market these goods remain continuous. Otherwise, the agreement may resemble a sales contract with competition-restricting elements.

Under an exclusive distribution agreement, the exclusive distributor is obligated to market the provided products within the exclusive rights area and increase sales. This obligation encompasses marketing activities and customer services. In practice, the distributor often commits not to sell any other products apart from those supplied by the manufacturer and refrains from operating outside the designated exclusive territory.

In return, the supplier, within the exclusive territory, agrees not to sell to other distributors. Additionally, the supplier may go further by ensuring that other distributors do not sell the relevant products within the exclusive distributor's territory. This strengthens the exclusive rights granted to the distributor. As the exclusive rights become more robust, the contract becomes more susceptible to scrutiny under Competition Law. 

C) Preparation of Exclusive Distribution Agreements in Compliance with Competition Law

The 4th Article of the Law on the Protection of Competition No. 4054 (the ‘Law’) prohibits agreements, concerted practices, and decisions that restrict competition. It outlines the characteristics of such actions to determine what may constitute restrictions on competition. These characteristics include:

a) Determining the purchase or sale price of goods or services, as well as any terms related to these prices, such as cost or profit components, 

b) Allocating markets for goods or services and sharing or controlling any market resources or elements, 

c) Controlling or determining the quantity of supply or demand for goods or services or setting them outside the market,

d) Hindering the activities of competing undertakings, restricting them, or forcing them out of the market through boycotts or other behaviors, or preventing new entrants from entering the market,

e) Applying different conditions to persons in the same status with equal rights, obligations, and performances, except for exclusive dealership,

f) Making the purchase of one product or service conditional on the purchase of another product or service, or imposing conditions related to the resale of a product or service contrary to the nature of the business or commercial customs.

Exclusive distribution agreements can potentially involve price fixing, market allocation, and hindrance of market entry. Therefore, without a specific exemption, they are considered agreements that restrict competition under the Competition Law. 

Under normal circumstances, agreements that would violate Competition Law may benefit from a block exemption if they meet certain conditions. This is because such agreements may not always entirely and consistently limit competition; in some cases, they may enhance market competition and provide benefits to society. For example, exclusive distribution agreements can significantly improve the quality of service the end consumer receives. Exclusive distributors often invest significant effort in marketing and servicing the products, which can stimulate competition among manufacturers and ultimately result in consumers receiving higher-quality products at more competitive prices.

According to Article 5 of the Law, the Competition Board may grant an exemption from the prohibitions of Article 4 for agreements, decisions, and practices that meet the following conditions:

a) Providing for new developments or improvements in the production or distribution of goods or the provision of services, or for economic or technical development,

b) Ensuring that consumers receive a fair share of the resulting benefits,

c) Not eliminating competition in a significant part of the relevant market,

d) Not imposing on the undertakings concerned restrictions that are not indispensable to achieving the objectives set out in sub-paragraphs (a) and (b).

Additional requirements that exclusive distribution agreements must meet to benefit from block exemption have been set out in the Communiqué on Block Exemption in Vertical Agreements. These requirements include:

a) Not preventing the buyer from determining its own selling prices, provided that the supplier may, without coercing or inciting, set maximum resale prices, provided that such prices do not become fixed or minimum resale prices,

b) Except in the following cases, not imposing restrictions on the territory or customers to whom the buyer may sell the contract goods or services:

-   Limitations on active sales to end-users by members of a selective distribution system not operating at the wholesale level,

-   Restrictions on the buyer operating at the wholesale level from making passive sales to end-users,

-   Limitations on the sales to unauthorized distributors by members of a selective distribution system,

-   In cases involving spare parts that are intended to be combined, prohibiting the buyer from selling these parts as spare parts to third parties without the consent of the supplier, who is the manufacturer of the contract goods.

c) In a selective distribution system, subject to the right to ban a system member who is not authorized to operate in a location not allocated to the system member's location, there shouldn’t be any restrictions on active or passive sales by system members at the retail level.

d) There shouldn’t be prohibiting sales between system members, except where a purchaser is granted the right to carry out a sale for the purpose of resale to an end-user.

e) In cases involving spare parts that are intended to be combined, the contract shouldn’t prohibit the supplier who sells these parts from selling them as spare parts to end-users or repairers not authorized by the buyer, who combines them. 

In addition to the above-mentioned conditions, the Communiqué states that, for an agreement to benefit from the group exemption, the market share of the supplier and the buyer in the relevant product market must not exceed 30% separately. For instance, if a white goods manufacturer's share of the total white goods market exceeds 30%, then an exclusive distribution agreement with any of its distributors, even if it meets all other conditions, would not be eligible for exemption and would be considered in violation of Law No. 4054 on Protection of Competition.

D) Benefiting from Exemption

Manufacturers and distributors entering into exclusive distribution agreements generally do not need to notify the Competition Authority, even though such agreements typically run afoul of competition rules. Agreements meeting the exemption criteria can benefit from exemption without the need for notification. However, it is recommended practice to notify the Board to confirm compliance with exemption. Many businesses today proactively notify the Competition Board and seek confirmation of compliance to avoid potential future issues.

The Competition Board does not set the duration of the exemption for exclusive distribution agreements; it can be unlimited or granted based on specific conditions or obligations. Exemption decisions are effective from the date of the agreement or the date of the concerted practice's implementation.

Please note that this information note is provided for informational purposes and does not constitute legal advice. It's important to consult with legal professionals well-versed in competition law when drafting or entering into exclusive distribution agreements to ensure compliance with the relevant laws and regulations.

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