What is a distribution agreement?
A distribution agreement is made between a supplier and a distributor. The supplier - often also the producer or manufacturer - supplies the goods to the distributor. The distributor then independently delivers the products to customers. A distribution agreement does not have to be in writing. For example, verbal agreements between the supplier and the distributor on prices, minimum purchase and termination of the distribution agreement can also be just as valid.
Are price fixing allowed?
Despite the fact that price-fixing agreements may seem beneficial at first glance, agreements regarding fixed or minimum prices violate competition law. Such agreements qualify as "hardcore restrictions" under competition law. Competition law means that companies are not allowed to make agreements that restrict competition (horizontally or vertically). Horizontal competition refers to agreements made between competitors; for example, the agreement between car manufacturers that none of the manufacturers will offer cars for less than fifty thousand euros. The imposition of fixed or minimum selling prices is then a typical example of vertical price agreements, since these agreements are made between the supplier and the distributor.
However, using a recommended retail price or imposing a maximum resale price is allowed and is not a hardcore restriction under competition law. What is important is that the maximum resale price is not so low that it is actually a fixed (minimum) selling price.
Thus, the main rule is that price fixing is not allowed. However, there are a number of exceptions to this main rule:
- The general exemption
The general exemption allows an agreement between business owners if it contributes to an economic or technical advance. However, a reasonable part of the benefits of the agreement must be for the ultimate buyer. Also, the agreement must not go further than necessary and there must still be room for competition. Thus, it is permissible under certain circumstances to reach agreements that benefit sustainability, the investment climate, the opening of new markets, quality standards and economies of scale for distribution.
- Bagatel exemption
Companies with a relatively small turnover and/or market share are also subject to an exception to the cartel ban. The so-called "bagatelle exemption. Thus, small business owners are allowed to make agreements with each other if;
- In the case of goods: no more than 8 companies participate and together they have an annual turnover not exceeding €5.5 million; or
- In all other cases: no more than 8 companies participate and they have a combined annual turnover of up to €1.1 million.
In the case of price fixing in the distribution agreement, however, one of the aforementioned exceptions is not likely to occur. Nevertheless, it may happen that a fixed sales price is imposed when launching a new product, entering a new market or during a temporary price reduction or (discount) promotion. In those cases, price fixing is allowed.
What if the price agreement violates competition?
If a provision from a distribution agreement is contrary to competition law - and there are none of the above exceptions - the provision qualifies as "null and void. This means that the entire (conflicting) provision never legally existed. In principle, only the provision is null and void and not the entire distribution agreement (= partially null and void). Thus, in principle, the rest of the distribution agreement simply continues to exist, but not if the provision in question is so important to the agreement that its absence causes the entire agreement to become unenforceable or meaningless.
In addition to nullity, the Consumer and Market Authority (ACM) can also impose a fine if cartel agreements have been made. If the agreements restrict trade between member states, the European Commission can also impose a fine. This can cause considerable costs, as the regulators can impose a fine of up to 40% of the annual group turnover. Also depending on how long the violation lasted.
And as always, prevention is better than cure
Thus, acting in violation of competition law can be quite costly. All the more important to make sure that the distribution agreement you conclude or intend to conclude complies with the legal rules. New European legislation(VBER) has been in force since June 1, 2022. Distribution agreements from before this date had to comply with this new legislation no later than May 31, 2023.
