Are manufacturers allowed to tell distributors what prices to charge for their products? Are they allowed to restrict retail sales of their products via online sales channels? Starting from June this year, the rules governing the relationship between manufacturers and distributors of goods are to fundamentally change. The changes deserve due attention because they pose both potential risks and opportunities.
In the eyes of many entrepreneurs, the field of competition law is often reduced to the topic of huge fines, which “clearly affect only the biggest companies, not us“. Many entrepreneurs have already seen that this attitude is incorrect. Competition law is not only about cartels and abuse of a dominant position. It also comprises an area that affects a large number of companies that are often unfamiliar with it. This area is distribution relationships or, in other words, vertical agreements.
Simply put, this part of competition law addresses the regulation of commercial relationships between a manufacturer and its distributors when placing products on the market. This applies to manufacturers, importers and/or wholesalers who market their goods and/or services through independent third-party distributors. For example, competition law prohibits suppliers from resale price maintenance. Furthermore, is it not allowed to prohibit or significantly restrict internet sales. Therefore, protection of intra-brand competition is at stake.
The Office is conducting a series of investigations into resale price maintenance with record fines being imposed, getting near the statutory cap of 10% of the total turnover of the fined company.
Combatting resale price maintenance
Although potential restrictions resulting from distribution agreements are not as dangerous as cartel agreements, this does not mean that competition authorities do not deal with them. Quite the contrary. For example, the Czech Office for the Protection of Competition (the Office) has recently declared combat against resale price maintenance, which it has identified as one of its two priorities. These are not just empty words. Currently, the Office is conducting several investigations into this practice imposing record fines in the ensuing administrative proceedings, reaching the statutory cap of 10% of the total turnover of the fined company. Many of these cases have also received considerable media coverage.
Therefore, it is definitely good to know the obligations imposed by competition law in connection with the distribution of goods and services, what it prohibits and what it allows. What is even more important to know is that a significant change in EU rules took place from 1 June 2022. Becoming acquainted with the new rules that apply in supplier-buyer relationships is thus a necessity.
How much to sell for?
The manufacturer is still not allowed to tell the distributor how much to resell its goods for. It is therefore not possible to set a fixed or minimum selling price or to enforce compliance with it. On the other hand, the new rules still principally allow producers to set recommended and maximum prices. Thus, for example, a television manufacturer can (merely and truly) recommend to a distributor the price for which it should ideally sell or tell the distributor the maximum price it can charge for a television. However, the manufacturer cannot, for example, tell the distributor that it cannot resell it for less than CZK 5,000. Under certain conditions, only the setting of so-called minimum advertised prices is tolerated, i.e. the setting of the lowest price for which the television is offered in online advertisements or in leaflets. However, even then, the manufacturer may not restrict the reseller by not allowing it to sell the goods for a price lower than that advertised in the leaflet.
The new regulation allows fixed pricing in fulfilment contracts. These are contracts in which the manufacturer agrees directly with the customer on a supply of goods but uses an independent distributor to carry out the transaction. The new rules further confirm that even setting fixed or minimum resale prices can be, under very strict conditions, exempt from the prohibition of anti-competitive agreements. However, given our experience with competition authorities, we do not expect them to accept a defence based on a demonstration of the positive effects of an anti-competitive agreement.
Restrictions of online sales
The competition authorities want to give customers the opportunity to choose the method of purchase that suits them best. Following the boom of the internet, e-shops and online marketplaces, the authorities therefore recognise the need to allow manufacturers to effectively support brick-and-mortar shops, which are indispensable for the sale of a wide range of products. However, the new regulation gives manufacturers and brand owners more options to restrict the online sale of their goods.
Under the new rules, manufacturers can prohibit their distributors from selling on marketplaces such as Amazon or eBay under certain conditions. However, they must not prohibit them from using price comparison services (such as Google Shopping or Heureka).
The amended rules also give manufacturers the possibility to implement the dual pricing strategy when supplying their distributors with goods under certain conditions. In the above case of televisions, this would apply, for example, if a television intended for online sale is supplied by the manufacturer to a distributor at a higher price than a television for sale in a brick-and-mortar shop. Under the old rules, this wasn´t possible. However, the manufacturer must not prohibit the effective use of the internet for online sales.
Manufacturers and distributors as competitors
Since the last amendment of the rules governing distribution agreements in 2010, there has been rapid development in direct distribution. This means that producers often sell a part of their production directly to customers in their brick-and-mortar stores or in their own online shops. By doing so, however, they also become competitors of the distributors who sell their products on the retail level of markets, which raises additional competition law concerns.
One of the issues, for example, is the exchange of commercially sensitive information between a manufacturer and a distributor in the context of dual distribution. The exchange is certainly necessary for the effective marketing of goods. On the other hand, the exchange of information between competitors is always suspicious. The new rules therefore specify that the manufacturer and the distributor may only exchange information necessary to enhance the distribution and/or production of the goods. On the contrary, the manufacturer and the distributor are still not allowed to inform each other about the prices at which they intend to sell the goods on the retail market.
Selection criteria by manufacturer
The new regulation also provides manufacturers with additional options for the setting of their distribution network. For example, in the case of selective distribution, the manufacturer sets specific criteria and its goods can only be sold by those distributors who meet them. This is the case of luxury products, for example, where the manufacturer clearly determines who can sell the goods and under what conditions. Under the new rules, manufacturers can use significantly different criteria for brick-and-mortar shops as opposed to online sellers. They also have more options to prevent sales to unauthorised retailers. Manufacturers are also able to stipulate that there can be up to five exclusive retailers who can sell in a particular territory and not only one, as has been the case until now. They can also prohibit sales by other retailers in that territory.
Manufacturers also have greater freedom if they decide to use genuine agents for the distribution of their goods (to whom they can generally set a fixed resale price) or if they wish to prohibit distributors from buying and reselling competing goods. Such “single branding” restrictions are also automatically renewable for a period longer than five years under certain conditions.
The new legislation introduces many more changes and clarifications, which we have covered in detail in our DLC Countdown newsletters available on the HAVEL & PARTNERS website. Existing distribution relationships will need to reflect these changes within one year, i.e. by 1 June 2023. We strongly recommend using this period to allow manufacturers, brand owners and distributors to explore the opportunities presented by the new rules. They can use the opportunity to amend their distribution systems to better suit their long-term sales interests.
HAVEL & PARTNERS competition law team comprises over 27 lawyers, economists and legal assistants and has been recognised by the prestigious international ratings Chambers Europe Awards and The Legal 500 as one of the best in the field in the Czech Republic and Slovakia. The group has been working on distribution law issues for a long time. We help set up distribution systems, have successfully commented on new bills and are members of the Distribution Law Center, a pan-European initiative focused on supplier-customer relationships.
