Abstract
While exclusive distribution agreements are not regulated within the law, they are significant instruments of the commercial life and take place at practice of competition law within its feature of exclusive right to sell. Therefore, exclusive distribution agreements are considered as vertical agreements in terms of competition law and are subject to various limitations.
I. INTRODUCTION
Exclusive distribution agreement is a special type of distribution agreement. Although the distribution and exclusive distribution agreements are not regulated under Turkish law, that sui generis (unique) agreements have emerged due to the necessities within business life1.
Distribution agreements regulate the supplier’s obligation to provide goods or services to the distributor for the purpose of the sale of such goods or services continuously. The concept of exclusivity, which constitutes the typical feature of exclusive distribution agreements, distinguishes the exclusive distribution from the general concept of distribution.
The concept of exclusivity makes the evaluation of exclusive distribution agreements compulsory in terms of competition law. Therefore, this article first focuses on the characteristics of exclusive distribution agreements and then analyses the exclusive right to sell, which constitutes the most important feature of these agreements, within the scope of the Law on Protection of Competition, Block Exemption Communiqué on Vertical Agreements and Guidelines on Vertical Agreements which has been prepared to explain the relevant communiqué.
II. THE DEFINITION AND CHARACTERISTICS OF EXCLUSIVE DISTRIBUTION AGREEMENT
As mentioned above, exclusive distribution agreement is a special type of distribution agreement and the major difference between these agreements is that the supplier provides the exclusive right to sell to the exclusive distributor in an allocated territory 2. In this section, first distribution agreements will be defined, and then the characteristics of exclusive distribution agreements will be explained.
A. Definition
1. Distribution Agreement
The distribution agreement can be defined as an agreement in which the supplier continuously undertakes to provide its goods or products, wholly or partially, to the distributor for reselling 3and in return, the distributor undertakes to engage in transactions, that would increase the demand of the supplier’s goods or products by selling them on its own behalf and account 4. Such agreements do not regulate all the details of the relationship between the parties, but state the general obligations undertaken by them and establish a framework for the agreements to be made in the future5.
The main characteristic of the distribution agreements is that the distributor acts on its own behalf while fulfilling its obligations regulated under such agreement 6. Likewise, distributor is an independent merchant and therefore bears personally the costs and risks which arise from all kinds of investments and organizations which he carries out to increase the sales of goods7.
2. Exclusive Distribution Agreement
This agreement allows distributors to sell specific goods or products in a specific territory through exclusive right to sell which is vested in him, and to become the exclusive distributor of the provided goods in that territory, in the form of active sales8. Within the specific territory that is allocated to the exclusive distributor, the supplier is under the obligation to avoid sending such products to a third party, who is in its distribution chain.
Abovementioned situation is economically beneficial for both the exclusive distributor and the supplier. Supplier’s benefit for increasing the sales of the produced or provided goods, directs him to collaborate with the exclusive distributors. Supplier obtains the opportunity to assure the increase in long-term sales of its goods through the exclusive distribution agreements and that goal can only be achieved via continuous relationship with exclusive distributors. Continuity of the relationship between the exclusive distributor and the supplier also exists in the concept of agency, 9 however, most of the time, it is easier and practical both economically and legally for the suppliers to sell the products through reliable customer portfolio of the exclusive distributor, instead of entering into agreements personally with each customer provided by mercantile agents. For this reason, not only major and powerful industrial producers but also small-sized companies as well prefer to market their products through exclusive distributorship. Hence, small-sized enterprises can carry out the distribution of their goods by making reasonable amounts of expense 10.
B. Characteristic Features of Exclusive Distribution Agreement
1. Exclusive Right to Sell
Exclusivity, which is the main feature distinguishing regular distribution agreements from distribution agreements, allows a person or an enterprise to carry out commercial activities in a specific territory or for a specific customer group.
Exclusive right to sell has to be limited in terms of duration, territory and the goods that are subject to agreement. Granting such rights for a long term should not be deemed 11 as immoral12 limitation of the economic freedom of the supplier. Yet the exclusive distributor’s obligation to increase the sales of the goods requires long term planning, investment and organization.
The exclusive distributor obtains the opportunity to sell the products provided or produced by the supplier with an exclusive obligation not to compete with other sellers in a specific territory. On the other hand, the supplier has the opportunity to commercialize its goods and to establish a network of sales and customer services without making any investment or expense. Thus, the supplier can make long-term manufacturing and sales plans and significantly reduce the marketing risks of its enterprise. In the meantime, the supplier holds the power of disposition of the goods for distribution, and transfers the risk of distribution to the exclusive distributor.
2. Non-Competition Obligation of the Exclusive Distributor
Whether the exclusive distributor is permitted to sell the products competing with the products subject to agreement and/or products produced by another supplier constitutes the subject matter of non-competition obligation. The exclusive distributor shall be subject to non-competition obligation due to the mutual interest of the parties within the exclusive distribution agreement. The products of the supplier shall only and exclusively be sold by the exclusive distributor in the allocated territory and thus, the supplier will deem that the exclusive distributor shows the maximum effort in order to increase the sales of the goods that are provided by him. In the event that the exclusive distributor undertakes the sale of the similar products, he shall not only be engaged in activities to increase the sales of products subject to the agreement, but also in the other products which are provided by other producers or suppliers. Additionally, the exclusive distributor shall hold the obligations to strengthen the market value of the products and provide pre-sale and post-sale services, as well. In this condition, the capacity of the exclusive distributor may not be sufficient to increase the sales of goods to the optimal level. For this reason, the exclusive distributor is subject to non-competition rule. However, the parties may agree on different provisions within an agreement, as a principle.
III. ANALYSIS OF EXCLUSIVE DISTRIBUTION AGREEMENT FROM THE PERSPECTIVE OF COMPETITION LAW
A. In General
According to the Law on the Protection of Competition 13 numbered 4054 (“LPC”), fundamental objective of competition 14 rules is to ensure fair and equal conditions for economic activities. Pursuant to the relevant provision15 of LPC, agreements between the enterprises which aim to prevent, distort or restrict competition in a particular market place, or the enterprises which are able to create such impact directly or indirectly are illegal and prohibited. According to this article, in order to be able to carry out economic activities without any restriction, agreements must not include any clause restricting the commercial freedom of parties in exchange of goods and services, and preventing fair business environment. However, in the case of satisfying all the conditions stated under LPC article 16 relating to exemption system, inter-enterprise agreements restricting competition shall not be considered illegal and shall be held exempted from the prohibition of engaging in competition restricting agreements.
Pursuant to the exemption system, the required conditions are; (i) ensuring new developments and improvements or economic or technical development in the production or distribution of goods and providing services; (ii) creating consumer surplus; (iii) not significantly eliminating the competition in the relevant market and; (iv) not limiting competition more than what is compulsory for achieving the goals set out in the subparagraphs (i) and (ii). Additionally, Board is authorized to issue communiqués which ensure block exemptions for the types of agreements that meet the mentioned conditions17. Subsequently, the Board has published Block Exemption Communiqué on Vertical Agreements18 numbered 2002/2 (“Communiqué”), on grounds that such vertical agreements, which are made between enterprises operating at different levels of the production or distribution chain with the aim of purchasing, selling or reselling of certain goods or services, effect economy in a positive way by increasing the competition. This Communiqué regulates the conditions for the vertical agreements to be excluded from the prohibition of making agreements that restrict competition. In order to explain the aspects which will be taken into consideration in Communiqué’s implementation, Guideline on Vertical Agreements 19(“Guideline”) has been published and herein the exemption system is regulated in detail.
As explained above, since exclusive distribution agreement creates monopoly in a specified territory due to its nature, it introduces various restrictions to the freedom of the parties. For this reason, as there is a constant conflict between exclusive distribution agreements and competition law rules which forbids the prevention of competition, a discussion as to whether or not the provisions in exclusive distribution agreements are valid against competition law will be brought forward. The reason for this is that the exclusive distribution agreements fall within the scope of vertical agreements and in case the criteria stated under Communiqué are met, such agreements are excluded from the prohibition on agreements restricting competition20.
Abovementioned Communiqué is amended by the Communiqué numbered 2007/2 21and it is indicated that the exemption provided under the Communiqué shall be implemented in the event that the supplier’s market share in relevant market, in which it provides the goods or services subject to vertical agreement, does not exceed 40% 22. The scope of the Communiqué has been narrowed down, compared to the previous version, by determining a market share threshold. Also, the exemption was withdrawn from the agreements containing non competing clause, which were made before the market share threshold regulation came into force and drawn up between the domineering entities (such as Coca Cola, Efes, Frito-Lay) and the final selling points. By the implementation of the market share threshold system, the possibility of domineering entities’ automatically benefitting from the block exemption is decreased.
While the required conditions for agreements to take advantage of the block exemption are not specified under the Communiqué; the limitations excluding the vertical agreements from the scope of block exemption are listed23. In other words, if the aspects specified under the related provision exist in vertical agreement, such agreement shall not benefit from block exemption 24. First of these aspects is the prevention of buyer’s freedom to designate its own selling price. According to this, freedom of buyer, who is the reseller of such goods subject to the agreement, to determine the price tariff of goods cannot be prevented. However, provided that it does not turn into fixed or minimum selling price as a result of the pressure or encouragement by any of the parties, it is possible for the supplier to determine the maximum selling price or recommend the selling price of goods subject to the agreement 25. Another aspect is, introducing limitations to the buyer’s territory or customers to whom it will sell its goods or services, other than the situations stated under the Communiqué. Within this context, another exceptional issue specified within the scope of exemptions under the Communiqué is that the active sales to be made with respect to the vertical agreement between the supplier and the buyer can be limited in terms of an exclusive territory or exclusive customer group allocated to supplier itself or another buyer. However, this limitation should not cover buyer’s customers. Limitation of passive sales 26 to be made to such territory or customer group will be evaluated as an infringement which excludes the agreement from the block exemption
B. In Terms of Exclusive Right to Sell
Through the right to sell granted to the exclusive distributor, the products subject to the agreement can be sold within the limitations stipulated under the agreement. Such distribution limitations may be relevant to the territory or the customers that the products will be provided to.
The Guideline determines the cases in which it is deemed to be an exclusive territory or a customer group allocated to the exclusive distributor. In order for a territory or a customer group to be evaluated as exclusive, to which the exclusive distributor carries out the sales activities, only one distributor or one supplier shall be carrying out the sales activities for such territory or the customer group. In other words, in the event that more than one enterprise is carrying out active sales for a specific territory or a customer group, then such territory or the customer group shall not be deemed as exclusive. In case a supplier reserves its direct right to sell for the territory or the costumer group subject to the agreement or, in the event that more than one distributor has been arranged for the related territory, then there wouldn’t be an exclusive territory or a customer group subject to the prohibition of active sales27.
In the endorsement of exclusive right, in order to implement the agreement effectively, the supplier needs to curb down the competitiveness of other distributors in the same territory. A provision limiting only the direct sales being made by the supplier does not provide exclusivity on behalf of the exclusive distributor. Inasmuch as, the distributors located out of the relevant territory shall be able to carry out sales activities of the same kind of products subject to the agreement in that territory. The reason of this is the exclusive right to sell has effect only between the parties of the agreement and it cannot therefore limit other distributors’ sales activities in the territory subject to the agreement.
In the event the supplier does not make any sale within the territory of the exclusive distributor and imposes active sales limitation by prohibiting active sales of the distributors in its distribution chain within the territory subject to the agreement, then territorial protection is ensured for the exclusive distributor. Thus, such territory is exclusively allocated to the exclusive distributor. Nevertheless, even though such measure is not taken, the intended goal cannot be achieved by only regulating the territorial protection in the agreement. However, the territorial protection mentioned herein should not be perceived as an absolute territorial protection. As will be explained below, the absolute territorial protection includes the restriction of active sales of other distributors and/or exclusive distributors within the exclusive territory of the exclusive distributor as well as the prohibition of passive sales.
Despite the fact that an exception is recognized with regard to active sales, the restrictions regarding the customer and territory subject to the agreement are nevertheless forbidden. As mentioned above, the active sales can be restricted in accordance with the related provision 28 of the Communiqué. According to this, the restriction of the active sales to be made by the distributors in the territories allocated to the other distributors can be accepted valid and a valid territorial protection can be provided to this extent. Nonetheless, the passive sales cannot be restricted or forbidden in terms of any vertical agreement. In this respect, the prohibition and/ or restriction of both the active and passive sales constitute an absolute territorial protection and such matter is forbidden according to the competition rules.
In case the exclusive distributor is also the exclusive buyer, the supplier should sell the goods subject to the agreement only to the exclusive distributor in the territory subject to the agreement pursuant to the exclusive supply obligation29. In other words, the supplier should not compete with the exclusive distributor. In accordance with provision of the Communiqué30regarding such liability, in the vertical agreements containing exclusive supply obligation, exemption applies on condition that the market share of the buyer in the relevant market in which it purchases the goods and services that are the subject of the vertical agreement does not exceed 40%. In addition to this rule, as explained above, the conditions excluding the vertical agreements from the scope of the exemption shall not exist. In case these conditions are not met, these agreements cannot benefit from the block exemption.
IV. CONCLUSION
During the evaluation process with respect to the points stated above, the Board essentially takes into account whether an agreement falls within the scope of vertical agreements or not; neither does take the name of the agreement given by the parties into account nor analyse the qualifications of the agreement within the framework of law of obligations. However, exclusive distribution agreements include significant restrictions with respect to the competition law and such restrictions are important in terms of business life. When the contractual liabilities and rights of the parties are considered; since the economic freedom of not only the parties to the agreement but also the third parties can be restricted through the exclusive distribution agreement; by considering the balance of benefit, compliance with the law is ensured via the exemption method. Taking all these into account, the Board aims to protect exclusive distributors, their suppliers, third parties and customers through the restrictions regulated within the Communiqué.
BIBLIOGRAPHY
Cemile Demir Gökyayla, Milletlerarası Özel Hukukta Tek Satıcılık Sözleşmeleri, Istanbul 2013.
Hasan İşgüzar, Tek Satıcılık Sözleşmesi, Ankara 1989.
Hüseyin Karabulut, “Rekabetin Korunması Hakkındaki Kanun Kapsamında Dağıtım Anlaşmaları”, Legal Fikri ve Sınai Haklar Dergisi No: 4, 2005.
Meltem Küçükayhan Aşçıoğlu, Rekabet Hukuku ve Dağıtım Sözleşmeleri, Ankara 2011.
Metin Topçuoğlu, Rekabet Hukuku Açısından Acentelik ve Dağıtım Sözleşmeleri, Ankara 2006.
Competition Authority, Glossary of Competition Terms, April 2014.
Guideline on Vertical Agreements dated 09.09.2015 (Access: 27.05.2016) http://www.rekabet.gov.tr/File/?path=ROOT%2F1%2FDocuments%2FBa%C5%9F vuru+Rehberi%2Fdikey.pdf.
FOOTNOTE
1 Since aforementioned agreements are not regulated by law, different terms are used for the parties of these agreements in practice, Supreme Court decisions and Competition Board (“Board”) decisions such as distributor, wholesaler, exclusive distributor, vendor etc. In our article, we considered it appropriate to use the following terms for the parties of distribution agreements: “distributor/ buyer and supplier”; and the following terms for the parties of exclusive distribution agreements: “exclusive distributor/buyer and supplier”. 19th Civil Chamber of Supreme Court E. 2001/4568, K. 2002/1473, T. 5.3.2002; Competition Board Decision (“CBD”) No:04-52/696-178, CBD No: 03-23/278-126, CBD No: 99-47/503-319, CBD No: 99-53/575-365.
2 Cemile Demir Gökyayla, Milletlerarası Özel Hukukta Tek Satıcılık Sözleşmeleri, Istanbul 2013, p. 17.
3 Metin Topçuoğlu, Rekabet Hukuku Açısından Acentelik ve Dağıtım Sözleşmeleri, Ankara 2006, p. 49.
4 Meltem Küçükayhan Aşçıoğlu, Rekabet Hukuku ve Dağıtım Sözleşmeleri, Ankara 2011, p. 4 ff.
5 Topçuoğlu, p. 50.
6 Another characteristic of the distribution relationship between parties is continuity, in other words, the parties are obliged to perform their obligations during the course of the agreement.
7 Topçuoğlu, p. 59.
8 Active Sales: Sales made by actively approaching individual customers inside another distributor’s exclusive territory or exclusive customer group. Active sales can be done by direct marketing methods, for instance, by direct mail or visits, or through advertisement in the media or other promotions specifically targeted at individual customers inside another distributor’s exclusive territory or exclusive customer group, or by establishing a distribution warehouse or outlet in another distributor’s exclusive territory. Competition Authority, Glossary of Competition Terms, p. 54.
9 An agent is an individual who acquires a profession of mediating through agreements relating a commercial enterprise continuously in a specific location or territory, or carries out these activities on behalf of such merchant depending upon an agreement, without having a legal status in an entity such as commercial representative, commercial agent, salesman or employee. In some aspects, agency shows similarities with the concept of exclusive distributor. Likewise, the exclusive distributor, agency is an independent merchant and the related relation is continuous. However, the agent does not buy the goods or products subject to the agreement with the purpose of reselling them. Agent’s role is to mediate. The agent always carries out activities on behalf of the job holder. On the other hand, the exclusive distributor acts independently on his behalf. In terms of competition law, impose of resale price by the job holder upon his agent shall not be deemed as violation. Hasan İşgüzar, Tek Satıcılık Sözleşmesi, Ankara 1989, p. 39.
10 İşgüzar, p. 39.
11 İşgüzar, p. 108.
12 Turkish Civil Code, Art. 23.
13 Official Gazette (OG) dated 13.12.1994 and numbered 22140.
14 “Competition which ensures the free economic choices between the entities in goods and services markets.” Competition Authority, Glossary of Competition Terms, 164.
15 LPC, Art. 4.
16 LPC, Art. 5.
17 LPC, Art. 5.
18 Official Gazette dated 14.07.2002 and numbered 24815.
19 Guideline on Vertical Agreements dated 09.09.2015 http://www.rekabet.gov.tr/File/?path=R OOT%2F1%2FDocuments%2FBa%C5%9Fvuru+Rehb eri%2Fdikey.pdf (Access: 27.05.2016).
20 Additionally, the conditions of block exemption from the prohibition of making competition limiting agreements regarding vertical agreements in motor vehicle sector are identified thereby publishing the Block Exemption Communiqué on Vertical Agreements and Concerted Practices in the Motor Vehicle Sector numbered 2005/4 in Official Gazette dated 12.11.2005 and numbered 25991.
21 OG dated 25.05.2007 and numbered 26532.
22 Communiqué, Art. 2/2.
23 Communiqué, Art. 4.
24 Hüseyin Karabulut, “Rekabetin Korunması Hakkındaki Kanun Kapsamında Dağıtım Anlaşmaları”, Legal Fikri ve Sınai Haklar Dergisi No: 4, 2005, p. 12.
25 Communiqué, Art. 4/a.
26 Passive Sale: Sales in response to unsolicited requests from customers in other distributors’ exclusive territories or customer groups, including delivery of goods or services to such customers; sales generated by general advertising or promotion in the media; sales generated by internet and similar ways are passive sales. Glossary of Competition Terms, 155.
27 Demir Gökyayla, p. 90 ff.
28 Communiqué, Art. 4/b-1.
29 Exclusive Supply Obligation: Direct or indirect obligation of the supplier to sell the goods or services subject to the agreement only to one buyer in Turkey for the purposes of using or reselling. Guideline, p. 47.
30 Communiqué, Art. 2/3.
