Licence for Categories of Exclusive Distribution Agreements 

Competition Authority Decision of 5 November 1993 granting a licence under Section 4(2) of the Competition Act, 1991, to categories of exclusive distribution agreements.

Decision No. 144

Introduction

1.	Under Section 4(2) of the Competition Act, 1991, the Competition Authority may grant a licence for the purposes of Section 4 of the Act to any category of agreements:

	'which, in the opinion of the Authority, having regard to all relevant market conditions, contributes to improving the production or distribution of goods or provision of services or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit and which does not‑

	(i)	impose on the undertakings concerned terms which are not indispensable to the attainment of those objectives;

	(ii)	afford undertakings the possibility of eliminating competition in respect of a substantial part of the products or services in question.'

2.	A large number of agreements have been notified to the Authority concerning exclusive distribution arrangements for the resale of products.  Since such agreements have been notified, the Authority may grant a licence, including a category licence, under Section 4(2) of the Act, in accordance with Section 7(3).  The Authority has carefully examined all of the notified agreements.  The Authority is therefore able to define a category of agreements and concerted practices which can be regarded as normally satisfying the conditions laid down in Section 4(2).

3.Notice of intention to grant a category licence for exclusive distribution agreements was published on 9 July 1993, and submissions were invited from interested parties.  A large number of submissions was received on the draft category licence, and full account was taken of these prior to finalising this decision.

The Subject of the Decision

4.	This decision concerns agreements for the exclusive distribution of goods for resale.  The essential feature of such agreements is that the manufacturer or supplier (the supplier) agrees to supply certain goods for resale to only one party, the  exclusive distributor, within a defined territory.  Within that territory, no other party will be supplied with the goods for resale by the supplier.  The agreements usually contain other restrictions, as well as clauses which are not restrictive.

5.	A large number of the notified agreements relate to imported products, where the supplier is located outside the State and supplies the goods to, usually, a single exclusive distributor who undertakes the distribution of goods within the State to resellers.  A considerable proportion of the agreements, however, is in respect of Irish manufactured products where the manufacturer, rather than distribute the goods himself, entrusts distribution to another party, who is usually a specialist distributor.  While the exclusive territory in these cases is often the State, it may be confined to a part, sometimes a small part, of the State on occasion.  A number of distributors have exclusive distribution agreements with several different suppliers, either for imported products or domestic products or both.  Some suppliers may entrust the distribution of different products to different exclusive distributors.

The Products and the Market

6.	A very wide variety of products forms the subject matter of the notified agreements.  These include foodstuffs, other grocery products, consumer durable goods, pharmaceuticals, petroleum products, products for the agricultural and industrial sectors, and many others. Given the large number and the heterogeneous nature of the products concerned, and of those which may also be included in other agreements which have not been notified or which may be made in future, it is not possible to describe the relevant market conditions which prevail.  It is not necessary to do so in the case of this category licence, however, in particular because the benefit of the category licence may be withdrawn in the case of an individual agreement if it is found that it does not satisfy all the conditions prescribed in Section 4(2), especially where competitive conditions in the market are inadequate.

7.	Most of the notified agreements stipulate that the territory concerned is the State, or a wider area, including, for example, Northern Ireland.  Where the territory is a part of the State, there are usually several parallel agreements which, in combination, cover the State.  In some cases, however, only a part of the State is covered by the agreement.  This decision relates to agreements which relate to the State or to any part of the State.

EEC Regulation 1983/83

8.	EEC Regulation No. 1983/83, of 22 June 1983, is a block exemption regulation which applies Article 85(3) of the Treaty of Rome to categories of exclusive distribution agreements.  The regulation entered into force on 1 July 1983 and it expires on 31 December 1997.  This replaced a previous block exemption for exclusive distribution agreements, Regulation 67/67.
9.	Exemption is granted to agreements involving only two parties in which one agrees to supply only the other with certain goods for resale within the whole or a defined area of the common market.  The only other obligation allowed upon the supplier is not to supply the goods to users in the contract territory.  The exclusive distributor ‑ the purchaser ‑ may be obliged not to manufacture or distribute competing goods, to obtain the goods only from the supplier, and to refrain from active marketing outside the contract area, that is he may be required not to seek customers, establish any branch or maintain any distribution depot outside his own territory.  He may also undertake to purchase complete ranges or minimum quantities of the goods, to sell the goods under trademarks or packed and presented as specified by the supplier, and to engage in sales promotion, involving advertising, maintaining a sales network or stock of goods, providing customer and guarantee services, and employing staff with specialised or technical training.  Exclusive agreements for the supply of services rather than the resale of goods are not covered by the Regulation.

10.	The exemption does not apply where competing manufacturers enter into reciprocal agreements, that is where each agrees to supply the other exclusively.  Where at least one of the competing manufacturers has a total annual turnover below 100m ECU, however, a non‑recipocal agreement is allowed, that is one may agree to supply the other exclusively.  Benefit of the exemption is denied also where users can obtain the goods only from the exclusive distributor, with no alternative source of supply outside the contract territory, or where one or both of the parties makes it difficult for intermediaries or users to obtain the goods from dealers inside or outside the common market by, for example, the exercise of industrial property or other rights.  Agreements for the resale of drinks in premises used for the sale and consumption of drinks or for the resale of petroleum products in service stations are not allowed the benefit of exemption under this Regulation.

11.	An essential feature of the Regulation is that there must be no attempt to create absolute territorial protection for the exclusive distributor, that is there must always be the possibility of parallel imports into the contract territory (and the distributor must always be free to sell to dealers or users in another distributor's exclusive territory).  The benefit of the exemption may be withdrawn from a specific agreement in certain circumstances, where, for example, effective competition is lacking.  Exclusive distributors must be free to choose their own customers and to decide upon their own resale prices.

Assessment

(a)	Applicability of Section 4(1)

12.	Section 4(1) of the Competition Act, 1991, prohibits and renders void all agreements between undertakings which have as their object or effect the prevention, restriction or distortion of competition in trade in any goods or services in the State or in any part of the State.

13.	The suppliers of goods, whether they are located outside or inside the State, are engaged in the supply of goods for gain.  The exclusive distributors in the State are engaged in the distribution of goods for gain.  Both suppliers and exclusive distributors are therefore undertakings within the meaning of Section 3(1) of the Competition Act.  The exclusive distribution agreements are agreements between undertakings.  This decision also applies to exclusive distribution arrangements which are operated by undertakings but which take the form of concerted practices rather than of a legally‑binding agreement.  The relevant product or products in each case is or are as specified in the individual agreement.  The relevant geographic market is the State or a part of the State, as specified in the individual agreement.  This decision only applies to agreements to which only two undertakings are party ‑ the supplier and the exclusive distributor.  Both the products and the area of distribution concerned must be specified in the agreement.

(i)	The exclusive distribution requirement

14.	The primary feature of an exclusive distribution agreement is that the supplier agrees to supply certain goods for resale only to the exclusive distributor within a defined territory.  Such an agreement may be made for a very long time, or it may have an indefinite duration, which may also be lengthy in practice.  This prevents the supplier from supplying the goods which are the subject of the agreement for resale to any other distributor in the territory for as long as the agreement endures, and it prevents any other distributor in the territory from obtaining the goods from the supplier for resale in the territory for the same period.  This limits the commercial freedom of the supplier to supply for resale other distributors, and the freedom of other distributors to obtain the goods for resale from the supplier.  It introduces a degree of rigidity into the market, since distribution arrangements are established for long or relatively long periods of time, and since many goods are already tied under such agreements.  The fact that the products are available only from a single source in the territory also tends to restrict intra‑brand competition.  An exclusive distribution agreement therefore constitutes a restriction upon competition which offends against Section 4(1) of the Competition Act.

(ii)	Other restrictive clauses

(a)	Restrictions on the supplier

15.	Besides the obligation on the supplier not to supply the goods to other distributors in the territory, there may be a requirement for the supplier not to supply users, that is final purchasers, in the territory.  Since such an obligation prevents suppliers from dealing directly with users, and prevents users from obtaining supplies directly from the supplier, this represents a restriction upon competition which offends against Section 4(1) of the Competition Act.

(b)	Restrictions on the exclusive distributor which affect competition.

16.	Agreements often contain clauses which oblige the exclusive distributor:
	(1)	not to manufacture or distribute goods which compete with the contract goods;

	(2)	to obtain the contract goods for resale only from the supplier;

	(3)	to refrain, outside the contract territory and in relation to the contract goods, from seeking customers, from establishing any branch and from maintaining any distribution depot.

Each of these restrictions is dealt with below, along with other possible restrictions on competition.

Dealing in competing goods and dealing only with the supplier

17.	The obligation not to manufacture or distribute competing goods limits the freedom of the exclusive distributor in choosing which goods to handle, and it prevents suppliers of competing goods from supplying, or availing of the services of, that distributor.  The requirement to obtain the goods only from the supplier prevents the exclusive distributor from obtaining them from another source, in particular from exclusive distributors in other territories where they might be obtained more cheaply.  These obligations restrict competition and they offend against Section 4(1) of the Act.

Active competition outside territory

18.	The obligation to refrain from seeking customers, etc. outside the allotted territory, prevents the exclusive distributor from engaging in active competition outside his territory, that is from directly seeking customers in the territory or territories contracted to other exclusive  distributors.  It affords a degree of territorial protection to exclusive distributors.  Where the agreement is one of a series, each of which applies to a different part of the State, an obligation of this nature restricts competition within the State, and offends against Section 4(1) of the Act.  Where the agreement relates to the whole State, such an obligation prevents the exclusive distributor from actively competing outside the State.  It does not represent, prima facie, a restriction upon competition within the State.  The Authority is concerned that such an agreement could be one of a series of standard agreements which the supplier has with exclusive distributors in a number of different countries, particularly in the various EC Member States.  The presence of an identical or similar clause in these other agreements would prevent active competition in Ireland from exclusive distributors in other countries, and, in the circumstances, this would effectively represent a restriction upon competition.  Clauses of this nature may well come within the scope of Article 85(1) of the Rome Treaty.

Passive competition outside territory

19.	An obligation on the exclusive distributor to refrain from supplying any customers who are located outside the allotted territory, however, that is one which forbids even passive competition and the responding to unsolicited orders from outside the territory, is an even more serious restriction upon competition.   This may also take the form of requiring the distributor not to supply anyone who might resell the products outside the territory.  Where the agreement is one of a number for different territories, each with the same requirement, this provides each exclusive distributor with absolute territorial protection.  They are assured that they are the only source of supply of the products in the territory, and that other resellers and users are unable to obtain the products from any source whatsoever outside the territory.  This effectively eliminates any competition to the exclusive distributor in respect of the contract products.  Again, where the agreement is one of a series, each of which applies to a different part of the State, an obligation of this nature restricts competition within the State, and offends against Section 4(1) of the Act.  The same type of territorial problem arises as in the case of prohibitions on active competition where the specified territory is the State.  Such clauses also may well come within the prohibition of Article 85(1) of the Rome Treaty.

Freedom to choose customers

20.	Any limitation on the freedom of the exclusive distributor to choose his own customers is generally restrictive of competition, and offends against Section 4(1) of the Act.  In certain circumstances, however, the exclusive distributor may be forbidden to supply the goods to unsuitable dealers.  This is acceptable provided that admission to the distribution network is based on objectively justifiable criteria of a qualitative nature relating to the professional qualifications of the owner of the business or his staff or the suitability of his business premises, if the criteria are the same for all potential dealers, and if the criteria are applied in practice in a manner which is non‑discriminatory.  To this extent, such an obligation would not offend against Section 4(1) of the Act.  This category licence, however, does not apply to exclusive distribution agreements which are part of a selective distribution system, including those for motor vehicles.

Freedom to appoint agents and sub‑distributors

21.	Any limitation on the freedom of the exclusive distributor to appoint agents and sub‑distributors to distribute the products likewise is generally restrictive of competition, and offends against Section 4(1) of the Act.  If the supplier reserves the right to approve the appointment of agents or sub‑distributors by the exclusive distributor, the supplier must not be allowed to withhold approval arbitrarily.  If the supplier may withhold consent from the exclusive distributor to conclude, alter or terminate such sub‑agreements only for objectively valid reasons, this would not offend against Section 4(1) of the Act.

Freedom to determine prices

22.	A limitation on the exclusive distributor in determining his own resale prices and conditions of sale is also a restriction on competition.  In particular, the exclusive distributor might be required to sell at a price fixed by the supplier, or at a price not less than or more than that indicated by the supplier.  The Authority regards such clauses as limitations upon the reseller's freedom to determine his own prices, and to represent the enforcement of, or being conducive to, resale price maintenance.  It considers these as being a serious restriction upon competition, and therefore as a serious infringement of the prohibition in Section 4(1).  It was argued in several submissions that suppliers should be allowed to impose maximum resale prices. The Authority disagrees with these arguments.  While the Government is entitled to specify maximum prices for any product, this is not the prerogative of private undertakings; the setting of maximum resale prices is, in itself, an anti‑competitive practice; and there is the real danger that any maximum price imposed by a supplier would become, at the same time, the effective minimum price charged by resellers.  The Authority does not, however, regard the recommending of resale prices to the distributor by the supplier as amounting to resale price maintenance, provided that there is no agreement or concerted practice that the distributor observe such prices, and provided also that the distributor is informed that he is free to set his own prices.  In these circumstances, the recommending of resale prices to the distributor by the supplier would not offend against Section 4(1) of the Act.

Dealers' resale prices

23.	The Authority takes the same view concerning the freedom of the person who purchases from the distributor, if that purchaser is a reseller, to determine his own resale prices.  Any limitation upon such a purchaser (a dealer) imposed by the supplier or the exclusive distributor would offend against Section 4(1) of the Act.  The recommending of resale prices to the dealer, in the terms outlined above, whether by the supplier or the exclusive distributor, would not be regarded by the Authority as offending against Section 4(1).

Post‑term limitations

24.	Any restrictions upon competition, and indeed other limitations as well, which apply after the termination of the agreement also generally offend against Section 4(1).  The only exception to this concerns the keeping confidential of secret information.

(c)	Restrictions on the exclusive distributor which do not affect competition

Promotion of sales

25.	The exclusive distributor may undertake to do any or all of the following:
	(1)	to purchase complete ranges of goods or minimum quantities;

	(2)	to sell the contract goods under trade marks, or packed and presented as specified by the supplier;

	(3)	to take measures for the promotion of sales, in particular:

		 ‑	to advertise,

		 ‑	to maintain a sales network or stock of goods,
		 ‑	to provide customer and guarantee services,
		 ‑	to employ staff having specialised or technical training.

The Authority considers that these are examples of clauses which generally do not restrict competition, and the list is not comprehensive.  They relate to matters which are usually an integral part of the function of distributing goods for resale on behalf of the supplier.  They are needed in order to ensure an adequate performance by the exclusive distributor, and they provide the rationale for employing an exclusive distributor in the first place.  Without them, it is possible that distribution of the goods might not occur at all, which itself would be deleterious to competition.  The Authority believes that such clauses generally do not offend against Section 4(1) of the Act. The minimum quantity may relate to a single delivery or to purchases over a period, and it may include the setting of sales or turnover targets.

26.	It is possible, however, that obligations of this nature might be formulated or applied in a fashion such that they take on the character of restrictions of competition, in which case they would offend against Section 4(1) of the Act.

Keeping of records, etc

27.	A number of other obligations may also be imposed on the exclusive distributor, such as:

	(1)	to provide reports and returns of information relating to customers, sales, prices, stocks, competitive conditions, the activities of competitors, etc;

	(2)	to keep accounts, records etc, for inspection;

	(3)	to keep lists of names of customers, or serial numbers on products, for inspection;

	(4)	to provide suitable premises;

	(5)	to store products in suitable conditions;

	(6)	to allow inspection of premises, storage and stocks;

	(7)	to permit the supplier to approve the content of advertisements and promotional material.

For the reasons given above, the Authority considers that such clauses also do not generally restrict competition, and so do not offend against Section 4(1) of the Act.  If they were to be formulated or applied in a way which did restrict competition, they would offend against Section 4(1).  This would apply, in particular, if any requirement on the exclusive distributor to supply information resulted in a limitation of his freedom to set prices.  The circulation of such information, by the supplier, to exclusive distributors would also offend against Section 4(1). 

Challenge to validity of trademarks, etc.

28.	Exclusive distribution agreements may contain an obligation on the distributor not to challenge the validity of the supplier's trademark or other industrial or commercial property, during and/or after termination of the agreement.  Such an obligation does not generally offend against Section 4(1) of the Act.  If the supplier does not prohibit the distributor from challenging such validity, but allows the possibility of terminating the agreement in the event of any challenge, this does not offend against Section 4(1) of the Act.

Confidentiality Provisions

29.	Exclusive distribution agreements may contain obligations on the distributor (and sometimes on the supplier as well) to keep secret confidential information.  There can be a requirement to use such information only for the purposes of the agreement, and a prohibition on disclosing or divulging such information to any other person.  The confidential information may include that relating to products, processes, business, accounts, etc.  The confidentiality provisions may also have to be made binding on employees and subsidiary and affiliated companies, and occasionally on customers. While the confidentiality provisions, if any, are always applicable during the course of the agreement, they often continue after the agreement is terminated.

30.	The Authority considers that such provisions on confidentiality during the period while the agreement is in operation are integral features of the relationship between the supplier and the exclusive distributor and they usually relate to proprietary information.  Without them, the agreement might well not be made, and the goods might not be distributed.  They do not restrain competition between the two parties, since there is none under the overall terms of the agreement.  Such obligations on confidentiality during the period of the agreement are not regarded by the Authority as offending against Section 4(1) of the Act.

31.	Confidentiality provisions which apply after termination of the agreement, particularly those concerned with proprietary information, are also considered by the Authority to be generally integral to the original agreement.  To the extent that they are not used to prevent either party competing after termination of the agreement, they are not regarded as offending against Section 4(1) of the Act.  If they were to be used to prevent competition after termination, they would offend against Section 4(1) of the Act.
(b)	Applicability of Section 4(2)

32.	Under Section 4(2), the Competition Authority may grant a licence in the case of any agreement or category of agreements which, 'having regard to all relevant market conditions, contributes to improving the production of goods or provision of services or to promoting technical or economic progress, while allowing consumers a fair share  of the resulting benefit and which does not:‑

	(i)	impose on the undertakings concerned terms which are not indispensable to the attainment of those objectives;

	(ii)	afford undertakings the possibility of eliminating competition in respect of a substantial part of the products or services in question.'

33.	In the opinion of the Authority, exclusive distribution agreements, in general, are likely to fulfil the conditions provided for in Section 4(2) and qualify for the grant of a category licence.

(i)	The exclusive distribution and related requirements

(a)	Improvements in distribution

34.	Exclusive distribution agreements generally lead to an improvement in distribution because the supplier is able to concentrate his sales activities and he does not need to maintain numerous business relations with a large number of dealers.  Particularly in the case of international trade, difficulties resulting from linguistic, legal and other differences are more easily overcome by the appointment of a  distributor located in the territory.  In the case of domestic firms, it is often preferable for the supplier to concentrate on production and to delegate the distribution function to a specialist distributor who already possesses the necessary organisation and dealer contacts.

35.	Exclusive distribution agreements facilitate the promotion of sales of a product and lead to intensive marketing and to continuity of supplies while at the same time rationalising distribution.  They stimulate competition between the products of different manufacturers.  The appointment of an exclusive distributor who will take over sales promotion, customer services and carrying of stocks is often the most effective way, and sometimes indeed the only way, for the manufacturer to enter a market and compete with other manufacturers who are already present.  This is particularly so in the case of small and medium‑sized undertakings.  It must be left to the parties, however, to decide whether and to what extent they consider it desirable to incorporate in the agreements terms providing for the promotion of sales.

(b)	Fair share to consumers

36.	As a rule, such exclusive distribution agreements also allow consumers a fair share of the resulting benefit as they gain directly from the improvement in distribution, and their economic and supply position is improved as they can obtain products, particularly those manufactured in other countries, more quickly and more easily.

(c)	Indispensability

Exclusive supply, etc.

37.	The exclusive supply obligation, which involves the supply of the goods for resale only to the exclusive distributor in the territory, and the obligation on the supplier not to supply the goods to users in the territory, the obligations on the distributor not to deal in competing products, to obtain the goods only from the supplier, and to refrain from active sales outside the territory, are indispensable to the attainment of these objectives.  They produce a clear division of functions between the parties and compel the exclusive distributor to concentrate his sales on the contract goods and the contract territory.  The Authority believes that, where they are limited to the duration of the agreement, such restrictions are generally necessary in order to attain the improvement in the distribution of goods sought through exclusive distribution.  A post‑termination restriction on competition is not indispensable.  Consumers will be assured of a fair share of the benefits only if there is no absolute territorial protection for the exclusive distributor.

Passive sales

38.	An obligation to refrain from passive sales outside the territory, where the territory comprises only part of the State, is not indispensable to achieve the benefits, and does not fulfil the conditions of Section 4(2) of the Act.  It cannot be granted the benefit of this category licence.  An obligation to refrain from passive sales outside the territory, when the territory is the State, as explained, creates some difficulty under the Competition Act since it does not directly affect competition within the State.  To the extent that it is part of a series of similar agreements which prevent passive sales into the State it would restrict competition within the State.  It would produce no benefits and would not be indispensable (and would tend to eliminate competition) and would not fulfil the conditions of Section 4(2) of the Act.  Such restrictions are not permitted under Regulation 1983/83. (See also para 74).

Choice of customers

39.	An obligation which limits the exclusive distributor's choice of customers, except where the exclusive distributor is forbidden to supply the goods to unsuitable dealers on objectively justifiable grounds, in the conditions described in para 20, offends against Section 4(1).  Such an obligation produces no benefit and is not indispensable, and so does not fulfil the conditions of Section 4(2) and cannot be granted the benefit of this category licence.

Appointment of agents and sub‑distributors

40.	A provision which limits the exclusive distributor's freedom to appoint agents and sub‑distributors, without objectively valid reasons on the part of the supplier, offends against Section 4(1).  Such a provision produces no benefits, and is not indispensable, and so does not fulfil the conditions of Section 4(2), and cannot be granted the benefit of this category licence.

Price determination

41.	A limitation on the freedom of the exclusive distributor to determine his prices and conditions of sale offends against Section 4(1) and, since it produces no benefits and is not indispensable, it does not fulfil the conditions of Section 4(2), and cannot be granted the benefit of this category licence.  The position is the same where the customer of the distributor, who is the reseller, is not free, or is not informed that he is free, to determine his resale prices.  Such a restriction on competition also cannot be granted the benefit of this category licence.

Post‑term restrictions

42.	The restrictions on competition which are permitted under this category licence are only permitted for the duration of the agreement.  Restrictions which continue after the termination of the agreement produce no benefits and are not indispensable, and so they fail to fulfil the conditions of Section 4(2), and do not benefit from this category licence.  While certain confidentiality provisions which continue after termination of the agreement do not offend against Section 4(1), this is the case only if they are not used to prevent competition. If they were to be used in this way, this would produce no benefit and would not be indispensable and would not fulfil the conditions of Section 4(2).  Such provisions cannot benefit from this category licence.

Other obligations

43.	To the extent that obligations on the supplier of the kind described in paras 25 and 27 are formulated or applied in a way which restricts competition, they offend against Section 4(1). They produce no benefits and are not indispensable, and do not fulfil the conditions of Section 4(2).  They also cannot benefit from this category licence.

(d)	Elimination of competition

44.	Since competition at the distribution stage is ensured by securing that there is no absolute territorial protection for the exclusive distributor, the exclusive distribution agreements covered by this category licence will not normally afford any possibility of eliminating competition in respect of a substantial part of the products in question.  This would not be the case if an exclusive distributor had exclusive agreements in respect of a substantial range of competing products, insofar as these afforded the possibility of eliminating competition in respect of a substantial part of the products in question.  This licence would not apply in such circumstances.

Competing manufacturers

45.	The category licence should be reserved for agreements for which it can be assured with sufficient certainty that they satisfy the conditions of Section 4(2) of the Act.  It is not possible, without a case‑by‑case examination, to conclude that adequate improvements in distribution occur where a manufacturer entrusts the distribution of his goods to another manufacturer with whom he is in competition.  This applies whether the agreement is on a reciprocal or a non‑reciprocal basis.  Such agreements are, therefore, excluded from this category licence.  They require an individual decision by the Authority.

No absolute territorial protection

46.	Consumers will be assured of a fair share of the benefits only if absolute territorial protection is not permitted.  Thus agreements relating to goods which the user can obtain only from the exclusive distributor should be excluded from this category licence.  In addition, the parties cannot be allowed to abuse industrial property rights or other rights in order to create absolute territorial protection.

(ii)	Miscellaneous considerations

Only two undertakings party

47.	This category licence applies to agreements to which only two undertakings are party ‑ the supplier and the exclusive distributor.  Several undertakings forming one economic unit count as one undertaking for the purposes of this category licence.  The benefit of the licence is not lost if the supplier enters into exclusive purchase agreements with several resellers.  The category licence also applies if the agreements do not contain some of the permitted restrictions, or if the arrangements are less restrictive than those specified, provided that the essential exclusive distribution nature of the agreements remains.

48.	The supplier may delegate the performance of his contractual obligations to a connected or independent undertaking which he has entrusted with the distribution of his goods, so that the reseller has to purchase the contract goods from the latter undertaking.  The involvement of undertakings other than the contracting parties must be confined to the execution of deliveries.  The parties may accept exclusive supply only for themselves and not impose them on third parties since otherwise more than two undertakings would be party to the agreement.  The obligation on the parties to ensure that the obligations they have accepted are respected by connected undertakings is, however, covered by this category licence.
For resale

49.	The notion of resale requires that the goods concerned be disposed of by the purchasing party to others in return for consideration.  Agreements on the supply of goods which the purchasing party transforms or processes into other goods or uses or consumes in manufacturing other goods are not agreements for resale.  The same applies to the supply of components which are combined with other components into a different product.  The criterion is that the goods distributed by the reseller are the same as those the other party has supplied to him for that purpose.  The economic identity of the goods is not affected if the reseller merely breaks up and packages the goods in smaller quantities, or repackages them, before resale.  Where the reseller performs additional operations to improve the quality, durability, appearance or taste of the goods (including the dilution of a concentrated extract with water or another liquid and bottling before resale), the position will mainly depend on how much value the operation adds to the goods.  Only a slight addition in value can be taken not to change the economic identity of the goods.  

Goods

50.	Exclusive agreements for the supply of services rather than the resale of goods are not covered by this category licence.  The licence still applies, however, where the reseller provides customer or after‑sales services incidentally to the resale of the goods.  Nevertheless, a case where the charge for the service is higher then the price of the goods would fall outside the scope of this licence.  

Exclusive Obligation

51.	The exclusive supply obligation does not prevent the supplier from providing the contract goods to other resellers who afterwards sell them in the exclusive distributor's territory.  It makes no difference whether the other dealers concerned are established outside or inside the territory.  The supplier is not in breach of his obligation to the exclusive distributor provided that he supplies the resellers who wish to sell the contract goods in the territory only at their request and that the goods are handed over outside the territory.  It does not matter whether the reseller takes delivery of goods himself or through an intermediary, such as a freight forwarder.  Supplies of this nature are only permissible, however, if the reseller and not the supplier pays the transport costs of the goods into the contract territory. 

52.	This category licence does not apply where the exclusive distributor is restricted to supplying  only certain categories of customers (e.g. specialist retailers) in his contract territory and prohibited from supplying other categories (e.g. department stores), which are supplied by other resellers appointed by the supplier for that purpose.

Restriction on competition by the supplier

53.	The restriction on the supplier himself supplying the contract goods to final users in the exclusive distributor's contract territory need not be absolute.  Clauses permitting the supplier to supply certain customers in the territory ‑ with or without compensation to the exclusive distributor ‑ are compatible with the category licence provided that the customers in question are not resellers.  The supplier remains free to supply the contract goods outside the contract territory to final users based in the territory.

No absolute territorial protection

54.	The category licence cannot be claimed for agreements that give the exclusive distributor absolute territorial protection.  If the situation described in Article 3(b) of this category licence obtains, the parties must ensure either that the contract goods can be sold in the contract territory by other undertakings or that users have a real possibility of obtaining them from undertakings outside the contract territory, at the prices and on the terms there prevailing.  The supplier can represent an alternative source of supply for the purpose of this provision if he is prepared to supply the contract goods on request to final users located in the contract territory.  Article 3(c) of this licence is chiefly intended to safeguard the freedom of dealers and users to obtain the contract goods from outside the territory.

55.	This category licence ceases to apply as from the moment that either of the parties takes measures to impede sales into the contract territory from outside.  Agreements in which the supplier undertakes with the exclusive distributor to prevent his other customers from supplying into the contract territory are ineligible from the outset.  The inapplicability of the category licence follows from the mere fact that the agreement contains restrictions on competition which are not covered by Article 2.1 of this category licence.

Withdrawal of the category licence

56.	Section 8(3) of the Competition Act states

	'Where the Authority is of the opinion that, having regard to the requirements of Section 4(2) and to the basis upon which a licence under that subsection was granted:‑

		(a)	there has been a material change in any of the circumstances on which the decision was based,

		(b)	any party commits a breach of any obligation attached to the decision,

		(c)	the licence was based on materially incorrect or misleading information, or

		(d)	any party abuses the permission granted to it by the licence,
		the Authority may revoke or amend the licence and, without prejudice to the generality of this subsection, may in particular insert in a licence conditions the effect of which is to prohibit specific acts by any party thereto which would otherwise be authorised pursuant to such a licence.'

The Authority considers that it also has the power, in accordance with Section 8(3), to withdraw the benefit of the category licence in individual cases.  This would be the case where an individual agreement had effects incompatible with Section 4(2), particularly where:

	(a)	the contract goods are not subject, in the contract territory, to effective competition from identical goods or goods considered by users as equivalent in view of their characteristics, price and intended use;

	(b)	access by other suppliers to the different stages of distribution within the contract territory is made difficult to a significant extent;

	(c)	for reasons other than those referred to in Article 3(b) and (c) of this category licence it is not possible for intermediaries or users to obtain supplies of the contract goods from dealers outside the contract territory on the terms there customary;

	(d)	the exclusive distributor, without any objectively justified reason, either refuses to supply in the contract territory categories of purchasers who cannot obtain contract goods elsewhere on suitable terms or applies to them differing prices or conditions of sale.

The situations described above are meant as illustrations of the sort of situations in which the Authority can withdraw a category licence in the case of an individual agreement.  There may well be other situations in which the Authority might exercise this power.

Service station agreements

57.	This category licence does not apply to agreements for the resale of petroleum products in service stations, since these relate only to exclusive purchasing.  They are subject to a separate category licence.

Section 5 of the Act

58.	This category licence, being granted in accordance with Section 4(2) of the Competition Act, does not exclude the application of Section 5 of the Act.

Duration of category licence

59.	A number of submissions suggested that the specified period for the licence should be five years, so as to allow the possibility for early review.  The Authority considers that there is merit in such arguments, and that the specified period for the category licence should be five years.  At the end of this period, on the application of a party to a request under Section 7 of the Act, the period of the category licence may be extended, with or without amendments to the licence, if it is considered by the Authority that the requirements of Section 4(2) continue to be fulfilled.  The category licence shall enter into force on 5 November 1993.  It shall expire on 31 December 1998.  The category licence is at the end of this Decision.

Notification

60.	In accordance with Section 4(3)(b) of the Competition Act, where a licence covers a category of agreements, agreements within that category which comply with the terms of the licence need not be notified under Section 7 to benefit from the licence while it is in force.  Nevertheless, where there is real doubt, in a particular case, an undertaking may request the Authority to declare whether its agreements comply with this category licence.  This would have to be done by way of full notification under Section 7.

61.	It is expected that suppliers and exclusive distributors who wish to benefit from this category licence in future will ensure that new exclusive distribution agreements satisfy the conditions specified in the licence.  Parties to agreements which have been made prior to the coming into force of the category licence will also presumably seek to amend these agreements if necessary so as to satisfy the conditions of the licence, especially in the case of agreements which were in existence on the date of commencement of the Act, that is agreements which were entered into prior to 1 October 1991.  Appropriate provisions are necessary in the circumstances.

Agreements already notified

62.	In the case of exclusive distribution agreements which were in existence on 1 October 1991, and which have been notified to the Authority before 1 October 1992, this licence shall have effect from 5 November 1993 where the agreements already fulfil the conditions of the licence.  Where such notified agreements do not fulfil the conditions of the licence, they do not qualify for the benefit of the licence.  The grant of this licence constitutes a refusal to grant a licence to such agreements, unless individual consideration by the Authority is requested before 17 December 1993.  Where such notified agreements are amended to fulfil the conditions of the licence, the licence shall have effect from the date when the conditions of the licence are fulfilled.

63.	In the case of exclusive distribution agreements which came into existence after 1 October 1991, and which have been notified to the Authority before 5 November 1993, this licence shall have retroactive effect from the date of notification, if the agreements already fulfilled the conditions of the licence, or from the date, being not earlier than the date of notification, when the conditions of the licence were fulfilled.  For other agreements which came into existence after 1 October 1991, and which have not been notified, or those which come into existence in the future, this licence shall have effect from the date, at or after the date of grant of the licence, upon which its conditions are fulfilled.

64.	The sole requirement for exclusive distribution agreements to enjoy the benefit of the category licence is that they be brought into line with the provisions of the licence.  It is left to the undertakings concerned as to how they do this.  One way is for the parties to agree to amend the original agreement, while another is for the supplier unilaterally to release the exclusive distributor from all obligations that would prevent the application of the category licence after it comes into operation.  

Divergences from EC Regulation 1983/83

65.	This Decision and the category licence itself are based to a very large extent upon EC Regulation 1983/83, which grants a block exemption from the prohibition of Article 85(1) of the Treaty of Rome to certain categories of exclusive distribution agreements.  A large number of the notified agreements are within the scope of Article 85(1), and it is desirable that exemptions from Article 85(1) of the Treaty and licences under Section 4(2) of the Act in respect of the same agreements should correspond to the greatest extent possible.  These agreements should also be treated in the same way as purely domestic agreements which do not fall within the scope of Article 85(1).  Where divergences occur, the Authority does not consider that they are such as would frustrate the achievement of the objectives of Regulation 1983/83, nor would they prejudice the uniform application of Community competition law throughout the common market.

66.	The main difference between this Decision and the Regulation is in its method of construction.  The Regulation is in two sections, the Recitals, which give some justification for, and explanation of, the operative part, and the Regulation itself.  There is also a subsequent explanatory Notice related to the Regulation.  This decision follows more closely the approach of the Authority in individual licence decisions.  The justification and explanations are given in a form different from that in EC‑type recitals, and they avoid the need for a separate explanatory note.  As with the recitals, however, this part of the decision is vital to the operative part of the licence, which is identical in form to the corresponding section of the Regulation.

67.	References to the common market or to a defined area of the common market in the Regulation are altered to the State or to a defined area of the State in the category licence (Articles 1 and 3(c) of the licence).

68.	Article 3(b) of the Regulation allows manufacturers of competing goods to enter into a non‑reciprocal exclusive distribution agreement if one or both has a total annual turnover of no more than 100 million ECU.  It is not proposed to include an equivalent de minimis provision in the category licence.  The Authority considers that any such agreements, which might have a significant effect on the domestic economy, should be subject to individual decisions.  As a consequence, Article 5 of the Regulation, which relates to the ECU and the calculation of total turnover, is not necessary in this category licence.  Article 4.1 of this category licence also omits the reference to Article 3(b) in the Regulation.

69.	Article 3 of the category licence contains a number of clauses which are not included in the operative part of the Regulation, as follows:

	(1)	Article 3(d) prohibits any restriction on the reseller's freedom to choose customers, with one exception.  This is covered, however, in the notice relating to the Regulation;

	(2)	Article 3(e) does not permit the supplier to withhold consent from the exclusive distributor appointing agents or sub‑distributors, except for objectively valid reasons.  While not referred to in the Regulation, such a provision is found in the EC block exemption Regulation for motor vehicle distribution and servicing agreements ;

	(3)	Articles 3(f)(g) and (h) refer to the imposition of fixed prices and to recommended prices, to distributors and to dealers.  The preamble to the Regulation states that the distributor must have freedom to determine his prices.  The category licence spells this out specifically and in more detail in the case of exclusive distributors, and applies it also  to dealers.  This latter is in accordance with Article 85(1) and with EC precedents in individual decisions;

	(4)	Article 3(i) prohibits any restriction on the distributor after termination of the agreement, except in the case of confidential information provided that the distributor is not restrained from competing.  The preamble and the Notice clearly states that any restrictions may be imposed only for the duration of the agreement.  The reference to confidential information is not believed to be in contradiction with EC precedent, provisions prohibiting the disclosure of  secret know‑how after termination being found, for example, in the EC block exemption Regulations for patents , and know‑how licences ;
	(5)	Article 3(j) refuses the benefit of the category licence where the exclusive distributor has exclusive agreements in respect of a substantial range of competing products, which afford the possibility of eliminating competition in respect of a substantial part of the products in question.  While this is not specifically referred to in Article 3 of the Regulation, the Authority is concerned that such a situation could arise to the detriment of competition, given the size of the domestic economy, since it might lead to a restriction of inter‑brand competition.  It is not considered to be in contradiction with the principles underlying the Regulation.

70.	Article 5 of the category licence is identical to Article 6 of the Regulation, except that references to the EC are changed to references to the Authority and the Competition Act, and that the reference to the charging of excessive prices has been omitted.  The Authority considers that excessive prices could only be charged where the exclusive distributor possesses market power, and thus where Article 5(a) would already be applicable.

71.	Article 7 of the Regulation contains transitional provisions for agreements which previously benefited from Regulation 67/67.  Since there has been no previous category licence in the State, such transitional provisions are not needed in the category licence.  Certain provisions are needed for agreements which have been notified, however, and these are contained in Article 6 of the licence.  This is particularly necessary because the Authority cannot grant a licence which applies retrospectively to agreements which were in force on 1 Octber 1991 and which have been duly notified before 1 October 1992.

72.	Article 8 of the Regulation stated that it did not apply to agreements for the sale of drinks on on‑licensed premises or for the sale of petroleum products in service stations, there being a separate Regulation relating to these.  Since there is no equivalent category licence for drinks, but there is for petroleum products, the reference to drinks is omitted from Article 7 of the category licence, but the reference to petroleum products is retained.  Article 7 of the category licence states that this licence does not apply to exclusive distribution agreements which are part of a selective distribution system, including those for motor vehicles.  The EC Commission considers agreements in respect of each selective distribution system separately, and it has a special block exemption Regulation in respect of the distribution of motor vehicles.

73.	Apart from different commencement and expiry dates in Article 10 of the category licence compared to Article 10 of the Regulation, the rest of the category licence is the same as the Regulation.

74.	Notwithstanding the fact that this category licence is closely based upon Regulation 1983/83, the fact that an agreement satisfies the conditions of this category licence does not necessarily mean that it benefits from the exemption afforded by the Regulation.  This category licence cannot authorise exclusive distribution agreements which infringe Article 85(1) and which do not satisfy the requirements of Regulation 1983/83.  This point is included as Article 8 of the category licence, and there is no corresponding provision in the Regulation.

The Decision

75.	The Competition Authority considers that exclusive distribution agreements constitute agreements between undertakings which have the object and effect of preventing, restricting or distorting competition in goods in the State, and thus they offend against Section 4(1) of the Competition Act, 1991.  In the opinion of the Authority, having regard to all relevant market conditions, such agreements generally satisfy all the conditions required for the grant of a category licence under Section 4(2) of the Competition Act.  Accordingly, the Competition Authority grants a licence to the specified category of agreements, subject to the specified period and specified conditions as required under Section 8(1) of the Competition Act, as follows:

	The Category Licence
Article 1

Pursuant to Section 4(2) of the Competition Act, 1991, and subject to the provisions of this licence, the Competition Authority grants a category licence to agreements to which only two undertakings are party and whereby one party, the supplier, agrees with the other, the exclusive distributor, to supply certain goods for resale within the whole or a defined area of the State only to that other.

Article 2

1.	Apart from the obligation referred to in Article 1 no restriction on competition shall be imposed on the supplier other than the obligation not to supply the contract goods to users in the contract territory.

2.	No restriction on competition shall be imposed on the exclusive distributor other than:

	(a)	the obligation not to manufacture or distribute goods which compete with the contract goods;

	(b)	the obligation to obtain the contract goods for resale only from the other party;

	(c)	the obligation to refrain, outside the contact territory and in relation to the contract goods, from seeking customers, from establishing any branch, and from maintaining any distribution depot.
3.	Article 1 shall apply notwithstanding that the exclusive distributor undertakes all or any of the following obligations:

	(a)	to purchase complete ranges of goods or minimum quantities;
	(b)	to sell the contract goods under trade marks, or packed and presented as specified by the other party;

	(c)	to take measures for the promotion of sales, in particular:

		‑	to advertise,
		‑	to maintain a sales network or stock of goods,
		‑	to provide customer and guarantee services,
		‑	to employ staff having specialised or technical training. 

Article 3

Article 1 shall not apply where:

	(a)	manufacturers of identical goods or of goods which are considered by users as equivalent in view of their characteristics, price and intended use enter into reciprocal exclusive distribution agreements between themselves, or into a non‑reciprocal exclusive distribution agreement between themselves, in respect of such goods:

	(b)	users can obtain the contract goods in the contract territory only from the exclusive distributor and have no alternative source of supply outside the contract territory;

	(c)	one or both of the parties makes it difficult for intermediaries or users to obtain the contract goods from other dealers in other countries, in particular where one or both of them:

		1.	exercises industrial property rights so as to prevent dealers or users from obtaining outside, or from selling in, the contract territory properly marked or otherwise properly marketed contract goods;

		2.	exercises other rights or takes other measures so as to prevent dealers or other users from obtaining outside, or from selling in, the contract territory contract goods.

	(d)	the supplier imposes any restriction on the reseller's freedom to choose customers, except where the reseller is forbidden to supply unsuitable dealers on objectively justifiable grounds;
	(e)	the supplier is entitled, without objectively valid reasons, to withhold consent from the exclusive distributor to conclude, alter or terminate agreements with agents and sub‑distributors;

	(f)	the supplier obliges the exclusive distributor to sell at a fixed price, or at not less than a minimum price or at not more than a maximum price;

	(g)	the supplier recommends to the exclusive distributor a specified resale price or a specified maximum or minimum resale price, unless the reseller is informed that he is free to determine his own resale prices;

	(h)	the above subsections (f) and (g) shall apply mutatis mutandis to obligations upon and recommendations to any reseller supplied by the exclusive distributor:

	(i)	the supplier imposes any restriction on the reseller after the date of termination of the agreement, except in the case of prohibiting the use or disclosure of confidential information, provided that such prohibition does not prevent the exclusive distributor from competing after such termination;

	(j)	the exclusive distributor has exclusive agreements in respect of a substantial range of competing products, which afford the possibility of eliminating competition in respect of a substantial part of the products in question.

Article 4

1.	Article 3(a) shall also apply where the goods there referred to are manufactured by an undertaking connected with a party to the agreement.

2.	Connected undertakings are:

	(a)	undertakings in which a party to the agreement, directly or indirectly:

	 ‑	owns more than half the capital or business assets, or
 
	 ‑	has the power to exercise more than half the voting rights, or
	 ‑	has the power to appoint more than half the members of the supervisory board, board of directors or bodies legally representing the undertaking, or

	 ‑ 	has the right to manage the affairs;

	(b)	undertakings which directly or indirectly have in or over a party to the agreement the rights or powers listed in (a);
	(c)	undertakings in which an undertaking referred to in (b) directly or indirectly has the rights or powers listed in (a).

3.	Undertakings in which the parties to the agreement or undertakings connected with them jointly have the rights or powers set out in paragraph 2(a) shall be considered to be connected with each of the parties to the agreement.

Article 5

The Authority may withdraw the benefit of this category licence, pursuant to Section 8(3) of the Competition Act, 1991, when it finds in a particular case that an agreement which is covered by this licence nevertheless has certain effects which are incompatible with the conditions set out in Section 4(2) of the Competition Act, and in particular, but not only, where:

	(a)	the contract goods are not subject, in the contract territory, to effective competition from identical goods or goods considered by users as equivalent in view of their characteristics, price and intended use;

	(b)	access by other suppliers to the different stages of distribution within the contract territory is made difficult to a significant extent;

	(c)	for reasons other than those referred to in Article 3(b) and (c) it is not possible for intermediaries or users to obtain supplies of the contract goods from dealers outside the contract territory on the terms there customary;

	(d)	the exclusive distributor, without any objectively justified reason, either refuses to supply in the contract territory categories of purchasers who cannot obtain contract goods elsewhere on suitable terms or applies to them differing prices or conditions of sale.

Article 6

1.(a)	As regards agreements which were in existence on 1 October 1991, and were notified before 1 October 1992, this category licence shall have effect from 5 November 1993, where the agreements already fulfil the conditions of the licence.

  (b)	As regards agreements which were in existence on 1 October 1991, and were notified before 1 October 1992, and which do not fulfil the conditions of the licence, but which are later amended to fulfil the conditions of the licence, this category licence shall have effect from the date when those conditions were fulfilled.

2.	As regards agreements which came into existence after 1 October 1991, and which were notified before 5 November 1993, this category licence shall have retroactive effect from the date of notification where the agreements already fulfil the conditions of the licence, or from the date, being not earlier than the date of notification, when the agreements were amended so as to fulfil those conditions.

3.	This category licence constitutes a refusal to grant a licence to exclusive distribution agreements which have been notified before the coming into force of this category licence and which do not fulfil its conditions, unless individual consideration by the Authority is requested before 17 December 1993.

Article 7

This category licence shall not apply to agreements entered into for the resale of petroleum products in service stations, or to exclusive distribution agreements which are part of a selective distribution system, including those for motor vehicles.

Article 8

Nothing in this category licence may be taken as authorising any exclusive distribution agreement which infringes Article 85(1) of the Treaty of Rome and fails to satisfy the requirements of EC Regulation 1983/83, unless the agreement has been specifically exempted by the EC Commission under Article 85(3).

Article 9

This category licence shall apply mutatis mutandis to concerted practices of the type defined in Article 1.

Article 10

This category licence shall enter into force on 5 November 1993.  It shall expire on 31 December 1998.

For the Competition Authority.

Patrick M. Lyons
Chairman
5 November 1993.