What is an Exclusive Distribution Agreement?

Introduction

An exclusive distribution agreement might take the form of a geographical limitation, in which the supplier agrees to sell his products exclusively to one distributor for resale in a certain region, or of a customer restriction, in which the supplier is limited to sales to a specific set of consumers. It is fairly common in the pharmaceutical industry, where chemists are assigned only to institutional sales to major customers such as hospitals.

Based on whether the limitation works upstream or downstream, competition law recognises two main forms of exclusive agreements: (a) Exclusive Supply Agreements and (b) Exclusive Distribution Agreements.

Exclusive Supply Agreements

Section 3(4)(c) of the Competition Act, 2002 (“Act”) defines exclusive supply agreements as agreements that prohibit the purchaser from purchasing/dealing with goods other than those of the supplier. Exclusive supply agreements impose a constraint on the seller. [1]Exclusive supply agreements are frequently referred to as’ single branding’ or ‘quantity forcing’ arrangements.

Exclusive Distribution Agreements

According to Section 3(4)(c) of the Act, an exclusive distribution agreement is one that limits, restricts, or withholds the output or supply of any products or allocates any region or market for the disposal or sale of goods. An exclusive distribution agreement imposes a limitation on the seller.

Exclusive distribution agreements can also function as an agreement establishing an exclusive medium/channel for the sale/distribution of goods, such as offline or online. Online sales are recognised as passive sales under EU competition law, and any limits on such passive selling are deemed hard-core restrictions.

Under an exclusive distribution agreement, a supplier commits to sell its products to just one distributor for resale in a certain region. At the same time, the distributor’s active selling into other (exclusively allotted) territories is typically limited. Reduced intra-brand rivalry and market partitioning, which may promote price discrimination, in particular, are the key potential competitive threats. When most or all suppliers use exclusive distribution, it might weaken competition and encourage collusion at both the supplier and distributor levels. Finally, exclusive distribution may result in the closure of other distributors, reducing competition at that level.

Exclusive agreements are evaluated under Indian Competition Law.

Market Power

The idea of market power is not defined in the Act. Significant market power or a dominating position, on the other hand, is defined by criteria such as market share, size, resources, the relevance of rivals, economic power, commercial advantages, vertical integration, consumer dependency, entrance barriers, market structure, and market size.

Exclusive agreements may be examined under both Section 3(4) and Section 4 of the Act.

The Competition Act, Section 4(1), bans a business or organisation from exploiting its dominating position. A dominating position is simply the existence of considerable market power that allows a corporation to operate independently of the competitive dynamics existing in the relevant market; or (ii) influence its competitors, consumers, or the relevant market in its favour.

Vertical agreements, as defined in Section 3(4) of the Act, are not inherently anti-competitive. Vertical agreements are anti-competitive only if they have a significant adverse effect on competition (AAEC) in India. Vertical agreements, according to the Competition Commission of India’s (“CCI”) decisional practice, induce AAEC only if the business imposing such vertical constraint has the market capacity to foreclose competition.

Thus, only when the parties concerned have sufficient market power are exclusive agreements anti-competitive under Section 3(4) or Section 4 of the Act.

These variables are also examined by the CCI when determining market power under Section 3(4) of the Act. When calculating market power for the purposes of assessing agreements under Section 3(4) of the Act, the CCI has taken into account criteria such as market share, market structure3, duration of the agreement4, entry barriers5, and so on.

The CCI’s decisional practice also demonstrates that market shares are frequently seen as an important sign of market dominance. For the purposes of assessing exclusivity agreements under Section 3(4) of the Act, the CCI may require enterprises to have at least a 30% market share in the relevant market to be considered to have adequate market power.

Businesses That Mostly Use Exclusive Distribution

Exclusive distribution is often used for technically sophisticated or high-quality commodities that need a certain level of expertise. Employees may require specialised training in order to market the items. The selling of medicinal items is one example. Customers who purchase items such as electronics and automobiles may require specialist aftersales maintenance or repair services, which exclusive distributors are supposed to offer.

High-tech electronics businesses, women’s apparel manufacturers, automakers, and major appliance manufacturers are among the industries that frequently participate in the exclusive distribution. Companies that frequently employ exclusive distribution include Samsung, Gucci, Lamborghini, Apple, BMW, and Mercedes.

An Illustration of Exclusive Distribution

Assume Prada needs a distributor in a specific region. Prada understands that having stores all over the region will reduce its brand equity (the prestige associated with its brand). As a result, Prada becomes the only distributor for the specified region. The exclusive distributor then establishes its own exclusive Prada sales centres and offers Rolex watches through sales centres located in the region’s wealthy neighbourhoods.

Prada is pleased with the outcome of naming an exclusive dealer. As a result, it chooses to repeat the process with a second region. This time, however, Prada has the choice of keeping the original exclusive dealer it utilised in the prior territory or choosing a new one. Because Prada wants to preserve its brand equity, it will not enter the new territory directly and will not hire many wholesalers in order to keep its exclusive and premium stance. These types of business psychology and marketing tactics may be found in a variety of sectors.

References

Exclusivity Clauses in Commercial Agreements-Issues Under Indian Competition Law https://www.mondaq.com/


[1] https://www.contractscounsel.com/t/us/exclusive-distribution-agreement

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