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Drafting a distribution agreement according to vertical agreements block exemption

Drafting a distribution agreement according to vertical agreements block exemption

The rules for restricting active selling are different. Active selling is the distributor actively marketing to, targeting and approaching customers. You're not allowed to completely ban the distributor from actively selling the products outside the distributor's territory.

However, you're allowed to ban the distributor from actively selling to customers in territories that you've reserved exclusively for another distributor or reserved exclusively for yourself.

So, for example, if you were a supplier with an exclusive distributor in the north of England, and you had reserved the south of England to market to customers yourself, you could ban a distributor you appoint in Wales from actively approaching customers in both the north and south of England. You couldn't ban them from actively selling the product in Scotland if you hadn't appointed an exclusive distributor in Scotland, or reserved Scotland exclusively for yourself. You couldn't have a blanket ban in your agreement preventing them from selling anywhere outside their territory, as this would be too wide a restriction. It would go beyond what's necessary to protect your exclusive distributor and your own exclusive market.

Effect of using these banned terms

Other invalid anti-competitive terms

There are some other anti-competitive terms that are themselves invalid, but that won't make the whole agreement invalid. If the agreement remains commercially workable without these terms, they can be removed, leaving the rest of the agreement in place.

One such term is a non-compete obligation, which prevents the distributor from selling goods that compete with the supplier's goods. The block exemption recognises that, within limits, the supplier may need to prevent the distributor from selling a competitor's goods. It allows the supplier to do so during the life of the distribution agreement for up to 5 years. A non-compete obligation longer than this will be invalid.

Note that if a minimum sales target has the practical effect of forcing the distributor to buy from you more than 80% of the goods they sell, it will amount to an indirect non-compete obligation. This is treated in the same way as a direct non-compete clause, and must not last for more than 5 years.

The supplier is allowed to prevent the distributor from selling competing goods after the distribution agreement has ended for a period of up to one year. However, certain conditions must be met first, namely that the restriction must:

  • Relate to goods or services that compete with the supplier's
  • Be necessary to protect the know-how transferred by the supplier to the distributor; and
  • Only prevent the distributor from selling competing goods from the same premises they operated from during the term of the distribution agreement.

If the distribution agreement contains non-compete clauses that are more extensive than those allowed by the block exemption, the non-compete clause will be invalid. If it can be severed from the rest of the agreement, the rest of the agreement will be valid.

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