Distribution agreements and the new cartel laws
Distribution agreements increasingly are subject to competition law implications. In particular that is the case where suppliers of products themselves directly sell products (often through websites) in competition with their own dealers.
Accordingly understanding the proposed new cartel laws1 and the Commerce Commission’s very recently revised competitor collaboration guidelines2 will be very important for those advising on distribution agreements.
Let’s say that you are acting for Zimbra Corporation3, a manufacturer of designer T-shirts. Zimbra sells T-shirts direct to the public via its website. It also supplies T-shirts to various retailers throughout New Zealand.
As Zimbra is technically in competition with the retailers, the new cartel prohibitions may apply to its supply arrangements with the retailers. Any arrangements between Zimbra and its retailers that amount to price fixing, market allocation or output restriction may breach the new cartel prohibitions, subject to the potential application of the new vertical supply contract exemption.
The new vertical supply contract exemption will be very important to cartel provisions in a distribution agreement. A cartel provision will come within the vertical supply contract exemption where:
- it is contained in the supply contract between the supplier and the customer;
- the cartel provision in the contract “relates to” the supply of goods or services by the supplier to the customer (including to the customer’s maximum re-sale price); and
- the cartel provision does not have the dominant purpose of lessening competition between the supplier and the customer.
You point out to Sarah, the manager of Zimbra, that the new cartel laws may have potential application to Zimbra’s supply arrangements with its retailers. She then asks you some questions.
“Well, obviously I have to set the price at which I supply the T-shirts to the retailers. That must be okay?”
You confirm that that is fine. The vertical supply contract exemption definitely applies to the setting of the supply price by Zimbra to the retailers.
Sarah then asks: “Can I provide the retailers with a recommended price list from time to time and require retailers when resupplying the T-shirts to not price at a level greater than that?”
You advise her that Zimbra can do that as long as the requirement is set out in the supply agreement with the retailer. You also note the importance that the price stipulation amounts to the setting of a true maximum price. Setting an actual resupply price, or a minimum resupply price, would not come within the exemption (and would likely be considered to have the dominant purpose of lessening competition).4
Next Sarah asks: “I want to ensure each retailer appointed has a real incentive to promote the Zimbra brand in the area so I want to give each retailer an exclusive area of operation and limit them to only selling though their own stores in those areas. Can I do that?”
You note that a provision limiting each retailer to where they sell amounts to market allocation and therefore is a cartel provision under the Cartel Bill. However the vertical supply contract exemption may well apply. The exclusivity provision appears to “relate to” the supply of the product by Zimbra and does not seem to have the dominant purpose of lessening competition between Zimbra and the retailers. The position might be different if Zimbra had already supplied the retailers for several years without such a market allocation provision. The Commerce Commission might contend that in those circumstances the limitation could not really be said to “relate to” the supply of the product.5
Finally, Sarah asks you: “Can I require the retailers not to stock or supply certain named competitor brands of designer T-shirts as a condition of me supplying the Zimbra brand? I don’t want them to sell the T-shirts of my major competitor.”
In response you note that such a restriction would likely come within the new prohibition on output restriction in the Cartel Bill. The provision is restricting the retailer from supplying goods that it supplies in competition with Zimbra.6 You also explain that you wouldn’t be confident that the vertical supply contract exemption would apply. The Commerce Commission may well consider that the limitation does not “relate to” the supply of the product by Zimbra. The Commission’s revised guidelines note that a provision imposing a restriction on products other than the product actually supplied is less likely to be considered to “relate to” the supply of the particular product.7
In conclusion, distribution agreements increasingly are subject to competition law implications. That is particularly so where suppliers sell the products directly to customers themselves (perhaps through a website) in competition with dealers or distributors.
In such circumstances the prohibitions in the Cartel Bill on price fixing, market allocation and output restriction are potentially relevant to provisions in distribution agreements.
Accordingly it is important to be aware both of the expanded definition of cartel conduct in the Cartel Bill and of the terms of the new vertical supply contract exemption.
The Commerce Commission’s recently revised Competitor Collaboration Guidelines provide a helpful starting point to considering how the new law will apply to distribution agreements.
John Land is a Senior Competition Law Specialist and Commercial Litigator at Bankside Chambers in Auckland. Formerly a partner of Kensington Swan for 20 years, he can be contacted on 09 379 1513 or at email@example.com.
- Commerce (Cartels and Other Matters) Amendment Bill (the Cartel Bill).
- Commerce Commission Competitor Collaboration Guidelines, revised draft, August 2014 (Commission Revised Guidelines).
- Zimbra Corporation is a fictitious company and is not intended to have any connection or resemblance to any existing company of that or any other name.
- Commission Revised Guidelines, example on p 29.
- Commission Revised Guidelines, para 3.14.
- See proposed s 30A(3)(c) Commerce Act.
- Commission Revised Guidelines, para 3.11.
Last updated on the 17th March 2016