I. About This Article
A distribution agreement is one of the most important commercial instruments for businesses. A properly structured distribution system helps a company deliver products effectively, strengthen its brand, increase sales and build stable commercial channels on the market.
However, in practice, distribution agreements may also become a source of significant antitrust risks. This is especially relevant when the supplier or distributor focuses only on the commercial effect of the transaction and does not properly assess the requirements of competition law.
In this article, antitrust risks mean the legal risks that may arise from provisions in a distribution agreement that restrict competition, allocate markets, prohibit certain types of sales or create the risk of reducing customer choice.
This article will help you understand what exclusive distribution is, what the difference is between restrictions on active and passive sales, why restrictions on passive sales are particularly high-risk clauses and when an exclusive distribution model may be legally justified.
The article is based on Georgian competition law, European Union competition law approaches, distribution agreement practice and TB Legal’s experience in contract law and competition law.
II. Why Is a Distribution Agreement Important for Business?
A distribution agreement determines how a product reaches the market, who sells it, in which territory the distributor operates, what commercial terms apply to the parties and how responsibility is allocated between the supplier and the distributor.
For a business, a well-structured distribution system may be an important growth tool. It simplifies logistics, reduces sales costs, increases product availability in the local market and strengthens brand control.
At the same time, however, a distribution agreement is a sensitive instrument from the perspective of competition law. Its terms may concern allocation of territories, customer restrictions, pricing policy, exclusivity, non-compete obligations or other issues that affect competitive processes on the market.
Therefore, when preparing a distribution agreement, it is not enough to agree only on commercial terms. It is necessary to assess whether the agreement contains clauses that may be considered a violation of competition law.
For more information about contract-related matters, see our service page: Contract Law Services in Georgia.
III. Distribution Agreements and Competition Law
A distribution agreement is usually concluded in a vertical relationship — between a supplier and a distributor. Such a relationship differs from a horizontal agreement between competitors, but this does not mean that vertical agreements are irrelevant for competition law.
Vertical agreements may also be beneficial for competition. They may support better distribution of products, market development, stronger distributor incentives and improved service quality.
However, in certain cases, such agreements may restrict competition. This happens when the agreement effectively allocates territories, restricts competition between distributors, reduces customer choice or prevents other players from entering the market.
Therefore, when legally assessing a distribution agreement, it is important to examine not only its text, but also its economic effect: how it operates on the market, how strong the market position of the parties is, how long the restriction applies and what impact it has on consumers.
For more information about competition law services, see our service page: Competition Law Services in Georgia.
IV. Exclusive Distribution Agreements and Legal Risks
One of the most common forms of distribution agreement is exclusive distribution. Under this model, the supplier entrusts the sale of products in a specific geographic territory to only one distributor.
For example, a mineral water producer may grant one distributor the exclusive right to sell products in the Guria region, another distributor in Adjara and a third distributor in Kakheti.
From a commercial perspective, this model allows the supplier to better control sales, increase distributor motivation and avoid chaotic competition between distribution channels.
However, from the perspective of competition law, exclusive distribution may create a risk of geographic market allocation. If distributors are prohibited from operating in each other’s territories in a way that ultimately restricts customer choice, such a model may become problematic.
The risk is particularly high when exclusivity restricts not only active sales, but also prohibits passive sales. Correctly understanding the difference between these two concepts is therefore essential.
V. What Is a Restriction on Active Sales?
Active sales mean targeted commercial actions by a distributor aimed at attracting customers from another territory or another customer group.
Examples of restrictions on active sales include:
prohibiting a distributor from targeted advertising in another exclusive territory; restricting the sending of sales agents into another distributor’s territory; prohibiting direct offers to customers located in another territory; restricting the creation of a campaign or local website specifically targeted at a particular region.
A restriction on active sales usually aims to protect the territory of an exclusive distributor. In such cases, a distributor may be prohibited from carrying out targeted commercial activities in another distributor’s territory.
However, a restriction on active sales does not always mean absolute territorial isolation. If the distributor can still respond to a customer’s unsolicited request from another territory, a certain degree of competition remains.
For this reason, in certain cases, restrictions on active sales may be legally permissible if they are proportionate, do not go beyond what is necessary and do not lead to a substantial restriction of competition.
VI. What Is a Restriction on Passive Sales?
Passive sales refer to situations where a distributor does not actively seek customers in another territory, but responds to a customer’s own initiative.
For example, a passive sale occurs when a customer from another region contacts the distributor and requests delivery of the product. An order received through a general website or online platform may also be considered a passive sale if the distributor did not specifically target that customer.
A restriction on passive sales prohibits the distributor from supplying the product even when the customer itself expresses interest and the initiative comes entirely from the customer.
Examples of restrictions on passive sales include:
prohibiting response to orders received from customers located in another territory; restricting responses to requests received by email or telephone; prohibiting online orders because of the customer’s location; restricting fulfilment of orders received through a general website from customers located in another territory.
A restriction on passive sales practically creates a mechanism of absolute territorial protection. It significantly restricts both competition between distributors and the customer’s freedom of choice.
For this reason, in competition law practice, restrictions on passive sales are usually considered particularly high-risk clauses.
VII. Why Are Restrictions on Passive Sales Particularly Dangerous?
Restrictions on passive sales are problematic because they deprive customers of the opportunity to choose from whom they want to purchase the product.
If a customer contacts another distributor on its own initiative, but the agreement prohibits that distributor from fulfilling the order, the market is effectively divided artificially into territories.
Such a model reduces competition between distributors. Each distributor is protected not only from active intrusion, but also from customer-initiated requests. As a result, territorial exclusivity becomes almost absolute.
For competition law, this is particularly problematic because such market allocation reduces competitive pressure on price, quality, service and delivery conditions.
According to international approaches, restrictions on passive sales are usually difficult to justify and are often treated as serious anticompetitive clauses.
Therefore, when preparing a distribution agreement, particular attention should be paid to whether the text restricts passive sales directly or indirectly.
VIII. When Can Exclusive Distribution Be Legally Justified?
A distribution agreement does not automatically violate competition law. Exclusive distribution is also not prohibited in itself.
In certain cases, exclusive distribution may be economically justified. For example, when entering a new market, a supplier may need a strong local partner who will invest in product promotion, logistics, customer service and development of the sales network.
In such cases, granting an exclusive territory may serve as a mechanism for increasing the distributor’s motivation and protecting its investment.
However, the permissibility of such an arrangement always depends on the specific circumstances. The assessment considers the market power of the parties, the duration of the agreement, the market structure, the number of competitors, the degree of customer choice and whether a less restrictive alternative exists.
In competition law, the key question is not only what the contract says, but also what effect the clause has on the market.
IX. What Should Be Checked Before Signing a Distribution Agreement?
Before signing a distribution agreement, a business should assess several issues.
First, it should be determined whether the agreement contains an exclusivity clause and what the scope of that exclusivity is.
Second, restrictions on active and passive sales should be clearly distinguished. General wording used in a contract may, in practice, become a restriction on passive sales, which carries high legal risk.
Third, the market position of the parties should be assessed. The stronger the supplier or distributor is on the relevant market, the higher the competition law risk.
Fourth, the duration of the agreement should be checked. Long-term exclusive arrangements may be more problematic, especially when they restrict opportunities for other distributors or customers.
Fifth, the economic justification should be assessed. If exclusivity is necessary for developing a new market, protecting an investment or improving the quality of supply, these circumstances should be considered in advance and should be capable of being documented.
X. Why Are These Issues Often Overlooked in Georgia?
In Georgia, many companies view distribution agreements only as commercial documents. Attention is paid to price, territory, supply, payment, stock and marketing, while competition law assessment is often overlooked.
One reason is that specialized legal practice in competition law, especially in distribution models, remains relatively limited in Georgia.
Companies often use template agreements, direct translations of foreign documents or texts adapted only to commercial needs. This approach may seem fast and inexpensive at the beginning, but may create serious legal risks in the long term.
A distribution agreement should be assessed not only as a contract, but also as part of the competitive structure operating on the market. This is why it should be analysed from both contract law and competition law perspectives.
XI. How TB Legal Can Help
TB Legal assists businesses with drafting, reviewing and assessing competition law risks in distribution agreements.
Our services include legal analysis of exclusive distribution models, assessment of active and passive sales restrictions, review of territorial clauses, analysis of non-compete provisions and balancing the commercial purpose of the agreement with the requirements of competition law.
TB Legal’s approach is based on combined analysis of contract law and competition law. This is particularly important where the distribution model includes exclusive territories, selective distribution, online sales restrictions, influence on pricing policy or other sensitive clauses.
If your company is planning to enter into a distribution agreement or already uses a distribution model, it is advisable to assess in advance whether it contains antitrust risks.
XII. Conclusion
A distribution agreement is an important commercial instrument for businesses, but if drafted incorrectly, it may become a source of serious antitrust risks.
Exclusive distribution is not always prohibited, but its conditions must be carefully assessed. Restrictions on passive sales are particularly high-risk because they significantly limit customer choice and competition between distributors.
The key lesson for businesses is that a distribution agreement should not be assessed only by its commercial effect. Competition law analysis is also necessary.
Contact TB Legal if you need preparation, review or antitrust risk assessment of a distribution agreement. We will help reduce legal risks for your business.
XIII. Sources Used
This article is based on the following sources:
- Georgian competition legislation.
- European Union competition law approaches to vertical agreements and distribution systems.
- The author’s doctoral research in competition law.
- TB Legal’s practical experience in contract law and competition law matters.
Disclaimer
This article has been prepared for general informational purposes only and does not constitute individual legal advice or a legal opinion. Antitrust risks related to distribution agreements may be assessed differently depending on the specific market, the market shares of the parties, the duration of the agreement, the content of sales restrictions and the economic effect of the arrangement.
Before entering into a specific agreement, it is recommended to obtain an individual legal assessment from a qualified lawyer.
