I. Introduction
A distribution agreement is one of the most important commercial instruments for businesses. A well-structured distribution system enables a company to efficiently deliver products to the market, strengthen its brand, and increase sales.
However, in practice, distribution agreements often become a primary source of antitrust risks, especially when suppliers focus solely on the commercial aspects of the transaction and fail to properly assess the requirements imposed by competition law, which frequently remain overlooked.
In this article, antitrust risks refer to the legal risks that may arise from specific clauses within a distribution agreement that contradict the requirements of Georgian competition law.
One of the most common models that a distribution agreement предусматривает is exclusive distribution. In such cases, the supplier grants a single partner the exclusive right to distribute its products within a specific territory.
While this model increases operational efficiency, it simultaneously creates risks of market partitioning and restrictions on competition. As a result, consumer choice is reduced, and market entry becomes more difficult for other players.
II. Distribution Agreement with Exclusivity and Legal Risks
In the case of exclusive distribution, the supplier entrusts the sale of products within a specific geographic area to only one distributor. While this model naturally improves logistics and sales for the company, it may also have negative effects on effective and healthy competition.
Specifically, an exclusive distribution agreement reduces competition within the relevant distribution area and creates risks of geographic market allocation. Ultimately, this may harm the end consumer.
As discussed in detail in my doctoral research, the impact of exclusive distribution on effective competition is particularly pronounced at the retail level, where consumers are left with fewer choices and alternatives.
All of this ultimately creates the risk of violating competition law through such distribution agreements, potentially leading to sanctions against the companies involved.
Depending on the intensity of these risks, a distinction is made between clauses restricting active and passive sales within a distribution agreement.
III. Types of Exclusive Distribution
1. Restriction of Active Sales
A distribution agreement between a supplier and a distributor may grant a distributor an exclusive sales territory and prohibit it from operating in another distributor’s territory.
For example, a producer of mineral water “X” may grant distributor “A” the exclusive right to sell its product only in the Guria region. Similar distributors may be appointed for other regions.
A restriction on active sales prohibits the distributor from selling products outside its designated territory through means such as:
- Targeted advertising outside its exclusive territory
- Sending sales agents into another distributor’s territory
- Directly approaching customers in another distributor’s territory (emails, calls)
- Creating local websites or campaigns targeting another territory
However, restrictions on active sales still leave room for competition, as the distributor may supply products to customers located outside its territory if those customers initiate contact.
Therefore, such restrictions may be permissible under certain conditions, depending on factors such as market share, duration of the agreement, and the specifics of the case.
At the same time, it is essential to comply with the applicable exemption requirements under competition law. Otherwise, the agreement may be considered restrictive and lead to legal liability.
2. Restriction of Passive Sales
Unlike active sales, passive sales refer to situations where the distributor does not actively seek customers but responds to unsolicited requests.
Passive sales typically occur when a customer independently contacts the distributor from outside its territory or places an order through generally accessible channels.
A clause restricting passive sales prohibits the distributor from selling products even when the customer independently expresses interest. For example, the distributor may be prohibited from:
- Responding to orders from customers located in other territories
- Supplying products when customers initiate contact via phone, email, or other communication channels
- Accepting online orders from customers located outside its exclusive territory
- Fulfilling orders received through websites or online platforms for customers in other territories
Restrictions on passive sales effectively create absolute territorial protection and significantly limit both inter-brand competition and consumer choice.
For this reason, in competition law practice, such clauses are generally considered high-risk restrictions.
According to international approaches, restrictions on passive sales are typically not justifiable and do not benefit from exemption regimes.
Such clauses are often regarded as artificial market partitioning, which is prohibited under competition law and may result in the invalidity of the agreement and liability for the parties involved.
IV. When Can an Exclusive Distribution Agreement Be Justified?
It is important to note that a distribution agreement does not automatically violate competition law. The assessment always depends on the specific circumstances.
In particular, the following factors are considered:
- Market power of the parties
- Duration of the agreement
- Market development needs
- The actual economic effect of the agreement
In some cases, particularly when entering new markets, exclusive arrangements may be justified. However, such assessments always require an individual analysis.
V. Why Are These Issues Often Ignored in Georgia?
In the Georgian legal market, there are very few law firms specializing in competition law, particularly in the context of distribution models.
In many cases, companies rely on standard templates or focus only on the commercial aspects of agreements, which creates significant legal risks in the future.
For this reason, it is increasingly important for businesses to involve lawyers or law firms with specific expertise who assess such transactions not only from a contractual perspective but also from an antitrust standpoint.
VI. Conclusion
A distribution agreement is a powerful business tool. However, such agreements always involve risks related to competition law compliance, making it essential to carefully assess these risks in each specific case.
If you have any questions or require further clarification regarding this topic, the author remains available, as always, for professional discussion.
