Choosing distributors, managing sales channels and setting commercial terms are ordinary tools for growing a business.
However, in certain circumstances decisions aimed at making sales more effective may create risks of breaching competition law. Such actions may be qualified as anticompetitive concerted actions or abuse of a monopoly (dominant) position. Everything depends on the nature of the companies' conduct and their position on the relevant market, and may lead to fines imposed by the Antimonopoly Committee of Ukraine (the AMCU). Fines may amount to millions of hryvnias and be accompanied by orders to stop the infringement and change the relevant commercial practices.
That is why it is important not only to take competition law into account when building a distribution system, but also to review existing commercial practices regularly in light of current AMCU practice. Such an analysis helps identify potential competition risks, assess whether existing arrangements and the partners' actual conduct comply with the law and the AMCU's approach, and, if necessary, adjust the terms of cooperation and the management of sales channels in good time.
Law of Ukraine No. 2210-III of 11 January 2001 «On Protection of Economic Competition» (the Law) provides for several types of conduct that may create competition risks in distribution. In particular, Article 6 of the Law deals with anticompetitive concerted actions between companies. These include, among other things, actions concerning:
- setting prices or other terms of purchase or sale of goods;
- restricting markets or the range of sellers and buyers;
- allocating markets or sources of supply by territory, range of goods, sales or purchase volumes or other criteria;
- applying different terms to equivalent agreements, which puts certain companies at a competitive disadvantage.
Article 13 of the Law also prohibits abuse of a monopoly (dominant) position on the market. In distribution, this may concern, in particular, discriminatory terms of cooperation with distributors, imposing additional obligations, and unjustified refusal to supply goods.
As we can see, competition risks in distribution may arise both from agreements between manufacturers, importers and distributors and from unilateral actions of a company holding a dominant position. That is why it is important to look not only at the terms of distribution agreements and the internal commercial policies of manufacturers (importers), but also at how they are applied in practice: the commercial team's day-to-day interaction with partners, pricing approaches, bonus and discount systems, cooperation in advertising activities, and decisions on the terms of cooperation. It is the actual actions and communication of the commercial team that may show whether the practice of working with distributors complies with competition law.
To achieve their commercial goals, companies may use different models of selling their goods:
- direct sales to end consumers through physical stores,
- sales through online stores and marketplaces,
- distribution through independent partners, including through a selective distribution system.
The choice of a particular model depends on the brand's positioning and commercial strategy. The chosen sales model determines not only the sales channels, but also how cooperation with partners is organised and what requirements the manufacturer (importer) may impose on them. In particular, one way of organising distribution is a selective distribution system, within which the manufacturer (importer) may set criteria for selecting partners and requirements for the organisation and design of points of sale, sales channels, customer service standards, including specialised consultations, and the ways products are presented and promoted. Such terms may be aimed at ensuring a proper level of service, maintaining product quality and brand reputation, in particular protecting trademarks, ensuring a consistent customer experience across the distribution network and preventing cooperation with unscrupulous partners.
The mere introduction of selective distribution does not automatically make every restriction within such a system lawful. These approaches must take competition law into account so that the commercial strategy does not lead to unjustified restriction of competition or narrow the partners' ability to conduct their business independently; they must also be objectively justified, proportionate to their aims and applied on a non-discriminatory basis to partners in similar situations.
Terms governing online sales channels, internet advertising, digital platforms and other customer acquisition tools need particular attention. The manufacturer (importer) may set reasonable requirements for how products are promoted, the quality of advertising materials, the use of trademarks and compliance with brand standards. However, such requirements must not go beyond what is necessary for the distribution system to function properly, or in practice prevent buyers from accessing the products, including on a territorial basis, and from buying them through authorised partners.
In particular, the following need to be assessed: bans or restrictions on sales through certain marketplaces, requirements to pre-approve advertising campaigns to make sure advertising materials comply with brand standards, visual guidelines and correct product information, restrictions on the use of trademarks in search advertising, and rules for setting up targeted advertising. At the same time, such approval must not extend to the partner's independent pricing of the products, including the prices shown in advertising materials. The manufacturer (importer) may give recommendations on retail prices, but the decision on resale prices must remain with the distributor.
A particular risk arises if the rules for online promotion in practice limit certain partners' ability to attract buyers, create unjustified advantages for other members of the network, or turn into a tool for controlling to whom, where or on what commercial terms a partner may sell the products. Therefore, when approving online activities, it is important for the commercial team to understand the purpose of the relevant restrictions and check that they do not go beyond what is necessary to protect the brand and ensure the proper functioning of the distribution network.
The sales team often deals with pricing, promotions, discount and bonus systems. Using these tools does not in itself indicate a breach of competition law. In particular, a manufacturer, importer or supplier may set recommended retail prices, but they must remain a recommendation and not become a mandatory condition for reselling the goods. It is unacceptable to require partners to keep to the recommended price under the threat of stopping or limiting supplies, worsening the terms of cooperation, cancelling discounts, withdrawing bonuses or other sanctions. Even if the contract formally leaves the partner free to set prices, actual pressure or financial incentives may lead to fixed or minimum resale prices. That is why the sales team must avoid not only direct instructions on prices, but also any actions that in practice deprive the partner of pricing independence. To reduce competition law risks, companies should regularly review not only their distribution agreements, but also the sales team's internal rules and practice, and hold training to raise employees' awareness of competition law requirements, identify potentially risky commercial practices and prevent actions that may limit partners' pricing independence, create unjustified restrictions on sales channels or lead to anticompetitive concerted actions.
The risk arises not only when a manufacturer, importer or supplier imposes price restrictions on its own initiative, but also when the sales team responds to one partner's complaints about another partner's prices. For example, a distributor complains to a sales manager that a competitor sells the products cheaper and asks the manager to influence the competitor's pricing. If the sales manager then asks that distributor to raise the price to the recommended level, and a refusal threatens reduced discounts, withdrawn bonuses or stopped supplies, such actions may indicate that the distributor's freedom to set resale prices is in fact restricted. As a result, the supplier risks not only limiting price competition between partners, but also turning formally recommended prices into mandatory ones. Distributors' complaints about other partners' prices must therefore not become grounds for interfering in their independent pricing.
To minimise such risks, we recommend preparing short internal guidance for the sales department with procedures for responding to such requests from distributors. The guidance should contain practical recommendations on proper communication with partners, including examples of acceptable responses to complaints about competitors' prices, as well as clear warnings about statements and actions that may be seen as an attempt to influence another distributor's pricing.
An illustration of the competition law risks discussed in this article is AMCU decision No. 420-r of 2 July 2020 in the case of Grundfos Ukraine LLC and its partners. The AMCU found that the supply agreements contained terms on minimum recommended retail prices and minimum resale prices and provided for sanctions for failing to comply with these price requirements. Following the case, these actions were qualified as anticompetitive concerted actions on price fixing. This example shows that a supplier may set the commercial principles of cooperation with distributors, but must not replace recommendations with mandatory price requirements or use contractual mechanisms to limit partners' independence in setting resale prices.
Following the case, the AMCU found an infringement by all the respondents and fined them a total of over UAH 5.19 million. The case had more than financial consequences: while it was still being considered, Grundfos Ukraine LLC announced that it had stopped applying the price restrictions, informed its partners and amended the agreements, removing the provisions on minimum recommended retail prices and minimum resale prices. The case thus shows that competition law risks may require not only paying a fine, but also revising contractual terms and commercial practices in working with distributors.
To sum up, an effective distribution system must strike a balance between the supplier's commercial goals, quality of service and preserving a competitive environment. Formulating contractual restrictions in legally correct language is not enough for this. It is also necessary to check how they work in practice: whether partners keep their commercial independence, whether recommendations turn into mandatory requirements, and whether the sales rules comply with applicable competition law.
The DEGA Partners team is ready to help businesses assess the competition law risks of their chosen distribution model, review contracts and commercial policies, and develop practical recommendations and training for the sales team. This approach not only minimises the risk of breaching competition law, but also ensures the effective work of the distribution network and the sustainable development of the business.
