Exemption Requirements in Exclusive Distributorship Contracts in Competition Law

9/27/2021

All Insights
In commercial life, the undertakings' ability to carry out their activities freely without being under pressure, is important in terms of maintaining its presence in the market where the undertakings are operating, as well as the consumer's, who are the end buyers, ability to be able to benefit from the final product put on the market at fair pricing and with quality product balance.
Within this framework, the existence and protection of competition in the market is the determining factor for undertakings to maintain their existence and compete with other undertakings fairly.

In accordance with the above-mentioned reasons, Act No. 4054 On The Protection Of Competition (“Act”) has entered into force and made various regulations in order to prevent agreements, decisions and practices that prevent, distort or restrict competition, and the abuse of dominance by the undertakings that dominate the market. This article discusses the exemption of exclusive distributorship contracts such as distributorship, dealership, and franchise, regarding the activities prohibited under Competition Law.

Exemption And Activities Prohibited Under The Act On The Protection Of Competition
In order to prevent unfair competition between undertakings, the Act limited the agreements and transactions between the undertakings by Article 4 which states, “Agreements and concerted practices between undertakings, and decisions and practices of associations of undertakings which have as their object or effect or likely effect the prevention, distortion or restriction of competition directly or indirectly in a particular market for goods or services are illegal and prohibited.” Accordingly, in particular, but not limited to those listed; the following activities are considered to be within the scope of prohibited activities due to the limitation of competition: determining the terms of purchase and sale of goods or services, sharing or control of markets or their resources and elements, controlling or determining the amount of supply or demand for goods or services, aggravating, restricting the activities of competitor undertakings or taking them out of the market or preventing their entry into the market; non-equal treatment of persons in equal standing, with the exception of exclusive dealership, linking the purchase of a good or service to the purchase or display of another good or service. In such a case, applying for an exemption mechanism should be considered. There are two ways to benefit from the exemption under the Act. First, it is possible to benefit from the "Block Exemption'' issued by the Board within the scope of communiqués regarding the block exemption. If it is not possible to be included in the scope of the group exemption, in any case, it may be possible to benefit from the "Individual Exemption" formed by the conditions in the 1st paragraph of Article 5.

Individual Exemption
The individual exemption relates only to agreements, concerted practices, and decisions contrary to Article 4. In both Turkish and European Competition Law, there is no exemption regulation concerning the prohibition of abuse of the dominant position. Pursuant to Article 5 of the Act; Competition Board (“Board”), may grant Individual exemptions to distribution agreements that have an anti-competitive effect or purpose providing that all of the following conditions are met; providing new developments and improvements or economic or technical developments in the production or distribution of goods and the provision of services, the consumer benefits from it, the absence of competition in a significant part of the relevant market and not limiting competition more than is necessary to achieve the objectives expressed in the first and second place. Here, it should be emphasized that these requirements must exist cumulatively. Even the absence of only one of the conditions will prevent the granting of the exemption.

In terms of their procedures and scopes, block exemptions and individual exemption are different. Namely, in order to obtain an individual exemption for an agreement, a notification must be made in accordance with Article 5 of the Act. In the block exemption, if the agreement meets the exemption requirements, the agreement falls within the scope of block exemption without the parties' need for a notification.

While individual exemption is valid only for the agreement subject to exemption decision, in block exemption, the multiple agreements on similar subjects may be exempted from the scope of the prohibition on anti-competitive restrictions as a group.

Block Exemption Communiqué On Vertical Agreements
Since exclusive distributorship contracts such as distributorship, dealership, and franchise have the characteristics of vertical agreements, they fall within the scope of the 2002/2 Block Exemption Communiqué on Vertical Agreements (“The Communiqué”) published in the Official Gazette dated 14.07.2002 and numbered 24815.

The Communiqué sets out requirements exempting vertical agreements from the implementation of Article 4 of the Act as a group. In addition, the "Guideline on Vertical Agreements" ("Guideline") numbered 18-09/179-RM(1), accepted on 29.03.2018, was published by the Board in order to guide the implementation of the Communiqué and to eliminate the question marks regarding the Communiqué.

To summarize briefly, in order for the contracts to remain within the scope of the Communiqué, it has to (i) be a vertical agreement, (ii) be a contract with a maximum duration of 5 years, (iii) the undertakings subject to the contract do not exceed the 40% share limit, (iv) undertakings are not competing with each other unless they are within the scope of the exception and (v) there should be no other applicable block exemption communiqué regarding the agreement.

Limitations that Exclude Agreements from Block Exemption:
Under Article 4 of the Communiqué, it has been accepted that determining the resale price between undertakings, limiting the territory and customers, contracts concerning selective distribution systems and the parts that can be assembled have the purpose of preventing competition, directly and indirectly, it has been accepted that these will be considered within the scope of exemption only if certain qualifications exist.

Below, limitations regulated under Article 4 shall be evaluated in terms of distributorship, dealership, and franchise agreements.

Determination Of Resale Price
Under the subparagraph a of Article 4 of Communiqué, it is clearly prohibited the buyer's own selling price to be determined by the supplier. However, Although the selling price is not determined, it is made possible in the continuation of the paragraph to determine the highest price at which the product can be sold or to include the price recommended to be sold; “…It is to such an extent that the provider may determine the maximum selling price or recommend the selling price, on condition that it does not transform into a fixed 5 or minimum selling price as a result of the pressure or encouragement by any of the parties.” If the maximum price or recommend price is determined, it should be clearly stated on the product that these are the maximum or recommend prices.

Territory and Customer Restriction
Under the subparagraph b of Article 4 of the Communiqué, it is prohibited to impose restrictions on the regions or customers where the buyer will sell the goods or services subject to the contract. However, if the contract remains within the scope of the 4 exceptions specified numerous clausus and explained below, the territory and customer restrictions may be imposed.

i) Restriction of active sales by the supplier to an exclusive territory or exclusive group of customers assigned to the supplier or to a buyer provided that it does not include sales made by the buyer's customers
In this exception, the Communique made a distinction between active and passive sales. Accordingly, only the active sale of the buyer can be restricted. "Active sale" is a sale made by the buyer by using direct marketing methods. Accordingly, sales that the buyer aims to make as a result of active efforts, such as billboards and flyers, may be limited within the scope of the exception. However, “passive sales”, which refers to the fact that the customer buys the product voluntarily without the active efforts of the buyer, cannot be limited in any way and are not considered as an exception. Internet sales can be accepted as the most up-to-date example of passive sales. Under no circumstances shall the supplier restrict the sales made by the buyer on the buyer's own website. However, it should be noted that; since promotions, brochures, or campaign promotions to customers by e-mail show the active effort of the buyer, these are considered to be active sales.

Under the scope of this exception, the supplier has been given the opportunity to grant regional authorization to its distributors throughout Turkey and at the same time protect each of their own regions from other distributors. The same is valid for the dealers.

ii) Restriction of the sales of the buyer operating at the wholesale level to the end-users
Within the scope of this exception, if the buyer is a wholesaler, the sale of goods supplied by the supplier to end users may be restricted. According to the guideline, imposing such a restriction is seems necessary in order to maintain the efficiency of the distribution network and to offer goods and services to consumers on equal terms at extreme points.

iii) Restriction of the sales to unauthorized distributors by the members of a selective distribution system
Within the scope of this exception, it is possible for the supplier to decide on the sale of the goods or services subject to the agreement only by the members of the selective distribution system that the supplier has determined, and that these members sell the goods and services only to distributors authorized by the supplier. It is possible that the supplier protects the trademark image and provides services at the level determined by the supplier. It is seen that such restrictions are imposed especially in trademarks considered as “luxury trademarks”. In any case, the supplier should determine authorized distributors according to objective criteria.

iv) In the case of parts supplied to assemble, restriction of the sale of these parts by the buyer to the competitor of the manufacturer supplier
It should be noted that within the scope of this exception, the sale of the supplied parts to the competitors of the manufacturer supplier may be restricted. The buyer cannot be restricted from selling parts to non-competing undertakings.

Selective Distribution Systems
According to the definition in the Communiqué; Selective Distribution System means a distribution system in which the supplier undertakes to sell the goods or services subject to the agreement directly or indirectly only to the distributors the supplier has chosen based on specified criteria, and these distributors undertake not to sell the subject goods or services to unauthorized distributors.

In the event that the buyers who are members of the selective distribution system operate at the retail level, their active or passive sales to the end user cannot be restricted unless a regional limitation is stipulated, and also the purchase and sale of the members among themselves cannot be prevented, therefore, the system members will not be obliged to purchase the products from the supplier.

Non-Compete Obligation
The "non-compete obligation" that can be brought by the supplier to the distributor is regulated under Article 5 of the Communiqué. Accordingly, in order for the non-competition obligation to be imposed on the distributor to benefit from the Communiqué, the non-competition obligation must not be of indefinite duration and must not exceed 5 years. At this point, contracts that are determined to have a term of less than five years but shall be automatically renewed shall also be considered of indefinite duration and shall not be able to benefit from the Communiqué.

Pursuant to the Communiqué, in the case of a non-compete obligation of more than 5 years, if the non-compete clause can be separated from the contract, the remainder of the contract shall survive and the non-compete period shall be considered to be limited to the 5-year period specified in the Communiqué. There is no doubt that; in addition to the contractual provisions that directly prohibit non-compete obligation, contractual provisions and actual practices that indirectly impose non-compete obligations shall also be considered within the scope of the prohibition.

Conclusion
Some of the contracts concluded in commercial life, especially exclusive distributorship contracts, include competitive concerns by their nature. These contracts' exemption status should be examined from the stage of drawing up, contracts should be prepared in a way that complies with these conditions and, if necessary, measures should be taken by undertakings by applying for exemption.

You can reach the full text of the Actfrom here
You can reach full text of The Communique from here
You can reach the full text of the Guideline from here

Related Expertises
Similar Insights
The popularity in use of a non-fungible token (“NFT”) to combine blockchain technology and creative intellectual property is increasing gradually.
With the Coronavirus (“Covid-19”), which has been in our lives since December 2019, the lifestyle with masks and social distance has become the new normal.
Cryptocurrency trade has become a highly preferred investment type in recent years and the popularity of the said investment has considerably increased in Turkey as well. As it is known, since cryptocurrency is not a material type of fiat money and cannot be claimed ownership by any state or organization, its status and conformity to the law remained in a questionable dimension.
Turkey-specific information concerning the key legal issues that need to be considered when drafting and enforcing governing law and jurisdiction clauses.
Turkey-specific information concerning the key legal issues that need to be considered when mediating a dispute.
While Coronavirus (“Covid-19”) is still affecting the world essentially, retail industry, as one of the most deeply affected fields in the commercial world by the reflections of the pandemic, should also be careful to pass their plans through the legal filter, in order to protect the health of employees, to satisfy customers and to get over this Covid-19 period with the least possible losses.
In line with the 15th Action Report within the scope of the Base Erosion and Profit Shifting Project (the “BEPS Project”) conducted by the Organisation for Economic Co-operation and Development (the “OECD”), the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the "Convention"), stipulating amendments to the double taxation agreements has been signed by 68 countries including Turkey on 7 June 2017.
Retail sector comes first among the sectors most affected by the COVID-19 outbreak (“Coronavirus”) around the whole world along with our country and causes disruptions in functioning and sustainability of certain sectors such as retail, logistics, health, automotive, and textile.
After having been approved on 11.01.2011, the Turkish Code of Obligations (the “TCO”) numbered 6098 was published on the Official Gazette dated 04.02.2011 and numbered 27836. In accordance with the Article 648, the TCO entered into force as of the date of 01.07.2012.
Per article 367 of the Turkish Commercial Code No. 6102 (“TCC”), boards of directors of joint stock companies may transfer some authority related to the management of the company to some members of the board of directors or to third parties who are not members of the board of directors with an internal directive that it will prepare and put into effect.