In an exclusive distribution agreement, a supplier assigns exclusivity for the resale of its products in a particular territory to a single distributor (or reseller). In an exclusive customer allocation agreement, the supplier assigns exclusivity to a single distributor for resale to a particular group of customers. The possible risks to competition from such agreements are reduced competition between distributors for the same products/brands, potential market sharing, and a reduction in competition through limiting market access to potentially competing distributors.
For the purposes of the First Conduct Rule, these types of agreement will generally require an analysis of their effects or likely effects on competition in the relevant market.
For further information, please refer to the Guideline on the First Conduct Rule (in particular, paragraphs 6.85 to 6.89).
Hypothetical example
SportCo, a global brand, is a medium-sized player in the Hong Kong market for sports equipment. SportCo’s practice is to appoint an exclusive wholesale distributor for each country where its products are marketed and it has one such distributor for Hong Kong. To become a SportCo exclusive wholesaler, the distributor is obliged to sell only SportCo products and not to sell the products of SportCo’s rivals. Distributors are responsible for all promotional activities in their allotted territory and SportCo reimburses certain of the promotional costs incurred by its distributors including costs associated with staff training.
In addition to the SportCo distributor, a large number of competing distributors already operate in Hong Kong. Moreover, as many of SportCo’s competitors do not require exclusivity, a number of these distributors operate successfully on a nonexclusive basis. SportCo does not seek to prevent online retailers based outside of Hong Kong from selling to end consumers in Hong Kong. Hong Kong consumers can therefore also purchase SportCo’s products online from overseas should they
wish.
While the combination of an exclusive territory arrangement with a non-compete clause might give rise to concerns under the First Conduct Rule in some cases in terms of foreclosing competing suppliers’ access to the market, there is no evidence on the facts that this would be an issue here. SportCo’s practice may limit competition for SportCo’s own products at the distributor level, but interbrand competition appears strong and it is notable that a number of the competing distributors in Hong Kong do not operate on an exclusive basis. Further, the fact that end consumers can purchase SportCo’s products online may serve to alleviate some concerns around a restriction of intra-brand competition.
In terms of a risk that the exclusivity arrangements might facilitate collusion at either the supplier or distributor level, this seems unlikely given the market structure. The supplier is medium-sized, there are many distributors in the market in Hong Kong and not all suppliers practice exclusive distribution.
In any event, even assuming the SportCo exclusive distribution agreement has some adverse impact on competition, the restrictions placed on the distributor may serve to incentivise the promotion of the SportCo brand and may therefore be justifiable under the general exclusion for agreements enhancing overall economic efficiency in section 1 of Schedule 1 to the Ordinance. Whether this is the case will depend on the facts of the case but it is notable that SportCo reimburses its distributors for certain promotional costs. In view of this, there may be an argument that SportCo needs to impose a non-compete obligation on its distributors so as to prevent free riding on its investments in these distributors by competing suppliers who might otherwise use the distributors.