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7. Exclusive distribution and exclusive customer allocation

What is an exclusive distribution agreement?

In an exclusive distribution agreement, a supplier assigns exclusivity for the re-sale of its products in a particular territory to a single distributor (or a re-seller).

 

[Source: Commission’s Guideline on the First Conduct Rule Para 6.85]

 

What is an exclusive customer allocation agreement?

In an exclusive customer allocation agreement, the supplier assigns exclusivity to a single distributor for re-sale to a particular group of customers.

 

[Source: Commission’s Guideline on the First Conduct Rule Para 6.85]

 

Exclusive distribution and exclusive customer allocation agreements will not generally be considered by the Commission to have the object of harming competition. 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, including an assessment of how intra-brand and inter-brand competition is affected, the extent of the territorial and/or customer sales limitations, and whether exclusive distributorships are common generally in the markets impacted by the agreements under consideration.

 

[Source: Commission’s Guideline on the First Conduct Rule Para 6.86]

 

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.

 

[Source: Commission’s Guideline on the First Conduct Rule Hypothetical Example 19]

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