Regulation of the distribution relationship
Competing products
Are restrictions on the distribution of competing products in distribution agreements enforceable, either during the term of the relationship or afterwards?
Yes, restriction on the distribution of competing products in distribution agreements are fully enforceable. Competition restrictions may apply to supplier and distributor. Accordingly, article 711 of the Civil Code sets out that when exclusivity is not expressly provided by the parties in the distribution agreement, there is a general presumption that an obligation will be implied. This presumption applies to distribution and agents by setting out that supplier cannot empower any agent or distributor for the granted territory and the distributor or agent cannot lead other businesses that compete with the suppliers. However, exclusivity and the prohibition to compete during the contractual period needs to be interpreted restrictively in the sense that it applies to a specific territory and goods and for the contractual period of distribution only.
The parties may provide broader non-compete clauses to extend it to a post-termination period. Clauses restricting activities may be valid and enforceable, especially after termination insofar as they comply with the following requirements:
- be limited in time, especially if the non-compete clause extends to a period after termination of distribution;
- be limited in a specific territory, that is where distributor used to represent the supplier;
- be limited in a specific market segment;
- be reasonable; and
- be technically justified.
Prices
May a supplier control the prices at which its distribution partner resells its products? If not, how are these restrictions enforced?
Suppliers, distributors and resellers are free to establish the prices of the products, including arrangements that impose price restrictions on the distributor following up the structure and market demand. Under the Antitrust Law, control of prices and commercial restrictions on a distributor are allowed inasmuch as they are commercially justifiable and does not impact negatively on consumers, competitors and does not overburden the distributor financially.
May a supplier influence resale prices in other ways, such as suggesting resale prices, establishing a minimum advertised price policy, announcing it will not deal with customers who do not follow its pricing policy, or otherwise?
Price fixing, fixing of maximum prices, recommended prices, resale prices, minimum advertised price policy, among others are regarded as practices commonly adopted by the locals and included in commercial agreements. Such clauses are regarded, in principle, as valid and enforceable especially if evidenced that they do not limit unjustifiable competition or concentrate economic power to dominate markets, set abusive prices against the distributor or affect unreasonably consumers. If they affect competition, such rules will be under the examination of the Antitrust Law. The prevailing rule under the local Antitrust Law is the Rule of Reason where the pro-competitive effect of the arrangement will be examined together with the negative impact on the competition and consumers’ rights.
May a distribution contract specify that the supplier’s price to the distributor will be no higher than its lowest price to other customers?
Yes. A specific covenant of a distribution agreement may determine rules that set the price of the products that the supplier will provide the distributor and the price imposed by the distributor on its customers, especially if such rules aim to make the distributed products more competitive in the market and impact the increase in profits without overburdening competitors and consumers.
Are there restrictions on a seller’s ability to charge different prices to different customers, based on location, type of customer, quantities purchased, or otherwise?
There are no restrictions that prohibit or limit charging different prices to diverse customers if competition is not affected. Charging different prices grounded on the peculiarities of the customers and special conditions of the market is in fact recommendable as they are considered market variants.
Geographic and customer restrictions
May a supplier restrict the geographic areas or categories of customers to which its distribution partner resells? Are exclusive territories permitted? Is there a distinction between active sales efforts and passive sales that are not actively solicited, and how are those terms defined?
The parties may set out the contractual territory secured to distributor grounded on geographic areas, field of use, relevant markets or categories of customers to which its distributor partner resell. The limitation should be adequately tailored by the supplier so that allegations of unclear and unreasonable restrictions are raised by distributors.
Exclusivity is permitted within Brazilian territory and should be expressly provided in the agreement, since exclusivity means the exclusion of a natural person or company to distribute the goods on the Brazilian market. If exclusivity is granted to the distributor or agent, suppliers will be prevented from competing with suppliers for the specific exclusive granted market. Nevertheless, article 711 of the Civil Law determines that exclusivity would prevail in the case of absence of clause.
There is no distinction between ‘active sales efforts’ and ‘passive sales’ under the laws of the land and granting rights over a distribution agreement commonly encompasses the practice of sales undertaken by the distributor unless otherwise provided in the agreement.
Online sales
May a supplier restrict or prohibit e-commerce sales by its distribution partners?
A supplier may restrict or prohibit e-commerce sales by its distribution partners and grant e-commerce rights to different distributors. Such a restriction justifies by the fact that digital platforms are viewed as diverse geographic locations with specific rules and different consumer behaviour. Nevertheless, such restriction or prohibition should be expressly provided in the agreement pursuant to article 711 of the Civil Code, which determines exclusivity would prevail in the case of an absence of clause.
The local laws do not require commercial and business reports that establish different territories from physical sales and e-commerce sales nor the obligation to pay any ‘invasion fees’. However, ‘invasion fees’ may be stipulated in the agreement.
Refusal to deal
Under what circumstances may a supplier refuse to deal with particular customers? May a supplier restrict its distributor’s ability to deal with particular customers?
Supplier may refuse to deal with any particular customers through a distributor, as there are no laws preventing supplier to do so. However, article 715 of the Civil Law secures indemnification to the distributor if the supplier ceases to deliver the goods without reason to the distributor or reduces the amounts in a way that overburdens the distributor’s activities or makes the continuation of the agreement uneconomical. Article 715 has been interpreted extensively to encompass situations where a supplier unreasonably limits the distribution of products to specific customers within a specific territory.
Competition concerns
Under what circumstances might a distribution or agency agreement be deemed a reportable transaction under merger control rules and require clearance by the competition authority? What standards would be used to evaluate such a transaction?
Distribution or agency agreements are not subject to reportable transaction and the revision or approval by CADE and other agencies since they are ruled by the laws of contracts provided by the Civil Code and ancillary legislation. Therefore, such agreements are not framed in principle as a merger or acquisition and therefore do not necessarily involve corporation transactions based on structural changes in companies.
Notwithstanding that, associative agreements are transactions under merger review and approval irrespective of the fact the association arises from a contractual link or formation of a new legal entity. There are scholars’ understanding that a distribution agreement should be framed as an association, since efforts, commitments and extensive investment are required by a supplier and distributor to promote goods in the market. The possible framing of distribution, agency and franchising as associative agreements has led to strong complaints by local businessmen, as such agreements are highly promoted as an effective mechanism of disposing of goods in the market due to the lack of public control. Classifying distribution agreements as associate would make compulsory the presentation of such agreement for prior approval thereby creating a bureaucracy and permitting state control without justifying reasons.
As an attempt to reduce the uncertainty about associative agreements, CADE issued Resolution 17 on 18 October 2016, which provided relevant rulings on the associative agreement merger review. Accordingly, an associative agreement has been defined under the antitrust concept as an association of two or more parties that sets out a common entrepreneurship for the exploitation of an economic activity insofar as the following requirements are met: (1) the agreement stipulates the splitting up of the risks involved and results in economic activity that will be or is exploited by the associative agreement; (2) the agreement is executed for a period over two years, and (3) the contracting parties need to be competitors in the market.
Further to that, an associative agreement will be filed for merger review and approval by CADE solely when one of the parties in the commercial transaction has had gross revenues in Brazil of an approximate amount of US$120 million in the fiscal year prior to the transaction and any other economic group involving in the transaction has had an approximate gross revenue of US$15 million in the fiscal year prior to the transaction.
The merger investigation will focus on the impact of the merger on the relevant market. Therefore, extensive information on the merger and parties involved may be requested, such as detailed market information, identification of the existing competition, barriers to competition and other competitive dynamics of the relevant examined market.
Do your jurisdiction’s antitrust or competition laws constrain the relationship between suppliers and their distribution partners in any other ways? How are any such laws enforced and by which agencies? Can private parties bring actions under antitrust or competition laws? What remedies are available?
Antitrust laws establish requirements concerning the combat and suppression of abusive practices of dominant economic positions and enlist commercial practices that damage competition. Among the listed practices – article 36, paragraph 3 of Federal Law 12,529 of 30 November 2011 – that may influence the enforceability of distribution agreements and may be a presumption of violation of the antitrust laws are:
- the establishment of common prices and sales conditions;
- the adoption of uniform commercial behaviour;
- limitation or restraint on trade or market access by new companies;
- obstacles to the establishment, operation and development of a competing enterprise, supplier, purchase or financer of a certain product or service; and
- the sale of a product to the acquisition of another or to the utilisation of a service.
The examination of any commercial practice under the Antitrust Law takes place by means of administrative proceedings at CADE brought by the authorities of CADE and by any other third party, including consumers, that may be fell affected by the practice (administrative complaint).
Therefore, no specific constraints under the competition laws are applicable to suppliers and distributors.
Private injured parties may bring actions before the state courts grounded on antitrust violation follow up the requirements of article 47 of Federal Law 12,529/2011 and seek compensation for damages.
