Distributor Breaches Exclusivity or Sells via a Marketplace – What Your Contract Allows
A distributor starts selling outside their territory, appears on a marketplace, or cuts prices, and the manufacturer turns to the contract. However, the contract often contains a clause that is unenforceable under Czech competition law — and enforcing it can result in a fine for the manufacturer, not the distributor. Our Prague-based legal team at ARROWS sets up and enforces these relationships. Below is a guide on what you can stipulate in your contract.
Key takeaways
Decision-making framework: three distribution models and what is permitted in each
The answer to the question "can a distributor do that" depends on the distribution system you operate. There are three models, and it is necessary to distinguish between them; they can be combined by territory, but not within the same territory.
The first is exclusive distribution. You reserve a territory or customer group for yourself or assign it to a limited number of distributors. In this model, you may prohibit active sales by other distributors into the exclusive territory—that is, targeted acquisition, approaching specific customers, and targeted advertising for that territory. However, you may not prohibit passive sales, i.e., responding to unsolicited demand.
The second is selective distribution. You select dealers based on qualitative criteria, and in the territory where you operate the system, you may prohibit both active and passive sales to unapproved distributors. This is the most powerful tool against sales through unauthorized channels.
The third is free distribution. Even without an exclusive or selective system, you can restrict active sales into a territory or customer group reserved for you or exclusively allocated to a maximum of five exclusive distributors, and you can also restrict passive sales to unapproved distributors in a territory where you operate a selective distribution system. However, the scope of permissible restrictions is narrowest here.
Market share also plays a role in the decision-making. The Block Exemption Regulation protects vertical agreements only if neither the supplier's nor the buyer's share of the relevant market exceeds 30%; above this threshold, each restriction is assessed individually. We discuss the termination of these relationships in the article Terminating a contract with a distributor.
Step-by-step procedure
The procedure has one rule: first, find out what happened, then check your own contract, and only then send a formal notice.
The first step is to collect evidence. Screenshots of the advertisement with a date, order documents, a customer complaint, and, if possible, a test purchase. A dispute cannot be conducted without specific transactions.
The second step is to classify the conduct. The deciding factor is whether the distributor actively approached the customer or simply fulfilled an incoming request. Advertising targeted at another's territory is an active sale; a general website accessible from anywhere is a passive sale.
The third step is to review your own contract. Fixed and minimum resale prices, restrictions on passive sales beyond the statutory exemptions, and preventing the effective use of the internet are hardcore restrictions: because of them, the agreement loses the protection of the block exemption and must be assessed individually. If you enforce such a provision, you risk administrative proceedings and the clause not holding up in court.
The fourth step is to estimate your market share. This is not about an exact number, but about whether you are safely below thirty percent or on the borderline; this determines how strong a restriction you can afford.
The fifth step is to choose a tool. A notice to remedy with a reference to specific transactions, a contractual penalty, termination, or an action for an injunction. In price disputes, it is necessary to distinguish between enforcing a prohibited price and defending against unfair competition; in domestic relationships, this is not about dumping, but about predatory pricing in the context of an abuse of a dominant position, or unfair competition. We discuss below-cost prices in the article Dumping prices and unfair competition.
The sixth step is to assess the risk of a counter-attack. A distributor who receives a notice based on a prohibited provision may file a complaint with the Office for the Protection of Competition or claim the invalidity of the entire clause. We discuss proceedings before the Office in the article Resolving disputes with the Office for the Protection of Competition.
The seventh step is to amend the contract for the future. A distribution agreement should include definitions of active and passive sales, rules for online sales and advertising, qualitative criteria for sales channels, and a reporting mechanism that allows you to identify a breach before a customer complains.
What is standard in the market and what is a warning sign
In well-designed systems, it is standard for the contract to distinguish between active and passive sales with its own definition, describe the requirements for the sales channel, and regulate compensation between distributors when one invests in acquisition and another closes the deal. Sales reporting by territory or customer group is also standard, as breaches are difficult to prove without data.
A tiered sanction is also standard: a notice, a penalty, loss of exclusivity, termination. Jumping from an email directly to termination is often ineffective and risky in long-term relationships.
There are three warning signs. The first is a contract promising absolute territorial protection, meaning that no one else can supply anything at all into the territory—such a provision loses the protection of the block exemption, and the distributor cannot rely on it. For passive sales via an e-shop, it also holds that provisions forcing a trader to violate the prohibitions of the regulation on unjustified geo-blocking are automatically void. The second is a pricing policy enforced by bonuses and refusal to supply, which is the most frequently sanctioned conduct by manufacturers in practice.
The third sign is a non-compete clause without a defined territory, scope of activity, or circle of persons; such a clause is ineffective, and the company will only find out in a dispute.
Where the legal line is drawn
A distribution agreement operates between two regimes: commercial law, which gives it freedom, and competition law, which takes that freedom away.
According to Section 3 of the Act on the Protection of Competition, agreements whose object or effect is the distortion of competition are prohibited and void, and prohibited agreements include, in particular, agreements on the direct or indirect fixing of prices or on market sharing. If the reason for the prohibition concerns only part of the agreement, only that part is void—unless it cannot be severed from the rest of the content, in which case the entire contract falls. Agreements with a negligible effect on competition are not considered prohibited, but the Office for the Protection of Competition states that agreements on fixed or minimum resale prices cannot typically be considered de minimis.
According to Section 4 of the same Act, the prohibition does not apply to agreements that meet the conditions of the EU block exemptions—even if they cannot affect trade between member states. In practice, this means that even a purely Czech distribution agreement is assessed under the EU's Commission Regulation (EU) 2022/720 on vertical agreements.
Contact our experts
The regulation provides a trio of rules that determine what you can write in your contract. The exemption applies only if the market share of neither the supplier nor the buyer exceeds 30% of the relevant market. In exclusive distribution, a hardcore restriction is the restriction of the territory or customers to whom the distributor may sell—with the exception of restricting active sales into the territory or customer group reserved for the supplier or allocated to a maximum of five other exclusive distributors. And preventing the effective use of the internet for sales is also a hardcore restriction, although the regulation expressly permits other restrictions on online sales and restrictions on online advertising whose purpose is not to prevent the use of an entire online advertising channel. The regulation expires on May 31, 2034.
However, there is another step between a hardcore restriction and invalidity that is often skipped in practice. The regulation states that the exemption does not apply to such an agreement, not that the agreement is prohibited; only then is it assessed under Section 3, i.e., its object or effect, the negligibility of its impact, and the conditions for an individual exemption. The Court of Justice in case C-211/22 Super Bock Bebidas stated in this regard that the concepts of hardcore restriction and restriction by object are not conceptually interchangeable and do not necessarily coincide. However, the practical conclusion does not change: such a provision remains highly risky.
The sanction is borne by the one who concludes the prohibited agreement. According to Section 22a of the Act on the Protection of Competition, a fine of up to CZK 10,000,000 or up to 10% of the competitor's net turnover for the last completed accounting period shall be imposed for concluding an agreement in violation of Section 3(1). Liability falls on both parties to the agreement, not just the one who proposed it.
The final boundary is the non-compete clause. According to Section 2975 of the Civil Code, a clause is disregarded if it does not specify the territory, scope of activity, or circle of persons; a clause for an indefinite period or for a period longer than five years is prohibited and is deemed to have been agreed for five years. If it restricts the obligated party more than required for necessary protection, a court may limit, annul, or declare it invalid. However, civil law validity is not enough. Excluded from the block exemption is a non-compete obligation for an indefinite period or longer than five years, and a post-term non-compete obligation; the latter is covered only cumulatively if it relates to competing goods, is limited to the premises where the buyer operated, is necessary to protect the know-how transferred, and lasts for a maximum of one year. A five-year post-term non-compete clause is therefore not safe from a competition law perspective. In addition, there remains the defense against unfair competition under Section 2976, especially in cases of breach of a trade secret or free-riding on reputation.
Potential problems | How ARROWS can help (consultation@arws.cz) |
|---|---|
Distributor sells outside the territory: it is unclear whether it is an active or passive sale | We will classify individual transactions and assess what can be enforced. We will prepare a formal notice based on specific documents |
Risky clause: the contract prohibits passive sales or sets prices | We will review the contract against the block exemption and rewrite risky articles. In an ongoing dispute, we will propose a safer line of argument |
Sales via marketplace: the manufacturer is unsure what they can prohibit | We will set qualitative criteria for channels and a ban on unapproved platforms. We will add rules for online advertising |
Complaint to the Office: the distributor defends by filing a complaint against the manufacturer | We represent clients in proceedings before the Office and prepare a defense. We will also assess the exposure from the perspective of a fine |
Pricing policy: the sales department pushes for uniform prices on the market | We will propose legal tools, i.e., maximum and recommended prices without sanctions or pressure. We will set up internal rules for communication with the sales department |
Final summary
In the case of a breach of exclusivity, proceed in the opposite way to what is customary. First, classify the specific transactions based on whether they were active or passive sales, then check your own clause, estimate your market share, and only then choose your tool. The contract should include your own definitions of active and passive sales, rules for online channels, and a reporting system from which you can identify a breach yourself.
The legal boundaries in this area are set against the manufacturer. Restricting passive sales beyond the exemptions, setting resale prices, and preventing internet sales will deprive the agreement of the block exemption regardless of what the parties signed, and the risk of a fine also falls on the manufacturer who pushed for the clause. Moreover, a contractual penalty securing an invalid provision cannot be enforced. The law firm ARROWS handles these disputes as part of its Commercial and Court Disputes service and is insured for professional liability with a limit of CZK 350,000,000. Write to consultation@arws.cz.