An Exclusive Distribution Agreement is a contract between a distributor and a manufacturer/vendor that authorize the distributor to sell the subject of the contract exclusively in a territory. As a matter of course, exclusive distributor is obliged not to compete with the manufacturer during the contract period. On the other hand, manufacturers usually stipulate non-compete clauses for post contract period in the exclusive distribution agreements as they do not want to have a competitive opponent for their next exclusive distributor in same territory.
Are non-compete clauses for post contract period in exclusive distribution agreements valid under Turkish Law?
Non-competition agreement covering the post contract period is stipulated under Article 123 of Turkish Commercial Code numbered 6102 (“TCC”) for commercial agents. The main question is whether this regulation foreseen for commercial agents shall also be applied to exclusive distributorship relations or not. It is accepted that the relevant provisions of non-compete clauses for post contract period (Article 123) should also be applied to the exclusive distributorship relations considering the non-compete nature of both commercial relations during contract period.
Non-Competition Agreements for the Period Subsequent to the Termination of the Exclusive Distribution Agreement
Non-competition agreement for post contract period is only deemed valid provided that the agreement meets the following conditions:
- Scope of Non-Competition: The maximum limit of the scope of non-competition is stipulated under Article 123 of the TCC. According to Article 123 of the TCC, the subject of non-competition agreement shall only be limited to (i) customer network of exclusive distributor (e.g., wholesalers or retailers), (ii) territory of exclusive distributor and (iii) the contracts signed or mediated to be signed by the exclusive distributor. In an example where the exclusive distributor has authorized only for Istanbul, the exclusive distributor cannot be prohibited to operate in Ankara for the post contract period.
- Duration of Non-Competition: The duration of non-competition could be decided for maximum of 2 years starting from the termination of the exclusive distribution agreement. If the non-compete obligation is decided for more than 2 years (e.g., for 5 years), the relevant provision is not completely deemed null and void, it is deemed valid for 2 years.
- Time of Non-Competition Agreement: Non-competition agreements shall only be valid if it is concluded during the exclusive distribution agreement period. Agreements concluded before the exclusive distribution agreement or on the same date with exclusive distribution agreement are deemed invalid. Therefore, non-competition agreements for post contract duration should not be stipulated in the main exclusive distribution agreement. In addition, non-competition agreements concluded after the termination of exclusive distribution agreement can be freely drawn up without considering the limitations hereby.
- Written Form Requirement: Non-Competition Agreements are deemed valid only if the agreements are concluded in written form. In addition to written form condition, the non-competition agreement should be delivered to the exclusive distributor within a reasonable time. Therefore, it is suggested to sign a delivery record regarding the delivery time of the non-competition agreement.
- Compensation: According to Article 123 of the TCC, the distributor should receive an adequate compensation for the waiting period due to non-competition. When determining an adequate compensation, potential loss due to non-competition and recent incomes during the exclusive distributor agreement should be considered. In the event that no compensation is decided in the agreement, or an adequate amount of compensation is not agreed, the exclusive distributor may file a lawsuit and claim an adequate compensation.
Competition Law Aspects of Non-Competition Agreements
Exclusive Distribution Agreements are considered vertical agreements under Competition Law. As a general rule, agreements that have the object or effect, or likely effect, of preventing, distorting or restricting competition directly or indirectly in a particular market for goods or services are prohibited. However, a block exemption is granted by the Turkish Competition Authority through Communique 2002/2 on Vertical Agreement Block Exemption (“Communique“) for vertical agreements.
According to Article 5 of the Communique, any non-competition clause that extends beyond the termination of the contract takes the agreement out of the scope of block exemption. However, in certain circumstances, non-compete agreements after the termination of the main contract are allowed. A non-compete agreement may be concluded provided it does not exceed one year from the expiry of the agreement, it only applies to goods and services in competition with the goods or services that are the subject of the agreement, it is limited to the facility or land where the purchaser operates during the agreement, and it is compulsory for protecting the know-how transferred by the provider to the purchaser.
As seen, while Article 123 of the Turkish Commercial Code (“TCC”) allows non-competition agreements for up to 2 years, the Communique only allows non-competition agreements after the termination of the main contract for 1 year with additional conditions. In this case, should an individual exemption application be made for agreements longer than 1 year?
While the application of both legislations together is quite controversial, considering the Turkish code interpretation system, Article 123 of the TCC should be considered as a special law stipulating the non-competition agreements for the post-contract period. These agreements should be exempted from the implementation of Competition Law rules and the Communique, as long as they do not exceed 2 years.