Choosing the Right Distribution Structure Determines the Risk
An increasing number of Korean companies are entering into distribution agreements with German distributors as part of their European market-entry strategy.
Using Germany as a gateway to expand across Europe after establishing a foothold in sectors such as cosmetics, food, consumer goods, and B2B industrial products can be an effective strategy. However, if the distribution agreement is signed without sufficient legal review, unexpected disputes may arise when the relationship is later terminated.
German distribution agreements can generally be divided into exclusive distribution and selective distribution models. The scope of EU competition law and the termination risks may differ significantly depending on the structure selected.
| Category | Exclusive Distribution | Selective Distribution |
| Concept | Sales rights are granted to a single distributor within a defined territory | Sales are permitted only through distributors meeting specified criteria |
| Typical Use | General distribution of consumer and industrial products | Premium brands, luxury goods, and technology products |
| VBER Treatment | Block exemption may apply where the relevant market share remains below 30% | Similar framework applies, but selection criteria must also be objective and transparent |
| Termination Risk | Relatively high | Easier to terminate where agreed criteria are breached |
Even in an exclusive distribution arrangement, passive sales to customers within the EU generally cannot be prohibited.
A contractual provision restricting such passive sales may violate EU competition law.
Key Clauses That Should Be Reviewed in the Agreement
The territorial, product, and channel scope of any exclusivity should be defined clearly.
If the scope is drafted too broadly, it may exceed what is permitted under EU competition law. If it is drafted too narrowly, disputes may arise over the extent of the distributor's exclusivity.
In practice, disputes also arise where a distributor with "exclusive rights for Germany" claims that neighboring markets fall within its exclusive territory.
The agreement should also include provisions addressing:
- · minimum purchase quantities or minimum sales targets;
- · loss of exclusivity if those targets are not met;
- · contract term and automatic renewal;
- · treatment of remaining inventory upon termination;
- · governing law; and
- · dispute resolution.
Without minimum performance requirements, a distributor may remain commercially inactive while continuing to retain exclusivity.
The governing-law and dispute-resolution provisions should also be designed together.
The parties may choose German law or Swiss law as the governing law, while selecting arbitration through an institution such as the ICC or DIS, depending on the commercial structure.
EU Competition Law Violations Can Affect the Entire Agreement
German distribution agreements are subject to EU competition law, including the Vertical Block Exemption Regulation (VBER, Commission Regulation (EU) 2022/720).
The current VBER, which remains in force until May 2034, reflects a significantly strengthened regulatory approach toward online sales and digital distribution.
Certain restrictions are treated as hardcore restrictions, including:
- · resale price maintenance (RPM);
- · restrictions on passive sales within the EU; and
- · blanket prohibitions on online sales.
Where a provision constitutes a hardcore restriction, the issue may extend beyond the enforceability of that particular clause and may jeopardize the application of the block exemption to the agreement as a whole.
The agreement may also become subject to enforcement by the European Commission or Germany's Federal Cartel Office (Bundeskartellamt).
In 2025, the Court of Justice of the European Union (CJEU) also adopted a stricter approach to distinguishing between active and passive sales.
Broadly drafted sales restrictions may therefore be interpreted as restricting passive sales as well, making it necessary to reassess legacy distribution clauses.
Compensation Risk upon Termination
Under Section 89b of the German Commercial Code (HGB), commercial agents (Handelsvertreter) may be entitled to compensation for the customer base they have developed after termination of the agency agreement.
The compensation amount is generally capped at one year's average commission, calculated based on the preceding five years, and in practice may range from tens of thousands to hundreds of thousands of euros depending on the relationship.
Although this statutory compensation right is formally limited to commercial agents, German courts have, under certain circumstances, applied the same principle by analogy to distributors (Vertragshändler).
Such compensation risk may arise where, for example:
- the distributor is substantially integrated into the supplier's sales organization; and
- the supplier is able to continue using the customer base developed by the distributor after termination.
The most effective risk-management approach is therefore to structure the relationship from the outset so that these conditions are not inadvertently satisfied.
Work with DECENT Law Firm
In a German distribution agreement, the scope of exclusivity, EU competition-law compliance, termination rights, and compensation exposure can shape the commercial relationship for years.
DECENT Law Firm's German Desk advises throughout the full lifecycle of German and EU distribution arrangements, including:
- structuring exclusive and selective distribution rights;
- VBER compliance review;
- drafting and reviewing distribution agreements;
- termination strategy;
- compensation claims; and
- dispute resolution.
If your company is considering entering into a distribution agreement in Germany, it is advisable to review the structure and key contractual terms before signing.