Competition Issues

Franchise Agreements

Franchise agreements are vertical agreements under Irish and EU competition law. They are potentially compatible with competition law.  They may benefit from the block exemptions for vertical agreements. They may be justified on competition law first principles, broadly on the basis that their benefits may exceed the adverse effects on competition.

Horizontal agreements are agreements between participants at the same level in the market. Vertical agreements are those between participants at different levels in the market. Vertical agreements containing restrictions  are much less likely to offend competition law, than horizontal agreements which contain restrictions.

Vertical agreements may adveresely affect competition by reason of restraints imposed by the use of market power.  The EU 2010 Vertical Agreements Block Exemption Regulation expires in 2022. It takes a similar approach to previous regulations.  Agreements entered prior to 31st May 2010 may benefit from the earlier 1999 regulation.  The exemptions are based on the trade-off between the assumed benefits in terms of network viability, quality, and investment and the anti-competitive effect.


Block Exemption

The Block Exemption provides a “safe harbour” for distribution and other “vertical” agreements, provided that its conditions are met. The market share of the supplier must not exceed 30 percent of the relevant market in which it sells its goods or services. The market share of the buyer in the purchasing market must not exceed 30 percent.  This amends the earlier position, which applied the exemptions, when the supplier’s share did not exceed 30 percent.

Provided that the agreement does not contain hard-core restrictions and relevant market share does not exceed 30%, the general Vertical Agreements Block Exemption, is applicable. This may be so, even if the system is based on non-objective criteria. The franchise agreement must not contain so-called hardcore provisions. If the agreement incorporates hardcore restrictions such as fixed or minimum resale prices or prohibitions on exports, then the exemption is not available.

If the Vertical Agreement Block Exemption is not available by reason of the presence of hardcore restrictions, then the agreement is likely to be unenforceable. It may be the subject of criminal sanction. If it does not contain hardcore restrictions of this nature and does not directly, appreciably affect competition, it is likely to be valid.


Blacklist Restrictions I

The block exemption contains a “black list” of restrictions.  If any are included, the exemption will not apply.   The restrictions are as follows:

  • Price fixing or maintenance restrictions;  a supplier may impose a minimum retail price or recommended price provided such provisions do not have the effect of a fixed or minimum resale price as a result of pressure from incentives offered by the parties;
  • Territorial restrictions; it is permitted to restrict active sales into a territory reserved by the supplier of which another distributor has been granted exclusivity, provided that this restriction does not limit unsolicited sales by the distributor’s customers;
  • Restrictions in a selective distribution retail system from making active or passive sales to end users. In a selective distribution system, there must be no restriction as to whom they may sell.  There may be restrictions as to the location of the business premises.  Distributors in a selective distribution system must be allowed to purchase goods from other appointed distributors within the network.

Blacklist Restrictions II

There are further restrictions /conditions which are not permitted, even where the specified market share is not exceeded.  These include the following:

  • Any direct or indirect “non-compete” obligation which last indefinitely or exceeds five years.   A “non-compete” obligation is one which requires the buyer not to manufacture, purchase or sell competing goods;
  • Any direct or indirect obligation preventing the buyer from manufacturing, purchasing, selling or re-selling goods after termination of the agreement; It is permissible to have restrictions lasting not more than one-year post-termination which relate to competing goods. This includes any direct obligation to prevent members of the selective distribution system from selling the brands of specified competing suppliers.

The Commission may withdraw the benefit of the block exemption even when the market share threshold is not exceeded, where it finds that the agreement has effects which are incompatible with the purpose of the exemption.


First-Principles Analysis

If that vertical agreement does not come under the exemption, it must be analysed under competition law. The question of whether the agreement has the effect of restricting competition is made by comparing the actual and likely future position in the relevant market, with the restraints in place. and the position which would apply without them.

The agreement will restrict competition if it affects actual or potential competition to the extent that on the relevant market, a negative effect on prices, output, or the variety or quality of the goods can be expected with a reasonable degree of probability.

The likely negative effects on competition must be appreciable.  Appreciable anti-competitive effects are likely to occur where at least one of the parties has or obtains some degree of the market power, and the agreement contributes to the creation, maintenance and strengthening of that market power or allows the party concerned to exploit it.

Price fixing is almost always unjustifiable. However, in a franchise network, a fixed retail price might be necessary to co-ordinate a short term low price marketing campaign.  In the case of more mature or complex products, retail price maintenance may enable retailers to provide a certain level of service that cannot be achieved otherwise and limits the capacity of others to “free ride” on the service.


Guidelines on Risks

The guidelines on vertical restraints set out the following potentially negative effects of a vertical agreement

  • foreclosure of suppliers or buyers by raising barriers to entry or expansion;
  • reduction of inter-brand competition by softening competition between supplier and competitors or the facilitation of collusion;
  • reduction of inter-brand competition between distributors of the same brand by softening competition between the buyer and competitors and/ or the facilitation of collusion;
  • creating obstacles to market integration, in particular limitations of the possibilities for consumers to purchase goods or services in any State they choose.

In considering negative effects, the following factors such taking into account.

  • a reduction in inter-brand competition is more problematical than a reduction in intra-brand competition;
  • exclusive arrangements are generally more anti-competitive than non-exclusive arrangements;
  • restraints for non-branded goods and services are generally less harmful than restraints affecting branded goods and services;
  • a combination of vertical restraints aggravates negative effects.

Guidelines on Justification

There are possible justifications for vertical restraints including

  • resolving free rider issues in relation to another’s promotional efforts;
  • opening or entering new markets;
  • the supplier’s need to have his product launched with premium resellers only;
  • an investor may not commit to required investment without particular distribution arrangement being in place;
  • transfer of significant know-how to the distributor may justify the non-compete;
  • if retail pricing is too high, this may create a double marginalisation which can be avoided by imposing a maximum resale price on the retailer;
  • selective distribution, exclusive and similar distribution restrictions may help to increase the reseller’s sales effort;
  • economies of scale in distribution can be achieved by limiting the number of distributors;
  • uniformity and quality standardisation can be achieved by creating a brand image through selective distribution or franchising.

The case is generally strongest for vertical restraints of limited duration which help the introduction of new complex products or protect the specific investment.


Guidelines on Assessment

The factors in assessing vertical restraints include

  • the nature of the agreement including in particular the nature and duration of the restraints
  • the percentage of total sales on the market affected;
  • the market position of the parties including their market share, competitive advantage over competitors;
  • the marketing position of competitors; the stronger the position of competitors and the greater the number, the less likely the parties will be able to individually exercise market power, foreclose the market or soften competition;
  • the market position of buyers; if customers have buyer power that can prevent sellers exercising market power, this may solve the competition problem that might otherwise arise;
  • entry barriers;
  • the maturity of the market; negative effects are more likely in a mature market;
  • the level of trade affected; f restrictions are more in intermediate goods, this is less likely to be problematic than where restrictions are placed on the final product;
  • the nature of the product; negative effects are more likely with heterogeneous less expensive products that are one off purchase;
  • whether there is a network of similar agreements;
  • whether the agreements are imposed rather than agreed,
  • regulatory environment;
  • behaviour such as price leadership, price discrimination, previous cartel behaviour.

Minimum and fixed retail prices are generally prohibited . Such clauses are unlikely to be capable of being justified under competition law. However, exceptionally, they may be justifiable where they generate sufficient efficiencies. If for example, there is a new product, retail price maintenance may assist in expanding demand in the introductory period.


Franchise Agreements Clauses

Provisions in franchise agreements which contain hard-core restrictions are likely to be void and subject to sanctions. These will include, in particular, fixing retail prices and export bans to other states.

Clauses required to protect know-how being appropriated by potential competitors are likely to be valid. Clauses which are required to maintain the identity and reputation of a framework of the franchise are usually valid.

Territorial and customer exclusivity are potentially void, subject to exemption. An exemption applies if the relevant market share is less than 30% or if the restrictions are necessary to achieve economic efficiency.


Protecting Intellectual Property

A franchise agreement requires the communication of know-how to the franchisees and the provision of assistance to enable them to apply the franchisor’s methods. It is legitimate that the franchisor protects his know-how and intellectual property from competitors. Restrictions which do so will are usually valid, provided that they are not excessive.

Restrictions which protect intellectual property rights are usually covered by the exemptions, provided they operate below the 30 percent threshold.  The following intellectual property right restrictions are generally considered necessary in order to protect the franchisor;

  • obligations restricting the franchisor in engaging directly or indirectly in any other business;
  • obligations not to acquire a financial interest in competitors which would give the franchise a power to influence its conduct;
  • obligations not to disclose the third party’s know-how so long as this is not in the public domain;
  • obligations on the franchisee to communicate with the franchisor any experience gained in exploiting the franchise and granting the franchisor and other franchisees a non-exclusive licence for the use of know-how resulting from that experience;
  • obligations on the franchisee to inform the franchisor of infringements of licensed intellectual property rights and to take legal action against infringers or assist the franchisor in so doing;
  • obligations not to use know-how licensed by the franchisor, other than for the purpose of exploitation of the franchise;
  • obligations not to assign the rights without consent.

Post-Termination Restrictions

Restrictions on the franchisee during the contract period and for a reasonable time afterwards from opening a shop,  or  a similar restriction on competing with a member of the network is generally legitimate.  Similarly, obligations not to transfer the shop to others for a period, without the prior approval of the franchisor are generally permissible as they are intended to prevent competitors from indirectly benefiting from know-how and assistance provided.

The above restrictions may operate for a reasonable period after expiry. Generally, twelve months is reasonable.  Non-competition agreements that apply after the expiry of the agreement may not be justified where the know-how provided largely comprises commercial techniques or where the franchisees have already had prior experience in the area. A case by case approach is necessary.


Trading Restrictions

Franchisors may take measures in order to maintain the identity and reputation of the network bearing their name and symbol.  Provisions which effect this control and are necessary, will not generally breach competition law.   The same principles apply to the obligation to apply the business methods and know-how provided

Similar considerations apply in relation to the obligation to sell the relevant goods only in premises laid out and set up in accordance with the franchisor’s instructions.  The franchisee may be obliged to provide uniform presentation and conform with organisational requirements,

Restrictions on the sale of franchised goods to resellers outside the franchise network are usually valid.  Without such restrictions, many of the obligations would be meaningless.  Goods could be passed on to third parties with no access to the franchisor’s know-how, who are not bound by the same obligations which are necessary to establish and maintain the originality and reputation of the network. The more important the transfer of know-how, the more likely the restraints create efficiencies and /or are indispensable to protect know-how and are thereby valid.

Other restrictions which are not necessary to the essential character of the franchise may be subject to competition prohibitions. These include restrictions on where the franchisor operates which might result in territorial protection, market sharing and might prevent price competition.


References and Sources

The Encylodaedia of Forms and Precedents Vol 16(4)

Franchising Law and Practice Looseleaf and CD-ROM John Pratt Service
The Law and Regulation of Franchising in the EU Mark Abell 2013
Fundamentals of Franchising 3rd ed EBarkoff 2009 (USA)
UNIDROIT Guide to International Master Franchise Arrangements 2nd ed Edited by: Lena Peters
UNIDROIT
Principles of European Law Volume 2: Commercial Agency, Franchise and Distribution Contracts Martijn W. Hesselink, Jacobien W. Rutgers, Odavia Bueno Diaz 2006
Franchising Law 2nd ed Martin Mendelsohn 2004
Negotiating an International Master Franchise Agreement Martin Mendelsohn 2002

DECLARATION IN RESPECT OF VERTICAL AGREEMENTS AND CONCERTED PRACTICES

Decision No. D/10/001

Date: 1 December 2010 

Declaration In Respect of Vertical Agreements and Concerted Practices.

Whereas:

(i) Section 4(1) of the Competition Act 2002 (“the Act”) prohibits all

agreements between undertakings, decisions of associations of undertakings and

concerted practices which have as their object or effect the prevention, restriction

or distortion of competition in trade in any goods or services in the State or in an

part of the State,

and

(ii) Section 4(3) of the Act permits the Competition Authority (“the Authority”)

to declare in writing that in its opinion a specified category of agreements,

decisions or concerted practices complies with conditions set out in section 4(5),

which are that the agreements, decisions or concerted practices, having regard to

all relevant market conditions, contribute to improving the production or

distribution of goods or provision of services or to promoting technical or economic

progress, while allowing consumers a fair share of the resulting benefit and do not

(a) impose on the undertakings concerned terms which are not indispensable to

the attainment of these objectives, (b) afford undertakings the possibility of

eliminating competition in respect of a substantial part of the products or services

in question,

and

(iii) Section 4(2) of the Act provides that an agreement, decision or concerted

practice shall not be prohibited if it falls within a category of agreements,

decisions or concerted practices the subject of a declaration for the time being in

force under section 4(3),

and

(iv) Section 4(3) further provides that any such declaration may be revoked by

the Authority if it becomes of the opinion that the category no longer complies

with those conditions,

PURSUANT TO SECTION 4(3) OF THE ACT, THE AUTHORITY

HEREBY DECLARES AS FOLLOWS: –


Article 1

1. For the purposes of this Declaration:

(a) “actual competitor” means an undertaking that is active on

the same relevant market; 

(b) “buyer” includes an undertaking which, under an agreement

falling within Section 4(1) of the Act, sells goods or services

on behalf of another undertaking;

(c) “competing undertaking” means an actual or potential

competitor;

(d) “connected undertakings” means:

(i) undertakings in which a party to the agreement,

directly or indirectly:

– has the power to exercise more than half the

voting rights, or

– has the power to appoint more than half the

members of the supervisory board, board of

management or bodies legally representing the

undertaking, or

– has the right to manage the undertaking’s

affairs;

(ii) undertakings which directly or indirectly have, over

a party to the agreement, the rights or powers

listed in (i);

(iii) undertakings in which an undertaking referred to

in (ii) has, directly or indirectly, the rights or

powers listed in (i);

(iv) undertakings in which a party to the agreement,

together with one or more of the undertakings

referred to in (i), (ii) or (ii), or in which two or

more of the latter undertakings, jointly have the

rights or powers listed in (i);

(v) undertakings in which the rights or the powers

listed in (a) are jointly held by:

– parties to the agreement or their respective

connected undertakings referred to in (i) to (iv), or

– one or more of the parties to the agreement or

one or more of their connected undertakings

referred to in (i) to (iv) and one or more third

parties. 

(e) “customer of the buyer” means an undertaking not party to

the agreement which purchases the contract goods or

services from a buyer which is party to the agreement.

(f) “intellectual property rights” includes industrial property

rights, know-how, copyright and neighbouring rights;

(g) “know-how” means a package of non-patented practical

information, resulting from experience and testing by the

supplier, which is secret, substantial and identified: in this

context, ‘secret’ means that the know-how is not generally

known or easily accessible; ‘substantial’ means that the

know-how is significant and useful to the buyer for the use,

sale or resale of the contract goods or services; ‘identified’

means that the know-how is described in a sufficiently

comprehensive manner so as to make it possible to verify

that it fulfils the criteria of secrecy and substantiality;

(h) “non-compete obligation” means any direct or indirect

obligation causing the buyer not to manufacture, purchase,

sell, or resell goods or services which compete with the

contract goods or services, or any direct or indirect

obligation on the buyer to purchase from the supplier or

from another undertaking designated by the supplier more

than 80% of the buyer’s total purchases of the contract

goods or services and their substitutes on the relevant

market, calculated on the basis of the value or, where such

is standard industry practice, the volume of its purchases in

the preceding calendar year;

(i) “potential competitor” means an undertaking that, in the

absence of the vertical agreement, would, on realistic

grounds and not just as a mere theoretical possibility, in

case of a small but permanent increase in relative prices be

likely to undertake, within a short period of time, the

necessary additional investments or other necessary

switching costs to enter the relevant market;

(j) “selective distribution system” means a distribution system

whereby the supplier undertakes to sell the contract goods

or services, either directly or indirectly, only to distributors

selected on the basis of specified criteria and where these

distributors undertake not to sell such goods or services to

unauthorised distributors within the territory reserved by

the supplier to operate that system; 

(k) “vertical agreement” means an agreement or concerted

practice entered into between two or more undertakings

each of which operates, for the purposes of the agreement

or concerted practice, at a different level of the production

or distribution chain, and relating to the conditions under

which the parties may purchase, sell or resell certain goods

or services;

2. For the purposes of this Declaration, the terms “undertaking”,

“supplier” and “buyer” include their respective connected

undertakings.


Article 2

1. In the Authority’s opinion vertical agreements of the kind

referred to in Article 3 of this Declaration comply with the conditions

referred to in Section 4(5) of the Act.1

 to the extent that such

agreements contain restrictions of competition which would

otherwise be prohibited by Section 4(1) of the Act.


Article 3

1. This Declaration applies to vertical agreements containing

provisions which relate to the assignment to the buyer or use by the

buyer of intellectual property rights, provided that those provisions

do not constitute the primary object of such agreements and are

directly related to the use, sale or resale of goods or services by the

buyer or its customers. The Declaration applies on condition that, in

relation to the contract goods or services, those provisions do not

contain restrictions of competition having the same object or effect

as vertical restraints which are not covered by this Declaration.

2. This Declaration does not apply to vertical agreements entered

into between competing undertakings, except where competing

undertakings enter into a non-reciprocal vertical agreement and:

(a) the supplier is a manufacturer and a distributor of goods,

while the buyer is a distributor and not a competing

undertaking at the manufacturing level; or

Those conditions are: that, having regard to all relevant market conditions, the agreements

contribute to improving the production or distribution of goods or provision of services or to promoting

technical or economic progress, while allowing consumers a fair share of the resulting benefit and do

not –

(a) impose on the undertakings concerned terms which are not indispensable to the

attainment of these objectives,

(b) afford undertakings the possibility of eliminating competition in respect of a

substantial part of the products or services in question. 

(b) the supplier is a provider of services at several levels of

trade, while the buyer provides its goods or services at

the retail level and is not a competing undertaking at the

level of trade where it purchases the contract services.

3. Subject to paragraph 4 of this Article, this Declaration applies on

condition that the market share held by the supplier does not exceed

30% of the relevant market on which it sells the contract goods or

services and the market share held by the buyer does not exceed 30

% of the relevant market on which it purchases the contract goods

or services.

4. For the purposes of paragraph 3, where in a multi party

agreement an undertaking buys the contract goods or services from

one undertaking party to the agreement and sells the contract goods

or services to another undertaking party to the agreement, the

market share of the first undertaking must respect the market share

threshold provided for in that paragraph both as a buyer and a

supplier in order for the exemption provided for in Article 2 to apply.


Article 4

1. This Declaration does not apply to vertical agreements the subject

matter of which falls within the scope of any other Declaration made

pursuant to Section 4(3) of the Act.

2. This Declaration does not apply to vertical agreements which,

directly or indirectly, in isolation or in combination with other factors

under the control of the parties, have as their object:

(a) the restriction of the buyer’s ability to determine its sale

price. This does not affect the ability of suppliers to

impose a maximum sale price or recommend a sale price,

provided that they do not amount to a fixed or minimum

sale price as a result of pressure from, or incentives

offered by, any of the parties;

(b) the restriction of the territory into which, or of the

customers to whom, a buyer party to the agreement,

without prejudice to a supplier’s ability to place

restrictions on the buyer’s place of establishment, may

sell the contract goods or services, except:

(i) the restriction of active sales into the exclusive

territory or to an exclusive customer group

reserved to the supplier or allocated by the 

supplier to another buyer, where such a restriction

does not limit sales by the customers of the buyer,

(ii) the restriction of sales to end users by a buyer

operating at the wholesale level of trade,

(iii) the restriction of sales by the members of a

selective distribution system to unauthorised

distributors within the territory reserved by the

supplier to operate that system, and

(iv) the restriction of the buyer’s ability to sell

components, supplied for the purposes of

incorporation, to customers who would use them

to manufacture the same type of goods as those

produced by the supplier;

(c) the restriction of active or passive sales to end users by

members of a selective distribution system operating at

the retail level of trade, without prejudice to the

possibility of prohibiting a member of the system from

operating out of an unauthorised place of establishment;

(d) the restriction of cross-supplies between distributors

within a selective distribution system, including between

distributors operating at different level of trade;

(e) the restriction, agreed between a supplier of components

and a buyer who incorporates those components, of the

supplier’s ability to sell the components as spare parts to

end-users or to repairers or other service providers not

entrusted by the buyer with the repair or servicing of its

goods.


Article 5

1. This Declaration does not apply to the following obligations

contained in vertical agreements:

(a) any direct or indirect non-compete obligation, the

duration of which is indefinite or exceeds five years;

(b) any direct or indirect obligation causing the buyer, after

termination of the agreement, not to manufacture,

purchase, sell or resell goods or services;

(c) any direct or indirect obligation causing the members of a

selective distribution system not to sell the brands of

particular competing suppliers.

For the purposes of paragraph (1)(a), a non- compete obligation

which is tacitly renewable beyond a period of five years shall be

deemed to have been concluded for an indefinite duration. 

2. By way of derogation from paragraph 1(a), the time limitation

of five years shall not apply where the contract goods or services are

sold by the buyer from premises and land owned by the supplier or

leased by the supplier from third parties not connected with the

buyer, provided that the duration of the non-compete obligation

does not exceed the period of occupancy of the premises and land

by the buyer.

3. By way of derogation from paragraph 1(b), the Declaration

shall apply to any direct or indirect obligation causing the buyer,

after termination of the agreement, not to manufacture, purchase,

sell or resell goods or services where the following conditions are

fulfilled:

(a) the obligation relates to goods or services which compete

with the contract goods or services;

(b) the obligation is limited to the premises and land from

which the buyer has operated during the contract period;

(c) the obligation is indispensable to protect know-how

transferred by the supplier to the buyer;

(d) the duration of the obligation is limited to a period of one

year after termination of the agreement.

Paragraph 1(b) is without prejudice to the possibility of imposing a

restriction which is unlimited in time on the use and disclosure of

know-how which has not entered the public domain and this

Declaration will apply in such cases.


Article 6

1. For the purposes of applying the market share thresholds

provided for in Article 3(3), the following rules shall apply:

(a) the market share of the supplier shall be calculated on

the basis of the market sales value data and the market

share of the buyer shall be calculated on the basis of

market purchase value data. If market sales value or

market purchase value data are not available, estimates

based on other reliable market information, including

market sales and purchase volumes, may be used to

establish the market share of the undertaking concerned;

(b) the market shares shall be calculated on the basis of data

relating to the preceding calendar year; 

(c) the market share of the supplier shall include any goods

or services supplied to vertically integrated distributors

for the purposes of sale;

(d) if the market share is initially not more than 30% but

subsequently rises above that level without exceeding

35%, this Declaration shall continue to apply for a period

of two consecutive calendar years following the year in

which the 30% market share threshold was first

exceeded;

(e) if a market share is initially not more than 30% but

subsequently rises above 35%, this Declaration shall

continue to apply for one calendar year following the year

in which the level of 35% was first exceeded;

(f) the benefit of points (d) and (e) may not be combined so

as to exceed a period of two calendar years.

(g) the market share held by the undertakings referred to in

Article 1(e)(v) shall be apportioned equally to each

undertaking having the rights or the powers listed in

Article 1(e)(i).


Article 7

1. Existing agreements and concerted practices which:

(a) comply with the existing Declaration in Respect of Vertical

Agreements and Concerted Practices (D/03/001); and

(b) were entered into prior to 1 December 2010;

shall continue to benefit from the said Declaration D/03/001 in

respect of agreements between suppliers and resellers until 31 May

2011. 


Article 8

1. The Authority may amend this Declaration from time to time,

including in particular an amendment to exclude a particular

category of goods or services, where in its opinion access to the

relevant market or competition therein is significantly restricted by

the cumulative effect of parallel networks of similar vertical

restraints implemented by competing suppliers or buyers covering

more than 50% of a relevant market.

2. This Declaration shall enter into force on 1 December 2010,

with a review after 6 years, and shall expire on 1 December 2020.

For the Competition Authority

______________________

Dr Stanley Wong

Member & Director of Monopolies Division

Competition Authority

30 November 2010

_______________________


EU  Regulation  330/2010

of 20 April 2010

on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices

(Text with EEA relevance)

THE EUROPEAN COMMISSION,

Having regard to the Treaty on the Functioning of the European Union,

Having regard to Regulation No 19/65/EEC of the Council of 2 March 1965 on the application of Article 85(3) of the Treaty to certain categories of agreements and concerted practices (1), and in particular Article 1 thereof,

Having published a draft of this Regulation,

After consulting the Advisory Committee on Restrictive Practices and Dominant Positions,

Whereas:

(1)

Regulation No 19/65/EEC empowers the Commission to apply Article 101(3) of the Treaty on the Functioning of the European Union (2) by regulation to certain categories of vertical agreements and corresponding concerted practices falling within Article 101(1) of the Treaty.

(2)

Commission Regulation (EC) No 2790/1999 of 22 December 1999 on the application of Article 81(3) of the Treaty to categories of vertical agreements and concerted practices (3) defines a category of vertical agreements which the Commission regarded as normally satisfying the conditions laid down in Article 101(3) of the Treaty. In view of the overall positive experience with the application of that Regulation, which expires on 31 May 2010, and taking into account further experience acquired since its adoption, it is appropriate to adopt a new block exemption regulation.

(3)

The category of agreements which can be regarded as normally satisfying the conditions laid down in Article 101(3) of the Treaty includes vertical agreements for the purchase or sale of goods or services where those agreements are concluded between non-competing undertakings, between certain competitors or by certain associations of retailers of goods. It also includes vertical agreements containing ancillary provisions on the assignment or use of intellectual property rights. The term ‘vertical agreements’ should include the corresponding concerted practices.

(4)

For the application of Article 101(3) of the Treaty by regulation, it is not necessary to define those vertical agreements which are capable of falling within Article 101(1) of the Treaty. In the individual assessment of agreements under Article 101(1) of the Treaty, account has to be taken of several factors, and in particular the market structure on the supply and purchase side.

(5)

The benefit of the block exemption established by this Regulation should be limited to vertical agreements for which it can be assumed with sufficient certainty that they satisfy the conditions of Article 101(3) of the Treaty.

(6)

Certain types of vertical agreements can improve economic efficiency within a chain of production or distribution by facilitating better coordination between the participating undertakings. In particular, they can lead to a reduction in the transaction and distribution costs of the parties and to an optimisation of their sales and investment levels.

(7)

The likelihood that such efficiency-enhancing effects will outweigh any anti-competitive effects due to restrictions contained in vertical agreements depends on the degree of market power of the parties to the agreement and, therefore, on the extent to which those undertakings face competition from other suppliers of goods or services regarded by their customers as interchangeable or substitutable for one another, by reason of the products’ characteristics, their prices and their intended use.

(8)

It can be presumed that, where the market share held by each of the undertakings party to the agreement on the relevant market does not exceed 30 %, vertical agreements which do not contain certain types of severe restrictions of competition generally lead to an improvement in production or distribution and allow consumers a fair share of the resulting benefits.

(9)

Above the market share threshold of 30 %, there can be no presumption that vertical agreements falling within the scope of Article 101(1) of the Treaty will usually give rise to objective advantages of such a character and size as to compensate for the disadvantages which they create for competition. At the same time, there is no presumption that those vertical agreements are either caught by Article 101(1) of the Treaty or that they fail to satisfy the conditions of Article 101(3) of the Treaty.

(10)

This Regulation should not exempt vertical agreements containing restrictions which are likely to restrict competition and harm consumers or which are not indispensable to the attainment of the efficiency-enhancing effects. In particular, vertical agreements containing certain types of severe restrictions of competition such as minimum and fixed resale-prices, as well as certain types of territorial protection, should be excluded from the benefit of the block exemption established by this Regulation irrespective of the market share of the undertakings concerned.

(11)

In order to ensure access to or to prevent collusion on the relevant market, certain conditions should be attached to the block exemption. To this end, the exemption of non-compete obligations should be limited to obligations which do not exceed a defined duration. For the same reasons, any direct or indirect obligation causing the members of a selective distribution system not to sell the brands of particular competing suppliers should be excluded from the benefit of this Regulation.

(12)

The market-share limitation, the non-exemption of certain vertical agreements and the conditions provided for in this Regulation normally ensure that the agreements to which the block exemption applies do not enable the participating undertakings to eliminate competition in respect of a substantial part of the products in question.

(13)

The Commission may withdraw the benefit of this Regulation, pursuant to Article 29(1) of Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty (4), where it finds in a particular case that an agreement to which the exemption provided for in this Regulation applies nevertheless has effects which are incompatible with Article 101(3) of the Treaty.

(14)

The competition authority of a Member State may withdraw the benefit of this Regulation pursuant to Article 29(2) of Regulation (EC) No 1/2003 in respect of the territory of that Member State, or a part thereof where, in a particular case, an agreement to which the exemption provided for in this Regulation applies nevertheless has effects which are incompatible with Article 101(3) of the Treaty in the territory of that Member State, or in a part thereof, and where such territory has all the characteristics of a distinct geographic market.

(15)

In determining whether the benefit of this Regulation should be withdrawn pursuant to Article 29 of Regulation (EC) No 1/2003, the anti-competitive effects that may derive from the existence of parallel networks of vertical agreements that have similar effects which significantly restrict access to a relevant market or competition therein are of particular importance. Such cumulative effects may for example arise in the case of selective distribution or non compete obligations.

(16)

In order to strengthen supervision of parallel networks of vertical agreements which have similar anti-competitive effects and which cover more than 50 % of a given market, the Commission may by regulation declare this Regulation inapplicable to vertical agreements containing specific restraints relating to the market concerned, thereby restoring the full application of Article 101 of the Treaty to such agreements,

HAS ADOPTED THIS REGULATION:


Article 1

Definitions

1.   For the purposes of this Regulation, the following definitions shall apply:

(a)

‘vertical agreement’ means an agreement or concerted practice entered into between two or more undertakings each of which operates, for the purposes of the agreement or the concerted practice, at a different level of the production or distribution chain, and relating to the conditions under which the parties may purchase, sell or resell certain goods or services;

(b)

‘vertical restraint’ means a restriction of competition in a vertical agreement falling within the scope of Article 101(1) of the Treaty;

(c)

‘competing undertaking’ means an actual or potential competitor; ‘actual competitor’ means an undertaking that is active on the same relevant market; ‘potential competitor’ means an undertaking that, in the absence of the vertical agreement, would, on realistic grounds and not just as a mere theoretical possibility, in case of a small but permanent increase in relative prices be likely to undertake, within a short period of time, the necessary additional investments or other necessary switching costs to enter the relevant market;

(d)

‘non-compete obligation’ means any direct or indirect obligation causing the buyer not to manufacture, purchase, sell or resell goods or services which compete with the contract goods or services, or any direct or indirect obligation on the buyer to purchase from the supplier or from another undertaking designated by the supplier more than 80 % of the buyer’s total purchases of the contract goods or services and their substitutes on the relevant market, calculated on the basis of the value or, where such is standard industry practice, the volume of its purchases in the preceding calendar year;

(e)

‘selective distribution system’ means a distribution system where the supplier undertakes to sell the contract goods or services, either directly or indirectly, only to distributors selected on the basis of specified criteria and where these distributors undertake not to sell such goods or services to unauthorised distributors within the territory reserved by the supplier to operate that system;

(f)

‘intellectual property rights’ includes industrial property rights, know how, copyright and neighbouring rights;

(g)

‘know-how’ means a package of non-patented practical information, resulting from experience and testing by the supplier, which is secret, substantial and identified: in this context, ‘secret’ means that the know-how is not generally known or easily accessible; ‘substantial’ means that the know-how is significant and useful to the buyer for the use, sale or resale of the contract goods or services; ‘identified’ means that the know-how is described in a sufficiently comprehensive manner so as to make it possible to verify that it fulfils the criteria of secrecy and substantiality;

(h)

‘buyer’ includes an undertaking which, under an agreement falling within Article 101(1) of the Treaty, sells goods or services on behalf of another undertaking;

(i)

‘customer of the buyer’ means an undertaking not party to the agreement which purchases the contract goods or services from a buyer which is party to the agreement.

2.   For the purposes of this Regulation, the terms ‘undertaking’, ‘supplier’ and ‘buyer’ shall include their respective connected undertakings.

‘Connected undertakings’ means:

(a)undertakings in which a party to the agreement, directly or indirectly:

(i)has the power to exercise more than half the voting rights, or

(ii)has the power to appoint more than half the members of the supervisory board, board of management or bodies legally representing the undertaking, or

(iii)has the right to manage the undertaking’s affairs;

(b)undertakings which directly or indirectly have, over a party to the agreement, the rights or powers listed in point (a);

(c)undertakings in which an undertaking referred to in point (b) has, directly or indirectly, the rights or powers listed in point (a);

(d)undertakings in which a party to the agreement together with one or more of the undertakings referred to in points (a), (b) or (c), or in which two or more of the latter undertakings, jointly have the rights or powers listed in point (a);

(e)undertakings in which the rights or the powers listed in point (a) are jointly held by:

(i)parties to the agreement or their respective connected undertakings referred to in points (a) to (d), or

(ii)one or more of the parties to the agreement or one or more of their connected undertakings referred to in points (a) to (d) and one or more third parties.


Article 2

Exemption

1.   Pursuant to Article 101(3) of the Treaty and subject to the provisions of this Regulation, it is hereby declared that Article 101(1) of the Treaty shall not apply to vertical agreements.

This exemption shall apply to the extent that such agreements contain vertical restraints.

2.   The exemption provided for in paragraph 1 shall apply to vertical agreements entered into between an association of undertakings and its members, or between such an association and its suppliers, only if all its members are retailers of goods and if no individual member of the association, together with its connected undertakings, has a total annual turnover exceeding EUR 50 million. Vertical agreements entered into by such associations shall be covered by this Regulation without prejudice to the application of Article 101 of the Treaty to horizontal agreements concluded between the members of the association or decisions adopted by the association.

3.   The exemption provided for in paragraph 1 shall apply to vertical agreements containing provisions which relate to the assignment to the buyer or use by the buyer of intellectual property rights, provided that those provisions do not constitute the primary object of such agreements and are directly related to the use, sale or resale of goods or services by the buyer or its customers. The exemption applies on condition that, in relation to the contract goods or services, those provisions do not contain restrictions of competition having the same object as vertical restraints which are not exempted under this Regulation.

4.   The exemption provided for in paragraph 1 shall not apply to vertical agreements entered into between competing undertakings. However, it shall apply where competing undertakings enter into a non-reciprocal vertical agreement and:

(a)

the supplier is a manufacturer and a distributor of goods, while the buyer is a distributor and not a competing undertaking at the manufacturing level; or

(b)

the supplier is a provider of services at several levels of trade, while the buyer provides its goods or services at the retail level and is not a competing undertaking at the level of trade where it purchases the contract services.

5.   This Regulation shall not apply to vertical agreements the subject matter of which falls within the scope of any other block exemption regulation, unless otherwise provided for in such a regulation.


Article 3

Market share threshold

1.   The exemption provided for in Article 2 shall apply on condition that the market share held by the supplier does not exceed 30 % of the relevant market on which it sells the contract goods or services and the market share held by the buyer does not exceed 30 % of the relevant market on which it purchases the contract goods or services.

2.   For the purposes of paragraph 1, where in a multi party agreement an undertaking buys the contract goods or services from one undertaking party to the agreement and sells the contract goods or services to another undertaking party to the agreement, the market share of the first undertaking must respect the market share threshold provided for in that paragraph both as a buyer and a supplier in order for the exemption provided for in Article 2 to apply.


Article 4

Restrictions that remove the benefit of the block exemption — hardcore restrictions

The exemption provided for in Article 2 shall not apply to vertical agreements which, directly or indirectly, in isolation or in combination with other factors under the control of the parties, have as their object:

(a)

the restriction of the buyer’s ability to determine its sale price, without prejudice to the possibility of the supplier to impose a maximum sale price or recommend a sale price, provided that they do not amount to a fixed or minimum sale price as a result of pressure from, or incentives offered by, any of the parties;

(b)

the restriction of the territory into which, or of the customers to whom, a buyer party to the agreement, without prejudice to a restriction on its place of establishment, may sell the contract goods or services, except:

(i)

the restriction of active sales into the exclusive territory or to an exclusive customer group reserved to the supplier or allocated by the supplier to another buyer, where such a restriction does not limit sales by the customers of the buyer,

(ii)

the restriction of sales to end users by a buyer operating at the wholesale level of trade,

(iii)

the restriction of sales by the members of a selective distribution system to unauthorised distributors within the territory reserved by the supplier to operate that system, and

(iv)

the restriction of the buyer’s ability to sell components, supplied for the purposes of incorporation, to customers who would use them to manufacture the same type of goods as those produced by the supplier;

(c)

the restriction of active or passive sales to end users by members of a selective distribution system operating at the retail level of trade, without prejudice to the possibility of prohibiting a member of the system from operating out of an unauthorised place of establishment;

(d)

the restriction of cross-supplies between distributors within a selective distribution system, including between distributors operating at different level of trade;

(e)

the restriction, agreed between a supplier of components and a buyer who incorporates those components, of the supplier’s ability to sell the components as spare parts to end-users or to repairers or other service providers not entrusted by the buyer with the repair or servicing of its goods.


Article 5

Excluded restrictions

1.   The exemption provided for in Article 2 shall not apply to the following obligations contained in vertical agreements:

(a)

any direct or indirect non-compete obligation, the duration of which is indefinite or exceeds five years;

(b)

any direct or indirect obligation causing the buyer, after termination of the agreement, not to manufacture, purchase, sell or resell goods or services;

(c)

any direct or indirect obligation causing the members of a selective distribution system not to sell the brands of particular competing suppliers.

For the purposes of point (a) of the first subparagraph, a non-compete obligation which is tacitly renewable beyond a period of five years shall be deemed to have been concluded for an indefinite duration.

2.   By way of derogation from paragraph 1(a), the time limitation of five years shall not apply where the contract goods or services are sold by the buyer from premises and land owned by the supplier or leased by the supplier from third parties not connected with the buyer, provided that the duration of the non-compete obligation does not exceed the period of occupancy of the premises and land by the buyer.

3.   By way of derogation from paragraph 1(b), the exemption provided for in Article 2 shall apply to any direct or indirect obligation causing the buyer, after termination of the agreement, not to manufacture, purchase, sell or resell goods or services where the following conditions are fulfilled:

(a)

the obligation relates to goods or services which compete with the contract goods or services;

(b)

the obligation is limited to the premises and land from which the buyer has operated during the contract period;

(c)

the obligation is indispensable to protect know-how transferred by the supplier to the buyer;

(d)

the duration of the obligation is limited to a period of one year after termination of the agreement.

Paragraph 1(b) is without prejudice to the possibility of imposing a restriction which is unlimited in time on the use and disclosure of know-how which has not entered the public domain.


Article 6

Non-application of this Regulation

Pursuant to Article 1a of Regulation No 19/65/EEC, the Commission may by regulation declare that, where parallel networks of similar vertical restraints cover more than 50 % of a relevant market, this Regulation shall not apply to vertical agreements containing specific restraints relating to that market.


Article 7

Application of the market share threshold

For the purposes of applying the market share thresholds provided for in Article 3 the following rules shall apply:

(a)

the market share of the supplier shall be calculated on the basis of market sales value data and the market share of the buyer shall be calculated on the basis of market purchase value data. If market sales value or market purchase value data are not available, estimates based on other reliable market information, including market sales and purchase volumes, may be used to establish the market share of the undertaking concerned;

(b)

the market shares shall be calculated on the basis of data relating to the preceding calendar year;

(c)

the market share of the supplier shall include any goods or services supplied to vertically integrated distributors for the purposes of sale;

(d)

if a market share is initially not more than 30 % but subsequently rises above that level without exceeding 35 %, the exemption provided for in Article 2 shall continue to apply for a period of two consecutive calendar years following the year in which the 30 % market share threshold was first exceeded;

(e)

if a market share is initially not more than 30 % but subsequently rises above 35 %, the exemption provided for in Article 2 shall continue to apply for one calendar year following the year in which the level of 35 % was first exceeded;

(f)

the benefit of points (d) and (e) may not be combined so as to exceed a period of two calendar years;

(g)

the market share held by the undertakings referred to in point (e) of the second subparagraph of Article 1(2) shall be apportioned equally to each undertaking having the rights or the powers listed in point (a) of the second subparagraph of Article 1(2).


Article 8

Application of the turnover threshold

1.   For the purpose of calculating total annual turnover within the meaning of Article 2(2), the turnover achieved during the previous financial year by the relevant party to the vertical agreement and the turnover achieved by its connected undertakings in respect of all goods and services, excluding all taxes and other duties, shall be added together. For this purpose, no account shall be taken of dealings between the party to the vertical agreement and its connected undertakings or between its connected undertakings.

2.   The exemption provided for in Article 2 shall remain applicable where, for any period of two consecutive financial years, the total annual turnover threshold is exceeded by no more than 10 %.


Article 9

Transitional period

The prohibition laid down in Article 101(1) of the Treaty shall not apply during the period from 1 June 2010 to 31 May 2011 in respect of agreements already in force on 31 May 2010 which do not satisfy the conditions for exemption provided for in this Regulation but which, on 31 May 2010, satisfied the conditions for exemption provided for in Regulation (EC) No 2790/1999.


Period of validity

This Regulation shall enter into force on 1 June 2010.

It shall expire on 31 May 2022.

This Regulation shall be binding in its entirety and directly applicable in all Member States.

Done at Brussels, 20 April 2010.

For the Commission

The President

José Manuel BARROSO