The EU Treaty prohibits anti-competitive agreements and decisions which may affect trade between EU states which have as their object or effect, the restriction or distortion of competition within the EU common market. The effect must be appreciable. Where any restriction is found to be in contravention of this provision, it is automatically void and unenforceable. It can also be subject to fines applied by the European Commission.
The modernisation regulations which came into force in 2004 radically altered the way EU competition law worked. By abolishing the requirement for notification of agreements, the European Commission has required businesses to make and rely on their own assessments of competition law compliance.
The EU Commission accepts that agreements between small and medium-sized undertakings rarely appreciably affect trade between member states. Small and medium-sized undertakings are those with a turnover below €50 million or total balance sheet of less than €43 million and employ not more than 250 people. They are generally not caught by EU competition law. Although the EU notice in this regard is not legally binding, it is widely used and followed.
Although an agreement may not have an appreciable effect on competition or trade between member states, it may be caught by EU competition law if one or more parallel networks or similar agreements cumulatively result in the closing of potential opportunities to actual or potential competitors.
Even if an agreement is caught by EU competition law, it may be valid if, broadly speaking the overall economic benefits outweigh the negative impact on competition. The agreement must
- improve production or distribution or promote economic progress while allowing consumers a fair share of these benefits;
- not impose on firms restraints which are not indispensable to the attainment of these benefits;
- not afford such firms the possibility of eliminating competition in respect of substantial part of the products in question.
Block Exemptions I
Both the EU and Irish competition law have been reformed so that distributorship agreements raise fewer competition law issues than was once the case. Most distributorship agreements will be exempt under EU rules provided that the supplier’s market share is below 30%, and the agreement does not contain specified excluded restrictions.
In 2000 the EU Commission adopted a single block exemption for “vertical agreements”. Vertical agreements are agreements or practices entered between two or more businesses which operate at different levels in the production or distribution chain and which relate to the conditions under which the parties may purchase, sell or re-sell goods or services.
The Regulation applies a market share threshold. Where the market share held by the supplier does not exceed 30% of the relevant market on which it sells the relevant goods or services, and the market share of the buyer does not exceed 30% of the relevant market in which it purchases the relevant goods or services, the Regulation does not apply. The European Commission has published notes on the definition of the market for the purpose of market share.
Block Exemptions II
The exemption covers exclusive distributions, exclusive purchasing and franchising as well as selective distributions and agency arrangements. If the supplier’s relevant market share value for the particular product is below 30%, the vertical agreement is covered by the block exemption provided the hardcore restrictions and conditions are not breached.
The 2000 block exemption lasted until May 2010 and was replaced by the 2010 EU Vertical Agreements Block Exemption, which expires in 2022. It takes a similar approach to previous regulations. Agreements entered prior to 31st May 2010 benefit from the earlier 1999 regulation. The exemption is based on the trade-off between the assumed benefits in terms of network viability, quality, and investment and the anti-competitive effect.
Block Exemptions III
The 2010 EU Regulation on Vertical Agreements significantly changed the approach of previous block exemptions. It provides exemptions on more general terms, which in effect allows more restraints to be permissible in principle unless prohibited. It adopts a so-called black list of prohibited terms. It gives greater flexibilities in vertical agreements.
A safe haven is created where the relevant entities do not have significant market power. 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 amended the earlier prior position, which applied when the supplier’s share did not exceed 30 percent.
The Commission recognises that certain type of vertical agreements may improve economic efficiency within a chain of production or distribution by facilitating better coordination between participating undertakings. This may lead to a reduction in transaction and distribution costs to the parties and an optimisation of their sales and investment levels.
Selective or exclusive distribution agreements for motor vehicles and spare parts are potentially exempt under separate Block Exemption applicable to that sector. This sectoral Block Exemption is a modified version of the general Vertical Agreements Block Exemption.
The blacklisted or so-called hard-core restraints which are prohibited are set out in the Regulation. They are not capable of being exempted. The most significant types are resale price maintenance and territorial restrictions.
Resale price maintenance may arise directly by fixing a minimum resale price. It may arise indirectly by fixing discount levels or indirect action which imposes penalties or practical obstacles in order to ensure the maintenance of a recommended minimum price.
Maximum prices are not restricted in themselves. Although resale price maintenance is almost invariably regarded as objectionable, there may be highly exceptional circumstances in which it can be justified.
The block exemption does not apply to a restriction of the territory into which or the customers to whom a buyer party to the agreement, may sell the contract goods. This is without prejudice to a restriction on his place of establishment. There are exceptions
There are restrictions on the use of non-compete obligations arising after the term of the agreement and obligations regarding competing products in selective distribution networks. They are restricted, irrespective of market share. They may be severed from an agreement, so that the remainder may be capable of benefiting from the exemption.
The Commission has published guidelines on vertical restraints. This assists in the interpretation of the Regulations and sets out the Commission’s policy in order to assist businesses to undertake a self-assessment of the agreements. There is a four-stage test for analysis. The party should first and analyse the relevant market and ascertain the relevant market share. If the shares are each below 30%, then the agreement may be within the exemption.
If the market share is less than 30%, then the hard-core prohibitions must be considered. If the parties have a share of more than 30%, the agreement must be considered from the perspective of whether it falls within the prohibition and if it does so, whether it falls within the exemptions.
A key issue is whether the agreement is such that it leads to insufficient competition between brands. A reduction in competition between brands is generally more harmful than a reduction of competition within the brand. A combination of restraints may increase the harmful effect on competition and are less easily justified.
Restraints that are required in order to justify a bilateral investment in the context of a specific type of relationship are more easily justified. Restraints imposed in the context of seeking to open up new products or geographic markets are similarly more easily justified.
The Commission emphasises the market position of competitors, the existence and extent of barriers to entry and the maturity of the product markets. The Commission is of the view that negative effects are more likely to follow in a mature market than in an emerging or dynamic market.
Scope of Exemption
The block exemption applies only if the market share of the supplier does not exceed 30 percent of the relevant market in which it sells its goods or services, and the market share of the buyer in the purchasing market does not exceed 30 percent. This amends the earlier prior position, which applied provided the supplier’s share did not exceed 30 percent.
Accordingly, a market share of 30% of the relevant market on the part of the supplier is the test for “market power”. Below 30% no “market power” is presumed. Above 30%, there is no presumption of illegality. A business must make an assessment as to whether the agreement is restrictive of competition. There are Guidelines to assist.
Vertical agreements entered by associations of businesses and their members or between associations and suppliers may avail of the exemption if none of them together with connected undertakings has an annual turnover of more than €50,000,000.
Limits on Exemption I
If the parties to the agreements are themselves, competitors, the exemption only applies if the arrangements are not reciprocal; e.g.
- the supplier is the manufacturer and the distributor of goods while the buyer is distributor and not a competing business at the manufacturer level
- the supplier is a service provider at several levels of the trade while the buyer buys goods and services at the retail level and does not compete at the level of trade at which it purchases these services.
The exemption does not apply to vertical agreements which directly or indirectly, in isolation or combination with other factors under the control of the parties, have as their object, the restriction of the buyer’s ability to determine the sale price. This is without prejudice to the possibility of the supplier imposing a maximum sale price or recommending a sale price provided that does not amount to a fixed or a minimum sale price as a result of pressure from, or incentives offered by the parties.
Limits on Exemption II
The exemption does not apply to a restriction of the territory into which or the customers to whom a buyer party to the agreement, may sell the contract goods. This is without prejudice to a restriction on his place of establishment. There are exceptions for
- restrictions on active sales into the exclusive territory or to an exclusive customer group, reserved to the supplier and allocated to another buyer, provided that such restriction does not limit sales but the customers of the buyer;
- restrictions on sales to end users by a buyer operating at wholesale level;
- restrictions on sales by members of a selective distribution system to unauthorised distributors within the territory reserved by the supplier to operate that system
- restrictions on the buyer’s ability to sell components supplied for the purpose of incorporation, to customers who would use them to manufacture the same type of goods as those produced by the suppliers.
Invalid Restrictions I
The agreement loses the benefit of the exemption if it contains so-called “hardcore” restrictions. In this sense, the following restrictions are “prohibited” under the block exemption. Their presence means that the black exemption will not apply. The position will then need to be considered under general competition law principles. In most cases, but not all, falling within the restrictions is such that it is unlikely to be possible to justify the agreement under general competition law principles.
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 – a supplier may impose a minimum retail price or recommended price provided such provisions do not have the effect of a fixed or minimum re-sale 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 are blacklisted. 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.
There are further conditions which are not permitted, even where the 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.
The exemption does not apply to non-compete clauses exceeding five years, those with indefinite duration or, with limited exceptions, restrictions on the buyer’s ability to manufacture or trade in goods and services after termination of the agreement.
Other Justifications I
The fact that the Block Exemption conditions are not met does not necessarily mean that there is an infringement of competition law. This depends on the nature of the restrictive clauses and their actual economic effect in practice. Otherwise, prohibited restrictions may be justified in terms of economic efficiency, where there is already significant competition in the market
Even where the Block Exemption is not available, the arrangements may be lawful if they satisfy certain other criteria. It must be possible to justify any non-qualitative selection criteria on the basis of gains in efficiency and marketing requirements relative to the goods concerned. Objective criteria of a qualitative nature may relate to
- technical and professional requirements;
- trading and qualifications;
- minimum quality requirements;
- requirements relating to premises;
- equipment and installations;
- requirements that goods be sold in specialised retail premises.
Other Justification II
Provided that system is based on qualitative and objective criteria, the agreements may contain ancillary obligations, which are required for the purpose of the system. There may be, for example, be justifiable obligations regarding
- displaying quality goods;
- imposing quality standards;
- requiring evidence of financial capacity;
- requiring particular get up and appearance;
- providing for opening hours;
- obligations to take a minimum supply of stocks.
- obligations to provide general trading information to allow manufacturers to check that sales are not being made to unauthorised dealers;
- obligations requiring checks to be made regarding compliance with restrictions,
- requirements that manufacturers guarantee be honoured in the case of goods applicable bought only from authorised retailers,
- requirements that the manufacturer’s consent be of gained before participation in trade fairs;
- obligations to use manufacturer’s names;
- obligations seeking to provide for distinctions between the functions of wholesalers and retailers;
- restrictions by which types of goods being supplied to different categories of customers are sufficiently different.
Limitations on the distributors’ freedom to set prices will almost invariably be anticompetitive. It may facilitate curtail arrangements of suppliers or distributor level
References and Sources
Comercial Law Fidelma White 2nd Ed 2012 Ch 4
Enclylopaedia of Forms and Precedents Vol. 16 (4)
International Commercial Agency and Distribution Agreements: Case Law and Contract Clauses (AIJA Series) (2011) H
Distribution Agreements under EC Comptetition Law: Viktoria Robertson (2008)
International Agency, Distribution and Licensing Agreements (Commercial) Christou
Distribution Agreements Under the EC Competition Rules 2002 Korah O’Sullivan