Concerned about being party to anti-competitive behaviour? Knowing the ins and outs of horizontal and vertical agreements can help you make sure you adhere to competition law. But it also pays to know the EU’s stance on restraints, especially when the vertical agreement block exemption does not apply. In this instance, the parties to the relevant agreement need to assess the position themselves. The EU Commission has provided guidance to assist with this process. Here, we discuss EU guidance on vertical restraints in more detail to help you get to know the main principles of the EU’s guidelines.
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Vertical agreements and competition law
For the purposes of competition law, vertical agreements are agreements entered into between two or more parties who are not acting at the same level of the production, supply and distribution chain in relation to the agreement. For many vertical agreements, the EU’s vertical agreement block exemption will apply, exempting those agreements from the UK’s and EU’s anti-competition regulations. To the extent that the vertical agreement block exemption does not apply, it is the responsibility of the parties to the agreement themselves to decide whether anti-competition concerns arise. To this end, the EU Commission has issued guidelines on vertical restraints.
What does the vertical restraints guidance cover?
The vertical restraints guidance helps you to determine whether an agreement should be excluded from the UK’s Chapter I, or the EU’s Article 101, prohibitions by including guidance as to the main principles and how they are to be applied to certain specific vertical restraints.
In addition, the guidance discusses the situations in which an agreement, despite falling within the prohibitions, may still be individually legally excepted.
What are the main principles of the vertical restraints guidance?
The main general points included in the vertical restraints guidance include:
- The issues to be assessed when considering whether competition has been restricted will depend on the individual circumstances of each situation.
- Generally, vertical restraints are less likely to be anti-competitive than horizontal restraints.
- It is important that competition relating to both inter-brand (different brands of the same type of products) and intra-brand (different dealers supplying products from the same supplier) are protected.
- Key factors to consider include: the economic effect of the restraints, the parties’ and competitors’ market positions, any entry barriers, the type of product or service in question and the length of the agreement.
The specific guidelines on vertical restraints cover:
Exclusive distribution
In an exclusive distribution arrangement, the parties agree that the products will only be sold to a specific distributor in a certain territory. The distributor is then prohibited from selling the products into other specified territories which have been allotted to other distributors.
Exclusive distribution is covered by the vertical agreement block exemption. But, if this does not apply (for example, because of the market share of the parties) the guidelines provide that the supplier’s and its competitors’ positions in the market, the market’s maturity and the level of the supply and distribution chain which is affected, are important factors to be considered in determining whether the arrangement is anti-competitive. In addition, the potential risk of complicity between buyers and the market position at the distributor level may be relevant.
Selective distribution
Selective distribution arrangements should not be caught by the Chapter I or Article 101 prohibitions if the distributors are chosen based on objective, non-discriminatory criteria required because of the product type. Where the criteria are designed simply to limit the number of distributors, competition issues may arise.
In addition, selective distribution must be necessary for the products in question (for example, highly technical or luxury products) and the extent of any restrictions on the distributors must be proportional based on the type of product.
Selective distribution is covered by the vertical agreement block exemption as long as the distributor is not restricted from selling the products to final customers or the other parties within the network. This would amount to a hardcore restriction. If the vertical agreement block exemption does not apply, the guidelines provide that the supplier’s and its competitors’ positions in the market are crucial factors in deciding whether the arrangement is anti-competitive or not, as well as the existence of entry barriers in respect of distributors. Interestingly, the guidelines also provide that a distributor must be permitted to sell the products online.
Exclusive customer allocation
These types of arrangements require a supplier to sell products to one distributor who will then sell them on to a specific class of customers. Often, the distributor will not be permitted to sell the products to customers who the supplier directly distributes to or who are allotted to other distributors.
Exclusive distribution is covered by the vertical agreement block exemption but, if this does not apply, for example, because of the market share of the parties, the guidelines provide that the supplier’s and its competitors’ positions in the market, the market’s maturity and the level of the supply and distribution chain which is affected are important factors to be considered in determining whether the arrangement is anti-competitive. In addition, the potential risk of complicity between buyers and the market position at the distributor level may be of relevance.
Single branding
Essentially non-compete provisions, these clauses oblige or strongly encourage a buyer to acquire the majority of its products from a specific supplier, either because of a particular obligation or as a result of incentives.
Single branding is covered by the vertical agreement block exemption but, if this does not apply, for example, because of the market share of the parties, the guidelines provide that the supplier’s position in the market and the length of the non-compete obligation are the principal factors to be considered in determining whether the arrangement is anti-competitive.
Exclusive supply
Under an exclusive supply arrangement, a supplier will provide the relevant services or products to a single buyer.
Exclusive supply is covered by the vertical agreement block exemption. But, if this does not apply, the guidelines provide that the buyer’s and its competitors’ market shares, the market strength of the supplier, the length and extent of the supply obligation, the product type and the level of the supply and distribution chain at which the agreement is made, are all significant factors in determining whether the arrangement is anti-competitive or not.
Tying
This obligation ‘ties’ the distributor into acquiring another service or product from the supplier (or an entity specified by the supplier) in order to acquire the original service or product. It can be an issue in both vertical agreements and horizontal agreements and could be an abuse under the Chapter II or Article 102 (of the TFEU) prohibitions.
Tying is covered by the vertical agreement block exemption, provided that the parties’ relevant market share threshold is not exceeded. But if the block exemption does not apply, the guidelines provide that the supplier’s market position in relation to the original service or product is crucial. This may be affected by the existence of any entry barriers and the market position of the buyer and any competitors of the supplier.
Restrictions on the sale price
A supplier is able to recommend a sale price or put in place a maximum resale price under the vertical agreement block exemption. But a minimum or fixed sale price obligation is a hardcore restriction and not permitted. If the vertical agreement block exemption does not apply because the supplier’s market share is above 30%, the guidelines provide that stating a recommended resale price may result in uniform pricing across the market. And this could result in suppliers colluding, which, as a consequence, could have anti-competitive effects.
Upfront access payments
These are fixed payments made by a supplier to a distributor in return for being permitted to access a distribution network and obtain services from the retailers.
Upfront access payments are covered by the vertical agreement block exemption but, if this does not apply, the guidelines provide that the existence of entry barriers for other suppliers may be an anti-competitive factor, as well as the risk that a supplier may be encouraged to limit its supplies to one distributor.
Category management agreements
Such agreements provide that a supplier will deal with the marketing of a certain type of goods for itself and its competitors.
Category management agreements are covered by the vertical agreement block exemption but, if this does not apply, the guidelines provide that the extent of the agreement, the aggregate use of this type of agreement in the market and the market position of the supplier and its competitors should all be assessed in determining the anti-competitive effects of the arrangement. Distributor collusion and supplier collusion can also be a risk.
Franchise arrangements
Provided that the parties’ market shares do not exceed the stated threshold, the vertical agreement block exemption will apply in respect of:
- Any provisions in the franchise agreement which deal with the licensing of intellectual property rights required for the use of the products or services (so long as these do not form the main purpose of the agreement) and/or
- Certain vertical restraints in the franchise arrangement. As franchise agreements are broadly a combination of various vertical restraints, the guidance specified for those vertical restraints will apply if the franchise arrangement does not fall within the vertical agreement block exemption. Consideration will also need to be given to the importance of know-how and the need for non-compete obligations in the arrangement.
Combination of vertical restraints
Particular care should be taken if two or more of the above vertical restraints are included in the same arrangement as this can lead to a hardcore restriction, which is not permitted in any form under the vertical agreement block exemption.
Legal exception
It is possible for any of the above vertical restraints to be legally excepted from the Chapter I or Article 101 prohibitions if the benefits of the arrangements counterbalance the anti-competitive effects. Further guidance is given on this in the guidelines.
Although vertical restraints are less likely to be considered as anti-competitive than horizontal restraints, each vertical agreement needs to be considered from a competition perspective. Many will benefit from the vertical agreement block exemption, but the vertical restraints guidance also needs to be considered to minimise the risk of competition issues and their consequences arising.
