EU vertical restraints can expose your business to anti-competitive risks if agreements aren’t carefully structured.
Knowing the ins and outs of horizontal and vertical agreements is crucial for staying compliant, particularly when your arrangement falls outside the block exemption, a legal safeguard that only applies if strict conditions, such as market share thresholds and the absence of certain restrictions, are met.
If your agreement doesn’t qualify, it’s up to you to assess whether it might restrict competition. The EU Commission’s guidance on vertical restraints offers practical criteria to help you do just that. Our commercial law solicitors work with businesses to structure legally compliant agreements that support your commercial aims and reduce competition law risk across the UK and EU markets.
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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. You can access the EU Commission’s summary of the vertical restraints guidelines on EUR-Lex for an overview of how these rules apply and when exemptions might be available.
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) is protected.
- Key factors to consider include the economic impact of the restraints, the parties’ and competitors’ market positions, any entry barriers, the type of product or service in question, and the duration 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.
The vertical agreement block exemption covers exclusive distribution. 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. Additionally, the potential risk of complicity between buyers and the market position at the distributor level may also 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 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 to a specific class of customers. Often, the distributor will not be permitted to sell the products to customers whom the supplier distributes directly or who are assigned to other distributors.
The vertical agreement block exemption covers exclusive distribution 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. Additionally, the potential risk of complicity between buyers and the market position at the distributor level may be a relevant consideration.
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.
The vertical agreement block exemption covers single branding 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.
The vertical agreement block exemption covers exclusive supply. 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. The presence of entry barriers may influence this, the buyer's market position, and the supplier's competitors.
Restrictions on the sale price
A supplier can recommend a sale price or establish 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. Suppose the vertical agreement block exemption does not apply because the supplier’s market share exceeds 30%. In that case, the guidelines stipulate that stating a recommended resale price may lead to uniform pricing across the market. This could result in suppliers colluding, which, in turn, 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.
The vertical agreement block exemption covers upfront access payments; however, if this does not apply, the guidelines indicate 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 a single distributor.
Category management agreements
Such agreements stipulate that a supplier will handle the marketing of a specific type of goods for itself and its competitors.
The vertical agreement block exemption covers category management agreements 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 exempted from Chapter I of the UK's Competition Act 1998 or the EU’s Article 101 prohibitions if the benefits of the arrangements counterbalance the anti-competitive effects. Further guidance is given on this in the guidelines. In the UK, the CMA’s guidance on the Vertical Agreements Block Exemption Order (VABEO) provides additional detail on how these exemptions are assessed under the Competition Act 1998.
Although vertical restraints are less likely to be considered anti-competitive than horizontal restraints, each vertical agreement must be evaluated 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.
Making vertical agreements work for your business
Although vertical agreements generally attract less scrutiny than horizontal ones, getting them wrong can still expose your business to fines, unenforceable contracts, or serious reputational harm. Whether you’re entering an exclusive supply deal, rolling out a selective distribution system, or managing a multi-layered franchise network, understanding how the EU guidelines apply in practice is crucial.
With the proper legal support, vertical restraints can be structured to comply with competition law while preserving the commercial goals behind them. Our experienced commercial law solicitors can help you assess risk, align with EU and UK guidance, and design compliant agreements tailored to your business model.
