Lexis ®PSL Competition Practice Note

An overview of competition issues impacting vertical commercial agreements Produced in partnership with K&L Gates LLP

EU and UK competition law prohibit certain contractual restrictions where a supplier of goods or services seeks to impose restrictions on the buyer further down the production or distribution chain, such as a distributor, an agent or a franchisee. Particular ‘red flag’ areas include provisions designed to preserve exclusivity (eg by restricting sales by the buyer to particular customers or into particular EU territories) or provisions designed to restrict the buyer’s ability to determine its resale prices.

Where properly drafted and implemented with the guiding fall precisely within their terms. The vast majority of commercial competition law principles in mind, the vast majority of these agreements between parties operating at different levels of the vertical commercial agreements should escape competition law supply chain (vertical agreements), such as distribution, agency scrutiny. However, it is always important to look out for problematic and franchise agreements, benefit from the Vertical Agreements provisions, and in particular the ‘red flag’ areas highlighted below, Block Exemption. which could expose the parties to serious risk and liability. This can include, fines and the possibility of the agreement (or offensive The Block Exemption provides a broad exemption for all but a provisions) being found to be unenforceable. limited number of so-called ‘hardcore’ restrictions (the presence of which render an entire agreement void and unenforceable) and excluded conditions (which render the condition and any Application of Article 101 TFEU to non-severable provisions void and unenforceable). commercial agreements However, be aware that even if a hardcore restrictions or Article 101(1) TFEU prohibits agreements (whether written or excluded condition is not present: oral, and formal or informal) between undertakings that have • the Block Exemption only applies if the supplier and buyer’s as their object or effect the restriction, prevention or distortion market shares are below 30%-if either company’s relevant of competition within the EU and which have an effect on trade market share is above 30%, it is necessary to assess any between EU Member States. restrictions in light of Article 101(1) TFEU (it may also be References: necessary to consider Article 102 TFEU, which prohibits the Art 101 TFEU abuse of market dominance) This provision is mirrored in the national competition laws of EU • the Block Exemption does not apply to certain categories Member States (for example, the Chapter I prohibition in the UK). of commercial agreement, including intellectual property References: licences and certain aspects of motor vehicle distribution Competition Act 1998, s 2 agreements, which benefit from their own block exemptions (see Applying block exemptions to IP agreements and Motor Exceptions to the main rule vehicles) • the Block Exemption does not apply to reciprocal agreements The European Commission has issued, in the form of regulations, between competitors-check that the parties do not compete ‘block exemptions’ which provide automatic exemption (ie a at any level of the supply chain, and if they do that their presumption of legality) for certain categories of agreement that agreement falls within a defined exception. Agents A supplier which appoints a commercial the agent (whereby agent negotiatesand sells the products or services on the agreement’. ‘agency an into behalf) enters supplier’s Where a genuine agency agreement is in place, the contracts concluded and/or negotiated on behalf the of principal generally fall outside the rules on restrictive agreements. the agencyHowever, arrangement should be reviewed in detail, with reference the to EU vertical restraints guidelines ensure to it falls within the definition‘genuineof a agency agreement’ (ie the agent bears no, or only insignificant, financial and commercial risks in relation the to agreement). moreFor detail on agency agreements, see Agency agreements below. Distributors A supplier which uses a distributor sell to or distribute its goods or services on the level of any supply chain relies on a so-called ‘vertical distribution’ agreement. undertakings independent between therefore is agreement The operating, the for purposes the of agreement, different at levels theof supply chain. The goods be may sold on through various levels the of supply chain, before eventually being sold the to customer. A vertical supply chain could a producer involve selling the goods on a wholesaler, to who sells the goods who on a distributor, to sells the goods a downstream to who in turn retailer, sells the to end-customers. Each these of parties is active different at levels theof supply chain. As vertical agreements are entered between into the producer and third-parties, or between different third-parties in the supply chain, each the of above agreements than the one (other between the retailer and the individual consumer) will be subject competitionto and law, the rules on restrictive agreements. An assessment be to undertaken will have as whether to falls it within the Block Exemption or is capable an of individual exemption.

have thehave same parent company. where a parent company wholly owns a subsidiary, and sister companies companies and their parent-meaning which agreement is individually exempted. whether the arrangement may restrict competition, and competition, restrict may arrangement the whether assess whether the agreement generates positive effects (‘efficiencies’) which outweigh the negative effects so that an Block Exemption if the agreement does not meet the criteria in the Block Exemption, carry out a a case-by-case assessment as to identify the type restriction of involved consider whether the arrangement meets the criteria in the Intra-group agreements usually fall outside the scope Article of 101 TFEU and should only raise competition concerns if the group is abusing a dominant market position (Article 102 TFEU). same relevant product and geographic markets. geographic and product relevant same References: 11 guidelines, para cooperation EU horizontal Note-companies forming the same undertaking are not considered be to competitors, if even they are both active on the • • Where a company exercises decisive influenceover another company (the ability control to the affairs the of company), both companies are a ‘single economic entity’, meaning that the undertaking, same the part example: of are companies for independent companies and do not apply to agreements agreements to apply not do and companies independent between companies that part form the of same ‘undertaking’. Operating from a vertically-integrated business decreases the risk a competition of law infringement, on the basis that the rules on restrictive agreements apply agreements to between A producer which sells or distributes its goods or services directly on the market itself is defined as being ‘vertically integrated’. Different ways to get products to market to products get to ways Different integration Vertical be relatively blurred such that effectively one overall assessment of the impact the of arrangement on competition is conducted. Note-the dividing line between the third and fourth stages can often • • competition law has various stages: • • Assessing vertical agreements The process analysing for the compatibility a restriction of with

An overview of competition issues impacting vertical commercial agreements

as how to the minimum is calculated). A restriction on a buyer who is a wholesaler from reselling to end users. This exception allows restrictions both of active and sales. passive A prohibition imposed on all distributors sell to certain to end users provided is it based on objective grounds related the to product as a ban on (such selling certain to customers for reasons health of or safety). A restriction on sales’ ‘active the by buyer the into exclusive territory or exclusive customer group reserved the to supplier or allocated the by supplier provided another to that buyer, the restriction does not limit sales the by buyer’s customers requiring by the buyer(eg insert to a restriction on active sales itsinto agreements with its sales’ customers). ‘Active means actively approaching a specific customer group or customers in a specificterritory via media advertisements, the internet or other promotions specifically targetedat that customer group or customers in that territory The vertical (see agreements block exemption - Active and passive sales). restrictionA the establishing prohibiting buyer from or maintaining branch, a sales or outlet distribution depot in territories reserved the to supplier or another In buyer. addition, in order potential avoid to ‘free rider’ issues, a supplier imposemay an obligation on the buyer operate to a minimum physicalof sales outlets within the territory in which is it grantedexclusivity, and makea minimum to number ‘off-line’ of physical sales through those outlets specific to (subject rules an obligation on the orders buyer any refer to received excluded or territory reserved its outside customers from distributors. other to customers • • The Vertical Agreements Block Exemption provides that the following resale restrictions are not hardcore restrictions and are therefore permitted: References: 330/2010 Regulation • • • allowed? are restrictions resale What Agents represent their principal, contract on behalf their of principal and fiduciaryhave dutiesto act in the best interestsof their principal no liabilityhave the to customer the for goods or their actions (this is borne the by principal) are normally paid a commission their for services deal directly with both the principal and the end-customer or party,third representing the principal a right compensation to have on termination under the Commercial Agents Regulations (Council Directive) 1993 Distributors for example, reduced discounts, bonuses, example, reimbursements for or supplies from or the less supplier, favourable treatment as compared with the supplier’s other distributors, or measures designed induce to a distributor resell not to to group, customer or territory reserved its outside customers party onward for sale the of goods add a margin profit for andexpenses to sell on the goods a contractualhave relationship with the end-customer or third are liable their for own activities buy the goods from taking the supplier, ownership the of goods take on the product risk measures, such as: such measures, • block exemption - Active and passive sales and The vertical agreements block exemption - Internet sales). In addition, the general rule covers indirect restrictions or order from outside the reserved sales territory. As a general rule, internet sales are treated as (ie passive from a website) sales and can therefore not be restricted The vertical (see agreements sales’ outside the territory or customer group is not allowed. In other words, the supplier cannot or prevent discourage the buyer from selling the product or service in response an to unsolicited Firstly, this rule covers direct restrictions on resale outside a particular territory or customer the to group, limited (subject exceptions described In below). particular, a ban on ‘passive the buyer sell may is considered a hardcore restriction and is thusnot permitted, if even the market share thresholds are not exceeded. What resale restrictions are not allowed? not are restrictions resale What Restricting the territories which, into or the customers whom, to to whom,to its the sell, customers) may buyer comply (or with the Exemption. Block Agreements Vertical Conversely, the agreement impose may restrictions in respect ‘no-go’of territories or customer groups. The parties must therefore ensure that the terms appointment, of and particularly restrictionsany on the territories which, into or on the customers the right be to an exclusive distributor in a particular territory or to customers). of group particular a An agreement will typically set out the the nature of rights granted theby supplier in particular the to buyer, exclusive any rights (eg Buyer’s resale rights and obligations and rights resale Buyer’s Distinguishing between distributors and agents between distributors Distinguishing The main differences between the roles and responsibilities distributors of and agents are:

An overview of competition issues impacting vertical commercial agreements

is indispensable for protecting substantial and necessary and substantial protecting for indispensable is know-how transferred the by supplier and the to buyer, is limited in duration a period to one of year after termination of the agreement. would be imposing a hardcore restriction on that distributor. The Vertical Agreements Block Exemption will not exempt an agreement which contains a restriction which limits the ability of a reseller determine to its resale price. References: art 4 330/2010, (EU) Commission Regulation Supplier’s obligations Supplier’s In addition obliging to the supplier supply to products or services the agreement theto buyer, may-depending on the terms under which the buyer as is an appointed exclusive distributor)- (eg prohibit the supplier from supplying the products or services customersto in the buyer’s exclusive territory or exclusive customer group. Such a restriction is permissible and cover may both active and passive sales. Always ensure that if this restriction does the not apply (and supplier therefore retains a right supply to products or services customersto in the buyer’s territory or customer that the group), parties are not competitors one at or more the level of supply thuschain potentially precluded (and from exemption under the Block Exemption). Pricing restrictions A supplier negotiating a vertical agreement with a buyer wish may imposeto restrictions on the price which at the buyer resells the goods or services. In certain circumstances this can constitute a ‘hardcore’ restriction which is considered a negative impact have to on competition. example, For a supplier that dictates resale prices itsby distributors called resale (so price maintenance (RPM)), • • An agreement contain can, a non-compete however, restriction unlimitedof duration on the use and disclosure know-how of that has not fallen the into public domain, provided that the know- how is substantial (ie includes information that is significant and useful the to buyer the for use, sale or resale the of contract services). or products Note that non-compete obligations also may be subject the to UK common law doctrine on restraints trade. of The UK doctrine stipulates be that to enforceable, a restraint trade of must be reasonable in extent and duration. This national rule cannot be used invalidate a non-compete to obligation that does not infringe Article 101(1) TFEU, however apply may it where, for example, an agreement is an unlikely appreciable have to impact on trade between EU Member States. References: Co. v Pihsiang Machinery Manufacturing Medical Aids Ltd Days 44 [2004] EWHC Ltd operated during the contract period relates the to goods or services which compete with the contract goods or services is limited the to premises and land from which the buyer has servicing its of goods is not permitted. manufacturer) which restricts the supplier from selling the service or repairers independent users, end parts to spare providers not entrusted the by buyer with the repair or sales. that note provision a in an agreement However, between a supplier spare of parts and a buyer who incorporates the spare parts its into original own product equipment (an who will use them manufacture to the same type goods of as those produced the by supplier (ie the seller’s competitors). This exception allows restrictions both of active and passive In the context a supply of contract covering components thefor purposeincorporation of finished into products, a restriction ona buyer from reselling components customers to • • services after the termination the of agreement. under However, the Block Exemption, such a non-compete obligation (whether direct or indirect) is not allowed unless it: The supplier also may wish restrict to the buyer from manufacturing, purchasing or distributing competing products or occupancy of the premises. the of occupancy obligations non-compete Post-term buyer from premises owned or leased the In by such supplier. cases, the non-compete obligation is exempted provided that its duration does not exceed the period the of buyer’s Block Exemption, thus and it part any the of agreement from which cannot it be severed are void. One exception this to is where the product is resold the by A non-compete obligation indefinite of duration (including one which is tacitly renewableover of years’or five beyondyears) five duration is an excluded condition under the Vertical Agreements purchases the of contract products and theirsubstitutes from the supplier or someone designated the by supplier is considered a non- compete obligation subject this to rule). is only allowed under the Vertical Agreements Block Exemption if has it a duration less of (a minimum than years fivepurchase obligation which requires the buyer buy to more than 80% its of total competing products or services without the supplier’s consent. such a non-competeHowever, obligation direct (whether or indirect) In addition the to resale restrictions outlined above, is it common anfor agreement contain to an obligation on the buyer buy to all or the vast majority a particular of product or service from the supplier and manufactureonly, not to purchase or deal and/or in sell) (eg Non-competeprovisions and exceptions relating selective to distribution systems (ie concerning the appointment distributors of who meet specific Selective distribution). (see requirements) Note-the Block Exemption sets out specific hardcorerestrictions •

An overview of competition issues impacting vertical commercial agreements

to deviate fromto what they think is the preferred resale price proposed an by important supplier on the market it doesit not pressurise a buyer stick to a maximum to or recommended price, as this would essentially result in RPM (eg a supplier could penalise a distributor restricting by volume of the product distributor a to that did not adhere an to RRP), and doesit not offer incentives a buyer to stick to a maximum to or recommended price, as this could a discount result in RPM (eg or rebate which only comes play if RRP into is followed). the risk a supplier of imposing maximum or recommended resale prices is that most or all resellers might these follow prices, as they would compare their prices with those other of resellers in the market. This act may reduce to competition in the market between products the of same brand or facilitate to and suppliers, between collusion the stronger the market position the the of higher supplier, the risk that a maximum or recommended resale price will lead a to uniform price level in the market. Resellers find may it difficult price levels more easily canit limitprice competition between distributors that for brand but could it also impact competition in the downstream market generally affecting by the prices charged competing for products, and canit result in higher prices, as there is a lack downward of pressure on prices as distributors cannot lower their prices below the level agreed with suppliers. • • more For detail on RPM, see Resale price maintenance . prices resale recommended or Maximum Whilst RPM is a hardcore restriction, a supplier be may able to impose maximum or recommended resale prices (RRP) on a buyer. Assessing pricing restrictions benefit cannot and restrictions ‘hardcore’ are RPM obligations from the Block Exemption, whether or not the restriction can be severed from the rest the of agreement and without regard the to market share the An of supplier. agreement containing RPM will therefore need be to assessed individually. The supplier must ensure thatan RRP/maximum price is genuine- that: means this References: 227-228 paras guidelines, EU vertical restraints • • The potential competitive harm regarding maximum or is: prices resale recommended • • References: art 4 (EU) 330/2010, Commission Regulation the effect theHowever, of maximum price or RRP and what’s actually happening in practice needs be to carefully considered. is describedWhat in a distribution agreement as RRP or a maximum prices in practice be may operating as a fixed price. Also, be may it that in practice genuine even RRP or maximum prices are having a restrictive effect.

it canit limit price competition and make collusion between suppliers as they are able easier, monitor to changes fixed to set, and linking the resale price the to resale prices similar of products competitors. by sold fixing the maximumof discount level the distributor can apply a certainto price granting rebates a distributor to only if a certain resale price is fixing the level of the resale distribution margin distribution resale the of level the fixing recommends or caps resale prices. resale caps or recommends resale price maintenance (RPM)-where a supplier instructs its buying customers resale not to below a certain price, and supplier the prices-where resale recommended and maximum RPM can restrict competition in a number ways: of • Only in very limited circumstances RPM may be acceptable and can benefitfrom an individualexemption where the efficiencies outweigh the negative effects. Suppliers might also use threats or warnings induce to a certain a pricing at distributor into level. For example,For a supplier could delay or suspend deliveries a distributorto that sets a higher discount level of than supplier. the by recommended would result in RPM, a supplier be may acting in a fashion that, in effect, forces a distributor resell to their goods a certain at price. As well as analysing contractual provisions which lead may to RPM, is it important assess to the behaviour a supplier of in practice. Though no contractual provisions might be in place that • • • References: 48 para guidelines, EU vertical restraints • to resaleto prices, but can also result from less direct measures. It is therefore very important look to out provisions for which might not seem be to RPM obligations first at sight,forexample: considered be to a ‘hardcore’ restriction competition of and cannot benefitfrom the Block Exemption. RPM can result from direct obligations in vertical agreements relating Any obligation that stipulates that a buyer resells its goods or services a fixed at (so-calledor minimum price RPM) is Resale price maintenance price Resale • • highly unlikely if the agreement contains an RPM clause). There are two broad categories pricing of restrictions: If seems it that the agreement restrictmay competition, the agreement still may benefitfrom an individualexemption itsif positive effects outweigh its negative effects (though this is recommended resale If the below). prices agreement (see falls outside the of Block Exemption, case-by-case a assessment is required taking account into the market conditions. Certain clauses that affect resale pricing not may qualify as a pricing restriction, meaning that they could be permitted as they fall within the Block Exemption, such as maximum or

An overview of competition issues impacting vertical commercial agreements

limiting the proportion sales of that can be exported a buyer by punishing buyers which export goods supplying by smaller volumes those to buyers or boycotting those buyers, and a pricing system under which buyers are charged a higher price goodsfor sold outside a certain territory than those for resold certain a within territory. distributor carries out targeted marketing customers of outside its territory more detail (for on active and passive sales, see The vertical agreements block exemption - Active and passive sales). This means thata supplier can its prevent distributors from directly approaching customers other distributor’s within exclusive territory, thereby protecting its exclusive distributors to some extent. If the agreement falls outside the of Block Exemption, a case-by-case assessment is required taking account into the market conditions. If seems it that the agreement restrict may competition, still may it benefitfrom an individualexemption itsif positive effects outweigh its negative effects. Assessing export bans The restriction the of territory its which into a buyer (or resellcustomers) may goods or services is considered a ‘hardcore’ restriction under the Block Exemption. References: art 4(b)(i) 330/2010, (EU) Commission Regulation Any agreement which contains such a restriction will therefore be unable benefit to from the Block Exemption. This is the case unless the restriction relates a restriction to on ‘active’ sales into an exclusive territory that has been exclusively allocated a to or whichdistributor, the supplier hasreserved itself. for Essentially, this means that only export bans that restrict ‘active’ sales an exclusive into territory can be exempted under the Block Exemption. a prohibition However, on making passive sales into another’s territory is not permissible. ‘Passive’ selling is where a distributor responds unsolicited to requests from individual customers about the product, whilst ‘active’ selling is where a • • • Such agreements protect distributors from competition from importsproducts of obtained third by parties outside the territory allocated them to (so-called ‘parallel imports’). With these export bans, these distributors will therefore benefitfrom absolute territorial protection from competition outside that territory. This distorts competition between Member States in the EU, example for maintaining by price differences between products. similar for countries Export bans are presumed restrict to competition object by (ie there is no need show to that these agreements a negative have effect on competition). The Vertical Agreements Block Exemption will not exempt an agreement which contains an absolute export ban. Certain restrictions on the territories which into distributors sell may may be exempted under the Block Exemption.

and this benefit may consumers. provided RPM by allow may retailers provide to additional pre- sales services, in particular in relation complex to products. product supplier’s the for demand enhance services These RPM the avoid may ‘free-rider’ problem (ie where one distributor takes advantage the of promotion efforts which beenhave made another by distributor). The higher margins term, low-price campaigns two six weeks to (usually in duration) which implemented are distributors distribution by a in network. These price promotions can benefit consumers, and with the funds (through higher increase to margins) sales and marketing efforts the for products fixedresale prices might be necessaryfor co-ordinating short- where a manufacturerintroduces a new product the to market, RPM be may helpful during the initial period following the introduction. example, for RPM provide may, distributors result from indirect measures that are intended restrict to exports or imports between EU Member States, example: for Member States can be maintained. An export ban can be directly included in an agreement or may its products different at prices particular to countries. It may therefore seek imports prevent to or exports products of between Member States so that these differences between Suppliers wish may restrict to buyers from exporting products. A supplier might, example, for wish supply to different variants a productof particular to countries within the EU, or supply to Export bans • • • RPM can in certain limited circumstances lead efficiencies, to for example: individual exemption might apply the to agreement. References: 225 para guidelines, EU vertical restraints An agreement with RPM will need be to assessed determine to whether the agreement generates positive effects or ‘efficiencies’ which outweigh the negative effects, so that an by caseby assessment indicates that the restrictions are anti- competitive, the agreement still may be capable an of individual exemption. However, when the agreementHowever, imposes (which pricing doesrestrictions) not fall within the Block Exemption, and a case An agreement recommended with RPM (or or maximum prices thatoperate as are hardcorefixed restrictions prices) and unlikely beto acceptable on a case case by assessment. isin effect a fixed price imposedby the supplier). Agreements or concerted practices such as these will also be treated as hardcore restrictions and will not fall within the Block Exemption. RRP or maximum retail prices can also constitute RPM (for induce to threats/warnings makes supplier a where example, a distributor impose to the RRP or so that the maximum price

An overview of competition issues impacting vertical commercial agreements

the market position the of supplier on the market the of tying printers)-theproduct importance (eg the of supplier on the market is the main reason a buyer why find may it difficult to refuse a tying obligation competitors’ market positions-if competitors are numerous and strong, anti-competitive effects Buyers are less likely. have alternative suppliers from whom purchase to the tying product without the tied printer product cartridges), (eg and the power buyers-powerful of buyers will not easily be forced acceptto tying without gaining some benefit. Alternatively, tyingAlternatively, can be made a requirement the of initial sale, example,for maintenance product a for must be carried out by tying). contractual as (known manufacturer the several have may effects on competitionTying that are similar thoseto discussed in relation single to branding Single (see branding example, For below). tying lead may less to competition customersfor buying the second (tied) printer product (eg cartridges). If there are not enough customers interested in buying the second (tied) product alone, this can lead to competing suppliers the of tied product exiting the market, resulting in higher prices and/or poorer service customers. for See further, Individual Exemptions under Article 101(3) TFEU. Single branding Single branding is a particular type exclusive of deal, where the buyer agrees deal to only or almost only with the supplier in relation a particular to type product-so of that the supplier’s impact on both the tied and tying markets. The following factors bewill relevant: • References: 219 para guidelines, EU vertical restraints • • Where anti-competitive effects arise are likely to from a tying obligation, the parties the to agreement be may able show to that efficienciesrelevant are and outweigh theseeffects so that an individual applies. exemption References: 222 guidelines, para EU vertical restraints might, example, for leadTying efficiencies to arisingfrom the joint production or joint distribution tying of and tied products, or lead a supplierto buying large quantities the of tied product (where product). tied the produce not does supplier the References: 216-217 guidelines, paras EU vertical restraints Assessing tying agreements is exempted under the BlockTying Exemption when the market share on the of both supplier, the market the of tied product and the market the of tying product, and the market share the of buyer do not exceed 30%. If an agreement does not fall within the Block Exemption, an individual assessment be required, will including assessing the

Tying can be achieved throughTying physical integration, example for when there is only one type software of package that will work with a given operating system (known as technical tying). If customers would buy the products separately (if they were then theable) potential impact on suppliers the of stand-alone products be to considered. will have then tyingthese products together is not acting alter to purchasing behaviour and is unlikely be to problematic. crucial in assessing the impact the of tying on the market. The first issueto consider is whether the tied products are distinct. If customers would purchase the products together a supplier has market power (see Tying and bundling).a supplier has Tying market power (see The type products of involved and how they are tied will be with one rather supplier, than buying the tying and tied products from two separate suppliers. also may constitute an abuseTying a dominant of position where EU vertical restraints guidelines, paras 214, 215 guidelines, paras EU vertical restraints can result in a single brandingTying type obligation of the for tied product, as result may it in a buyer dealing only or almost only known as tying. An example would be the sale printer cartridges being tied the to sale printers. of References: In some vertical agreements, a buyer be may required to purchase a second distinct (tied) product from a supplier as a condition purchasing of a first(tying) product. This practice is Tying by the wholesalers to appointed retailers in other wholesalers’ wholesalers’ other in retailers appointed to wholesalers the by territories qualify may individual for overcomes it exemption (as ‘free-riding’). free. However, if wholesalersfree. However, located in different territories are obliged invest in to promotional activities in ‘their’ territories to support sales appointed by retailers, restrictions on active sales exemption. example,For in the case a selective of distribution system, cross supplies between appointed distributors must normally remain There be may certain circumstances in which an agreement containing an export ban positive have may effects that outweigh its negative effects, and hence be suitable individual for agreement not may need be to considered, as the agreement will be permissible under competition law. justified,forexample on the groundsof health A banand safety. on passive sales might also be permissible where a distributor has made substantial investments enter to a new market (but only a limitedfor period). In these cases, the positive effects the of agreement be may capable an of individual exemption. There be may some cases where an export ban is objectively When the agreement imposes (which an export does not ban) fall within the Block Exemption, and a case-by-case assessment indicates that the restrictions are anti-competitive, the

An overview of competition issues impacting vertical commercial agreements

wholesale level rather than the retail level (ie one level removed consumer). the from considered unlikely comply to with Article 101 TFEU. an absence barriers of entry to buyers/potential for buyers which means that new buyers could enter the market strong buyer power counteract to the market power of suppliers if the obligation relates intermediate to rather than final products (the buyers intermediate of products are usually well- informed customers, able assess to quality and therefore less reliant on brand and image, whereas final goods are, directly or indirectly, sold final to consumers whooften rely more on and image), and brand in relation final to products, the agreementrelates to the single branding obligations shorter than one year entered into non-dominantby companies are in general not considered to risegive an to overall anti-competitive effect single branding obligations one of yearsfive to by entered into non-dominant companies usually require a further balancing positiveof and negative effects, ie the duration is regarded as a and factor, neutral single branding obligations exceedingyears five are generally Positive effects Other circumstances where there be may a positive effect outweighing negative any effect include: Other market factors market Other Other exclusive agreements which are in place in the market are also important. If a number the of supplier’s competitors have also entered single into branding obligations, the cumulative effect such of arrangements create competition may concerns. if the buyer hasHowever, a market share less of than 5%, this is not generally considered contribute to such to a cumulative effect and the agreement will not be problematic. indicatingFactors that a single branding obligation be may less of include: concern a • • • • References: 132-141 60-64 and guidelines, paras EU vertical restraints Note-an arrangement that does not fall within the Block Exemption because contains it a hardcore restriction, rather is threshold share because market a example, for than, exceeded, is unlikely be to deemed acceptable on case-by- a case assessment or benefit to from an individualexemption it’s possible(although exceptions for As be to made). a general rule, is it recommended that such hardcore restrictions be removed. agreement the of Duration The duration the of agreement is also important outside the of context the of Block Exemption. guidance: By of way • • •

only be dealing in and stocking the supplier’s products). This is particularly problematic where the buyer has a significant market presence trading so that is it a key partner suppliers. for where the buyer is consumer-facing, there is a reduction in-storeof inter-brand competition between (competition different brands would be reduced as the buyer/retailer would arrangement-this becomes more problematic the greater percentage the of market that is affected exclusive by arrangements, and competing on an ongoing basis the for buyer’s business, ie once the exclusive arrangement is in place there is no competition in relation that buyer to the for period the of softening competition of between suppliers as they are not locking competing suppliers out the of market the overall cost per unit becomes cheaper if more items are purchased). requirements agreeing keep to number a (eg items of displayed which in effect precludes the and display other two- of items), part pricingfee structures a fixed plus price (eg per unit so that encourage the buyer concentrate to its purchases with the supplier such as minimum purchasing requirements an (eg agreement purchase to 10,000 items stocking per annum), than 80% its of requirements from the supplier-this is the branding, and single of form clearest quantity-forcing: incentives or obligations are agreed which non-compete: whereby the buyer is obliged purchase to more less arise likely to where competitors also strong have market products. attractive similarly offer can and positions ‘must-have’ item,‘must-have’ competitors will findveryit difficult to maintain a foothold in the market where the supplier is imposing single branding obligations. On the other hand, concerns are much Exemption, a case-by-case assessment is required, which will turn primarily on the market position example, the For of supplier. if the supplier has a strong position in themarket and is selling a Assessing single branding agreements If a a single branding agreement falls outside the Block • References: 130 para guidelines, EU vertical restraints • the product.the product is the only product its of type that will stock. it This can mean that competing suppliers are denied access the to buyer, limiting the degree competition of between different suppliers of The potential harm competition to includes: • branding. This requires the buyer report to better any offers from competing suppliers and means that the buyer can only accept the improved offer if the supplier refuses match to it. Note-an ‘English clause’ can also the have same effect as single • A single branding obligation can take two principal forms: • References: 129 guidelines, para EU vertical restraints

An overview of competition issues impacting vertical commercial agreements

the existence strong of competing buyers on the upstream market which means that the buyer faces significant competition on that market the absence barriers of which (conditions make difficult it for firmsfor to new enter suppliersthe market) entering the market strong bargaining power suppliers of so that the buyer’s constrained is conduct the buyer’s market share on the upstream market (on (on market upstream the on share market buyer’s the which purchases it the contract goods/services) and on the whichdownstream exceeds the buyer market (on is active) 30% the buyer’s market share on the downstream market exceeds 30% and exclusive supply relates a particular to use the of products. or the buyer is dominant on the downstream market. exclusive supply agreements shorter thanyears five entered non-dominant by into companies usually require a balancing of positive and negative effects, ie in this instance, the duration is regarded as a neutral factor agreements lasting longer thanyears five are generally considered unlikely comply to with Article 101 TFEU. minimum supply requirement. supply minimum shutting other buyers out the of market-other buyers would be unable buy to from the supplier and a therefore may have reduced presence on the downstream market, and reduction intra-brand of competition in relation (competition salesto the of supplier’s products) as buyers fewer will offer product.the • • • (although it’s possible(although exceptions for As be to made). a general rule, is it recommended that such hardcore restrictions be removed. Examples situations of where competition concerns are likely to includearise where: • • • The duration the of agreement is also important outside the of context the of Block Exemption. guidance: By of way • • indicatingFactors that an exclusive supply agreement be may less a concern of include: The potential harm competition to includes: • References: 194 guidelines, para EU vertical restraints • agreements supply exclusive Assessing If an exclusive supply agreement falls outside the Block Exemption, a case-by-case assessment is required. References: 60-64 and 194-199 paras guidelines, EU vertical restraints Note-an arrangement that does not fall withinthe Block Exemption because contains it a hardcore restriction, rather is threshold share because market a example, for than, exceeded, is unlikely be to deemed acceptable on a case-by- case assessment or benefit to from an individualexemption

supplier supplies most its of products the to buyer or a an outright obligation supply to or exclusively, ‘quantity forcing’-incentives which induce the supplier to concentrate its sales eg on higher one buyer, pricing if the loan to the buyer. loan the to buyer. an exclusive relationship, obtain to extra security its for investment in addition the to security which to a traditional lenderwould access. have As a result, the supplier provides the providers due imperfect to banks) capital of (eg information. The supplier better have may information due its to presence in and understanding the of markets and be able, through imposed on the buyer further (for information on hold-up and below), agreements supply Exclusive see problems, the buyer is having trouble obtaining a loan from regular buyer. The supplierbuyer. would not incur such costs without having an agreement with the buyer which allows the supplier recover to its investment-eg an agreement with a single branding commitment specificto the relationship-eg the installation or adaptationof equipment the by supplier when this equipment can be used afterwards only produce to components the for particular free-riding competing by suppliers-eg where the supplier invests in promotional material the at buyer’s premises hold-up problems, ie where an investment is needed which is where a non-compete obligation enables the avoidance of • • example special in equipment or training. involve: may arrangements supply Exclusive supplier, limiting thesupplier, degree competition of between buyers. there also may beHowever, positive effects such as where there are client-specific investmentsforto be madeby the buyer, References: 192 guidelines, para EU vertical restraints This can mean that competing buyers are denied access the to Exclusive supply is where the supplier is obliged or induced sell to only or either mainly one to in general, buyer, or a particular for use (known as ‘industrial supply’). Exclusive supply agreements agreement, see Assessing vertical agreements outside the block exemption-case study - Single branding obligations-a worked example purchasing obligations could be a less restrictive alternative a to non-compete but the still may have same positive effects. a workedFor example an of assessment a single of branding efficiency gains. single branding, to In relation quantity forcing/minimum agreement, consideration must be given as whether to less any anti-competitive alternative exists which would achieve the same positive effects. a restrictive For agreement be to exempted, there must be no less restrictive achieving of way the same When considering the positive and negative aspects theof • • References: 144-147 107, guidelines, paras EU vertical restraints •

An overview of competition issues impacting vertical commercial agreements

to negotiateto and/or conclude contracts on behalf the of principal. almost always used distribute to branded final products, it as allows brand owners greater control how over their products are retailed. References: 174 para guidelines, EU vertical restraints The selection authorised of distributors does not depend on the number contractual of territories or geographic areas (like exclusive distribution). Instead, relates it selection to criteria linked the to the nature of product, example, for the availability of technical sales assistance IT products. for In addition, the restrictions affecting resale the of products do actively to not relate selling a specified to territory or geographic area, but instead restrict sales non-authorised to distributors, meaning that only other selected authorised distributors and final customers can buyfrom a selected authorised distributor. moreFor detail on selective distribution agreements and their assessment under Article 101 TFEU and the Block Exemption, see Selective distribution. Agency agreements An agency agreement is defined as an agreement between an agent and a principal, whereby the agent is vested with the power Exclusive distribution agreements Exclusive distributionis a particular type exclusive of deal where a distributor is allocated a territory within which only that distributor can actively market itself as the distributor the of goods. supplier’s References: 151 guidelines, para EU vertical restraints This can lead a reduction to in competition in relation the to sale the of supplier’s goods in the relevant territory. However, the arrangement also may pro-competitive have benefits,for example, enable may it the distributor justify to the investment required launch to the supplier’s product in a new territory. moreFor detail on exclusive distribution agreements and their assessment under Article 101 TFEU and the Block Exemption, see Exclusive distribution agreements . Selective distribution agreements Selective distribution arrangements a network involve of selected authorised distributors which are restricted in the way in which they resell may the products. Selective distribution is References: 12-16 guidelines, paras EU vertical restraints The agent must or not bear bear only any, an insignificant commercial or financial riskrelation in to the contracts negotiated or concluded on behalf the of principal. An agent will usually be paid a commission on the sales he makes. short run, and the investment must be asymmetric, ie one party the to contract invests more than the other party. suppliers and can only be sold a significant at loss mustit be a long-term investment that is not recouped in the made the by buyer is considered be to relationship-specific when, after termination the of contract, cannot it be used by the buyer purchase to and/or use products supplied other by the investment must be relationship-specific. An investment uniform product than in the case a product of with different qualities). and grades the obligation being imposed is in relation an to undifferentiated product (the loss a possible of source of supply matters less competing for buyers in the case a of its customers than the wholesaler or retailer has in responding theto demand the of final consumerfor whom brands are more play an likely to important and role), the obligation being imposed is in relation an to intermediate rather than a final(a manufacturer product that uses a certain input usually has more flexibilityrespondto to the demandof outright exclusivity obligation but which the still may have same positive effects. less restrictive means achieving of the same efficiency gains. In relation exclusive to quantity supply, or forcing a minimum supply obligation could be a less restrictive alternative an to positive effects. a restrictiveFor agreement be to exempted, there must be no When considering the positive and negative aspects the of agreement, consideration must be given as whether to less any anti-competitive alternative exists which would achieve the same When these conditions are met, there is usually a good reason an exclusive have supplyto obligation the for duration takes it to rules. accounting under investment the depreciate • • However, there are a numberHowever, conditions of be to met that have to restriction: the justify • agreement with an exclusive supply commitment imposed on the supplier. Encouraging investment in this can way be a positive effect. by the buyer, such the asby in buyer, special equipment or training. The buyer would not incur such costs without having an agreement with the supplier which allows the buyer recover to its investment, eg an Circumstances where there be may a counterbalancing positive effect include a situation where there is a ‘hold-up problem’. This is where there are client-specific investmentsto be made aspects the of agreement, which must benefit consumers, outweigh the anti-competitive aspects the of agreement (see Article 101(3) under TFEU). Exemptions Individual Positive factors An individual exemption will also available when the positive • •

An overview of competition issues impacting vertical commercial agreements

branding obligation). it isit not possible be to an agent one for product and an if supplier the of product another for distributor independent these products are in the same product market, and risks taken the by agent in a different product market are not contract. agency the to relevant theprevent principal appointing other agents a specific for type transaction, of customer or territory (ie an exclusivity or obligation), theprevent agent acting as an agent or distributor other for businesses which compete the principal with (ie single a distribution its of products. A franchise an involves arrangement whereby the franchise Companyowner, A, allows third parties, such as Company B, to use a name, trademark, and/or a particular business method (for example, know-how) which is associated with the franchisor. References: 189 guidelines, para EU vertical restraints Because the agent is a separate business (ie independent) from the principal, such concerning provisions any the relationship between the agent and principal will be subject and the to, have potential infringe, to the rules on restrictive agreements. References: Art 101 TFEU Exclusive agency provisions will not normally result in anti- competitive effects. non- post-term, and provisions agency branding Single compete agency provisions infringe may the rules on restrictive agreements where they lead or contribute to, restricting to, competition on the relevant market where the goods are sold. an agreementHowever, containing these provisions benefit may from the Block Exemption where the relevant market share thresholds and the other criteria are fulfilled, or may be capable anof individual exemption. Franchising Use the of franchise distribution model has significantly increased in the last decades few and can enable the franchisor establish,to with limited investments, a uniform network the for Only risks takenthe by agent in the same product market are that: means This relevant. • • agreements agency in Restrictions In addition governing to the conditions sale of or purchase the of goods the by agent on behalf the of principal, agency agreements can also contain provisions on the relationship between the agent and principal. References: 19 para guidelines, EU vertical restraints These provisions may: • •

contributions the advertising to budgets the principal. of takes responsibility customer’s for non-performance the of contract in relation the to (unless agent’s or own fault), has an obligation invest in to sales promotions, such as undertakes responsibility towards third parties damage for caused the by product in sold relation the to (unless agent’s own fault) contributes the to costs relating the to supply or purchase of the contract goods or services (including transportation costs) his own costmaintains stocks or risk) (at the of contract goods For more For detail on the application competition of agency law to agreements, see further Agency under EU Competition Law. In general, the rules on restrictive agreements will not apply to contracts concludedand/or negotiated an by agent in a genuine agency agreement, in except certain situations. required activities within the same market be established (ie other activities undertaken on the same product market, the at risk)? own agent’s Where no contract-specific risks and no market-specific investments can be established, can risks any related other to fully reimbursed the by principal) . Step 3 agent is appointed the by principal for)? An example market-specific of investments includes the agent equipment, in investing premises personnel or training of (unless Where no contract-specific risks are established, can any risks established, any can risks are contract-specific no Where related market-specific to investments be established (ie investments the by agent the for particular activity which the Step 2 • • • • • stocks)? Examples contract-specific of risks are where the agent: Step 1 Can contract-specific any risks be established (ie financing of In practical terms, the assessment the of agreement and identifying the risk should the involve following steps: likely to have been have likely to acting independently rather than as an agent. This means that the agreement withthe supplierwill be subject to the rules on restrictive agreements. It must be based on the economic reality the of situation, as opposed theto legal form. Where the agent bears some risk, is it by-case basis. References: 14 and 16-17 guidelines, paras EU vertical restraints Identifying risk The question risk of the for agent must be assessed on a case-

An overview of competition issues impacting vertical commercial agreements

the IP rights are part a vertical of agreement is an (that agreement with conditions under which the parties purchase, may sell or resell certain goods or services) and not an agreement concerning licensingpure disclosing the of any franchisor’s know-how which is not public already granting a licence covering know-how gained from exploiting franchisees other and franchisor the to franchise, the protecting and assisting the franchisor legally by protecting the franchise IP rights only use to the licensed franchise know-how the for purposes theof exploitation the of franchise, and preventing assignment the of franchise agreement without the consent. franchisor’s selective distribution obligations (ie restrictions on the number authorisedof distributors and possibilities resale) for non-compete restraints (ie the distributor is obliged or induced concentrate to its orders a particular for type of product with one supplier), and/or exclusive distribution requirements (ie the supplier agrees to sell its products one to distributor in a particular territory) preventing the franchisee from competing directly against the franchise similar business any in preventing the franchisee buying competitor any into are fulfilled:are References: 31 guidelines, para EU vertical restraints • • • • • • • See further, The vertical agreements block exemption . IP rights Protecting Certain obligations are generally considered be to necessary to protect the franchisor’s IP rights. These include, example, for an obligation on the franchisee engage not to directly or indirectly, similarin any business, or an obligation on the franchisee not to disclose third to parties the know-howprovided the by franchisor, as long as this know-how is not in the public domain. Such provisions otherwise may normally be viewed as being restrictive competition.of Obligations contained in franchise agreements will usually be covered the by Block Exemption where the following conditions reasonable limits on those restrictions, in order ensure to that effective competition is not harmed. Franchise agreements commonly contain a combination of particular products the concern which restrictions different being distributed, and especially: • • • or weaker forms these of types vertical of restraints. Applying the Block Exemption The following restrictions/obligations are permitted under the Block Exemption: • • use the of particular name, trademark or business method of franchise? the or technical assistance during the the of agreement, life for example, training, advice on real estate or financial planning? Step 5-does Company Company B pay or A a fee royalty the for property trademarks rights (eg or signs and the know-how) for use and distribution goods of or services. Step 4-does Company A provide Company B with commercial layout of thelayout of premises? This ensures uniform presentation and sales products of or services the at same quality. level of A franchise agreement will usually contain licences intellectual of Step 3-is Company A able exercise to control Company over B and the in which way Company B operates his/her business, example,for in relation how to the product is sold and/or the Company A’s name, trademark and/or business method? business and/or trademark name, A’s Company who trader independent an as remain B Company 2-does Step bears its own financial risk? Step 1-does Company B conduct its own business, but under a wholesale franchise-where Company B distributes certain distributes B Company franchise-where wholesale a using end-users, to opposed as retailers, to directly products businessCompany name, A’s method or products. name a service franchise-where Company B offers a service under and method, business and name business A’s Company trademark certain sells B Company franchise-where distribution a products from a retail outlet under business Company A’s a production or industrial franchise-where Company Company franchise-where industrial or production a B manufactures products in line with Company A’s specifications, and then sells them under A’s Company or a new business or an existing business wishes a enter to into new business area or market without relevant experience in it. an already existing and successful business wants expand, to need the for franchisor impose to certain restrictions on the franchisee in order protect to the interests the of franchise. the at same timeHowever, is it similarly recognised that there are rules on restrictive agreements. In practical terms, competition law generally recognises the Franchise agreements and competition law law and agreements competition Franchise Franchise agreements are subject competition to law and the are regarded as integral components the of business which is franchised. Note-both the IP licence and commercial or technical assistance • • • • Step-by-step analysis to identify a franchise agreement: franchise a identify to analysis Step-by-step • • • • • Types of franchise agreements agreements franchise of Types Different types franchise of can be identifiedfollows: as • A franchise system will commonly be used where: •

An overview of competition issues impacting vertical commercial agreements the more a transfer know-how of is regarded as being important, the more will beit considered that a restraint on the franchisee will be more or likely necessary create to efficiencies, or be indispensable in order to protect the know- how a restriction (eg, on the type input of colour dye used in a new product colouring for sweets demand’ ‘on the by soldcustomer, in ‘fun shops’ uniform of image) where a non-compete obligation on the goods or services purchased the by franchisee is necessary maintain to the common identity and reputation the of franchise network (eg, non-compete clauses excluding other any brands sweets of from the ‘fun shops’ allowing the franchise outlets uniformity and prevents competitors benefitingfrom the trade name). as necessary where they clearly protect IP rights or maintain the common identity and reputation the of franchise network. property obligations Intellectual A supplier will typically seek protect to its intellectual property (IP) rights in the contract products, including trade marks, copyright, rights, patent design rights and know-how. The Vertical Agreements Block Exemption exempts agreements which contain IP assignment or licence provisions, provided that these do not constitute the primary object the of agreement and are directly related the to use, sale or resalethe by buyer or its customers. Care should be taken when drafting IP provisions that these do an anti-competitivenot have object or effect (ie indirectly result in a prohibited restriction on the buyer’s ability trade, to in one or more the of discussed ways above). moreFor detail on the application IP of rights vertical to agreements, see The vertical agreements block exemption - Intellectual property rights in vertical agreements. Exempting restraints in franchise agreements franchise in restraints Exempting franchiseFor agreements that do not automatically fall within the Block Exemption, an assessment has be to made as whether to the pro-competitive gains outweigh thenegative effects the of restriction in order justify to an individual exemption. are: consider to Particular factors • • Practically speaking, such restrictions will usually be regarded

Company A provides Company B with a pure license a of trademark or sign the for purpose merchandising. of Company produce B to a drink with the recipe Company A provides Company B with a mould or master copy, and licenses Company produce B to and distribute copies, or Company A provides Company B with a recipe and licenses the IP rights must be assigned or licensed to, the use for by, franchisee not the other around, way (and ie IPrights provided theby franchisee the to supplier). vertical restrictions competition of which are hard core restrictions and are not exempted under the Block Exemption, and primary object must be the purchase, sale or resale goods of or services and the IP rights must simply serve implement to this) in relation the to contract goods or services, do not contain Company A sells goods resale for Company to B and licenses Company use B to its trade name market to the goods) do not constitute the primary object the of agreement (the are directly related the to distribution the of goods or services theby franchisees, where marketing forms the object the of exploitation the of IP rights (ie a franchise agreement where Reed Elsevier (UK) Limited trading as LexisNexis. Registered office 1-3 Strand Londonare WC2N trademarks 5JR Registered of Reed Elsevier in England Properties number 2746621 Inc. RegisteredVAT © LexisNexis No. 2015GB 730 0815-009. 8595 20. LexisNexis The informationand the Knowledge in this document Burst logo is current as of August 2015 and is subject to change without notice. Commission will, as a general rule, apply the principles the of Block Exemption and Vertical Guidelines the to agreement. EU vertical restraints guidelines, para 44 guidelines, para EU vertical restraints Where the agreement only or primarily concerns licensing IP of rights, is it not covered the by Block Exemption. the However, • References: • The Block Exemption does not cover the following situations, others: among • effectively because the IP rights are assigned or to licensed for use the to buyer. agreement directly concerning the assignment or licensing of IP rights the for manufacture goods. of This means that the Block Exemption applies franchise to agreements where the sale, resale, or use goods of or services can be performed more The the IP rights must be provided in an for agreement to purchase or distribute goods/provide services, rather than an • • • •

An overview of competition issues impacting vertical commercial agreements