Joint R & D
A block exemption applies to joint research and development on products and processes with joint exploitation of the results of the same. Research and development agreements may benefit from a block exemption.
This applies even between competitors, provided that their combined share in the relevant market is less than 25% at the time the agreement is entered. The exemption continues so long as this is maintained. Agreements falling outside this criteria are subject to analysis under competition law.
If parties are not in competition, the exemption applies for the duration of the research and development and for up to seven years of joint exploitation. If the parties are competitors, it will apply only if the relevant market share is less than 25%. If that share rises to 30%, a one-year period is allowed to unwind the arrangement.
Hard-core restrictions, including limitations of output, price fixing, and restriction of territories into which passive sales may be made, are prohibited. Each party must have access to the results of the research and development equally.
If there is no joint exploitation, each must be free to exploit the rights. The rights may be limited to fields where they were not competitors before the agreement.
Joint exploitation is limited to research and development, which produces intellectual property rights or know-how which are necessary for the manufacture of the products or for undertaking the relevant processes. Businesses which undertake to manufacture must fulfil orders for supplies by all the parties.
The relevant product market is that of pre-existing products with which the products will compete if it is a new product. Where the product is entirely novel, the relevant market is that for existing products for which it will substitute. If the product is entirely new, it may be difficult to define the relevant market.
If the conditions for the exemptions are not met, the research and development agreements may still be capable of being justified. There is less risk of anticompetitive effects where the research and development are at an early stage or outsourced. Where the agreements extend to production and marketing, anticompetitive risks increase significantly.
The authorities will scrutinise the arrangement to consider whether there is a disguised cartel arrangement, foreclosure of the market, increased coordination and anti-competitive behaviour.
A potential competitor is one who, in response to a small but permanent increase in price, is likely to undertake the necessary investments and arrangements in order to supply a new or improved product on the relevant market.
Vertical Agreements Assessment
The Commission has published guidelines on vertical agreements which fall outside the block exemption regulation. They include selective distribution, exclusive distribution and similar restrictions. They may still benefit from exemption under Section 101(3).
The assessment focuses on the difference between the position which would prevail but for the agreement and that which would prevail in the absence of the agreement on the relevant market. A reduction in competition amongst dealers in the same brand is less significant if there is intra-brand competition between dealers in different and competing brands.
In order for vertical agreements to be restrictive of competition in their effect, they must affect actual or potential competition to such extent that on the relevant market, negative effects on prices, output, innovation, variety and quality of goods can be expected with a reasonable degree of probability. The likely negative effects must be appreciable.
This may occur where one of the parties has obtained some degree of market power, and the agreement contributes to the maintenance or strengthening of that power or allows a party to exploit that power.
Potential Negative Effects
The Commission identifies the potential negative effects of vertical agreements as, including
- foreclosure of suppliers or buyers by raising barriers to entry or expansion;
- reduction of intra-brand competition between distributors of the same brand by softening competition between the buyer and competitors or by facilitating collusion;
- reduction of intra-brand competition by softening competition between suppliers and competitors or by facilitation of collusion;
- creating obstacles to market integration, in particular, limitations on the possibilities for consumers to purchase goods and services in the state of their choosing.
Factors in considering negative effects include
- a reduction in inter-brand competition is more problematic than in intra-brand competition;
- exclusive arrangements are generally more anti-competitive than non-exclusive arrangements;
- restraints for non-branded goods and services are generally less harmful than restraints affecting branded goods and services;
- a combination of vertical restraints generally aggravates negative effects.
Possible justifications for vertical restraints include
- solving the free rider by which one distributor may free ride on another\’s promotional efforts;
- opening up and entering new markets;
- the supplier needs to have the product launched only with premium resellers;
- the investor may not commit to the needed investment without particular distribution arrangements being in place;
- transfer of significant knowhow to the distributor may justify a non-compete obligation;
- pricing too high may create a double marginalisation problem which could be avoided by imposing a maximum resale price in order to increase the retailer’s sales efforts;
- economies of scale and distribution may be achieved by limiting the number of distributors;
- achieving uniformity and quality standardisation by creating a brand name through selective distribution or franchising;
- economies of scale and distribution achieved by limiting the number of distributors.
The strongest case is usually for vertical restraints of limited duration, which help the introduction of new complex products or protect relationship-specific investments. Capital market imperfections may require that loans be provided to the distributor, with quantity and non-compete obligations.
Factors in assessing the vertical restraints include
- nature of the agreement,
- nature of duration or percentage of total sales affected;
- the market position of competitors, in particular the market share. The stronger the position of competitors and the greater their number, the less likely parties are able to individually exercise market power and foreclose competition;
- the market position of buyer’s; where customers have buyer power, this may prevent parties from exercising market power and resolve competition issues which would otherwise exist;
- entry barriers;
- maturity of market; negative effects are more likely in a mature market;
- level of trade; restrictions on intermediate goods are less likely to be problematic than restrictions placed on distributors of final goods;
- nature of products; negative effects are more likely with heterogeneous less expensive products;
- whether there is a network of similar agreements;
- whether it is imposed rather than agreed
- the regulatory environment;
- market behaviour such as price leadership, price discrimination and participation in previous cartels.
Agency Agreements and Competition Law
The Commission’s Guidelines on Vertical Restraints define agency agreements as agreements with persons who have the power to negotiate or conclude contracts on behalf of a principal, either in its own name or in the name of the principal, for the purchase or sale of goods and services by the principal.
A genuine agent is simply a conduit. The principal bears all the commercial risks. In this case, the principal is fully responsible for the agent.
An agreement will be regarded as an agency agreement for the purpose of Commission Guidelines if the agent does not become the owner of the goods purchased and does not supply the services. Typically, the agent will not maintain stocks or contribute to supply and purchase costs. It will not take responsibility for contractual non-performance. It is not obliged to invest in sales promotion.
Relationships between principal and agent may infringe competition law. Exclusive agency agreements will not generally lead to anticompetitive effects. However, single branding and post-term non-compete provisions, which relate to inter-brand competition, may infringe completion law if they contribute to foreclosure of the relevant market in which the goods or services are purchased and sold. Some type of provision may be justified under the block exemption regulation.
Resale Price Maintenance
Resale price maintenance is generally anti-competitive. Exceptionally, minimum or fixed resale prices may allow efficiencies, which may be justified in terms of benefits to the consumer. If the supplier share is less than 30% of the market, an agreement recommending minimum resale prices may benefit from a block exemption. At levels higher than this, a competitive assessment may be required.
Resale price maintenance is presumptively invalid and unlikely to be capable of being justified. Exceptionally, it may allow greater efficiency. If a new product is being introduced, retail price maintenance may be justified in order to establish the product during its initial phase.
It may be necessary to fix resale prices in order to coordinate periodic low-price campaigns in a franchise network. It may be necessary to facilitate the sale of complex products and services. For example, it may allow retailers to provide resale services, which could not be provided if third parties could freely ride on their efforts.
Where the party’s market share is less than 15%, de minimis provisions may apply in resellers’ agreement, but not in respect of retail price maintenance.
Price recommendations to franchisees will not necessarily breach competition law, provided there is no concerted practices between the franchisor and franchisee in relation to the application of the prices concerned. Agreements relating to maximum resale or recommended prices may enjoy the benefit of the block exemption if the market shares are below 30%.
A most favoured clause requires a supplier to give the purchaser price or terms at least as good as those provided to others. The supplier may be obliged to meet or better third-party offers made to the purchaser. Such clauses may allow buyers to benefit from reduced prices and promote competition. However, they may have anticompetitive effects by way of coordinating prices and facilitating collusion.
Clauses which oblige the purchaser to disclose the identity of the third party, making the better offer, may assist collusion. In another context, it may facilitate exclusivity by enabling the distributor to match any third-party competitor.
An exclusive distribution agreement grants a distributor exclusivity in respect of a particular category or type of goods or customer within a territory. The distributor is usually restricted from making sales outside of this territory. In contrast to an exclusive distributor, a selective distributor may sell to authorised dealers and end-users. They do not have exclusivity in terms of territory.
Exclusive and selective distributor arrangements are potentially anti-competitive. They may reduce intra-brand competition, particularly when most or all suppliers are part of the exclusive distribution chain.
Exclusive distribution agreements may come within the block exemption for vertical agreements. Where the market shares are less than 30% or where there are hard-core restrictions, the block exemption will not be available. Beyond the exemption, a competition analysis may uphold the agreement.
In making the analysis, the market position of the supplier and its competitors will be important. Diminution of inter-brand competition will tend towards an anticompetitive finding. However, strong inter-brand competition may allow an exemption.
Where the market is dominated by a number of competitors, each operating its own distribution network, the risk of collusion and reduction of inter-brand competition will be considered. The block exemption may be withdrawn in cases where the supplier has less than 30% market share if there is any evidence of this occurring.
Distribution agreements may bring benefits which allow the creation and support of a new brand through economies of scale. Provided a fair of these efficiencies is made available to the public, then the exemption may apply.
The level of the distribution at which the restriction apply is relevant. Restrictions at lower levels are more likely to impede consumer choice. Restrictions higher up the chain may be less objectionable where they do not foreclose competition to the same extent.
Resale restrictions may be permissible in this context, including restrictions on active sales outside the territory of the exclusive distributor and restrictions on sales to unauthorised dealers within the territory. Fixed or minimum resale prices and restrictions on resale are impermissible hard-core restrictions.
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