Vertical Agreements [EU]

Exemption for vertical supply and distribution agreements

Regulation (EU) No 330/2010 — application of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices gives a block exemption from Article 101(1) TFEU to vertical agreements* which fulfil certain requirements. These agreements may, for instance, help a manufacturer to enter a new market, or avoid the situation whereby one distributor ‘free rides’ on the promotional efforts of another distributor, or allow a supplier to depreciate an investment made for a particular client.

Certain requirements must be fulfilled before a particular vertical agreement is exempt from Article 101(1) TFEU:

• the agreement does not contain any of the ‘hardcore’ restrictions set out in the regulation;
• there must be a market share cap of 30% for both suppliers and buyers;
• the regulation contains conditions relating to 3 specific restrictions.

‘Hardcore’ restrictions

There are 5 restrictions that lead to the exclusion of the whole agreement from the benefit of the regulation, even if the market shares of the supplier and buyer are below 30%. They are considered to be severe restrictions of competition because of the likely harm they cause to consumers. In most cases they will be prohibited and it is considered unlikely that vertical agreements containing them fulfil the conditions of Article 101(3) TFEU:

1. suppliers are not allowed to fix the (minimum) price at which distributors can resell their products (resale price maintenance);
2. market-partitioning by territory or by customer is prohibited. Distributors must remain free to decide where and to whom they sell. The regulation contains exceptions to this rule, which, for instance, enable companies to operate an exclusive distribution system or a selective distribution system;
3. selected distributors, while being prohibited to sell to unauthorised distributors, cannot be restricted in the end-users to whom they may sell;
4. selected distributors must remain free to sell or purchase the contract goods to or from other selected distributors within the network;
5. an agreement between a manufacturer of spare parts and a buyer which incorporates these parts into its own products may not prevent or restrict sales by the manufacturer of these spare parts to end-users, independent repairers or service providers.

Conditions

A vertical agreement is covered by this regulation if neither the supplier nor the buyer of the goods or services has a market share exceeding 30%. For the supplier, it is its market share on the relevant supply market, i.e. the market on which it sells the goods or services that is decisive for the application of the block exemption. For the buyer, it is its market share on the relevant purchase market, i.e. the market on which it purchases the goods or services, which is decisive for the application of the regulation.

The regulation applies to all vertical restraints other than those mentioned above. However, it does impose specific conditions on 3 vertical restraints:

• obligations not to compete during the contract;
• obligations not to compete after termination of the contract;
• the exclusion of specific brands in a selective distribution system.

When these conditions are not fulfilled, these vertical restraints are excluded from the exemption by the regulation. However, the regulation continues to apply to the remaining part of the vertical agreement if that part can operate independently from the non-exempted vertical restraints.

It has applied since 1 June 2010 and will expire on 31 May 2022.

Guidelines on vertical restraints

The European Commission has also published guidelines on vertical restraints. These describe the approach taken towards vertical agreements not covered by the regulation.

They help companies to check that their vertical agreements (agreements between companies operating at different levels of the production or distribution chain, such as manufacturers and wholesalers or retailers, to buy and sell goods or services) comply with EU competition rules, as laid down in Article 101 of the Treaty on the Functioning of the European Union (TFEU).

They complement Regulation (EU) No 330/2010, the EU’s Block Exemption Regulation (BER), which renders the prohibition of Article 101(1) TFEU inapplicable to vertical agreements meeting certain requirements and provides such agreements with a ‘safe harbour’.

They set out general principles for assessing vertical restraints and provide guidance for the assessment of the most common types of vertical restraints:

• single branding (non-compete obligations)
• exclusive distribution;
• exclusive customer allocation;
• selective distribution;
• franchising;
• exclusive supply;
• upfront access payments;
• category management agreements;
• tying; and
  resale price restrictions.

They describe the general framework of analysis and the enforcement policy used by the European Commission in individual cases concerning vertical agreements.

Article 101 TFEU

Under Article 101(1) TFEU, agreements between firms that may affect trade between EU countries and that have as their object or effect to prevent, restrict or distort competition are prohibited.
Article 101(2) TFEU states that agreements, concerted practices and decisions by associations of undertakings prohibited under Article 101(1) TFEU are null and void.
Article 101(3) TFEU, however, allows certain agreements — if they create sufficient benefits that outweigh the anti-competitive effects — to be exempt from the prohibition in Article 101(1).
The main objective of Article 101 is to ensure that firms do not use agreements, including vertical agreements, to restrict competition to the detriment of consumers.

Vertical agreements which generally fall outside the scope of Article 101

According to the guidelines, the following types of vertical agreements fall outside the scope of Article 101:

• agreements of minor importance and between SMEs, which do not appreciably restrict competition because of the small market share of the parties;
• agency agreements*, the determining factor in regard to the application of Article 101 being the financial or commercial risk borne by the agent in relation to the activities for which he has been appointed as agent by the principal;
• subcontracting agreements* so long as the technology or equipment provided by the contractor is necessary to enable the subcontractor to produce the products. However, if the contractor imposes restrictions on the subcontractor such as obliging it not to conduct or exploit its own research and development or not to produce for third parties in general, the agreement may fall within the scope of Article 101 TFEU.

Application of the BER

For most vertical restraints, competition concerns only arise if there is insufficient competition at one or more levels of trade. This means that there must be some degree of market power at the level of the supplier or the buyer or at both levels.

It is the supplier’s market share on the market where it sells the contract goods or services and the buyer’s market share on the market where it purchases the contract goods or services which determine the applicability of the block exemption. For the block exemption to apply, the supplier’s and the buyer’s market share must each be 30% or less (provided that the agreement does not contain hardcore restrictions and that the clause concerned is not an excluded restriction).

However, exceeding the market share threshold of 30% does not create a presumption of illegality. This threshold serves only to distinguish those agreements which benefit from a presumption of legality from those which require individual examination. The guidelines assist firms in carrying out such an examination.

The BER (Article 4) contains a list of hardcore restrictions which lead to the exclusion of the vertical agreement from the scope of the BER’s application. This would mean there is a presumption that the agreement falls within the scope of Article 101(1) TFEU and is unlikely to fulfil the conditions of Article 101(3) TFEU.

The BER (Article 5) also contains a list of excluded restrictions. These restrictions are not covered by the BER even if the market share threshold is not exceeded. However, the BER continues to apply to the remaining part of the vertical agreement if that part is able to be excluded from the non-exempted restriction.
Withdrawal of the block exemption and disapplication of the BER.

Withdrawal

The presumption of legality conferred by the BER may be withdrawn. This arises where a vertical agreement, considered either in isolation or together with similar agreements enforced by competing suppliers or buyers, comes within the scope of Article 101(1) and does not fulfil all the conditions of Article 101(3). This might arise for example when, on a given market, certain suppliers practise purely qualitative selective distribution while other suppliers practise quantitative selective distribution.
Where the withdrawal procedure is applied, the burden of proof that the agreement is within the scope of Article 101(1) and that the agreement does not fulfil one or several of the conditions of Article 101(3) falls on the Commission.

The Commission has the exclusive power to withdraw the benefit of the BER in respect of vertical agreements restricting competition on a relevant geographic market which is wider than the territory of a single EU country.
Article 6 of the BER allows the Commission to exclude from the scope of the BER parallel networks of similar vertical restraints where these cover more than 50% of a relevant market.

Market definition and market share calculation

The Commission notice on the definition of the relevant market for the purposes of competition law already provides guidance on the rules, criteria and evidence it uses when considering market definition issues.

A section of the guidelines is devoted to:

the relevant market for the calculation of the 30% market share threshold under the BER — the market share of both the supplier and the buyer are decisive in determining if the block exemption applies;
the calculation of market shares under the BER based in principle on value figures but, where these are not available, on substantiated estimates.

Assessment

The following general rules apply when assessing vertical restraints in situations where the BER does not apply:
in the case of an individual examination by the Commission, the Commission bears the burden of proof that the agreement in question infringes Article 101(1) TFEU.

Firms claiming the benefit of Article 101(3) TFEU bear the burden of proving that the conditions are met;

• to assess whether a vertical agreement has the effect of restricting competition, the Commission considers the actual or likely future situation in the relevant market with the vertical restraints in place as opposed to what would have been the situation in the absence of such vertical restraints;
• appreciable anticompetitive effects are likely to occur when at least one of the parties has or obtains some degree of market power and the agreement contributes to creating, maintaining or strengthening that market power or allows the parties to exploit that power.

The negative effects that may result from vertical restraints which EU competition law aims at preventing include:

• the anti-competitive foreclosure of other suppliers or other buyers;
• the softening of competition and facilitation of collusion between the supplier and its competitors;
• the softening of competition between the buyer and its competitors and/or facilitation of collusion amongst these competitors;
• the creation of obstacles to market integration.

On a market where individual distributors distribute the brand(s) of only one supplier, less competition between the distributors of the same brand will tend to lead to less intra-brand competition. However, if inter-brand competition is strong, it is unlikely that less intra-brand competition will have negative effects for consumers.
Exclusive arrangements are generally worse for competition than non-exclusive arrangements. For example, under a non-compete obligation, the buyer purchases only one brand. A minimum purchase requirement, on the other hand, may leave the buyer scope to purchase competing goods and the degree of foreclosure may therefore be less.

Vertical restraints agreed for non-branded products are in general less harmful than restraints affecting the distribution of branded products. The distinction between non-branded and branded products often coincides with the distinction between intermediate products and final products.

It is important to recognise that vertical restraints may have positive effects by, in particular, promoting non-price competition and improved quality of services. The case of efficiencies is in general strongest for vertical restraints of a limited duration which help the introduction of new complex products, which protect relationship-specific investments or which facilitate the transfer of know-how.

Motor vehicles – block exemption

Regulation (EU) No 461/2010 grants the motor vehicle sector a specific block exemption for vertical agreements for the purchase, sale or resale of new motor vehicles and vertical agreements for the provision of repair and maintenance services for such vehicles and for the distribution of spare parts.

Regulation (EU) No 461/2010 applies Regulation (EU) No 330/2010 to vertical agreements concerning the purchase, sale or resale of new motor vehicles.

Vertical agreements relating to the motor vehicle aftermarket

Regulation (EU) No 461/2010 also applies Regulation (EU) No 330/2010 to vertical agreements concerning conditions for the purchase, sale or resale of spare parts for motor vehicles, or for the provision of repair and maintenance services for motor vehicles, so long as these fulfil the requirements for exemption under Regulation (EU) No 330/2010, and do not contain any of the following hardcore restrictions described in Regulation (EU) No 461/2010:

• restriction of the sales of spare parts for motor vehicles by members of a selective distribution system;
• restriction, agreed between a supplier of spare parts or repair equipment and a manufacturer of motor vehicles, of the supplier’s ability to sell those goods to authorised or independent distributors, repairers or end users;
• restriction, agreed between a manufacturer of motor vehicles which uses components for the initial assembly of motor vehicles and the supplier of such components, of the supplier’s ability to visibly place its trade mark or logo on the components supplied.

In accordance with Regulation No 19/65/EEC, when parallel networks of similar vertical restraints cover more than 50 % of a relevant market, the European Commission may decide that this regulation does not apply to vertical agreements that include specific restraints relating to that market.

It entered into force on 1 June 2010 and will remain valid until 31 May 2023.