Vertical agreements - Introduction and different types Flashcards
Vertical integration
Undertaking itself operates all (or several) functions in the distribution chain.
Article 101(1) TFEU is not applicable because of “Single Economic Entity”-doctrine
Article 102 TFEU is applicable to undertakings which hold a dominant position on the relevant market.
Commercial agents
Agents negotiates and enters into contracts on the producer’s behalf
If the agent and principal belongs to the same economic entity art. 101 does not apply
- That the agent does not bear any risk by itself (either commercially or financially);
- Acquires the property of the goods sold under the agency agreement
- Maintains at its own cost or risk stocks of the goods
Criterion of risk
- Contract-specific risks –> Risks directly related to the contracts entered into by the agent.
- Risks related to market-specific investments –> Risks undertaken by the agent in order to get appointed.
- Risks related to other activities required by the principal for the agent to perform on the market –> E.g. risks relating to after-sales services.
- If the agent bears none or only a small part of these risks, the agreement falls outside art. 101
Some clauses can still fall under article 101:
Exclusivity clauses or non-compete obligations:
- Exclusivity imposed on the retailer does not typically constitute a problem.
- Exclusivity imposed on the agent typically constitutes a problem if it entails “foreclosure” on the market
Facilitation of concerted practice:
- Can be problematic if several principals use the same agent, either by foreclosing others from using the agent, or by utilising the agent to facilitate coordination
Negative effects of vertical agreements
Inter-brand competition –> Competition between different other undertakings’ products/services (Competition between different brands)
Intra-brand competition –> Competition between different distributors/retailers of a given product/service (Competition within the same brand/product)
Restriction of intra-brand usually not a problem, unless inter-brand competition is weak
Concerned with the single market imperative –> movement of goods between member states
Four possible negative effects
- Forclosure of suppliers or buyers due to barriers to entry
- Softening of competition between supplier and its competitors
- Softening of competition between buyer and its competitors
- Creation of obstacles for market integration
Vertical agreements – typical harmful effects
- Input foreclosure
- Customer foreclosure
- Weakened competition (both inter-brand and intra-brand)
- Concerted practice
- Establishment of barriers to entry
- Barriers to integrating the market
Positive effects of vertical agreements
Free-rider problem
- One retailer invests in promoting a product, which another retailer takes advantage of, without doing the work himself
- Non-compete provision or exclusivity agreement can alleviate this problem
Removing barriers to entry (protecting ”new entrants”)
Safehavens for vertical agreements
De minimis doctrine
- Outside art. 101(1), if the non-competing undertakings to the agreement have an individual market share under 15% and no hardcore restrictions
Block exemption
- Outside art. 101(1), if the market share of buyer and seller is under 30% and no hardcore restrictions
Individual exemption under art. 101(3)
Assessment of vertical agreements
Four steps
1. Define the relevant market and calculate market shares
2. Are the market shares belox 30 % –> If yes, block exemption applies
3. If market shares over 30 %, consider if the agreement falls within art. 101(1)
4. If art. 101(1) infringed, look to see if individually exempted under art. 101(3)
Relevant factors
- The nature of the agreement –> What kind of agreement are we looking at. Have to analyze which type of agreement the parties have ventured into.
- The market position of the parties –> 15 % and 30% thresholds are what we are working with
- The market position of competitors –> Many small competitors or one big
- The position of the buyers of the contract products (buyer power)
- Entry barriers
- Vertical restrains, e.g. non-compete obligations
- The level of trade affected by the agreement
- The nature of the product
- The dynamics of the market
Direct and indirect export bans
General proposition –> Export bans will violate art. 101(1), because they violate the single market imperative
- Restriction of active sales can be permitted
- Restriction of passive sales, will not be permitted
Direct export bans
- Object restriction –> An agreement between the producer and the distributor, according to which the producer will only sell to the distributor in a specified areas, and that the producer will impose on other distributors not to sell in the same area. (restricts parallel trade)
- No exemption, either under art. 101(3) or block exemption
Indirect export bans
- Any measure which indirectly entails the same effect as a direct export ban
- Price discrimination.
- Monitoring.
- Restricting guarantees or withdrawal of discounts.
- Buying up supplies or reducing supplies to amount “needed”.
- Restrictions on cross-supplies.
Exemption under art. 101(3)
- Objectively justified (health and safety) – narrow exception
- Test of new product in a limited territory (restrictions on making active sales outside that territory are legitimate in the testing period).
- Selective distribution system (legitimate to restrict active sales if necessary to protect investments in advertising etc. in each distributor’s own territory).
- Significant investments by the distributor on a new market (territorial restriction of passive sales legitimate in two years). Old (2010) guidelines (61).
Exclusive distribution
Exclusive right for a distributor to sell in one specific territory.
- Protection from active sales into the territory from other distributors
- Reduces intra-brand competition
Not by object infringement, the effects of the agreement must be examined
- Looks at the supplier and its competitors, since loss of intra-brand is only a probloem is inter-brand is weakened
Block exemption
- Market share of the supplier and buyer are less than 30 %
- Np hardcore restrictions (restriction of passive sale, restriction of active sale when both exclusive and selective distribution)
Single branding (exclusive buying)
Obligation for the buyer (retailer) to buy all of its products at one single supplier
- Only allowed to sell that one product and therefore not allowed to sell any competitors products
- May restrict inter-brand
Assessment under Article 101(1)
- Not an object infringement
- May result in foreclosure of competitors – particularly when supplier is unavoidable trading partner (market position, must stock item)
- Duration also important – longer duration and higher market share the more likely a restriction is (above 5 years normally no-go)
- Cumulative foreclosure effect of parallel single branding networks.
Block exemption
- Market share under 30 %
- Duration of non-compete obligation is five years or less
Selective distribution
The producer only sells to authorised distributors
- Distributors can only resell to customers and or other authorised distributors.
Typically used (and allowed) in situations where a legitimate reasons, fx qualitative reasons
- Necessary due to the type of product (brand/luxury products, complex technology)
- Retailers are chosen based on objective criteria, that are non-discriminatory
- Criterias does not go beyond what is necessary
By object
- Prohobition on retailers advitising prices
- Restriction of cross-supplies between distributors
- Restriction on online sale
Block exemption
- Market share under 30 %
- No hard-core restrictions
Franchising
Franchisee opertes as an individual business, but uses the name and know-how of the franchisor
- Transfer of intellectual property rights
Restrictions that falls outside the scope of Article 101(1)
- It is decisive that the end customers have the same “experience” with all franchisees. Franchisor must therefore impose similar standards on all franchisees.
- The imposed terms must serve protection of the IP rights granted.
- No territorial market sharing or minimum reasale prices
Block exemption
- Market shares under 30 %
- No hard-core restrictions
Exclusive supply agreements
Pricing restrictions
Minimum or fixed prices
- By object –> no block exemption
- Can be exempted under art. 101(3) –> Introduction of new product, resale price maintenance can be allowed, if necessary for expanding demand
Recommended prices or maximum prices
- Falls under the VBER if the criteria are satisfied
- The measures must not on a de facto basis entail fixed resale prices.
Parity provisions
