Competition Law Notes on Vertical Restraints

Read our FREE Competition Law Notes on Vertical Restraints. Ideal for exam revision and general reference.

Non-price vertical restraints

Tying

• Exclusive distribution agreements
• Selective Distribution Agreements
• Single Branding Agreements
• Franchise Agreements
• ‘Hard-core’ restraints
• Resale price maintenance
• Export Bans

• Raising rivals costs
• Induce rivals to exit the industry by raising their costs
• higher cost rival quickly reduces output allowing the predator to immediately raise price or market share
• Vertical restraints: justifications
• Induce the provision of services
• distribution efficiencies
• facilitate the introduction of a new product
• ensures sufficient number of retail outlets
• quality certification by certain outlets
• prestige products

• Anticompetitive aspects of vertical
• Market partition
• Resale price maintenance
• US law under s1 Sherman Act

Rule of reason approach adopted in Continental TV inc v GTE Sylvania Inc 433 US 36 (1977)

While intrabrand competition is reduced interbrand competition may be increased allowing the manufacturer to achieve certain efficiencies in the distribution of his products

• Costs imposed by vertical restraints
• consumers unable to purchase product without service
• increased product differentiation which increases costs
• may facilitate price discrimination
• free riding is over stated
• Article 81(1)

Prohibits:

agreements which may affect trade and which have as their object or effect the prevention, restriction or distortion of competition

Art 81(2) such agreements are void unless exempted under art 81(3)

• Art 81 (3)

Agreement.. which contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing customers a fair share of the resulting benefit, and which does not….

• Art 81(3) continued

(a) impose .. restrictions which are not indispensable to the attainment of these objectives;

(b) afford .. the possibility of eliminating competition in respect of a substantial part of the products in question.

EU case law

• resale price maintenance

RPM will always be regarded as a restriction on competition within meaning of Art 81(1)

Pronuptia de Paris GmbH v Pronuptia de Paris [1986] 1 CMLR 414  [ECJ]

generally a franchise will not infringe art 81 but will if contain RPM “provisions which impair the franchisee’s freedom to determine his own prices are restrictive of competition”

SA Binon & Cie v SA Agence et Messageries de la Presse [1985] 3 CMLR 800 [ECJ]

“provisions which fix the prices to be observed in contracts with third parties constitute, of themselves, a restriction on competition within the meaning of Article 81(1)”

• Exclusive distribution agreements

Consten and Grundig v Commission [1966] CMLR 416  [ECJ]

object to create absolute territorial protection with no possibility of parallel trade

object the restriction of competition so assessment of its effect unnecessary

Selective Distribution

Metro SB Grossmarkte v Commission (1978) 2 CMLR 1 [ECJ]

Selective distribution system is unobjectionable as long as the resellers were chosen on the basis of objective criteria which had a genuine relationship to the product in question and not applied in arbitrary way to discriminate against certain retailers

   GlaxoSmithKline Services Unlimited v Commission [2006] 5 CMLR 1623 [CFI]

• An agreement to limit parallel trade could only be considered to have as its object the restriction of competition in so far as it could be presumed to deprive final consumers of those advantages
• The specific characteristics of the pharmaceutical sector were important
• Vichy v Commission [1992] ECR II -415 [CFI]

Tying agreements

Hotel may be tied to a particular beer brewer. In exchange for certain benefits from the brewer – loans, the lease of premises, furniture, promotion - the hotel is obliged to purchase beer and sometimes other drinks exclusively from the brewer and not to sell competing products

Delimitis v Henninger Bräu [1992] 5CMLR 210 [ECJ]

Market – ‘distribution of beer in premises for the sale and consumption of drinks’

• nature and extent of the agreements
• number of outlets tied
• duration of the agreements
• examine the possibility of new entry
• level of competition on the market

cumulative effect of the agreements – do they have an appreciable effect on competition or is the effect insignificant?

   Société La Technique Minière v Maschinenbau Ulm GmbH [1966] CMLR 357  (‘STM’)   [ECJ]

Must look at agreement in the light of the competition which would occur if the agreement in question was not or had not been made

• nature and quantity of the products covered by the agreement
• the market power of the grantor
• the number of agreements
• is the agreement necessary for the penetration of a new market?
• the opportunities permitted to other competitors by way of parallel trade etc

• Ancillary Restraints

Agreements such as joint ventures, non-restrictive distribution which do not have as their object or effect the restriction of competition but contain other ancillary restraints

   Remin BV and NV Verenigde Bedrijven Nutricia v Commission [1987] 1 CMLR 1 [ECJ]

Would not purchase business unless assured vendor will not set up business in competition within geographic area. Therefore leads to an increase in competition because increases the number of undertakings in the market

Duration and scope must be limited to what necessary for the sale

Must be directly related and necessary to the implementation and proportionate to the main non-restrictive agreement

   Pronuptia de Paris GmbH v Pronuptia de Paris [1986] 1 CMLR 414 [ECJ] [Franchise]

Restraints must be subordinate to the implementation of the agreement

If on the basis of objective factors it can be concluded that without the restriction the main non-restrictive transaction would be difficult or impossible to implement

Those not necessary are those that share markets between the franchisor and franchisees; absolute territorial protection; restriction of price competition – Resale Price Maintenance

   Métropole Télévision v Commission [2001] 5 CMLR 1236 [CFI]

Creation of Joint Venture for the entering of the pay TV market included some restrictive clauses giving the parties the exclusive right to broadcast special interest channels and the right of first refusal with respect to new special interest channels

In the assessment of ancillary restraints you do not weigh the pro and anti-competitive aspects under article 81(1) but under article 81(3)

If considered objectively the duration and scope of the ancillary restraints exceed what is necessary, they must be assessed separately  under art 81(3)

Reform of EC vertical restraints

Green Paper on Vertical Restraints in EC Competition Policy (1996)4/

Communication from the Commission on the application of the Community competition rules on vertical restraints (Follow up to the Green Paper on Vertical Restraints) (1998) http

Reform of EC vertical restraints

Commission Regulation (EC) No 2790/1999 of 22 December 1999 on the application of Article 81(3) of the Treaty to categories of vertical agreements and concerted practices (Block Exemption Regulation)

Commission Notice, Guidelines on Vertical Restraints (May 2000)

Block Exemption Regulation 2790/1999

”Vertical agreements” - are agreements for the sale or purchase of goods or services between companies operating at different levels of the production or distribution chain, including:

industrial supply agreements,

exclusive and selective distribution agreements, franchising agreements and single branding agreements in, e.g. the beer and petrol sectors.

EC Commission (1999)

Vertical agreements may contain certain restrictions to competition which, in the absence of significant market power by the companies involved, nevertheless generally improve production and distribution of the goods and services concerned.

However, such agreements can also have negative effects on the market, in particular by partitioning markets or by foreclosing markets.

Block Exemption Regulation 2790/1999

The rules embody a shift from the formalistic regulatory approach underlying the old legislation towards a more economic approach in the assessment of vertical agreements under the EU competition rules.

Block Exemption Regulation (December 1999, in force 1 June 2000)

Aim to simplify rules and reduce the regulatory burden for companies, while ensuring a more effective control of vertical restraints implemented by companies holding significant market power.

EC Block exemption (safe harbour)

Restricted to agreements where the supplier has no more than 30 % of the relevant market.

Outside exemption (a) – (e)

(a) RPM  (excluding maximum)

Outside exemption (a) – (e)

(b) The restriction of the territory into which, or of the customers to whom, the buyer may sell the good or services. EXCEPT

….restrictions are within the exemption

the restriction of active sales into the exclusive territory or to an exclusive customer group reserved to the supplier or allocated by the supplier to another buyer

the restriction of sales to end users by a buyer operating at the wholesale level of trade

the restriction of sales to unauthorized distributers by the members of a selective distribution system

the restriction of the buyers ability to sell components to customers who would use them to manufacture the same type of goods as those produced by the supplier

Outside exemption (a) – (e)

( c)The restriction of active or passive sales to end users by members of a selective distribution system operating at the retail level of trade

(d) Restrictions on cross-supplies between distributors within a selective distribution system

(e) Restrictions on sales of spare parts to independent repairers/service providers.

Active Sales: In some circumstances producer may restrict actively approaching customers in another territory or customer group by direct mail, targeted advertising

Passive Sales: Producer may not restrict distributers selling to any customer if it is an unsolicited order. E.g. through the Internet

Other restrictions are not exempted but may be compatible

i.e. “non-compete” obligations – requiring distributers to resell only the brands of one supplier may be compatible if required because of long term investment but these can not be beyond 5 years

Above 30% market share threshold

Vertical agreements will not be covered by the Block Exemption Regulation but are not automatically presumed to be illegal either. They require individual assessment under Article 81(3)