competition.vertical agreements

Vertical agreements

Julija Jerneva

• Vertical restraints are generally less harmful than horizontal restraints and may provide substantial scope for efficiencies

De minimis

• vertical agreements entered into by non- competing undertakings whose individual market share on the relevant market does not exceed 15 % are generally considered to fall outside the scope of Article 101(1)

• But:• subject to cumulative effect and hardcore restrictions

Exceptions to Article 101 (1)

• Genuine agency agreements

• Subcontracting agreements

• Franchise agreements

Block Exemption Regulation

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

• Supplier market share less than 30%

• Buyer market share less than 30%

• No hardcore restrictions

Hardcore restrictions

(a) the restriction of the buyer's ability to determine its sale price, without prejudice to the possibility of the supplier to impose a maximum sale price or recommend a sale price, provided that they do not amount to a fixed or minimum sale price as a result of pressure from, or incentives offered by, any of the parties;

Hardcore restrictions (b) the restriction of the territory into which, or of the customers to

whom, a buyer party to the agreement, without prejudice to a restriction on its place of establishment, may sell the contract goods or services, except:

(i) 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, where such a restriction does not limit sales by the customers of the buyer,

Active/passive sales

• ‘Active’ sales mean actively approaching individual customers by for instance direct mail, including the sending of unsolicited e-mails, or visits;

• ‘Passive’ sales mean responding to unsolicited requests from individual customers including delivery of goods or services to such customers

• Internet?

Sales through internet: hardcore restrictions

(a) an agreement that the (exclusive) distributor shall prevent customers located in another (exclusive) territory from viewing its website or shall automatically re-rout its customers to the manufacturer's or other (exclusive) distributors' websites.


(b) an agreement that the (exclusive) distributor shall terminate consumers' transactions over the internet once their credit card data reveal an address that is not within the distributor's (exclusive) territory


(c) an agreement that the distributor shall limit its proportion of overall sales made over the internet.


(d) an agreement that the distributor shall pay a higher price for products intended to be resold by the distributor online than for products intended to be resold offline.

• Unless it can be objectively justified

Free riding

• A distributor which will be the first to sell a new brand or the first to sell an existing brand on a new market

+ substantial investments (often sunk investments)

= restrictions of passive and active sales can be necessary during the first two years


(b) the restriction of the territory into which, or of the customers to whom, a buyer party to the agreement, without prejudice to a restriction on its place of establishment, may sell the contract goods or services, except:

(ii) the restriction of sales to end users by a buyer operating at the wholesale level of trade,



(iii) the restriction of sales by the members of a selective distribution system to unauthorised distributors within the territory reserved by the supplier to operate that system, and



(iv) the restriction of the buyer's ability to sell components, supplied for the purposes of incorporation, to customers who would use them to manufacture the same type of goods as those produced by the supplier;


(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, without prejudice to the possibility of prohibiting a member of the system from operating out of an unauthorised place of establishment;


(d) the restriction of cross-supplies between distributors within a selective distribution system, including between distributors operating at different level of trade, unless:

• appointed wholesalers located in different territories are obliged to invest in promotional activities in ‘their’ territories to support the sales by appointed retailers


(e) the restriction, agreed between a supplier of components and a buyer who incorporates those components, of the supplier’s ability to sell the components as spare parts to end-users or to repairers or other service providers not entrusted by the buyer with the repair or servicing of its goods.

Excluded (from exemption) restrictions

(a) any direct or indirect non-compete obligation, the duration of which is indefinite or exceeds five years;

• more than 80 % of the buyer's total purchases

• Unless the contract goods or services are sold by the buyer from premises and land owned by the supplier or leased by the supplier from third parties not connected with the buyer, provided that the duration of the non-compete obligation does not exceed the period of occupancy of the premises and land by the buyer


(b) any direct or indirect obligation causing the buyer, after termination of the agreement, not to manufacture, purchase, sell or resell goods or services, unless:

a) the obligation relates to goods or services which compete with the contract goods or services;

(b) the obligation is limited to the premises and land from which the buyer has operated during the contract period;

(c) the obligation is indispensable to protect know-how transferred by the supplier to the buyer;

(d) the duration of the obligation is limited to a period of one year after termination of the agreement.


(c) any direct or indirect obligation causing the members of a selective distribution system not to sell the brands of particular competing suppliers.

Block Exemption Regulation

• Regulation may be non-applicable where:• competition is significantly restricted by the cumulative effect of parallel

networks of similar vertical agreements practised by competing suppliers or buyers

• Regulation is non-applicable where:• networks of similar vertical restraints cover more than 50 % of a

relevant market

If block exemption does not apply

• No presumption of illegality

• Object or effect?

• Even if by either object or effect the agreement restricts competition, additional analysis must be performed on the basis of Article 101(3) rules (see Commission guidelines for the assessment of standard vertical restraints)

Object or effect?• “hardcore restrictions” (as opposed to “excluded restrictions”) are

“object cases”• Hardcore restrictions: Article 4 of the Commission regulation

• Excluded restrictions: Article 5 of the Commission regulation

• Object cases = it is enough to establish the “fact” = violation of Article 101(1)

• All other cases to be analysed on the basis of the “effects” of the agreement on the market(s)

Assessment • For vertical agreements to be restrictive of competition

by effect: • they must affect actual or potential competition to such an extent that on

the relevant market negative effects on: • prices,

• output,

• innovation,

• or the variety or quality of goods and services

• such effects should be expected with a reasonable degree of probability.

• the likely negative effects on competition must be appreciable

Likelihood of negative appreciable effects

• at least one of the parties has or obtains some degree of market power and the agreement contributes to the creation, maintenance or strengthening of that market power or allows the parties to exploit such market power

Market power

• Market power is the ability to maintain prices above competitive levels or to maintain output in terms of product quantities, product quality and variety or innovation below competitive levels for a not insignificant period of time.

• (market power ≠ dominance)

Frequent negative effects

• anticompetitive foreclosure of other suppliers or other buyers by raising barriers to entry or expansion


• softening of competition between the supplier and its competitors and/or facilitation of collusion amongst these suppliers, often referred to as reduction of inter- brand competition


• softening of competition between the buyer and its competitors and/or facilitation of collusion amongst these competitors, often referred to as reduction of intra-brand competition if it concerns distributors' competition on the basis of the brand or product of the same supplier


• the creation of obstacles to market integration, including, above all, limitations on the possibilities for consumers to purchase goods or services in any Member State they may choose

Inter-brand and intra-brand competition

• if inter-brand competition is fierce, it is unlikely that a reduction of intra-brand competition will have negative effects for consumers

Branded and non-branded goods

• Branding tends to increase product differentiation and reduce substitutability of the product, leading to a reduced elasticity of demand and an increased possibility to raise price

• Vertical restraints for non-branded goods and services are in general less harmful

Effects: which markets?

• Both downstream and upstream markets!

• A manufactures luxury goods and is willing to enter the Belgian market

• In Belgium certain retailers (B, C and D) have a reputation for stocking only ‘quality’ products

• Other retailers do not have such a reputation

• However, B, C and D have already entered into various distribution agreements with the competitors of A and therefore have no possibility to accept A’s goods anymore

Methodology of analysis• nature of the agreement

• market position of the parties

• market position of competitors

• market position of buyers of the contract products

• entry barriers

• maturity of the market

• level of trade (which level of production/distribution)

• nature of the product

Most common vertical restraints

• Single branding

• Exclusive distribution

• Exclusive customer allocation

• Selective distribution

• Exclusive supply

• Upfront access payments

• Category Management Agreements

• Tying

• Resale price restrictions

Single branding

• an obligation or incentive scheme which makes the buyer purchase more than 80% of its requirements on a particular market from only one supplier

• minimum purchase requirements, stocking requirements or non-linear pricing, such as conditional rebate schemes or a two-part tariff (fixed fee plus a price per unit)

• ‘English clause’ requires the buyer to report any better offer and allowing him only to accept such an offer when the supplier does not match it

Exclusive distribution

• the supplier agrees to sell its products to only one distributor for resale in a particular territory

• risks: reduced intra-brand competition and market partitioning, which may facilitate price discrimination; foreclosure of other distributors and therewith reduce competition at that level

• But if strong competitors: the reduction in intra-brand competition is outweighed by sufficient inter-brand competition

Exclusive customer allocation• the supplier agrees to sell its products to only one distributor for

resale to a particular group of customers

• mainly applied to intermediate products and at the wholesale level when it concerns final products, where customer groups with different specific requirements concerning the product can be distinguished

• may lead to efficiencies, especially when the distributors are required to make investments in for instance specific equipment, skills or know-how to adapt to the requirements of their group of customers

• risks: reduced intra-brand competition and market partitioning, which may facilitate price discrimination; foreclosure of other distributors and therewith reduce competition at that level

Selective distribution

• not a restriction on active selling to a territory but a restriction on any sales to non-authorised distributors, leaving only appointed dealers and final customers as possible buyers

• purely qualitative selective distribution and quantitative selective distribution

• The characteristics of the product must be such as to require selective distribution

Purely qualitative selective distribution

• Purely qualitative selective distribution selects dealers only on the basis of objective criteria required by the nature of the product such as training of sales personnel, the service provided at the point of sale, a certain range of the products being sold etc.

= no direct limit on the number of distributors

Quantitative selective distribution

• Quantitative selective distribution: further criteria for selection that more directly limit the potential number of dealers by, for instance, requiring minimum or maximum sales, by fixing the number of dealers, etc

Exclusive supply

• the supplier is obliged or induced to sell the contract products only or mainly (quantity forcing) to one buyer, in general or for a particular use

• The main competition risk of exclusive supply is anticompetitive foreclosure of other buyers

Upfront access payments

• fixed fees that suppliers pay to distributors in the framework of a vertical relationship at the beginning of a relevant period, in order to get access to their distribution network

• may have the same downstream foreclosure effect as an exclusive supply type of obligation

• are likely to increase the price charged by the supplier for the contract products

Category Management Agreements

• within a distribution agreement, the distributor entrusts the supplier (the ‘category captain’) with the marketing of a category of products including in general not only the supplier's products, but also the products of its competitors

Tying • customers that purchase one product (the tying product) are

required also to purchase another distinct product (the tied product) from the same supplier or someone designated by him

• Whether products will be considered as distinct depends on customer demand

• may lead to anticompetitive foreclosure effects on the tied market, the tying market, or both at the same time

• may lead to less competition for buyers interested in buying the tied product, but not the tying product

Resale price restrictions • ResalePriceMaintenance:

• Prohibited: fixed and minimum

• Allowed: maximum and recommended (but genuinely recommended!)

• RPM can still be exempted under Article 101(3)• New product (to allow the distributors increase marketing efforts without

being under pressure from each other)

• franchise system

• a coordinated short term low price campaign (2 to 6 weeks in most cases) which will also benefit the consumers

‘hold-up problem’ • A is a manufacturer of widgets

• B is a manufacturer of widgetetts, which generally requires widgets to produce

• B is willing to start production of new improved version of widgetetts, which requires seriously improved widgets

• A agrees to invest into the production of new type of widgets, but requires exclusivity of purchase from B for the period of 10 years (A will recover the costs of investment within 8 years)

• B’s competitor C is also considering the new improved version of widgetetts but will not start manufacturing earlier than in 3 years’ time

‘know-how hold-up problem’ • A is a manufacturer of midgets

• B is willing to start the production of midgetetts, which would require midgets

• Usage of midgets in the production is complicated and requires substantial know-how passing from A to B

• A offers to produce midgetetts himself, but B in turn offers exclusive purchase obligation from A for 10 years

‘vertical externality issue’

• A manufactures cositas and the varied costs drop substantially when the sales are up

• B is the distributor of cositas in UK

• A imposes on B maximum retail price on cositas to ensure that the sales are up

• B asks in return exclusive distribution in UK

• Another distributor C is willing to start selling cositas in UK, so A is choosing between exclusive and selective distribution

Other positive effects

• See Commission guidelines (para 107)

Thank you!

• Julija Jerneva

• Mobile: +371 29131597

competition.vertical agreements

Law