WS 8 – DISTRIBUTION AGREEMENTS

Introduction to Question structure EC OR UK

Article 81 State that Art 81 prohibits:

‘all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market.’

Article 81(2) ‘Any agreement or decisions prohibited pursuant to this article shall be automatically void.’

Chapter I Prohibition

Section 2 Competition Act 1998: ‘agreements between undertakings, decisions by associations of undertakings or concerted practices which:

(a) may affect trade within the UK, and(b) have as their object or effect the prevention, restriction or distortion of competition within the UK,

are prohibited unless they are exempt.’

2(4) says any agreement prohibited by section 2(1) is void

Article 81 EC - Does agreement infringe article 81 or the chapter I prohibition?

1 What type of agreement is it?

1. Exclusive Distribution Agreement

S agrees not to appoint another distributor in D’s territory and to not supply goods itself in that territory. Therefore, D is the only outlet for goods in the territory (excluding passive sales from elsewhere)

S commonly requires D not to sell competing products and meet sales targets.

2. Sole Distribution Agreement

S agrees not to appoint another distributor in D’s territory but retains the right to sell the goods in D’s territory himself.

3. Selective Distribution Agreement – for luxury products or tech products

S controls who D can sell to.Helps maintain brand image and luxuriousness of itemAllows customers a specialist and official after-sales or repair service, if goods so require.

2Does agreement infringe article 81 or the chapter I prohibition?

Requirements to infringe:

1 Art 81(1) requires either:

Agreements:o State whether the agreement is:

Formal Informal Non-binding Verbal

o Look at terms of the agreement – look out for “D buys from S” and “D can resale”.

1

decisions by associations of undertakings – trade associations decisions by concerted practices

2 Between two or more undertakings.

State that the two undertakings (companies) are independent of each other

3 Which may affect trade to an appreciable extent (NAOMI) between member states (article 81) or UK (Ch.I)

TEST – is the effect felt in the UK OR is it beyond one MS border??

For example: only one distributor for an area – therefore only 1 route between UK and an MS

Is the relevant agreement/decision/practice alters or has the potential to alter the natural flow of trade between member states.

NB – look for hint in the question – normally told to discuss either EC or UK or both?

4 Object or effect is the prevention, restriction or distortion of competition within the common market (article 81) or within the UK (Chapter I)

Art 81(1) & Chapter I (s.2) wording is the same:

The following list if from Art.81(1).. if within here then term is OBJECT:

(a) directly or indirectly fix purchase or selling prices or any other trading conditions; (b) limit or control production, markets, technical development, or investment; (c) share markets or sources of supply; (d) apply dissimilar conditions to equivalent transactions with other trading parties,

thereby placing them at a competitive disadvantage; (e) make the conclusion of contracts subject to acceptance by the other parties of

supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.

object – look at specific terms of agreementeffect – look at impact on common market

NB – do not consider the intentions of the parties

Clause ObjectIs it in the Art 81(1) / CH I list?

Effect

Distribution Agreement

No No Breach

Exclusivity No No Breach

Price Fixing YES – Art 81(1)(a) / S.2 No need to mention effect

Minimum purchase

No Possible breach – if it forces D to focus on S’s products rather than some other S.

2

Export Ban YES No need to mention effect

Challenging Trade Mark validity

No Probably in the future.

Non-compete obligation

No Probably breach – restraint of trade

2. consequence of infringement

Breach of article 81: (i.e. affects trade between member states)

a. 81(2) says offending term is void. Agreement is void unless term can be severed which is unlikely. So agreement is unenforceable.

b. EC commission can fine the parties up to 10% of worldwide turnover under article 23 of regulation 1/2003 for both parties

c. EC shall order the parties to cease infringing activities and investigate parties

d. As article 81 is directly effective, third parties suffering loss from infringement can bring claims for damages and / or injunctions in national courts.

e. If OFT is investigating – Dir disqualified for max 15 years s9A CDPA86

Breach of Chater I prohibition : (i.e. only affects trade within UK)

a. Agreement void under S.2(4) Comp Act – unenforceable

NB – beware – where S is trying to stop a D selling outside of his exclusive area – can be used as defence by D because if agreement is VOID then he can continue breaching the ban… should inform client not to sue D.. advice would be to renegotiate the terms.

b. Office of Fair Trading (NCA) OFT can fine parties up to 10% of worldwide turnover.

c. Third parties suffering loss from infringement can bring claims for damages.

d. Directors of offending companies can be disqualified for up to 15 years under the s.9A Enterprise Act 2002.- but only if OFT get involved.

3(1).Can the parties avoid Article 81 infringement?

ARTICLE 81 INFRINGEMENT (CH I infringement below)

Argue situation falls outside scope of article 81. Two important examples: parent and subsidiary and ‘genuine agency agreements.’

Avoidance methods:

1 Severance

Check how many terms are anti-comp..

Only if there is some substance left in the agreement. Are the terms central to the agreement Use the Blue pencil test..

If there are many terms that need to be severed then this option is not available.

3

2 Notice on Agreements Of Minor Importance (NAOMI)

Para 1 says agreements do not fall under 81(1) if effect on trade is not appreciable.

Para 4 says that if notice applies, the commission will not initiate proceedings or a fine. - DISADVANTAGE – this is only a notice – non binding

Third parties may still claim though.

Requirements for protection:

1. Vertical agreement between undertakings

2. if undertakings are competitors then neither has an individual market share exceeding 10% of relevant markets affected by agreement, or

if undertakings are non-competitors, neither has an individual market share exceeding 15% of relevant markets affected by agreement. (para 7)

NB – Making this less advantageous than the BLOCK EXEMPTION because the % is lower.

3. Para 11 states the agreement must not contain any ‘hardcore’ restrictions which are:

if horizontal:

price –fixing limiting output/sales allocation of markets or consumers

if vertical:

restricting B’s ability to determine price restricting territory B may sell to

N.B. Restricting territory does not include:

restriction of active sales into exclusive territory of someone else restriction of sales to end users by a buyer operating at the wholesale level of

trade

3 NAAT

NOT strictly an avoidance technique… simply indicates which jurisdictional law applies.

TEST – MARKET SHARE:

if share exceeds 5% = presumption is that there is an effect on trade between MS’s therefore EC law applies.

If share does not exceed 5% = presumption there is no effect therefore national law applies.

4 Self-Assessment under 81(3)

Is agreement essentially more pro-competitive than anti-competitive?

If parties assess their agreement as meeting the requirements of 81(3) then 81(1) may not apply.

4

Requirement under 81(3):

1. agreement contributes to improving the production or distribution of goods, or to promoting technical or economic progress

2. while allowing consumers a fair share of the resulting benefit3. which does not impose restrictions which are indispensable to the attainment of

these objectives4. and which does not afford undertakings the possibility of eliminating competition re

a substantial part of products in question.

Very unlikely to apply. Risky in assuming compliance.

5 Vertical Restraints Block Exemption - 2790/99 Block exemption , does it protect us?

Checklist for Block Exemption:

1. There must be a vertical agreement under Art 2(1)

between two or more undertakings,

i.e. at different levels of production or distribution chain,

2. The market share of the SUPPLIER must not exceed 30% under Art 3(1)

3. Are there any hardcore prohibitions under Art 4?

Article 4 is a list of forbidden restrictions, one of which means the block exemption will not apply to the agreement at all.

Art 4(a) price fixingArt 4(b) restrictions re territory or customers B can sell in or sell to. I.e. export ban

4(b) does not prohibit:

restriction of active sales into exclusive territory of supplier/one of supplier’s other buyers e.g. D1 cannot sell in D2’s territory

restriction of sales to end users by a B operating at wholesale level of trade restriction of sales to unauthorised distributors by members of a selective

distribution system restrictions re B’s ability to sell components

IF either of these terms are there then the Agreement is VOID.

4. Are there any other prohibited agreements under Art 5(1)

Article 5 contains ‘softcore’ terms which 2790/99 does not apply to.

Art 5(a) non compete during the agreement – non compete obligation max is 5 years Art 5(b) non compete after terminating the agreement – non compete obligation is 1 year

The term will be VOID but if the terms can be severed the rest of agreement is exempt.

Test for severance is the ‘Blue pencil test’. In exam if there are many terms that breach and it leaves an empty agreement then the terms cannot be severed.

5. If no hardcore and no article 5, agreement automatically benefits from the block exemption

However, articles 6 and 8 allow the Commission or the Member State respectively to withdraw the benefit of the exemption to a particular agreement.

5

6 Limited Immunity

Section 39 Competition Act 1998 provides a limited immunity for small agreements. A small agreement is one where the parties joint turnover does not exceed £20m per section 39(1)(a) Competition Act 1998 (Small Agreements and Conduct of Minor Significance) Regulations 2001.

N.B. per section 39(1)(a) price fixing cannot be a small agreement.

Immunity is ONLY from penalties/fines (s36)

3(2).Can parties avoid Chapter I prohibition? 21.2.6

CHAPTER 1 PROHIBITION INFRINGEMENT

Avoidance methods:

1 Severance

Check how many terms are anti-comp.. Blue pencil test..

If there are many terms that need to be severed then this option is not available.

2 Notice on Agreements Of Minor Importance (NAOMI)

The APPRTECIABILITY test is used in the UK. Essentially the same as NAOMI criteria:

Para 1 says agreements do not fall under 81(1) if effect on trade is not appreciable.

Para 4 says that if notice applies, the commission will not initiate proceedings or a fine. - DISADVANTAGE – this is only a notice – non binding

Third parties may still claim though.

Requirements for protection:

1. Vertical agreement between undertakings

2. if undertakings are competitors then neither has an individual market share exceeding 10% of relevant markets affected by agreement, or

if undertakings are non-competitors, neither has an individual market share exceeding 15% of relevant markets affected by agreement. (para 7)

NB – Making this less advantageous than the BLOCK EXEMPTION because the % is lower.

3. Para 11 states the agreement must not contain any ‘hardcore’ restrictions which are:

if horizontal:

price –fixing limiting output/sales allocation of markets or consumers

if vertical:

restricting B’s ability to determine price restricting territory B may sell to

N.B. Restricting territory does not include:

6

restriction of active sales into exclusive territory of someone else restriction of sales to end users by a buyer operating at the wholesale level of

trade

3 NAAT

NOT strictly an avoidance technique… simply indicates which jurisdictional law applies.

TEST – MARKET SHARE:

if share exceeds 5% = presumption is that there is an effect on trade between MS’s therefore EC law applies.

If share does not exceed 5% = presumption there is no effect therefore national law applies.

4 Self-Assessment under section 9 Competition Act 1998

Section 9(1) Competition Act 1998 sets out same four conditions as 81(3).

Requirement under 81(3):

5. agreement contributes to improving the production or distribution of goods, or to promoting technical or economic progress

6. while allowing consumers a fair share of the resulting benefit7. which does not impose restrictions which are indispensable to the attainment of

these objectives8. and which does not afford undertakings the possibility of eliminating competition re

a substantial part of products in question.

Very unlikely to apply. Risky in assuming compliance.

Is agreement more pro-competitive than anti-competitive?

Again, not very safe, risk involved.

5 Parallel Exemption under section 10 Competition Act 1998 . (BEST AVOIDANCE)

Section 10 exempts an agreement from Chapter I if it falls within an EC block exemption, e.g vertical restraints block exemption 2790/99

Checklist for Block Exemption:

1. There must be a vertical agreement under Art 2(1)

between two or more undertakings,

i.e. at different levels of production or distribution chain, and the agreement must relate to the conditions under which parties may ‘purchase, see or re-sell certain goods or services.’

2. The market share of the SUPPLIER must not exceed 30% under Art 3(1)

However, if agreement involves exclusive supply obligations, the market share of the buyer must not exceed 30% of the relevant market in which it purchases the goods or services.

7

3. Are there any hardcore prohibitions under Art 4?

Article 4 is a list of forbidden restrictions, one of which means the block exemption will not apply to the agreement at all.

Art 4(a) price fixing

Art 4(b) restrictions re territory or customers B can sell in or sell to. I.e. export ban

4(b) does not prohibit:

restriction of active sales into exclusive territory of supplier/one of supplier’s other buyers e.g. D1 cannot sell in D2’s territory restriction of sales to end users by a B operating at wholesale level of trade restriction of sales to unauthorised distributors by members of a selective distribution system restrictions re B’s ability to sell components

IF either of these terms are there then the Agreement is VOID.

4. Are there any other prohibited agreements under Art 5(1)

Article 5 contains ‘softcore’ terms which 2790/99 does not apply to.

Art 5(a) non compete during the agreement – non compete obligation max is 5 years Art 5(b) non compete after terminating the agreement – non compete obligation is 1 year

The term will be VOID but if the terms can be severed the rest of agreement is exempt.

Test for severance is the ‘Blue pencil test’. In exam if there are many terms that breach and it leaves an empty agreement then the terms cannot be severed.

5. If no hardcore and no article 5, agreement automatically benefits from the block exemption

However, articles 6 and 8 allow the Commission or the Member State respectively to withdraw the benefit of the exemption to a particular agreement.

6 Limited Immunity

Section 39 Competition Act 1998 provides a limited immunity for small agreements. A small agreement is one where the parties joint turnover does not exceed £20m per section 39(1)(a) Competition Act 1998 (Small Agreements and Conduct of Minor Significance) Regulations 2001.

N.B. CANNOT be used if s.39(1)(a) price fixing in agreement.

Immunity is ONLY from penalties/fines (s36)

Advice to client

Advice depends on:

If agreement still draft then advice to remove or amend terms

If too late and contentious then advice of consequences and penalties

8

Article 82 EC – MOST PROBABLY MCQ IN EXAM

Article 82: ‘Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market insofar as it may affect trade between Member States.’

Such abuse may, in particular, consist in:

(a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions

(b) limiting production, markets or technical development to the prejudice of consumers(c) applying dissimilar conditions to equivalent transactions with other trading parties,

thereby placing them at a competitive disadvantage(d) making the conclusion of contracts subject to acceptance by the other parties of

supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of the contracts.

Question Structure 1. one or more undertakings

2. of a dominant position?

(a) Product market – Test – to what extent are products interchangeable?? If the PM is narrow = high dominance (larger share of smaller market) If the PM is wide = low dominance (smaller share of larger market)

(b) Geographic market – Test – to what extent are trading conditions the same? Smaller area the more unique the product eg Haggis

(c) Dominance is presumed at 40%, yet the presumption is rebuttable.

3. Abuse of that position?

Essentially behaviour which is not normal commercial behaviour and is detrimental to consumers or competitors.

Can affect consumers, such as high prices or limiting supply, or competitors such as predatory pricing.

4. Abuse effects trade between MS / within UK

Effect on trade must be appreciable

5. Consequences:Same as Art 81.

The Chapter II Prohibition

Section 18 Competition Act 1998:

‘..any conduct on the part of one or more undertakings which amounts to the abuse of a dominant position in a market is prohibited if it may affect trade within the UK.’

18(2) details examples of conduct which may amount to abuse:

(a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions

(b) limiting production, markets or technical development to the prejudice of consumers(c) applying dissimilar conditions to equivalent transactions with other trading parties,

thereby placing them at a competitive disadvantage

making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of the contracts.

Question involving amending terms so that they comply with the Block Exemption:

9

CLAUSE WHY ANTI-COMP? DOES B/E DEAL WITH THE ISSUE ADVICE TO CLIENT

Exclusivity NOT prohibited N/A

Minimum purchase order

Non-compete obligation Art 5(a) 1. Remove2. Amend:

limit it to less than 5 years (art5(a) reduce to less than 80% to comply

with art 1(b)

Price fixing Art 4(a) – Hardcore prohibition 1. Remove2. Amend so that there is a maximum or

a recommended price (Art 4(a)) (only minimum is hardcore)

Export Ban Depends on whether active of passive:- Active = D goes to C- Passive = C goes to D (internet)

IF passive:NOT allowed under Art 4(b)

IF active:Allowed only if territory of another exclusive disti OR if supplier reserved for itself

1. Amend so that any reference to the internet/email is removed

Not to sell competing products

Non Compete obligation Art 5(a) 1. Limit to less than 5 years

Blanket export ban Export ban under Art 4(b) 1. Remove2. Amend so that it only bans active

sales in territory of another exclusive disti OR supplier reserved area.

No Challenge of IPRS (trademarks)

Not prohibited Leave it in

Background – Seller could prevent competitors from selling their products in the market using IP rights (sue for breach and get injunction stopping them selling). Effect – this stops the D from suing the S on trademark issues. If D sues S for TM then they could potentially lose out as unable to sell due to injunctions etc.

Restraint of trade Non compete obligation Art 5(b) 1. Amend – reduce the time frame to 1 year to comply with Art 5(b) minimum. MUST be competing goods

10