Guidelines on vertical restraints

SUMMARY OF:

Commission notice — Guidelines on vertical restraints

WHAT IS THE AIM OF THE GUIDELINES?

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.

KEY POINTS

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

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.

Enforcement policy in individual cases

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.

BACKGROUND

For more information, see:

Overview: making markets work better (European Commission).

KEY TERMS

Agency agreement: an agent is a firm or an individual granted the power to negotiate and/or conclude contracts on behalf of another person (the principal), either in the agent’s own name or in the name of the principal, for the: (i) purchase of goods or services by the principal, or (ii) sale of goods or services supplied by the principal.

Subcontracting agreement: an agreement where a contractor provides technology or equipment to a subcontractor that undertakes to produce certain products on the basis thereof (exclusively) for the contractor.

Foreclosure: excluding rivals from access to the market by, for example, acquiring the sources of raw materials or entering into long-term contracts with suppliers to purchase inputs, thus raising the barriers to entry of the market in question.

MAIN DOCUMENT

Commission notice — Guidelines on Vertical Restraints (SEC(2010) 411 final, 10.5.2010)