UK and EU competition law prohibits anti-competitive agreements between businesses. There are heavy penalties for infringements. When setting up a distribution network, whatever the size, status or sector of your business, it is important to be aware of the main competition rules.
UK and EU competition laws prohibit anti-competitive agreements, such as agreements to fix high prices or to carve up markets.
What are vertical agreements?
Vertical agreements in competition law refer to agreements down the distribution line, i.e. between supplier and distributor or distributor and retailer.
Distribution agreements are often used as a low risk way of growing business into new markets or territories.
Suppliers of luxury or technically complex products may want to enter into selective distribution agreements with buyers so that they can maintain the quality and reputation of their products and have greater control over how their products are resold.
Most vertical agreements, including selective distribution agreements, will benefit from a block exemption given to vertical agreements as long as the criteria for the block exemption is met and the agreement does not contain any of the “hardcore” restrictions specified in the block exemption.
The Vertical Agreements Block Exemption (VABE)
VABE was established under Commission Regulation (EU) No 330/2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices.
In order to benefit from VABE there are several conditions that the agreement and parties must satisfy:
- The agreement must comply with Article 101(3) of the Treaty on the Functioning of the European Union (TFEU);
- The parties must not be competing (note: there are exceptions to this rule);
- The parties must be retailers of goods and have an annual turnover of 50 million euros or less;
- The parties must have a market share threshold of 30% or less;
- The agreement must not contain any “hardcore” restrictions;
- The agreement must not be for longer than 5 years (note: there are exceptions to this rule);
- The agreement must not include obligations on the buyer not to manufacture, purchase, sell or resell goods or services after termination; and
- In a selective distribution system, the agreement must not include an obligation on sellers not to sell brands of particular competing suppliers. However, the supplier can prevent sellers from selling competing brands in general.
Article 101(3) TFEU
The Article states:
The provisions of paragraph 1 may, however, be declared inapplicable in the case of:
– any agreement or category of agreements between undertakings,
– any decision or category of decisions by associations of undertakings,
– any concerted practice or category of concerted practices, which contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit, and which does not:
(a) impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives;
(b) afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question.
If the agreement is incompatible with the above then the European Commission or the Competition and Markets Authority (CMA) could withdraw the benefit of VABE. The burden of proof is on the Commission or CMA to prove that the agreement falls under Article 101(1)/Chapter I Competition Act 1998 but outside the conditions of Article 101(3).
Hardcore restrictions are not severable like other restrictions (i.e. if a restriction is found to be anti-competitive but it is not a hardcore restriction then VABE could still apply to the rest of the agreement). Hardcore restrictions however prevent the entire agreement from being able to rely on VABE.
Examples of hardcore restrictions include:
- price-fixing or resale price maintenance;
- territorial/customer sales restrictions (note: there are exceptions); and
- cross supplies between distributors within a selective distribution system.
Article 101(1) TFEU and Chapter I Competition Act 1998
If an agreement is not exempt under VABE, it may still fall outside the scope of Article 101(1) and Chapter I.
The Article states:
The following shall be prohibited as incompatible with the internal market: 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 internal market, and in particular those which:
(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.
Chapter I states:
Agreements etc. preventing, restricting or distorting competition
(1) Subject to section 3, agreements between undertakings, decisions by associations of undertakings or concerted practices which‚Äî
(a) may affect trade within the United Kingdom, and
(b) have as their object or effect the prevention, restriction or distortion of competition within the United Kingdom, are prohibited unless they are exempt in accordance with the provisions of this Part.
Therefore if the following criteria are satisfied the agreement will fall within the scope of Article 101(1)/Chapter I:
1. There is an agreement, decision or concerted practice between undertakings;
2. which may affect trade; and
3. it has the object or effect to prevent, restrict or distort competition.
However, even if the above criteria are satisfied, it may still fall outside the scope of Article 101(1)/Chapter I if there is no ‘appreciable effect’ on competition or is exempt under Article 101(3). Guidance can be taken from the European Commission’s notice on agreements of minor importance which do not appreciably restrict competition under Article 101(1) of the Treaty on the Functioning of the European Union (known as the ‘De Minimis Notice’) as to whether there is an appreciable effect on competition.
If a selective distribution method is used and VABE does not apply, the European Commission’s notice – guidelines on vertical restraints provides guidance for the assessment of selective distribution under Article 101(1). If the agreement complies with the following then it is likely to fall outside the scope of Article 101(1)/Chapter I:
1. The nature of the product necessitates a selective distribution system, in order to preserve its quality and ensure its proper use;
2. The resellers are chosen on the basis of an objective criteria of a qualitative nature;
3. The above criteria is laid down uniformly for all and not applied in a discriminatory fashion; and
4. The criteria laid down does not go beyond what is necessary.
Key points to consider when entering into a vertical agreement:
1. Ensure the agreement does not contain any “hardcore” restrictions;
2. Consider the De Minimis Notice and whether there is an appreciable effect on competition;
3. Consider whether the agreement falls within the scope of Article 101(1)/Chapter I;
4. Consider if the agreement is exempt under Article 101(3); and
5. Consider whether the agreement can benefit from VABE.
This article provides a brief overview of VABE, Article 101 TFEU and Chapter I Competition Act 1998 when it comes to vertical agreements. Competition law in the UK and Europe is complex and specialist legal advice should be sought before entering into any vertical agreements whether you are a manufacturer, supplier, distributor, seller or re-seller.
To find out more about how Moore Blatch and our commercial solicitors can assist you to ensure your distribution agreements comply with both national and EU competition law, please contact Dorothy Agnew, a partner in our commercial team, on 02380 718078 or by emailing firstname.lastname@example.org.