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The competition rulesfor supply and

distribution agreements

Competition

Competition policyin Europe

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The competition rules

for supply and

distribution agreements

Competition policy in Europe

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Pictures used under license ofwww.shutterstock.com

Luxembourg: Publications Office of the European Union 2012

ISBN 978-92-79-22116-3doi:10.2763/67458

(c) European Union, 2012Reproduction of the text is authorised provided the source is acknowleged.Reproduction of the artistic material contained therein is prohibited.

Printed in Belgium
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Contents

1. Introduction 5

2. Vertical agreements 7Article 101 7

3. Agency agreements 11

4. The Block Exemption Regulation 134.1 Scope of application of the Block Exemption Regulation 13

4.2 Requirements for application of the Block Exemption Regulation 15

The hardcore restrictions 15The 30 % market share cap 17The excluded restrictions 18

4.3 Withdrawal of the Block Exemption Regulation 19

5. The Guidelines 215.1 Purpose of the Guidelines 21

5.2 General rules for the assessment of vertical restraints 22

5.3 Criteria for the assessment of the most common vertical restraints 24

Single branding 24Exclusive distribution and exclusive customer allocation 25Selective distribution 27Franchising 28Exclusive supply 30Upfront access payment 31Category management agreements 31Tying 32Resale price restrictions 33

6. Competition authorities 35

7. Information on competition policy 37

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1. Introduction

The goal of the European Unions competition policy is to protect and developeffective competition in the common market for the benefit of consumers. Competition

is a basic mechanism of the market economy involving supply and demand. Suppliers(producers, traders) offer goods or services on the market in an endeavour to meetdemand (from intermediate customers or consumers). Demand seeks the bestcombination of quality and price for the products it requires. Competition betweensuppliers leads to the most efficient response to demand. In addition to being a simpleand efficient means of guaranteeing consumers the best choice in terms of qualityand price of goods and services, it also forces firms to strive for economic efficiencyand innovation.

The legislative framework of European competition policy is provided by the Treaty onthe Functioning of the European Union (TFEU)(Articles 101109).

Treaty on the Functioning of the European Union:

Articles 101-106:http://ec.europa.eu/competition/antitrust/legislation/articles.html

Articles 107-109 to be found in the full text:

http://eur-lex.europa.eu/en/treaties/index.htm
http://ec.europa.eu/competition/antitrust/legislation/articles.htmlhttp://eur-lex.europa.eu/en/treaties/index.htmhttp://eur-lex.europa.eu/en/treaties/index.htmhttp://ec.europa.eu/competition/antitrust/legislation/articles.html

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Further rules are provided by Council and Commission regulations. Europeancompetition policy comprises five main areas of action:

[1] the prohibition of agreements which restrict competition (Article 101)

[2] the prohibition of abuses of a dominant position (Article 102)

[3] the prohibition of mergers which significantly impede effective competition inthe EU (merger regulation)

[4] the liberalisation of monopolistic sectors (Article 106)

[5] the prohibition of State aid (Articles 107 and 108).

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2. Vertical agreements

Article 101 of the TFEU applies to agreements that may affect trade between MemberStates and which prevent, restrict or distort competition.

Article 101

1. The following shall be prohibited as incompatible with the commonmarket: all agreements between undertakings, decisions by associationsof undertakings and concerted practices which may affect trade betweenMember States and which have as their object or effect the prevention,restriction or distortion of competition within the common market, and inparticular those which:

(a) directly or indirectly fix purchase or selling prices or any other tradingconditions;

(b) limit or control production, markets, technical development, orinvestment;

(c) share markets or sources of supply;

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The first condition for Article 101 to apply is that the agreements in questionare capable of having an appreciable effect on trade between Member States. Ifan agreement is not capable of having an appreciable effect on trade betweenMember States it does not need to comply with the European competition rules. TheCommission has provided guidance on the application of the effect on trade conceptin a notice.

(d) apply dissimilar conditions to equivalent transactions with othertrading 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 oraccording to commercial usage, have no connection with the subjectof such contracts.

2. Any agreements or decisions prohibited pursuant to this Article shall beautomatically void.

3. The provisions of paragraph 1 may, however, be declared inapplicable inthe 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 orto promoting technical or economic progress, while allowing consumersa fair share of the resulting benefit, and which does not:

(a) impose on the undertakings concerned restrictions which are notindispensable to the attainment of these objectives;

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

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Guidelines on the effect on trade concept

See the Commission Notice Guidelines on the effect on trade conceptcontained in Articles 81 and 82 of the Treaty (Official Journal of the EuropeanUnion, C101, 27.4.2004, p.81).

http://ec.europa.eu/competition/antitrust/legislation/trade.html (EuropeanCommission website)orhttp://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52004XC0427(06):EN:NOT (EUR-Lex)

Where the first condition is met, Article 101(1) prohibits agreements which appreciablyrestrict or distort competition. The Commission has provided guidance on what is notan appreciable restriction of competition in another notice see section 4.2 below.

If an agreement appreciably restricts competition, this agreement is automaticallynull and void according to Article 101(2). However, Article 101(3) renders thisprohibition inapplicable for those agreements which create sufficient benefits tooutweigh the anti-competitive effects. Such agreements are said to be exemptedunder Article 101(3). The Commission has provided guidance on the conditions forthe exception contained in Article 101(3) in a separate notice.

Guidelines on the application of Article 81(3) (now 101(3))See the Commission Notice Guidelines on the application of Article 81(3) ofthe Treaty (Official Journal of the European Union, C101, 27.4.2004, p.97).http://ec.europa.eu/competition/antitrust/legislation/trade.html (EuropeanCommission website)orhttp://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52004XC0427(06):EN:NOT (EUR-Lex)

Article 101 applies amongst others to vertical agreements. Vertical agreements areagreements for the sale and purchase of goods or services which are entered

into between companies operating at different levels of the production or

distribution chain. Distribution agreements between manufacturers and wholesalersor retailers are typical examples of vertical agreements. However, an industrial supplyagreement between a manufacturer of a component and a producer of a productusing that component is also a vertical agreement.

Vertical agreements which simply determine the price and quantity for a specific sale

and purchase transaction do not normally restrict competition. However, a restrictionof competition may occur if the agreement contains restraints on the supplier or the
http://ec.europa.eu/competition/antitrust/legislation/trade.htmlhttp://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52004XC0427http://ec.europa.eu/competition/antitrust/legislation/trade.htmlhttp://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52004XC0427http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52004XC0427http://ec.europa.eu/competition/antitrust/legislation/trade.htmlhttp://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52004XC0427http://ec.europa.eu/competition/antitrust/legislation/trade.html

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buyer (hereinaster referred to as vertical restraints). Examples of such verticalrestraints are an obligation on the buyer not to purchase competing brands (i.e. non-compete obligation) or an obligation on the supplier to only supply a particular buyer(i.e. exclusive supply).

Vertical restraints may have not only negative effects but also positive effects. Theymay for instance help a manufacturer to enter a new market, or avoid the situationwhereby one distributor free rides on the promotional efforts of another distributor, orallow a supplier to depreciate an investment made for a particular client.

Whether a vertical agreement actually restricts competition and whether in thatcase the benefits outweigh the anti-competitive effects will osten depend on themarket structure. In principle, this requires an individual assessment. However,the Commission has adopted Regulation (EU) No 330/2010, the Block ExemptionRegulation (the BER), which entered into force on 1 June 2010 and which provides

a safe harbour for most vertical agreements.

This guide sets out the key features of these new rules for vertical agreements.The flow chart at the end of this guide may also help in applying the rules and will

facilitate the reading of this guide.

The BER Block Exemption Regulation

Please see: Official Journal of the European Union, L 102, 23.4.2010, p. 1-7.You can also find the text on DG Competitions web site http://ec.europa.eu/competition/antitrust/legislation/vertical.html, or on EUR-Lex http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32010R0330:EN:NOT

The Guidelines on Vertical Restraints

Please see: Official Journal of the European Union, C 130, 19.5.2010, p.1.You can download the Guidelines on Vertical Restraints under:http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52010SC0411:EN:NOT (EUR-Lex) or on the Commission Website:http://ec.europa.eu/competition/antitrust/legislation/legislation.html (downloadthe Compilation about Antitrust Enforcement)

The BER renders by block exemption the prohibition of Article 101(1) inapplicable tovertical agreements entered into by companies with market shares not exceeding30 %. The Commission has also published Guidelines on Vertical Restraints(the Guidelines). These describe the approach taken towards vertical agreements notcovered by the BER.
http://ec.europa.eu/http://eur-lex/http://eur-lex.europa.eu/LexUriServ/LexUriServhttp://ec.europa.eu/competition/antitrust/legislation/legislation.htmlhttp://ec.europa.eu/competition/antitrust/legislation/legislation.htmlhttp://eur-lex.europa.eu/LexUriServ/LexUriServhttp://eur-lex/http://ec.europa.eu/

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3. Agency agreements

Guidelines,

paragraphs 1221

The Guidelines set out criteria for the assessment ofagency agreements. Genuineagency agreements do not fall within the scope of Article 101(1). The determiningfactor in assessing whether Article 101(1) is applicable to an agency agreement is thefinancial or commercial risk borne by the agent in relation to the activities for which ithas been appointed as an agent by the principal.

Three types offinancial or commercial risk are material to this assessment.

First, there are the risks which are directly related to the contracts concludedand/or negotiated by the agent on behalf of the principal, such as financingof stocks.

Secondly, there are the risks related to market-specific investments. These areinvestments specifically required for the type of activity for which the agenthas been appointed by the principal, i.e. which are required to enable the agentto conclude and/or negotiate a particular type of contract. Such investments(for example, the petrol storage tank in the case of petrol retailing) are usually

irrecoverable costs, because upon leaving the particular field of activity the

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investment cannot be sold or used for other activities, other than at a significantloss.

Thirdly, there are the risks related to other activities that the principal requiresthe agent to undertake within the same market where the agency activity also

takes place.

The agency agreement is considered a genuine agency agreement and all obligationsimposed on the agent in relation to the contracts concluded on behalf of the principalfall outside Article 101(1) if the agent does not bear any of these three types of risk.Risks that are related to the activity of providing agency services in general, suchas the risk of the agents income being dependent upon his success as an agent orgeneral investments in, for instance, premises or personnel are not material to thisassessment.

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4. The Block Exemption Regulation

4.1 Scope of application of the Block

Exemption Regulation

The Block Exemption Regulation (BER) applies to vertical agreements concerningthe sale of all kinds of goods and services.

Exception

The only exception concerns motor vehicles, the sales of which are covereduntil 31 May 2013 by a sector-specific block exemption granted by CommissionRegulation (EC) No 1400/2002 (Official Journal of the European Communities,L 203, 1.8.2002, p. 3041). The application of that regulation to motor vehiclesales agreements was extended by Commission Regulation (EU) No 461/2010(Official Journal of the European Union, L 203, 1.8.2002, p. 3041). As toagreements for vehicle repair and spare parts distribution, Regulation 330/2010applies from 1 June 2010, with the addition of three supplementary clauses setout in Regulation 461/2010. You can find the regulations on the websitehttp://ec.europa.eu/competition/sectors/motor_vehicles/legislation/legislation.html
http://ec.europa.eu/competition/sectors/motor_vehicles/legislation/legislation.htmlhttp://ec.europa.eu/competition/sectors/motor_vehicles/legislation/legislation.html

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The BER does not apply to rent and lease agreements, as no sale takes place. Forthe same reason, the BER does not apply to agreements concerning the assignment

or licensing of intellectual property rights such as patents. Provisions relating tointellectual property rights are, however, covered by the BER if they do not constitutethe primary object of the vertical agreement but only facilitate the purchase, sale orresale of the contract goods or services by the buyer. An example of the latter wouldbe a manufacturer who facilitates the marketing of its products by licensing the use ofits trade mark to the distributor of its products.

Although the BER applies in principle to all vertical agreements, it does not apply tovertical agreements concluded between competitors. For instance, an agreementbetween two brewers active in different countries, where each brewer becomes theexclusive importer and distributor of the other brewers beer in his home market, is notcovered. The competition concern in such cases is a possible restriction of competitionbetween two competitors. This issue is dealt with in the Commissions Guidelineson horizontal cooperation agreements. However, vertical agreements betweencompetitors are covered by the BER if the agreement is non-reciprocal (i.e. the buyer is

purchasing from but not also selling to the supplier) and the buyer is not a competingmanufacturer but only a competitor of the supplier at the distribution level (i.e. thesituation where a manufacturer competes with its distributors on the downstreamdistribution market).

Applicability of Article 101 to horizontal co-operation agreements

Please see: Guidelines on the applicability of Article 101 of the Treaty on theFunctioning of the European Union to horizontal co-operation agreements(Official Journal of the European Union, Official Journal C11, 14.1.2011, p. 1).These guidelines are also available on Competition DGs web sitehttp://ec.europa.eu/competition/antitrust/legislation/horizontal.html.,or on EUR-Lex http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52011XC0114(04):EN:NOT

Guidelines,paragraphs 3145

Guidelines,paragraphs 27 and 28
http://ec.europa.eu/competition/antitrust/legislation/horizontal.htmlhttp://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:http://ec.europa.eu/competition/antitrust/legislation/horizontal.html

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4.2 Requirements for application of the BlockExemption Regulation

The BER contains certain requirements that have to be fulfilled before it renders theprohibition of Article 101(1) inapplicable for a particular vertical agreement. The first

requirement is that the agreement does not contain any of the hardcore restrictionsset out in the BER. The second requirement concerns the market share cap of 30 %for both suppliers and buyers. Thirdly, the BER contains conditions relating to threespecific restrictions.

The hardcore restrictions

The BER contains five hardcore restrictions that lead to the exclusion of the wholeagreement from the benefit of the BER, even if the market shares of the supplier and

buyer are below 30 %. Hardcore restrictions are considered to be severe restrictionsof competition because of the likely harm they cause to consumers. In most casesthey will be prohibited. It is considered unlikely that vertical agreements containingsuch hardcore restrictions fulfil the conditions of Article 101(3), but undertakingsmay demonstrate that in their particular case pro-competitive effects outweigh thenegative effects to reverse the negative presumption.

[1] The first hardcore restriction concerns resale price maintenance: suppliers are notallowed to fix the price at which distributors can resell their products. However,the imposition of maximum resale prices or the recommendation of resale pricesis normally not prohibited.

Guidelines,

paragraph 48


[2] The second hardcore restriction concerns restrictions concerning the territory intowhich or the customers to whom the buyer may sell. This hardcore restrictionrelates to market partitioning by territory or by customer. Distributors mustremain free to decide where and to whom they sell. The BER contains exceptionsto this rule, which, for instance, enable companies to operate an exclusivedistribution system or a selective distribution system. If a manufacturer wants tooperate a selective distribution system, an exception to this hardcore restrictionallows it to prohibit its selected distributors to sell, both actively and passively,

to non-authorised distributors. If a manufacturer wants to operate an exclusive

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distribution system, the exclusive distributors can be protected against eachothers active sales, i.e. they can be required not to actively approach, forinstance by direct mail or visits, customers in each others exclusive territoriesand not to specifically target by advertising, in whatever media, customers ineach others exclusive territories. However, passive sales, i.e. sales in response to

unsolicited orders including delivery, must always remain free. In order to servecustomers effectively, distributors must be free to use advertising or promotion tothe extent that these are reasonable ways to reach their own customers and theymust thus in principle be free to use the internet and have a website to sell theirproducts, even if such sales efforts also reach other customers. If a customervisits the website of a distributor and this leads to a sale, that is consideredpassive selling. The distributor can thus not be required, for instance, toautomatically reroute such a customer to other exclusive distributors websites.

[3] + [4] The third and fourth hardcore restrictions concern selective distribution.Firstly, selected distributors cannot be restricted in terms of the end-users towhom they may sell. Selective distribution therefore cannot be combined withexclusive distribution, with the exception that it is allowed to apply a locationclause: the supplier may commit itself to appoint only one distributor in a giventerritory and can require the distributor to sell only from a given location.

Secondly, the appointed distributors must remain free to sell or purchase thecontract goods to or from other appointed distributors within the network. Thismeans that appointed distributors cannot be forced to purchase the contractgoods only directly from the supplier.


Guidelines,paragraph 59

[5] The fisth hardcore restriction concerns agreements that prevent or restrict end-users, independent repairers and service providers from obtaining spare partsdirectly from the manufacturer of the spare parts. An agreement betweena manufacturer of spare parts and a buyer which incorporates these parts into itsown products (original equipment manufacturer) may not prevent or restrict salesby the manufacturer of these spare parts to end users, independent repairers orservice providers.

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The 30 % market share cap

A vertical agreement is covered by the BER if both the supplier and the buyer of thegoods or services do not have a market share exceeding 30 %. For the supplier, it isits market share on the relevant supply market, i.e. the market on which it sells the

goods or services that is decisive for the application of the block exemption. For thebuyer, it is its market share on the relevant purchase market, i.e. the market on whichit purchases the goods or services, which is decisive for the application of the BER.

In order to calculate these market shares, it is necessary to determine the relevantproduct market and the relevant geographic market. On the relevant market, thesupplier calculates its market share by comparing its turnover achieved on that marketwith the total value of sales on that market. A buyer calculates its market share bycomparing its purchases on the relevant market with the total purchases on thatmarket.

The relevant market

See the Commission Notice on definition of the relevant market (Official Journalof the European Union, C 372, 9.12.1997). (Please see http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:31997Y1209(01):EN:NOT). See alsoparagraphs 8695 of the Guidelines.

Prior to the BER and the Guidelines the Commission adopted a Notice on agreementsof minor importance. Whereas the BER provides an exemption from the Article 101(1)prohibition because the positive effects of the agreement outweigh the negativeeffects, this notice quantifies, with the help of lower market share thresholds, what isnot an appreciable restriction of competition in the first place and for that reason notprohibited by Article 101(1).

A vertical agreement between companies whose market share on the relevant marketdoes not exceed 15 % (de minimis threshold) is generally considered not to haveappreciable anti-competitive effects, unless the agreement contains a hardcorerestriction. Where the market is foreclosed by the application of parallel networksof similar vertical agreements by several companies, the de minimis thresholdis set at 5 %. While these de minimis thresholds do not provide a safe harbour ifthe agreement contains a hardcore restriction, they do apply in the case where theagreement contains one or more of the excluded restrictions described below.
http://eur-lex.europa/http://eur-lex.europa/

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The excluded restrictions

The BER applies to all vertical restraints other than the abovementioned hardcorerestraints. However, it imposes specific conditions on three vertical restraints: non-compete obligations during the contract; non-compete obligations aster terminationof the contract; and the exclusion of specific brands in a selective distribution system.When the conditions are not fulfilled, these vertical restraints are excluded from theexemption by the BER. However, the BER continues to apply to the remaining part ofthe vertical agreement if that part is severable (i.e. can operate independently) fromthe non-exempted vertical restraints.

Notice on agreements of minor importance

See the Commission Notice on agreements of minor importance (Official Journalof the European Union, C368, 22.12.2001, p.13).Please see:

http://ec.europa.eu/competition/antitrust/legislation/deminimis.html(European Commission website)orhttp://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2001:368:0013:0015:EN:PDF (EUR-Lex)


The first exclusion from exemption concerns non-compete obligations ofindefinite duration or which exceed five years. Non-compete obligations aredefined in the BER as obligations that require the buyer to purchase from thesupplier or from an undertaking designated by the supplier all or more than80 % of the buyers total requirements. Such obligations prevent the buyerfrom purchasing and selling competing goods or services or limit such purchasesor sales to less than 20 % of its total purchases. Such non-compete obligationsare not covered by the BER when their duration is indefinite or exceeds fiveyears. Non-compete obligations that are tacitly renewable beyond a period offive years are also not covered. However, non-compete obligations are coveredby the BER when their duration is limited to five years or less, or when renewalbeyond five years requires the explicit consent of both parties and no obstaclesexist that hinder the buyer from effectively terminating the non-competeobligation at the end of the five-year period.
http://ec.europa.eu/competition/antitrust/legislation/deminimis.htmlhttp://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2001:368:0013:http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2001:368:0013:http://ec.europa.eu/competition/antitrust/legislation/deminimis.html

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The five-year limit for non-compete obligations does not apply when the goodsor services are resold by the buyer from premises and land owned by thesupplier or leased by the supplier from third parties not connected with thebuyer. In such cases the non-compete obligation may be of the same durationas the period of occupancy of the point of sale by the buyer.

The second exclusion concerns post term non-compete obligations, i.e. non-compete obligations imposed on the buyers for a period aster the termination oftheir contract. Such non-compete obligations are excluded from the exemptionof the BER, unless the obligation is indispensable to protect knowhowtransferred by the supplier to the buyer, is limited to the point of sale from

which the buyer has operated during the contract period and is limited toa maximum period of one year aster termination of the contract.

The third exclusion concerns the sale of competing brands in a selectivedistribution system. If suppliers prevent their appointed dealers from selling

specific competing brands, such a restriction does not benefit from theexemption of the BER.

4.3 Withdrawal of the Block Exemption Regulation

The BER confers a presumption of legality. Vertical agreements that meet itsrequirements normally do not contravene the competition rules. In the exceptionalcases where an agreement does restrict competition and the positive effects do notoutweigh the negative effects, the benefits of the block exemption can be withdrawn.The Commission and, where the relevant geographic market is not wider than itsterritory, the competition authority of a Member State can take such a withdrawaldecision. A withdrawal decision has effects only for the future and is not retroactive.

In particular, withdrawal may be necessary where parallel networks of similarvertical agreements operated by several suppliers on the same market, such as thewidespread use of non-compete agreements or selective distribution, restrict accessto that market or competition therein.



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5. The Guidelines

5.1 Purpose of the Guidelines

Above the market share threshold of 30 %, the BER does not apply. However,exceeding the market share threshold of 30 % does not create a presumption ofillegality. This threshold serves only to distinguish those agreements which benefitfrom a presumption of legality from those which require individual examination.To assist firms in carrying out such an examination, the Commission adopted theGuidelines on vertical restraints.

The Guidelines set out general rules for the assessment of vertical restraints andprovide criteria for the assessment of the most common types of vertical restraints:single branding (non-compete obligations), exclusive distribution, customer allocation,selective distribution, franchising, exclusive supply, upfront access payments, categorymanagement agreements, tying and resale price restrictions. This should enable firmsto carry out their own assessment of their vertical agreements under Article 101(1)and (3).

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5.2 General rules for the assessmentof vertical restraints

Guidelines,

paragraphs 96 109The Commission applies the following general rules when assessing vertical restraintsin situations where the BER does not apply:

1. In the case of an individual examination by the Commission, the latter will bearthe burden of proof that the agreement in question infringes Article 101(1). Theundertakings claiming the benefit of Article 101(3) bear the burden of provingthat the conditions of that paragraph are fulfilled. When likely anti-competitiveeffects are demonstrated, undertakings may substantiate efficiency claims and

explain why a certain distribution system is indispensable to bring likely benefitsto consumers without eliminating competition, before the Commission decideswhether the agreement satisfies the conditions of Article 101(3).

2. The assessment of whether a vertical agreement has the effect of restrictingcompetition will be made by comparing the actual or likely future situation inthe relevant market with the vertical restraints in place with the situation thatwould prevail in the absence of the vertical restraints in the agreement.

3. Appreciable anticompetitive effects are likely to occur when at least one ofthe parties has or obtains some degree of market power and the agreementcontributes to the creation, maintenance or strengthening of that market poweror allows the parties to exploit such market power.

4. The negative effects on the market that may result from vertical restraintswhich EU competition law aims to prevent are the following:

(i) anticompetitive foreclosure of other suppliers or other buyers by raisingbarriers to entry or expansion;

(ii) sostening of competition between the supplier and its competitors and/or facilitation of collusion amongst these suppliers, osten referred to asreduction of inter-brand competition;

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(iii) sostening of competition between the buyer and its competitors and/orfacilitation of collusion amongst these competitors, osten referred to asreduction of intra-brand competition if it concerns competition betweendistributors on the basis of the brand or product of the same supplier;

(iv) the creation of obstacles to market integration, including, above all,limitations on the possibilities for consumers to purchase goods orservices in any Member State they may choose.

5. On a market where individual distributors distribute the brand(s) of only onesupplier, a reduction of competition between the distributors of the same brandwill lead to a reduction of intra-brand competition between these distributors,but may not have a negative effect on competition between distributors ingeneral. In such a case, if inter-brand competition is fierce, it is unlikely thata reduction of intra-brand competition will have negative effects for consumers.

6. Exclusive arrangements are generally worse for competition than non-exclusivearrangements. Exclusive dealing, by the express language of the contract orits practical effects, makes one party fulfil all or practically all its requirementsfrom another party. For instance, under a non-compete obligation the buyerpurchases only one brand. A minimum purchase requirement, on the other hand,may leave the buyer scope to purchase competing goods and the degree offoreclosure may therefore be (much) less.

7. Vertical restraints agreed for non-branded products are in general less harmfulthan restraints affecting the distribution of branded products. The distinctionbetween non-branded and branded products will osten coincide with thedistinction between intermediate products and final products.

8. It is important to recognise that vertical restraints may have positive effects by,in particular, promoting non-price competition and improved quality of services.In a number of situations vertical restraints may help to improve production anddistribution since the usual arms length dealings between supplier and buyer,determining only price and quantity of a certain transaction, can lead to a sub-optimal level of investments and sales. The case of efficiencies is in generalstrongest for vertical restraints of a limited duration which help the introductionof new complex products, which protect relationship-specific investments orwhich facilitate the transfer of know-how.

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5.3 Criteria for the assessment of the most commonvertical restraints

Single branding


Single branding covers those agreements where the buyer is induced or obligedto concentrate its orders for a particular type of product with one supplier, as is thecase with non-compete obligations for instance (see chapter 4.2, section excludedrestrictions). Such agreements may lead to foreclosure of other suppliers who mayhave difficulties expanding or entering the same market. The foreclosure effect may

be considerably increased if several suppliers apply single branding obligations onthe same market. This may make the market more rigid and also facilitate horizontalcollusion between competitors.

The capacity for single branding obligations of one specific supplier to result inanticompetitive foreclosure arises in particular where competitors are not ableto compete for an individual customers entire demand because the supplier inquestion is an unavoidable trading partner at least for part of the demand onthe market, for instance because its brand is a must stock item preferred by

many final consumers.

If competitors can compete on equal terms for each individual customersentire demand, single branding obligations of one specific supplier are generallyunlikely to hamper effective competition unless the switching of supplier bycustomers is rendered difficult due to the duration and market coverage of thesingle branding obligations. The higher the share of the total market covered byits single branding obligations and the longer the duration of the obligations, themore significant foreclosure is likely to be.

Single branding obligations shorter than one year entered into by non-dominantcompanies are generally not considered to give rise to appreciable anti-competitive effects.

Single branding obligations between one and five years entered into by non-dominant companies usually require a balancing of pro- and anti-competitiveeffects, while single branding obligations exceeding five years are for mosttypes of investments not considered necessary to achieve the claimedefficiencies, or the efficiencies are not sufficient to outweigh the foreclosure

effect.

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Anticompetitive foreclosure is less likely in the case of intermediate productsand more likely in the case offinal consumer products.

For intermediate products on a market where no company is dominant, anappreciable cumulative foreclosure effect is unlikely to arise as long as less

than 50 % of market sales are tied.

For final products at the retail level, appreciable foreclosure effects may ariseif a non-dominant supplier ties more than 30 % of the market. For a dominantcompany, even a modest tied market share may already lead to significantanticompetitive effects.

For final products at the wholesale level, the risk of foreclosure depends onthe type of wholesaling and the entry barriers at the wholesale level. There isno risk of anticompetitive foreclosure if competing manufacturers can easily

establish their own wholesale outlets.

In the case of a relationship-specific investment made by the supplier, a non-compete or minimum purchase obligation for the period of depreciation of theinvestment will generally fulfil the conditions of Article 101(3).

Where the supplier provides the buyer with a loan or provides the buyer withequipment which is not relationship-specific, this in itself is normally notsufficient to justify the exemption of an anticompetitive foreclosure effect on

the market.

The transfer of substantial know-how, as for example in the case of franchising,usually justifies a non-compete obligation for the whole duration of the supplyagreement.

Exclusive distribution and exclusive customer allocation


Exclusive distribution/exclusive customer allocations are agreements wherebythe supplier agrees to sell its products only to one distributor for resale in a particularterritory or for resale to a particular class of customers. In those agreements,distributors are usually also limited in their active selling into other exclusivelyallocated territories or classes of customers. Such agreements may reduce intra-brandcompetition and lead to market partitioning, which may facilitate price discrimination

between different territories or between different customers. When applied by several

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suppliers on the same market, such agreements may also facilitate horizontalcollusion, both at the level of suppliers and at the level of distributors. Lastly, exclusivedistribution/exclusive customer allocation may lead to anticompetitive foreclosure ofother distributors.

The stronger the position of the supplier, the more problematic is the possible lossof intra-brand competition, unless the agreement also leads to clear and substantialefficiencies.

When several suppliers appoint the same exclusive distributor in a given territory or fora given customer class, such multiple exclusive dealerships may increase the risk ofsostening of competition and horizontal collusion, in particular in highly concentratedmarkets.

In the case where the exclusive distributor has market power, if for instance at the

retail level it becomes the exclusive distributor for a whole market, the foreclosure ofother distributors may have a serious anti-competitive effect.

Exclusive distribution at the retail level is more likely to lead to anti-competitiveeffects when retail territories are large and final consumers have little possibility ofchoosing between high-price/high-service and low price/low service distributors.

At the wholesale level, appreciable anti-competitive effects are unlikely when theexclusive wholesaler is not restricted in his sales to retailers. However, where one

wholesaler becomes the exclusive distributor for a significant number of suppliers,competition between these brands may be reduced and there may be anticompetitiveforeclosure at the wholesale level.

The combination of exclusive distribution or exclusive customer allocation withexclusive sourcing increases the competition risks of market partitioning and pricediscrimination. Exclusive distribution/exclusive customer allocation makes it moredifficult for customers to take advantage of possible price differences for a certainbrand. The combination with exclusive sourcing, requiring the exclusive distributorsto buy their supplies for the particular brand directly from the manufacturer, alsoeliminates possible arbitrage by these distributors, as they are prevented from buyingfrom each other. This combination is therefore enhancing the suppliers possibilities tolimit intra-brand competition and apply dissimilar conditions to the disadvantage ofconsumers, unless the combination allows the creation of efficiencies leading to lowerprices to all final consumers.

Exclusive distribution normally leads to efficiencies where investments by distributorsare required in order to protect or build up the brand image. This applies in particularfor new products, complex products and products whose qualities are difficult to

assess. In addition, in such cases, a combination of exclusive distribution and a non-compete obligation may help the distributor to focus on the particular brand.

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Exclusive customer allocation normally leads to efficiencies where the distributorsare required to make investments in specific equipment, skills or know-how to adaptto the requirements of their customers. The depreciation period of these specificinvestments indicates the justified duration of an exclusive customer allocationsystem. In general, the case is strongest for new or complex products and for products

requiring adaptation to the needs of the individual customer. Efficiencies are morelikely for intermediate products, i.e. when the products are sold to different types ofprofessional buyers. Allocation offinal consumers is unlikely to lead to efficiencies.

Selective distribution


Selective distribution agreements restrict the number of distributors by applyingselection criteria for admission as an authorised distributor. In addition, the authoriseddistributors are restricted in their sales possibilities, as they are not allowed to sellto non-authorised distributors, leaving them free to sell only to other authoriseddistributors and final customers. Such agreements may reduce intra-brand competitionand, in particular where several suppliers apply selective distribution, foreclose certaintypes of distributors and facilitate horizontal collusion between suppliers or buyers.

Selective distribution agreements which are based on purely qualitative selectioncriteria, i.e. where distributors are selected only on the basis of objective criteriarequired by the nature of the product, such as training of sales personnel, aregenerally considered to lack anti-competitive effects. Such agreements fall outsideArticle 101(1) if the selection criteria are necessary to preserve the products qualityand proper use, are applied uniformly and without discrimination, and accordingly noadvance limit is put on the number of authorised distributors.

Selective distribution agreements which are based on quantitative selection criteriawhich have the effect of limiting the number of authorised distributors beyondqualitative criteria are assessed under the following rules.

While the BER exempts selective distribution regardless of the nature of theproduct concerned and regardless of the nature of the selection criteria, if thecharacteristics of the product do not require selective distribution or the appliedcriteria and if appreciable anti-competitive effects result, the benefit of the BERis likely to be withdrawn.

In general, the stronger the position of the supplier, the more problematic is the

loss of intra-brand competition. However, where a supplier is the only one in themarket applying selective distribution, the agreements are normally fulfilling the

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conditions of Article 101(3) provided that the nature of the products in questionrequires selective distribution to ensure efficient distribution.

When the main suppliers all apply selective distribution, there may bea significant risk of anti-competitive effects resulting from the cumulative

effect of all such systems. Such a cumulative effect problem is unlikely to ariseas long as less than half of the market is covered by selective distribution.Also, no problem is likely to arise where the coverage rate exceeds half of themarket, but the aggregate market share of the five largest suppliers is below50 %. Where the coverage rate exceeds half of the market and the five largestsuppliers hold more than 50 % of the market, serious competition concernsmay arise if the five largest suppliers all apply selective distribution. Exemptionunder Article 101(3) is unlikely if new distributors capable of adequately sellingthe products in question, especially price discounters or online-only distributorsoffering lower prices to customers, are prevented from accessing the market.

Foreclosure of more efficient distributors may also become a problem whenthere is buying power, in particular where a strong dealer organisation imposesselection criteria on the supplier with the aim of limiting distribution to theadvantage of its members.

Where the aggregate market share of the five largest suppliers exceeds 50 %,they should not impose on their appointed distributors conditions which seek toensure that the latter will not sell the brands of other specific competitors.

Selective distribution normally leads to efficiencies where investments bythe distributors are required in order to protect or build up the brand imageor to provide pre-sales services. In general, efficiencies are strongest for newproducts, complex products and products whose qualities are difficult to assess.

Franchising


Franchise agreements are vertical agreements containing licences of intellectualproperty rights, in particular trade marks and know-how for the use and distributionof goods or services. In addition to the licence, the franchisor usually provides thefranchisee, during the life of the agreement, with commercial or technical assistance.The licence and the assistance are integral components of the business method beingfranchised. In addition to the provision of the business method, franchise agreements

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may contain a combination of vertical restraints concerning the sale of the productsconcerned, such as selective distribution, non-compete obligations, exclusivedistribution or weaker forms thereof. The guidance provided in the previous sections inrespect of these types of restraints also applies to franchising, subject to the followingspecific remarks.

The more important the transfer of know-how, the more likely it is that the verticalrestraints will fulfil the conditions for exemption under Article 101(3).

An obligation not to sell competing goods or services falls outside Article 101(1) if theobligation is necessary in order to maintain the common identity and reputation of thefranchised network. In such cases, the non-compete obligation may last for the wholeduration of the franchise agreement.

The following obligations are in general considered to be necessary to protect the

franchisors intellectual property rights and are usually considered to fall outsideArticle 101(1):

(a) an obligation on the franchisee not to engage, directly or indirectly, in anysimilar business;

(b) an obligation on the franchisee not to acquire financial interests in the capitalof a competing undertaking if such acquisition would give the franchisee thepower to influence the economic conduct of the competing undertaking;

(c) an obligation on the franchisee not to disclose to third parties the know-howprovided by the franchisor as long as this know-how is not in the public domain;

(d) an obligation on the franchisee to communicate to the franchisor anyexperience gained in exploiting the franchise and to grant it and otherfranchisees a non-exclusive licence for the know-how resulting from thatexperience;

(e) an obligation on the franchisee to inform the franchisor of infringements oflicensed intellectual property rights, to take legal action against infringers or toassist the franchisor in any legal actions against infringers;

(f) an obligation on the franchisee not to use know-how licensed by the franchisorfor purposes other than the exploitation of the franchise;

(g) an obligation on the franchisee not to assign the rights and obligations underthe franchise agreement without the franchisors consent.

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Exclusive supply


An exclusive supply agreement obliges or induces the supplier to sell a particulargood or service, for the purposes of a specific use or for resale, only or mainly to onebuyer. Such exclusive supply agreements may lead to foreclosure of other buyers.

If the buyer has no market power on his downstream sales market, then normally noappreciable negative effects on competition can be expected. Negative effects mayarise when the buyer holds a market share of more than 30 % on the downstreamsales market and on the upstream purchase market. Where a company is dominant onthe downstream market, any obligation to supply the products only or mainly to the

dominant buyer may easily have significant anti-competitive effects.

The higher the share of the market sold under exclusive supply conditions andthe longer the duration of the exclusive supply agreement(s), the more significantforeclosure is likely to be. Exclusive supply agreements shorter than five yearsentered into by non-dominant companies usually require a balancing of pro- andanti-competitive effects, while agreements exceeding five years are for most typesof investments not considered necessary to achieve the claimed efficiencies or theefficiencies are not sufficient to outweigh their foreclosure effect.

Foreclosure of competing buyers is not very likely where these competitors havesimilar buying power. In such a case anticompetitive foreclosure could only occur forpotential entrants, especially when major incumbent buyers enter into exclusive supplycontracts with the majority of suppliers on the market (cumulative effect problem).

Where a supplier and a buyer which are not in a dominant position both have to makerelationship-specific investments to produce respectively use the contract products,the combination of non-compete and exclusive supply is usually justified.

Anticompetitive foreclosure is less likely in the case of homogeneous and intermediateproducts and more likely in the case of heterogeneous and final branded products.

Exclusive supply normally leads to efficiencies where the buyer is required to makerelationship-specific investments.

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Upfront access payment


Upfront access payments are fixed fees that suppliers pay to distributors as part ofa vertical relationship in order to get access to their distribution network. This categoryincludes various practices such as slotting allowances, the so called pay-to-stay feesand payments to have access to a distributors promotion campaigns.

The more important the market position, both upstream and downstream, of thedistributor in question, the greater the risk that upfront access payments may result inanticompetitive foreclosure of other distributors. A high fee may mean that a supplierpaying such a fee wants to channel a substantial volume of its sales through

this distributor in order to cover the costs of the fee, which may have the samedownstream foreclosure effect as an exclusive supply type obligation.

The cumulative use of upfront access payments in highly concentrated markets maysosten competition between distributors. The upfront access payments are likely toincrease the per unit prices charged by the suppliers in order to cover the fees paidand this may reduce price competition between the distributors on the downstreammarket, while the distributors profits are increased as a result of the access payments.

However, the use of upfront access payments may also lead to efficiencies. In manycases they may contribute to an efficient allocation of shelf space for new productsand prevent suppliers from free riding on distributors promotional efforts.

Category management agreements


Category management agreements are agreements by which, within a distributionagreement, the distributor entrusts the supplier (the category captain) with themarketing of a category of products including in general not only the suppliersproducts, but also the products of its competitors.

In some circumstances, category management agreements may result in theforeclosure of competing suppliers and collusion between distributors (e.g. if they usethe same supplier as the category captain) or between suppliers (e.g. if they exchange

market information through the distributor).

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However, the use of category management agreements may also lead to efficienciesThey may allow distributors to have access to the suppliers marketing expertise fora certain group of products and to achieve economies of scale, for the benefit ofgreater customer satisfaction.

Tying


Tying exists where a supplier makes the sale of one product conditional upon thepurchase of another distinct product from the supplier or someone designated byit. The first product is referred to as the tying product and the second as the tied

product. Tying agreements may lead to anticompetitive foreclosure effects on themarket of the tied product and on the market of the tying product. The foreclosureeffect depends on the tied percentage of total sales on the market of the tiedproduct. Where, in addition, a non-compete obligation is agreed in respect of the tiedproduct, this increases the possible foreclosure effect. Tying may also lead directly tosupra-competitive prices, in particular when the two products can be used in variableproportions as inputs to a production process and the tying prevents customers fromreacting to a price increase of the tying product by increasing their demand for the tiedproduct and decreasing their demand for the tying product, and when the tying allows

price discrimination according to the use the customers make of the tying product.

The market position of the supplier on the market of the tying product is ofcardinal importance for assessing possible anti-competitive effects. As long as thecompetitors of the tying supplier are sufficiently numerous and strong, no appreciableanti-competitive effects can be expected, as buyers have sufficient alternatives topurchase the tying product without the tied product, unless other suppliers also applytying.

Where tying is combined with a non-compete obligation for the tying product, thisconsiderably strengthens the position of the supplier and increases the likelihood ofappreciable anti-competitive effects of tying.

Anti-competitive effects of tying are less likely where buyers have significant buyingpower.

Tying obligations may produce efficiencies arising from joint production or jointdistribution or from the fact that the supplier can purchase the tied product in largequantities. For tying to fulfil the conditions of Article 101(3), however, it must be

shown that a fair share of these cost reductions are passed on to the consumer. Tying

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is therefore normally not exemptable where the retailer is able to obtain, on a regularbasis, supplies of the same or equivalent products on the same or better conditionsthan those offered by the supplier which applies the tying practice.

Tying may also help to ensure a certain uniformity and quality standardisation.

However, the supplier of the tying product needs to demonstrate that these positiveeffects cannot be realised as efficiently simply by requiring the buyer to purchaseproducts satisfying minimum quality standards.

Resale price restrictions

Guidelines,paragraphs 48-49 and 223229

Suppliers are not allowed to fix the price at which distributors can resell theirproducts, so called resale price maintenance (RPM). This is a hardcore restriction(see chapter 4.2, The hardcore restrictions).

RPM may restrict competition in a number of ways. RPM may facilitate collusion bothbetween suppliers (by enhancing price transparency on the market) and betweenbuyers (by eliminating intra-brand price competition), and may more generallysosten competition between manufacturers and/or between retailers, particularly

when manufacturers use the same distributors to distribute their products and RPMis applied by all or many of them. RPM may lead to a price increase as all or somedistributors are prevented from lowering their sales price for that particular brand.RPM may also prevent more efficient retailers or distribution formats from entering themarket or acquiring sufficient scale with low prices.

RPM may also lead to efficiencies. RPM may be helpful during the introductory periodof a new product to persuade distributors to increase their sales efforts. Fixed resaleprices may be necessary in order to organise in a franchise system a coordinatedshort term low price campaign. In some situations the extra margin provided by RPMmay allow retailers to provide (additional) pre-sales services and prevent free-ridingon these services, in particular in the case of complex products and products whosequalities are difficult to assess.

The imposition of maximum resale prices or the recommendation of resale pricesis normally not prohibited. However, the practice of recommending a resale price todistributors or imposing a maximum resale price on distributors may have the effectthat such a price will work as a focal point for the distributors and may be followedby most or all of them. In addition, maximum or recommended resale prices may

facilitate horizontal collusion between suppliers.

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The market position of the supplier is an important factor in assessing possible anti-competitive effects of recommended or maximum resale prices. The stronger thesuppliers position, the higher the risk that a recommended resale price or a maximumresale price is followed by most or all distributors.

Maximum and recommended resale prices may also produce efficiencies. In particular,maximum prices may reduce prices for consumers and may ensure that the brand inquestion competes more forcefully with other brands.

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6. Competition authorities

If you would like to contact a national Competition Authority, please find the contactdetails on this comprehensive list on the pages of the European Competition Network:

http://ec.europa.eu/competition/ecn/competition_authorities.html

If you would like to contact the Directorate-General for Competition of the EuropeanCommission, please see the contact details below:

Contact website: http://ec.europa.eu/competition/contacts/index_en.html

Postal address:European CommissionDirectorate-General for Competition1049 Bruxelles/BrusselBELGIQUE/BELGI
http://ec.europa.eu/competition/ecn/competition_authorities.htmlhttp://ec.europa.eu/competition/contacts/index_en.htmlhttp://ec.europa.eu/competition/contacts/index_en.htmlhttp://ec.europa.eu/competition/ecn/competition_authorities.html

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7. Information on competition policy

The Directorate-General for Competition (DG COMP) publicises its activities througha number of media.

On the Internet you can find legislation, judgments of the Court of Justice and theGeneral Court, Commission decisions, press releases, the Directorate-Generalsnewsletter, articles and speeches by the Commissioner, etc. The entry point isDG Competitions portal on the internet: http://ec.europa.eu/competition/

Publications can be found at: http://ec.europa.eu/competition/publications/

If you want to order publications via the EU bookshop please go tohttp://bookshop.europa.eu. Selected books about Competition only are to be found here:http://bookshop.europa.eu/en/competition-policy-cbiuoKABstTO0AAAEjtZAY4e5L/

The comprehensive source for EU-related official texts (e.g. the Official Journal):http://eur-lex.europa.eu/JOIndex.do
http://ec.europa.eu/competition/http://ec.europa.eu/competition/publications/http://bookshop.europa.eu/http://bookshop.europa.eu/en/competition-policy-cbiuoKABstTO0AAAEjtZAY4e5L/http://eur-lex.europa.eu/JOIndex.dohttp://eur-lex.europa.eu/JOIndex.dohttp://bookshop.europa.eu/en/competition-policy-cbiuoKABstTO0AAAEjtZAY4e5L/http://bookshop.europa.eu/http://ec.europa.eu/competition/publications/http://ec.europa.eu/competition/

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NotprohibitedbyEU

CompetitionRules

N

otprohibitedbyEU

CompetitionRules

Ind

ividualassesment

u

nderArticle101

notnecessary

Individualassesmentunder

Article101necessary

Inmostcasesprohibited

CoveredbyBER

No

tcoveredbyBER

de-minimis:o

utside

Art

icle101(1)

Containsnoexcluded

res

trictions

Contains

oneormore

excluded

restrictions

Yes

No

Itisagenuineagency

agreement:r

isksliewith

theprincipal?

1

5

%

3

0%

>30%

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shares

Presumedtofallwithin

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Itcontainsahardcore

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Itconcernsanagency

agreement

Verticalagreements

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How to obtain EU publications

Free publications:

via EU Bookshop (http://bookshop.europa.eu);

at the European Unions representations or delegations. You can obtain their contact

details on the Internet (http://ec.europa.eu) or by sending a fax to +352 2929-42758.

Priced publications:

via EU Bookshop (http://bookshop.europa.eu).

Priced subscriptions (e.g. annual series of the Official Journal of the European Union

and reports of cases before the Court of Justice of the European Union): via one of the sales agents of the Publications Office of the European Union

(http://publications.europa.eu/others/agents/index_en.htm).

European Commission

Competition policy in Europe

The competition rules for supply and distribution agreements

Luxembourg: Publications Office of the European Union

2012 40 pp 14.8 x 21 cm

ISBN 978-92-79-22116-3doi:10.2763/67458
http://bookshop.europa.eu/http://ec.europa.eu/http://bookshop.europa.eu/http://publications.europa.eu/others/agents/index_en.htmhttp://publications.europa.eu/others/agents/index_en.htmhttp://bookshop.europa.eu/http://ec.europa.eu/http://bookshop.europa.eu/

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