EU Distribution Law 9781472561664, 9781849461467

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Preface In a way this book remains what it was when it was first published in 1992. It is now, as it was then, a guide to EU law aspects of distribution agreements, aimed in particular at legal practitioners and in-house corporate lawyers who are not necessarily already familiar with EU institutions and procedures, or with competition law. It is intended to provide an approachable, readable and informative introduction to EU competition law and the law on commercial agents as they affect distribution contracts and practices. But since 1992 the European Union and its competition law have kept developing at a heady pace, and the last six years have been no exception. This edition is being published following a full revision in 2010 of the general EU rules on distribution agreements and a radical overhaul of the specific framework within which motor vehicle distribution takes place, as well as the 2007 accession of two more Member States to the EU and the 2009 entry into force of the Lisbon Treaty. The main legislative amendment to the generally applicable distribution rules in 2010 was the narrowing of the scope of the safe harbour provided by the ‘block exemption’ for distribution agreements. Following this change, the market share of the distributor, and not just that of the supplier, as was the case before, is relevant. This change reflects the increased focus in enforcement authorities on powerful buyers, which is evident also in the relevant European Commission guidelines, also fully revised in 2010, which now deal explicitly with practices typical of powerful retailers, such as the appointment of ‘category captains’ and the charging of ‘upfront access fees’. The legal changes adopted in 2010 for the motor vehicle sector have not yet all entered into force, but they are even more farreaching and will require all suppliers and distributors in this sector to review their strategies and contracts over the next few years. Though the significant revision of the ‘soft law’ contained in the guidelines does not change the law as such, it will prove very influential in practice, particularly as the guidelines tend to be followed not only by the European Commission itself but also by national courts and authorities. Some of the most important revisions include significantly expanded guidance on the legality of internet sales restrictions imposed by suppliers, as well as a more generous approach to resale price maintenance. Similarly, though the accession of Bulgaria and Romania on 1 January 2007 did not change the law as such, it means that EU law has an ever broader geographical impact. It also changed the meaning of expressions in contractual clauses such as ‘an exclusive territory comprising all Member States of the European Union’, necessitating a review of many distribution contracts. It may in addition have entailed the redrafting of contracts that list the Member States by name, as well as

vi  preface to the fifth edition

the education of commercial staff who may need to change their practices to ensure that they do not illegally hinder sales from or into these new EU territories. The entry into force of the Lisbon Treaty on 1 December 2009 did not change the substance of competition law, but it did change some of the terminology, and it rearranged the Treaty Articles. Amongst other changes, Articles 81 and 82 of the EC Treaty became Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU). In this book, all references are to the current numbering, and in the case of direct quotations and names of texts, changes are indicated with square brackets. The same approach has been taken to the former Court of First Instance, now renamed the General Court. As has now been the case for some time, national courts and competition authorities deal with the substantial majority of enforcement in this area. Business itself also continues to bear significant responsibility for assessing the legality of its own conduct. Companies need to monitor certain aspects of their business closely in this context: for example, an increase in market share can render a previously legal agreement illegal. While block exemptions provide some with safe harbours in which to shelter, others face the choppy open sea of ‘self-assessment’. The change of focus in recent years away from formal legalism and towards economic coherence is clearly desirable. However, it has reduced legal certainty, and the legality of given conduct depends increasingly on many factors beyond the actual terms of an agreement. It is strongly advised that those new to EU competition law read chapters one, two and three before consulting any of the later chapters. These first chapters give a general overview of the EU legal order, and in particular competition law as applied to distribution practices. Without an appreciation of the background against which they operate, it will be difficult to understand the more specific rules discussed in the later chapters. Each chapter except the first opens with ‘Key Points’ that give a brief sketch of the areas covered in that chapter. They are necessarily simplified statements of the law and as such need to be read together with the fuller treatment given in the body of the chapters. I would like to thank two friends and erstwhile colleagues for reading parts of the text and providing very helpful comments that enabled me to make significant improvements to it. Anne Wegner, partner in the German law firm Luther and expert in motor vehicle distribution, looked at the part of chapter four dealing with this complicated area of the law, and Peter Citron of Hogan Lovells contributed a number of new ideas to the final chapter. Thanks also go to my colleagues in the Antitrust, Competition and Trade group at Freshfields Bruckhaus Deringer, from whom I learn on a daily basis. The law is stated as at 1 December 2010. Finally, this edition, like the last, is dedicated to my father, Dan Goyder, who reviewed the early editions in full and is sadly no longer here to do so. His life was and remains an inspiration to me far beyond the law. Joanna Goyder Brussels December 2010

Table of Cases alphabetical european court of justice and european general court Accinauto v Commission Case T-176/95 [1999] ECR II-1635, [2000] 4 CMLR 33.............................................................................................................. 84 ACF Chemiefarma Case 41/69 [1970] ECR 661, [1970] CMLR 43....................... 23 Activision Blizzard Case C-260/09, pending.......................................................... 83 Activision Blizzard Case T-18/03 [2009] ECR II-1021, [2009] 5 CMLR 1469..... 83 AEG Telefunken v Commission Case 107/82 [1983] ECR 3151, [1984] 3 CMLR 325....................................................................................23, 25, 133, 153 AKZO Chemie v Commission Case C-62/86 [1991] ECR I-3359, [1993] 5 CMLR 215................................................................................................... 41, 43 Akzo Nobel v Commission Case C-550/07, 14 September 2010........................... 59 Akzo Nobel v Commission Case T-253/03 [2007] ECR II-3523........................... 59 Alrosa v Commission Case C-441/07, 29 June 2010.............................................. 63 AM & S v Commission Case 155/79 [1982] ECR 1575, [1982] 2 CMLR 264...... 59 Ambulanz Glöckner Case C-475/99 [2001] ECR I-8089, [2002] 4 CMLR 726.... 25 Asia Motors France v Commission Case T-28/90 [1996] ECR II-961, [1992] 5 CMLR 431............................................................................................. 67 AstraZeneca v Commission Case C-457/10, pending............................................ 40 AstraZeneca v Commission Case T-321/05, 1 July 2010........................................ 40 Automec v Commission (No 2) Case T-24/90 [1992] ECR II-2223, [1992] 5 CMLR 431..................................................................................... 65, 154 Bagnasco v BPN Case C-215/96 [1999] ECR I-135, [1999] 4 CMLR 624............ 29 Bass Case C-204/02 [2003] ECR I-14763............................................................. 122 Bayer v Commission Cases C-2/01 and C-3/01 [2004] ECR I-23, [2004] 4 CMLR 653................................................................................................... 23, 84 Bayer v Commission Case T-41/96 [2000] ECR II-3383, [2001] 4 CMLR 126.... 23 Béguelin Import Co v GL Import-Export SA Case 22/71 [1971] ECR 949, [1972] CMLR 81.................................................................................................. 33 Belasco v Commission Case 246/86 [1989] ECR 2117, [1991] CMLR 96............ 29 Bellone v Yokohama Case C-215/97 [1998] ECR I-2191..................................... 221 BIDS Case C-209/07 [2008] ECR I-8637, [2009] 4 CMLR 310............................. 30 Binon v Agence et Messageries de la Presse Case 243/83 [1985] ECR 2015, [1985] 3 CMLR 800....................................................................118, 131, 138, 150 BMW v Commission Cases 32/78 etc [1979] ECR 2435, [1980] 1 CMLR 370............................................................................................... 152, 157 BNIC v Clair Case 123/83 [1985] ECR 391, [1985] 2 CMLR 430................... 29, 48

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Bosch Case 13/61 [1962] ECR 45, [1962] CMLR 1................................................ 12 Brasserie de Haecht v Wilkin (No 1) Case 23/67 [1967] ECR 407, [1968] CMLR 26...................................................................................... 31, 91, 96 Brasserie du Pêcheur and Factotame III Cases C-46/93 and C-48/93 [1996] ECR I-1029............................................................................................... 13 British Airways v Commission Case C-95/04 [2007] ECR I-2331............ 41, 43, 44 Bronner v Mediaprint Case C-7/97 [1998] ECR I-7791, [1999] 4 CMLR 112..... 45 BRT v SABAM (No 1) Case 127/73 [1974] ECR 313, [1974] 2 CMLR 238.......... 33 Bundeskartellamt v Volkswagen Case C-266/93 [1995] ECR I-3477, [1996] 4 CMLR 505............................................................................. 205, 209–12 Camera Care v Commission Case 792/79 [1981] ECR 119, [1980] 1 CMLR 334......................................................................................................... 63 Caprini v Conservatore del registro delle imprese di Trento Case C-485/01 [2003] ECR I-2371............................................................................ 221 CEES v CEPSA Case C-217/05 [2006] ECR I-11987, [2007] 4 CMLR 181......................................................................51, 203, 205–7, 209, 212 Centrosteel v Adipol Case C-456/98 [2000] ECR I-6007..................................... 221 CEPSA v Tobar Case C-279/06 [2008] ECR I-6681, [2008] 5 CMLR 1327............................................ 32, 33, 34, 87, 88, 203, 206–7, 210, 212 CIF Case C-198/01 [2003] ECR I-8055, [2003] 5 CMLR 829............................... 14 City Motors Group NV Case C-421/05 [2007] ECR I-653.................................. 165 Clearstream Case T-301/04 [2009] ECR II-3155, [2009] 5 CMLR 2677.............. 46 CNPA v Commission Case C-341/00 [2001] ECR I-5263....................................... 5 Coca-Cola v Commission Cases T-125/97 and T-127/97 [2000] ECR II-1733, [2000] 5 CMLR 467............................................................................................. 27 Commission v Council Case 81/72 [1973] ECR 575, [1973] CMLR 639............. 10 Commission v Italy Case 39/72 [1973] ECR 101, [1973] CMLR 439..................... 7 Commission v Volkswagen Case C-74/04 [2006] ECR I-6585, [2008] 4 CMLR 1297................................................................................87, 118, 134, 155 Consten & Grundig v Commission Cases 56/64 and 58/64 [1966] ECR 299, [1966] CMLR 418.............................................24, 28, 48, 78–79, 83, 95 Costa v ENEL Case 6/64 [1964] ECR 585, [1964] CMLR 425............................... 14 Courage v Crehan Case C-453/99 [2001] ECR I-6297, [2001] 5 CMLR 1058..... 54 Daimler Chrysler v Commission Case T-325/01 [2005] ECR II-3319, [2007] 4 CMLR 559................................ 24, 25, 29, 57, 62, 153, 203, 207, 209–11 Delimitis v Henninger Bräu AG Case C-234/89 [1991] ECR I-1935, [1992] 5 CMLR 210......................................................................31, 91–92, 96, 97 Demo-Studio Schmidt v Commission Case 210/81 [1983] ECR 3045, [1984] 1 CMLR 63............................................................................................. 141 Deutsche Telekom v Commission Case C-280/08, 14 October 2010.................... 46 Deutsche Telekom v Commission Case T-271/03 [2008] ECR II-477, [2008] 5 CMLR 631............................................................................................. 46 Dillenkofer Cases C-178/94 etc [1996] ECR I-4845, [1996] 3 CMLR 469............ 13

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Distillers v Commission Case 30/78 [1980] ECR 2999, [1980] 3 CMLR 121....... 82 Dow Benelux v Commission Case 85/87 [1989] ECR 3137, [1991] CMLR 410............................................................................................................ 58 Dunlop Slazenger International v Commission Case T-43/92 [1994] ECR II-441, [1993] 5 CMLR 352........................................................................ 82 Dutch Electrotechnical Equipment Cases C-105/04 and C-113/04 [2006] ECR I-8725......................................................................................................... 124 E.ON Case T-141/08, pending................................................................................. 57 Eco Swiss China Time v Benetton Case C-126/97 [1999] ECR I-3055, [2000] 5 CMLR 816............................................................................................. 53 EMI v CBS Cases 51/75 etc [1976] ECR 811, [1976] 2 CMLR 235....................... 85 Erauw-Jacquery v La Hesbignonne Case 27/87 [1988] ECR 1919, [1988] 4 CMLR 576......................................................................................................... 80 ETA Fabriques d’Ebauches v DK Investments Case 31/85 [1985] ECR 3933, [1986] 2 CMLR 674..................................................................................... 83, 119 Faccini Dori Case C-91/92 [1994] ECR I-3325, [1995] 1 CMLR 665................... 13 FEDETAB v Commission Cases 209/78 etc [1980] ECR 3125, [1981] 3 CMLR 193....................................................................................... 135, 138, 155 Filtrona Espanola v Commission Case T-125/89 [1990] ECR II-393................... 62 Fontaine v Aqueducs Automobiles Case C-128/95 [1997] ECR I-967, [1997] 5 CMLR 39............................................................................................. 166 Ford v Commission Cases 25/84 and 26/84 [1985] ECR 2725, [1985] 3 CMLR 325................................................................................................. 133–34 France Télécom v Commission Case C-202/07 [2009] ECR I-2369, [2009] 4 CMLR 1149....................................................................................................... 43 Francovich v Italian Republic Cases C-6/90 and C-9/90 [1981] ECR I-5357, [1993] 2 CMLR 66............................................................................................... 13 General Motors (Opel Nederland) v Commission Case C-551/03 [2006] ECR I-3173, [2006] 5 CMLR 1.............................................................. 62, 82, 152 GlaxoSmithKline v Commission Cases C-501/06 P [2009] ECR I-9291, [2010] 4 CMLR 50.................................................. 21, 30, 35, 51, 85, 115, 119–20 Grand Garage Albigeois Case C-226/94 [1996] ECR I-651, [1996] 4 CMLR 778....................................................................................................... 166 Guerin Automobiles v Commission Case C-282/95 [1997] ECR I-503, [1997] 5 CMLR 447............................................................................................. 65 Guerin Automobiles v Commission Case T-186/94 [1995] ECR II-1753, [1996] 5 CMLR 685............................................................................................. 65 Hasselblad v Commission Case 86/82 [1984] ECR 883, [1984] 1 CMLR 559................................................................................................................ 84, 150 Heirs of Paul Chevassus-Marche v Groupe Danone Cases C-19/07 [2008] ECR I-159, [2008] 2 CMLR 387........................................................................ 217 Herlitz v Commission Case T-66/92 [1994] ECR II-531, [1995] 5 CMLR 458.................................................................................................................. 61, 82

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Hilti AG v Commission Case C-53/92 [1994] ECR I-667, [1994] 4 CMLR 614.................................................................................................................. 44, 59 Hoechst AG v Commission Cases 46/87 and 227/88 [1989] ECR 2859, [1991] CMLR 410................................................................................................ 57 Hoffman-La Roche v Commission Case 85/76 [1979] ECR 461, [1979] 3 CMLR 211............................................................................................. 41, 42, 44 Höfner and Elser v Macrotron GmbH Case 41/90 [1991] ECR I-1979, [1993] 4 CMLR 306............................................................................................. 25 Honyvem Informazioni Commerciali v De Zotti Case C-465/04 [2006] ECR I-2879......................................................................................................... 218 Hugin v Commission Case 22/78 [1979] ECR 1869, [1979] 3 CMLR 345........... 27 Hydrotherm v Andreoli Case 170/83 [1984] ECR 2999, [1985] 3 CMLR 224..... 25 Ice Cream cases see Langnese-Iglo v Commission ICI v Commission Case 48/69 [1972] ECR 619, [1972] CMLR 557............... 24, 26 Ingmar v Eaton Leonard Technologies Case C-381/98 [2000] ECR I-9305, [2001] 1 CMLR 9............................................................................................... 215 Intel T-286/09, pending............................................................................. 38, 39, 227 Irish Sugar v Commission Case T-228/97 [1999] ECR II-2969, [1999] 5 CMLR 1082....................................................................................................... 40 Itochu v Commission Case T-12/03 [2009] ECR I-883, [2009] 5 CMLR 1375................................................................................................................ 26, 83 Javico v Yves St Laurent Case C-306/96 [1998] ECR I-1983, [1998] 5 CMLR 172.................................................................................................................. 29, 85 JCB Service v Commission Case C-167/04 [2006] ECR I-8935, [2006] 5 CMLR 23............................................................................62, 74, 84, 87, 88, 153 JCB Service v Commission Case T-67/01 [2004] ECR II-49, [2004] 4 CMLR 1346................................................................................................. 84, 88 Keck and Mithouard Cases C-267/91 and C-268/91 [1993] ECR I-6097, [1995] 1 CMLR 101............................................................................................... 9 Kontogeorgas v Kartonpak Case C-104/95 [1996] ECR I-6643, [1997] 1 CMLR 1093..................................................................................................... 217 Kruidvat BVBA v Commission Case T-87/92 [1996] ECR II-1931..................... 151 Kruidvat v Commission Case C-70/97 [1998] ECR I-7183, [1999] 4 CMLR 68..................................................................................................... 5, 151 L’Oréal v De Nieuwe AMCK Case 31/80 [1980] ECR 3775, [1981] 2 CMLR 235................................................................................131, 132, 137, 138 La Technique Minière v Maschinenbau Ulm GmbH Case 56/65 [1966] ECR 234, [1966] CMLR 357.......................................................................... 33, 79 Langnese-Iglo v Commission Case C-279/95 [1998] ECR I-5609, [1998] 5 CMLR 933................................................................................31, 92, 96, 97, 114 Langnese-Iglo v Commission Case T-7/93 [1995] ECR II-1533........92, 96, 97, 114 Leclerc v Commission Case T-88/92 [1996] ECR II-1961................... 139, 145, 151 Manfredi Cases C-295/04 etc [2006] ECR I-6619, [2006] 5 CMLR 980............... 54

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Mannesmannröhren-Werke v Commission Case T-112/98 [2001] ECR I-729, [2001] 5 CMLR 54............................................................................ 57 Marleasing Case C-106/89 [1990] ECR I-4135, [1992] 1 CMLR 305................... 13 Marshall v Southampton AHA Case 152/84 [1986] ECR 723, [1986] 1 CMLR 688......................................................................................................... 13 Masterfoods v HB Ice Cream Case C-344/98 [2000] ECR I-11369, [2001] 4 CMLR 449....................................................................................... 52, 54 Matra Hachette v Commission Case T-17/93 [1994] ECR II-595....................... 117 Mavrona v DES Case C-85/03 [2004] ECR I-1573.............................................. 215 Metro v Cartier (No 2) Case C-376/92 [1994] ECR I-15, [1994] 5 CMLR 331...................................................................................................... 131, 139, 142 Metro v Commission (No 1) Case 26/76 [1977] ECR 1875, [1978] 2 CMLR 1........................................................................31, 131, 134–40, 149, 150 Metro v Commission (No 2) Case 75/84 [1986] ECR 3021, [1987] 1 CMLR 118......................................................................................... 136–37, 151 Michelin (No 1) Case 322/81 [1983] ECR 3461, [1985] 1 CMLR 282.................. 44 Microsoft v Commission Case T-201/04 [2007] ECR II-3601, [2007] 5 CMLR 846................................................................................................... 44, 51 Miller International v Commission Case 19/77 [1978] ECR 131, [1978] 2 CMLR 334......................................................................................................... 82 Minoan Lines Case T-66/99 [2003] ECR II-5515......................................... 208, 211 National Panasonic v Commission Case 136/79 [1980] ECR 2033, [1980] 3 CMLR 169........................................................................................................... 9 Neste Markkinointi Oy Case C-214/99 [2000] ECR I-11121................................ 91 Netherlands v Van der Wal Cases C-174/98 and C-198/98 [2000] ECR I-1......... 55 Nintendo Case T-13/03 [2009] ECR II-947, [2009] 5 CMLR 1421......24, 61, 62, 82 Nissan France Case C-309/94 [1996] ECR I-677, [1996] 4 CMLR 778.............. 166 Nungesser v Commission Case 258/78 [1982] ECR 2015, [1983] 1 CMLR 278........................................................................................................................ 80 O2 v Commission Case T-328/03 [2006] ECR II-1231, [2006] 5 CMLR 258...... 31 Officier van Justitie v Kolpinghuis Nijmegen Case 80/86 [1987] ECR 3939, [1989] 2 CMLR 18............................................................................................... 13 Orkem v Commission Case 374/87 [1989] ECR 3283, [1991] 4 CMLR 502........ 57 Parker Pen v Commission Case T-77/92 [1994] ECR II-549, [1995] 5 CMLR 435................................................................................................... 61, 82 Pedro IV Servicios Case C-260/07 [2009] ECR I-2437, [2009] 5 CMLR 1291... 111 Peugeot v Commission Case C-322/93 [1994] ECR I-2727................................ 165 Peugeot Nederland v Commission Case T-450/05 [2009] ECR II-2533....................................................................................62, 83, 134, 169 Piau v Commission Case C-171/05 [2006] ECR I-37............................................ 36 Pierre Fabre Case C-439/09 [2010] OJ C24/27................... 55, 74, 86, 141, 154, 115 Politi v Italian Ministry of Finance Case 43/71 [1971] ECR 1-39, [1973] CMLR 60.............................................................................................. 7, 12

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Porto di Genova Case C-179/90 [1991] ECR I-5889, [1994] 2 CMLR 422.......... 42 Portugal v Commission Case C-163/99 [2001] ECR I-2613, [2002] 2 CMLR 1319....................................................................................................... 42 Poseidon Chartering BV v Marianne Zeeschip VOF Case C-3/04 [2006] ECR I-2505......................................................................................................... 215 Procureur du Roi v Guerlain Cases 253/78 and 1-3/79 [1980] ECR 2327, [1981] 2 CMLR 99............................................................................................... 65 Pronuptia de Paris GmbH v Pronuptia de Paris Irmgard Schillgalis Case 161/84 [1986] ECR 353, [1986] 1 CMLR 414...................................... 88, 177–90 Publishers Association v Commission (No 2) Case C-360/92 [1995] ECR I-23, [1995] 5 CMLR 33.............................................................................. 87 Rewe v Hauptzollamt Kiel Case 158/80 [1981] ECR 1805, [1982] CMLR 449............................................................................................................ 13 Riviera Auto Service Cases T-185/96, T-189/96 and T-190/96 [1999] ECR II-93............................................................................................................. 65 Roberts v Commission Case T-25/99 [2001] ECR I-1881, [2001] 5 CMLR 828......................................................................................................... 92 Salonia v Poidomani Case 126/80 [1981] ECR 1563, [1982] 1 CMLR 64............ 29 Sandoz v Commission 277/87 [1990] ECR 45, [1990] 4 CMLR 242.................... 23 Schöller Lebensmittel v Commission Case T-9/93 [1995] ECR II-1611, [1995] 5 CMLR 602................................................................................. 31, 92, 97 Semen Deutsche Tamoil GmbH Case C-348/07 [2009] ECR I-2341, [2009] 3 CMLR 389........................................................................................... 219 SGL Carbon v Commission Case C-308/04 [2006] ECR I-5577, [2006] 5 CMLR 922......................................................................................................... 48 Skimmed Milk Powder Case 114/76 [1977] ECR 1211, [1979] 2 CMLR 83......... 10 Société de Vente de Ciments et Betons de l’Est SA v Kerpen & Kerpen GmbH & Co KG Case 319/82 [1983] ECR 4173, [1985] 1 CMLR 511............. 33 Solvay v Commission Case C-109/10, pending...................................................... 40 Solvay v Commission Case T-57/01 [2009] ECR II-4621...................................... 40 Stork v Commission Case T-241/97 [2000] ECR II-309, [2000] 5 CMLR 31....... 65 Stremsel v Commission Case 61/80 [1981] ECR 851, [1982] 1 CMLR 240......... 28 Suiker Unie v Commission Cases 40-48/73 [1975] ECR 1663, [1976] 1 CMLR 295.................................................... 8, 25, 42, 74, 203, 208–10, 212, 213 Syfait I Case C-53/03 [2005] ECR I-4609............................................................... 52 Syfait II Cases C-468/06 etc [2008] ECR I-7139, [2008] 5 CMLR 1382 ....21, 45, 223 Tepea v Commission Case 28/77 [1978] ECR 1391, [1978] 3 CMLR 392............ 82 Tetrapak Case C-333/94 [1996] ECR I-5951, [1997] 4 CMLR 662....................... 43 TetraPak Rausing SA v Commission Case T-51/89 [1990] ECR II-309, [1991] CMLR 334................................................................................................ 38 Tipp-ex v Commission Case 279/87 [1990] ECR I-261......................................... 61 Transocean Marine Paint Association v Commission Case 17/74 [1974] ECR 1063, [1974] 2 CMLR 459........................................................................... 60

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United Brands v Commission Case 27/76 [1978] ECR 207, [1978] 1 CMLR 429................................................................................................... 27, 45 Van Colson and Kamaan v Land Nordrhein-Westfalen Case 14/83 [1984] ECR 1891, [1986] 2 CMLR 430............................................................... 12 Van den Bergh Foods v Commission Case C-552/03 [2006] ECR I-9091..................................................................................42, 44, 92, 97, 115 Van den Bergh Foods v Commission Case T-65/98 [2003] ECR II-4653, [2004] 4 CMLR 14......................................................................................... 42, 92 Van Duyn Case 41/74 [1974] ECR 1337, [1975] 1 CMLR 1.................................. 13 Van Gend & Loos Case 26/62 [1963] ECR 1, [1963] CMLR 105.......................... 12 VBVB v Commission Cases 43/82 and 63/82 [1984] ECR 19, [1985] 1 CMLR 27........................................................................................................... 89 Verbond der Nederlandse Ondernemingen Case 51/76 [1977] ECR 133, [1977] 1 CMLR 413............................................................................................. 13 Vereeniging van Cementhandelaren v Commission Case 8/72 [1972] ECR 977, [1973] CMLR 7.............................................................................. 24, 87 Vichy v Commission Case T-19/91 [1992] ECR II-415............................... 139, 150 Viho Europe v Commission Case C-73/95 [1996] ECR I-545, [1997] 4 CMLR 419......................................................................................................... 26 Viho Europe v Commission Case T-102/92 [1995] ECR II-17, [1995] 4 CMLR 299......................................................................................................... 26 Vlaamse Reisebureaus v Sociale Dienst Case 311/85 [1987] ECR 3801, [1989] 4 CMLR 213............................................................................... 208–9, 212 Volk v Vervaecke Case 5/69 [1969] ECR 295, [1969] CMLR 273.......................... 32 Volkswagen v Commission Case C-338/00 [2003] ECR I-9189, [2004] 4 CMLR 351................................................................................................... 62, 82 Volvo Car Germany v Autohof Weidensdorf Case C-203/09, 28 October 2010.................................................................................................................... 218 Vulcan Silkeborg A/S Case C-125/05 [2006] ECR I-7637, [2007] 4 CMLR 25........................................................................................................................ 164 Wagner Miret Case C-334/92 [1993] ECR I-6911, [1995] 2 CMLR 49................ 13 Walt Wilhelm v Bundeskartellamt Case 14/68 [1969] ECR 1, [1969] CMLR 100...................................................................................................... 11, 48 Whitbread Case T-131/99 [2002] ECR II-2023, [2002] 5 CMLR 101................. 122 Windsurfing v Commission Case 193/83 [1986] ECR 611, [1986] 3 CMLR 489........................................................................................................................ 28 Woodpulp Cases 89/85 etc [1993] ECR 1307, [1993] 4 CMLR 407................ 25, 47 X BV Case C-429/07 [2009] 5 CMLR 1745............................................................ 55 Yves St Laurent v Commission Case T-19/92 [1996] ECR II-1851..................... 151

xvi  Table of cases

numerical european court of justice 13/61 Bosch [1962] ECR 45, [1962] CMLR 1........................................................ 12 26/62 Van Gend & Loos [1963] ECR 1, [1963] CMLR 105................................... 12 6/64 Costa v ENEL [1964] ECR 585, [1964] CMLR 425....................................... 14 56/64 and 58/64 Consten & Grundig v Commission [1966] ECR 299, [1966] CMLR 418.............................................................24, 28, 48, 78–79, 83, 95 56/65 La Technique Minière v Maschinenbau Ulm GmbH [1966] ECR 234, [1966] CMLR 357.......................................................................... 33, 79 23/67 Brasserie de Haecht v Wilkin (No 1) [1967] ECR 407, [1968] CMLR 26.................................................................................................. 31, 91, 96 14/68 Walt Wilhelm v Bundeskartellamt [1969] ECR 1, [1969] CMLR 100...................................................................................................... 11, 48 5/69 Volk v Vervaecke [1969] ECR 295, [1969] CMLR 273................................... 32 41/69 ACF Chemiefarma [1970] ECR 661, [1970] CMLR 43............................... 23 48/69 ICI v Commission [1972] ECR 619, [1972] CMLR 557........................ 24, 26 22/71 Béguelin Import Co v GL Import-Export SA [1971] ECR 949, [1972] CMLR 81.................................................................................................. 33 43/71 Politi v Italian Ministry of Finance [1971] ECR 1-39, [1973] CMLR 60.......................................................................................................... 7, 12 8/72 Vereeniging van Cementhandelaren v Commission [ 1972] ECR 977, [1973] CMLR 7.............................................................................................. 24, 87 39/72 Commission v Italy [1973] ECR 101, [1973] CMLR 439.............................. 7 81/72 Commission v Council [1973] ECR 575, [1973] CMLR 639...................... 10 40-48/73 Suiker Unie v Commission [1975] ECR 1663, [1976] 1 CMLR 295................................................................... 8, 25, 42, 74, 203, 208–10, 212, 213 127/73 BRT v SABAM (No 1) [1974] ECR 313, [1974] 2 CMLR 238................... 33 17/74 Transocean Marine Paint Association v Commission [1974] ECR 1063, [1974] 2 CMLR 459............................................................................................. 60 41/74 Van Duyn [1974] ECR 1337, [1975] 1 CMLR 1........................................... 13 51/75 etc EMI v CBS [1976] ECR 811, [1976] 2 CMLR 235................................. 85 26/76 Metro v Commission (No 1) [1977] ECR 1875, [1978] 2 CMLR 1........................................................................31, 131, 134–40, 149, 150 27/76 United Brands v Commission [1978] ECR 207, [1978] 1 CMLR 429.................................................................................................................. 27, 45 51/76 Verbond der Nederlandse Ondernemingen [1977] ECR 133, [1977] 1 CMLR 413............................................................................................. 13 85/76 Hoffman-La Roche v Commission [1979] ECR 461, [1979] 3 CMLR 211............................................................................................. 41, 42, 44 114/76 Skimmed Milk Powder [1977] ECR 1211, [1979] 2 CMLR 83................. 10 19/77 Miller International v Commission [1978] ECR 131, [1978] 2 CMLR 334......................................................................................................... 82 28/77 Tepea v Commission [1978] ECR 1391, [1978] 3 CMLR 392..................... 82

  Table of cases  xvii

22/78 Hugin v Commission [1979] ECR 1869, [1979] 3 CMLR 345.................... 27 30/78 Distillers v Commission [1980] ECR 2999, [1980] 3 CMLR 121............... 82 32/78 etc BMW v Commission [1979] ECR 2435, [1980] 1 CMLR 370..... 152, 157 209/78 etc FEDETAB v Commission [1980] ECR 3125, [1981] 3 CMLR 193....................................................................................... 135, 138, 155 253/78 and 1-3/79 Procureur du Roi v Guerlain [1980] ECR 2327, [1981] 2 CMLR 99........................................................................................................... 65 258/78 Nungesser v Commission [1982] ECR 2015, [1983] 1 CMLR 278........... 80 136/79 National Panasonic v Commission [1980] ECR 2033, [1980] 3 CMLR 169........................................................................................................... 9 155/79 AM & S v Commission [1982] ECR 1575, [1982] 2 CMLR 264............... 59 792/79 Camera Care v Commission [1981] ECR 119, [1980] 1 CMLR 334......... 63 31/80 L’Oréal v De Nieuwe AMCK [1980] ECR 3775, [1981] 2 CMLR 235...............................................................................................131, 132, 137, 138 61/80 Stremsel v Commission [1981] ECR 851, [1982] 1 CMLR 240.................. 28 126/80 Salonia v Poidomani [1981] ECR 1563, [1982] 1 CMLR 64..................... 29 158/80 Rewe v Hauptzollamt Kiel [1981] ECR 1805, [1982] CMLR 449............. 13 210/81 Demo-Studio Schmidt v Commission [1983] ECR 3045, [1984] 1 CMLR 63......................................................................................................... 141 322/81 Michelin (No 1) [1983] ECR 3461, [1985] 1 CMLR 282.......................... 44 43/82 and 63/82 VBVB v Commission [1984] ECR 19, [1985] 1 CMLR 27......... 89 86/82 Hasselblad v Commission [1984] ECR 883, [1984] 1 CMLR 559...... 84, 150 107/82 AEG Telefunken v Commission [1983] ECR 3151, [1984] 3 CMLR 325....................................................................................23, 25, 133, 153 319/82 Société de Vente de Ciments et Betons de l’Est SA v Kerpen & Kerpen GmbH & Co KG [1983] ECR 4173, [1985] 1 CMLR 511..................... 33 14/83 Van Colson and Kamaan v Land Nordrhein-Westfalen [1984] ECR 1891, [1986] 2 CMLR 430........................................................................... 12 123/83 BNIC v Clair [1985] ECR 391, [1985] 2 CMLR 430............................ 29, 48 170/83 Hydrotherm v Andreoli [1984] ECR 2999, [1985] 3 CMLR 224.............. 25 193/83 Windsurfing v Commission [1986] ECR 611, [1986] 3 CMLR 489......... 28 243/83 Binon v Agence et Messageries de la Presse [1985] ECR 2015, [1985] 3 CMLR 800....................................................................118, 131, 138, 150 25/84 and 26/84 Ford v Commission [1985] ECR 2725, [1985] 3 CMLR 325................................................................................................................ 133–34 75/84 Metro v Commission (No 2) [1986] ECR 3021, [1987] 1 CMLR 118........................................................................................................ 136–37, 151 152/84 Marshall v Southampton AHA [1986] ECR 723, [1986] 1 CMLR 688........................................................................................................................ 13 161/84 Pronuptia de Paris GmbH v Pronuptia de Paris Irmgard Schillgalis [1986] ECR 353, [1986] 1 CMLR 414................................................... 88, 177–90 31/85 ETA Fabriques d’Ebauches v DK Investments [1985] ECR 3933, [1986] 2 CMLR 674..................................................................................... 83, 119

xviii  Table of cases

89/85 etc Woodpulp [1993] ECR 1307, [1993] 4 CMLR 407.......................... 25, 47 311/85 Vlaamse Reisebureaus v Sociale Dienst [1987] ECR 3801, [1989] 4 CMLR 213........................................................................................... 208–9, 212 C-62/86 AKZO Chemie v Commission [1991] ECR I-3359, [1993] 5 CMLR 215.................................................................................................................. 41, 43 80/86 Officier van Justitie v Kolpinghuis Nijmegen [1987] ECR 3939, [1989] 2 CMLR 18........................................................................................................... 13 246/86 Belasco v Commission [1989] ECR 2117, [1991] CMLR 96..................... 29 27/87 Erauw-Jacquery v La Hesbignonne [1988] ECR 1919, [1988] 4 CMLR 576........................................................................................................................ 80 46/87 and 227/88 Hoechst AG v Commission [1989] ECR 2859, [1991] CMLR 410............................................................................................................ 57 85/87 Dow Benelux v Commission [1989] ECR 3137, [1991] CMLR 410........... 58 277/87 Sandoz v Commission [1990] ECR 45, [1990] 4 CMLR 242.................... 23 279/87 Tipp-ex v Commission [1990] ECR I-261................................................. 61 374/87 Orkem v Commission [1989] ECR 3283, [1991] 4 CMLR 502................. 57 C-106/89 Marleasing [1990] ECR I-4135, [1992] 1 CMLR 305............................ 13 C-234/89 Delimitis v Henninger Bräu AG [1991] ECR I-1935, [1992] 5 CMLR 210..................................................................................31, 91–92, 96, 97 C-6/90 and C-9/90 Francovich v Italian Republic [1981] ECR I-5357, [1993] 2 CMLR 66............................................................................................... 13 41/90 Höfner and Elser v Macrotron GmbH [1991] ECR I-1979, [1993] 4 CMLR 306......................................................................................................... 25 C-179/90 Porto di Genova [1991] ECR I-5889, [1994] 2 CMLR 422................... 42 C-267/91 and C-268/91 Keck and Mithouard [1993] ECR I-6097, [1995] 1 CMLR 101........................................................................................................... 9 C-53/92 Hilti AG v Commission [1994] ECR I-667, [1994] 4 CMLR 614..... 44, 59 C-91/92 Faccini Dori [1994] ECR I-3325, [1995] 1 CMLR 665............................ 13 C-334/92 Wagner Miret [1993] ECR I-6911, [1995] 2 CMLR 49......................... 13 C-360/92 Publishers Association v Commission (No 2) [1995] ECR I-23, [1995] 5 CMLR 33............................................................................................... 87 C-376/92 Metro v Cartier (No 2) [1994] ECR I-15, [1994] 5 CMLR 331...................................................................................................... 131, 139, 142 C-46/93 and C-48/93 Brasserie du Pêcheur and Factotame III [1996] ECR I-1029........................................................................................................... 13 C-322/93 Peugeot v Commission [1994] ECR I-2727......................................... 165 C-266/93 Bundeskartellamt v Volkswagen [1995] ECR I-3477, [1996] 4 CMLR 505......................................................................................... 205, 209–12 C-178/94 etc Dillenkofer [1996] ECR I-4845, [1996] 3 CMLR 469...................... 13 C-226/94 Grand Garage Albigeois [1996] ECR I-651, [1996] 4 CMLR 778....... 166 C-309/94 Nissan France [1996] ECR I-677, [1996] 4 CMLR 778....................... 166 C-333/94 Tetrapak [1996] ECR I-5951, [1997] 4 CMLR 662................................ 43 C-73/95 Viho Europe v Commission [1996] ECR I-545, [1997] 4 CMLR 419.... 26

  Table of cases  xix

C-104/95 Kontogeorgas v Kartonpak [1996] ECR I-6643, [1997] 1 CMLR 1093..................................................................................................... 217 C-128/95 Fontaine v Aqueducs Automobiles [1997] ECR I-967, [1997] 5 CMLR 39......................................................................................................... 166 C-279/95 Langnese-Iglo v Commission [1998] ECR I-5609, [1998] 5 CMLR 933................................................................................31, 92, 96, 97, 114 C-282/95 Guerin Automobiles v Commission [1997] ECR I-503, [1997] 5 CMLR 447......................................................................................................... 65 C-215/96 Bagnasco v BPN [1999] ECR I-135, [1999] 4 CMLR 624..................... 29 C-306/96 Javico v Yves St Laurent [1998] ECR I-1983, [1998] 5 CMLR 172.................................................................................................................. 29, 85 C-7/97 Bronner v Mediaprint [1998] ECR I-7791, [1999] 4 CMLR 112.............. 45 C-70/97 Kruidvat v Commission [1998] ECR I-7183, [1999] 4 CMLR 68.... 5, 151 C-126/97 Eco Swiss China Time v Benetton [1999] ECR I-3055, [2000] 5 CMLR 816......................................................................................................... 53 C-215/97 Bellone v Yokohama [1998] ECR I-2191.............................................. 221 C-174/98 and C-198/98 Netherlands v Van der Wal [2000] ECR I-1................... 55 C-344/98 Masterfoods v HB Ice Cream [2000] ECR I-11369, [2001] 4 CMLR 449................................................................................................... 52, 54 C-381/98 Ingmar v Eaton Leonard Technologies [2000] ECR I-9305, [2001] 1 CMLR 9........................................................................................................... 215 C-456/98 Centrosteel v Adipol [2000] ECR I-6007............................................. 221 C-163/99 Portugal v Commission [2001] ECR I-2613, [2002] 2 CMLR 1319..... 42 C-214/99 Neste Markkinointi Oy [2000] ECR I-11121......................................... 91 C-453/99 Courage v Crehan [2001] ECR I-6297, [2001] 5 CMLR 1058.............. 54 C-475/99 Ambulanz Glöckner [2001] ECR I-8089, [2002] 4 CMLR 726............. 25 C-338/00 Volkswagen v Commission [2003] ECR I-9189, [2004] 4 CMLR 351.................................................................................................................. 62, 82 C-341/00 CNPA v Commission [2001] ECR I-5263................................................ 5 C-2/01 and C-3/01 Bayer v Commission [2004] ECR I-23, [2004] 4 CMLR 653.................................................................................................................. 23, 84 C-198/01 CIF [2003] ECR I-8055, [2003] 5 CMLR 829........................................ 14 C-485/01 Caprini v Conservatore del registro delle imprese di Trento [2003] ECR I-2371............................................................................................. 221 C-204/02 Bass [2003] ECR I-14763...................................................................... 122 C-53/03 Syfait I [2005] ECR I-4609........................................................................ 52 C-85/03 Mavrona v DES [2004] ECR I-1573....................................................... 215 C-551/03 General Motors (Opel Nederland) v Commission [2006] ECR I-3173, [2006] 5 CMLR 1.............................................................. 62, 82, 152 C-552/03 Van den Bergh Foods v Commission [2006] ECR I-9091..................................................................................42, 44, 92, 97, 115 C-3/04 Poseidon Chartering BV v Marianne Zeeschip VOF [2006] ECR I-2505......................................................................................................... 215

xx  Table of cases

C-74/04 Commission v Volkswagen [2006] ECR I-6585, [2008] 4 CMLR 1297...............................................................................................87, 118, 134, 155 C-95/04 British Airways v Commission [2007] ECR I-2331..................... 41, 43, 44 C-105/04 and C-113/04 Dutch Electrotechnical Equipment [2006] ECR I-8725......................................................................................................... 124 C-167/04 JCB Service v Commission [2006] ECR I-8935, [2006] 5 CMLR 23............................................................................62, 74, 84, 87, 88, 153 C-295/04 etc Manfredi [2006] ECR I-6619, [2006] 5 CMLR 980......................... 54 C-308/04 SGL Carbon v Commission [2006] ECR I-5577, [2006] 5 CMLR 922......................................................................................................... 48 C-465/04 Honyvem Informazioni Commerciali v De Zotti [2006] ECR I-2879......................................................................................................... 218 C-125/05 Vulcan Silkeborg A/S [2006] ECR I-7637, [2007] 4 CMLR 25............ 164 C-171/05 Piau v Commission [2006] ECR I-37..................................................... 36 C-217/05 CEES v CEPSA [2006] ECR I-11987, [2007] 4 CMLR 181.......... 51, 203, 205–7, 209, 212 C-421/05 City Motors Group NV [2007] ECR I-653........................................... 165 C-279/06 CEPSA v Tobar [2008] ECR I-6681, [2008] 5 CMLR 1327........................................................... 32, 33, 34, 87, 88, 203, 206–7, 210, 212 C-468/06 etc Syfait II [2008] ECR I-7139, [2008] 5 CMLR 1382............ 21, 45, 223 C-501/06 etc GlaxoSmithKline v Commission [2009] ECR I-9291, [2010] 4 CMLR 50.................................................. 21, 30, 35, 51, 85, 115, 119–20 C-19/07 Heirs of Paul Chevassus-Marche v Groupe Danone [2008] ECR I-159, [2008] 2 CMLR 387........................................................................ 217 C-202/07 France Télécom v Commission [2009] ECR I-2369, [2009] 4 CMLR 1149....................................................................................................... 43 C-209/07 BIDS [2008] ECR I-8637, [2009] 4 CMLR 310..................................... 30 C-348/07 Semen Deutsche Tamoil GmbH [2009] ECR I-2341, [2009] 3 CMLR 389....................................................................................................... 219 C-429/07 X BV [2009] 5 CMLR 1745..................................................................... 55 C-441/07 Alrosa v Commission, 29 June 2010....................................................... 63 C-550/07 Akzo Nobel v Commission, 14 September 2010.................................... 59 C-260/07 Pedro IV Servicios [2009] ECR I-2437, [2009] 5 CMLR 1291............ 111 C-280/08 Deutsche Telekom v Commission, 14 October 2010............................. 46 C-203/09 Volvo Car Germany v Autohof Weidensdorf, 28 October 2010.......... 218 C-260/09 Activision Blizzard, pending................................................................... 83 C-439/09 Pierre Fabre [2010] OJ C24/27............................ 55, 74, 86, 141, 154, 115 C-109/10 Solvay v Commission, pending............................................................... 40 C-457/10 AstraZeneca v Commission, pending..................................................... 40

  Table of cases  xxi

european general court T-51/89 TetraPak Rausing SA v Commission [1990] ECR II-309, [1991] CMLR 334............................................................................................................ 38 T-125/89 Filtrona Espanola v Commission [1990] ECR II-393............................ 62 T-24/90 Automec v Commission (No 2) [1992] ECR II-2223, [1992] 5 CMLR 431................................................................................................. 65, 154 T-28/90 Asia Motors France v Commission [1996] ECR II-961, [1992] 5 CMLR 431......................................................................................................... 67 T-19/91 Vichy v Commission [1992] ECR II-415........................................ 139, 150 T-19/92 Yves St Laurent v Commission [1996] ECR II-1851.............................. 151 T-43/92 Dunlop Slazenger International v Commission [1994] ECR II-441, [1993] 5 CMLR 352............................................................................................. 82 T-66/92 Herlitz v Commission [1994] ECR II-531, [1995] 5 CMLR 458....... 61, 82 T-77/92 Parker Pen v Commission [1994] ECR II-549, [1995] 5 CMLR 435.................................................................................................................. 61, 82 T-87/92 Kruidvat BVBA v Commission [1996] ECR II-1931............................. 151 T-88/92 Leclerc v Commission [1996] ECR II-1961............................ 139, 145, 151 T-102/92 Viho Europe v Commission [1995] ECR II-17, [1995] 4 CMLR 299............................................................................................................ 26 T-7/93 Langnese-Iglo v Commission [1995] ECR II-1533.................92, 96, 97, 114 T-9/93 Schöller Lebensmittel v Commission [1995] ECR II-1611, [1995] 5 CMLR 602................................................................................. 31, 92, 97 T-17/93 Matra Hachette v Commission [1994] ECR II-595............................... 117 T-186/94 Guerin Automobiles v Commission [1995] ECR II-1753, [1996] 5 CMLR 685............................................................................................. 65 T-176/95 Accinauto v Commission [1999] ECR II-1635, [2000] 4 CMLR 33.............................................................................................................. 84 T-41/96 Bayer v Commission [2000] ECR II-3383, [2001] 4 CMLR 126............. 23 T-185/96, T-189/96 and T-190/96 Riviera Auto Service [1999] ECR II-93.......... 65 T-125/97 and T-127/97 Coca-Cola v Commission [2000] ECR II-1733, [2000] 5 CMLR 467............................................................................................. 27 T-228/97 Irish Sugar v Commission [1999] ECR II-2969, [1999] 5 CMLR 1082...................................................................................................................... 40 T-241/97 Stork v Commission [2000] ECR II-309, [2000] 5 CMLR 31............... 65 T-65/98 Van den Bergh Foods v Commission [2003] ECR II-4653, [2004] 4 CMLR 14..................................................................................................... 42, 92 T-112/98 Mannesmannröhren-Werke v Commission [2001] ECR I-729, [2001] 5 CMLR 54............................................................................................... 57 T-25/99 Roberts v Commission [2001] ECR I-1881, [2001] 5 CMLR 828........... 92 T-66/99 Minoan Lines [2003] ECR II-5515................................................. 208, 211 T-131/99 Whitbread [2002] ECR II-2023, [2002] 5 CMLR 101.......................... 122 T-57/01 Solvay v Commission [2009] ECR II-4621............................................... 40

xxii  Table of cases

T-67/01 JCB Service v Commission [2004] ECR II-49, [2004] 4 CMLR 1346................................................................................................................ 84, 88 T-325/01 Daimler Chrysler v Commission [2005] ECR II-3319, [2007] 4 CMLR 559............................................ 24, 25, 29, 57, 62, 153, 203, 207, 209–11 T-12/03 Itochu v Commission [2009] ECR I-883, [2009] 5 CMLR 1375....... 26, 83 T-13/03 Nintendo [2009] ECR II-947, [2009] 5 CMLR 1421..............24, 61, 62, 82 T-18/03 Activision Blizzard [2009] ECR II-1021, [2009] 5 CMLR 1469.............. 83 T-253/03 Akzo Nobel v Commission [2007] ECR II-3523.................................... 59 T-271/03 Deutsche Telekom v Commission [2008] ECR II-477, [2008] 5 CMLR 631......................................................................................................... 46 T-328/03 O2 v Commission [2006] ECR II-1231, [2006] 5 CMLR 258............... 31 T-201/04 Microsoft v Commission [2007] ECR II-3601, [2007] 5 CMLR 846.................................................................................................................. 44, 51 T-301/04 Clearstream [2009] ECR II-3155, [2009] 5 CMLR 2677....................... 46 T-321/05 AstraZeneca v Commission, 1 July 2010................................................. 40 T-450/05 Peugeot Nederland v Commission [2009] ECR II-2533.........................................................................................62, 83, 134, 169 T-141/08 E.ON, pending......................................................................................... 57 T-286/09 Intel, pending............................................................................. 38, 39, 227

commission decisions ARG/Unipart [1988] OJ L45/34............................................................................ 159 Baccarat see Compagnie des Cristalleries Baccarat BASF Lacke & Farben [1995] OJ L272/16, [1996] 4 CMLR 811........................... 61 Bass [1999] OJ L186/1........................................................................................... 122 Bayer Dental [1990] OJ L351/46............................................................................. 83 BMW (No 1) [1975] OJ L29/1, [1975] 1 CMLR D44......................95, 96, 138, 142, 143, 149, 150, 151, 152 Boosey & Hawkes [1987] OJ L286/36, [1988] 4 CMLR 67.............................. 27, 63 BP Kemi [1979] OJ L286/32, [1979] 3 CMLR 684........................................... 91, 94 British Sugar [1999] OJ L76/1, [1999] 4 CMLR 1316............................................ 61 CECED [2000] OJ L187/47, [2000] 5 CMLR 635.................................................. 35 Charles Jourdan [1989] OJ L35/31, [1989] 4 CMLR 591....................177, 178, 184, 185, 189, 190 Coca Cola, 22 June 2005, DG Comp website.......................................................... 63 Compagnie des Cristalleries Baccarat [1991] OJ L97/16............................... 56, 141 Computerland [1987] OJ L222/12, [1989] 4 CMLR 259.............178, 179, 180, 182, 183, 184, 185, 186, 187, 188, 189, 190, 191, 200 Continental Can [1972] OJ L7/25, [1972] CMLR D11.......................................... 40 Daimler Chrysler [2002] OJ L257/1...................................................... 207, 208, 209 Daimler Chrysler [2007] OJ L317/76.................................................................... 170

  Table of cases  xxiii

Deutsche Bundesliga [2005] OJ L134/46.............................................................. 125 Distillers [1978] OJ L50/16, [1978] 1 CMLR 400................................................... 84 Dutch Banks [1999] OJ L27/28, [2000] 4 CMLR 137............................................ 29 Dutch Industrial Gases [2003] OJ L84/1, [2003] 5 CMLR 144............................. 29 Fiat [2007] OJ L332/77.......................................................................................... 170 General Motors (Opel) [2007] OJ L330/44.......................................................... 170 Gosme/Martel [1991] OJ L185/28.......................................................................... 83 Grohe [1985] OJ L19/17, [1988] 4 CMLR 612............................................. 138, 149 Grundig [1994] OJ L20/15...................................................................... 119, 155–56 Hennessy-Henkel [1980] OJ L383/11, [1981] 1 CMLR 601................................ 117 Hugin/Liptons [1978] OJ L22/23, [1978] CMLR D19........................................... 27 IBM PC [1984] OJ L118/24, [1984] 2 CMLR 342.................................. 96, 138, 141 Ideal Standard [1985] OJ L20/38, [1988] 4 CMLR 627......................... 138–39, 149 D’Ieteren Motor Oils [1991] OJ L20.42................................................................ 140 IMA Rules [1980] OJ L318/1, [1981] 2 CMLR 498.............................................. 212 Intel, 13 May 2009, DG Comb website..................................................... 38, 43, 227 Ivoclar [1985] OJ L369/1, [1988] 4 CMLR 781.................................... 138, 148, 150 Junghans [1977] OJ L30/10, [1977] 1 CMLR D82........................138, 141, 148, 149 Kathon Biocide [1984] OJ C59, [1984] 1 CMLR 476............................................ 96 Kenwood [1993] OJ C67/9, [1993] 4 CMLR 389................................................. 139 Kodak [1970] OJ L147/24, [1970] CMLR D19..................................................... 138 Langnese-Iglo [1993] OJ L183/19, [1994] 4 CMLR 51........................................ 114 Liebig Spices [1978] OJ L53/20, [1978] 2 CMLR 116............................................ 92 Murat [1983] OJ L348/20, [1984] 1 CMLR 219........................................... 138, 141 Nathan-Bricolux [2001] OJ L54/1, [2001] 4 CMLR 1122..................................... 88 National Panasonic [1982] OJ L354/28, [1983] 1 CMLR 497............................... 23 Nintendo [2003] OJ L255/33, [2004] 4 CMLR 421......................................... 24, 62 Omega [1970] OJ L242/22, [1970] CMLR D49....................131, 132, 138, 143, 148 Parfums Givenchy [1992] OJ L236/11, [1993] 5 CMLR 579....................... 151, 154 Peugeot [1986] OJ L295/19, [1989] 4 CMLR 371........................................ 132, 152 Pittsburgh [1972] OJ L272/35, [1973] CMLR D2................................................ 211 Procter & Gamble/Gillette, COMP/M.3732, 15 July 2005............................. 95, 123 Pronuptia [1987] OJ L13/39, [1989] 4 CMLR 355............................... 189, 190, 191 Repsol, 12 April 2006, DG Comp website..........................................63, 88, 122, 212 SABA (No 1) [1976] OJ L28/19, [1976] 1 CMLR D61............................. 90, 134–35 SABA (No 2) [1983] OJ L376/41, [1984] 1 CMLR 676........................ 136, 143, 154 Scottish & Newcastle [1999] OJ L186/19.............................................................. 122 Servicemaster [1988] OJ L332/38, [1989] 4 CMLR 581.............................. 183, 188 Systemform [1997] OJ L47/11................................................................................. 61 Telenor/Canal+/Canal Digital, 5 January 2004, DG Comp website.................... 103 Topps, 26 May 2004, DG Comp website......................................................... 83, 118 Toyota [2007] OJ L329/52..................................................................................... 170 UEFA Champions League [2003] OJ L291/25...................................................... 125

xxiv  Table of cases

Villeroy & Boch [1985] OJ L376/15, [1988] 4 CMLR 461.......................... 138, 140, 141, 142, 143, 155 Volkswagen [2001] OJ L262/14............................................................................. 118 Whitbread [1999] OJ L88/26................................................................................. 122 Woodpulp [1985] OJ L85/1..................................................................................... 25 Yamaha, 2003, DG Comp website................................................................... 85, 154 Yves Rocher [1987] OJ L8/49, [1988] 4 CMLR 592.............177, 178, 180, 183, 184, 185, 186, 187, 188, 189, 190, 191 Yves Saint Laurent Parfums [1992] OJ L12/24, [1993] 4 CMLR 120........................................................................141, 145, 148, 151, 154

national courts France Bijourama v Festina, Case 2006-17900, 16 October 2007.................................... 231 Hi-Fi/Home Cinema, Decision 06-D-285, October 2006.................................... 231 SARL PMC Distribution v SAS Pacific Creation, Case 07-04360, 18 April 2008...................................................................................................... 231 Spain Carburantes Costa de la Luz v Repsol, Decision No 477/2007, 29 July 2007...... 232 United Kingdom Argos Ltd v Office of Fair Trading; JJB Sports plc v Office of Fair Trading [2006] EWCA Civ 1318....................................................................................... 25 British Leyland v TI Silencers [1981] 2 CMLR 75.................................................. 33 Chemidus Wavin v Société pour la Transformation et l’Exploitation des Resines Industrielles SA [1978] 3 CMLR 514..................................................... 33 Crehan [2006] UKHL 38................................................................................... 52, 54 Douglas King v Tunnock [2000] EuLR 531, [2000] IRLR 569............................ 220 R v Secretary of State for Transport, ex parte Factortame Ltd (No 2) [1990] 3 CMLR 375............................................................................................. 14 United States Leegin Creative Products v PSKS, 551 US 877 (2007)................................. 225, 235

Table of Legislation treaties Amsterdam Treaty.................................................................................................. 3, 6 EC Treaty.................................................................................................................... 1 European Atomic Energy Treaty............................................................................... 1 European Coal and Steel Treaty................................................................................ 1 Lisbon Treaty...................................................................................................1, 4, 5, 6   Declaration 27...................................................................................................... 14 Maastricht Treaty see Treaty on European Union Nice Treaty.............................................................................................................. 3, 6 Single European Act................................................................................................... 6 Treaty on European Union................................................................................ 1, 3, 6 Treaty on the Functioning of the European Union.................................................. 1   Arts 34–36.............................................................................................7, 15, 88, 95   Art 101................... 4, 6, 8, 12, 14, 15, 21–29, 31, 33, 36, 40, 44–45, 47–55, 60, 62, 64–65, 74, 82, 84, 95, 98–99, 105, 113, 115, 123–25, 132–33, 135, 139, 141, 156, 180, 191, 204–8, 210–13, 226, 232–33, 239–40 (1)....................................... 7, 15, 21–23, 28–29, 31–32, 34, 37–38, 49–50, 54, 65, 75–98, 103–4, 110–14, 116–17, 119, 122, 124–25, 130–43, 147–56, 158, 166, 169–71, 178–91, 193–95, 197–200, 203, 208, 211–14, 225 (a)........................................................................................................ 87 (e)........................................................................................................ 94 (2).............................................................. 15, 33–34, 54, 75, 131, 143, 192 (3)..............................5, 7, 15, 21–22, 30–31, 33–38, 49–50, 72, 75, 80, 85, 89, 93, 97–98, 107, 110, 113–20, 122, 124–25, 131–34, 136–37, 141, 143–56, 158, 169, 171, 178–80, 182–83, 192, 194, 199–200, 212–14, 225 (b)........................................................................................................ 36   Art 102.....................................4, 6, 8, 12, 14, 15, 21–22, 26–27, 38–46, 48–55, 57, 60, 62, 64–65, 95, 98, 123, 125, 156, 223, 226–27, 232–33, 240   Art 167(4)............................................................................................................. 35   Art 263.......................................................................................................... 4, 5, 62   Art 265.............................................................................................................. 4, 67   Art 267........................................................................................................ 6, 51, 52   Art 288............................................................................................................ 12, 13   Art 297.................................................................................................................... 7

xxvi  Table of legislation

regulations Reg (EEC) 17/62 [1962] JO 204.............................................................................. 49 Reg (EEC) 123/85 [1985] OJ L15/16..................................................................... 157 Reg (EC) 1475/95 [1995] OJ L145/25................................................................... 157 Reg (EC) 2790/1999 [1999] OJ L336/21........................................... 98, 100, 223–24 Reg (EC) 1400/2002 [2002] OJ L203/30................................................. 157–67, 169   recital 1(1)(w).................................................................................................... 164   recital 9............................................................................................................... 165   recital 10............................................................................................................. 165   recital 13............................................................................................................. 162   recital 14............................................................................................................. 165   recital 15............................................................................................................. 162   recital 16............................................................................................................. 162   recital 20............................................................................................................. 163   recital 32............................................................................................................. 166   Art 1(1)(b).......................................................................................................... 163 (e).......................................................................................................... 160 (n)......................................................................................................... 159 (2).............................................................................................................. 159   Art 2(1)............................................................................................................... 158 (3).............................................................................................................. 159   Art 3(1)............................................................................................................... 160 (2).............................................................................................................. 160 (3).............................................................................................................. 165 (4).............................................................................................................. 165 (5).............................................................................................................. 164 (6).............................................................................................................. 165 Art 4.................................................................................................................... 163 (1).............................................................................................................. 162 (b).......................................................................................................... 162 (iii)................................................................................................... 165 (d).......................................................................................................... 162 Art 5(1)............................................................................................................... 163 (2)(a).......................................................................................................... 164 (b)......................................................................................................... 164 Art 6.................................................................................................................... 166 (2).............................................................................................................. 167 Art 7.................................................................................................................... 167 Art 8.................................................................................................................... 161 (2).............................................................................................................. 160 Art 9.................................................................................................................... 159 Reg (EC) 1/2003 [2003] OJ L1/1................................................... 14, 49–50, 232–33

  Table of legislation  xxvii

recital 14............................................................................................................... 64 Art 2.............................................................................................................. 35, 115 Art 3...................................................................................................................... 49 (3)................................................................................................................ 49 Art 5...................................................................................................................... 52 Art 7................................................................................................................ 60–63 (2)................................................................................................................ 66 Art 8................................................................................................................ 62–63 Art 9........................................................................................................ 60, 63, 232 Art 10.............................................................................................................. 60, 64 Art 11.................................................................................................................... 53 (6)............................................................................................................... 53 Art 12.................................................................................................................... 53 Art 15(1)............................................................................................................... 55 (3)............................................................................................................... 55 Art 16.............................................................................................................. 52, 54 Art 17.................................................................................................................... 56 Art 18.................................................................................................................... 56 (2)............................................................................................................... 56 (3)............................................................................................................... 56 Art 19.................................................................................................................... 58 Art 20.................................................................................................................... 57 Art 21.................................................................................................................... 57 Art 23.............................................................................................................. 56, 62 (2)............................................................................................................... 60 Art 24.............................................................................................................. 56, 62 Art 25.................................................................................................................... 60 Art 27................................................................................................................ 8, 60 Art 28.................................................................................................................... 58 Art 29.................................................................................................................. 113 (2)............................................................................................................. 199 Reg (EC) 772/2004 [2004] OJ L123/11........................................................... 99, 192 Reg (EC) 773/2004 [2004] OJ L123/18............................................................. 50, 58 Art 5...................................................................................................................... 66 Annex, Form C..................................................................................................... 66 Reg (EC) 864/2007 [2007] OJ L199/40................................................................... 54 Reg (EU) 330/2010 [2010] OJ L102/1...................71–72, 97–114, 132, 143–47, 158, 167–68, 170–71, 179, 192–99, 241–50 recital 15..................................................................................................... 146, 199 Art 1(1)(a).................................................................................................... 99, 104 (c).......................................................................................................... 103 (d).................................................................................................. 111, 195 (e).......................................................................................................... 144

xxviii  Table of legislation

(f).................................................................................................. 102, 192 (g).................................................................................................. 112, 196 (h)......................................................................................................... 214 (2)...................................................................................................... 101, 104 Art 2(1)......................................................................................................... 98, 104 (2).............................................................................................................. 104 (3)...................................................................................................... 102, 192 (4).............................................................................................................. 103 (a).......................................................................................................... 103 (b).......................................................................................................... 103 (5)................................................................................................................ 98 Art 3.................................................................................................................... 100 (1).............................................................................................................. 100 Art 4...............................................................................75, 105, 110, 111, 117, 146 (a)............................................................................................................... 105 (b).......................................................................................................... 105–9 (iii)........................................................................................................ 144 (c)............................................................................................... 109, 145, 198 (d)...................................................................................................... 110, 145 (e)........................................................................................... 99, 109–10, 145 Art 5.............................................................................................. 110–12, 146, 168 (1).............................................................................................................. 195 (a).......................................................................................................... 195 (b).......................................................................................................... 195 (c).......................................................................................... 146, 168, 198 (2)...................................................................................................... 111, 195 (3).............................................................................................................. 196 Art 6.................................................................................................................... 114 Art 7................................................................................................................ 101–2 (c)............................................................................................................... 102 Art 8.................................................................................................................... 104 Art 9...................................................................................................................... 98 Reg (EU) 461/2010................................................................................... 158, 170–71 recital 9............................................................................................................... 158 Art 5.................................................................................................................... 170 directives Dir 86/653/EEC [1986] OJ L382/17.......................................... 204, 214–22, 324–33 Art 1(2)............................................................................................................... 215 (3).............................................................................................................. 215 Art 2(2)............................................................................................................... 215 Art 3(1)............................................................................................................... 216

  Table of legislation  xxix

(2).............................................................................................................. 216 Art 4(1)............................................................................................................... 216 (2).............................................................................................................. 216 (3).............................................................................................................. 216 Art 5.................................................................................................................... 216 Art 6(1)............................................................................................................... 216 Art 7(1)............................................................................................................... 216 (2).............................................................................................................. 217 Art 8(a)............................................................................................................... 217 (b).............................................................................................................. 216 Art 9.................................................................................................................... 217 Art 12.................................................................................................................. 217 Arts 13–16.................................................................................................... 217–18 Arts 17–18.................................................................................................... 218–20 Art 17............................................................................................................ 218–19 Art 19.................................................................................................................. 218 Art 20.................................................................................................................. 220 Dir 2000/31/EC [2000] OJ L178/1.......................................................................... 17 Dir 2005/29/EC [2005] OJ L149/22........................................................................ 16

1

European Union Law 1.1 

what is the eu? and the ec?

The European Union (EU) institutions and the Treaties that create and govern them have changed both in name and in substance several times over the years. Past case law and other texts of course refer to them by the names that they had at the time, so it is helpful to know how these relate to the present Treaties and terminology. The European Community (EC)1 was founded by the Treaty of Rome (or EC Treaty) in 1958. At the same time the European Atomic Energy Community, often known as ‘Euratom’, was created. These two Treaties, together with the 1952 European Coal and Steel Treaty, which expired in 2002, were together known as the European Communities, and from 1967 onwards they had common institutions: one Council, one Commission, one European Parliament and one European Court of Justice. On the entry into force of the Treaty on European Union (TEU) in 1993, the European Union was created, and the three European Communities became one of the three parts or ‘pillars’ of the EU. The other two pillars of the EU were a common foreign and security policy, and cooperation in the fields of justice and home affairs. Then on 1 December 2009 the Lisbon Treaty entered into force and changed the name of the EC Treaty to Treaty on the Functioning of the European Union (TFEU). The effect of this latest change is that the ‘European Community’ has ceased to have a separate existence and is now simply part of the EU.2 The EU has legal personality and can enter into international agreements. There are 27 Member States of the EU. These are Austria, Belgium, Bulgaria, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, the Slovak Republic, Slovenia, Spain, Sweden and the United Kingdom. The official languages of the EU are Bulgarian, Czech, Danish, Dutch, English, Estonian, Finnish, French, German, Greek, Hungarian, Irish, Italian, Latvian, Lithuanian, Maltese, Polish, Portuguese, Romanian, Slovak, Slovenian, Spanish and Swedish. The different language versions of legislative texts all carry equal weight. 1

  Prior to 1993, it was known as the European Economic Community (EEC).   Although the ‘European Community’ no longer exists, the abbreviation ‘EC’ is sometimes used to denote ‘European Commission’ (as in, eg, ‘EC Guidelines’). This can be confusing, so I have avoided such usage, referring instead to, eg, ‘EU Guidelines’. 2

2 1—european union law [1.2]

1.2 

eu institutions

The following are the EU’s main institutions.

1.2.1  European Council The European Council is made up of the heads of state or government of all the Member States, and headed by the President of the European Council, who serves for a term of two and a half years. It is responsible for determining the political direction and priorities of the EU.

1.2.2  Council of Ministers The Council of the European Union is made up of one representative from the government of each Member State. It is referred to according to sectors of responsibility: for example, ‘the Transport Council’ is made up of Ministers of Transport. This means that it is possible for ‘the Council’ to have several different meetings at the same time. Competition law is handled by various Councils depending on the subject matter: for example, the 2004 procedural reform of competition law was discussed by the Industry Council, but the Transport Council deals with competition measures specifically applicable to the transport sector. In almost all spheres it is the Council, jointly with the European Parliament, that has responsibility for adopting secondary legislation, on the basis of proposals made by the Commission (though competition law is one of the few areas in which the Parliament’s role is fairly limited). The Council also opens negotiations for international agreements between the EU and third countries, and adopts any Decision authorising their signature and conclusion.

1.2.3 Commission The European Commission has 27 members or ‘Commissioners’ (one from each Member State), nominated by common consensus between the governments of all the Member States and the person whom they have previously agreed to nominate as Commission President, and approved by the Parliament. In principle the Commissioners perform their duties independently of any influence from national governments and national interests. The Commission administration is divided up into 32 Directorates-General (DGs) and specialised ‘services’. Of particular interest in the context of EU

[1.2]   eu institutions  3

distribution law are the Competition DG or ‘DG Comp’3 (responsible for the enforcement of EU competition rules) and the Internal Market and Services DG (dealing with the internal market, including rules applicable to commercial agency). The Commission also has a number of internal services such as the Legal Service, which is involved in all Commission acts of legal significance. The Commission has responsibility for defending the general interest of the EU. It makes legislative proposals to the Council and European Parliament and has a duty to ensure within the limits of its powers that the rules of the Treaty are obeyed. It has some legislative powers delegated to it by the Council, and it administers EU policies. In the field of competition law it has important enforcement powers: in particular it may impose fines of up to 10 per cent of a company’s worldwide annual turnover. It also has broad powers to conduct investigations and inspections where it suspects breach of the competition rules. DG Comp is divided into nine Directorates. Directorate A is responsible for ‘policy and strategy’ including the European Competition Network and international relations, and Directorate R deals with ‘registry and resources’. The five Directorates B to F apply the EU rules on anticompetitive agreements, abuse of a dominant position and merger control to various industry sectors: Directorate B covers energy and environment; Directorate C covers information, communication and media; Directorate D covers financial services; Directorate E covers basic industries, manufacturing and agriculture; and Directorate F covers transport, post and other services. Directorate G deals with cartels, and Directorate H is responsible for control of state aid.

1.2.4  European Parliament The European Parliament has been a directly elected body since 1979 and now has 736 (soon to increase to 754) members. Until 1993, despite the 1986 Single European Act, which increased its powers, it remained essentially a consultative body (though its views were often influential). With the entry into force of the Maastricht Treaty in 1993, the Amsterdam Treaty in 1999, the Nice Treaty in 2003 and the Lisbon Treaty in 2009, its powers have steadily grown. It now enjoys an equal role with the Council in almost all areas of legislative activity. Competition law is an exception, with the Parliament often having only a consultative role. The Parliament has powers with respect to the budget, the admission of new Member States to the EU and the conclusion of association agreements with third countries. It also has to approve the nomination of the Commission President and other Commission members. In addition it has the power to adopt a motion of censure of the Commission, requiring it to resign in its entirety. It thereby exercises 3  The Competition Directorate-General was known as DG IV until 1999, when Commission President Prodi abolished the use of the numbering system in favour of names based on the policy areas covered.

4 1—european union law [1.2]

political control, which it wielded most famously during the crisis that brought down President Santer’s Commission in 1999.

1.2.5  European Court of Justice and European General Court The Court of Justice of the European Union4 is situated in Luxembourg. It consists of the European Court of Justice (ECJ), the General Court (EGC)5 and some specialised courts. Cases may be brought to the Court by the EU institutions, Member States and, in some circumstances, by companies and individuals. The ECJ has 27 judges and 8 (soon to increase to 11) Advocates General. Exceptionally important cases may be heard either by a ‘full Court’ of 27 judges or by a ‘Grand Chamber’ of 13. But the vast majority is heard by a Chamber of three or five judges.6 It reviews actions brought by other institutions or Member States concerning the acts, or failures to act, of the other institutions; makes findings of breaches against Member States in the case of their failure to observe their obligations under the Treaties; ensures the uniform application of EU law by giving authoritative interpretations of that law when requested by national courts; and hears appeals on points of law from the EGC. Cases brought directly to the ECJ, requests for preliminary rulings and appeals from the EGC all last an average of around eighteen months. The EGC has 27 judges who sit in Chambers of three or five, or as single judges or, in particularly complex or important cases, as a ‘full Court’ of 27 judges or a ‘Grand Chamber’ of 13. It has jurisdiction over, among other things, competition law cases, where it reviews Commission Decisions when they are challenged by private parties. Cases before the EGC take an average of a little over two years. Appeal from judgments of the EGC lies, on questions of law only, to the ECJ. The kinds of cases that may be of relevance in the context of EU distribution law are the following. 1.2.5.1  Judicial Review The EGC acts frequently in its judicial review capacity in the field of competition law under Articles 263 and 265 TFEU. In particular it hears appeals from companies on whom the Commission has imposed fines for agreements or conduct in breach of Article 101 or 102 TFEU. Both the finding of an infringement and the level of any fine may be reviewed.

4  Not to be confused with either the European Court of Human Rights in Strasbourg or the International Court of Justice in the Hague. 5   Until it was renamed upon the entry into force of the Lisbon Treaty on 1 December 2009, this court was known as the Court of First Instance (CFI). 6   A case is heard by a Grand Chamber if a Member State or an EU institution party to the case so requests, or in particularly complex or important cases.

[1.2]   eu institutions  5

Cases brought by private parties or by a Member State against the Commission are always heard by the EGC. Those brought by a Member State against the Council or Parliament, or by one EU institution against another, are heard by the ECJ. Private parties appealing against measures that are not addressed specifically to them are always required to show that they are ‘directly and individually concerned’.7 The only exception – recently introduced8 – to this rule is if the measure is a ‘regulatory act’ that does not require implementation, in which case only ‘direct’ and not ‘individual’ concern need be shown. The EGC can also review the adoption by the Commission of a block exemption Regulation (see below chapter two section 2.4.2) if there are grounds for alleging that the Commission enacted such a Regulation illegally. A Member State can always make such a challenge, and the case will be heard by the EGC. Companies, on the other hand, have in the past had difficulty establishing the ‘direct and individual concern’ that was necessary to obtain standing to bring such an action.9 The scope of the term ‘regulatory act’ is not certain, but if ‘individual concern’ no longer needs to be shown to challenge a block exemption, such an action may now be easier to bring. 1.2.5.2  Infringement Proceedings Infringement proceedings may be brought against a Member State or EU institution for breach of EU law. Proceedings might be brought, for example, by the Commission against a Member State for failure to implement or inadequate implementation of a Directive. This kind of case is preceded by an administrative phase during which the Commission attempts to persuade the Member State to rectify the situation. Only if this proves unsuccessful will the case be brought before the ECJ. The only Directive of direct relevance to distribution law is the Directive on commercial agents (see below chapter six section 6.3). 1.2.5.3  Preliminary Ruling The TFEU allows (or in the case of a court from which no appeal lies, requires) a judge sitting in a national court to ask the ECJ for a preliminary ruling on the interpretation10 or validity of EU law when such an issue arises in a case before 7   In Case C-70/97 Kruidvat v Commission [1998] ECR I-7183, [1999] 4 CMLR 68, Kruidvat had been sued by Givenchy for selling Givenchy products while not an authorised member of its network. Kruidvat tried to challenge the Art 101(3) exemption that had approved Givenchy’s distribution arrangements but was held to have no standing to do so because during the Commission’s investigation it had intervened only through its trade association, and it had not at any point applied to become a member of the network. It was therefore not ‘individually concerned’ within the meaning of Art 263. 8   This exception entered into force on 1 December 2009 under the Lisbon Treaty. 9   A challenge to the block exemption Regulation on vertical restraints failed for lack of ‘individual concern’: Case C-341/00 CNPA v Commission [2001] ECR I-5263. 10   Although the ECJ is in principle limited to performing an interpretative role, the borderline between interpretation and application can be hard to discern, and it sometimes all but directs the national court on how to apply the law to the facts of the case.

6 1—european union law [1.3]

him.11 For example, a litigant in a national court might allege the invalidity of a contract being enforced against him on the grounds that the contract violates Article 101 TFEU. The national judge might be unsure whether or not, on a proper interpretation of Article 101, the contract is void. Either of the parties might suggest to the judge, or the judge might decide on his own initiative, to put a preliminary question of interpretation to the ECJ. It takes an average of around eighteen months to obtain an answer to a preliminary question, thereby extending the duration of the national proceedings considerably. Such a delay may well be to the advantage of one party and to the disadvantage of the other, and so may be used by one party as a delaying tactic. It is up to the national judge to decide on the basis of national procedural rules whether to grant any kind of interim relief in such circumstances.

1.3 

what are the sources of eu law?

The main sources of EU law relevant to distribution law are as follows.12

1.3.1  Treaty on the Functioning of the European Union The Treaty on the Functioning of the European Union (TFEU) is primary EU legislation. It has been amended a number of times since it came into force in 1958, most importantly by the 1986 Single European Act; the Treaty on European Union, which entered into force on 1 November 1993; the Amsterdam Treaty, which entered into force on 1 May 1999; the Nice Treaty, which entered into force on 1 February 2003; and the Lisbon Treaty, which entered into force on 1 December 2009. The Amsterdam and Lisbon Treaties effected successive renumberings of the TFEU, which can make for confusion when looking at cases and texts dating from before the renumbering. In this book only the current numbering is used, but readers will need to be aware of the old numbering when consulting sources dating from or dealing with events before 1 December 2009. The most important Articles of the TFEU in the context of distribution law are Article 101 (originally Article 85 and later Article 81) and Article 102 (originally Article 86 and later Article 82),13 which contain the competition rules applicable to commercial enterprises. The rules contained in these two Articles are directly effective (see below) and so are part of national law in EU Member States. Breach of these Articles can render a party liable to a fine by the European Commission or 11

  Art 267 TFEU.   A complete list of sources would include some other categories such as international law and internal administrative acts of the EU. 13   See below Appendix 1. 12

[1.3]

what are the sources of eu law?  7

by a national competition authority, and may mean that a contract or some of its terms are void and unenforceable. It may also give rise to liability in damages. Articles 34 to 36, setting out the Treaty rules on free movement of goods, are also relevant to distribution. They prohibit, with certain exceptions, national laws and regulations that hinder free trade between Member States.14

1.3.2 Regulations Whether adopted by the Commission or by the Council and European Parliament, Regulations are also directly applicable law in all Member States. Like the Articles of the TFEU referred to above, they are also part of national law and are automatically binding on Member States, government agencies and companies and individuals. There is no need for any sort of act of transposition into national law: By reason of their nature and their function in the system of the sources of [EU] law, regulations have direct effect and are, as such, capable of creating individual rights which national courts must protect.15

In fact, transposing acts are not only unnecessary but also illegal.16 Regulations are always published in the Official Journal of the European Union, and they come into force 20 days after publication unless another date is specified in the Regulation itself.17 Such publication is obligatory and is a condition of the Regulation’s binding effect. The Commission Regulations of specific relevance to distribution are certain block exemption Regulations implementing Article 101(3) TFEU. They ensure the validity of various categories of agreement that might otherwise be void and unenforceable by virtue of the prohibition contained in Article 101(1).

1.3.3 Directives Directives are usually adopted jointly by the Council and Parliament. They are addressed to Member States and require a certain legislative result to be achieved by a particular date. However, Member States are left free to decide how they wish to implement Directives and to draft their own implementing legislation. It often happens that a Directive is not implemented in time by some or all Member States. Even when this occurs it is still sometimes possible for an individual to benefit from some or all of the rules laid down in the Directive. In such a case, the Directive or part of it is said to have ‘direct effect’ (see below). Whether given terms of a 14   These rules are beyond the scope of this book. See, eg, P Oliver, Oliver on Free Movement of Goods in the European Union, 5th edn (Oxford, Hart Publishing, 2010). 15   Case 43/71 Politi v Italian Ministry of Finance [1971] ECR 1039, [1973] CMLR 60, para 9. 16   Case 39/72 Commission v Italy [1973] ECR 101, [1973] CMLR 439. 17   Art 297 TFEU.

8 1—european union law [1.3]

Directive will be held to have direct effect depends essentially on whether they are precise and unambiguous enough to confer rights on private parties, and against whom it is sought to enforce the Directive. The only Directive that will be considered in detail in this book is the Directive on commercial agents (below chapter six section 6.3).

1.3.4 Decisions Decisions are binding on the party or parties to whom they are addressed, and they are required to be notified only to such parties.18 They are of considerable importance in competition law. For example, if the Commission decides to impose a fine on a company for breach of Articles 101 or 102 TFEU, it must do this through a formal Decision addressed to that company. A Decision is also adopted to impose interim measures pending a final decision and to close an investigation on the basis of commitments given by a company, and it is also required to oblige an undertaking to submit to an investigation on its premises.

1.3.5  Opinions, Recommendations, Communications and Notices Unlike Treaty Articles, Regulations, Directives and Decisions, these other categories are not binding forms of law. An Opinion will be issued to a Member State before proceedings are taken against it in the ECJ, and Recommendations may suggest how a Member State’s national legislation should be amended in order to bring it into line with EU law. Communications and Notices provide guidance on the position taken by an institution making a publication. They bind no one, though they may have legal consequences to the extent that they create legitimate expectations. For example, where a Commission Notice might have led a company to believe that its illegal conduct was in fact permissible, the ECJ has held that the Commission may not impose a fine in respect of this conduct.19

1.3.6  Judgments of the European Court of Justice and European General Court Decisions of the ECJ are the highest authority for interpretation of EU law. There is no appeal from a judgment of the ECJ. The EGC is a lower court with jurisdiction to hear certain types of cases, including most competition cases, and its judgments are 18   Ibid. However, it is sometimes provided in secondary legislation that Decisions are to be published. For an example in the field of competition law, see Art 27 of Council Regulation (EC) 1/2003 on the implementation of the rules on competition laid down in Articles [101] and [102] of the Treaty, [2003] OJ L1/1. 19   Joined Cases 40-48/73 Suiker Unie v Commission [1975] ECR 1663, [1976] 1 CMLR 295, para 557.

[1.3]

what are the sources of eu law?  9

second in authority only to those of the ECJ. There is no formal doctrine of precedent, and the ECJ is free to depart from its previous rulings, though in practice this happens extremely rarely.20 The EU competition rules, with which a large part of this book is concerned, have been the subject of many cases before the ECJ and the EGC. Though not a source of law in the technical sense, the Opinions of the Advocates General are also sometimes useful. Before giving judgment in any case, the ECJ (but not the EGC) almost always has the benefit of hearing the submissions of the Advocate General assigned to that case. The Advocate General suggests to the Court how it should decide the case, and the suggestion is backed up by full analysis of the case and often by extensive consideration of earlier relevant jurisprudence of the ECJ and EGC, much in the style of the judgment of English judges. The Advocate General may even consider arguments that were not put forward by the parties and look at relevant principles in the national laws of EU Member States. This can be useful, since the ECJ’s judgment itself may be quite short and, since there is no official doctrine of precedent, may not always fully cite previous relevant cases. Although an Advocate General’s Opinion may not be followed by the Court, in very many cases it is. If the Court rejects an Advocate General’s Opinion in whole or in part, then the rejected arguments are of little practical use. However, in the case of a point on which the Court has never stated its view, the Opinion may be of persuasive value and may contain arguments worth adopting when arguing the point in a subsequent case.

1.3.7  General Principles of Law In interpreting EU law the ECJ and EGC have regard to, amongst other things, general principles, both those that can be deduced from the EU Treaties and those common to the laws of the Member States. These have proved a rich source in the field of fundamental rights, in particular in guaranteeing certain basic rights concerning the conduct of judicial and administrative proceedings. Both the European Convention on Human Rights (ECHR) and the Charter of Fundamental Rights of the European Union may be relevant in such cases. An example of the invocation of a fundamental right in the context of competition law is the claim made by a company whose premises had been searched by the Commission without any prior warning. The company alleged that this action constituted an unlawful infringement of its fundamental right to freedom from invasion of its privacy. Although the Court rejected this argument, referring to the exception to this principle permitted by the ECHR (the case predated the Charter) when interference with the right is necessary to protect the public interest, it accepted that in principle such fundamental rights had to be respected.21 20   An example is Joined Cases C-267 and C-268/91 Keck and Mithouard [1993] ECR I-6097, [1995] 1 CMLR 101. 21   Case 136/79 National Panasonic v Commission [1980] ECR 2033, [1980] 3 CMLR 169.

10 1—european union law [1.4]

The right to a hearing and legal professional privilege are also rights developed on the basis of general principles in the context of competition law, as is the right not to incriminate oneself. These are considered further below in chapter two. Other important general principles upheld by the ECJ include the principles of legal certainty22 and proportionality.23

1.4 

where is eu law to be found?

The texts of the most important Treaty Articles and secondary legislation in the context of distribution law are reproduced in the Appendices to this book. These and all other official texts, as well as many unofficial texts, are available on the internet, in particular on the DG Comp website. Below are mentioned some key sources for further reference. Details of useful websites, other resources and suggested further reading are provided at the end of this book.

1.4.1  Official Journal of the European Union The Official Journal is made up of the ‘C’ (communications) and the ‘L’ (legislation) series. Binding legislative texts appear in the L series and all other official documents in the C series. The Official Journal is published almost every day, with several issues usually appearing in one day. It is there that are found the texts of all Regulations and Directives, and many Decisions, Recommendations and Communications. In addition, Notices of intention to take particular Decisions are sometimes published: this gives interested parties the opportunity to make their views known before a final Decision is adopted. A subscription to the Official Journal is not expensive; the chief problem for subscribers is that in paper form it takes up a great deal of space. A CD-ROM or online service instead of or in conjunction with the paper form is therefore more convenient. But access to the Official Journal itself is often not necessary for those interested in competition law, given the very wide range of texts now available on the DG Comp and the European Courts websites. These include texts published in the Official Journal, as well as others that are never formally published in paper form.

1.4.2  European Court Reports (Reports of Cases before the ECJ and EGC) This series generally gives the full official text of Court judgments and, for cases before the ECJ, the Advocate General’s Opinion. However, some extremely long 22

  Case 81/72 Commission v Council [1973] ECR 575, [1973] CMLR 639.   Case 114/76 Skimmed Milk Powder [1977] ECR 1211, [1979] 2 CMLR 83.

23

[1.5]

eu law and national law  11

judgments are given in summary form only, and in such cases the full text can be obtained from the Court Registry. Unfortunately, the need to translate the reports into all official EU languages delays official publication, which lags behind judgment by over a year. However, each language version is published on the Court’s website as soon as it is available, so that at least one language version is always available the same day a judgment is given. Thus, where judgments are described in this book as ‘not yet reported’, they can nevertheless be found on the Court’s website. Judgments of the ECJ have a reference number that starts with ‘C’ and those of the EGC with a ‘T’. Cases dating from before the EGC was created in 1989 have no letter but only a number.

1.4.3  Common Market Law Reports – Antitrust Reports (CMLR) Although these are not official reports, they appear more promptly than the official European Court Reports: judgments appear a few months after they are delivered. They include not only ECJ and EGC judgments but also Commission Decisions and Notices and other useful texts such as relevant questions put in the European Parliament. They are therefore a convenient source of reference in practice, and CMLR references are given throughout this book.

1.5 

eu law and national law

In the area of distribution law, EU rules and national laws coexist, and there is a sharing of competence between the EU on the one hand and the Member States on the other. It is therefore crucial to understand the way in which the two bodies of law interact. The general principle is that in the absence of specific rules, national courts and authorities are free to apply national law, provided their action does not conflict with the application of the Treaty rules.24 In order to understand the way in which this general rule works it is necessary to be familiar with the two key notions of direct effect and supremacy.

1.5.1  Direct Effect of EU Law The fact that EU law is directly effective means that individuals may assert rights conferred upon them and be bound by duties imposed upon them by EU law, and these rights and duties may be enforced in national courts. In this way, EU law differs fundamentally from traditional international law, which in some Member 24   In the competition law area see Case 14/68 Walt Wilhelm v Bundeskartellamt [1969] ECR 1, [1969] CMLR 100; and below ch 2 section 2.7.

12 1—european union law [1.5]

States cannot be invoked by individuals in national courts unless there has been some kind of national legislative implementing measure. The principle of the direct effect of EU law was first established by the ECJ in Van Gend & Loos,25 a case concerning a Treaty Article. An individual invoked the direct effect of the Article against a government that had failed to carry out its obligations under the EEC Treaty (as it then was). This was ‘vertical’ direct effect, operating between a private party and the state. It was later affirmed that the principle applies not only to Treaty Articles but also to Regulations and Directives. Except in the case of Directives, and to a limited extent even then (see below), the principle applies also to relations between private parties (‘horizontal’ direct effect). It is not all Treaty provisions or all secondary EU legislation that are directly effective. In order to be so the obligations imposed by them must be clear and unambiguous, and unconditional, in that their operation must not be dependent on further action being taken by EU or national authorities.26 1.5.1.1  Direct Effect of Treaty Provisions The main Treaty provisions on competition are Articles 101 and 102 TFEU. It was established in Bosch27 that these two Articles are directly effective and that they may therefore be invoked by one undertaking against another in a national court. The general issue of whether and under what circumstances damages may be claimed for breaches of the Treaty is a question of national law and has not yet been resolved in all jurisdictions. However, as far as Articles 101 and 102 are concerned EU law clearly requires that damages be available to injured parties. (See further below chapter two section 2.8.2.) 1.5.1.2  Direct Effect of Regulations EU Regulations are directly effective: this is stated explicitly in Article 288 of the Treaty.28 This part of Article 288 has been interpreted by the Court as follows: Therefore, by reason of their nature and their function in the system of the sources of [EU] law, regulations have direct effect and are, as such, capable of creating individual rights which national courts must protect.29

25

  Case 26/62 [1963] ECR 1, [1963] CMLR 105.   Eg Case 14/83 Van Colson and Kamann v Land Nordrhein-Westfalen [1984] ECR 1891, [1986] 2 CMLR 430. This second requirement does not prevent a provision having direct effect even in the absence of the required action, if a deadline for such action has been laid down and that deadline has passed. 27   Case 13/61 [1962] ECR 45, [1962] CMLR 1. 28   For practical purposes, the expression ‘directly applicable’, which appears in Art 288, can be treated as equivalent to the expression ‘directly effective’, which is more often used by the ECJ. 29   Politi v Italian Ministry of Finance (above n 15). 26

[1.5]

eu law and national law  13

1.5.1.3  Direct Effect of Directives Perhaps surprisingly, given the absence of any statement in Article 288 that Directives can have direct effect, the ECJ has established that they can sometimes be directly effective. The potential direct effect of Directives was established in Van Duyn.30 It has since been described by the Court as follows: The binding effect of a directive implies that a national authority may not apply to an individual a national legislative or administrative measure which is not in accordance with a provision of the directive which has all the characteristics necessary to render possible its application by the court. . . Likewise, a national authority may not apply to a person legislative or administrative measures which are not in accordance with an unconditional and sufficiently clear obligation imposed by the Directive.31

Even if a Directive has been implemented by a Member State, the validity of that implementing legislation may be challenged by reference to the requirements of the Directive.32 For example, if a party considers that the Directive on commercial agents has been incorrectly implemented, it may argue in a national court that, insofar as it is incorrect, the national court should not apply it. However, the direct effect of a Directive may not generally be invoked by a private party against another private party.33 Nor may a Member State invoke the direct effect of a Directive or unimplemented part of a Directive against a private party if that Member State has not yet implemented the Directive or has not fully implemented it.34 However, the ECJ, at the same time as reiterating this rule, has stated that unimplemented Directives should nevertheless be looked to in interpreting national law, even in cases brought against private parties.35 It has also held that someone suffering prejudice as a result of a Member State’s failure to implement a Directive should under certain conditions be able to recover damages from that Member State.36

1.5.2  Supremacy of European Union Law EU law forms a new and unique legal order. This legal order has supremacy over the national legal orders of the Member States, and its rules have primacy over the rules of the national legal order. National courts have a duty not to apply national 30

  Case 41/74 [1974] ECR 1337, [1975] 1 CMLR 1.   Case 158/80 Rewe v Hauptzollamt Kiel [1981] ECR 1805, [1982] 1 CMLR 449, paras 41–43.   Case 51/76 Verbond der Nederlandse Ondernemingen [1977] ECR 133, [1977] 1 CMLR 413. 33   Case 152/84 Marshall v Southampton AHA [1986] ECR 723, [1986] 1 CMLR 688; and Case C-91/92 Faccini Dori [1994] ECR-I 3325, [1995] 1 CMLR 665. 34   Case 80/86 Officier van Justitie v Kolpinghuis Nijmegen [1987] ECR 3969, [1989] 2 CMLR 18. 35   Case C-106/89 Marleasing [1990] ECR I-4135, [1992] 1 CMLR 305; and Case C-334/92 Wagner Miret [1993] ECR I-6911, [1995] 2 CMLR 49. 36   Joined Cases C-6/90 and C-9/90 Francovich v Italian Republic [1981] ECR I-5357, [1993] 2 CMLR 66; Joined Cases C-46/93 Brasserie du Pecheur and C-48/93 Factortame III [1996] ECR I-1029; and Joined Cases C-178 etc/94 Dillenkofer [1996] ECR I-4845, [1996] 3 CMLR 469. 31 32

14 1—european union law [1.5]

laws that are in conflict with EU law. In other words, some element of sovereignty has been conferred by the Member States on the EU. Thus, for example, the UK Parliament’s sovereignty was curtailed by the accession of the United Kingdom to the European Communities (as they then were) in 1973. The principle of supremacy or primacy did not derive expressly from any of the Treaties but was established by the jurisprudence of the ECJ.37 One of the earliest and best known statements of the principle was made by the Court in the case of Costa v ENEL. In this case it had been argued that a subsequently enacted Italian law had the effect of overriding a piece of national legislation incorporating the EEC Treaty (as it then was) into national law in Italy and thereby overriding the Treaty provisions where the new law was inconsistent with them. The Court rejected this reasoning: The law stemming from the Treaty, an independent source of law, could not, because of its special and original nature, be overridden by domestic legal provisions, however framed, without being deprived of its character as [EU] law and without the legal basis of the [EU] itself being called into question.38

In other words, EU law provisions always take precedence over national law provisions where the two conflict. Regulation 1/200339 now sets out the way in which this principle applies in competition law. In the case of Article 101 TFEU, it means that where this Article prohibits or permits specific conduct, that conduct cannot be respectively permitted or prohibited by national law. In the case of Article 102 TFEU, there is instead a ‘double barrier’: an agreement or practice must be permitted by both EU law and the relevant national law if it is to be legal (see below chapter two section 2.7). Although at one time there was resistance on the part of some courts in some Member States to the principle of supremacy, it now finds more or less total acceptance in all Member States.40 Directly applicable EU law is therefore part of the national law of all 27 Member States of the EU. This means that certain Articles of the TFEU, all EU Regulations and, in certain circumstances, EU Directives, may be invoked in national courts, conferring rights and duties on the state and on individuals. In practice this may mean, for example, that a national court has to declare void a contract that would be perfectly valid according to the relevant domestic law. Alternatively, it may mean that a national court or even a national competition authority41 is obliged to refuse to apply a domestic statute if the statute is in conflict with EU legislation. However, in the case of Article 102 TFEU, the ‘double barrier’ means that EU law does not have the effect of overriding more restrictive national law. 37

  Since 1 December 2009 it has been affirmed by Declaration 27 of the Lisbon Treaty.   Case 6/64 [1964] ECR 585, [1964] CMLR 425.   Above n 18. 40   For an example of a case in which the UK House of Lords reaffirmed its acceptance of the rule of supremacy of Community law, see R v Secretary of State for Transport, ex parte Factortame Ltd (No 2) [1990] 3 CMLR 375. 41   Case C-198/01 CIF [2003] ECR I-8055, [2003] 5 CMLR 829. 38 39

[1.6]

what does eu distribution law consist of?  15

1.6 

what does eu distribution law consist of?

Most EU distribution law, and most of this book, is concerned with competition rules. The competition rules applicable to the distribution activities of private (and in some cases public) enterprises are contained in Articles 101 and 102 TFEU and in secondary legislation adopted to implement those rules. Article 101(1) prohibits certain agreements, and Article 101(2) states that they are void. Article 101(3) provides for exemption from this prohibition in certain circumstances. Article 102 prohibits abuse of a dominant position. The relevant secondary competition legislation consists mainly of Regulations setting out detailed procedural rules and exempting certain categories of agreement from the prohibition contained in Article 101(1). There are also important Notices giving guidance on the interpretation of the Regulations, on market definition and on the competition law treatment of agreements of minor importance and vertical agreements. Apart from competition law, another topic of particular relevance to distribution is the law relating to the protection of commercial agents. These rules are contained in a Directive and are discussed below in chapter six. Some other areas of legislation might legitimately be treated as ‘distribution law’. For example, there is EU legislation on doorstep selling, on distance sales through means such as mail order and electronic commerce, as well as on advertising and liability for damage caused by defective products.42 Although manufacturers and distributors should be aware of these, they are concerned essentially with consumer protection and so are outside the scope of this book, which focuses on competition law and other rules specific to the relationship between supplier and distributor. Similarly, the rules of free movement of goods contained in Articles 34 to 36 of the Treaty are of relevance to distributors. Member States are strictly limited in the restrictions they may impose on the circulation of goods from other Member States. The rules extend beyond direct import restrictions to any national laws that put goods imported from another Member State at a disadvantage. The impact of these rules on intellectual property rights is particularly important, since they may, for example, prevent a supplier in one country from using his intellectual property rights to stop a third-party distributor from repackaging his goods and selling them under a different name in another Member State. These rules are not covered in this book, as they concern the restrictive effects of national legislation rather than those of agreements between suppliers and distributors.43 In some situations distribution agreements may involve other aspects of intellectual property, such as knowhow, patent or software licensing, in which case 42   A draft Directive that would revise and extend the existing EU legislation on contracts negotiated away from business premises, unfair consumer contract terms, distance selling and consumer sales and guarantees is under discussion: COM(2008)614, 8 October 2008. 43   Thorough treatment of the whole of this area of the law is to be found in Oliver on Free Movement of Goods in the European Union (above n 14).

16 1—european union law [1.6]

more specialised texts should be consulted. Similarly, the broadcasting, telecommunications and utilities sectors are subject to regulatory regimes that are outside the scope of this book. In 1991, at the request of the Council, the Commission drew up a document entitled Towards a Single Market in Distribution.44 In this, the Commission outlined its plans for action to ensure that the distributive trades were able to meet the challenges of and take full advantage of the opportunities offered by the single European market. When discussing the way in which divergent national legislation and regulations may hamper developments in this direction, the Commission expressed a strong preference for as few regulatory constraints as possible. Instead, it preferred to rely on consultative mechanisms leading to self-regulation: National and local regulations affecting commercial activity are extensive and reflect the predominantly national or local character of the commercial sector. . . [T]here is no case for [EU] legislation except in very limited cases where differences between national rules threaten to inhibit the internationalisation of the sector – and in particular where the marketing method is intrinsically transnational in character. Even in these cases the Commission considers that the process of trade should be subject to as few regulatory constraints as possible. The best approach may therefore be to use consultative mechanisms to explore the scope for solutions based on self-regulation. This approach seems likely to prove particularly appropriate in dealing with new problems, where rapid changes in commercial methods and technology may give rise to a demand for regulation.45

Two examples were cited of areas in which such self-regulation had already been introduced. One was the issue of pre-contractual preliminaries to the conclusion of franchise agreements, which is the subject of a code of conduct adopted by the European Franchise Association in 1990. Another is the area of electronic payments: trade federations representing financial institutions and retailers cooperated to produce codes of conduct governing the relations between card issue distributors and cardholders in line with the relevant Commission Recommendations.46 (Recommendations are not legally binding.) Since then legal developments specifically applicable to distribution (except for those concerned with competition) have tended to take the form of nonbinding Recommendations, agreements and codes of conduct rather than binding Regulations, Directives or Decisions. Exceptions to this rule have occurred where such ‘soft law’ appeared ineffective. An example of binding legislation is the prohibition on ‘pyramid selling’ in the Unfair Commercial Practices Directive,47 though this is mainly due to the fact that the prohibition is seen as a consumer protection 44   COM(91)41 of 11 March 1991. See also the European Commission’s Green Paper on Commerce COM(96)530. 45   Ibid, para 3.1. 46   Recs 87/598/EEC [1987] OJ L365/72 and 88/590/EEC [1988] OJ L317/55. 47   Dir 2005/29/EC [2005] OJ L149/22 concerning unfair business-to-consumer commercial practices, Annex 1 of which includes a prohibition on pyramid selling.

[1.6]

what does eu distribution law consist of?  17

measure rather than a measure regulating relations between business parties. Another is the Electronic Commerce Directive.48 But technological developments since 1991 mean that cross-border trade is now commonplace, and these issues appear to have become of greater concern at the EU level. In 2010 the European Commission published a report identifying barriers to fairer and more efficient retailing49 and held a public consultation, with a view to deciding what further measures are needed. The very broad range of concerns mentioned includes malfunctioning of commercial property markets; reduced numbers of local shops; inadequate comparative price and quality information for consumers; slow growth of internet distribution (and in particular inadequate postal services and secure payment systems); lack of clarity on quality labels; poor functioning of retail labour markets; varying national approaches to environmentally friendly retail practices; and unfair contractual practices in the supply chain. In respect of the latter, the report refers to ‘a lack of rules governing unfair commercial practices and contractual relations between the various parties in the supply chain and/or poor application of the rules where they do exist’. Proposed measures are expected to be presented by the end of 2010. So more legislation directly affecting relations between suppliers and distributors may be on the way.

48

  Dir 2000/31/EC [2000] L178/1.   Commission Press Release MEMO/10/297, 5 July 2010; COM(2010)355, 5 July 2010.

49

2

EU Competition Law

key points • EU competition law prohibits certain anticompetitive agreements that affect trade between Member States. For example, terms banning exports or fixing resale prices will usually be void, and the European Commission or national competition authorities may impose fines on the parties to them. • Other anticompetitive agreements, such as some exclusivity arrangements and non-compete clauses, are exempted from this prohibition if they fall within the scope of a ‘block exemption’ or if they create sufficient efficiency benefits. • EU law also prohibits abusive unilateral behaviour by businesses that have a dominant market position. No exemption from this prohibition is available. • Such agreements and unilateral acts may infringe EU competition rules even though they only involve businesses in a single Member State, if they have an effect on inter-state trade. • EU competition law is not applicable in situations where there is no appreciable effect on trade between Member States, but in such situations national competition law may apply. • Responsibility for assessing whether their conduct infringes EU competition rules falls primarily on the parties themselves, subject to the control of the courts and authorities in the event of a dispute or complaint. • Businesses that infringe EU competition law risk not only the imposition of fines and the unenforceability of any infringing contractual clause but also claims for damages and other remedies which may be brought in national courts by injured parties. • The European Commission and most national competition authorities have powers, if they suspect infringement of EU competition rules, to require businesses to supply information and to make surprise inspections of company premises and records.

20  2—eu competition law

  key

texts

Treaty on the Functioning of the European Union (TFEU) Articles 101 and 102 (below Appendix 1)

EU Regulations Council Regulation (EC) 1/2003 on the implementation of the rules on competition laid down in Articles [101] and [102] of the Treaty, [2003] OJ L1/1 Commission Regulation (EC) 773/2004 relating to the conduct of proceedings by the Commission pursuant to Articles [101 and 102 TFEU], [2004] OJ L123/18, amended in respect of settlement proceedings by Commission Regulation (EC) 622/2008, [2008] OJ L171/3 Commission Regulation (EU) 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, [2010] OJ L102/1 (below Appendix 2)

EU Notices Commission Notice on co-operation within the network of competition authorities, [2004] OJ C101/43 Commission Notice on co-operation between the Commission and the courts of the EU Member States in the application of Articles [101] and [102], [2004] OJ C101/54 Commission Notice on the handling of complaints by the Commission under Articles [101]and [102], [2004] OJ C101/65 Commission Notice on informal guidance relating to novel questions concerning Articles [101]and [102] that arise in individual cases (guidance letters), [2004] OJ C101/78 Commission Guidelines on the effect on trade concept contained in Articles [101] and [102], [2004] OJ C101/81 Commission Guidelines on the application of Article [101(3)] (‘Article 101(3) Guidelines’), [2004] OJ C101/97 Commission Guidelines on the method of setting fines, [2006] OJ C210/2 Guidance on the Commission’s enforcement priorities in applying Article [102] to abusive exclusionary conduct by dominant undertakings (‘Guidance’), [2009] OJ C45/7 Commission Guidelines on vertical restraints, [2010] OJ C130/1 (below Appendix 3)

[2.1]

  introduction  21

2.1 

introduction

The competition provisions of the Treaty on the Functioning of the European Union (TFEU) directly affecting private parties involved in distribution agreements are Articles 101 and 102.1 They deal respectively with anticompetitive agreements and with abuse of a dominant position. Their purpose is to ensure the maintenance, throughout the common market, of the benefits that flow from the existence of competitive markets. Certain kinds of agreements and behaviour are therefore prohibited and can be penalised. Distribution contracts are normally ‘vertical agreements’: this means that the parties to the agreement are active at different stages of the production and marketing process and are therefore, at least for the purposes of the agreement, not competitors. Examples are distribution contracts between a manufacturer and a wholesaler, or between a wholesaler and a retailer. ‘Horizontal agreements’ are those made between competitors, such as an agreement between two or more retailers or between two or more manufacturers. Article 101 can apply to both vertical and horizontal agreements. A typical way in which Article 101 applies to a distribution agreement is to prohibit an export ban (where the distribution contract provides that goods are not to be sold outside a particular country or territory) or other provisions for market-sharing between different distributors, or arrangements granting absolute territorial exclusivity to distributors. Resale price-fixing will also normally infringe Article 101. The political aim of market integration has had a strong influence on EU competition policy, which means that any agreement of any significance that tends to divide up markets along national boundaries will fall within the scope of the prohibition in Article 101(1). This of course includes many exclusive distribution, selective distribution and franchising agreements. Even though the law and enforcement policy have in recent years become much more focused on both the economic concept of consumer welfare and actual market effects, the so-called ‘single market imperative’ continues to exert influence.2 Fortunately, many such agreements fall within the terms of a ‘block exemption’ Regulation, which exempts, among other things, a degree of territorial protection for parties to certain types of contract, though without permitting a complete ban on sales outside any given territory. Other agreements infringing Article 101(1) may be exempted under Article 101(3) on the basis that they create efficiency benefits.

1   Originally numbered Arts 85 and 86, these provisions were later renumbered Arts 81 and 82 and acquired their current numbering on the entry into force of the Lisbon Treaty on 1 December 2009. Their wording has remained substantively unchanged throughout. 2   The most recent European Court of Justice (ECJ) judgments continue to recognise its importance. See, eg, Cases C-501/06 etc GlaxoSmithKline v Commission, [2009] ECR I-9291, [2010] 4 CMLR 50, para 61; and Cases C-468/06 etc Syfait II [2008] ECR I-7139, [2008] 5 CMLR 1382, para 66.

22  2—eu competition law

[2.2]

Article 102, on the other hand, is most often applied to producers or suppliers, for example, for operating fidelity rebate schemes, or predatory or discriminatory pricing practices, which foreclose their competitors from the market. The summary that follows of the way in which these provisions are applied covers both substantive and procedural aspects of EU competition law but is necessarily concise and concentrates on those aspects of the law of direct relevance to distribution agreements. More detailed works on EU competition law should be consulted for further information on this subject (see the list of resources at the end of this book).

2.2 

article 101(1) tfeu

2.2.1  The Prohibition Article 101 begins by laying down a broad and general prohibition in Article 101(1): 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.

Article 101(1) goes on to give a non-exhaustive list of examples of violations of this prohibition; these are agreements that: 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.

The burden of proof that Article 101(1) is infringed is on the party alleging the infringement, whereas the burden in respect of Article 101(3), discussed below, is on the party seeking to rely on exemption. This may be crucial to parties when deciding what risks they want to take in making their distribution agreements.

2.2.2 ‘Agreements’ This concept covers both legally binding contracts as well as a wide range of informal arrangements that fall short of legally enforceable contracts. Although distribution agreements are usually legally binding agreements, it is not possible to avoid the application of the competition rules by not putting an agreement in

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writing or by relying on a so-called ‘gentlemen’s agreement’.3 Similarly, standard conditions appearing on the back of each of a series of invoices may be regarded as terms of agreement between the parties, even if from the point of view of national contract law they were never terms of the individual contracts.4 Furthermore, the Commission has long treated as ‘agreements’ certain arguably unilateral measures taken by suppliers to restrict parallel trade in their goods. Until recently the European Court of Justice (ECJ) upheld this approach. However, it is now clear that there are limits to such application of Article 101. In Bayer the Commission stretched the concept of ‘agreement’ further than ever before in order to fine Bayer €3 million for taking measures to prevent parallel imports between Member States of its heart drug Adalat.5 Bayer had set up systems to identify wholesalers in low-price countries who were engaging in parallel exports to highprice countries,6 then reduced its supplies to them accordingly. The wholesalers resorted to various means of obtaining additional supplies, such as placing orders through smaller wholesalers who were not being monitored by Bayer. The Commission found that this de facto export ban constituted an agreement. The European General Court (EGC), and later the ECJ, held that the Commission had stretched the notion of ‘agreement’ too far in this case and that it had only shown unilateral conduct on the part of Bayer (reduction of supplies), so that Article 101 did not apply. It attached importance to the fact that although Bayer openly admitted that it intended to reduce parallel trade, the Commission had not shown that Bayer had either made any request or communicated its policy to its wholesalers, so that there was nothing that they could be said to have acquiesced in, even tacitly.7 There was therefore no agreement. The Bayer decision concerned a simple commercial relationship consisting of a series of orders for supplies. The issue may be more complex in the context of selective distribution, though the same basic principle applies. For example, in AEG Telefunken8 refusal by AEG to supply a particular dealer was held to infringe Article 101(1) on the grounds that such action formed part of an agreement between AEG and its distributors that only certain types of distributors should receive supplies of AEG goods. This type of conduct is particularly relevant to selective distribution, and the ‘agreement’ issue will be considered again in chapter four. 3   Case 41/69 ACF Chemiefarma [1970] ECR 661, [1970] CMLR 43; National Panasonic [1982] OJ L354/28, [1983] 1 CMLR 497, para 43. 4   Case 277/87 Sandoz v Commission [1990] I ECR 45, [1990] 4 CMLR 242. 5   Cases C-2/01 and C-3/01 Bayer v Commission [2004] ECR I-23, [2004] 4 CMLR 653. 6  In some Member States pharmaceutical prices are state-controlled, and prices in these countries tend to be substantially lower than in countries where the market is freer, creating an incentive for purchasers in low-price states to export to high-price states. Manufacturers have therefore long wrestled with the question of what measures they may take to stop such ‘parallel trade’, which causes them a substantial loss of revenue and other problems. 7   Cases T-41/96 [2000] ECR II-3383, [2001] 4 CMLR 126, upheld in Bayer v Commission (above n 5). See also Commission Guidelines on vertical restraints [2010] OJ C130/1 (below Appendix 3) para 25. 8   Case 107/82 [1983] ECR 3151, [1984] 3 CMLR 325.

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The word ‘agreements’ covers not only horizontal arrangements but also vertical arrangements. This is very important in the context of distribution networks and agreements, which normally involve vertical relationships. At one time it was argued by some that vertical arrangements were not caught by Article 101 at all, but it has long been established that although horizontal agreements are normally treated more severely than vertical ones, both are potentially within the scope of Article 101.9 The borderline between ‘agreements’, ‘decisions’ and ‘concerted practices’ is not clearly delineated, and it is not necessary that it be so, since EU law applies in the same way to all of them.10 2.2.3  ‘Decisions by Associations’ This expression includes not only the rules and regulations of the association that are accepted by its members but also nonbinding recommendations made by the association to its members, at least to the extent that the members concerned comply with the measure.11 2.2.4  ‘Concerted Practices’ Virtually any kind of knowing cooperation between parties will amount to a concerted practice. The ECJ has defined the concept as: a form of co-ordination between undertakings which, without going so far as to amount to an agreement properly so called, knowingly substitutes a practical co- operation between them for the rules of competition.12

The principle is easy to state, but in practice it can be difficult to distinguish between independent response to competitors’ behaviour and collusion between competitors. This is particularly true in an oligopolistic market in which it is easy for the small number of competing firms to find out about each other’s behaviour on the market and therefore to react to it almost immediately as it occurs. In the Sugar case the Court said that the rule against concerted practices did not ‘deprive economic operators of the right to adapt themselves intelligently to the existing and anticipated conduct of their competitors’ but that it did, however, strictly preclude any direct or indirect contact between such operators, the object or effect whereof is either to influence the conduct on the market of an actual or potential 9

  Cases 56 and 58/64 Consten & Grundig v Commission [1966] ECR 299, [1966] CMLR 418.   See, eg, Nintendo [2003] OJ L255/33, [2004] 4 CMLR 421, para 256, upheld without consideration of this point, Case T-13/03, [2009] ECR II-947, [2009] 5 CMLR 1421. 11   Case 8/72 Vereeniging van Cementhandelaren v Commission [1972] ECR 977, [1973] CMLR 7 (price recommendations); Case T-325/01 Daimler Chrysler v Commission [2005] ECR II-3319, [2007] 4 CMLR 559, para 210. 12   Case 48/69 ICI v Commission [1972] ECR 619, [1972] CMLR 557, para 64. 10

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  article 101(1) tfeu  25

competitor or to disclose to such a competitor the course of conduct which they themselves have decided to adopt or contemplate adopting on the market.13

It is not clear precisely what the Commission is required to prove in order to establish such a concerted practice. However, in practice the Commission may make a presumption of a concerted practice in a situation in which it considers that there can be no other explanation in the circumstances.14 Participation in a manifestly anticompetitive meeting is treated as evidence of participation in a concerted practice, even if the company does not abide by the outcome of the meeting, unless it clearly indicates to the others present that it distances itself from their position.15 One form of concerted practice sometimes alleged between suppliers and distributors is a so-called ‘hub and spoke’ system in which either retailers arrange to exchange sensitive commercial information through a supplier, or suppliers do so through a retailer. Essentially this amounts to a cartel facilitated by a third party. Neither the Commission nor the European Courts have so far pronounced on any such cases, but the requirement that the parties ‘knowingly’ substitute cooperation for competition can be expected to mean that Article 101 would only be infringed where the parties providing and receiving the sensitive information do so with specific knowledge and intent as to the exchange.16

2.2.5 ‘Undertakings’ ‘Undertakings’ include any independent economic actor or entity: a company, a partnership, an association, a trust company, an individual or a group of individuals may therefore be an undertaking for these purposes. An undertaking does not have to be profit-making. The precise legal characterisation that would be applied under national law is not of direct relevance, and certainly it is not necessary that an undertaking have legal personality. As is generally the case in the interpretation of EU competition law, an economic rather than a legal approach is taken: what is important is the fact that an independent economic activity is being carried out.17 This means that public entities such as government bodies and local authorities may be classified as undertakings for these purposes if they are engaged in a commercial activity such as running an employment agency or ambulance service for payment.18 13

  Cases 40–48 etc/73 Suiker Unie v Commission [1975] ECR 1663, [1976] 1 CMLR 295, para 174.   Woodpulp [1985] OJ L85/1, on appeal Cases 89 etc/85 Woodpulp [1993] ECR 1307, [1993] 4 CMLR 407. 15   For a statement of this principle in a distribution case, see Daimler Chrysler v Commission (above n 11) para 202. 16   See UK Court of Appeal cases Argos Ltd and Another v Office of Fair Trading; JJB Sports plc v Office of Fair Trading [2006] EWCA Civ 1318. 17   Case 170/83 Hydrotherm v Andreoli [1984] ECR 2999, [1985] 3 CMLR 224. 18   See, eg, Case C-41/90 Höfner and Elser v Macrotron GmbH [1991] ECR I-1979, [1993] 4 CMLR 306, para 21; and Case C-475/99 Ambulanz Glöckner [2001] ECR I-8089, [2002] 4 CMLR 726. 14

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Agreements with agents for some purposes fall outside the scope of Article 101. However, the notion of agency in this context is narrow and can therefore be relied on only in limited circumstances. This subject is covered in chapter six. Similarly, agreements between members of a single group of companies will not be caught, since the group will be treated as a single undertaking, or one ‘economic unit’, unless the individual companies enjoy a high degree of independence of action. Again, it is irrelevant that a subsidiary may have separate legal personality from its parent company: the crucial factor is whether it enjoys economic independence.19 It is not independent if its parent company exercises a decisive influence on its commercial policies such as distribution and pricing.20 The existence of a ‘single economic unit’ will be presumed where the subsidiary is 100 per cent owned by the parent. The existence of a single economic unit also means that where the subsidiary has been party to an infringement, the parent may be held liable.21 A contractual clause cannot escape the application of Article 101 on the grounds that it was inserted by an officer of the company without proper authority.22

2.2.6  Market Definition No requirement to define the relevant market appears in Article 101, and in some cases it will be clear that even on the narrowest or widest view of the market that could reasonably be taken, the outcome of the application of Article 101 will be the same. However, in other cases the result of the Article 101 analysis may differ according to different views of market definition. For example, conduct may affect competition appreciably on one market but not on a possible broader one, or the parties may have market shares falling beneath the thresholds of the de minmis Notice on the basis of one market definition but not on the basis of a possible narrower definition. Market definition is also a key step in establishing whether a company is ‘dominant’ on the market for the purposes of Article 102 (see below section 2.5.2). It is therefore useful to discuss market definition before considering the concepts of effect on trade and restriction of competition. Both the geographical market and the product market must be defined. Although definitions used in decided cases can provide very useful guidance, they will not necessarily be identical in subsequent cases. The products and product markets themselves, as well as consumer habits and preferences, change over time, so that market definitions used in previous cases may not apply in a later case, even when 19   For a distribution law example, see Case T-102/92 Viho Europe v Commission [1995] ECR II-17, [1995] 4 CMLR 299, upheld in Case C-73/95 [1996] ECR I-545, [1997] 4 CMLR 419; also Interbrew, 1996 Annual Report on Competition Policy, 136. 20   Case 48/69 ICI v Commission [1972] ECR 619, [1972] CMLR 557. See also AEG Telefunken (above n 8). 21   For a distribution law example, see Case 12/03 Itochu v Commission [2009] ECR II-883, [2009] 5 CMLR 1375. 22   See Viho (above n 19).

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  article 101(1) tfeu  27

the agreements or conduct being assessed are very similar.23 The Commission has published a detailed Notice on market definition,24 and market definition in the context of distribution is discussed in chapter three. 2.2.6.1  Geographic Market The relevant geographic market is the area where the parties do business and in which the goods are subject to homogeneous competitive conditions. For example, in United Brands,25 where the product in question was bananas, countries in which a special preferential regime applied to banana imports from certain countries were excluded from the relevant geographical market. Retail markets are frequently national, regional or even smaller, depending on consumers’ purchasing habits. 2.2.6.2  Product Market The relevant product market normally consists of the product or service in question and all products or services considered by the consumer to be substitutable for them, in view of their characteristics, price and intended use (this is the concept of ‘demand substitutability’). So, in considering arrangements for banana distribution, the product market for bananas must be defined: for example, it must be decided whether, from the point of view of the consumer, apples can be considered a substitute for bananas. In some circumstances ‘supply substitutability’ may also be taken into account: this will be the case where products are not substitutable from the user’s point of view, but the supplier can with little difficulty switch to producing one rather than the other. An example is different grades of paper: most users require a specific quality, thickness and finish and do not consider one grade substitutable for another, but the supplier can fairly easily adjust its machines to produce the various different grades. In practice the Commission has often defined markets very narrowly. For example, in Boosey & Hawkes26 the relevant product market was defined by the Commission as brass band instruments for ‘British-style’ brass bands. A producer may even be dominant in the market of spare parts for its products if these spare parts are not available anywhere else, for example, because they are protected by intellectual property rights.27 But in some circumstances spare parts will be considered together with the main product as a single market.28 23   Cases T-125, 127/97 Coca-Cola v Commission [2000] ECR II-1733, [2000] 5 CMLR 467. This was a merger control case, but the same principles apply under Arts 101 and 102. 24   Commission Notice on the definition of relevant market for the purposes of [EU] competition law [1997] OJ C372/3. 25   Case 27//76 United Brands v Commission [1978] ECR 207, [1978] 1 CMLR 429. This case concerned Art 102, but the same principles apply under Art 101. 26   [1987] OJ L286/36, [1988] 4 CMLR 67. 27   Hugin/Liptons [1978] OJ L22/23, [1978] CMLR D19, reversed on appeal on another ground, Case 22/78 Hugin v Commission [1979] ECR 1869, [1979] 3 CMLR 345. 28   Commission Guidelines on vertical restraints (above n 7) para 91.

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2.2.7  ‘Which May Affect Trade between Member States’ This element of Article 101 is of dual importance. It is an essential substantive requirement for establishing an infringement of Article 101(1). It also governs the choice of law (EU or national) in the context of proceedings in national courts and national competition authorities (see below section 2.7). For this reason the Commission has published Guidelines on the effect on trade concept, which provide a detailed summary of ECJ and EGC case law and Commission practice on this point.29 The concept of an ‘effect on trade between Member States’ has always been broadly interpreted by the Commission and ECJ. In the early case of Consten & Grundig 30 it was said: [W]hat is particularly important is whether the agreement is capable of constituting a threat, either direct or indirect, actual or potential, to freedom of trade between member states in a manner which might harm the attainment of the objectives of a single market between states. Thus the fact that the agreement encourages an increase, even a large one, in the volume of trade between states is not sufficient to exclude the possibility that the agreement may ‘affect’ such trade in the above-mentioned manner.

In other words, it extends not only to restrictions causing a reduction in the flow of trade but also to any restrictions altering the pattern of trade that would otherwise exist, even if such an effect is only potential. It has also been said that the requisite effect on trade exists ‘where it is possible to foresee with a sufficient degree of probability that it may have an influence, direct or indirect, actual or potential, on the pattern of trade between Member States’.31 As a result of this broad interpretation, very many commercial agreements may be held to be within the scope of Article 101(1). Thus, although this requirement should always be considered, it is rare that an agreement of any economic importance is not held to satisfy it. In order to establish whether trade between Member States is affected, it is necessary to look at the effect of an agreement as a whole rather than at particular clauses in isolation.32 Thus, it is possible that an individual restrictive clause that in isolation would have no effect on inter-Member State trade can fall within the ambit of Article 101(1) when combined with other clauses in the agreement, if the agreement as a whole has such an effect. As already stated, the requirement that there be an effect on trade between Member States has been applied so as to bring within the terms of Article 101(1) an unexpected range of contracts. This is true of many agreements that might appear to be of only national importance and not to affect trade with other Member States. For example, the Court has considered that an agreement between 29

  [2004] OJ C101/81.  Above n 9. 31   Case 61/80 Stremsel v Commission [1981] ECR 851, [1982] 1 CMLR 240, para 14. 32   Case 193/83 Windsurfing v Commission [1986] ECR 611, [1986] 3 CMLR 489, para 97. 30

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  article 101(1) tfeu  29

Belgian asphalt producers had such an effect.33 Even a national newspaper distribution network has been found to fall within Article 101(1).34 More recent cases involving retail banking services have had the opposite outcome,35 and it may be that the Commission and the ECJ are influenced by the fact that most Member States now have appropriate national laws for dealing with such situations. However, the more of a reality the single European market becomes, the more likely it is that commercial practices in one Member State will affect trade in another.36 In addition, in the Dutch Industrial Gases37 cartel case the Commission held that although only Dutch subsidiaries were involved in the cartel, the effects of the conduct flowed through to the multinational parent companies through dividends paid up the group chain, which meant that there was an effect on trade between Member States. This approach could bring a very wide range of apparently local agreements within the scope of Article 101. Further, even if there are negligible exports of the goods in question, it is sufficient to infringe Article 101(1) that those goods are used to manufacture other goods that are the subject of cross-border trade.38 Similarly, it is possible in some circumstances for agreements ostensibly not concerning EU territory, such as an export ban imposed on operators in Ukraine and Russia, to have the requisite effect on trade.39 The effect on trade must be ‘appreciable’.40 The Commission’s Notice on the effect on trade concept includes quantitative criteria which will normally indicate the absence of an effect on trade, even if the agreement includes ‘hardcore’ restrictions (such as resale price-fixing clauses or clauses providing for absolute territorial protection): • the parties are small and/or medium-sized undertakings41 or • the aggregate market share of the parties (including their corporate groups) on any affected market does not exceed 5 per cent and • horizontal agreements (eg, between two suppliers): the aggregate annual EU turnover of the parties’ corporate groups in the products covered by the agreement (or, in the case of joint buying, their combined purchases of such products) does not exceed €40 million; 33   Case 246/86 Belasco v Commission [1989] ECR 2117, [1991] CMLR 96. For a case concerning a Belgian car distribution network, see Daimler Chrysler v Commission (above n 11) para 212. 34   Case 126/80 Salonia v Poidomani [1981] ECR 1563, [1982] 1 CMLR 64. 35   Case C-215/96 Bagnasco v BPN [1999] ECR I-135, [1999] 4 CMLR 624; and Dutch Banks [1999] OJ L271/28, [2000] 4 CMLR 137. 36   See also Guidelines on the effect on trade concept (above n 29) paras 77–92. 37   [2003] OJ L84/1, [2003] 5 CMLR 144, para 371. 38   Case 123/83 BNIC v Clair [1985] ECR 391, [1985] 2 CMLR 430. 39   Case C-306/96 Javico v Yves St Laurent [1998] ECR I-1983, [1998] 5 CMLR 172. See also Guidelines on the effect on trade concept (above n 29) paras 100–9. 40   This is a separate question to that addressed by the Commission’s de minimis Notice, which is whether there is an appreciable prevention, restriction or distortion of competition (see below section 2.2.8.3). 41  As defined in Commission Recommendation 2003/361/EC, [2003] OJ L124/36 (fewer than 250 employees and either an annual turnover not exceeding €50 million or an annual balance sheet total not exceeding €43 million).

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• vertical agreements (eg, between supplier and distributor): the supplier’s aggregate annual EU turnover in such products (or, in the case of licensing, the aggregate turnover of the licensor and licensee or, in the case of several purchase agreements, the buyer’s combined purchases) does not exceed €40 million.42 In such cases there is a rebuttable presumption that trade is not affected and undertakings relying on these thresholds in good faith will not be fined. Note that in the case of distribution networks, sales throughout the entire network are taken into account. In addition, where an agreement is considered by its very nature capable of affecting trade between Member States (eg, agreements concerning imports or exports, or covering several Member States), an effect on trade is rebuttably presumed when these thresholds are exceeded. An exception to this rule is that the five per cent threshold does not apply when the agreement covers only part of a Member State. 2.2.8  ‘Object or Effect the Prevention, Restriction or Distortion of Competition’ This requirement is in the alternative: either an anticompetitive object or an anticompetitive effect needs to be shown.43 It overlaps to some extent with the requirement that there be an effect on trade between Member States, and has also been broadly interpreted by the European Courts and Commission. The Commission’s Article 101(3) Guidelines44 indicate a possible shift towards a narrower interpretation, though there have not been enough Commission Decisions since then for any clear trend to be discerned. 2.2.8.1  Restrictions by Object In certain cases a restriction on competition will be presumed and no effect on competition need be proved to establish an infringement. Such a presumption applies when, taking into account the legal and economic context of the agreement,45 either (i) a restriction of competition is the necessary consequence of the content of the agreement, regardless of the actual intentions of the parties, or (ii) when the objective is to restrict competition. The intention of the parties is not a necessary factor, but it may be taken into account.46 Case law has established that 42

  See paras 50 and 52 of the Notice.   GlaxoSmithKline v Commission (above n 2) para 55. 44   Commission Guidelines on the application of Article [101(3)], [2004] OJ C101/97. 45   Factors taken into account as ‘legal and economic context’ here are limited. They apparently do not extend to the specific and highly regulated nature of the EU pharmaceuticals market, which is relevant only under Art 101(3): GlaxoSmithKline v Commission (above n 2) paras 60–61. 46   Case C-209/07 BIDS [2008] ECR I-8637, [2009] 4 CMLR 310; Cases C-501/06P etc GlaxoSmithKline v Commission (above n 2) para 58. The latter judgment also makes it clear that there is no requirement 43

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  article 101(1) tfeu  31

the category of ‘object restriction’ includes certain vertical restrictions such as resale price-fixing and market-sharing, including prohibitions or limitations on exports.47 For distribution agreements, object restrictions correspond to the socalled ‘hardcore’ restrictions that prevent an agreement from benefiting from the vertical restraints block exemption (see below chapter three section 3.5.7). 2.2.8.2  Restrictions by Effect Other types of restriction that do not have an anticompetitive object will only infringe Article 101(1) if they have anticompetitive effects. This depends on the agreement itself but also on the surrounding market circumstances. A key concept here is that of the ‘counterfactual’, meaning what the situation would be, either in the absence of the agreement or, when appropriate, if the agreement were less restrictive. Note that this is not the same as weighing up the pro- and anticompetitive effects of an agreement, which is done not under Article 101(1) but only under Article 101(3).48 The requirement that the economic and market situation surrounding an agreement must be taken into account in assessing its compatibility with Article 101(1) means that it is frequently difficult to come to a firm opinion as to whether that provision is infringed or not. In any case, a meaningful assessment can only be made with full information on the precise market for the product, market structure and market trends in the EU Member States affected. The economic analysis required can be complex, and the European Commission and national authority officials dealing with such cases comprise economists as well as lawyers. Also, the fact that a distribution contract is one of many making up a network may affect its legal status: an agreement between a Belgian brewery and a Belgian bar has been held to infringe Article 101(1), since it had to be considered in the context of a large number of similar arrangements making up the distribution network.49 However, for an effect on competition to be found, the individual agreement in question must itself contribute significantly to such an effect.50 Also, the existence of a number of similar networks on the relevant market must be taken into consideration.51 that an object restriction harm consumers, as Art 101 serves to protect not only competitors and consumers but also the structure of the market and competition as such (paras 62–63). 47   Guidelines on Article 101(3) (above n 44) para 23. 48   Case T-328/03 O2 v Commission [2006] ECR II-1231, [2006] 5 CMLR 258. This case concerned a horizontal agreement, but it emphasises the importance of considering under Art 101(1) what would have happened in the absence of the agreement in question, particularly in markets undergoing liberalisation or emerging markets. 49   Case 23/67 Brasserie de Haecht v Wilkin (No 1) [1967] ECR 407, [1968] CMLR 26. 50   Case C-234/89 Delimitis v Henninger Brau AG [1991] ECR 1935, [1992] 5 CMLR 210; Case C-279/95 Langnese-Iglo v Commission [1998] ECR I-5609, [1998] 5 CMLR 933; and Case T-9/93 Schöller Lebensmittel v Commission [1995] ECR II-1611, [1995] 5 CMLR 602. 51   Case 26/76 Metro v Commission (No 1) [1977] ECR 1875, [1978] 2 CMLR 1. See also below ch 3 section 3.4.

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2.2.8.3  Agreements of Minor Importance The requirement that there be an effect on competition is subject to a de minimis limitation, which is generally expressed as the requirement that there be an appreciable effect on competition.52 In order to provide guidance on the scope of this rule the Commission has published a Notice on agreements of minor importance which do not appreciably restrict competition.53 The Notice sets thresholds based on the parties’ market shares, below which the Commission will not institute proceedings or impose fines. National authorities and courts are not legally bound by the Commission’s Notice, but it states that it is intended to provide them with guidance, and in practice they can be expected to follow it. The thresholds are: • horizontal agreements54 (eg, between two suppliers): the aggregate market share of the parties’ corporate groups on any of the relevant markets affected by the agreement does not exceed ten per cent; • vertical agreements (eg, between supplier and distributor): the market share of each of the parties’ corporate groups on any of the relevant markets affected by the agreement does not exceed 15 per cent; and • any agreement if the parties are small or medium-sized businesses.55 The Notice states that these thresholds do not apply to hardcore restrictions such as resale price-fixing clauses or clauses providing for absolute territorial protection, which may infringe Article 101(1) even below these market shares. The de minimis rule can in principle still apply to such clauses56 but normally only in the case of market shares that are considerably below the thresholds set out in the Notice.57 Note that non-compete clauses are not hardcore and so can benefit from the 15 per cent threshold. When a number of similar networks of supply or distribution agreements have a cumulative foreclosure effect (hindering competitors’ access to distribution outlets) on the relevant market then the threshold is five per cent for horizontal and vertical agreements. Such an effect is said to be unlikely to occur when less than 30 per cent of the relevant market is covered by such networks. 2.2.8.4  Ancillary Restrictions Restrictive clauses have sometimes been held to fall outside the scope of Article 101(1) on the grounds that, though restrictive, they are ‘ancillary’ to the main 52   Case 5/69 Volk v Vervaecke [1969] ECR 295, [1969] CMLR 273. See also Commission Guidelines on vertical restraints (above n 7) paras 8–10. 53   [2001] OJ C368/13. 54   The Notice defines ‘potential competition’ very widely, so that many agreements that one would not expect to be horizontal do in fact so qualify in this context. 55   See above n 53; and Commission Guidelines on vertical restraints (above n 7) para 11. 56   Case C-279/06 CEPSA v Tobar [2008] ECR I-6681, [2008] 5 CMLR 1327, para 42. 57  In Volk v Vervaecke (above n 52), the agreement was held to be de minimis, although it provided for absolute territorial protection; but the relevant market shares were well below one per cent.

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  article 101(2) tfeu  33

agreement. This means that they are directly related and objectively necessary to the main transaction, which is not itself anticompetitive, and are proportionate to it. This will frequently be the case for certain types of restrictive clauses in the context of selective distribution (see chapter four) and franchising (see chapter five). 2.2.8.5  Categories of Restrictions In chapter three a number of specific clauses and practices of relevance to distribution agreements in general are considered in turn. Selective distribution, franchising and agency contracts will then be considered in detail in separate chapters.

2.3 

article 101(2) tfeu

Any contractual clause infringing the prohibition described above and not exempted under Article 101(3) (see below) is declared by Article 101(2) to be void. It was confirmed early on by the ECJ that this paragraph is automatically effective, without the need for the Commission or any other authority to take any decision or even to know of the offending agreement.58 National courts are competent to declare an agreement void, so it is possible to raise Article 101(2) as a defence to a contractual action in a national court. The agreement is void not only as between the parties to the agreement but also with respect to third parties and with respect to the past and future.59 This means that a party may invoke as a defence to legal proceedings the nullity of an agreement to which he is not a party.60 Only the offending clauses are void under Article 101, and not the whole agreement, unless under the relevant national law those clauses are not severable from the rest of the agreement.61 The consequences of such partial nullity of an agreement therefore depend on the relevant national law.62 Under English law the question was expressed as follows in Chemidus Wavin by Buckley LJ: It seems to me that in applying Article [101] to an English contract one may well have to consider whether, after the excisions required by the Article of the Treaty have been made from the contract, the contract could be said to fail for lack of consideration or any other ground, or whether the contract could be so changed in its character as not to be the sort of contract that the parties intended to enter into at all.63 58

  Case 127/73 BRT v SABAM (No 1) [1974] ECR 313, [1974] 2 CMLR 238.   Case 22/71 Beguelin Import Co v GL Import-Export SA [1971] ECR 949, [1972] CMLR 81; and CEPSA v Tobar (above n 56) para 74. 60   Eg, British Leyland v TI Silencers [1981] 2 CMLR 75 (UK Court of Appeal). 61   Case 56/65 La Technique Minière v Maschinenbau Ulm GmbH [1966] ECR 234, [1966] CMLR 357; and CEPSA v Tobar (above n 56) para 78. 62   Case 319/82 Société de Vente de Ciments et Betons de l’Est SA v Kerpen & Kerpen GmbH & Co KG [1983] ECR 4173, [1985] 1 CMLR 511. 63   [1978] 3 CMLR 514, 519 (Saskatchewan Court of Appeal). 59

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Under English law there is no possibility for the Court to rewrite the offending contract term. This can lead to difficulties when, for example, a distribution agreement contains provision for an exclusive territory for the distributor. If the exclusivity clause is removed then only one of two results is possible. The entire contract may be held void, on the basis that the other terms agreed were dependent on exclusivity, and this will lead to confusion regarding orders, deliveries and obligations already incurred in application of the agreement. Alternatively, the contract may remain valid but with the exclusivity clause removed. However, since the Court has no power to adapt the contract terms to take account of the lack of exclusivity, the remaining terms may now be commercially unjust or unacceptable to one or other party. Similarly, it is a question of national law whether a contract that has previously been void under Article 101(2) is permanently void or can become valid following the amendment of the agreement. This might occur, for example, when a supplier informs its distributors that they are no longer bound by a fixed resale price.64 In some legal systems it may be possible for the Court to rewrite the contract to some extent so as to remove the exclusivity clause or in some way to adapt it. For example, a term providing for absolute exclusivity could be rewritten to provide only for a ban on active sales outside the distributor’s territory. Depending on the circumstances, this might have the effect of bringing the contract within the scope of exemption through Article 101(3) or a block exemption, making it legal and enforceable, at least for the future. 2.4 

article 101(3) tfeu

2.4.1 Exemption The widely drawn prohibition contained in Article 101(1) is tempered by Article 101(3), which provides that an arrangement infringing that prohibition may benefit from exemption if it: 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) i mpose 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.

Some categories of agreement benefit from ‘block exemptions’ (see below section 2.4.2) that deem specified categories of agreement to satisfy these requirements. Only if no block exemption applies will it be necessary to consider whether the agreement actually meets the four requirements set out in Article 101(3). 64

  CEPSA v Tobar (above n 56) para 75.

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  article 101(3) tfeu  35

All four requirements are discussed in detail in the Commission’s Article 101(3) Guidelines.65 If this issue comes before a court or authority, the burden of proof is on the party seeking to rely on Article 101(3).66 However, once that party has demonstrated, with convincing arguments and evidence, that the conditions for exemption are satisfied, it may be that the facts are such as to require the other party to rebut them, failing which the burden of proof will be considered satisfied. As far as the first criterion is concerned, and in particular when the future effects of an agreement are being assessed, it will be sufficient to show that it is probable that gains in efficiency may occur.67 2.4.1.1  Improving Production or Distribution or Promoting Technical or Economic Progress The restriction may contribute to improving distribution, for example, because it effects a rationalisation that reduces costs; or provides sufficient incentive for resellers to join a network; or improves the speed or quality of the distribution service. Cost-related efficiencies must be able to be proved and quantified, and qualitative efficiencies explained in detail. They must be substantial and specifically brought about by the agreement. The assessment under this criterion seeks to assess whether the restriction is sufficiently likely to bring appreciable objective advantages such as to compensate for the resulting disadvantages for competition. It may require any specific features of the market concerned to be taken into account.68 Non-economic benefits such as environmental protection and promotion of cultural diversity are not mentioned in the Guidelines, suggesting that they should not be considered. In the past such factors have occasionally been taken into consideration,69 and this may be justified from a legal point of view by Treaty Articles that require them to be taken into account when applying other Treaty provisions.70 However, in its Article 101(3) Guidelines the Commission relies on ECJ and EGC cases when stating that such factors should be taken into account only ‘to the extent that they can be subsumed under the four conditions of Article [101 (3)]’ (para 42), which suggests that the Commission may now confine itself more strictly to consideration of economic benefits. 65

 Above n 44.   Council Regulation (EC) 1/2003 on the implementation of the rules on competition laid down in Articles [101] and [102] of the Treaty, [2003] OJ L1/1, Art 2. 67   GlaxoSmithKline v Commission (above n 2) paras 82–83. 68   For example, the highly regulated nature of the pharmaceutical market. Ibid, paras 92–93. 69   Eg, CECED [2000] OJ L187/47, [2000] 5 CMLR 635, in which environmental benefits were recognised. However, note that an example, based on the facts of this case, appears in the Commission’s draft revised Guidelines on horizontal cooperation agreements (‘Draft Guidelines’) para 319, but it refers only to the economic benefits of the agreement. The revised Draft Guidelines are available on the DG Comp website and are expected to be finalised and applied as of 1 January 2011. 70   Eg, Art 167(4) TFEU: ‘the Union shall take cultural aspects into account in its action under other provisions of the Treaties.’ 66

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2.4.1.2  Consumers Receive Benefit In the past this requirement was not often considered at length separately by the Commission, since the kind of improvements required under this provision were presumed to be passed onto consumers if there was a competitive market in the goods, as is required by Article 101(3)(b).71 However, the Guidelines now require that the consumer (in the broad sense of the users of the product) benefit must be shown at least to compensate for any negative effects of the restrictions, so that the greater the restriction the greater the benefit that must be shown. This will be hard to prove in the case of qualitative benefits such as increased product variety or accessibility, and even in the case of price reductions it may be difficult to show precisely the impact of the restriction on price. 2.4.1.3  No Indispensable Restrictions If there is any less restrictive way of achieving the same improvement then exemption will not apply. The Commission’s Guidelines require that the indispensability of the agreement be considered with respect to both the contract as a whole and its individual clauses. But the parties are not required to consider ‘hypothetical or theoretical’ alternatives, rather only ‘realistic and attainable’ alternatives.72 2.4.1.4  Competition Not Substantially Eliminated The agreement must not afford the undertakings the possibility of eliminating competition in respect of a substantial part of the products in question. In principle it is possible even for dominant firms to satisfy this requirement,73 since it refers to the effect of the agreement under consideration and not to the market position of the parties. However, if the market affected by the distribution contract is not already subject to healthy competition, then in practice exemption is unlikely to apply, since even a slight further reduction in competition may cause the elimination of competition. If these four substantive criteria are satisfied then the agreement benefits from exemption and does not infringe Article 101, and there is no need for any specific procedure to be followed. It is then fully legal and enforceable in a national court.74 Note that exemption applies only as long as the four criteria are satisfied, so agree71  In some cases the benefit has not been economic; nor has it benefited individual purchasers: in CECED (above n 69), the Commission’s exemption Decision referred to the reduction in environmentally harmful emissions, which would be effected through the agreement, and said ‘Such environmental results for society would adequately allow consumers a fair share of the benefits even if no benefits accrued to individual purchasers of machines.’ 72  Art 101(3) Guidelines, para 75. 73   Case C-171/05 Piau v Commission [2006] ECR I-37. 74   The application of Art 101(3) by arbitrators, as opposed to judges, raises several difficult issues. See, eg, R Nazzini, ‘International Arbitration and Public Enforcement of Competition Law’ [2004] ECLR 153.

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  article 101(3) tfeu  37

ments and their market environment need to be kept under regular review. This means, for example, that a five-year non-compete clause that satisfied Article 101(3) at the outset of an arrangement but that two years later, because of the success of the product, is no longer ‘indispensable’, will cease to be enforceable. However, sunk costs and the need to recoup investment should be taken into account in making this assessment,75 and the Commission and national competition authorities would not normally accord priority to intervening in such cases. The Commission’s Article 101(3) Guidelines make it clear that a party wishing to rely on Article 101(3) has a significant burden to discharge. The stated aim of the Guidelines is to develop an economic methodology for applying Article 101(3), which must be applied ‘in light of the circumstances specific to each case’ and ‘reasonably and flexibly’, to establish whether an exemption is justified by economic efficiency gains. The detail given shows just how complex this may be and the level of economic expertise that may need to be brought to bear. Particularly now that it is the national courts and authorities, and the parties themselves, rather than the Commission, who have to decide these issues, it may be that there will be more focus on deciding whether or not Article 101(1) is infringed in the first place, and less discussion of Article 101(3), which appears so difficult to satisfy, particularly in the presence of high market shares.76 Under the current procedural regime described below, in force since 1 May 2004, it is for the parties to assess both whether the agreement in question infringes Article 101(1) and whether it qualifies for exemption under Article 101(3). Therefore assessment of arrangements under Articles 101(1) and 101(3) may appear to be parts of a single question, particularly as much of the same economic analysis is relevant to both. However, the two issues do remain legally distinct, and if the agreement comes before a court or enforcement authority the burden of proof is different in each case.

2.4.2  Block Exemptions The Commission has the power to issue ‘block exemption’ Regulations which state that certain categories of agreement are deemed to fulfil the requirements of Article 101(3).77 If parties satisfy the relevant market share thresholds and take care to draft their agreement so that it satisfies the other requirements of a block exemption (in particular avoiding the inclusion of any of the forbidden or ‘hardcore’ (‘black-listed’) clauses listed in the Regulation) then they enjoy the certainty that their arrangements are exempted, rather than having to rely on their own or 75

 Art 101(3) Guidelines, para 44.   Some recent cases support this speculation. See below ch 3, n 85.   Block exemptions were first introduced at a time when exemption could be granted only by formal Decision of the Commission. Now that exemption is available automatically it might be more logical to replace the block exemptions with guidelines, but block exemptions have so far been retained as they bind both the Commission and national courts and authorities and so provide more legal certainty than guidelines. 76 77

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their advisers’ judgment on this issue. This is normally a much more attractive option than that of performing the economic and legal analysis necessary to establish that the agreement is outside the scope of Article 101(1), or to be reasonably certain that the substantive requirements of Article 101(3) are fulfilled. At present three block exemptions exist for distribution agreements. One is applicable to all vertical agreements satisfying certain criteria, and the other two apply only to distribution agreements concerning motor vehicles and their spare parts and related after-sales services. All three will be described in later chapters. The fact that an agreement falls within the scope of a block exemption does not guarantee that it will not be found to infringe Article 102, which prohibits abuse of a dominant position.78

2.4.3  Change of System on 1 May 2004 At some points in this book I make reference to cases in which exemption was ‘granted’ or ‘refused’ by the Commission, which may seem puzzling given that I have stated that Article 101(3) applies – where its four criteria are satisfied – without the need for any procedural formality. The reason for this is that before 1 May 2004 the procedural situation in respect of exemption under Article 101 (3) was completely different. Only the Commission had the power to grant an exemption under Article 101(3). Thus, if a national court was called on to decide on the validity of a contract that had not been expressly exempted by the Commission, it had to confine itself to considering whether Article 101(1) was infringed and, if so, whether a block exemption applied. Even if it seemed clear to the court that the Commission would have exempted the contract in question, that was irrelevant to the court’s decision, unless the agreement had been notified to the Commission, in which case the court might stay proceedings to await the Decision of the Commission. Under the current procedural regime, discussed in more detail later in this chapter, parties are spared the expense and time involved in approaching the Commission for an individual exemption, but they can no longer obtain the legal certainty that was available under the old system.

2.5 

article 102 tfeu

2.5.1 Introduction Article 102 TFEU is the provision intended to deal with monopolies and undertakings with high levels of market power, and its application can lead to huge fines.79 78

  Case T-51/89 TetraPak Rausing SA v Commission [1990] ECR II-309, [1991] CMLR 334.   The largest competition law fine ever imposed on a single company was a €1.06 billion one imposed on Intel for infringement of Art 102 (13 May 2009, available on the DG Comp website; appeal pending Case T-286/09 Intel). 79

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  article 102 tfeu  39

Whereas Article 101 covers arrangements involving cooperation between two or more businesses, Article 102 focuses on unilateral behaviour. Since the behaviour of a single company will only be of concern to competition law if it has a certain level of market power, Article 102 is only relevant to companies with strong market positions. The existence or creation of dominance is not prohibited by Article 102, but only its abuse. That provision states: Any abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it shall be prohibited as incompatible with the internal market insofar as it may affect trade between Member States.

Before describing the way in which Article 102 has been applied by the Commission in specific cases, it is worth noting that in recent years there has been growing pressure, both inside and outside the Commission, for a less formalistic and more economics-based approach to Article 102 cases than has characterised past Commission and Court decisions. In 2005 DG Comp published an unofficial discussion paper on interpretation and enforcement of Article 102 in respect of exclusionary abuse,80 which gave rise to wide-ranging and vigorous debate. The initial intention was to develop enforcement guidelines, but in the end too many issues remained too controversial to allow a clear position on the interpretation of the law to be adopted. Instead, 2008 saw the adoption of ‘Guidance on the Commission’s Enforcement Priorities in Applying Article [102 TFEU] to Abusive Exclusionary Conduct by Dominant Undertakings’.81 This Guidance sets out the type of practices on which the Commission intends to focus its enforcement resources and its investigations, and how it will analyse single-firm exclusionary conduct. It is expressly limited in a number of ways and in particular states explicitly that it is not a statement of the law but rather of enforcement priorities, and of the framework of analysis that the Commission will apply in deciding whether to take action. Nevertheless, on some points it does appear to take a position on the law, and in practice not only the Commission but also national courts and authorities can be expected to refer to it when interpreting both Article 102 and national equivalents. It is clearly intended to herald an approach rooted in modern economics and a focus on effects, notably the anticompetitive foreclosure of competitors,82 rather than applying formal ‘per se’ rules. The Commission’s most recent Decisions do broadly reflect increased attention to the economic effects of alleged abuse.83 However, Commission Guidance cannot change the more formalistic past case law of the European Courts, and some uncertainty remains as to the extent to which the Courts endorse this change of 80   ‘Staff Discussion Paper on the application of Article [102] of the Treaty to exclusionary abuses by dominant undertakings’, available on the DG Comp website. 81   [2009] OJ C45/7 (hereafter ‘Guidance’). This deals only with exclusionary abuse. No Commission guidance has so far been published on exploitative abuse. 82  Ibid, paras 19–22. 83   Eg, Intel (above n 79).

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approach. There has so far been no unambiguous sign from them on the question, due in part to the fact that even the most recent judgments still deal with Commission Decisions dating from some years ago.84 The meaning of ‘undertaking’ and ‘may affect trade between Member States’ are the same as for Article 101 (see above sections 2.2.5 and 2.2.7 respectively), and concepts specific to Article 102 are described below.

2.5.2  ‘Dominant Position’ First it is necessary to ascertain whether the undertaking is ‘dominant’. The ECJ has said that if a firm is in a position to take decisions without any real need to take into account the behaviour of other firms or consumers, then it has a dominant position: Undertakings are in a dominant position when they have the power to behave independently, which puts them in a position to act without taking into account their competitors, purchasers or suppliers. That is the position when, because of their share of the market, or of their share of the market combined with the availability of technical knowledge, raw materials or capital, they have the power to determine prices or to control production or distribution for a significant part of the products in question. This power does not necessarily have to derive from an absolute domination permitting the undertakings which hold it to eliminate all will on the part of their economic partners, but it is enough that they be strong enough as a whole to ensure to those undertakings an overall independence of behaviour, even if there are differences in intensity in their influence on the different partial markets.85

If a company is not dominant on its own, it may be jointly dominant with other companies, sometimes even if its relationship with them is vertical. For example, in Irish Sugar the EGC held that the manufacturer Irish Sugar was jointly dominant with its distributor Sugar Distributors Ltd because of its shareholding and board representation in the other company, as well as certain policy-making structures and economic links in the form of various agreements, including an exclusive supply agreement.86 However, such cases are highly unusual. It is often hard to establish whether or not an undertaking has a ‘dominant position’. Given that dominance refers to the possession of a certain degree of market strength, it is first crucial to define the geographic and product market (see above section 2.2.6). The next step will be to quantify the company’s market share, as this can often provide a primary indication as to whether Article 102 is potentially applicable. 84   Eg, Case T-57/01 Solvay v Commission, [2009] ECR II-4621, appeal pending Case C-109/10 (Commission Decision in 2000); and Case T-321/05 AstraZeneca v Commission, 1 July 2010, appeal pending Case C-457/10 (Commission Decision in 2005). 85   Continental Can [1972] OJ L7/25, [1972] CMLR D11, para II-3. See also Guidance (above n 81) paras 9–18. 86   Case T-228/97 Irish Sugar v Commission [1999] ECR II-2969, [1999] 5 CMLR 1082.

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  article 102 tfeu  41

2.5.2.1  Market Share Thresholds Though levels of market power, and therefore dominance, do not directly equate with market shares, some rules of thumb based on market shares do exist and are a useful starting point. If an undertaking has a very large market share in percentage terms then dominance will be assumed: a market share over 50 per cent, without more, creates a rebuttable presumption of dominance.87 Between 50 per cent and 40 per cent, a variety of factors will be taken into account. Below 40 per cent, a finding of dominance is not likely.88 2.5.2.2  Other Factors Relevant to Dominance Market shares alone are not conclusive of dominance or its absence and may indeed be misleading. Market structure, in particular the number of competing undertakings and their respective market shares, is also important. For example, a 45 per cent share is more likely to indicate dominance if the competitors in the market all have less than five per cent than if there is another competitor with 40 per cent. Other relevant factors include the existence and importance of barriers to entry and expansion into the market.89 If there are low barriers to entry in the industry, in principle even a company with a very high market share may not be dominant, since it will probably have many potential competitors ready to enter the market immediately if prices are raised above a competitive level. Similarly, in innovation markets, the pattern tends to be that a firm developing a new, better product (software or a medicine, for example) quickly acquires a large market share but keeps it only for a fairly short time, after which a new, better product is developed by a competitor, who in turn enjoys a high market share until his product is displaced by something new. However, above a market share of 50 per cent it will be hard to rebut the presumption of dominance. Finally, even an undertaking with a high market share, and apparently facing limited actual or potential competition, may have little market power if it is constrained by powerful buyers, which may credibly threaten to switch to a different supplier or to sponsor either a new entrant or expansion by an existing competitor.

2.5.3  ‘The Internal Market or . . . a Substantial Part of It’ Article 102 requires that the abuse of dominance cover at least a ‘substantial part’ of the internal market, and this acts in some sense as a de minimis rule for Article 87

  Case C-62/86 AKZO Chemie v Commission [1991] ECR I-3359, [1993] 5 CMLR 215.   Guidance (above n 81) para 13. A rare exception to this is the Commission Decision, ultimately upheld in Case C-95/04 British Airways v Commission, [2007] ECR I-2331, where BA had just under 40 per cent of the UK air travel agency services purchase market. 89   Case 85/76 Hoffman-La Roche v Commission [1979] ECR 461, [1979] 3 CMLR 211. 88

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102. It refers both to the geographical area covered and to the volume of trade as a proportion of the EU market. Both southern Germany and Belgium90 have been held to be ‘substantial’ in relation to sugar production, as have individual facilities such as ports and airports.91

2.5.4 ‘Abuse’ It is not the creation or enjoyment of a dominant position that is prohibited as such but only its ‘abuse’. Whether particular conduct amounts to abuse may depend on many surrounding economic circumstances, including the extent to which the company is dominant: companies with extremely high market shares are sometimes referred to as ‘super-dominant’, and they may be found to have committed abuse when behaving in a way that would not have been abuse in the case of a less powerful company. In any case, a wide range of conduct may constitute abuse, and that conduct will frequently consist of practices that are standard in the industry, and perfectly legal if used by non-dominant companies. This is sometimes explained by saying that dominant companies have a ‘special responsibility’ in this respect. In Van den Bergh Foods92 the EGC stated that the abusive conduct (freezer exclusivity) . . . constitutes a standard practice on the relevant market. In the normal situation of a competitive market, those agreements are concluded in the interests of the two parties and cannot be prohibited as a matter of principle. However, those considerations, which are applicable in the normal situation of a competitive market, cannot be accepted without reservation in the case of a market on which, precisely because of the dominant position held by one of the traders, competition is already restricted.

The fact that the use of certain business practices that are standard in the industry is denied to the most successful companies in the industry can be hard for businessmen to accept. Nor need any intention to harm competition be shown,93 though intention does sometimes play a role, in particular in predatory pricing cases. Abusive practices are sometimes divided into the two categories of ‘exclusionary’ conduct (using market power to eliminate or weaken the position of competitors) and ‘exploitative’ conduct (making unfair use of market power), although many types of abusive conduct may have both exploitative and exclusionary effects. Exclusionary abuse is sometimes explained as conduct foreclosing competitors ‘by other means than competing on the merits of the products or services they provide’.94 The abuse and effect generally occur in the market on which the 90

  Suiker Unie (above n 13) para 864.   Eg, Case C-179/90 Porto di Genova [1991] ECR I-5889, [1994] 4 CMLR 422; and Case C-163/99 Portugal v Commission [2001] ECR I-2613, [2002] 2 CMLR 1319. 92   Case T-65/98, [2003] ECR II-4653, [2004] 4 CMLR 14, para 159, upheld in Case C-552/03 [2006] ECR I-9091. 93   Hoffman-La Roche (above n 89). 94   Guidance (above n 81) para 6. 91

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  article 102 tfeu  43

dominant position is held, but behaviour or effects on a neighbouring market have been held to be within the scope of Article 102.95 Though there is no possible ‘exemption’ under Article 102, conduct that would otherwise be characterised as abuse can escape the scope of Article 102 when there is either ‘objective justification’ for the conduct or when there are sufficient economic efficiencies to mean that no net consumer harm is likely.96 Types of conduct relevant to distribution agreements that have been characterised as abusive include the following. 2.5.4.1  Predatory Pricing If a dominant company prices its goods or services at a level so low that it may drive equally efficient competitors out of the market or limit their development, it may be held to abuse its dominant position, contrary to Article 102. The allegation in such a case is that a dominant firm incurs losses in the short term but is later able to raise its prices more profitably as a result of the reduction in the competition that it faces. The European Courts97 have held that the test for whether prices are predatory and therefore abusive is whether: •  they are below average variable costs;98 or •  they are below average total costs99 and there is evidence of an intention to eliminate a competitor from the market.

Unlike US law, EU law does not require that the possibility or likelihood of recoupment of the initial losses be shown. Nor can a dominant company justify pricing below cost on the grounds that it is meeting the prices of its (non-dominant) competitors.100 2.5.4.2  Exclusive Supply and Conditional Rebates In practice many abuse Decisions, including the one imposing a huge fine on Intel,101 concern conduct aimed at pressurising another party only to deal with the dominant firm, for example by applying conditional rebates that remove any     95   Eg, Interbrew (Annual Report on Competition Policy 1996), where the abusive behaviour in other Member States where Interbrew was not dominant was found to allow it better to exploit its dominance on the Belgian market, where it was dominant. See also Case C-333/94 Tetrapak [1996] ECR I-5951, [1997] 4 CMLR 662 where there was dominance in one product market and abuse and benefits in another; and British Airways (above n 88), where there was dominance and abuse in the market for purchase of travel agency services and a benefit in the air transport market.     96   See Guidance (above n 81) paras 28–31 and the case law cited there.     97   AKZO Chemie (above n 87); and Case C-202/07 France Télécom v Commission [2009] ECR I-2369, [2009] 4 CMLR 1149.     98   The Guidance refers instead to ‘average avoidable costs’, which include some fixed costs incurred during the relevant period.      99   The Guidance refers instead to ‘long run average incremental costs’, which exclude common costs incurred in respect of other products. 100   France Télécom v Commission (above n 97). 101  Above n 79.

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incentive on purchasers to use other providers for part of their needs. Past cases show that systems of discounts, bonuses or loyalty rebates offered by suppliers may constitute abuse when the effect of such behaviour is to apply dissimilar conditions to equivalent transactions with other trading parties in that two purchasers pay a different price for the same quantity of the same product depending on whether they obtain their supplies exclusively from the undertaking in a dominant position or have several sources of supply.102

More recently the Commission has moved away from looking at discrimination and towards more of a predatory pricing approach. This means that, even if not discriminatory, such systems may constitute exclusionary abuse if they foreclose smaller firms (which do not have the capacity to supply a large percentage of users’ needs) from supplying even a part of those needs, by making rebates dependent on the purchase of very large quantities or very large proportions of a user’s total needs. However, if a discount or rebate is clearly attributable to, for example, costs saved by bulk production or delivery, then it should not be treated as abuse. Another type of abuse based on exclusive supply was found when free freezers were made available by ice cream suppliers to their distributors on condition that they only be used to stock the supplier’s brand of ice cream, as this foreclosed these retail outlets to other suppliers.103 However, the circumstances were very specific: ice cream (unlike other products such as soft drinks) can be stocked only in freezers, and the distributors were small ‘corner shops’, which did not have enough space for more than one freezer. In addition, a very high proportion of the market (83 per cent) was covered by this and other similar networks. A similar practice in respect of other products, or involving larger retailers or supermarkets, would not necessarily infringe Article 102. 2.5.4.3  Tying and Bundling Article 102 has frequently been applied to tying practices.104 One of the forms of abuse that led to a large fine on Microsoft 105 was its tying of its Windows operating system with its Windows-based media player. Market definition is crucial in such cases and may change quickly over time in new technology markets: if it had been decided in Microsoft that an operating system incorporating a media player was a single product then this practice would not have infringed Article 102.

102   Case 85/76 Hoffman-La Roche v Commission [1979] ECR 461, [1979] 3 CMLR 211, para 90; and Case 322/81 Michelin (No 1) [1983] ECR 3461, [1985] 1 CMLR 282. In British Airways (above n 88), a fine of €6.8 million for a system of loyalty rebates tying travel agents and discouraging them from selling tickets of other airlines was upheld by the ECJ. 103   Van den Bergh Foods v Commission [2006] ECR I-9091 (above n 92). The agreements were also held to infringe Art 101. 104   Eg, Case C-53/92 Hilti AG v Commission [1994] ECR I-667, [1994] 4 CMLR 614. 105   Upheld in Case T-201/04 Microsoft v Commission [2007] ECR II-3601, [2007] 5 CMLR 846.

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  article 102 tfeu  45

2.5.4.4  Refusal to Supply and Price Squeeze Refusal to supply by a dominant firm may constitute abuse, in particular if the party to whom supplies have been refused was previously being supplied. When a party is a regular customer then refusal to supply is likely to be regarded as abuse unless there are proved to be good reasons for termination of supply.106 Therefore, it is advisable for firms in a strong market position to keep full records of any complaints and other correspondence with dealers leading up to termination. It is currently uncertain in precisely what circumstances a dominant supplier is entitled to refuse supplies so as to protect itself from losses caused by parallel exports of its products. We have seen earlier in this chapter that agreements aimed at discouraging parallel trade infringe Article 101, but it is uncertain to what extent unilateral conduct employed to these ends is subject to Article 102. This issue is of great importance in the pharmaceutical industry given the high levels of parallel trade in that sector (see above section 2.2.2). Some clarification of the law has now been provided, at least in respect of pharmaceutical markets. In Syfait II the ECJ held that a dominant pharmaceutical supplier, in order to put a stop to parallel exports by wholesalers, may refuse to meet demands going beyond ‘ordinary orders’ from those wholesalers. ‘Ordinary orders’ are to be judged in the light of both the size of those orders in relation to the requirements of the domestic market and the previous business relations between that undertaking and the wholesalers concerned.107 Only very rarely will refusal of access to a facility be held to be abuse of a dominant position, and in the context of distribution such conduct has never been found to be abusive. It was argued in Bronner v Mediaprint that the refusal by a large newspaper publisher to allow a small newspaper publisher and distributor access to its nationwide early morning home-delivery system, even in return for reasonable payment, was abuse of the former’s dominant position. The smaller competitor argued that postal delivery would not take place until late morning and that with its low number of subscribers it would be unprofitable for it to organise its own home-delivery system. The ECJ rejected this argument. It held that for there to be an abuse it was necessary . . . not only that the refusal of the service comprised in home-delivery be likely to eliminate all competition in the daily newspaper market from the person requesting the service and that such refusal be incapable of being objectively justified, but also that the service in itself be indispensable to carrying on that person’s business, inasmuch as there is no actual or potential substitute in existence for that home-delivery scheme.108

It went on to say that newspapers could be distributed in many other ways, for example, through shops or by post, and moreover that it had not been established that the creation of a second home-delivery service could never be economically viable. 106

  United Brands (above n 25); and Syfait II (above n 2).  Above n 2.   Case C-7/97 [1998] ECR I-7791, [1999] 4 CMLR 112, para 41.

107 108

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Another type of conduct treated as a form of refusal to supply is a price squeeze, which occurs when a dominant company, active on an upstream and a downstream market, charges a price on the upstream market that, compared to the price it charges on the downstream market, prevents an equally efficient competitor from operating profitably on the downstream market.109 2.5.4.5  Refusal to Honour Guarantee In Novo Nordisk110 the Commission considered that refusal to honour a guarantee and disclaiming liability for malfunction of medical equipment on the grounds that the equipment had been used in conjunction with a competitor’s components, despite the proven compatibility of those components, constituted abuse. 2.5.4.6  Excessive Pricing Excessive or exploitative pricing is explicitly mentioned in Article 102 as an example of abuse, but in practice few such cases are brought. This is probably because of the difficulty of establishing what a ‘fair’ price is and because of competition authorities’ reluctance to act as price regulators. 2.5.4.7 Discrimination Both price and other types of discrimination are prohibited when there is no objective justification for the different treatment, such as the fact that it is cheaper to supply each unit when large volumes are ordered. In Clearstream abuse was found when Clearstream, which was dominant in the provision of clearing and settlement services for securities, charged Euroclear a higher price than it charged to other customers for similar services and no justification for the difference was shown.111 Discrimination as between football fans of different nationality was held to be abuse in a case in which the Commission fined the French World Cup organisers for the way in which ticket distribution was organised.112

2.6 

extraterritorial application

The extraterritorial scope of the EU competition rules is not completely certain. It is established that an arrangement made outside EU territory but at least partially implemented within it may fall within the scope of those rules, regardless of 109   Eg, Case T-271/03 Deutsche Telekom v Commission [2008] ECR II-477, [2008] 5 CMLR 631, upheld Case C-280/08, 14 October 2010. 110   1996 Annual Report on Competition Policy, para 62. 111   Case T-301/04 [2009] ECR II-3155, [2009] 5 CMLR 2677. 112   [2000] OJ L5/55, [2000] 4 CMLR 963.

[2.7]

  eu competition rules versus national rules  47

whether the undertakings concerned have any kind of establishment within the European Union: If the applicability of prohibitions laid down under competition law were made to depend on the place where the agreement, decision or concerted practice was formed, the result would obviously be to give undertakings an easy means of evading those prohibitions. The decisive factor is therefore the place where it is implemented. The producers in this case implemented their pricing agreement within the [European Union]. It is immaterial in that respect whether or not they had recourse to subsidiaries, agents, sub-agents or branches within the [EU] in order to make their contracts with purchasers within the [European Union].113

Fines may therefore be imposed on the firms concerned and termination of the agreement ordered, provided some implementing measures are taken on EU territory. For example, an American manufacturer or supplier could be fined for maintaining a network of independent distributors within the European Union if the terms of the distribution agreements infringed Article 101. It would not be necessary for it to be shown that the American firm had a branch or subsidiary within the European Union that had implemented the agreement. Whether and how the payment of such a fine can be enforced is a different question and depends on the jurisdiction concerned. It is still uncertain what types of act constitute ‘implementation’. Nor is it clear whether, in the absence of implementing measures, the EU has jurisdiction. For example, if a Japanese firm were to agree with an American firm not to supply certain products to the European Union, could there be EU jurisdiction in such a case? It may be that a mere ‘effect’ in the European Union and no actual act of implementation is sufficient to found jurisdiction. The Commission takes this latter, broader view of its jurisdiction, so non-EU enterprises could in principle have such behaviour challenged by the Commission and have to argue the jurisdictional question on appeal to the EGC. However, in the case of many third countries the problem is unlikely to arise in practice, thanks to provisions for cooperation in competition law enforcement included in international agreements, such as the European Economic Area Agreement (with Iceland, Liechtenstein and Norway), as well as to dedicated competition cooperation agreements in force with the United States, Canada, Japan and Korea, and to relevant provisions in the more general agreements that exist with many other countries.

2.7 

eu competition rules versus national rules

All 27 Member States have competition laws that are very similar in substance to EU competition rules and apply only to anticompetitive behaviour affecting their 113

  Woodpulp ECJ (above n 14) para 16.

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[2.7]

national markets. But they frequently differ in their detail, and even where the substantive law is identical, procedural rules and sanctions vary.114 It is therefore important to know when an alleged infringement is potentially subject only to national law (which is enforced only by national courts and authorities), only to Articles 101 or 102 (which may be enforced either by the Commission or at national level) or to both. The separate question of how it is decided whether the Commission or one or more national authorities actually deals with a specific case is considered later in this chapter. As already stated, the general principle is that EU law takes precedence over national law, and when there is a conflict between the two, a national court must apply the EU law rule (see above chapter one, section 1.5.2). Therefore, conduct that infringes EU law cannot be authorised by national law. The fact that a national law or state measure permits, encourages or facilitates a particular practice is no defence to an allegation of infringement of EU law, unless national law actually mandates the infringing conduct, leaving the undertaking with no alternative course of action.115 In competition law there is a sharing of competence between the European Union and the Member States. The requirement in Articles 101 and 102 that conduct have an effect on trade between Member States (see above section 2.2.7) has been interpreted by the ECJ as creating and delimiting this division of competence: when an agreement has no appreciable effect on trade between Member States then it falls outside the scope of EU law, and national law may be freely applied to the agreement.116 However, although in cases where inter-Member State trade is not affected EU law does not apply, where such trade is affected, then both EU and national law may be applied, provided that the uniform application of EU law is not prejudiced. For the EU institutions applying competition law the application of this principle is simple, since they only have the option of applying EU law provisions.117 For national courts and competition authorities the question is more complicated, as they need to decide whether to apply EU law, national law, or both. The general principle clearly means that national law can never permit conduct that is prohibited by EU law. However, until recently it was less clear whether and when this principle allowed national law to prohibit conduct that would not be prohibited by Article 101 or 102. 114   For a description of the competition law enforcement regimes in each of the 27 Member States, see D Broomhall and J Goyder (eds), Modernisation in Europe 2008 (London, Law Business Research, 2007). 115   Case 123/83 BNIC v Clair [1985] ECR 392, [1985] 2 CMLR 430; and Cases C-94/04 and C-202/04 Cipolla [2006] ECR I-11421. 116   Consten & Grundig (above n 9). 117   However, if sanctions are imposed by both systems, the level of the EU fine will be set to take into account any national sanction imposed: Case 14/68 Walt Wilhelm v Bundeskartellamt [1969] ECR 1, [1969] CMLR 100. Whether the reverse is true depends on the relevant national law. However, a fine imposed by a non-EU authority, for example in the US, will not normally be taken into account by the Commission: Case C-308/04 SGL Carbon v Commission [2006] ECR I-5577, [2006] 5 CMLR 922.

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  procedural aspects of articles 101 and 102 tfeu  49

This issue is therefore expressly covered by the procedural Regulation 1/2003.118 Article 3 provides that whenever national bodies apply national competition law to an agreement or practice that affects trade between Member States, they must also apply Article 101. In such cases, application of national law must not lead to the prohibition of agreements that do not infringe Article 101(1) or of agreements that either fulfil the criteria of Article 101(3) or fall within the scope of a block exemption. When national bodies apply national law to an abuse prohibited by Article 102, they must also apply Article 102. However, in this case national law may also impose stricter national rules prohibiting unilateral conduct. A number of Member States have such rules, which prohibit, for example, abuse of ‘economic dependence’ or ‘superior bargaining power’, or resale below cost.119 Article 3(3) states that these rules do not limit the application of national laws with other objectives. These presumably include rules on consumer protection and protection of agents or franchisees, and sanctions for criminal cartel activity.

2.8 

procedural aspects of articles 101 and 102 tfeu

2.8.1 Introduction Enforcement of Articles 101 and 102 is a complex subject, involving a large number of actors, including public authorities and private undertakings, courts and competition authorities, and national bodies as well as EU institutions. The aspects covered here are those most likely to be of relevance in the context of distribution agreements. The procedural enforcement rules relating to Articles 101 and 102 underwent radical reform (often referred to as ‘modernisation’) on 1 May 2004, with the entry into effect of Regulation 1/2003,120 which replaced Regulation 17/62. The main impact of that change was to shift more responsibility for the assessment of agreements under Article 101 to parties and their advisers, and to increase the powers and responsibilities of national courts and national competition authorities (NCAs) for enforcement of Articles 101 and 102. In the description that follows, the old rules will be mentioned only to the extent that this is necessary in order to understand judgments, Decisions and other texts that predate the change, the substance of which in most cases remains good law. The third edition of this book provides further detail on the old regime.121 Apart 118

 Above n 66.   Commission, ‘Report on the Functioning of Regulation 1/2003’, COM(2009)206 final, 29 April 2009, paras 19–22. The Commission observes there that this ‘divergence of standards’ may hinder pan-European business strategies and is an issue that needs further examination. 120  Above n 66. For a detailed report on the application in practice of the new rules see ‘Report on the Functioning of Regulation 1/2003’ (ibid) and the accompanying Commission Staff Working Paper, SEC(2009)574 final, 29 April 2009. 121   J Goyder, EU Distribution Law, 3rd edn (Poole, Palladian Law Publishing, 2000). 119

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from references to Articles 101 and 102, all references to Articles in this chapter below refer to Regulation 1/2003 (unless stated otherwise). Note that additional detailed rules on procedural issues, including the rights of parties under investigation and third parties, the handling of complaints, time limits and the conduct of investigations and oral hearings, appear in Commission Regulation 773/2004.122

2.8.2  Institutional Framework In this section the interrelating roles of the EU and national authorities and courts are briefly described,123 and it is explained how cases are allocated between the various authorities. The specific powers and responsibilities of the European Commission and the role of private enforcement are discussed in later sections. 2.8.2.1 Commission A broad responsibility for enforcement of EU competition law has lain principally with the Commission since 1962. At that time it was given a number of powers and duties, which it has made vigorous use of ever since. It has the power to carry out investigations and inspections and to adopt various enforcement Decisions, including those imposing fines and, though these are rare, behavioural and even structural remedies. One of the aims of the 2004 procedural reforms was to decentralise the enforcement of Articles 101 and 102, giving national courts and NCAs a greater role and freeing the Commission’s resources to pursue serious infringements such as major cartels and abuses of dominance affecting a large part of the European Union. While the Commission continues to welcome and act on complaints concerning serious competition law infringements, a large majority of cases involving distribution arrangements are now handled at national level. It used to be possible to notify agreements to the Commission with a view to obtaining a Decision stating either that Article 101(1) was not infringed, that it was but a block exemption applied (‘negative clearance’) or that the conditions of Article 101(3) were fulfilled (‘individual exemption’). In practice such formal Decisions were rare, and instead many informal administrative ‘comfort letters’ were given every year. These provided a lesser degree of legal certainty than a formal Decision, but in many circumstances they were sufficient in practice for the parties’ commercial purposes.124 The Commission no longer plays this role, though 122   Commission Regulation (EC) 773/2004 relating to the conduct of proceedings by the Commission pursuant to Articles [101 and 102 TFEU], [2004] OJ L123/18, amended in respect of settlement proceedings by Commission Regulation (EC) 622/2008, [2008] OJ L171/3. 123   See also above ch 1 for a general description of each of the main EU institutions. 124   This was particularly the case for distribution agreements as these are normally vertical agreements and so could be formally exempted retrospectively if this later became necessary, for example in the event of a contractual dispute or complaint to an authority.

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  procedural aspects of articles 101 and 102 tfeu  51

there are now various other ways in which it may provide guidance (see below section 2.8.5). Despite this change, the Commission remains very influential, as will be seen from its current wide range of powers, discussed below. Apart from powers to investigate and to inspect company premises, it has the power to withdraw cases from NCAs and to make submissions in national litigation involving Articles 101 and 102. It also has the power to adopt a range of Decisions. The many Commission Notices and Guidelines, listed at the beginning of this chapter, also ensure that in practice its views exert considerable influence on national courts and NCAs. 2.8.2.2  European General Court and European Court of Justice The European General Court125 (EGC) hears all appeals from private parties against Commission Decisions, whether they are parties to whom the Decision is addressed or third parties with standing to appeal the Decision. It carries out a full review of the case, and its judgment may be appealed, on points of law only, to the European Court of Justice (ECJ). The EGC’s review is detailed and comprehensive in respect to the question whether the conditions for application of the competition rules are met. However, to the extent that the Commission is called on to make a complex economic assessment, for example to define a product market126 or make a technical assessment,127 it confines its review to assessing whether the Commission has committed a ‘manifest error’. This will be the case, for example, when the EGC reviews a Decision finding an infringement of Article 101 or 102.128 Such a review involves checking whether the evidence relied on is factually accurate, reliable and consistent, whether all the relevant information has been taken into account and whether it supports the conclusions drawn. When a question of interpretation of EU law arises in a national court, that court has the option, and in some cases the obligation, to consult the ECJ. It does this by requesting a preliminary ruling from the ECJ under the procedure provided in Article 267 TFEU. Questions of interpretation of EU law may be put in cases not only where the national court is applying that law directly but also where it is applying domestic law that refers to EU law to determine the rules applicable to a purely domestic situation.129 The question was raised at the time of the 2004 procedural reform as to whether the ECJ had sufficient resources to deal with the many more such references that might occur under the new regime. However, 125

 Prior to 1 December 2009 known as the Court of First Instance.   Microsoft v Commission (above n 105) para 482. 127   Clearstream v Commission (above n 111) para 94. 128   GlaxoSmithKline v Commission (above n 2), where, in a rare example of a finding of such ‘manifest error’, the ECJ upheld the EGC’s finding that the Commission had not taken into account all of GlaxoSmithKline’s factual arguments and relevant evidence (paras 85 and 146). 129   Case C-217/05 CEEES v CEPSA [2006] ECR I-11987, [2007] 4 CMLR 181, where Spanish law provided that the rules in an EU block exemption should apply to certain agreements affecting only the national market. 126

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there has not been any significant increase in the number of such references, perhaps because in practice national courts more often have difficulty applying the law to the facts, rather than interpreting the law itself. 2.8.2.3  National Competition Authorities National authorities are required to have full powers to enforce Articles 101 and 102. These are the powers to require termination of an infringement, to take interim measures, to accept commitments and to impose fines and penalty payments (Article 5). This is intended to contribute to decentralisation of enforcement, since it allows NCAs to deal with many cases that would previously have been dealt with by the Commission. When doing so, NCAs must not take decisions that would run counter to any existing Commission Decision.130 Most NCAs have (under their national law) powers of investigation and inspection, which they use to enforce both the EU competition rules and their national competition laws, and over the last few years there has been significant voluntary harmonisation of the nature and scope of these powers across the Member States. However, there remains considerable variation in the decision-making procedures, including the type and level of sanctions they can impose. In some jurisdictions infringement decisions or decisions imposing fines may be made only by a court, with the administrative authority having a mainly investigative role, and the scope of legal professional privilege also varies widely. Other remaining differences concern liability within groups of undertakings and following the transfer of a business, limitation periods and the standard of proof.131 NCAs may ask one another for assistance in their investigations, and the Commission may request an NCA to carry out an investigation for it, in which case the officials remain subject to their national procedural rules. The question of whether Article 267 TFEU allows any NCAs to request a preliminary ruling from the ECJ has not yet been entirely settled and is complicated by the widely varying types of bodies that are classed as NCAs for the purposes of Regulation 1/2003. However, the ECJ appears inclined to interpret this right narrowly.132 2.8.2.4  Case Allocation and Information Exchange between the Commission and NCAs In order to promote a timely and appropriate allocation of cases amongst NCAs and the Commission in the new decentralised enforcement system, a European 130  Art 16 and Case C-344/98 Masterfoods v HB Ice Cream [2000] ECR I-11369, [2001] 4 CMLR 449, though the precise scope of this obligation remains unclear. The UK House of Lords interpreted it narrowly in Crehan [2006] UKHL 38. 131   Commission Report (above n 119) para 33. 132  In Case C-53/03 Syfait I [2005] ECR I-4609 it held a request from the Greek Competition Committee inadmissible.

[2.8]

  procedural aspects of articles 101 and 102 tfeu  53

Competition Network (ECN) consisting of the Commission and the NCAs was created. Its function is to facilitate information exchange and cooperation between its members in the enforcement of Articles 101 and 102. Article 11 of Regulation 1/2003 requires the Commission and NCAs to notify one another when carrying out investigations or when planning to take certain decisions, to enable coordination of enforcement if more than one authority has an interest in the case. The Commission Notice on co-operation within the network of competition authorities133 provides guidance on how cases are to be allocated, and this appears to work fairly smoothly in practice. In principle an authority receiving a complaint is in charge of the case unless those ECN members interested decide that it should be reallocated so that a ‘well-placed’ authority can deal it with. Any such reallocation should normally happen within two months. An authority is considered ‘well placed’ if: • there are substantial effects or implementation in the jurisdiction concerned; and • the NCA can effectively put an end to and impose sanctions for the infringement; and • the NCA can, possibly with assistance from other NCAs, gather the necessary evidence.

The Commission may withdraw a case from an NCA in order to deal with it itself (Article 11(6)), but so far it has rarely done so. If it has not done this during the initial two-month period then it will do so only if: • ECN members envisage adopting conflicting decisions; or • they envisage taking decisions conflicting with established case law; or • they unduly prolong proceedings; or • a Commission Decision is needed to develop EU competition policy.

Article 12 of Regulation 1/2003 provides for significant volumes of information, including much confidential information, to be exchanged between members of the ECN, which can raise confidentiality concerns for companies. The information so exchanged may be used only for the purposes of enforcing Articles 101 and 102 and similar domestic laws, and there are express – though not completely clear – rules intended to maintain high levels of protection of fundamental rights. In particular such information should not be used to fine or imprison a natural person. Legal professional privilege rules vary considerably from one Member State to another, and these differences may be exploited by NCAs so as to use the information exchange mechanisms to obtain access to documents not available to them under their domestic rules. 2.8.2.5  National Courts National courts are empowered and required to apply Articles 101 and 102 in full. They must do so even when the parties do not raise competition law arguments, since these Articles are fundamental rules of public policy.134 They must apply 133

  [2004] OJ C101/43.   Case C-126/97 Eco Swiss China Time v Benetton [1999] ECR I-3055, [2000] 5 CMLR 816.

134

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[2.8]

them in accordance with the case law of the EGC and ECJ, which are the highest authority for the interpretation of EU law. In addition, they may not take decisions running counter to any Decision taken (even if its application has been suspended) or even ‘contemplated’ by the Commission. This may sometimes necessitate a stay of a national court case, and appropriate interim measures, pending the outcome of Commission proceedings. In such circumstances the national court may also want to request a preliminary ruling from the ECJ.135 Allegations of infringement of Article 101 frequently arise in the form of a socalled ‘Euro-defence’ when a defendant, against whom proceedings for breach of contract are being brought, claims that the contract is void and unenforceable under Article 101(2) for infringement of Article 101(1). National courts may also grant an injunction on the basis of a breach or threatened breach of these Articles, or damages. They also review decisions of their NCAs. Proceedings in a national court will often have advantages over Commission administrative proceedings, though this will depend to some extent on the procedural provisions of the relevant national law. Injunctions and interim measures can normally be obtained more quickly, the winning party may recover costs and there is the opportunity to combine the claim under EU law with a damages claim and any other claim available under national law. Whereas interim measures may be imposed by the Commission (see below), damages for loss caused by anticompetitive conduct are not available through the Commission or the ECJ or EGC but only in a national court. EU law requires that damages be available through national courts on the basis of an infringement of Article 101 or 102, though the procedures and conditions under which this may be done are governed by national law.136 Even a party to an infringing agreement is entitled to claim damages if, as a result of his weak bargaining position, the party cannot really be said to be responsible for it.137 In contrast to the situation in the United States, damages claims are much less common in EU Member States,138 and there are a number of reasons for this. The Commission is particularly keen to promote private enforcement through damages claims in national courts and is expected to propose further procedural reforms to this end (see chapter seven). However, there are limitations on the ability of some national courts to deal with competition cases. Complex economic evaluation is often necessary, as is a full understanding of competition law principles. Some Member States have specialised competition courts, but in many cases these issues will come before national judges who are not familiar with competition law and with economic evidence. And in some Member States competition law itself is still a relatively new 135

  Masterfoods v HB Ice Cream (above n 130); and Reg 1/2003 (above n 66) Art 16.   Case C-295/04 etc Manfredi [2006] ECR I-6619, [2006] 5 CMLR 980. 137   Case C-453/99 Courage v Crehan [2001] ECR I-6297, [2001] 5 CMLR 1058. The law applicable to the claim is established under Reg 864/2007 [2007] OJ L199/40 (‘Rome II Regulation’). 138   The first ever such award of damages by an English court was made in Crehan v Inntrepreneur [2004] EWCA 637, though it was later overturned. See above n 130. The main issue in the case was the application of Art 101 to a non-compete obligation imposed by a brewery on a pub tenant. The frequency of damages claims is starting to increase, though the majority concern hardcore cartels. 136

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  procedural aspects of articles 101 and 102  55

concept. Furthermore, the national court will confine itself to the specific dispute arising between the parties and cannot investigate the industry concerned in general terms, even if the evidence suggests anticompetitive behaviour on a wide scale; similarly, it will look at past behaviour only, rather than, as the Commission or an NCA does, have regard to the way in which the market is likely to develop in the future. Also, it will not be easy for evidence from other Member States to be obtained, and a judgment will normally have effects only in the jurisdiction and as between the parties concerned. In some cases, therefore, action by the Commission or an NCA will be more appropriate, as well as cheaper for the complainant. The Commission has published a Notice on co-operation between the Commission and the courts of the EU Member States in the application of Articles 101 and 102 by which it seeks to encourage greater reliance on national courts for the enforcement of EU competition law.139 National courts, when dealing with matters involving Articles 101 and 102, may contact the Commission to request information: such information may be procedural (for example, whether the Commission has investigated a given distribution system), substantive (that is, questions of interpretation of Articles 101 or 102) or factual (such as statistics, market studies and economic analyses). They may also ask for an opinion ‘on questions concerning the application of the EU competition rules’ (Article 15(1)). In practice the Commission responds to several such requests a year. The involvement of the Commission raises issues as to the protection of parties’ rights, and these are governed by national procedural law.140 National courts are not members of the ECN, as their independent judicial status makes this inappropriate, but Member States are required to notify the Commission of their national courts’ judgments concerning Articles 101 and 102. The Commission has no power to take over a case from a national court, but Article 15(3) of Regulation 1/2003 provides that it may, if it is aware of such proceedings, make written observations in national litigation141 and intervene orally if the national court agrees. NCAs also have the right under Article 15(3) to make observations on cases in the courts of their jurisdiction.

2.8.3  European Commission Investigations142 The Commission may open an administrative procedure with a view to obtaining the termination of an illegal agreement and maybe also imposing fines. It may do 139

  [2004] OJ C101/54.   Joined Cases C-174/98 and 198/98 Netherlands v Van der Wal [2000] ECR I-1 deal with the question of whether disclosure of such guidance to a national court may be obtained by a third party. 141  It has rarely done so: see Commission Staff Working Paper (above n 120) paras 283–90; and its more recent intervention on a distribution law issue, now referred to the ECJ, Case C-439/09 Pierre Fabre [2010] OJ C24/27. On the scope of this right of intervention, see Case C-429/07 X BV, 11 June 2009, [2009] 5 CMLR 1745. 142   See generally ‘Best Practices on the Conduct of Proceedings Concerning Articles 101 and 102 TFEU’, available on the DG Comp website. 140

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this pursuant to a formal complaint (see below section 2.8.6) or an anonymous tip-off about a distribution practice alleged to infringe the Treaty rules, as a result of which it decides to take investigative action. Although proceedings are often initiated on the basis of a complaint received, the Commission can and does open proceedings on its own initiative. In addition the Commission has the power to investigate particular sectors of the economy and particular types of agreements, when it suspects a restriction or distortion of competition (Article 17). The Commission obtains much of its information in its investigations through complaints and information supplied by third parties and the voluntary cooperation of the parties involved. It is frequently in a company’s interests to be cooperative and helpful towards the Commission. As well as being a factor that may lead to a lower fine, it lends credence to claims that any infringement found was not intentional, which may also reduce the level of any fine imposed. In particular, fines may be substantially reduced when information implicating other companies is provided (see below section 2.8.4.1). The Commission has two main ways of actively obtaining information: requests for information and inspection of premises. 2.8.3.1  Requests for Information Article 18 of Regulation 1/2003 empowers the Commission to ‘require undertakings and associations of undertakings to provide all necessary information’. Supply of incorrect or misleading information can lead to fines of up to one per cent of the company’s worldwide annual turnover (Article 23). A simple request for information under Article 18(2) cannot be enforced, though the supply intentionally or negligently of inaccurate information can result in fines on undertakings. If no response or an inadequate response is supplied, then the Commission may take a formal Decision under Article 18(3) requesting the information to be provided within a certain period. If that Decision is not complied with then fines, again up to one per cent of the company’s annual turnover or periodic penalty payments up to five per cent of turnover (Article 24), may be imposed. If information is requested by the Commission by a certain date, it must still be supplied even if a settlement between the parties has been reached in the meantime, and a company failing to do so may be fined. 143 2.8.3.2 Inspections The notorious ‘dawn raids’ during which Commission officials arrive at a company’s premises unannounced, with a mandate to enter land, buildings and vehicles in order to obtain evidence, are a regular occurrence. Companies should be aware of the possibility of such an investigation and need to be prepared to deal with such a situation should it arise. Although it occurs much less often in the 143

  Compagnie des Cristalleries Baccarat [1991] OJ L97/16.

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  procedural aspects of articles 101 and 102  57

context of vertical distribution arrangements than in the case of hardcore cartels, it does happen.144 Also, it has been used in some Article 102 cases and, on one occasion, at the start of a sector inquiry. It is even possible, subject to judicial authorisation, for the Commission to inspect non-business premises, including private homes (Article 21). Article 20 provides two alternative types of inspection: • the Commission may arrive at an undertaking’s premises with a simple mandate for investigation. The undertaking is not obliged to allow the officials in, though it may often be better to do so in order to maintain good relations with the investigating team; or • on the other hand, officials may come unannounced, with a Commission Decision making it obligatory for the undertaking to allow them in. Refusal to admit can lead to financial sanctions, but forced entry can only be made with the aid of the relevant national authorities.145 Those national authorities are obliged to cooperate, but the Commission must observe national rules relating to the provision of this assistance, so that undertakings’ fundamental rights are protected.146

Any formal Decision must state clearly the subject matter and purpose of the investigation.147 During an investigation, however it is initiated, the undertaking has a right to have a lawyer present, if a lawyer can be summoned reasonably quickly. Once they have gained admission, officials are entitled to be shown all relevant documents and other records, including computer-stored information and mobile phones, and to take copies and ask on-the-spot questions about the records inspected and about facts and documents related to the investigation. Officials may also ask detailed questions. A company has no general right to stay silent but may refuse to answer to the extent that it would otherwise be compelled to provide answers that might involve admission of an infringement. Officials may only ask for factual data: they may not ask questions such as ‘What was the object of the meeting?’ or ‘What occurred at the meeting?’ or require production of documents related to the meeting, in circumstances in which it is clear that they suspect that the object of the meeting was to restrict competition.148 During an investigation the Commission can also seal premises, computers or other records, and significant fines may be imposed for interference with such measures.149 At the end of such on-site investigation the undertaking will be asked to sign a copy of the inspectors’ note of what has taken place. It is important to ensure that all of what has been recorded is accurate and that any pertinent observations relating to the documents inspected, any claims of legal privilege or confidentiality and any objections to the conduct of or questions posed by the inspectors, are recorded. 144   For examples, see Daimler Chrysler (above n 11) para 6; and Peugeot, Commission Press Release IP/05/1227, 5 October 2005. 145   For example, by the grant of an Anton Pillar type injunction from the High Court in the United Kingdom. 146   Joined Cases 46/87 and 227/88 Hoechst AG v Commission [1989] ECR 2859, [1991] CMLR 410. 147  Ibid. 148   Case 374/87 Orkem v Commission [1989] ECR 3283, [1991] 4 CMLR 502; and Case T-112/98 Mannesmannröhren-Werke v Commission [2001] ECR II-729, [2001] 5 CMLR 54. 149   E.ON was fined €38 million for breach of seals, [2008] OJ C240/6, appeal pending, Case T-141/08.

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It is also important to ensure that a note is taken of the documents and other records inspected or copied during the visit so that it is known precisely what information the Commission has in its possession. 2.8.3.3  Power to Take Statements Since 1 May 2004 the Commission has had the power to take statements from any consenting person at any stage in an investigation (Article 19). This may be on the occasion of an inspection or at a separate time. 2.8.3.4  Confidentiality and Access to File by Complainants and Third Parties Commission officials are bound by a general obligation of professional secrecy in their work, and this obligation is mentioned explicitly in Article 28 of Regulation 1/2003. Information regarded as confidential with regard to third parties (such as business secrets and technical knowhow) should be clearly indicated as such so that it is not inadvertently disclosed by the Commission to third parties at a later stage. The precise scope of professional secrecy is not certain, and more importantly, it may be overridden in the interests of ensuring that another party is sufficiently well informed to be able to defend itself before the Commission: the Commission is required to balance the interests of one party’s right to defend itself against the damage that may be done to another party’s business interests.150 Information obtained by the Commission during an inspection cannot be used for a purpose other than that stated in the inspection mandate (Article 28), but the Commission does have the right to start a second investigation in order to verify information found on a first investigation if that information leads to evidence of conduct contrary to the competition rules.151 The law relating to the rights of complainants, those suspected of infringements of the competition rules and other third parties to see the information in possession of the Commission is now codified in Regulations 1/2003 and 773/2004.152 It extends to all relevant information held by the Commission, subject to the confidentiality rules (see above): there is a right to access to all documents unless they contain business secrets; are internal Commission or NCA documents, are correspondence between ECN members or are confidential for some other reason. If the Commission refuses access to a document, this refusal cannot be formally challenged until the Commission has adopted a decision on the substance of the case, though it may be possible to reach an informal solution through the Hearing Officer. Complainants are entitled to see relevant documents, though the Commission is well aware that the making of a complaint may be exploited by a company so as to obtain information about a competitor. 150

  Hilti (above n 104).   Case 85/87 Dow Benelux v Commission [1989] ECR 3137, [1991] CMLR 410. 152  Above nn 66 and 122. Commission Notice on the rules for access to the Commission file [2005] OJ C325/7 gives more detail on practical procedures and the extent of the right of access. 151

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2.8.3.5  Legal Professional Privilege Legal professional privilege is recognised, and so communications between a party and its independent legal adviser registered at an EU Bar need not be disclosed,153 provided that they either relate to a Commission investigation already underway or are prepared exclusively for the purpose of seeking legal advice from an external lawyer in exercise of rights of defence.154 This privilege extends to protect documents that essentially reproduce the text or contents of the advice and are circulated internally within the firm, but not to documents evidencing legal advice provided internally, by in-house counsel, for example.155 There has for some time been considerable pressure for change of the rule that excludes in-house counsel from the benefit of legal privilege in proceedings before the Commission, especially as in some Member States such lawyers remain registered at the Bar and subject to similar professional disciplines as apply to independent practitioners. However, the ECJ recently declined to extend the scope of privilege in this way.156 2.8.3.6 Hearings In the course of an investigation the Commission will propose to the parties concerned an oral hearing of the case, and they often accept. The Hearing Officers consider an oral hearing to be an opportunity for the parties ‘to orally express and develop their view as to the preliminary findings of the Commission’.157 It is not supposed to be adversarial, nor in itself to result in any specific decision or finding. The hearing, which will normally last no longer than a day, except in a complicated case involving many parties, is presided over by a Hearing Officer.158 Undertakings suspected of infringement of the competition rules are entitled to be heard, and other persons such as third parties with a ‘sufficient interest’, such as the complainant or a competitor, may be heard if the Commission considers it necessary. It is usual for the parties to be represented by lawyers. The Member States themselves are also entitled to be represented there. The Hearing Officer will then make a report to the Director General of DG Comp.

153

  Case 155/79 AM&S v Commission [1982] ECR 1575, [1982] 2 CMLR 264.   Case T-253/03 Akzo Nobel v Commission, upheld on appeal Case C-550/07, 14 September 2010, not yet reported. These judgments also lay down the procedure to be followed in the event of a dispute during an inspection as to the privileged nature of specific materials. 155   Hilti (above n 104). 156   Akzo Nobel (above n 154). 157   ‘Guidance on Procedures of the Hearing Officers in Proceedings relating to Articles 101 and 102 TFEU’, available on the DG Comp website, para 38. 158   The Hearing Officer’s role is to safeguard the rights of defence of defendants, complainants and other third parties. See Commission Decision of 23 May 2001 on the terms of reference of hearing officers, [2001] OJ L162/21; and ‘Guidance on Procedures of the Hearing Officers’ (ibid). 154

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2.8.4  European Commission Decisions Commission proceedings are often informal at the outset, while the Commission makes an initial assessment of whether a case merits further investigation. It will then either close the case, open discussions with a view to taking an Article 9 commitments Decision, or open proceedings that may lead to an Article 7 infringement Decision. In the case of infringement proceedings the Commission will give the company concerned its ‘statement of objections’, which formally outlines the allegations the Commission is making. All parties to the alleged infringement and interested third parties must be given the opportunity to put forward their arguments and views,159 and there may be an oral hearing (see above). In many cases expert economic evidence may be presented.160 Before either a commitments or an infringement Decision is taken the Advisory Committee on Restrictive Practices and Dominant Positions, composed of representatives of the NCAs, will be consulted. Both types of proceedings normally involve continuing exchanges of views and arguments, as well as a number of ‘state of play’ meetings intended to maintain good communication between the parties and the Commission case team. Before adopting a Decision accepting commitments (Article 9) or making a finding of inapplicability of Article 101 or 102 (Article 10) the Commission is obliged to publish a notice in the Official Journal inviting comments from third parties (Article 27). 2.8.4.1  Infringement Decisions and Fines and Other Remedies (Article 7) The Commission may order infringing conduct to be terminated or make a finding of a past infringement. Undertakings found to be in breach of Article 101 or 102 may also be fined up to 10 per cent of their annual worldwide turnover (Article 23(2)),161 though the Commission generally does not use this power to its maximum. The limitation period for the imposition of fines by the Commission for substantive infringements is five years from when the infringement ceases (Article 25). The Commission may also impose behavioural remedies (such as an order to a dominant company to continue to supply) or structural remedies (such as divestment of part of a business) when necessary. Structural remedies may be used only when there is no equally effective behavioural remedy or when such a remedy 159

  Case 17/74 Transocean Marine Paint Association v Commission [1974] ECR 1063, [1974] 2 CMLR

459.

160   See ‘Best Practices for the Submission of Economic Evidence and Data Collection in Cases Concerning the Application of Articles 101 and 102 TFEU and in Merger Cases’, available on the DG Comp website. 161   There is no provision at EU level for criminal sanctions or for fines on individuals, but some Member States’ national laws provide for the possibility of such sanctions for certain competition law offences, eg, the ‘cartel offence’ under the UK Enterprise Act 2002.

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would be more burdensome to the company. Structural remedies have so far never been used under Article 7. As to setting the amount of a fine, Commission Guidelines162 indicate that the ‘basic amount’ of the fine is first established. This is a proportion of the annual value of the company’s sales of the products affected by the infringement (usually only in the affected area of the EEA). The proportion can in principle be up to 30 per cent, but in practice it tends to be much less; the amount is then multiplied by the number of years that the infringement lasted. This ‘basic amount’ is then adjusted to reflect all the relevant circumstances, including both aggravating and mitigating circumstances. A fine will be higher if the illegal conduct was intentional or negligent. In this context ignorance of the law or inaccurate legal advice163 does not prevent conduct from being intentional if the anticompetitive nature of the conduct is known. Other aggravating circumstances include repeated infringements, refusal to cooperate with or obstruction of the Commission, a leading or instigating role, and measures taken against other firms to enforce the illegal practice. A fine may also be increased for deterrence purposes.164 It will be lower for a company (usually a smaller company) that has been party to an agreement or practice as a result of pressure from another party.165 Fines will also be reduced if a company has made reparation to injured parties.166 Other mitigating circumstances mentioned in the Guidelines are limited involvement, an infringement resulting from negligence, the fact that the conduct in question was authorised or encouraged by public authorities or legislation, and prompt termination of the behaviour once the Commission becomes involved. The existence of a compliance programme is now not normally taken into account as mitigation.167 Fines will also be lower when a company is cooperative.168 In addition, substantial reductions in fines or even total immunity are available to companies that provide significant assistance to the Commission in an investigation. There is only formal provision for this in the case of ‘secret cartels’ between competitors,169 but similar principles have been applied in a vertical distribution case on the basis of the Guidelines on the method of setting fines.170 162

  Guidelines on the method of setting fines, [2006] OJ C210/2.   Case 279/87 Tipp-ex v Commission [1990] ECR I-261. 164   Nintendo (above n 10). 165   BASF Lacke & Farben [1995] OJ L272/16, [1996] 4 CMLR 811; and Case T-66/92 Herlitz v Commission [1994] ECR II-531, [1995] 5 CMLR 458. 166   Nintendo (above n 10). 167   Unusually, the existence of a compliance programme was even an aggravating factor in British Sugar [1999] OJ L76/1, [1999] 4 CMLR 1316. But this was because there had been behaviour contrary to wording contained in a compliance programme that had been announced to the Commission and had been taken into account as a mitigating factor during separate proceedings against British Sugar in 1986. 168   Eg, Case T-77/92 Parker Pen v Commission [1994] ECR II-549, [1995] 5 CMLR 435; in Systemform [1997] OJ L47/11 the Commission took into account the fact that Systemform had not disputed the Commission’s findings in its statement of objections and had started to amend its infringing contracts before it received the statement of objections. 169   Commission Notice on immunity from fines and reduction of fines in cartel cases [2006] OJ C45/3, para 1. 170  Above n 162. See also Nintendo (above n 10); and Competition Policy Newsletter, Spring 2003, 50. 163

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The largest competition law fine ever imposed on a single company was one of €1.06 billion imposed on Intel for infringements of Article 102 consisting of abusive rebates and measures aimed at hindering the marketing of competitors’ products.171 At one time the highest fine ever on an individual company for infringement of Article 101 was the one of €102 million imposed on Volkswagen for using its distribution system to impose market partitioning measures. Volkswagen had over a period of 10 years systematically required its Italian dealers to reject orders from foreign customers, mainly German and Austrian, who were seeking to take advantage of lower Italian car prices. Volkswagen had also terminated dealership agreements with dealers who refused to cooperate in this policy.172 There have since been many substantial fines imposed in respect of vertical distribution arrangements, the highest being one of over €149 million imposed on Nintendo.173 Fines and periodic penalty payments can be imposed not only for substantive infringements of the competition rules but also for failure to respect certain procedural rules (Articles 23 and 24 of Regulation 1/2003). All Commission Decisions are subject to review by the EGC, which may annul a Decision and substitute its own judgment. The EGC may also review the size of any fine imposed. Decisions may be appealed by the parties to whom they are addressed or by any other person if the Decision is of ‘direct and individual concern’ to that person (Article 263 TFEU). There are limitation periods during which any appeal from such a Commission Decision must be brought, and failure to introduce an appeal in time will result in the appeal being declared inadmissible.174 Appeal from the EGC, on points of law only, lies to the ECJ (see above section 2.8.2.2). 2.8.4.2 Interim Measures (Article 8) The Commission may take some years to deal with a case before it. If the matter is urgent, the Commission may on its own initiative adopt interim measures. In such cases the time limit for both the parties subject to complaint and the complainants to make their views known may be shortened to one week. (In other cases normally not less than four weeks is allowed.) Since the entry into force of Regulation 1/2003, private parties may not themselves apply for such measures. In any case, interim measures will not be put in place in less than a few weeks, and it may 171

 Above n 79.   The fine was reduced to €90 million by the EGC, upheld in Case C-338/00 [2003] ECR I-9189, [2004] 4 CMLR 351. 173   [2003] OJ L255/33, [2004] 4 CMLR 421, reduced to €119 million on appeal, Case T-13/03 [2009] ECR II-947, [2009] 5 CMLR 1421. See also Opel Nederland (€43 million, reduced on appeal to €35 million), Case C-551/03, [2006] ECR I-3173, [2006] 5 CMLR 1; JCB (€39.6 million, reduced on appeal to €30.9 million), Case C-167/04 [2006] ECR I-8935, [2006] 5 CMLR 23; Daimler Chrysler (€71.8 million, reduced on appeal to €9.8 million) (above n 11); Peugeot Nederland (€49.5 million, reduced on appeal to €44.5 million) Case T-450/05, [2009] ECR II-2533. 174   Case T-125/89 Filtrona Espanola v Commission [1990] ECR II-393. 172

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therefore be preferable when possible to seek an injunction or other interim measure from a national court or NCA. Before the Commission’s power to grant interim measures was made explicit in Regulation 1/2003, the ECJ had held that it could do so . . . when the practice of certain undertakings in competition matters has the effect of injuring the interests of some Member States, causing damage to other undertakings, or of unacceptably jeopardising the [European Union]’s competition policy.175

It held that a prima facie case must be made out176 and that it must be shown that interim measures were necessary either to prevent likely serious and irreparable damage or to prevent a situation that was ‘intolerable to the public interest’.177 The former might be the case, for example, when a distributor is refused supplies and this threatens the continued viability of his business. However, it would be rare for a distributorship agreement or practice to have such grave effects as to make it ‘intolerable in the public interest’. Then a number of procedural safeguards must be observed, and it is these safeguards that mean that at least a few weeks are required before interim measures are ordered. Any measures adopted must be for a specified time (which may be extended) and aimed at preserving the situation as it was before the conduct complained of occurred. Fines or periodic penalty payments may be imposed for failure to comply with such a Decision. The Decision to impose interim measures may be appealed to the EGC. 2.8.4.3  Commitments (Article 9) Article 9 of Regulation 1/2003 provides that the Commission may, instead of adopting an infringement Decision, accept binding commitments from a company when these are sufficient to satisfy it that ‘there are no longer grounds for action’. Such a Decision does not take a position on whether or not there has been or is an infringement, and it does not preclude a national court from making an infringement finding, or an NCA from taking up the case. The Commission has made frequent use of this possibility, sometimes in cases involving distribution arrangements,178 and it allows cases to be closed more quickly and with less work for both it and the parties concerned. For the Commission, Article 9 also has the advantage that it is free to accept whatever commitments the parties are prepared to make, provided that these address the competition concerns identified: the Commission is not obliged to ensure, as it is when taking an Article 7 infringement decision, that the commitments are a proportionate response to its concerns.179 175

  Case 792/79 Camera Care v Commission [1981] ECR 119, [1980] 1 CMLR 334, para 14.   Boosey & Hawkes (above n 26). 177   Camera Care (above n 175) para 19. 178   Eg, Coca-Cola, 22 June 2005; and Repsol, 12 April 2006, both Decisions available on the DG Comp website. 179   Case C-441/07 Alrosa v Commission, 29 June 2010, not yet reported. 176

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2.8.5  Formal and Informal Guidance for Parties Parties frequently have genuine doubts as to the applicability of Article 101 to their distribution arrangements. Before 1 May 2004, when Regulation 1/2003 entered into force, firms had the option of notifying the Commission, which could provide an answer through a formal Decision or, much more often, an informal ‘comfort letter’. Regulation 1/2003 changed this. In line with the policy of freeing up Commission resources and placing more assessment responsibility on companies themselves, the Commission now responds to requests for guidance only exceptionally and in narrowly defined circumstances, and it has said that it will do so only in cases in which the law is uncertain. Guidance may be given either through a formal Article 10 Decision or in the form of ‘informal guidance’, but so far neither of these possibilities has been used. This may in part be because the difficulties in applying competition law very often arise rather from the application of the law to the specific facts of a case. (Many DG Comp officials are prepared to respond completely informally to specific queries made by telephone or email, which can be very helpful, but such responses provide no legal protection in the event of subsequent proceedings.) 2.8.5.1  Article 10 Decisions When justified by the ‘[EU] public interest’ the Commission will take a formal Decision stating that Article 101 or 102 does not apply in a particular situation. Such cases are intended to be rare: Recital 14 of Regulation 1/2003 refers to ‘exceptional cases . . . with a view to clarifying the law . . . in particular with regard to new types of agreement or practices that have not been settled in the existing case law and administrative practice’. 2.8.5.2  Informal Guidance Commission policy in this area is described in its Notice on informal guidance relating to novel questions concerning Articles 101 and 102.180 The criteria that need to be fulfilled before the Commission will consider giving guidance are very restrictive, so this mechanism is also clearly intended to be rarely available. The criteria are that: • an issue on which the law is undecided or unclear is involved; and • guidance would be useful in the light of: • the economic importance of the case to consumers; • the extent to which the practice in question is widespread; • the scope of any investments in relation to the size of the parties involved; and • the involvement of a structural operation such as a joint venture; and • the parties provide sufficient information. 180

  [2004] OJ C101/78.

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In addition, guidance will not be given if the same or similar issues are before the EGC or ECJ, or if the case itself is pending before the Commission, a national court or an NCA. Nor will it be given in the case of hypothetical or past circumstances. Guidance given is to be fully reasoned and published in full on the DG Comp website. In the past, certain comfort letters were treated as Decisions, meaning that they were challengeable in the ECJ and could not be reopened in the absence of new evidence,181 and national courts were required to regard them as a relevant element of fact.182 The same should apply to informal guidance. The decision whether or not to apply for formal or informal guidance, or not to draw the Commission’s attention to the matter at all, is one of commercial strategy as much as a legal one. It may be that when all factors are weighed up, the decision is taken to risk invalidity of the contract and the imposition of fines by the Commission. This may occur when the contract in all probability infringes Article 101(1) and would not qualify for exemption. However, it may also occur when there is real uncertainty as to the legality of the agreement because such arrangements have not been thoroughly considered before by the Commission: in such circumstances the inconvenience and risks attendant on being the subject of a test case may lead the parties to decide against notification. The publicity that would be given to the arrangements may also be a factor influencing this decision. 2.8.6  Enforcement by Private Parties The main opportunities for private parties to enforce Articles 101 and 102 are through complaints to the Commission and NCAs. They may also bring claims in national courts (see above section 2.8.2.5). 2.8.6.1 Complaints The Commission does not deal with all alleged infringements of Articles 101 and 102 that come to its attention. It has limited resources, and the ECJ has confirmed that, although it has a duty to consider every complaint, it has a broad discretion in deciding which cases should be given priority in the EU interest.183 Factors that may come 181

  Case T-241/97 Stork v Commission [2000] ECR II-309, [2000] 5 CMLR 31.   Joined Cases 253/78 and 1-3/79 Procureur du Roi v Guerlain, [1980] ECR 2327, [1981] 2 CMLR 99, paras 11–12. 183   Case T-24/90 Automec v Commission (No 2) [1992] ECR II-2223, [1992] 5 CMLR 431, para 86: ‘To assess the [EU] interest in pursuing the examination of a matter, the Commission must take account of the circumstances of the particular case, particularly the legal and factual aspects set out in the complaint referred to it. It is for the Commission in particular to weigh up the importance of the alleged infringement for the functioning of the [EU], the probability of being able to establish the existence of the infringement and the extent of the investigation measures necessary to fulfil successfully its task of securing compliance with Articles [101 and 102].’ See also in the context of distribution, Case T-186/94 Guerin Automobiles v Commission [1995] ECR II-1753, [1996] 5 CMLR 685, on appeal Case C-282/95 [1997] ECR I-503, [1997] 5 CMLR 447; and Joined Cases T-185/96, T-189/96 and T-190/96 Riviera Auto Service [1999] ECR II-93. 182

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into play include the limited economic or geographic impact of the alleged infringement, the fact that the conduct complained of has ceased, and the availability of remedies from a national court or NCA. The Commission has published a Notice on the handling of complaints which describes the complaints procedure before the Commission and includes guidance on the types of case it is likely to take up.184 A formal complaint may be made by ‘natural or legal persons who can show a legitimate interest’ (Article 7(2)). This probably includes anyone actually or potentially suffering damage as a result of the alleged infringement, as well as consumer associations. Complaints may be made, for example, by a distributor or retailer who is denied supplies by a producer in a dominant position; by a distributor prevented from selling outside a limited geographical territory; or by a seller refused supplies in order to dissuade him from fulfilling export orders. A complaint may be made in any form, even orally or anonymously, but the following rules should be observed if the rights connected with the making of a formal complaint are to be obtained: • the complaint should be made in writing in compliance with Form C,185 and if it is made by a party’s representative, such as an officer of the company or a lawyer, then formal proof of that representative’s authority to act must be supplied; • as much relevant information as possible should be included, including explanation of why the complainant has a legitimate interest in making the complaint. The identity and address of the complainant and any other relevant parties should be given, together with copies of all correspondence and other relevant documents. Details should be given of any connected proceedings (for example, proceedings before a national court). In many cases it will also be essential to give technical information regarding the product in question, so that the relevant product market may be ascertained. A description of the market structure and the market shares of the major players in the market, together with any information showing trends in the market should also be supplied where possible; and • the complaint should then be sent together with three paper copies and an electronic version, and a non-confidential version, to DG Comp.186

Complaints may also generally be made to NCAs,187 but their processes for dealing with complaints and the applicable procedural rules vary considerably. However, if the Commission is dealing with a case, NCAs are prohibited from doing so themselves. On the other hand, if the Commission decides not to pursue a case there is no obligation on any NCA to take it up instead. 2.8.6.2  The Commission’s Obligation to Follow Up Complaints The Commission may not ignore a formal complaint. It has said it will normally decide within four months whether to reject the complaint or to make further 184

  [2004] OJ C101/65.  Annexed to Reg 773/2004 (above n 122). 186  Ibid, Art 5. 187   The Commission Notice (above n 184) indicates when this may be more appropriate. 185

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investigation. During that time it may seek further information from and have informal discussions with the complainant. If it decides on rejection, it must inform the complainant of this and of the reasons, and then give the complainant a fixed time (not less than four weeks, and an extension can be requested) within which to submit further comments before finally rejecting the complaint. The duty to do so may be enforced by Article 265 TFEU proceedings.188 If the complainant does not respond, the complaint is deemed to have been withdrawn. All other cases proceed to a third stage at which the Commission either initiates proceedings against the allegedly infringing undertakings or rejects the complaint by a formal Decision (which the complainant may appeal in the EGC and ultimately in the ECJ). A formal complainant is entitled to receive a non-confidential version of the statement of objections (the formal document sent to the under­ takings concerned, setting out details of the allegations) and is entitled to comment on it within a fixed time limit. The complainant also has the right to speak at any oral hearing. If the complaint is ultimately rejected, which must be done by reasoned Decision, the complainant has the same rights as described above, including the rights to comment and to appeal the Decision. Once a Decision rejecting a complaint has been taken a complainant cannot ask for the investigation to be reopened unless it puts forward significant new evidence. However, the Commission can decide to reopen a file, and an NCA or national court can take up a case that has been closed by the Commission.

2.8.7  Involvement of Third-Country Authorities It is in the nature of restrictive agreements and abuse of market power that their effects are not always restricted to the territory of the European Union. A number of international agreements of different kinds now provide for contacts and cooperation between the EU competition authorities and those of certain third countries. The European Economic Area (EEA) Agreement effectively extends the EU ‘single market’ to Iceland, Liechtenstein and Norway.189 It provides for a ‘Surveillance Authority’, which in those three countries has equivalent powers and similar functions to the Commission, and includes competition rules almost identical to the EU competition rules. In the case of restrictive agreements and abuse of dominant position the rules provide that the EU authorities are responsible in all cases where there is an effect on trade between its Member States, even if trade between the other EEA states is also affected; the Surveillance Authority deals with cases only affecting trade between Iceland, Liechtenstein and Norway. In other cases in which there is no 188

  Case T-28/90 Asia Motors France v Commission [1996] ECR II-961, [1992] 5 CMLR 431.   When the EEA Agreement entered into force on 1 January 1994 it was of considerably greater importance than it is now, since Austria, Finland and Sweden were not then Member States of the European Union but were part of the EEA. 189

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appreciable effect on trade within the European Union (for example, because trade is only affected between, say, Sweden and Norway) then the Surveillance Authority is competent if the companies concerned achieve at least 33 per cent of their EEA turnover on the territory of Iceland, Liechtenstein and Norway; and the EU is competent if more than 67 per cent of their EEA turnover is achieved in EU Member States. When relevant, there is exchange of information and mutual cooperation on cases between these two authorities, as well as cooperation in investigations and in applying decisions. A ‘one-stop shop’ principle applies so that in any given case one authority will have responsibility for the procedure, although the other authority may be closely involved, and any decision taken by either authority is valid and enforceable throughout the EEA. A different type of cooperation is that provided for by the EC–US Cooperation Agreement, which provides simply for administrative cooperation between the United States competition authorities and those of the European Union. The Agreement has been in force since 1991 and provides for mutual assistance and information exchange. A similar agreement entered into force with Canada in 1999, Japan in 2003 and Korea in 2009. However, such Cooperation Agreements do not permit the authorities to pass on confidential information without the consent of the company concerned. In 1998 a Positive Comity Agreement was signed between the European Union and the United States. This builds on the comity provisions of the 1991 Agreement, providing that a party adversely affected by anticompetitive behaviour occurring in the territory of the other party may request the other to take action. There is also a presumption that in certain circumstances a party will normally defer or suspend its own enforcement activities, in particular when anticompetitive behaviour does not affect consumers in the territory of the requesting party or the behaviour is occurring principally in and is directed principally towards the other party’s territory. However, confidential information still cannot be exchanged by the authorities unless the parties grant an express waiver of their right to confidentiality. At global level in recent years, a World Trade Organization (WTO) Working Group failed to achieve agreement on the need to start negotiations for a multilateral agreement; nor have concrete steps been taken within the Organisation for Economic Co-operation and Development (OECD). However, a new independent body, the International Competition Network, established in 2001, has been very successful as an international forum for dialogue and, in particular, for the exchange of best practice amongst competition enforcement authorities. It has attracted membership from across the world, with member agencies from over 100 jurisdictions, including the European Commission. It is an informal, virtual network that works principally through its various working groups and an annual conference.

3

Distribution Agreements

key points • A distribution agreement will not infringe EU competition law if it has no appreciable effect on trade between Member States, though national competition law may apply. • If an agreement has an effect on trade and includes fixed or minimum resale prices or an absolute export ban (‘hardcore’ restrictions) it will almost certainly be unenforceable and may attract fines from the Commission or national competition authorities. • If it does not include hardcore restrictions and is not capable of appreciably affecting competition then it will not infringe EU competition law. • If it does affect competition but does not include hardcore restrictions, a block exemption may provide a ‘safe harbour’ for it, provided that neither (i) the market share of the supplier on the market where it supplies, nor (ii) the market share of the buyer on its purchasing market, exceeds 30 per cent. • The fact that an agreement does not satisfy the block exemption, whether because a market share is over 30 per cent or for some other reason, does not mean that it is illegal. • When the block exemption does not apply, whether the agreement infringes EU competition law rules depends on the nature of the restrictive clauses it contains and their economic effect on the relevant market. • In addition, if the restrictions in any agreement can be justified in terms of economic efficiency, and the market is sufficiently competitive, then a potentially infringing agreement may benefit from exemption and so be legal and enforceable. • Responsibility for assessing whether an agreement infringes EU competition rules, including whether it qualifies for exemption, falls primarily on the parties themselves, subject to the control of the courts and authorities in the event of dispute or complaint. • A company with a market share above 40 per cent may have a ‘dominant position’, and it should check that none of its distribution practices constitute an illegal ‘abuse’.

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  key

texts

Treaty on the Functioning of the European Union (TFEU) Articles 101 and 102 (below Appendix 1)

EU Regulations Commission Regulation (EU) 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 (‘vertical restraints block exemption’ or ‘block exemption’ or ‘Regulation’), [2010] OJ L102/1 (below Appendix 2) Commission Regulation (EC) 2790/1999 on the application of Article 81(3) of the Treaty to categories of vertical agreements and concerted practices, [1999] OJ L336/21 (expired but applicable to certain agreements until 31 May 2011)

EU Notice Commission Guidelines on vertical restraints (‘vertical restraints Guidelines’ or ‘Guidelines’), [2010] OJ C130/1 (below Appendix 3)

ECJ and EGC Judgments Cases 56 and 58/64 Consten & Grundig v Commission [1966] ECR 299, [1966] CMLR 418 Case 23/67 Brasserie de Haecht v Wilkin (No 1) [1967] ECR 407, [1968] CMLR 26 Case C-234/89 Delimitis v Henninger Brau [1991] ECR I-935, [1992] 5 CMLR 210 Case T-7/93 Langnese-Iglo v Commission [1995] ECR II-1533 upheld in Case C-279/95 [1998] ECR I-5609 Case T-9/93 Schöller Lebensmittel v Commission [1995] ECR II-1611 Case C-344/98 Masterfoods v HB Ice Cream [2000] ECR I-11369, [2001] 4 CMLR 449 Cases C-2/01 and C-3/01 Bayer v Commission [2004] ECR I-23, [2004] 4 CMLR 653 Case C-74/04 Commission v Volkswagen [2006] ECR I-6585, [2008] 4 CMLR 1297 Cases C-468/06 etc Syfait II [2008] ECR I-7139, [2008] 5 CMLR 1382 Cases C-501/06 etc GlaxoSmithKline v Commission, 6 October 2009, [2010] 4 CMLR 50

[3.1]

  introduction  71

An understanding of the basic substantive and procedural rules of EU competition law is essential background to this chapter and those that follow. Readers not familiar with these are recommended to start by reading chapter two. Unless otherwise stated, all references to Articles in this chapter (except for Articles 101 and 102 TFEU) refer to the vertical restraints block exemption Regulation 330/2010. Similarly, unless the context requires otherwise, all references to paragraphs refer to the vertical restraints Guidelines.

3.1 

introduction

Choice of a distribution method depends on many factors other than competition law. These may include matters relating to other areas of EU or domestic law such as intellectual property law and consumer protection legislation, as well as nonlegal considerations such as tax efficiency and the producer’s level of familiarity with local markets. EU competition policy and law are now firmly rooted in a largely economics-based approach under which firms without significant market power have considerable freedom to organise their distribution as they wish.1 When planning a distribution system, it is important to establish broadly the most important elements of the agreement. For example, is it important to retain control over resale prices? Is there a particular corporate brand image to be developed or promoted? Is it intended to grant distributors some degree of exclusivity within their sales area? In some situations it may be possible and desirable to integrate vertically, so that goods are distributed by subsidiaries or other connected companies. (This may raise issues of control of mergers and acquisitions, which are outside the scope of this book.) Once the entities charged with distribution are in fact under the control of the supplying company and form part of the same economic unit, EU competition law will not apply to agreements between them and to the terms and conditions under which the goods are required to be distributed, because EU competition law allows companies to make such internal decisions freely. Only if a company occupies a dominant position on the market may it be necessary to consider whether its unilaterally imposed pricing and other policies are permissible under EU competition law. If vertical integration is not the option chosen, it will be necessary to consider whether the type of distribution agreement envisaged is likely to infringe EU competition law. If the market shares of the supplier (where it supplies) and buyer (where it purchases) do not exceed 30 per cent, the arrangement may fit or may be adapted so as to fit into the framework of the vertical restraints block exemption 1   See, eg, Commission Guidelines on vertical restraints (‘vertical restraints Guidelines’ or ‘Guidelines’) [2010] OJ C130/1 (below Appendix 3), para 6. Unless otherwise stated, all references to paras in this chapter refer to these Guidelines.

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Regulation,2 which provides a ‘safe harbour’ for certain categories of agreement. When the agreement concerns motor vehicle distribution, it may benefit from sector-specific rules, provided it satisfies the relevant market share criteria. Although it is not mandatory to conform to a block exemption, if this can be done it will avoid the necessity to analyse the agreement and any restrictive clauses individually. This can often be convenient, as the question whether a clause is restrictive of competition and, if so, whether it can be justified on the basis of the economic efficiencies it brings, is not always easy to answer. In many cases the choice will lie between agency and exclusive distribution, and it will be necessary to weigh up the advantages and disadvantages of these two systems. The tightest control can be exercised over agents: agents may be instructed to charge particular prices and to deal only on particular terms and conditions or with limited categories of customers. However, it is important to ensure that the actual agency relationship is the kind of relationship that will be regarded as agency under EU law. Generally agents bearing no financial risk of certain types, including risk in respect of contracts entered into on behalf of their principal, so qualify. Note that agents are often entitled to compensation or indemnity on termination of the agency (see chapter six). Exclusive distribution involves allotting an exclusive sales area or customer group to each distributor. It will not usually be possible to guarantee each distributor absolute protection within the area or group: other dealers must be permitted to fulfil unsolicited orders coming from purchasers outside their territory or group. Nor can the supplier restrict distributors from supplying other resellers or dictate to the reseller the prices or conditions on which they may resell. Exemption is usually available under the vertical restraints block exemption for exclusive distribution agreements where the supplier’s and buyer’s market shares as referred to above do not exceed 30 per cent. Otherwise the four substantive conditions of Article 101(3) and, in particular, the presence of economic efficiency benefits, will have to be satisfied if exemption is to apply. Similarly, an exclusive sourcing requirement (meaning that all contract goods have to be sourced from the supplier) or a non-compete agreement (meaning that all contract goods and competing goods have to be sourced from the supplier) limited to a maximum term of five years will be exempted by the block exemption where the relevant market shares do not exceed 30 per cent; otherwise economic efficiencies will have to be present if exemption is to apply. Franchising arrangements, provided franchisees are not granted any territorial protection, often do not infringe EU competition rules at all. Where there is territorial protection and the market shares do not exceed 30 per cent the block

2   Commission Regulation (EU) 330/2010 on the application of Art 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices (‘vertical restraints block exemption’ or ‘block exemption’ or ‘Regulation’), [2010] OJ L102/1 (below Appendix 2). Unless otherwise stated, all references to Arts in this chapter (except for Arts 101 and 102 TFEU) refer to this Regulation.

[3.2]

how does eu competition law treat distribution agreements?  73

exemption will normally apply; otherwise economic efficiencies will have to be present, as for exclusive distribution or non-compete obligations. Selective distribution is the only method apart from agency that allows a supplier to control the channels through which the goods may eventually be sold right through until they reach the final user. A selective distribution system may not be considered restrictive of competition at all if it is based on objectively justified qualitative criteria for appointing distributors. When it does restrict competition, again, where the relevant market shares do not exceed 30 per cent the block exemption will apply, provided there are no restrictions on cross supplies between distributors or on the end-users whom retailers may supply. Where selective distribution is used, resellers must remain free to fix their own resale prices, as indeed must any type of distributors apart from agents or subsidiaries.

3.2 

how does eu competition law treat distribution agreements?

3.2.1  General Approach Distribution agreements are usually ‘vertical’ agreements because they are made between parties operating, at least for the purposes of the agreement, at different levels in the supply chain. Most vertical agreements are viewed as relatively benign from the point of view of competition law. Horizontal agreements – which occur between competing firms – are treated much more strictly.3 Over the last ten years or so there has been a fundamental shift in the Commission’s approach to vertical restraints. As compared with its previous approach, there is now greater emphasis on the economic effects of restraints rather than on their contractual form, and on economics-based arguments, which focus on the impact of agreements on consumer welfare.4 From an economic point of view, all types of vertical restraints are capable of being either pro-competitive or anticompetitive, depending on the surrounding circumstances. Ideally, therefore, each agreement would be evaluated individually on its merits. But while theoretically attractive, such an approach would demand vast resources and create severe uncertainty for companies needing to know whether their arrangements are legal and enforceable. Because a case-by-case investigation is not practicable, the European Commission has sought to make some generalisations about certain types of restraints (for example, resale price-fixing) and certain types of situations (for example, market shares not exceeding 30 per cent) in order to state some general rules. This both gives some legal certainty to companies and also relieves them – as well as the Commission and national courts and authorities – of the burden of carrying out an individual economic analysis of the benefits and anticompetitive effects of every agreement. 3

 Guidelines, paras 6 and 98–99.  Guidelines, para 7.

4

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3.2.2  Commission Guidelines Current Commission policy on distribution agreements is embodied in its block exemption on vertical restraints. This is accompanied by extremely detailed Guidelines in which it sets out its policy towards many types of vertical distribution agreements.5 The Guidelines represent the Commission’s attempt to provide a degree of legal certainty in the context of its economics-based approach, and they provide a very valuable guide to its thinking. The Commission may not depart from the Guidelines in an individual case without giving reasons.6 They are not intended to be applied mechanically but rather with full consideration of the circumstances of the individual case in question.7 The interpretation given to the Regulation by the Commission in the Guidelines is in some instances debatable, and it is not necessarily the same as the interpretation that might be given either by the European Court of Justice (ECJ) or European General Court (EGC, formerly known as the Court of First Instance or CFI) or by national courts or authorities: the Guidelines are without prejudice to the views of the ECJ and EGC,8 as it may be expressed in both past and future judgments. In practice the Guidelines are a very important tool. They set out fairly clearly the way in which the Commission is likely to apply Article 101 to distribution agreements and in particular to interpret the Regulation. General principles of interpretation of EU law require that the Commission’s intention in adopting the Regulation be taken into account when interpreting its provisions, so when they interpret the block exemption, the Guidelines are likely to carry significant weight, even before the European Courts. The ECJ has also said that a fine should not be imposed in a case in which a company might have been misled by a nonbinding Commission Notice into thinking its conduct was legal.9 Moreover, there has been very little guidance from the ECJ and EGC on the new rules on vertical restraints since they entered into force in 2000, so the Commission’s views as set out in its Guidelines remain extremely influential. They are likely to be relied on by national courts and competition authorities of the Member States when they are applying Article 101. Though they are not legally bound by them, national competition authorities were fully involved in their drafting and so are particularly likely to defer to them. National courts generally treat the Guidelines as of at least high persuasive value.

5

  Above nn 1 and 2.   Case C-167/04 JCB [2006] ECR I-8935, [2006] 5 CMLR 23, para 207.  Guidelines, para 3. 8  Guidelines, para 4. For a case in which the ECJ is to rule on the validity of the Commission’s approach to restrictions on internet sales as set out in the Guidelines, see Case C-439/09 Pierre Fabre [2010] OJ C24/27. 9   Cases 40 etc/73 Suiker Unie and Others v Commission [1975] ECR 1663, [1976] 1 CMLR 555. 6 7

[3.3]

  does the agreement infringe article 101(1) tfeu?  75

3.2.3  Assessing an Agreement in Practice In assessing how EU competition rules may apply to a distribution agreement, in principle the first task is to assess whether it includes provisions infringing Article 101(1) TFEU. However, the block exemption provides a ‘safe harbour’ for a wide range of distribution agreements that fall within the scope of Article 101(1). In practice, therefore, when analysing an agreement, it makes sense to check first whether it falls within the scope of the block exemption. If it clearly does so, it is not necessary to undertake the often difficult task of deciding whether it infringes Article 101(1). This chapter follows the order that strict legal reasoning dictates, but no one should hesitate when assessing a specific agreement first to look ahead to section 3.5 below, in case that indicates that a block exemption applies, in which case no further analysis is required.

3.3 

does the agreement infringe article 101(1) tfeu?

3.3.1 Introduction Article 101(1) applies to various types of clause frequently found in vertical distribution agreements, and these are discussed in turn below. Horizontal agreements, and horizontal aspects of mixed agreements, are generally subject to a different set of rules (see below section 3.7). Note that only the infringing clause, not necessarily the whole agreement, risks being held void under Article 101(2) (see above chapter two section 2.3). Note that certain restrictions, listed in Article 4 of the block exemption (sometimes referred to as the ‘black list’) are considered to have the object of restricting competition, or to be ‘hardcore’. These are restrictions such as resale price-fixing or absolute export bans, which are presumed to infringe Article 101(1) and not to satisfy the criteria of Article 101(3), although these presumptions can be rebutted with appropriate evidence.10 Also, where a distribution system affects only small operators or for some other reason has no appreciable cross-border effect, Article 101 will not apply. Similarly, if the relevant market shares are very low or for some other reason the agreement is not capable of appreciably affecting competition, EU competition rules are not infringed, although this will be hard to establish if the agreement contains hardcore restrictions.11 Even when an agreement infringes Article 101(1), very often it remains legal and enforceable as a result of exemption. There is now a general presumption, embodied in the vertical restraints block exemption, that most restrictions other than resale price-fixing and absolute export bans are not problematic where the relevant 10

 Guidelines, para 60.   Ibid, paras 8–11; and above ch 2 section 2.2.8.

11

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[3.3]

market shares do not exceed 30 per cent. Market share is used here as an indicator of market power. Although probably the best single indicator available, it remains a crude one. It inevitably denies the protection of the block exemption to some harmless agreements and provides a degree of immunity to some anticompetitive agreements. It also means that some companies need to monitor their own and their distributors’ market positions and regularly revisit the question of whether they still benefit from the block exemption. For this reason it may be advisable to provide contractually for the exchange of the necessary information.12 The main burden of this threshold falls on firms with market shares around 30 per cent. They have to undertake the sometimes complex tasks of establishing both the relevant geographic and product markets, and then of assessing their share of that market. This will be particularly difficult in fast developing markets, where definitions tend to change over time and market shares are volatile. Even where it seems fairly clear that the relevant market shares are above 30 per cent, there is no general presumption that the agreement is illegal.13 The Commission has cleared agreements where suppliers had high market shares.14 However, firms in this situation will only achieve any degree of legal certainty by performing detailed market analysis, as they will need to be in a position to show the absence of significant anticompetitive effects, or the presence of efficiency benefits, of any restraints. This will ensure that they are well placed to defend the legality of the agreement in the event that it is challenged by the Commission, by a national competition authority or by another party before a national court. In establishing the rules applicable it should be remembered that the highest legal authority is that of the case law of the ECJ and, below that, the EGC. Next in the hierarchy of authority are Council Regulations, then Commission Regulations and Decisions, and finally the various informal Communications, Guidelines and Notices in which the Commission sets out its interpretation of the law and its enforcement policy.

3.3.2  Possible Negative Effects of Restrictions in Distribution Agreements The Commission’s current approach is based on the belief that the main possible negative effects of vertical restraints are: • foreclosure of other suppliers or other buyers by raising barriers to entry or expansion; • reduction of competition, and facilitation of collusion, between suppliers; • reduction of competition, and facilitation of collusion, between distributors; and 12   When the parties are competitors it is important to ensure that the type of information exchanged is limited to what is strictly necessary for these purposes. See below section 3.7. 13   The presumption of illegality that applies to ‘object’ or ‘hardcore’ restrictions such as resale pricefixing and export prohibitions is rebuttable: Guidelines, para 60. 14  De Beers’ rough diamond supply agreements were cleared where its relevant market share was 60–65 per cent, with the rest of the market very fragmented: Commission Press Release IP/03/64, 16 January 2003. See also the beer supply case cited below at n 85.

[3.3]

  does the agreement infringe article 101(1) tfeu?  77

• the creation of obstacles to market integration, including limitations on the possibilities for consumers to purchase goods or services in any Member State they choose.15

Article 101(1) therefore applies so as to prohibit only those restraints that may actually appreciably restrict competition in one or more of these ways. With a few major exceptions, including resale price-fixing and absolute export bans, clauses are not viewed as automatically legal or illegal, the analysis depending not only on their terms but also very much on the economic context in which they operate. The market context of an agreement is much more important than the precise form of words used. Competition law issues arise mainly in situations in which the company in question has significant market power, and when competition from competing firms is weak. The Guidelines (paragraphs 111–21) list as some of the relevant factors for evaluating market power, apart from the nature of the agreement itself: • • • • • • • • •

market positions of the parties, and of their competitors and customers; barriers to entry; the degree of maturity of the market; the level of trade (for example, wholesale or retail) and whether goods are intermediate or final; the nature of the product; cumulative effects of several distribution networks; whether the agreement is ‘imposed’ or ‘agreed’; the regulatory environment; and past collusion with competing firms or conditions facilitating collusion.

Restrictions in distribution agreements where individual distributors distribute only for one supplier are unlikely to be considered harmful if competition between competing brands (inter-brand competition) is strong.16 Such restrictions often increase inter-brand competition and further market integration, for example, where a franchising system enables a franchisor’s investment in developing an original business method to be used across a wide area by many independent businesses. They can help suppliers enter new markets by providing retailer incentives and contribute to streamlining distribution logistics, thereby reducing costs and improving quality. Restrictions concerning branded goods are generally viewed as more likely to raise competition issues than restrictions concerning non-branded goods. Similarly, if an agreement concerns intermediate goods it is less likely to be considered anticompetitive than if it concerns final goods.17 15  Guidelines, para 100. The fact that EU competition law is used to pursue not only the economic aim of protecting competition but also the political aim of market integration accounts for a treatment of territorial restrictions that would seem very severe viewed from a purely economic standpoint. See also Guidelines, para 7; and above ch 2 section 2.1. 16  Guidelines, para 102. 17  Guidelines, para 104.

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Below, various different types of restrictions that may infringe Article 101(1) are discussed. Selective distribution, franchising and agency will be covered to some extent here, as they are largely subject to the same general rules that apply to all distribution agreements. However, later chapters also focus on each of these distribution methods separately, as each raises particular issues.

3.3.3  Exclusive Distribution and Territorial Protection An exclusive distribution agreement provides for a dealer to be the only dealer for particular goods in a defined territory. The territory may be as small as a single town or as large as a whole country or continent, but the dealer appointed to that territory has the assurance that the manufacturer or supplier is not supplying any of the dealer’s competitors in that territory.18 Such agreements do not usually exist in isolation: typically a manufacturer or supplier will distribute goods through a network of such relationships, each one relating to a different territory. The allocation of exclusive territories is usually accompanied by provisions giving some degree of protection to the distributors’ territories from exports from other territories, and this is more likely to raise competition concerns. There is therefore a close link between exclusive territories and export restrictions (see below section 3.3.5) The choice of exclusive distribution rather than, say, selective distribution or franchising, limits the control that a supplier may exercise on the way in which goods are marketed. An even greater degree of control is permitted by the use of agents, since then prices and terms and conditions of resale may be set (see chapter six), but the EU law definition of an ‘agent’ is narrow, and there may often in practice be no alternative to an exclusive distribution network. The Commission’s main concerns about exclusive distribution agreements are that they can reduce competition between distributors of the same brand (intra-brand competition) and that they contribute to market partitioning. It was established very early on that exclusive distribution agreements that affect trade flows between EU Member States normally infringe Article 101(1). Until Consten and Grundig,19 it was not certain whether vertical agreements could infringe Article 101(1) or whether that provision only applied to agreements between competitors. In Consten and Grundig the Court confirmed that Article 101 did indeed apply to vertical distribution agreements. In that case, Grundig, a German manufacturer of televisions, radios and other electrical equipment, had appointed Consten to be the exclusive distributor for its products in France. Consten undertook not to supply directly or indirectly anyone 18   Sometimes the supplier will also bind himself not to compete with the distributor in that territory, but in other cases the supplier may remain free to do so. An exclusive trademark licence linked to distribution in a specified territory will be treated as an exclusive distribution agreement: Guidelines, para 39. 19   Cases 56 and 58/64 Consten and Grundig v Commission [1966] ECR 299, [1966] CMLR 418.

[3.3]

  does the agreement infringe article 101(1) tfeu?  79

outside France. Grundig not only undertook not to deliver the contract goods to anyone in France but provided additional territorial protection by imposing similar restrictions on its German wholesalers and on its distributors in other Member States. There was also an arrangement under which Consten had the exclusive right to use the trademark ‘GINT’ in France. The case came to the ECJ on appeal from the Commission’s Decision that the agreement was contrary to Article 101(1) and therefore unenforceable. Consten had brought an action in the French courts to try to prevent a rival dealer from selling parallel imports of Grundig products that the dealer had obtained outside France. This was a profitable operation for the dealer because Grundig products were available at an appreciably lower price in some other Member States than in France. Consten was thus seeking protection for an arrangement that allowed it to be the only source of Grundig goods for customers in France. Within France its only competition could come from dealers selling the products of manufacturers and suppliers other than Grundig: it was subject to no competition at all in respect of Grundig products themselves, in which it enjoyed a monopoly. Its conduct was the subject of a complaint to the Commission, which found an infringement. In Consten and Grundig the ECJ upheld the Commission’s Decision to the extent that it condemned under Article 101(1) the clauses of the agreement granting absolute territorial protection to Consten. Further, the trademark agreement was also condemned to the extent that the exclusive right to the trademark was used to impede parallel imports. It was argued unsuccessfully before the ECJ that in fact the effect of the clauses conferring territorial exclusivity on the French dealer was to increase the flow of trade, and that it enabled more goods to be sold than otherwise would have been the case. Thus, it was argued, such clauses were in fact pro-competitive. But the Court held that if trade flows were disturbed from the course that they would otherwise have taken in the absence of the restriction, then this was sufficient to infringe Article 101(1), whether or not the flow of trade affected in fact increased or decreased. However, the ECJ stated that the Commission had not given sufficient reasons to justify condemning certain other parts of the agreement that were not directly obstructive of parallel imports. Thus, in that case the question was left open as to whether an agreement by a supplier simply to supply only one dealer in the contract territory, as opposed to a total ban on parallel imports and exports, infringes Article 101(1). In Société Technique Minière v Maschinebau Ulm,20 the Court held that agreements for exclusive distributorship did not necessarily infringe Article 101(1) in the absence of absolute territorial protection or export and import bans: whether they did depended on the factual situation and the degree of protection provided by the precise contract terms. The Court said that exclusivity might be justified in particular if it was necessary in order to penetrate a new market. Relevant factors were said to include: 20

  Case 56/65 [1966] ECR 235, [1966] CMLR 357.

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• the nature of the product; • whether the agreement is for supply of unlimited amounts or is limited to certain amounts; • the share that each party has of the market in which he does business; • whether the agreement is one of a number of similar agreements forming a distribution network for the goods; • the strength of territorial protection provided to the distributor and the possibility of parallel imports. It might be thought that the most minimal form of exclusivity, whereby the protection amounts only to an assurance that the supplier will supply no other reseller within the contract territory, would not necessarily infringe Article 101(1) at all. However, the Commission has in the past issued a block exemption covering agreements incorporating even this limited degree of territorial protection and has tended to assume that any form of territorial exclusivity requires exemption. Although this question is not in practice important in the many cases in which a block exemption clearly applies, it may be of relevance to agreements that fall outside the scope of the block exemption, since the burden of proof in respect of Article 101(3) falls on the party claiming its benefit, whereas the burden of proof that Article 101(1) applies is on the party alleging an infringement.21 These factors also seem to suggest that where the parties hold relatively small market shares or where there are not too many other similar agreements, exclusive distribution arrangements, even with some additional territorial protection, might fall outside the scope of Article 101(1). However, in practice exclusive distribution agreements involving any degree of territorial protection against sales being made into the exclusive territory from outside that territory have been treated by the Commission as infringing Article 101(1) and the above factors only taken into account when deciding whether or not exemption under Article 101(3) is available. There are some ECJ judgments that suggest that in some circumstances exclusivity, even with a limited form of territorial protection, may fall outside the terms of Article 101(1).22 But these are limited to the field of new technologies, in particular licences of plant breeders’ rights. Also, the Guidelines give examples of situations involving new brands or markets in which it seems that even exclusivity combined with additional territorial protection may not infringe Article 101(1).23 But it does not seem that the Commission or European Courts are ready to extend this line of thinking to agreements for distribution of established goods, whatever the market nature and structure. The Commission’s most recent policy statement is its Guidelines,24 in which it refers to the main possible anticompetitive effects of exclusive distribution as 21

  See above ch 2 section 2.4.1.   Case 258/78 Nungesser v Commission [1982] ECR 2015, [1983] 1 CMLR 278; and Case 27/87 Erauw-Jacquery v La Hesbignonne [1988] ECR 1919, [1988] 4 CMLR 576. 23  Paras 60–62; and see below section 3.3.5. 24  Paras 151–67. 22

[3.3]

  does the agreement infringe article 101(1) tfeu?  81

being reduced competition between brands (which can only be a problem if there is limited competition from other brands) and market partitioning. The Guidelines say that when exclusivity is applied by a small number of strong suppliers it can reduce competition and facilitate collusion between them, especially if the suppliers work through the same distributors. If there are a number of strong distributors who insist on exclusive distribution, this may increase the risk of collusion between them. If the distributor has buyer power, and especially if the exclusive territory is very large, exclusive distribution can also foreclose other distributors from the market. In general the Commission considers that problems are more likely to arise in mature markets than on a market with growing demand and changing technology and market positions, and also that they are more likely at retail than at wholesale level. So in practice, unless an agreement has only very limited effects or concerns a new product or market, exclusivity, whether or not accompanied by any additional form of territorial protection, will normally bring it within the scope of Article 101(1). However, it is most likely to raise competition issues and therefore be an enforcement priority for the competition authorities when the supplier has a high level of market power; when the exclusive territory is extremely large; or when a significant part of the market is covered by a number of similar networks. Note that such arrangements made between parties in a single Member State can infringe Article 101(1), so that even national exclusive distribution networks may fall within the prohibition laid down in that Article.25 3.3.4  Exclusive Supply Exclusivity or near-exclusivity granted to a single buyer within the EU (termed ‘exclusive supply’ by the Commission) is an extreme form of exclusive distribution. It concerns the Commission mainly because of the risk of foreclosure of other buyers (Guidelines, paragraph 194), in particular in the case of branded or differentiated products (paragraph 199). While a buyer’s market power on its purchasing market is important in enabling it to require exclusivity, there will only be a restriction of competition if it also has market power on the downstream market on which it sells (paragraph 194). Also, even if the buyer’s individual market share is not very high, there may be an equivalent effect if a number of major buyers enter into such arrangements with a number of suppliers. If this forecloses smaller or potential buyers, Article 101(1) may be infringed. 3.3.5  Export Restrictions and Other Means of Market Division Clauses prohibiting or hindering exports, whether in the context of exclusive distribution (see above section 3.3.3) or not, are presumed to infringe Article 101(1)   See cases cited above ch 2 section 2.2.7.

25

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and therefore to be illegal and unenforceable. A number of European Court judgments have emphasised the strong nature of this presumption.26 The Commission’s Guidelines also treat absolute export prohibitions as ‘hardcore’ restrictions, which raise a presumption of infringement of Article 101.27 The aim of market integration (that is, the establishment of a single market without frontiers throughout EU territory) has had a strong influence on competition policy and explains why export bans and other restrictions that tend to divide up markets, in particular along national lines, are treated severely. In Miller the ECJ held: [B]y its very nature, a clause prohibiting exports constitutes a restriction on competition, whether it is adopted at the instigation of the supplier or of the customer, since the agreed purpose of the contracting parties is the endeavour to isolate a part of the market.28

More recently it emphasised that indirect restrictions are analysed in the same way as explicit export bans: [A]n agreement concerning distribution has a restrictive object for the purposes of Article [101] if it clearly manifests the will to treat export sales less favourably than national sales and thus leads to a partitioning of the market in question.29

So market sharing of this sort virtually always falls within the scope of Article 101(1), regardless of the market situation. The restriction may occur in the form of an express clause in a distribution agreement, a verbal agreement30 or a clause in the terms and conditions of sale;31 and the fact that the export restriction in an agreement is not enforced is no defence to an allegation that the agreement infringes Article 101(1).32 At one time the highest fine ever on an individual company for infringement of Article 101 was one of €102 million imposed on Volkswagen for using its distribution system to impose market partitioning measures. Volkswagen had over a period of 10 years systematically required its Italian dealers to reject orders from foreign customers, mainly German and Austrian, who were seeking to take advantage of lower Italian car prices. Volkswagen had also terminated dealership agreements with dealers who refused to cooperate in this policy.33 The highest fine ever imposed on a company in respect of a vertical agreement infringing Article 101 is now one of over €149 million34 imposed on Nintendo for 26   Eg, Case T-77/92 Parker Pen Ltd v Commission [1994] ECR II-549, [1995] 5 CMLR 435; and Case T-43/92 Dunlop Slazenger International v Commission [1994] ECR II-441, [1993] 5 CMLR 352. 27  Para 50. 28   Case 19/77 Miller International v Commission [1978] ECR 131, [1978] 2 CMLR 334, para 7. 29   Case C-551/03 General Motors (Opel Nederland) v Commission [2006] ECR I-3173, [2006] 5 CMLR 1. 30   Case 28/77 Tepea v Commission [1978] ECR 1391, [1978] 3 CMLR 392. 31   Case 30/78 Distillers v Commission [1980] ECR 2999, [1980] 3 CMLR 121. 32   Case T-66/92 Herlitz v Commission [1994] ECR II-531, [1995] 5 CMLR 458; and Miller International v Commission (above n 28). 33   Upheld on appeal to the EGC and ECJ, but the fine was reduced to €90 million, Case C-338/00 Volkswagen v Commission, [2003] ECR I-9189, [2004] 4 CMLR 351. 34   The fine was reduced on appeal to €119.2 million, Case T-13/03 [2009] ECR II-947. For other high fines, see the cases cited above ch 2 n 173.

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  does the agreement infringe article 101(1) tfeu?  83

acting as the driving force behind a series of collusive practices with its distributors, designed to prevent exports of its game consoles and cartridges from highprice to low-price35 Member States. Not only did the formal agreements restrict parallel imports, but the distributors actively cooperated with Nintendo to identify exporting firms, on whom sanctions were imposed. The distributors themselves were therefore also fined substantial amounts, whereas more often in the case of distribution infringements it is only the supplier who is fined.36 As mentioned above, not only straightforward export prohibitions or restrictions but also indirect restrictions on export infringe Article 101(1). Such restrictions include the granting of bonuses in respect of domestic sales only,37 threatening to reduce supplies38 or requiring distributors to resell to third parties only unopened packages of goods, which was held to infringe Article 101(1) since it discouraged the repackaging of goods for different markets and thus indirectly restricted exports.39 In one case the Commission imposed a fine on Martell and its French distributor for an arrangement under which the distributor refused to grant rebates to a wholesaler who made parallel exports to Italy;40 this was despite the fact that the practice did not prevent the parallel trading from being financially viable, although it did reduce the profits to be made. Trademark rights may also be used to restrict exports, as in Consten and Grundig.41 Other methods of market division include refusal of supplies; restrictions on the use to which the goods supplied may be put; restrictions on advertising outside a specified area; and obligations on a distributor to sell to end-users only. Another type of indirect export restriction is refusal to provide warranty or after-sales services in respect of products not bought from an authorised distributor: when a manufacturer offers a guarantee for products bearing its trademark, the manufacturer has to ensure that that guarantee can be invoked throughout the whole of the EU distribution network.42 But when distributors are not reimbursed by the supplier for services under an EU-wide guarantee, it is permissible to require distributors making sales outside their territories to pay another distributor for 35   In early 1996 prices in the UK were up to 65 per cent cheaper than in Germany and the Netherlands. 36   Some distributors also appealed against their fines: Case T-12/03 [2009] ECR II-893, [2009] 5 CMLR 1375 (Itochu, whose fine was upheld); Case T-18/03 [2009] ECR II-1021, [2009] 5 CMLR 1469 (Activision Blizzard, whose fine was reduced, appeal pending, Case C-260/09). Similar practices by Topps in the market for Pokémon stickers and cards, where there were price differences of up to 243 per cent between EU Member States, resulted in a much smaller fine of €1.59 million, Commission Press Release IP/04/682, 26 May 2004, Decision available on DG Comp’s website. This was because the infringement was of short duration and stopped as soon as Topps had been warned by the Commission. 37   Case T-450/05 Peugeot Nederland v Commission [2009] ECR II-2533. 38   Peugeot (ibid). 39   Bayer Dental [1990] OJ L351/46. 40   Gosme/Martel [1991] OJ L185/28. 41   See above section 3.3.3 and n 19. 42   Case 31/85 ETA Fabriques d’Ebauches v DK Investment [1985] ECR 3933, [1986] 2 CMLR 674. See also Saeco, Commission Press Release IP/00/684, 29 June 2000. But in the case of selective distribution this rule applies only to goods purchased through an authorised distributor (see below ch 4, n 58).

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carrying out such services.43 Also, an individual distributor may offer a guarantee to his own customers only, in the absence of a manufacturer’s guarantee, or offer his own customers better terms than those included in the manufacturer’s guarantee.44 Another example of an indirect export ban appears in Accinauto v Commission,45 where the EGC upheld a fine for infringement of Article 101(1). In this case market partitioning was effected by means of a requirement on distributors to refer any customer enquiries coming from outside the distributor’s territory to the manufacturer. The Court held that this requirement was intended to serve as a disguised prohibition on making passive exports without the manufacturer’s prior authorisation. In Dunlop, the tennis ball producer was fined not only for the ban on exports of tennis balls but also for other measures including refusal to supply, pricing measures, marking and follow-up of exported products, buy-back of exported products and the discriminatory use of official labels, all intended to ensure enforcement of the export ban. In Distillers,46 different prices were charged to UK whisky dealers according to whether they were buying the whisky for export or for sale within the United Kingdom. Although there was strong economic justification in the circumstances for treating the home market differently from the Continental European market in this case, the Commission found that such discriminatory pricing fell within the scope of Article 101(1).47 A publishing house has also been persuaded to end its practice of charging different prices for its journals depending on the subscriber’s place of residence on the grounds that it was infringing EU competition rules.48 A rare example of a distribution policy aimed at preventing parallel trade that did not infringe Article 101(1) appears in Bayer.49 Parallel imports are a major concern in the pharmaceutical sector, and in Bayer the arrangement, although it was intended to limit parallel trade and was held by the Commission to infringe Article 101, was ultimately said by the ECJ to fall outside the scope of that provision, though on the specific ground that only a unilateral policy and no ‘agreement’ had been shown (see above chapter two section 2.2.2). On the other hand, an example of an unsuccessful attempt to reduce parallel trade in pharmaceuticals while avoiding the application of Article 101 was a policy of charging Spanish wholesalers different prices according to whether the pharmaceuticals were intended for domestic consumption or for export. The supplier argued that it was setting only one price but that Spanish pricing regulations imposed a second, arti43   Case T-67/01 JCB Service v Commission [2004] ECR II-49, [2004] 4 CMLR 1346, paras 136–45, upheld on appeal but this point not raised, Case C-167/04 (above n 6). 44   Case 86/82 Hasselblad v Commission [1984] ECR 883, [1984] 1 CMLR 559. 45   Case T-176/95 [1999] ECR II-1635, [2000] 4 CMLR 33. 46   [1978] OJ L50/16, [1978] 1 CMLR 400. 47   The same result would probably be reached today even under the Commission’s new economicsbased policy, so strong is the market integration imperative. 48   Pergamon Press, Commission Press Release IP(90)804. 49   Cases C-2/01 and C-3/01 Bayer v Commission [2004] ECR I-23, [2004] 4 CMLR 653.

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  does the agreement infringe article 101(1) tfeu?  85

ficially low price in the case of products for domestic consumption. The case eventually went to the ECJ, which held that Article 101(1) was infringed.50 However, more sympathetic treatment is now available for most territorial restrictions imposed in the context of the launch of new products or the entry into a new geographical market. In its Guidelines the Commission states: (60)  Hardcore restrictions may be objectively necessary in exceptional cases for an agreement of a particular type or nature and therefore fall outside Article 101(1). . . (61)  A distributor which will be the first to sell a new brand or the first to sell an existing brand on a new market, thereby ensuring a genuine entry on the relevant market may have to commit substantial investments where there was previously no demand for that type of product in general or for that type of product from that producer. Such investments may often be sunk… Where substantial investments by the distributor to start up and/or develop the new market are necessary, restrictions of passive sales by other distributors into such a territory or to such a customer group which are necessary for the distributor to recoup those investments generally fall outside the scope of Article 101(1) during the first two years. . . (62)  In the case of genuine testing of a new product in a limited territory or with a limited customer group and in the case of staggered introduction of a new product, the distributors appointed to sell the new product . . . may be restricted in their active selling outside the test market or the market(s) where the product is first introduced without falling within the scope of Article 101(1) for the period necessary for the testing or introduction of the product.

This may be very useful in enabling suppliers launching products in a new territory to offer distributors in that new territory sufficient incentives to invest in marketing the product, especially in product markets where internet sales channels are well established. Though the focus is on protection from sales from other territories, one can assume that distributorship exclusivity should also fall outside the scope of Article 101(1) in these circumstances. A clause prohibiting export to or from non- EU countries will only infringe Article 101(1) if there would otherwise be a reasonable likelihood of re-import back into the EU.51 For many goods and third countries the costs of transport and customs duties mean that this would not be economically worthwhile, though as the European Union becomes larger and concludes more free trade agreements, this will apply to fewer countries. In Yamaha52 even a requirement to contact the supplier before making internet export sales of musical instruments outside the European Economic Area (EEA) was found to infringe Article 101(1) on the grounds that it reinforced the market-partitioning effect of the agreement. 50  But the ECJ held that exemption under Art 101(3) might be available, Cases C-501/06 etc GlaxoSmithKline v Commission [2009] ECR I-9291, [2010] 4 CMLR 50. 51   Case C-306/96 Javico v Yves St Laurent [1998] ECR I-1983, [1998] 5 CMLR 172; and Cases 51 etc/75 EMI v CBS [1976] ECR 811, [1976] 2 CMLR 235. However, in Yamaha an export ban was held to be an object restriction, even when it related to Iceland, and the remote location and significant transport costs would have meant that export to the EU was unlikely: Commission Press Release IP/03/1028, 16 July 2003, Decision available on the DG Comp website. See also above ch 2 section 2.2.7. 52   Yamaha (ibid).

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3.3.5.1  Internet Sales Many new issues of market division arise because of the internet and electronic commerce. An outright ban on distributors selling via the internet will normally infringe Article 101(1),53 though it is legitimate, particularly in the context of selective distribution, to prevent a distributor from operating exclusively by internet and not maintaining a physical outlet.54 Similarly, there is infringement when a supplier requires distributors’ internet sites to be accessible only via the supplier’s own site, in such a way that the supplier could forward orders to the appropriate local distributor or else arrange automatic rerouting. Other examples of restrictions infringing Article 101(1) include requiring the refusal of online orders when the credit card used for payment has a billing address outside the exclusive territory; requiring the distributor to make a minimum proportion of total sales through physical shops (though a minimum absolute value or volume is acceptable); and the charging by the supplier of higher prices for goods intended to be sold online.55

3.3.6  Customer Restrictions Care should be taken by a supplier when imposing any restrictions on customers to whom a distributor may resell. The allocation of exclusive customer groups and other restrictions on the customers to whom the buyer may resell are analysed in a similar way to the territorial restrictions discussed above. A requirement that goods purchased be supplied only to a particular type of customer, such as endusers or specialist retailers, or to certain named customers will, like territorial exclusivity, generally infringe Article 101(1). So will a clause by which a buyer agrees only to buy quantities needed to supply his own end-user customers, thus prohibiting him from reselling the goods to other distributors.56 In the context of qualitative selective distribution in certain circumstances it does not infringe Article 101(1) to impose a prohibition on supply to unauthorised dealers or to require wholesalers not to supply end-users (see chapter four).

53   In B&W the Commission required the removal of an internet sales ban before clearing the agreement, though it did allow the supplier to impose quality requirements as to the design of the website in order to allow protection of the brand image and product reputation: Commission Press Release IP/02/916, 24 June 2002. The question of whether an absolute internet sales ban in a selective distribution agreement is always an ‘object’ restriction is before the ECJ in Case C-439/09 Pierre Fabre [2010] OJ C24/27. 54   This is the implication of the Commission’s informal clearance of the Yves St Laurent selective distribution system for perfume, Commission Press Release IP/01/713, 17 May 2001. 55  Para 52. Further detail on internet sales appears in the discussion on the block exemption, below section 3.5.7.2. 56  Guidelines, paras 168–73.

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  does the agreement infringe article 101(1) tfeu?  87

3.3.7  Resale Price-Fixing 3.3.7.1  Fixed or Minimum Prices Resale price-fixing,57 or the setting of minimum resale prices, represents one of the most serious types of vertical infringements of Article 101(1). Not only is it expressly prohibited by Article 101(1)(a) to the extent that it appreciably affects competition and restricts competition,58 but it is also hardly ever exempted (see below section 3.6.4). It attracts heavy fines.59 Even when the parties to an agreement or the relevant market share are very small, any attempt to fix retail prices or minimum resale prices will fall foul of Article 101(1),60 unless there is no effect on trade between Member States. For example, the Commission has taken the view that a resale price maintenance agreement for books within Germany (Sammelrevers) had no effect on trade between Member States and therefore did not infringe Article 101(1).61 But even retail price maintenance at a purely national level may fall within the scope of Article 101(1) if it is considered to have the effect of deflecting trade flows away from the channels in which they would naturally run if prices were fixed freely.62 Article 101(1) cannot apply if there is no appreciable effect on competition, but the Commission’s de minimis Notice provides no safe harbour for hardcore restrictions such as fixed or minimum retail price maintenance.63 Nor do the vertical restraints Guidelines refer to circumstances in which such a clause might fall outside Article 101(1). This is apparently not because the Commission does not accept the possibility in principle but because of a policy preference for imposition of resale price maintenance for positive, economic efficiencies-based reasons rather than in circumstances in which no such justification can be offered. The Guidelines 57   It is of course resale price-fixing that is prohibited, not price-fixing itself. This may sound obvious but is important when analysing practices such as ‘indirect fulfilment’, where a large customer concludes a purchase directly with a producer, and the producer subcontracts fulfilment of the contract to one of its distributors. There is no official guidance on the point, but such practices should not infringe Art 101, provided there is only a direct sale by the producer to the customer and no purchase and resale by the distributor: the distributor is essentially acting as an agent (but for possible agency issues see below ch 6 section 6.2.2). 58   Case C-279/06 CEPSA v Tobar [2008] ECR I-6681, [2008] 5 CMLR 1327, para 42. 59   Eg, Case C-167/04 JCB (above n 6) (€39.6 million, reduced on appeal to €30.9 million); and Case C-74/04 Volkswagen [2006] ECR I-6585, [2008] 4 CMLR 1297 (€30.96 million), annulled because no ‘agreement’ was proved,. 60   The Commission stated in Press Release IP/02/916, 24 June 2002 that minimum retail price-fixing in the form of a prohibition on the use of B&W loudspeakers as loss-leaders infringed Art 101(1). 61   Commission Press Release IP/02/461, 22 March 2002. The agreement applied to exported and re-imported goods only where they had been exported solely for the purpose of avoiding the resale price maintenance arrangements. See also Case C-360/92 Publishers Association v Commission (No 2) [1995] ECR I-23, [1995] 5 CMLR 33. Price-fixing for books often involves horizontal agreements between publishers: see below. 62   Case 8/72 Cement Dealers v Commission [1972] ECR 977, [1973] CMLR 7. 63   See above ch 2 section 2.2.8.3.

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refer to the following potential anticompetitive effects of resale price maintenance (paragraph 224): • facilitating supplier collusion and reducing suppliers’ incentives to reduce prices; • facilitating distributor collusion; • softening competition between suppliers or between distributors; • increasing retail prices; • reducing pressure on suppliers’ margins; • foreclosing smaller competing suppliers; and • reducing dynamism and innovation at distribution level.

3.3.7.2  Maximum or Recommended Prices Maximum prices are not normally considered restrictive of competition unless they combine with other factors, whether contractual obligations or the actual conduct of the parties, so as to impose a fixed or minimum resale price.64 Vertical price recommendation has always been treated as not anticompetitive in the context of franchising,65 and this was said in JCB to apply also to ‘a distribution system which is hybrid but very similar to a selective distribution system’.66 This is subject to the proviso that there is genuinely only a recommendation and no kind of pressure is put on distributors to sell at the recommended price. The Commission in its Guidelines (paragraphs 226–28) states that for all types of distribution agreement, in principle both recommended and maximum resale prices are covered by the block exemption where the relevant market shares do not exceed 30 per cent, but it does not explicitly state whether they may (sometimes) fall outside Article 101(1) altogether. However, it goes on to say that where market shares are higher, recommended or maximum resale prices may cause anticompetitive effects in that they may serve as a ‘focal point’ for resellers, so that they come to be followed by most or all of them, or may reduce competition or facilitate collusion between suppliers, and that this is most likely where the supplier has a strong market position. This suggests that where market shares are low, recommended and maximum resale prices may not necessarily infringe Article 101(1) at all. 3.3.7.3 Books In a number of Member States retail book prices are frequently fixed through horizontal agreements between publishers, 67 which distributors agree to adhere to. 64   CEPSA v Tobar (above n 58) para 71. See also Nathan-Bricolux [2001] OJ L54/1, [2001] 4 CMLR 1122; and Repsol [2004] OJ C258/7 (case closed with commitments, Commission Press Release IP/06/495, 12 April 2006, Decision available on the DG Comp website). 65   Case 161/84 Pronuptia de Paris v Schillgalis [1986] ECR 353, [1986] 1 CMLR 414. 66   Case T-67/01 JCB Service v Commission [2004] ECR II-49, [2004] 4 CMLR 1346, upheld on appeal but this point not raised, Case C-167/04 (above n 6). 67   Where they are fixed by national law or government authority, Arts 34–36 TFEU on free movement of goods may be relevant.

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  does the agreement infringe article 101(1) tfeu?  89

Such agreements are likely to infringe Article 101(1) and have generally been held not to qualify for Article 101(3) exemption. They will only not infringe Article 101(1) if they are restricted in application to a single national territory or region. However, such national systems may not limit cross-border sales, except in respect of imports the sole purpose of which is to circumvent the national price-fixing system.68 The increasing success of internet retailers in this sector means that the usefulness of such national systems is rapidly diminishing. The European Parliament has expressed its concern at this situation on a number of occasions and at one time drafted a proposed Directive, which would have allowed significant limitations on cross-border sales in the interests of cultural policy objectives.69 No such Directive was adopted, but the fact of the proposal demonstrates the strength of concern about this issue in some quarters.

3.3.8  Single-Branding (Non-Compete) and Exclusive Sourcing Obligations A supplier often chooses to conclude agreements with distributors that limit the extent to which the distributors may obtain goods from sources other than the supplier. The limitation may apply to all supplies of the contract product (say, the supplier’s brand of sports shoe) or to all supplies of a particular type of product – that is, the contract product and all competing products (say, all sports shoe requirements). The former does not prevent the buyer from obtaining and distributing competing goods, but the latter does. A supplier may want to impose either or both. The terminology used to refer to such clauses has not always been clear, with ‘exclusive purchase’ and ‘non-compete’ sometimes being used interchangeably, and without specifying which of the two types of restriction is meant. It will be seen in some of the extracts quoted below that in past cases the Commission itself has not been consistent in its use of these terms. Most recently, in its 2010 Guidelines the Commission has chosen yet another term, referring to ‘exclusive sourcing’.70 The usage adopted here is as follows. As in the Commission’s current block exemption Regulation and Guidelines, a ‘non-compete clause’, which is a type of ‘singlebranding’, refers to the second type of clause: it requires a distributor to obtain all or most of his requirements of a particular type of product from that supplier. The term ‘exclusive sourcing’ is used to denote the first type of clause, by which a supplier requires a buyer to obtain all or most his supplies of the contract goods 68   Joined Cases 43 and 63/82 VBVB v Commission [1984] ECR 19, [1985] 1 CMLR 27; and Sammelrevers (above n 61). 69   European Parliament Committee on Legal Affairs and the Internal Market, Report with Recommendations to the Commission on the Drawing up of a Directive of the European Parliament and of the Council on the Fixing of Book Prices 2001/2061(INI), 21 February 2002, adopted by the European Parliament on 16 May 2002. 70   By which it means ‘requiring the . . . distributors to buy their supplies for the particular brand directly from the manufacturer’, para 162.

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directly from the supplier but leaves the buyer free to buy and sell competing brands. 3.3.8.1  Non-compete Clauses An obligation on a reseller not to sell competing goods, though not ‘hardcore’, may fall under Article 101(1). The Commission described non-compete clauses (which it referred to as ‘exclusive purchasing agreements’) and their benefits in its Seventh Report on Competition Policy as follows: These are agreements under which the purchaser accepts an obligation to purchase particular goods from a single supplier only, over a relatively long period. They have an important business function in that they give a guarantee of ensured sales to one party and a guarantee of continuous supplies to the other. Exclusive purchasing agreements are consequently normal in almost all branches of the economy, as a rule in very large numbers; they are particularly common . . . between manufacturers and dealers. . . The purchaser is frequently given special privileges of the most varied kind, ranging from priority for deliveries and the assurance of technical assistance, through special prices, discounts, bonuses, premiums and fidelity rebates, and the guarantee of a specified margin, to long-term loans.71

This definition deals only with arrangements providing for absolute exclusivity. An agreement may fall under Article 101(1) even if a purchaser is not required to take all, but only a major part of, his requirements from the supplier. Nor is it necessary that there be any legal or even moral obligation on the buyer to do so. It is sufficient that in practice the agreement has a tendency to produce these effects.72 The same analysis also applies to practices such as quantity-forcing, whereby a buyer is required to purchase minimum volumes or a minimum percentage of his requirements, when this produces similar effects to a non-compete provision. It also applies to a threat to stop supplies if a distributor deals in competing products.73 Other restrictions that have the effect of dissuading buyers from purchasing competing goods, such as an obligation to stock complete ranges of goods,74 quantity discounts, non-linear pricing (for example, an initial lump sum plus a price per unit, meaning that the more the buyer buys, the lower the average cost of a unit) and other forms of quantity-forcing will be analysed on the same basis as non-compete clauses.75 The same would be true of ‘share of shelf ’ agreements by which retailers agree to reserve a specific proportion of shelf space, perhaps in a specified position, for the supplier’s goods. Such clauses may well infringe Article 101(1) and require exemption if they are to be valid. In its Seventh Report referred to above the Commission went on to state: 71

 Para 9.   Twelfth Commission Report on Competition Policy, para 12. 73   See Commission Press Release IP/02/521, 9 April 2002 on Check Point’s software distribution practices. 74   SABA (No 1) [1976] OJ L28/19, [1976] 1 CMLR D61. 75  Para 129. 72

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  does the agreement infringe article 101(1) tfeu?  91

Exclusive purchasing agreements may endanger competition, because they limit the purchaser’s freedom of choice and therefore at least potentially restrict the sales outlets open to other suppliers.76

In BP Kemi 77 the Commission explained that when concluded for a long term, such contracts freeze the competitive process. It is true that at the time the agreement is made, the purchaser may choose the supplier offering the best terms available. However, during the whole duration of the contract, the buyer is unable to switch to taking supplies either from a new market entrant or from a competing supplier who has meanwhile become more competitive. These other potential suppliers are thus excluded from competing for that duration. As in the context of many other types of agreement, the Commission and ECJ have stressed that non-compete obligations do not automatically fall within the scope of Article 101(1).78 They will infringe Article 101(1) only if they both affect trade between Member States and prevent, restrict or distort competition.79 A number of factors are relevant in deciding whether these conditions are fulfilled. In BP Kemi the Commission stressed the importance of taking into account the economic circumstances surrounding the agreement: [D]epending, inter alia, on the length of the period and on the economic context, including the market shares and positions of the purchaser and seller, such a purchasing obligation may constitute a restriction on competition within the meaning of Article [101]. . .80 When on such a market, which already displays a weak competitive structure, one of the most important suppliers enters into long-term contracts with one of the most important purchasers, which induce the purchaser to take all his requirements or the major part of his requirements from the same supplier, there exists an appreciable disadvantage for the supplier’s competitors and for purchasers, and there is then a restriction of competition for the purposes of Article [101(1)].81

In this case not only was the market itself characterised by weak competition, but also the parties involved happened to be very strong. Both these factors, amongst others, contributed to the finding that the agreement infringed Article 101(1). In Delimitis v Henninger Brau AG 82 the Court said that a non-compete agreement for beer would not infringe Article 101(1) unless two conditions were satisfied. First, taking into account the economic and legal context, the national market for distribution of beer by retail drinks outlets must be subject to substantial barriers to entry or for other reasons be foreclosed to competitors who might establish themselves on that market or increase their share of that market. Secondly, the supplier’s agreements must make a substantial contribution to that foreclosure.83 76

 Para 9.   [1979] OJ L286/32, [1979] 3 CMLR 684. 78   In the context of franchise networks they frequently do not infringe Art 101(1). See below ch 5 section 5.3.1. 79   Case 23/67 SA Brasserie de Haecht v Wilkin (No 1) [1967] ECR 407, [1968] CMLR 26. 80   BP Kemi (above n 77) para 59. 81   Ibid, para 68. 82   Case C-234/89 [1991] ECR I-935, [1992] 5 CMLR 210. 83   When a supplier concludes different types of agreement the contribution of each type may exceptionally need to be considered separately: Case C-214/99 Neste Markkinointi Oy [2000] I ECR I-11121, 77

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Delimitis was later applied by the Commission so as to grant informal negative clearance to Greene King’s tied-pub agreements.84 It held that the UK beer ‘ontrade’ (sale in pubs and restaurants) market was foreclosed as the result of the existence of a number of networks but that Greene King, which had only 1.3 per cent of this market, could not be said to contribute substantially to this foreclosure. In that case the Commission contrasted the situation of Greene King with that of bigger brewers such as Whitbread, which held over five per cent of the market. However, more recently the brewer Interbrew was granted informal negative clearance for its amended beer supply agreements, including non-compete obligations, on the basis of economic analysis showing no foreclosure effects, where it had about 56 per cent of the relevant market. This is evidence that a more economicsbased approach is now being applied in this area.85 In the Ice Cream cases,86 the EGC followed Delimitis and approved the fact that the Commission had taken into account not only the proportion of sales outlets tied to producers (about 30 per cent) and the quantities to which those commitments related but also the barriers to entry created by the practice of ‘freezer exclusivity’ (a system under which freezer cabinets are lent to retailers on condition that they do not use them to store competing goods). The duration of a non-compete agreement is a crucial factor. Such an agreement imposed only for a short term, such as one year, might not infringe Article 101(1).87 However, in practice suppliers are usually interested in longer periods, which make it likely that the contract infringes Article 101(1). In Liebig Spices,88 a manufacturer of spices concluded non-compete contracts with three large supermarket chains. This was another case in which both the supplier and the purchasers had very strong market positions, and the agreements together tied up a substantial part of the market, making it very difficult for other spice manufacturers to find large outlets through which to distribute their products. The agreements were found by the Commission to account for 35 per cent of [2001] 4 CMLR 993. However, the EGC rejected such an argument in Case T-65/98 Van den Bergh Foods v Commission [2003] ECR II-4653, [2004] 4 CMLR, para 204; the point was not considered on appeal, Case C-552/03 [2006] ECR I-9091. 84   Upheld in Case T-25/99 Roberts v Commission [2001] ECR II-1881, [2001] 5 CMLR 828. 85   Commission Press Release IP/03/545, 15 April 2003. The result in this case bears a striking resemblance to that in the Dutch competition authority’s 2002 ruling that Heineken’s beer distribution agreements, representing a market share of around 50 per cent, did not infringe the Dutch national equivalent of Art 101(1). DG Comp’s Competition Policy Newsletter Summer 2003 refers to the fact that it worked closely with the Belgian and Dutch competition authorities on these cases and to ‘the fruits borne by intensified contacts with NCAs’. See also the comment on the Dutch case in RBB Economics Brief 04, ‘Pro-competitive Exclusive Supply Agreements: How Refreshing!’ August 2002, http://www.rbbecon.com. 86   Case T-7/93 Langnese-Iglo v Commission [1995] II ECR 1533, upheld in Case C-279/95 [1998] ECR I-5609 and Case T-9/93 Schöller Lebensmittel v Commission [1995] ECR II-1611. See also Van den Bergh Foods (above n 83). Although in this latter case there was only freezer exclusivity and not a noncompete obligation, it was held that Art 101(1) was infringed and exemption was refused. 87   But contracts of around one year’s duration were found to infringe Art 101(1) in Schöller Lebensmittel (ibid). 88   [1978] OJ L53/20, [1978] 2 CMLR 116.

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  does the agreement infringe article 101(1) tfeu?  93

the total retail spice market. Not only was Article 101(1) infringed, but exemption was refused. Not just the market share of the company in question but also the structure of the market is very important: if a number of strong competitors each has a substantial market share, there may be no infringement of Article 101(1) because competition may not be sufficiently affected. In its most recent statement of policy in its 2010 Guidelines the Commission states its main concerns over non-compete and other single-branding restrictions.89 They may foreclose other suppliers, in particular when other actual or potential suppliers are for some reason not able to compete for purchasers’ entire demand, or when it is hard for purchasers to switch between suppliers. Therefore in making this assessment, the market position of competing suppliers, as well as the existence of barriers to entry, is crucial in establishing whether the supplier has sufficient market power to effect foreclosure. However, the existence of a number of strong suppliers on the market, operating similar systems, can have the effect of reducing competition and supporting collusion between them, thus reducing competition between brands at retail level. The Commission thinks this unlikely to occur where the market share of the largest supplier is below 30 per cent and the market share of the five largest suppliers is below 50 per cent. In some circumstances powerful buyers may be able to counteract the power of suppliers so as to obtain good terms, but in such cases it will be important to analyse whether buyers overall, and final customers, benefit. The Guidelines distinguish between non-compete obligations relating to an intermediate product, where foreclosure is less likely (assuming the supplier is not dominant and there are not a number of similar networks accounting for 50 per cent or more of the market), and retail markets, where anticompetitive effects are more likely to arise when non-dominant suppliers tie up 30 per cent or more of the market (or all suppliers have market shares below 30 per cent but the total tied market share is above 40 per cent). Such restrictions imposed by dominant companies may raise concerns at quite low tied market share levels. As to final products at wholesale level, it will be important to consider the entry barriers to that wholesale activity. When a buyer operates from premises and land owned by the supplier or leased by the supplier from a third party unconnected with the buyer, the Commission says it is unlikely to intervene in the absence of dominance. Also, in sectors in which selling more than one brand from the same site is difficult, it says that any foreclosure problem is better remedied by shortening the contract term. Therefore in practice, unless it is only for a very short period (no more than one year) or relates only to a small part of the relevant market, any agreement by a wholesaler or retailer to obtain supplies of a specific type of goods or service from one source only, where the supplier has a strong market position, will almost certainly violate Article 101(1) and need to benefit from exemption either through a block exemption or under Article 101(3), if it is not to be void and unenforceable. 89

 Paras 129–51.

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3.3.8.2  Exclusive Sourcing Exclusive sourcing, whereby a distributor may obtain supplies of the contract product only from a single supplier, is not discussed specifically in the block exemption or Guidelines. It does not normally raise competition law concerns. When it does, it raises not foreclosure concerns but rather market partitioning concerns. Whether such a clause infringes Article 101(1) will depend on all the surrounding market circumstances. The only exception to this is in the context of selective distribution, when such a restriction is ‘hardcore’ and so raises a presumption of an infringement of Article 101(1) (see below chapter four section 4.2.2.1). 3.3.8.3  ‘English’ Clauses An English clause is one that permits a purchaser to obtain supplies elsewhere only if he can obtain them more cheaply than from his supplier. The exercise of the right to buy elsewhere is normally subject to a number of conditions. For example, it may apply only if the alternative supplier is offering a certain minimum quantity, or the purchaser may be required to give his supplier the opportunity to match or better the alternative offer. It is similar in its effects to, and is therefore analysed in the same way as, a non-compete clause. In BP Kemi,90 the agreement included an English clause. The parties argued that this prevented the agreement from having the alleged restrictive effects on competition. However, the Commission considered that the conditions in which the clause could be invoked were so narrowly circumscribed that the clause did not significantly lessen the restrictive effects of the agreement. Further, the Commission even commented adversely on English clauses, saying that they could act as a mechanism for the exchange of information on prices and conditions between competitors. Such exchange of information is viewed suspiciously by the Commission. So even a straightforward English clause not hedged about with strict conditions may infringe Article 101(1).91

3.3.9 Tying Article 101(1)(e) states that ‘tying’ or the obligation to buy, together with the product actually wanted, a second product or service that, by its nature or according to commercial usage, has no connection with the subject of the contract, infringes Article 101(1). The Commission’s Guidelines include a section on tying (paragraphs 214–22). Its concerns are possible foreclosure on the market for the tied product, especially 90

  Above n 77.   See also Guidelines, para 129.

91

[3.3]

  does the agreement infringe article 101(1) tfeu?  95

when the tying is combined with a non-compete clause in respect of the tied product, but also on the market for the tying product. Tying may also lead to higher prices for consumers. The Guidelines make it clear that the supplier’s market position, as well as that of its competitors, is of central importance, as it is only when a firm (or group of firms using similar tying arrangements) have a high degree of market power and do not face sufficient competition or face powerful buyers that there can be an anticompetitive effect. It also states that when the tying is imposed in order to maintain quality standards, and it is not possible to formulate those standards as a contractual term, Article 101(1) may not be infringed at all. In practice the Commission has tended to raise concerns about tying under Article 102 rather than under Article 101 (see above chapter two section 2.5.4.3). 3.3.10  Intellectual Property Rights Intellectual property rights can be used to impede parallel imports, for example, by using different trademarks for the same product in different territories; and an agreement to use such rights in this way will infringe Article 101(1).92 However, the use of intellectual property rights to partition EU territory frequently occurs through the unilateral exercise by the right-holder of his rights rather than as a result of any agreement. It therefore tends to be dealt with under Articles 34–36 TFEU, which provide for free movement of goods. A clause requiring a distributor to use the supplier’s trademark does not infringe Article 101.93 3.3.11  Category Management and Upfront Access Payments The practices of category management and upfront access payments are both specific to supermarkets and similar large distribution chains. They feature in the Guidelines because of the same concern over the buyer power of these large retailers that led the Commission in 2010 to introduce an additional market share threshold applicable to the buyer into its vertical restraints block exemption. Category management is a practice whereby a retailer such as a supermarket makes one of its suppliers of a particular category of goods a ‘category captain’, responsible for the marketing of that category. So, for example, a chocolate supplier may be appointed to advise the supermarket on which and how much of different chocolate products and brands to sell, and how they should be displayed, priced and promoted. The only Commission Decisions so far addressing these practices have been in merger cases.94 The Guidelines state that neither of these practices is usually 92

  Consten and Grundig v Commission (above n 19).   BMW [1975] OJ L29/1, [1975] 1 CMLR D44, para 32. 94   Eg, COMP/M.3732 Procter & Gamble/Gillette, 15 July 2005, in which the Commission found no evidence of competition concerns and made largely positive comments about category management. 93

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problematic, but they may infringe Article 101(1) in some cases. If the category captain disadvantages its competitors’ products then this can lead to supplier foreclosure. Alternatively it might facilitate retailer collusion (if many retailers appoint the same captain) or supplier collusion (when they are able to exchange sensitive market information through retailers).95 In practice problems are unlikely to arise if the parties avoid any direct or indirect exchange of commercially sensitive information, or discussion of pricing, between suppliers or retailers. The parties should also ensure that any price recommendations are genuinely only recommendations (see above section 3.3.7). Upfront access payments are fixed fees paid by suppliers in return for access to a buyer’s distribution network and, for example, to certain shelf space or promotions. The Commission’s main concerns with these practices are foreclosure of other buyers or, exceptionally, foreclosure of other suppliers. Other issues of distributor collusion and price rises may occur but normally only if the distribution market is highly concentrated (paragraphs 203–6).

3.3.12  Other Acceptable Restrictions Other clauses which do not usually infringe Article 101(1) include obligations to advertise96 and to provide after-sales and guarantee services.97 Similarly, restrictions that are necessary, for example, for health and safety reasons, such as a prohibition on selling medicines to children, do not infringe Article 101(1).98

3.4 

network effect

In order to decide whether trade between Member States is affected, it may be necessary to take into account not only the agreement in question but also any similar agreements making up part of the same network99 and, if that single network does not affect trade sufficiently to infringe Article 101(1), other similar networks in the market. The fact that a distribution system is one of several in the same market is one of the factors that must be taken into account in deciding whether Article 101(1) is infringed. However, a supplier’s agreements must in themselves be of sufficient economic importance (in terms of the market positions of the parties and the duration of the contract) to contribute to making it difficult for competing suppliers to enter the market.100 In other words, if a distribution system is of minor     95  Paras 210–12. Supplier collusion will normally harm a retailer, so the retailer is unlikely to facilitate it.     96   BMW (above n 93) para 30.     97   IBM [1984] OJ L118/24, [1984] 2 CMLR 341.     98   Kathon Biocide [1984] OJ C59, [1984] 1 CMLR 476. See also Guidelines, para 60.     99   Brasserie de Haecht (above n 79); and Delimitis (above n 82). 100   Delimitis (above n 82); and Ice Cream cases (above n 86).

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  does the block exemption regulation apply?  97

importance and has no significant effect on the competitive situation then the mere fact that it is one of a group of similar networks does not mean that it infringes Article 101(1). The European General Court held in the Ice Cream cases that, following Delimitis, it is necessary . . . to consider whether, taken together, all the similar agreements entered into in the relevant market and the other features of the economic and legal context of the agreements at issue show that those agreements cumulatively have the effect of denying access to that market for new domestic and foreign competitors. If, on examination, that is found not to be the case, the individual agreements making up the bundle of agreements as a whole cannot undermine competition within the meaning of Article [101(1)] of the Treaty. If, on the other hand, such examination reveals that it is difficult to gain access to the market, it is necessary to assess the extent to which the contested agreements contribute to the cumulative effect produced, on the basis that only agreements which make a significant contribution to any partitioning of the market are prohibited.101

Network effect is of particular concern to brewers who all tend to use similar types of exclusive sourcing and non-compete networks to distribute their beers (see above section 3.3.8).

3.5 

does the block exemption regulation apply?

3.5.1 Introduction If an agreement falls within the scope of Article 101(1), then it requires exemption as provided for under Article 101(3) to be legal and enforceable. The two types of exemption available are (i) through a ‘block exemption’ (see above chapter two section 2.4.2) or (ii) by satisfying the four substantive criteria of Article 101(3). Block exemption will be available if the requirements of the vertical restraints block exemption Regulation 330/2010102 are met (or in the case of motor vehicles and related parts and service, if the requirements of the sector-specific rules discussed in chapter four are met). Many distribution agreements that infringe Article 101(1) are automatically valid and enforceable, and incur no risk of fines, through the operation of this block exemption. The basic principle of the vertical restraints block exemption is that it exempts vertical distribution agreements from the Article 101(3) prohibition if certain market share thresholds are satisfied and if the agreement contains no ‘hardcore’ (prohibited) clauses. Any relevant restriction not mentioned expressly is exempted. At the same time it is important to remember 101   Schöller Lebensmittel (above n 86) para 76. See also Case C-552/03 Unilever Bestfoods (Ireland) v Commission [2006] ECR I-9091, which concerned freezer exclusivity: 83 per cent of outlets in the market had supplier-owned freezers. 102   Above n 2.

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that a block exemption is interpreted strictly, meaning that it provides exemption only to agreements falling precisely within its terms.103 While clearly it is convenient if an agreement can benefit from the ‘safe harbour’ of the block exemption, it is extremely important to bear in mind that it does not lay down a compulsory regime. Equally important is the fact that an agreement falling outside the scope of the block exemption does not in itself raise any presumption as to whether or not it infringes Article 101(1), nor as to whether or not it may be exempted under Article 101(3).104 Block exemption Regulation 330/2010 entered into force on 1 June 2010, replacing Regulation 2790/1999.105 Like its predecessor, Regulation 330/2010 creates a broadly drawn, non-sectoral, economic effects-based exemption regime. Its relatively liberal approach of exempting most restrictions is balanced by a market share cap of 30 per cent, applicable to both supplier and buyer, above which it is not available. It therefore provides a zone of legal certainty, or ‘safe harbour’, for most firms, provided no prohibited clauses are included, but it leaves relative uncertainty for the most successful firms. Unless otherwise stated, all references to Articles in this chapter (except for Articles 101 and 102 TFEU) refer to this Regulation. Similarly, unless the context requires otherwise, all references to paragraphs refer to the vertical restraints Guidelines.

3.5.2 Scope The block exemption Regulation on vertical agreements is of general scope and is intended to cover supply, purchasing and distribution agreements. A very important characteristic of the Regulation is that it exempts all vertical agreements as defined (Article 2(1), unless they are covered by a different block exemption (Article 2(5)). Unlike older block exemptions, the Regulation does not limit exemption to an exhaustive list of clauses. This means that it covers practices such as category management and upfront access payments, although they are not mentioned there.106 This also means that the Regulation is unexpectedly generous

103   This can appear to operate harshly: for example, in an exclusive distribution system, if a second distributor is appointed in a certain region in Germany, then the prohibition on active selling into that region by all other exclusive distributors throughout the EU turns from a perfectly legal contract term into an illegal and unenforceable hardcore restriction. But this follows from the nature of block exemptions, which are intended to create clearly delineated safe harbours. 104  Guidelines, para 23. The reference here is to agreements in which the market share thresholds are not satisfied, but the same is true when the block exemption is inapplicable for other reasons, except for the presence of hardcore restrictions (see below section 3.5.7). 105   A transitional provision in Art 9, Reg 330/2010 allows agreements that benefited from exemption under Reg 2790/1999 at the time of its expiry on 31 May 2010 to continue to benefit from exemption for one more year, even if they do not satisfy the requirements of Reg 330/2010. This was intended to give businesses time to adapt its arrangements, given that Reg 330/2010 was only adopted in April 2010. For description and analysis of the earlier rules, see the fourth edition of this book (2005). 106  Paras 203 and 209.

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  does the block exemption regulation apply?  99

in some respects: for example, it exempts selective distribution irrespective of both the type of product concerned and the selection criteria applied. It also (with one exception, see Article 4(e)) exempts all restrictions imposed on the supplier. This means that any vertical restraint not expressly prohibited is exempted, and it leaves firms relatively free to draft their distributorship agreements as they think best from a commercial point of view. ‘Vertical agreement’ is defined as: an agreement or concerted practice entered into between two or more undertakings each of which operates, for the purposes of the agreement or the concerted practice, at a different level of the production or distribution chain, and relating to the conditions under which the parties may purchase, sell or resell certain goods or services.107

This definition covers agreements for purchase, sale and resale of goods or services. It extends to both intermediate and final goods and services, as well as to all levels of trade. Supply of goods for renting or leasing is covered, but not the contracts of rent or lease themselves.108 Nor does the Regulation exempt subcontracting, where one party provides technology or equipment to another, so that the latter can use them to produce certain goods for the former; there is a separate Commission Notice dealing with such arrangements.109 The Regulation therefore covers wholesale, retail, OEM110and industrial supply and bottling agreements. On the other hand, the Regulation does not cover various other types of vertical (that is, concluded between firms at different levels in the supply chain) agreements, such as agreements covered by the technology transfer block exemption111 and artistic copyright licence agreements.112 Distribution agreements concerning motor vehicles, as well as their spare parts and after-sales services, are to some extent covered by sector-specific rules (see chapter four). Some difficult issues of application arise in the case of vertical agreements entered into by competitors and exempted by the block exemption (see below section 3.5.5) because certain provisions, which can be expected to be treated as part of normal relations between a supplier and distributor and so to be covered by the exemption, may be seen in a different light when they appear in an agreement between competitors. For example, a contractual obligation on the distributor to provide the supplier with certain sales and pricing information would be covered, provided it meets a legitimate commercial need and is not being used, for example, to apply resale price maintenance or to discourage exports. But if the parties are 107

  Art 1(1)(a).  Paras 25(c)(d) and 26. 109  Para 22. 110  OEM stands for ‘original equipment manufacturers’, who supply parts for incorporation into a new product, in contrast to manufacturers who supply replacement parts. 111   Commission Regulation (EC) 772/2004 on the application of Art [101(3)] to categories of technology transfer agreements [2004] OJ L123/11. 112   A requirement that a distributor not infringe copyright in goods that he is distributing, such as books or software, will not usually infringe Art 101. To the extent that it does, it can be exempted by the block exemption, Guidelines, paras 40 and 42. 108

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competitors then the passing of such information may not be treated as part of the vertical agreement and may be analysed more strictly.113 The benefit of the block exemption is not limited to agreements referring to EU territory and so can provide legal security to companies whose agreements concern distribution in third countries, where EU competition rules may apply if there is an effect on trade between EU Member States. Finally, but crucially, the application of the Regulation is limited to situations in which the relevant market shares (see below) do not exceed 30 per cent.

3.5.3  Market Share Thresholds114 Where either the supplier or buyer has a relevant market share over 30 per cent this is presumed to reflect a degree of market power,115 which makes it undesirable that the agreement benefit from automatic exemption, and so the block exemption does not apply (Article 3). Exemption is available on condition that • the market share held by the supplier does not exceed 30 per cent of the relevant market on which it sells the contract goods or services; and • the market share held by the buyer does not exceed 30 per cent of the relevant market on which it purchases the contract goods or services.116

Both the relevant product and geographic markets, and then the market shares, need to be established. If the agreement covers a number of different products, the different markets will need to be analysed separately, and it may be that the agreement falls within the scope of the block exemption in the case of some markets but not others (paragraphs 72–73). Markets will frequently be hard to define, even with the aid of the Commission’s Guidelines on vertical restraints (paragraphs 87–92), and the Commission’s Notice on market definition (see above chapter two section 2.2.6). The relevant product market comprises ‘any goods or services which are regarded by the buyers as interchangeable, by reason of their characteristics, prices and intended use’ (paragraph 88). Interchangeability will be especially difficult to assess in new technology markets: market definitions and shares shift rapidly with 113   Much will depend on the nature of the information and on the reason for it. See draft ‘Guidelines on the applicability of Art 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements’, available on the DG Comp website and expected to be adopted in time to enter into force on 1 January 2011, replacing similar existing Guidelines, which do not cover information exchange. 114   The dual market share thresholds represent the main and by far the most important change in Reg 330/2010 as compared with its predecessor Reg 2790/1999, under which only one threshold applied in any given situation. 115   The use of market shares as a proxy for market power was controversial when first introduced but has come to be widely accepted and has for some years now been a feature of all block exemption Regulations. 116   Art 3(1).

[3.5]

  does the block exemption regulation apply?  101

each technological development, and the phenomenon of ‘convergence’ means that distinct types of product quickly become combined with each other to form a new single product. In the case of intermediate goods or services that are not recognisable in the final product, the market is normally defined on the basis of the direct buyers’ views, whereas in the case of pure resale the preferences of the final consumers are more relevant. When suppliers generally sell ranges of products, and purchasers regard the whole ranges, rather than individual products, as possible substitutes, then the product market may be the range taken together (paragraph 89). Markets are not generally defined by the form of retail distribution used, as different distribution formats (eg, supermarkets, smaller shops, mail order, internet) usually compete (paragraph 89). However, if different distribution channels clearly serve different purposes then they may represent separate markets.117 In food retail the question frequently comes up as to whether private label and branded products are part of the same market, and this will be a question of fact in each case. The same is true of the question whether spare parts are a separate market from the original equipment. The Guidelines state that they can be, depending on factors such as the effects of the restrictions involved, the lifetime of the equipment and the level of repair and replacement costs (paragraph 91). The relevant geographic market comprises: the area in which the undertakings concerned are involved in the supply and demand of relevant goods or services, in which the conditions of competition are sufficiently homogeneous, and which can be distinguished from neighbouring geographic areas because, in particular, conditions of competition are appreciably different in those areas.118

Wholesale markets are frequently national or wider, whereas retail markets tend to be smaller (paragraph 89). The development of internet distribution in a product market may broaden geographic market definition, particularly in the case of goods whose transport is easy and relatively cheap. Even when the market definition is clear enough, companies often do not keep statistics and information in the form needed for ascertaining the necessary market share figures. Article 7 provides that the supplier’s market share is to be based on market sales value data, and the buyer’s share on market purchase value data; if this is not available, alternatives such as volume data may be used. This provision also grants a measure of flexibility in the application of the thresholds, allowing exemption to continue for up to two years if a market share exceeds 30 per cent, without exceeding 35 per cent, or up to one year if it goes above 35 per cent. Note that Article 1(2) requires the market share of the whole of the supplier’s corporate group to be taken into account. The Guidelines specifically state that for the purposes of the block exemption (but not in competition analysis generally), any volume of a product produced for 117   This possibility is acknowledged in merger cases such as M.2951, 27 September 2002 (health and beauty products) and M.3108, 23 May 2003 (office supplies). 118  Para 88.

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[3.5]

a supplier’s own use should not be taken into account in calculating market share on a market for intermediate goods or services. On the other hand, when a supplier of finished goods is also a distributor, the supplier’s market share includes any goods or services supplied to his integrated distributors for resale (Article 7(c) and paragraphs 94–95). The 30 per cent threshold not only applies at the outset of the agreement but is relevant throughout its term. It will therefore be important to make regular checks to ensure that an agreement that originally fell within the scope of the block exemption still satisfies the market share requirement, though Article 7 of the Regulation does give some flexibility in this respect, as described above. At the same time companies have to be careful to ensure that, to the extent that this involves exchange of information between competing distributors, it stays strictly within the bounds of what is necessary for the purposes of checking the applicability of the block exemption or is a necessary part of the distribution arrangement. Beyond this, the rules on horizontal information exchange become relevant.119

3.5.4  Intellectual Property Rights Restrictions concerning intellectual property rights (IPRs) are within the scope of the Regulation only if they are ‘directly related to the use, sale or resale of goods or services by the buyer or its customers’ and are not the ‘primary object’ of the agreement (Article 2(3)).120 Some situations – such as the exclusive licensing of a trademark to be used in the course of the sale of goods by an exclusive distributor, or of marketing knowhow when goods are supplied to a franchisee – are clearly covered, but in others the assessment will be more difficult. For example, a complex manufacturing licence would not be covered, even if the agreement included supply of a necessary component, because of the lack of a direct link to the component, but it might be if the degree of processing of the component were more limited.121 Note that the IPR licence only falls within Article 2(3) of the block exemption if it is granted by the supplier to the buyer: so the type of subcontracting agreement under which the buyer licenses a manufacturer to produce items using the buyer’s IP right probably would not be covered by the Regulation.122 Nor may the IPR be used in such a way as to circumvent the blacklisted obligations in the block exemption (see below), for example, by dividing up territories by prohibiting even passive sales of the goods sold under the licensed trademark outside a given territory. 119

  See above n 113.   IPRs are defined in Art 1(1)(f). Art 2(3) is discussed in more detail in the context of franchising below in ch 5 section 5.4.1. The technology transfer block exemption (above n 111) may apply to a licensing agreement that is excluded from the benefit of exemption by Art 2(3). 121   The Commission considers that the dilution and bottling of a drink concentrate would be covered: para 36. 122  Para 22. 120

[3.5]

  does the block exemption regulation apply?  103

Software may be supplied to distributors either by delivery of multiple diskettes for resale or through the supply of a single diskette together with the grant of a licence to copy the software onto blank diskettes for resale. The former is clearly supply of goods for resale (paragraph 41). In the latter case it is hard to say whether the diskette or the licence is ‘ancillary’ since neither is any use without the other; the Commission considers that such a contract falls outside the block exemption.123 Paragraph 33 also mentions that broadcasting contracts are not covered.124 When a copyright holder obliges resellers to resell books or software on condition that any subsequent buyer (whether reseller or end-user) does not infringe the copyright, such an obligation, if it infringes Article 101(1), is covered by the block exemption. The same is true of any obligation on the buyer himself not to infringe the holder’s copyright (paragraphs 40 and 42). 3.5.5  Agreements between Competitors Most vertical agreements between competitors (defined in Article 1(1)(c)), whether actual or potential, cannot benefit from the block exemption.125 The exclusion of agreements between potential competitors from the scope of the Regulation may cause considerable difficulties, particularly when barriers to market entry are low. Also, assessment by the parties of whether this is the case may require knowledge of the business plans and current research projects of competitors. Not only may parties be reluctant to disclose information of this sort, but if they did the Commission might well consider such information exchange itself to be anticompetitive. The exclusion from the scope of the Regulation of reciprocal agreements between competitors is absolute. But nonreciprocal agreements between competitors do fall within the Regulation if: • the supplier is a manufacturer and the parties compete only at the level of distribution of goods;126 or • the parties compete in the provision of services but the buyer is a retailer and is not competing at the level of trade at which it purchases services from the supplier.127

The fact that such agreements (often referred to as ‘dual distribution’ agreements) fall within the scope of the block exemption is of course very helpful for the parties concerned. However, it does raise difficult questions in connection with 123   Guidelines, para 33. The technology transfer block exemption (above n 111) now covers software copyright licensing agreements, so this issue no longer arises in practice. 124   This interpretation was applied, and individual exemption granted, in Telenor/Canal+/Canal Digital, Commission Press Release IP/04/2, 5 January 2004, available on the DG Comp website. 125   Art 2(4); and Guidelines, para 27. Agreements between competitors may need to be analysed under both the vertical restraints rules and the rules on horizontal cooperation (see below section 3.7). 126   Art 2(4)(a). It is not clear whether the fact that the distributor is a potential competitor at manufacturing level is relevant, though logically it should be: otherwise a manufacturer who is also a distributor will more easily be able to make a distribution agreement with a potential competitor than will a manufacturer who does not distribute and who therefore cannot benefit from Art 2(4). 127   Art 2(4)(b).

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clauses in the agreement that are not clearly covered by that exemption. While the general rule is that all restrictions ‘relating to the conditions under which the parties may purchase, sell or resell certain goods or services’128 that are not expressly prohibited by the block exemption are permitted, it may not be safe to assume that this applies as generously to agreements between competitors as it does to those between non-competitors. For example, while it is a perfectly normal part of the relationship between a supplier and its distributors for them to discuss many issues such as pricing policies, sales volumes and promotional strategies, information exchange between competitors is treated much more strictly.129 It also raises issues in the case of ‘direct delivery’, whereby a distributor concludes a sale to a customer but subcontracts delivery of the goods to the supplier, so that physical delivery of the goods is made by the supplier directly to the customer. This should not normally affect application of the block exemption, but if the supplier is also competing with the distributor for customers, there is a risk that the commercial information inevitably exchanged, such as the identity of the customer and the product and volume supplied, and perhaps pricing, be interpreted as competitor collusion, and an infringement of Article 101(1). The Commission specifically states that ‘[a] distributor who provides specifications to a manufacturer to produce particular goods under the distributor’s brand name is not to be considered a manufacturer of such own-brand goods’. This means, for example, that the mere fact that a supermarket chain arranges for an independent producer to produce private label goods for it does not take its agreements with other suppliers outside the scope of the block exemption (paragraph 27). 3.5.6  Associations of Goods Retailers Vertical agreements between members of a goods retailers’ association and the association, or between the association and its suppliers, are exempted, provided no member, together with its ‘connected undertakings’, has an annual turnover above €50 million (Article 2(2)). The Commission has said that it will be flexible in the application of the €50 million rule, so that exemption is still available if the members exceeding this threshold together represent less than 15 per cent of the combined turnover of all the members (paragraph 29). The calculation of annual turnover for the purposes of this rule is covered in Articles 1(2) and 8 of the block exemption Regulation, which also provide some flexibility when the threshold is exceeded by no more than 10 per cent for up to two years. This appears to mean that, for some small companies, joint purchasing agreements are exempted, despite the fact that they could be seen as horizontal rather than vertical in their effects. However, the usefulness of this Article is in practice limited. If, as will often be the case, there are horizontal130 as well as vertical restric128

  Arts 2(1) and 1(1)(a).   See above n 113. 130   For example, a decision of the association to require members to purchase from the association, or to allocate exclusive territories to members. 129

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  does the block exemption regulation apply?  105

tions, the horizontal restrictions will first need to be analysed under Article 101 before the vertical analysis is carried out (paragraph 30). Also, when the members have significant market power, for example through the use of an exclusive label or their combined negotiating power, the Commission has the option of withdrawing the benefit of the block exemption (see section 3.5.11).

3.5.7  Blacklist: Prohibited or ‘Hardcore’ Clauses Even companies satisfying the 30 per cent market share thresholds cannot benefit from the Regulation if their agreements have any of the following ‘blacklisted’ or ‘hardcore’ objects. Such provisions are non-severable for these purposes (paragraphs 47 and 70), so their inclusion results in the whole agreement falling outside the Regulation. Article 4 begins: ‘The exemption . . . shall not apply to vertical agreements which, directly or indirectly, in isolation or in combination with other factors under the control of the parties, have as their object . . .’ (emphasis added). Therefore if any such restrictions are present, either in the terms of the contract or in the way in which it is applied, the Regulation does not apply, and the agreement does not benefit from the block exemption. 3.5.7.1  Fixed or Minimum Resale Prices (Article 4(a)) Fixed or minimum resale prices, whether enforced directly or applied through indirect means, take an agreement outside the scope of the block exemption. Indirect resale price maintenance may be achieved, for example, through fixing the margin or the maximum level of discount that a distributor may grant, or by making certain payments from the supplier dependent on observing a given price. On the other hand, recommended prices, and probably advertising citing the recommended prices, are exempted by the block exemption, as are maximum prices, provided there is no pressure or incentive on the buyer to abide by them (paragraph 226). Some practices, for example, the pre-printing of recommended prices on the packaging of goods, may function as fixed resale price maintenance (paragraph 47). 3.5.7.2  Restrictions on the Buyer as to Where or to Whom He May Sell (Article 4(b)) As a general rule the Commission regards restrictions on where or to whom a buyer may sell131 (but not restrictions as to where a shop or warehouse should be located) as hardcore restrictions, and this includes a complete ban on resale, when the purchaser is only allowed to use the goods for his own internal purposes. 131   The Guidelines provide many examples of direct and indirect measures covered by this prohibition (para 50). But a restriction on selling to certain end-users is not blacklisted to the extent that there is an objective justification (for example, for health and safety reasons) for such a ban (para 60).

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However, the Commission accepts that resale restrictions can sometimes be beneficial. The following types of clauses are therefore ‘carved out’ from the prohibition and so are exempted by the block exemption. (i) A prohibition on active sales into an exclusive territory allocated to another buyer or exclusively reserved to the supplier. Provided the other criteria of the Regulation are satisfied, exemption is available in the case of a prohibition on the buyer ‘actively’ reselling into exclusively allocated territories or into territories reserved132 to the supplier himself, provided the buyer is permitted to make ‘passive’ sales anywhere outside the territory. The concepts of ‘active’ and ‘passive’ sales are explained in the Guidelines (paragraphs 51–54), and some examples are given. The distinction is essentially between sales made as a result of active approaches to customers on the one hand and sales made in response to unsolicited orders made at the initiative of the purchaser on the other. A number of conditions need to be satisfied for this exception to apply. First, there can be only one exclusive distributor for each territory. Nevertheless, the supplier and buyer may have joint exclusivity: the supplier may bind himself not to supply end-users in the territory, but he is not required to do so as a condition of block exemption (paragraph 51). It is not clear whether conditional exclusivity (for example when the supplier retains the right to appoint a second distributor for the territory if the first distributor does not achieve a certain turnover within a given period) is covered. In principle it should be for as long as the actual exclusivity lasts. Second, the supplier must impose prohibitions on active sales into that territory on all its other EU distributors, as the concept of ‘exclusivity’ requires that the buyer be ‘protected against active selling into its territory . . . by all the other buyers of the supplier within the Union’ (paragraph 51). In practice this means that if this exception is to apply, the whole of the EU territory must be covered by the following (possibly in combination): (i) exclusive distribution territories protected from active sales; (ii) territories reserved to the supplier; or (iii) territories in which the buyer, for example, a distributor working in a selective distribution system, does not have protected exclusivity but is himself prohibited from making active sales into exclusively allocated or reserved territories. Partial exclusivity, whereby exclusivity in a given territory is shared between two or more distributors, is exempted by the Regulation because it does not in itself involve any restrictions on where the distributor may sell, but no territorial protection can be given beyond the assurance that the supplier will not supply, say, a third distributor in that territory. If more protection than this is to be given, individual 132   A territory may be reserved by the supplier for himself without the supplier yet being active in that territory. The reason for this rule is to combat free-riding: a supplier may for commercial planning reasons not want to roll out the distribution system to all EU Member States at the same time. ‘Reserved’ as used in the block exemption simply means that the supplier either distributes himself or does not yet distribute the contract goods at all in that territory. The concept is not made subject to any limitation in time or to any requirement to demonstrate intent to start selling in the territory in the future (para 55).

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  does the block exemption regulation apply?  107

exemption will be necessary. Suppliers may therefore prefer to allocate several small, exclusive territories rather than larger territories each with several distributors. This means that if exclusively allocated or reserved territories are listed in the distribution contract, the contracts will have to be updated when territories become or cease to be exclusively allocated or reserved. Alternatively, the contract may simply refer to such territories generically, but a way will have to be found of keeping resellers informed about such changes. The requirement of exclusivity relates only to the territories to which the sales restriction applies, not to the buyer on whom the restriction is imposed, so an active sales ban can be imposed on a non-exclusive distributor, so as simply to create an area of primary responsibility where the distributor will focus his marketing efforts. But this would only work provided that all the other territories (to which the ban applies) are exclusively allocated. If the whole network is made up of nonexclusive dealers then active sales bans will need to satisfy the Article 101(3) conditions (see below section 3.6.5). Active sales bans cannot be combined with selective distribution at the same level of trade, since in this case active selling into other territories must be permitted (see below chapter four section 4.2.2 and Guidelines, paragraphs 57 and 152). However, ‘unprotected’ exclusivity, meaning that the supplier agrees not to appoint any other distributor for the territory, is not a hardcore restriction and so can be combined with selective distribution. An active sales ban in a contract between a supplier and a buyer may not be imposed further down the distribution chain: a distributor subject to an active sales ban must remain free to decide whether or not he imposes such a restriction when reselling the goods. Only if the purchaser further down the chain is also party to the agreement may such a restriction be imposed. Article 4(b) refers to ‘a buyer party to the agreement’ rather than to ‘the buyer’, in order to make it clear that the block exemption can apply to an agreement between parties at more than two successive levels in the supply chain. The distinction between ‘active’ and ‘passive’ sales is particularly difficult to make in the context of internet sales, and the Guidelines go into some detail on this issue (paragraphs 52–56). Internet sales are normally regarded by the Commission as passive sales, so all distributors must in principle be free to make such sales, and a supplier may not reserve them to himself or to a particular distributor. This is the case despite the fact that a distributor’s website will normally be accessible to customers outside the distributor’s allotted territory. They remain passive sales even when a customer has opted to be kept informed by the distributor, for example about special offers. The language(s) of an internet site is considered irrelevant by the Commission for these purposes: the fact that a French distributor has an internet site offering French- and German-language options does not mean that the distributor is selling actively into German-speaking territories. The Guidelines (paragraph 52) provide the following examples of obligations on a distributor that will normally take an agreement outside the scope of the block exemption:

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• to prevent customers outside his territory viewing his website, or to automatically re-route them to the supplier’s or another distributor’s site (though he may be required to provide links to their sites); • to terminate credit card transactions where the card address is outside the allotted territory; • to limit the proportion of sales that he makes over the internet (though an absolute minimum value or volume of sales from a physical outlet may be stipulated, and that amount may be the same for all distributors or determined individually for each buyer on the basis of objective criteria such as the distributor’s size or location); or • to pay a higher price for products that are to be sold online than for those for sale offline (though the supplier may pay the distributor a fixed fee to support online or offline sales efforts).

However, the internet can also be used actively: a sale initiated through an unsolicited email addressed to someone outside the territory will be regarded as an active sale. The same is true of territory-based banners on third-party websites, which are a form of active selling into the territory where the banners are shown; and also true of paying a search engine or online advertisement provider to have advertisements displayed specifically to users in a particular territory. Such activities may therefore be prohibited without taking the agreement outside the scope of the block exemption. It is also permissible within the terms of the block exemption for a supplier to impose quality standards for internet selling (paragraph 54). The supplier may also require that a distributor have one or more physical sales outlets, which means that so-called ‘pure players’, who sell exclusively online, can be excluded. Such obligations, though they may be used in any type of distribution system, are of particular importance for selective distribution and so will be discussed further in chapter four. (ii) A prohibition on active sales to particular categories of customer. Similar considerations apply to the granting of exclusive customer groups as to exclusive territories (paragraphs 51–54). Such a group may be defined in a range of ways. It may be ‘a particular type of customers defined by their occupation but also a list of specific customers selected on the basis of one or more objective criteria’ (paragraph 168). As with exclusive territories, it is not permissible for a supplier to reserve all internet sales to himself or to a particular distributor. The customer list may be adjusted during the course of the agreement, but this should not be done in such a way that it in fact achieves an anticompetitive object such as resale pricefixing or unwarranted prevention of passive sales. For example, a supplier of medicines may allow a distributor to supply chemists but not hospitals, which the supplier might either allocate to another buyer or reserve to himself. Such a customer group restriction can be combined with an exclusively allocated territory and territorial protection (paragraph 51). (iii) A prohibition on wholesalers supplying end-users. A prohibition on a wholesaler supplying end-users is permitted, as is a clause allowing a wholesaler to supply certain (for example, bigger) end-users but not others (paragraph 55).

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  does the block exemption regulation apply?  109

(iv) A prohibition on members of a selective distribution system selling to unauthorised distributors. This is not surprising, as it is inherent in selective distribution that the distributors are ‘selected’. However, the restriction may only relate to sales into territories which the supplier engages in selective distribution or in which the supplier does not yet sell the contract products (paragraph 55 and see chapter four). Note that in the case of selective distribution, active and passive sales by retailers to any end-users must be permitted (Article 4(c)). In selective distribution, as in other types of distribution, it is permissible under the Regulation for a supplier to limit the number of appointed resellers in any territory. (v) A prohibition on a buyer reselling to competing manufacturers components that have been sold to the buyer for incorporation into another product. This exception is very limited, as it does not permit the supplier to prohibit resale to another reseller, who may then resell to a competing manufacturer. ‘Component’ refers to any intermediate goods, and ‘incorporation’ to the use of any input used to produce goods (paragraph 55). In practice this means that OEM suppliers cannot keep their OEM and other distribution channels separate, and as a result the price of the OEM goods is less likely than it might otherwise be to be discounted.133 The inclusion of this exception to the hardcore restriction implies that other types of ‘captive use’ obligation, whereby a distributor is not permitted to sell on the products that he has purchased, are regarded by the Commission as hardcore restrictions. 3.5.7.3  A Prohibition on Selective Distribution Retailers Making Active or Passive Sales to Any End-Users (Article 4(c)) When selective distribution is used there can be no exclusive territorial or customer allocation.134 Distributors must be free to make active and passive sales to all end-users, whether professional users or final consumers, in any territory. Restrictions related to sales through internet are permitted only to the extent that they are justified by legitimate considerations equivalent to those allowed in the case of offline sales, such as ensuring that unauthorised distributors do not obtain supplies. The only territorial protection that can be given is the imposition of a location clause, requiring the supplier’s approval before any additional or alternative sales outlet is opened by the distributor. Such a clause is apparently permitted in respect of both wholesalers and retailers.

133  Note that this situation is different from the blacklisted clause in Art 4(e), described below, because it concerns resale by the buyer and not the supplier. 134  Paras 56–57. See further below ch 4.

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3.5.7.4  A Prohibition on Cross-Supplies between Members of a Selective Distribution Network, at Whatever Level of Trade They Operate (Article 4(d)) When using selective distribution, no exclusive sourcing (in the sense of an obligation to purchase all the contract goods from the supplier) may be imposed, and cross-supplies between members of the network, whatever their level in the distribution chain, must be permitted.135 3.5.7.5  Restrictions on the Sale of Parts to End-Users and Independent Repairers by Suppliers to OEM Manufacturers (Article 4(e)) This is the only restriction on the supplier that is blacklisted, and it is helpful to independent repairers and consumers who might otherwise find it hard to obtain spare parts. Restrictions may be direct or indirect, as when the supplier of the spare parts is restricted in supplying technical information and special equipment that are necessary for the use of spare parts by independent third parties. The Commission interprets the Regulation as allowing a restriction on the supplier from selling to a OEM buyer’s own network of repairers and service providers, meaning that the buyer may reserve such sales to himself (paragraph 59). It is possible that the blacklisting of such restrictions encourages companies to reduce their reliance on subcontracting, for example, by integrating vertically so as to take over their subcontractors. When the specifications supplied by a buyer include the grant of an intellectual property right, the agreement will fall outside the block exemption anyway (see above section 3.5.4).

3.5.8  Non-compete Obligations (Article 5) Certain non-compete clauses, although not considered hardcore (as are the clauses listed in Article 4), are not covered by the block exemption. Their inclusion does not exclude the entire agreement from the benefit of the block exemption. Rather, if they are severable according to the applicable national law, they are excluded from the benefit of the Regulation, while the rest of the agreement may remain valid and enforceable under the Regulation (Guidelines, paragraphs 65 and 71). The severed clause will need to be assessed separately under Article 101(1) and (3) and may turn out to be enforceable or unenforceable. ‘Non-compete’ for the purposes of the Regulation is widely defined and may include practices such as rebate schemes and ties that indirectly have the practical effect of preventing a distributor from sourcing goods and services elsewhere. It covers both: 135

 Para 58. See further below ch 4.

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  does the block exemption regulation apply?  111

• any direct or indirect obligation on the buyer not to purchase, sell or resell competing goods; and • any direct or indirect obligation on the buyer to purchase more than 80 per cent (calculated on the basis of the value of its purchases in the preceding calendar year, or on the buyer’s best estimate)136 of its requirements of the contract goods and their substitutes from the supplier or a designated source.137

Article 5 does not prohibit an exclusive sourcing obligation relating to the contract goods themselves, even if it is of 100 per cent of the contract goods (unless in practice that amount exceeds the 80 per cent threshold referred to above). Exclusive sourcing in this sense is therefore exempted by the block exemption, regardless of its duration,138 except in the context of selective distribution (see below). 3.5.8.1  Non-compete Obligations during the Term of the Agreement A non-compete term applicable during the term of the agreement normally falls outside the Regulation only if it is of indefinite duration or exceeds five years in duration.139 When the duration is indefinite or tacitly renewable beyond five years it is not exempted (paragraph 66). But if a buyer operates from premises and land140 owned or leased by the supplier (where the lessor is unconnected with the buyer), a longer period is permitted, provided the duration of the non-compete clause does not exceed the period of occupancy. This may encourage suppliers such as breweries to lease premises rather than providing tenants with loans to enable them to purchase the premises, since in the latter case a supplier will not be able to rely on the block exemption so as to enforce a non-compete clause lasting more than five years. 3.5.8.2  Post-term Non-compete Obligations A post-term non-compete obligation covering manufacture, purchase, sale and resale is covered by the Regulation for a maximum period of one year after the contract has ended (Article 5(2)), provided that the obligation: • is limited to goods or services that compete with the contract goods or services (apparently the buyer may continue to deal in the contract goods themselves if he can obtain supplies); 136

 Para 66.   Art 1(1)(d). 138  Because it is not listed in Arts 4 or 5, and all vertical restraints not expressly prohibited are exempted. 139   If it is essential to maintain the common identity and reputation of a franchise network, exemption is not needed, as Art 101(1) is not infringed at all. In such a case the duration of the restriction is irrelevant, provided it does not exceed the duration of the franchise agreement itself (para 190) See also below ch 5 section 5.3.2. 140   The reference to premises and land was introduced into the legislation to avoid abuse of this provision through artificial agreements in which a petrol supplier built a petrol station on land owned by the station operator, using a loan from the operator, and then leased it back to the operator, who later obtained ownership: Case C-260/07 Pedro IV Servicios [2009] ECR I-2437, [2009] 5 CMLR 1291. See also Guidelines, para 67. 137

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• is limited to the land and premises from which the buyer has operated during the agreement; and • is indispensable to protect knowhow (as defined in Article 1(g)) transferred by the supplier to the buyer.

This exception is likely to be of relevance only in the case of franchising involving technically innovative products and services. The one-year maximum does not apply when the clause is necessary to protect knowhow that has not entered the public domain. 3.5.8.3  Non-compete Obligations and Selective Distribution In the case of selective distribution, members of a network may not be prevented from selling the brands of particular competitors. On the other hand an absolute non-compete ban of up to five years is permissible, as it is for other forms of distribution. This is because the Commission is concerned to avoid the risk of a number of suppliers engaging in a collective boycott of a specific competitor (paragraph 69). 3.5.8.4  Time Limits for Non-compete Obligations The time limits in Article 5 are interpreted strictly by the Commission (paragraph 66): a 10-year contract including a clause providing for non-compete will be treated as a 10-year non-compete clause, even if the agreement is terminable at any time by either party on three months’ notice. Similarly, a one-year non-compete clause tacitly renewable will be treated as of indefinite duration and as not satisfying the one-year or five-year requirements. Parties may therefore choose to conclude five-year agreements, with a new agreement then being concluded after these five years have elapsed. Alternatively, if the rest of the agreement is for a duration longer than five years, it should be clearly stated that the non-compete clause expires after five years.

3.5.9  Other Restrictions Tying, when it infringes Article 101(1), is exempted by the Regulation, as it clearly falls within the definition of ‘vertical restraints’ and is not blacklisted (paragraph 218). The same is true of provisions for upfront access payments (paragraph 203) and category management (paragraph 209).

3.5.10 Duration The duration of an agreement is irrelevant for the purposes of the block exemption, except when non-compete clauses are concerned. However, the block

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  does the block exemption regulation apply?  113

exemption itself expires on 31 May 2022, and it is impossible to say whether it will then be renewed in its existing form or in what respects any successor Regulation may differ.

3.5.11  Withdrawal and Dis-application In the case of agreements that fall within the scope of the block exemption, the exemption applies until the Commission or (in the case of withdrawal) a national competition authority take a formal measure removing the benefit of the Regulation. Such removal may occur even in the case of a company with a low market share, and it may happen in one of two ways. The first involves the adoption of an infringement finding against an individual party, whereas the second simply removes the benefit of the block exemption from a defined category of agreements but does not make any finding as to the legality or illegality of any specific agreement. In both cases the effects are for the future only and are not retrospective. 3.5.11.1  Withdrawal in Respect of an Individual Agreement The benefit of the block exemption can be withdrawn either by the Commission or by the relevant national authorities if they consider that the agreement, either on its own or together with similar agreements between other parties, infringes Article 101(1) and does not fulfil the criteria for exemption under Article 101(3).141 Member State authorities can withdraw the benefit of the exemption only in respect of that Member State or part of it, and provided that the area forms a ‘distinct geographic market’.142 Withdrawal takes effect only from the date of a formal Decision of the Commission and does not have retrospective effect. The onus is on the Commission to prove both an infringement of Article 101(1) and the non-fulfilment of the criteria for exemption under Article 101(3) (paragraph 77). The Commission envisages the principal importance of this clause as being in its use in dealing with cumulative network effects, in particular in markets dominated by certain types of selective distribution. In such cases it will take into account not only the individual supplier’s agreements but also the cumulative effects of ‘similar vertical restraints’ implemented by competitors, though in any given case the agreements in question will not infringe Article 101 unless they contribute significantly to the overall anticompetitive effect (paragraphs 75–76). 141   Council Regulation (EC) 1/2003 on the implementation of the rules on competition laid down in Articles [101] and [102] of the Treaty, [2003] OJ L1/1, Art 29 and Guidelines, paras 74–78. 142  Para 78. It would be theoretically possible therefore for a specific franchise agreement, for example, to be legal at EU level and in France but not in the UK. And this might be justified if anticompetitive effects arose out of particular characteristics of the UK market. In practice, in any case, it is likely that the Commission and the national authorities concerned would cooperate to find a coherent solution.

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In its Guidelines (paragraph 176) the Commission describes a scenario involving multiple exclusive dealerships in an oligopolistic market, in which the benefit of the block exemption might be withdrawn. But it remains to be seen whether the Commission will use this possibility more frequently in the future. So far it has been used extremely rarely,143 despite the fact that a number of block exemptions have for some years now provided for withdrawal. 3.5.11.2  Dis-application to a Particular Market The Commission (but not national authorities) also has the power (but is not obliged) to dis-apply the benefit of the exemption with respect to vertical agreements containing specific restraints in a particular market, where parallel networks of similar vertical restraints cover over 50 per cent of that market.144 No such Regulation has yet been adopted under this block exemption or indeed under any others. This power might be used, for example, to combat over-use of selective distribution in a particular sector, especially where the selection criteria being used are not justified by the nature of the goods or where there is discrimination against certain distribution channels, such as low-price outlets (paragraph 81). Such a Regulation would sometimes create a sort of de facto sector-specific block exemption Regulation. It would become applicable no earlier than six months after its adoption (paragraph 84). The exempted status of agreements affected by the dis-application during the period before it occurred would not be affected (paragraph 85).

3.6  does individual exemption   under article 101(3) tfeu apply?

3.6.1  Nature of Individual Exemption A distribution agreement that does not satisfy the block exemption does not necessarily infringe Article 101(1), but if it does, it may still benefit from exemption under Article 101(3). It is for the parties themselves to assess whether they satisfy the four substantive conditions laid down in Article 101(3), and the Commission has published Guidelines that in fact make detailed comment on both Articles 101(1) and (3) (see above chapter two section 2.4.1). The burden of proof of an infringement of Article 101(1) lies on the authority or party alleging the infringement, but the burden in respect of Article 101(3) is 143   The only example I am aware of under any block exemption is a Decision concerning ice cream distribution: Langnese-Iglo [1993] OJ L183/19, [1994] 4 CMLR 51. 144   Art 6 and Guidelines, paras 79–85. This provision seeks to deal with a problem that has arisen in the past, which was that the Commission could withdraw the benefit of the Regulation in respect of a specific agreement but could not prohibit the supplier in question from entering into similar agreements in the future. See Langnese-Iglo v Commission (above n 86).

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  does individual exemption under article 101(3) tfeu apply?  115

on the party claiming the benefit of exemption.145 Given the increasing importance of market analysis in applying Article 101, the burden is now a considerable one. This means that a party relying on such exemption needs to be prepared, in the event of a complaint or dispute, to adduce evidence to the effect that the four conditions of that provision are satisfied. Exemption applies only as long as those four conditions remain fulfilled (paragraph 123). The vertical restraints Guidelines include discussion of the application of these four criteria to distribution agreements (paragraphs 122–27). Below is discussed the likelihood that exemption applies to agreements containing certain terms commonly occurring in distribution agreements. Guidance in this area is available through consideration of terms exempted by the block exemption, but since the block exemption grants automatic exemption it errs on the side of caution. It is always possible that a term is too restrictive to be permitted by the block exemption, but that individual consideration of the specific situation will lead to the conclusion that Article 101(3) applies.

3.6.2  Positive Effects of Restrictions in Distribution Agreements Exemption under Article 101(3) applies only if its four criteria are satisfied. In particular, as the first condition, the agreement must be shown to contribute to ‘improving the production or distribution of goods or to promoting technical or economic progress’ or, in other words, improving economic efficiency. The Commission recognises that vertical restraints can frequently have positive effects, and it is in these situations that exemption under Article 101(3) may be available. The Guidelines (paragraphs 106–9) provide the following nine examples of the ways in which an agreement may bring about economic benefits: • by avoiding ‘free-riding’ by one distributor (or sometimes supplier) on the promotional efforts of another; • by providing the incentive to distributors to establish or enter new markets; • by building a reputation for a new product; • by providing an incentive for a supplier or buyer to make necessary sunk investments; • by providing protection, and therefore incentive, for a supplier to disclose relevant knowhow to the buyer; • by avoiding ‘double marginalisation’ where the distributor sets prices above the economically optimum level; • by creating economies of scale in distribution; • by making loans accessible on conditions not available on the open market; and • by creating brand image by imposing uniformity and quality standards. 145   Reg 1/2003 (above n 141) Art 2. The burden and standard of proof are discussed in, eg, Van den Bergh Foods (above n 83) and GlaxoSmithKline (above n 50).

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These positive effects are most likely to be found when the restrictions are imposed for a limited time and when they help in introducing complex products or in protecting sunk investments. It will be important to gather as much evidence as possible that this is the case. As already discussed, in assessing whether an agreement infringes Article 101(1), much will turn on market structure: this means looking at factors such as the market shares of the parties and their competitors; the extent to which the market is covered by tied outlets; the existence of buyer power and barriers to entry; and competitive advantages held by the parties or their competitors. Whether the market is new or mature, static or dynamic, is also relevant. Similar considerations relating to the nature of the market will also be relevant in substantiating arguments that Article 101(3) applies. In particular, if there is strong inter-brand competition from suppliers and distributors of competing products then there will be a realistic possibility of individual exemption: conversely, exemption is unlikely in the context of an oligopolistic market dominated by a few powerful companies. Evidence will be needed when it is argued that, for example, restrictions are necessary to prevent free-riding by competing distributors; to protect investments and knowhow; or to create incentives for market opening: it will not be sufficient simply to state without more that a contractual restriction is necessary. Individual exemption is most likely to apply when the relevant market share is between 30 and 40 per cent. Below 30 per cent the block exemption will usually apply, and above 40 per cent a company risks being considered dominant, in which case it will usually be difficult to make out grounds for exemption under Article 101(3). Despite the fact that the same economic efficiency arguments that apply in the case of non-dominant companies may well apply in the case of dominant companies, and such companies will think it unfair that they should be deprived of the chance to use efficient distribution methods, exemption is unlikely. Such companies face the hurdle that the fourth condition of Article 101(3) requires: that the agreement not make it possible for the parties substantially to eliminate com­ petition. While the Commission’s Guidelines do not rule out exemption involving a dominant company, they warn that when ‘there is no residual competition and no foreseeable threat of entry, the protection of rivalry and the competitive process outweighs possible efficiency gains’. As for a restrictive agreement that maintains or strengthens the market position of a company with a near-monopoly, it ‘can normally not be justified on the grounds that it also creates efficiency gains’ (paragraph 127). Some cases suggest that competition authorities may feel more comfortable narrowing the scope of Article 101(1) than applying Article 101(3) in the presence of high market shares.146 146   See the discussion of certain beer supply agreements above n 85. It is noteworthy that no individual exemptions of any kind of distribution agreement, of the type covered by the vertical restraints Guidelines, were granted by the Commission in the ten years leading up to the abolition of individual exemption Decisions in 2004.

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  does individual exemption under article 101(3) tfeu apply?  117

Similarly, the Guidelines say that a hardcore restriction (prohibited by Article 4 of the block exemption) is presumed not to satisfy the requirements of Article 101(3), though it is open to the parties to rebut this presumption by showing that the agreement has pro-competitive effects (paragraph 47). Over half of the Commission’s lengthy Guidelines on vertical restraints are devoted to explaining its approach to individual assessment of vertical restraints, and they provide detailed guidance in this area. The main points of this guidance are included in the summary of the rules given below.

3.6.3  Relevant Markets As already discussed, ascertaining the relevant market, both geographic and product, is often a crucial step in assessing the status of an agreement under EU competition rules, because it can determine whether or not the agreement benefits from the block exemption on vertical restraints. The block exemption works on an intentionally simplified basis, taking into consideration only the supplier’s share of the market onto which he sells the contract goods or services, and the buyer’s share of the market where he purchases the contract goods or services. When considering agreements on an individual basis other markets may be relevant too. For example, in the case of final products the market on which the buyer sells the products, especially where the buyer is a retailer, is likely to be relevant. In the case of intermediate goods or services, on the other hand, the buyer’s downstream markets are not likely to be relevant unless the buyer is the exclusive distributor for the whole of the European Union, when it becomes crucial (paragraph 194). Also, the growth of buyer power, in food retailing, for example, means that many retail distribution chains such as supermarkets exercise considerable power, and it may be possible to justify some types of restrictive clauses on the basis that the supplier’s market power is limited as a result of the buyer’s countervailing market power.

3.6.4  Resale Price Maintenance (RPM) 3.6.4.1  Fixed and Minimum RPM The general rule is that any attempt to fix retail prices or minimum resale prices is presumed to fall foul of Article 101(1) and not to qualify for exemption under Article 101(3).147 While it has always been theoretically possible to rebut the presumption against exemption for hardcore restrictions,148 in practice fixed and minimum RPM have tended to be regarded as always prohibited. Indeed, some Commission Decisions make statements that are close to a denial that resale price 147   Hennessy-Henkel [1980] OJ L383/11, [1981] 1 CMLR 601, which also involved exclusive distribution, exclusive sourcing and non-compete provisions. 148   Case T-17/93 Matra Hachette v Commission [1994] ECR II-595.

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[3.6]

maintenance may produce benefits.149 Until now the only case law supporting the possibility of exemption has related to products with special characteristics held to make RPM justifiable under Article 101(3): these are newspapers150 and, possibly, books (see above section 3.3.7.3). As of 2010 the Commission in its Guidelines (paragraph 225) does emphasise that in particular circumstances and when they are imposed at the initiative of the supplier, fixed or minimum resale prices may create economic efficiencies. The Commission gives three specific examples of circumstances in which exemption might be justified. These are when it is necessary in order to: • incentivise and enable distributors to increase their efforts to promote a new product (where this cannot be ensured by contractual terms); • organise, in a franchise or similar distribution system, a short term (say two to six weeks) low price campaign; or • incentivise and permit distributors to provide additional pre-sales services and prevent free-riding, in particular for complex or ‘experience’ products (that is, products that can be judged only through using them).

It remains to be seen to what extent the Commission and other authorities and courts will be receptive to such arguments, and companies would be right to be cautious about relying on this new apparent flexibility, given the restrictive language in which these examples are couched. In particular it should be borne in mind that Article 101(3) provides exemption only when it is not possible to achieve the efficiency sought through less restrictive means. Arguments for exempting RPM may well be met with the response that, for example, the provision of presales services could be contractually imposed or encouraged through the use of exclusive territories. In any case it will be very helpful in such a case to document from the outset the pro-competitive reasons and any related evidence for adopting RPM. 3.6.4.2  Maximum and Recommended RPM Recommended or maximum resale prices (which are exempted by the block exemption where the 30 per cent market share threshold is not exceeded) are regarded with suspicion by the Commission when the relevant market share is over 30 per cent because of the risk of them being followed by all or most distributors, and because it may reduce competition and facilitate collusion between them, in particular where the supplier has a strong market position. But in such cases exemption will be available if efficiencies can be shown to confer a net benefit. The Guidelines give as examples the use of maximum prices to avoid ‘double marginalisation’, so that distributors do not price more highly or make less effort 149   Eg, Volkswagen [2001] OJ L262/14, para 95, annulled on other grounds, Case C-74/04 (above n 59); and Topps (above n 36) para 142. 150   Case 243/83 Binon v AMP [1985] ECR 2015, [1985] 3 CMLR 800. Binon was subsequently granted a ‘comfort letter’.

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  does individual exemption under article 101(3) tfeu apply?  119

to increase sales than is desirable, and also to ensure that a brand is competitive with other brands (including own label products) distributed by the same distributor (paragraphs 226–29).

3.6.5  Exclusive Distribution and Territorial Protection Exclusive distribution together with territorial protection concerns the Commission mainly because of its tendency to partition markets and to reduce intra-brand competition. Absolute territorial protection will almost always infringe Article 101(1), even in the context of a highly competitive market, and it will not normally be individually exempted (paragraph 47). This rule applies not only to explicit bans on parallel imports and exports but also to indirect forms of territorial segregation. In Zanussi,151 the original distributorship arrangement provided that the manufacturer’s guarantee would be honoured only by the company’s importing subsidiary, which had directly imported the electrical goods from Zanussi into the Member State where the subsidiary operated. Thus, if parallel imports had subsequently been taken into another Member State, purchasers would not have been able to benefit from the guarantee by applying to the Zanussi subsidiary in that other Member State. Not only did such a clause infringe Article 101(1), but it did not qualify for exemption under Article 101(3). The Commission required that this rule be changed to require each local subsidiary to fulfil the terms of the manufacturer’s guarantee for any appliance used in the Member State where it operated: only then did it grant an exemption under Article 101(3).152 The Commission recognises a number of efficiencies that can be brought about by exclusive distribution and may justify exemption (paragraph 164), in particular in the context of new markets. These include solving a problem of ‘free-riding’ by distributors, in particular, in order to provide distributor incentives when entering new markets. Exclusive distribution is viewed as particularly appropriate when a distributor is making significant relationship-specific investments. In any case, real efficiencies will need to be proved, whether these take the form of providing incentives for distributor investment, economies of scale in transport or other benefits. Exclusive distribution is considered most likely to lead to efficiencies when investment is needed from distributors to build up the brand image, and the case for such restrictions is strongest for new products, complex products, experience products (the qualities of which are hard to judge before consumption) and credence products (which are hard to judge even after consumption). There can also be efficiencies from economies of scale in transport and distribution. In GlaxoSmithKline 153 the ECJ accepted that, at least in the special context of the 151

  1977 Commission Report on Competition Policy, para 20.   This approach was approved by the ECJ in ETA Fabriques d’Ebauches (above n 42). See also Grundig [1994] OJ L20/15. 153   Above n 50. 152

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pharmaceutical market, a dual-pricing system aimed at limiting parallel trade might be justified if it could be shown that it enhanced the supplier’s research and development (R&D) capacity.154 The Commission also recognises that charging a distributor different prices for goods depending on whether they are to be sold online or in a physical shop, which is normally a hardcore restriction, may be exempted in specific circumstances in which the supplier incurs higher costs in the case of online sales. For example, a supplier of kitchen equipment may find that purchasers of equipment from the distributor’s physical shop receive good advice and installation assistance, whereas online sales are less well supported. If this results in a higher demand for after-sales service and more calls on the supplier’s guarantee, this could justify charging a distributor more for goods that he intends to sell online (paragraph 64). Territorial protection in respect of active sales normally falls within the block exemption, but not where it is combined with selective distribution. In such circumstances, or when exclusive distribution is combined with exclusive sourcing (a requirement to purchase all contract goods from the supplier), exemption when the relevant market share is over 30 per cent is unlikely, unless there are very clear and substantial efficiencies. On the other hand, the combination with a non- compete clause is often pro-competitive, as it increases the incentive for the distributor to focus efforts on promoting the brand. Provided there is not significant foreclosure of other suppliers, the Commission considers that ‘the combination of exclusive distribution with non-compete may very well fulfil the conditions of Article 101(3) for the whole duration of the agreement, particularly at the wholesale level.’155 Exclusivity granted to a wholesaler is more likely to be exempted if there are no limitations on resale to retailers, always assuming the producer is not dominant. Generally speaking, exclusivity at wholesale level is regarded as less harmful than at retail level (paragraph 160). In its Guidelines the Commission gives an example of a scenario involving exclusive distribution at wholesale level in which exemption would probably be granted (paragraph 213). It also describes a scenario involving multiple exclusive dealerships in an oligopolistic market, in which the benefit of the block exemption might be withdrawn, as well as a scenario involving exclusive distribution combined with exclusive sourcing, in which exemption would probably not apply (paragraphs 165–67). Exemption is unlikely when a supplier has a strong market position and there is limited competition from other suppliers. In such cases significant efficiency benefits will be needed to justify exemption (paragraph 153). Also, markets where there are several exclusive distribution networks will arouse concerns as to the risk of collusion between competing producers or of a cumulative anticompetitive effect of the several networks (paragraph 154). 154   The judgment states that a sufficient causal link between the restriction and the benefit would be present if it could be shown that at least some of the extra profits would be used for R&D. 155  Paras 161–62; and see the example in para 167.

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  does individual exemption under article 101(3) tfeu apply?  121

3.6.6  Exclusive Supply Exclusivity or near-exclusivity granted to a single buyer within the European Union (termed ‘exclusive supply’ by the Commission) is an extreme form of exclusive distribution. It concerns the Commission mainly because of the risk of foreclosure of other buyers (paragraphs 194). Exemption is unlikely if the restriction will last over five years (paragraph 195). Exemption is most likely to be justified on the basis of ‘hold-up’ risks, meaning that one or other party would not take the risk of making the necessary investment or disclosing the necessary knowhow without a degree of contractual protection from failing to recoup the investment, or the knowhow being used for other purposes. The Commission states that a combination of exclusive supply and non-compete obligations may often be justified when both parties make sunk investments, and it gives an example of a situation involving an exclusive supply agreement and substantial investment by the buyer that would probably merit exemption (paragraphs 198 and 202).

3.6.7  Exclusive Customer Allocation When a supplier supplies only one distributor for resale to a particular class of customers many of the same concerns and potential efficiencies arise as in the case of exclusive distribution (paragraphs 168–73). Such a provision is most likely to be exempted when distributors are required to invest in specific equipment, skills or knowhow so as to be able to fulfil the requirements of their customer group, and when the restriction lasts only as long as is reasonable to allow depreciation of such investment (paragraph 172). In its Guidelines the Commission gives an example of an exclusive customer allocation agreement involving substantial investment by the buyer that would probably qualify for exemption (paragraph 173). Exclusive customer allocation is unlikely to be exempted when used at retail level (paragraph 172).

3.6.8  Non-compete and Exclusive Sourcing Obligations An obligation on a reseller not to manufacture, purchase, sell or resell competing goods is exempted by the block exemption Regulation for up to five years. If it falls outside the block exemption because it lasts longer than five years or because the 30 per cent market share threshold is exceeded, it may be eligible for individual exemption (paragraph 131). The Commission recognises that such clauses (and even more often, less restrictive ‘quantity-forcing’) can be useful, in particular for:

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• overcoming free-riding between suppliers; • providing incentives for relationship-specific investment by the supplier: exemption for the full duration of the agreement may be justified, and even for longer than five years if the investment is high; • providing incentives for the supplier to transfer substantial knowhow, which, once given, cannot be taken back, and which might be used to benefit its competitors: exemption for the full duration of the agreement is usually justified, as is often the case for franchising agreements; and • enabling the buyer to obtain a necessary loan from the supplier on better terms than he could obtain elsewhere.156

The Commission considers that single-branding agreements entered into between non-dominant companies and lasting between one and five years may be exempted, but it will not normally be possible to justify a duration of more than five years.157 When the parties are dominant exemption is still possible, though less likely. Non-compete restrictions are common in beer distribution. Brewers often lease or sell pubs to their tenants on condition that they limit the extent to which they stock competing beers. When the breweries are small, Article 101(1) probably will not be infringed at all (see above section 3.3.8), but when the brewery has a significant market share and for some reason cannot benefit from the block exemption, individual exemption under Article 101(3) may apply, as the benefits of such agreements are well recognised by the Commission.158 However, it will be important to avoid structuring such agreements in a way that contributes to foreclosure, for example, by imposing restrictive conditions for repayment of loans (paragraph 147), imposing penalties for early repayment or in any other way making it difficult for a tenant to break off an agreement. Exemption will in any case be unusual when the brewer’s market share exceeds 30 per cent, so such brewers may well have to untie or indeed purchase some of their pubs. Quantity-forcing, whereby a buyer either has to purchase minimum quantities or benefits from quantity rebates, and English clauses, whereby a buyer may purchase elsewhere only if the supplier refuses to match a cheaper price the buyer has been offered elsewhere, can have similar but usually reduced effects to those of non-compete clauses, and so receive similar treatment (paragraph 129). In its Guidelines the Commission gives examples of two scenarios in which non-compete and quantity-forcing agreements respectively would probably be exempted (paragraphs 149–50).

156

 Paras 145–46.   In Repsol the commitments on the basis of which the Commission closed the case included the commitment not to impose exclusive sourcing for more than a five-year term: Commission Press Release IP/06/495 (above n 64). 158   Individual exemptions for 20 years (about half of this period was accounted for by retrospective exemption) were granted in Whitbread [1999] OJ L88/26, upheld in Case T-131/99 [2002] ECR II-2023, [2002] 5 CMLR 101; Bass [1999] OJ L186/1, ultimately upheld in Case C-204/02 [2003] ECR I-14763; Scottish & Newcastle [1999] OJ L186/19. 157

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  horizontal distribution agreements  123

3.6.9 Tying Tying occurs when the purchase of one product is made conditional on the purchase of a separate product. In principle if it produces anticompetitive effects it may be justified by the presence of efficiencies such as joint production or joint distribution of the two products, bulk purchase of the tied product by the supplier or the maintenance of certain uniformity or quality standards (paragraph 222). The circumstances must of course be such that benefits are passed on to the consumer, and there is not some less restrictive means of achieving the aim. In practice the Commission has tended to raise concerns about tying under Article 102 (see above chapter two section 2.5) rather than under Article 101.

3.6.10  Category Management and Upfront Access Payments The Commission considers that category management (see above section 3.3.11) has a number of potential efficiencies. In a merger decision it referred to potential efficiencies such as: • increased sales levels through better product placement and use of best retail practices; • reduced use of listing fees as the retailer could be more confident in allocating shelf space on the basis of consumer preferences rather than the readiness of suppliers to pay for space; • increased consumer satisfaction; and • economies of scale for both suppliers and retailers.159

The Guidelines recognise the efficiencies that arise out of the use by the retailer of the supplier’s specialised expertise, economies of scale and greater customer satisfaction. They state that efficiencies are likely to be greatest when there is strong competition between brands and low consumer switching costs.160 Efficiencies associated with upfront access fees include efficient allocation of shelf space and also the avoidance of free-riding by suppliers on retailers’ promotional efforts: if a supplier bears at least part of the cost of that promotion he will have a greater incentive to introduce the best possible products (paragraphs 207–8).

3.7 

horizontal distribution agreements

Although distribution agreements are typically vertical, they may be entered into by competitors, for example, when one supplier agrees to distribute another’s goods or services. In this case they are still vertical agreements, but the vertical 159   COMP/M.3732 Procter & Gamble/Gillette, 15 July 2005, in which it found no evidence of competition concerns and made largely positive comments about category management in general. 160  Para 213.

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restraints block exemption only applies to such arrangements in limited circumstances (see above section 3.5.5). Any Article 101 analysis will have to take into account the possible horizontal as well as the vertical impact on competition. Competing firms may also enter into joint distribution arrangements with each other, which will be pure horizontal agreements, perhaps even cartels, subject to the general principles of Article 101.161 Joint ventures or other agreements between competitors involving distribution may have either or both horizontal or vertical elements. For example, a joint venture may be formed to achieve efficient purchasing through the ordering of larger volumes or the exercise of greater bargaining power. Alternatively it may be used for joint selling, distribution or marketing. In both of these cases there will be the horizontal aspects and then the vertical aspects to consider. Sometimes the arrangement will be related to a production or R&D agreement. The Commission has published Guidelines on the applicability of Article 101 to horizontal cooperation agreements, which are currently under revision,162 and these may be relevant whenever distribution arrangements involve competing companies. In particular they discuss joint purchasing and joint selling (called ‘joint commercialisation’). The draft Guidelines say that joint selling, even if non-exclusive, normally infringes Article 101(1), in particular because it involves coordination of pricing policy. Even in the absence of joint selling, Article 101(1) may well be infringed if the cooperation in distribution (for example, sharing distribution infrastructure or distributing the other party’s products) involves the exchange of sensitive commercial information.163 Similarly, agreements between suppliers in different geographic markets can lead to market partitioning and may infringe Article 101(1) unless the arrangement is objectively necessary to allow entry into another market. In all such cases there is a concern that actual or potential competition between the parties will be reduced. Article 101(3) will apply if its four conditions are fulfilled. An example of an Article 101(3) exemption is joint distribution by UIP of films for screening in cinemas, which was first exempted in 1989, and the exemption later renewed twice.164 The arrangements were considered to be administratively efficient, but each time the Commission considered them it required undertakings or contractual modifications aimed at ensuring that the parties retain a high degree of autonomy on the market, and it checked that competition on the market was not unduly

161

  Eg, Joined Cases C-105 and C-113/04 Dutch Electrotechnical Equipment [2006] ECR I-8725.   [2001] OJ C3/2. The draft revised Guidelines (Draft Guidelines) are available on the DG Comp website and are expected to be finalised and applied as of 1 January 2011. 163  Draft Guidelines, s 2. The Commission issued a negative clearance type ‘comfort letter’ in respect of the Opodo online travel agency joint venture of nine European airlines after it put in place safeguards against the exchange of commercially sensitive information, and against market foreclosure: Competition Policy Newsletter, Spring 2003. However, this was essentially joint infrastructure for reaching the market, and there was no joint price-fixing. 164   Commission Press Release IP/99/681, 14 September 1999. 162

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  article 102 tfeu  125

restricted. Similarly, in a number of cases the Commission has accepted collective selling of broadcasting rights.165 Joint purchasing is generally viewed as pro-competitive when the parties’ joint market share does not exceed 15 per cent on the relevant markets (Draft Guidelines, paragraph 203). Joint production agreements, which are generally viewed favourably under Article 101, are likely to infringe Article 101(1) if they fix the prices for market supplies of the parties, limit output or share markets or customer groups, though there is sometimes an exception for price-fixing in the case of joint ventures that carry out distribution as well as production (Draft Guidelines, paragraphs 154–55). The block exemptions that cover joint research and development and exploitation, and specialisation and joint production,166 also extend to cover related provisions for joint distribution or the appointment of a third-party distributor.

3.8 

article 102 tfeu

Until now this chapter has discussed only Article 101, but it should not be forgotten that Article 102, which prohibits abuse of a dominant position and was discussed in chapter two, can also apply to the distribution arrangements of dominant companies. For the purposes of the block exemption, if an agreement covers a number of different products, the different markets will need to be analysed separately, and even if Article 102 applies in the case of some markets, it may be that the agreement falls within the scope of the block exemption for the purposes of others (paragraph 73). Article 101(3) cannot exempt an arrangement that constitutes abuse of dominance (paragraph 127).

165

  Eg, UEFA Champions League [2003] OJ L291/25; and Deutsche Bundesliga [2005] OJ L134/46.   [2000] OJ L304/3 and L304/7. These are currently under revision, with new Regulations expected to enter into force on 1 January 2011. Draft proposed texts are available on the DG Comp website. 166

4

Selective Distribution

key points • Selective distribution is a system under which all dealers admitted to a supplier’s network agree not to resell goods to dealers outside the network. • The legality of a selective distribution system depends on the terms of the contracts and the way they operate in practice. • A selective distribution system that is justified by the nature of the products, and to which dealers are admitted on the basis of objective and qualitative criteria, will usually be legal, unless there are many such systems in the market. • If there are many such systems in a market or if the system is not based on justified, objective and qualitative criteria, the selective distribution system may be illegal and unenforceable, unless it is exempted. • If the contracts contain no ‘hardcore’ restrictions and the relevant market shares do not exceed 30 per cent, a general block exemption may apply so as to exempt the agreements. This is possible even if the system is based on non-objective criteria or fixed quotas, or if it is applied to goods for which it is not objectively necessary. • Selective or exclusive distribution systems for motor vehicles and their spare parts and repair and maintenance services may be exempted under sectorspecific rules. • Even if no block exemption applies, exemption will still be available if the system satisfies the four substantive criteria for exemption. In particular, it will be necessary to justify any non-qualitative selection criteria on the basis of marketing requirements or other efficiency gains relating to the specific type of goods concerned.

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  key

texts

EU Regulations Commission Regulation (EU) 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 (‘vertical restraints block exemption’ or ‘block exemption’ or ‘Regulation’), [2010] OJ L102/1 (below Appendix 2) Commission Regulation (EC) 2790/1999 on the application of Article [101(3)] of the Treaty to categories of vertical agreements and concerted practices, [1999] OJ L336/21 (expired but applicable to certain agreements until 31 May 2011) Commission Regulation (EU) 461/2010 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 the motor vehicle sector, [2010] OJ L129/52 (‘motor vehicle block exemption’) Commission Regulation (EC) 1400/2002 on the application of Article [101(3)] of the Treaty to categories of vertical agreements and concerted practices in the motor vehicle sector, [2002] OJ L 203/30 (expired in respect of agreements relating to motor vehicle aftermarkets but applicable to agreements for sale of new vehicles until 31 May 2013)

EU Notices Commission Guidelines on vertical restraints (‘vertical restraints Guidelines’ or ‘Guidelines’) [2010] OJ C130/1 (below Appendix 3) Supplementary Guidelines on vertical restraints in agreements for the sale and repair of motor vehicles and of the distribution of spare parts for motor vehicles (‘Supplementary Guidelines’), [2010] OJ C138/16 Distribution and Servicing of Motor Vehicles in the European Union (Explanatory Brochure or ‘EB’), http://www.europa.eu.int/‌comm/‌competition/‌car_sector/‌ explanatory_brochure_en.pdf (no longer applies to agreements relating to motor vehicle aftermarkets but applies to agreements for sale of new vehicles until 31 May 2013)

ECJ and EGC Judgments Case 26/76 Metro v Commission (No 1) [1977] ECR 1875, [1978] 2 CMLR 1 Cases 32/78 etc BMW v Commission [1979] ECR 2435, [1980] 1 CMLR 370 Case 107/82 AEG-Telefunken v Commission [1983] ECR 3151, [1984] 3 CMLR 325 Case 75/84 Metro v Commission (II) [1986] ECR 3021, [1987] 1 CMLR 118 Case C-376/92 Metro v Cartier (No 2) [1994] ECR I-15, [1994] 5 CMLR 331



  key texts  129

Case T-325/01 DaimlerChrysler v Commission [2005] ECR II-3319, [2007] 4 CMLR 559 Case C-551/03 General Motors (Opel Nederland) v Commission [2006] ECR I-3173, [2006] 5 CMLR 1 Case C-74/04 Commission v Volkswagen [2006] ECR I-6585, [2008] 4 CMLR 1297 Case C-167/04 JCB Service v Commission [2006] ECR I-8935, [2006] 5 CMLR 23 Case T-450/05 Peugeot Nederland v Commission [2009] ECR II-2533

Commission Decisions BMW (No 1) [1975] OJ L29/1, [1975] 1 CMLR D44 IBM PC [1984] OJ L118/24, [1984] 2 CMLR 342 Villeroy & Boch [1985] OJ L376/15, [1988] 4 CMLR 461 Yves Saint Laurent Parfums [1992] OJ L12/24, [1993] 4 CMLR 120 Parfums Givenchy [1992] OJ L236/11, [1993] 5 CMLR 579

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It is essential that this chapter be read in conjunction with chapter three for a full understanding of the treatment of selective distribution agreements. Unless otherwise stated, all references to Articles in this chapter (except for Articles 101 and 102 TFEU) refer to the vertical restraints block exemption Regulation 330/2010. Similarly, unless the context requires otherwise, all references to paragraphs refer to the vertical restraints Guidelines.

4.1 

do selective distribution agreements infringe article 101(1) tfeu?

4.1.1 Introduction Selective distribution involves a distribution network made up of dealers selected at the wholesale or retail level (often both) on the basis of specific criteria decided on by the manufacturer or producer of the goods or services concerned. It is sometimes combined with franchising (see chapter five). Whatever criteria are imposed, it will be necessary in some way to prevent nonapproved dealers obtaining supplies of the goods through members of the network, and it is this aspect of the arrangement which means that such a distribution policy is not purely unilateral behaviour (in which case it could not infringe Article 101(1)). Those dealers admitted to the system normally agree not to resell goods to other dealers unless these other dealers have also been approved by the manufacturer or producer. It is essentially this restriction on resale that potentially infringes Article 101(1). The selection criteria may be based on a variety of factors, including qualifications possessed by the dealer and his staff; the situation and appearance of the sales outlet; capacity to achieve a certain minimum level of turnover; capacity to perform certain after-sales services and repairs; and willingness to engage in particular promotional activities. Suppliers may also want to apply quantitative criteria. In this case, in order to join the sales network it is not sufficient that a dealer can demonstrate that he fulfils qualitative criteria of the kind listed above: if the quota for the area in which he would operate is full or if the dealer cannot achieve a required annual turnover, then he will not be admitted to the distribution network. Typically, selective distribution is used to distribute luxury goods of high value such as expensive perfumes, as well as the type of complex goods that require or benefit from the availability of pre-sales advice and service, and repair, maintenance and other forms of after-sales service. It is therefore commonly applied by manufacturers of electrical and electronic goods, and cars, for example. In fact it is so common in the car industry that there are sector-specific rules for the distribution of motor vehicles and their spare parts and after-sales services (see below section 4.4).

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  selective distribution agreements and article 101(1)  131

Selective distribution, like other types of distribution, has been given a specific treatment by the Commission and the European Courts, which have frequently emphasised that selective distribution is a desirable form of marketing for goods of a kind requiring or benefiting from either a specific sales environment or specialised advice at the point of sale or after-sales service. Selective distribution systems will often fall outside Article 101(1) altogether. The first time the European Court of Justice (ECJ) gave judgment in a selective distribution case1 it approved the approach taken up to then by the Commission in Omega2 and the other selective distribution Decisions it had made. The Court stated that selective distribution agreements, provided that they operate on the basis of objective and qualitative criteria that are appropriate for the type of goods in question and are applied uniformly and in a non-discriminatory way3 to all potential dealers, do not generally infringe Article 101(1). That approach has been frequently restated in subsequent cases.4 The types of clause that will generally not infringe Article 101(1) include first of all those following from the application of objective qualitative criteria. These include clauses restricting dealers to supplying only end-users or other authorised dealers within the network and those clauses stipulating that non-authorised dealers may not be supplied. Restrictions on distribution through the internet that are necessary to maintain quality standards do not infringe Article 101(1). Nor does the fact that a system is not ‘impervious’ (because unauthorised distributors are able somehow legally to obtain the goods, perhaps because non-selective distribution methods are used in some territories) mean that it automatically infringes Article 101(1).5 The Commission’s main concerns in the context of selective distribution are the risk of a reduction in competition between competing brands of goods, possible foreclosure of distributors or suppliers from entering or remaining on the market, and a reduction in competition as a result of the cumulative effect of a number of selective distribution networks operating on the same market. So other clauses, including those requiring dealers to satisfy additional criteria not falling within the category of objective qualitative criteria, may infringe Article 101(1) unless they are exempted under Article 101(3). In such cases exemption, either through the operation of a block exemption Regulation or by satisfying the four criteria of Article 101(3), will be needed to avoid the risk of invalidity of the agreement under Article 101(2) and possible fines. It will sometimes be possible for a selective distribution system that infringes Article 101(1) to benefit from a block exemption. The vertical restraints block 1

 Case 26/76 Metro v Commission (No 1) [1976] ECR 1875, [1978] 2 CMLR 1.   [1970] OJ L242/22, [1970] CMLR D49. 3  Case 243/83 Binon v Agence et Messageries de la Presse [1985] ECR 2015, [1985] 3 CMLR 800 includes an example of an allegation of discriminatory application of selection criteria. 4   Eg, Case 31/80 L’Oréal v De Nieuwe AMCK [1980] ECR 3775, [1981] 2 CMLR 235, para 15; and cases cited in Commission Guidelines on vertical restraints (‘vertical restraints Guidelines’ or ‘Guidelines’) [2010] OJ C130/1 (below Appendix 3) para 175. 5  Case C-376/92 Metro v Cartier [1994] ECR I-15, [1994] 5 CMLR 331. 2

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exemption6 is generally available when its conditions, including relevant market shares of no more than 30 per cent, are fulfilled. In particular, to benefit from this exemption, the selective distribution agreement must contain no ban on active or passive sales by retailers to end-users outside their allotted territories, and there must be no restriction on cross-supplies between approved distributors at any level in the network. Nor may there be any absolute ban on internet sales. However, even a system based on purely quantitative selection criteria can benefit from the block exemption, and the block exemption applies regardless of the nature of the goods. The Commission has in the past been ready to grant individual exemption or even negative clearance to systems in which additional criteria are applied, provided that they are justified.7 The first time that a selective distribution system came before the Commission was in Omega, which concerned the distribution of high-quality clocks and watches. In granting an Article 101(3) exemption to the agreements making up the system the Commission mentioned the potential benefits of such a system. These included enabling more intensive exploitation, continuity of supplies (given the limited production facilities) and the offering of a sufficient choice of models. Other advantages mentioned were the rationalising of distribution and the possibility of offering an efficient repair and guarantee scheme. Until 1 June 2000 there was no block exemption generally available for selective distribution agreements, and so individual exemption was the only type of exemption available. After that, and until the system of individual exemption was abolished on 1 May 2004, there was much less need for individual exemptions for such agreements. Probably because of this and because most selective distribution systems falling outside the scope of the block exemption would have involved suppliers with over 30 per cent market share, no formal exemption of a selective distribution system was in fact granted during that period. Agreements may infringe Article 101(1) ‘either individually or together with others’.8 It is therefore important, as is usual in EU competition law, to look not only at the clauses themselves but also at the wider economic environment in which they operate. For example, in the course of a Decision refusing exemption for a selective distribution system for cars the Commission noted that the restrictive effects of the agreement were ‘magnified by the existence of similar exclusive and selective distribution systems operated by other vehicle manufacturers’.9 Systems based on purely quantitative criteria, whereby suitable dealers are refused supplies simply on the basis that a fixed quota has been filled or that the 6  Commission Regulation (EU) 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 (‘vertical restraints block exemption’ or ‘block exemption’ or ‘Regulation’), [2010] OJ L102/1 (below Appendix 2). See above ch 3. 7   Though the system of individual exemption ceased to exist as of 1 May 2004 (see above ch 2 section 2.4.3) the old cases still provide guidance on the substantive application of Art 101. 8   L’Oréal (above n 4) para 21. 9   Peugeot [1986] OJ L295/19, [1989] 4 CMLR 371.

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territory concerned does not have enough (or wealthy enough) inhabitants to justify the appointment of another distributor, infringe Article 101(1) and have rarely been individually exempted under Article 101(3), though they are exempted by the vertical restraints block exemption when the relevant market shares do not exceed 30 per cent. As usual (see chapter three), any clauses banning imports or exports within the European Union, prohibiting internet sales or fixing resale prices will generally infringe Article 101(1) and not qualify for exemption.

4.1.2  Agreement or Unilateral Conduct? There can be no infringement of Article 101(1) on the basis of purely unilateral conduct. Therefore an independent decision by a supplier to supply certain dealers and not others cannot be a breach of that Article. However, if dealers admitted to a network are required to agree not to pass on the goods to dealers outside the network or if pressure is exerted on them in some other way to dissuade them from doing so, this will constitute an agreement or concerted practice for the purposes of Article 101. The principle is fairly easy to state: an unwritten and even unvoiced basis on which dealings take place between two parties may infringe Article 101(1). The difficulty is in knowing what evidence will be sufficient to establish this type of understanding (see above chapter two sections 2.2.2 and 2.2.4). The ECJ has said that the refusal to admit to a selective distribution network dealers who satisfy the relevant qualitative criteria, for motives such as the desire to maintain high price levels or to exclude ‘certain modern channels of distribution’, can show an infringement of Article 101(1). In AEG it said that the understanding that certain dealers would not be supplied . . . forms part of the contractual relations between the undertaking and resellers. Indeed, in the case of the admission of a distributor, approval is based on the acceptance, tacit or express, by the contracting parties of the policy pursued by AEG which requires inter alia the exclusion from the network of all distributors who are qualified for admission but are not prepared to adhere to that policy.10

Similarly, in Ford v Commission11 Ford, which operated a selective distribution system, stopped supplying left-hand drive cars to its German distributor in order to stem the flow of parallel imports that were taking place from Germany to the United Kingdom, because of the higher prices prevailing in the United Kingdom. This restrictive distribution policy was characterised as part of an agreement or concerted practice between Ford and its dealers. Ford appealed against the Decision, essentially on the grounds that such unilateral action could not be prohibited by Article 101, which only applies to consensual conduct. The Court rejected the appeal on the grounds that the refusal was not unilateral but rather 10

 Case 107/82 AEG Telefunken v Commission [1983] ECR 3151, [1984] 3 CMLR 325, para 38.   Joined Cases 25 and 26/84 [1985] ECR 2725, [1985] 3 CMLR 325.

11

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formed part of the contractual relations between Ford and its dealers. This was explained on the basis that ‘admission to the Ford AG dealer network implies acceptance by the contracting parties of the policy pursued by Ford with regard to the models to be supplied to the German market.’12 However, even in selective distribution systems, it is not the case that simply because they have joined the network, dealers can be assumed to have accepted all the supplier’s subsequent acts or policies. It must be shown either that the acts or policies follow from the terms of the original agreement or else that the distributors have subsequently acquiesced in them.13 In Volkswagen14 the ECJ confirmed that a unilateral instruction by a supplier to its selective distributors to maintain certain price levels did not infringe Article 101(1). The terms of the distribution agreement did not provide for binding prices to be imposed but only for nonbinding price recommendations; nor had it been shown that the distributors had acquiesced in the price-fixing pricing policy. The question of whether or not suppliers’ actions are unilateral therefore turns on the facts; the actual terms of the contract, as well as the subsequent conduct of the parties, are relevant. It is not clear whether silence on the part of a distributor may constitute acceptance. In practice it may therefore be advisable, even when the written terms of the contract appear to exclude illegal acts, for a distributor to object in writing to any such conduct on the part of the supplier if he wants to avoid being found party to an illegal contract.

4.1.3 The Metro Judgments In the 1960s and 1970s SABA, a producer of electronic equipment for the leisure market, distributed its products through a network of selected distributors. The competition rules on selective distribution are well illustrated by a series of early Commission Decisions and ECJ judgments relating to this particular selective distribution system. These cases provided the first opportunity for the Court to apply the competition rules to selective distribution agreements. In addition, in a second judgment the Court clarified some statements it had made in its earlier judgment about the kind of market conditions that might render the application of even objective, qualitative criteria contrary to Article 101(1). The cases involved SABA’s selective distribution network for consumer electronic goods, such as radios, televisions, tape-recorders, and video and hi-fi equipment. The network consisted of contracts and agreements with sole distributors, wholesalers and appointed retailers. The Commission had said in its first SABA Decision that some of the terms in the agreements did not infringe Article 101(1) at all, and it had exempted the additional restrictions pursuant to Article 101(3).15 12

  Ibid, para 21.   Acquiescence was found in Case T-450/05 Peugeot Nederland [2009] ECR II-2533. 14  Case C-74/04 Commission v Volkswagen [2006] ECR I-6585, [2008] 4 CMLR 1297. 15   SABA (No 1) [1976] OJ L28/19, [1976] 1 CMLR D61. 13

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Metro, a wholesale trading company that distributed through ‘cash and carry’ outlets, had been refused supplies by SABA on the grounds that it did not fulfil the conditions for admission as a SABA wholesaler, and it had unsuccessfully argued against the granting of an exemption by the Commission. In particular, Metro claimed that the operation of such a selective distribution system was a means of excluding outlets such as Metro’s, which operated in such a way as to reduce overheads and therefore to be able to offer consumers lower prices. Metro objected to the Commission’s exemption Decision and appealed to the ECJ, asking for the Decision to be annulled. The Court rejected the appeal and confirmed: [T]he Commission was justified in recognising that selective distribution systems constituted, together with others, an aspect of competition which accords with Article [101(1)], provided that resellers are chosen on the basis of objective criteria of a qualitative nature relating to the technical qualifications of the reseller and his staff and the suitability of his trading premises and that such conditions are laid down uniformly for all potential resellers and are not applied in a discriminatory fashion.16

The ECJ stated that price competition, though very important, was not the only kind of competition to be considered,17 thus justifying a system that, though restrictive in one sense, created the conditions for competition in different areas such as the provision of high-standard pre-sales and after-sales services. It confirmed that ‘price competition is so important that it can never be eliminated’. However, although recognising that in this case ‘the price structure [was] somewhat rigid’ it went on to say that this did not permit the conclusion ‘that competition had been restricted or eliminated on the market’. The Court held that selective distribution necessarily implies the obligation on authorised dealers not to sell to dealers outside the network, as well as a method of checking that this rule is kept. It is therefore acceptable for a supplier to insist that a dealer keep records of all non-consumer sales and of proof that such buyers are authorised members of the network. Provided that these restrictions and checks only serve the purpose of ensuring that objective, qualitative requirements, themselves not infringing Article 101, are satisfied, then those restrictions and checks will not infringe Article 101(1). However, most obligations guaranteeing the respect of terms that go further than this will infringe Article 101(1). Further, it held that a prohibition on wholesalers supplying private consumers, including schools, hospitals and military establishments, did not fall within the scope of Article 101(1). Such a separation of functions of wholesaler and retailer was accepted by the Court on the grounds that . . . if such a separation did not obtain the former would enjoy an unjustified competitive advantage. . . [C]ompetition would be distorted if wholesalers, whose costs are in general proportionally lighter precisely because of the marketing stage at which they 16

  Metro (No 1) (above n 1) para 20.   This statement was later seized on (unsuccessfully) by the appellant in Cases 209 etc/78 FEDETAB v Commission [1980] ECR 3125, [1981] 3 CMLR 193 in an attempt to justify retail price-fixing. 17

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operate, competed with retailers at the retail stage, in particular on supplies to private customers.18

The term requiring non-specialist shops to open a special department for selling consumer electronic goods also escaped Article 101(1) altogether. On the other hand, requirements on the wholesalers to participate in the creation and consolidation of the sales network, to achieve a minimum turnover and to conclude sixmonthly supply contracts, fell within Article 101(1) and required exemption under Article 101(3). However, the Court did see fit to qualify its approval of this selective distribution system. It said that even such a system as this might infringe Article 101(1) and not qualify for an exemption if: . . . in particular as the result of an increase in selective distribution networks of a nature similar to SABA’s, self-service wholesale traders were in fact eliminated as distributors on the market in electronic equipment for leisure purposes.19

This concluding qualifying statement caused some consternation amongst the operators of selective distribution systems and at the same time gave some hope to Metro. The Commission’s exemption Decision, as confirmed by the ECJ, had been of limited duration. Several years later, when the exemption was due to expire, SABA applied for an extension of the exemption. The terms of the agreements were almost unchanged, and the Commission granted the extension requested.20 Again, Metro contested the Commission’s Decision. This time Metro claimed that market conditions had changed. It said that there were now many more selective distribution systems in the consumer electronics market and that consequently wholesale traders such as Metro could not obtain direct supplies from producers. The Court had laid down a significant qualification to the general rule that agreements making up selective distribution networks based on objective, qualitative criteria are not generally caught by Article 101(1) and that if they contain other criteria, these will often be exempted, and this was explained further by the Court in Metro (No 2). The Court said that the presence on the market even of those systems based only on objective, qualitative criteria (sometimes referred to as ‘simple’ systems) had to be taken into account in examining Metro’s claim that the market had changed: It must be borne in mind that, although the Court has held in previous decisions that ‘simple’ selective distribution systems are capable of constituting an aspect of competition compatible with Article [101(1)] of the Treaty, there may nevertheless be a restriction or elimination of competition where the existence of a certain number of such systems does not leave any room for other forms of distribution based on a different type of competition policy or results in a rigidity in price structure which is not counter­ balanced by other aspects of competition between products of the same brand and by the existence of effective competition between different brands. 18

  Metro (No 1) (above n 1) para 29.   Ibid, para 50.   SABA (No 2) [1983] OJ L376/41, [1984] 1 CMLR 676.

19 20

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Consequently, the existence of a large number of selective distribution systems for a particular product does not in itself permit the conclusion that competition is restricted or distorted. Nor is the existence of such systems decisive as regards the granting or refusal of an exemption under Article [101(3)], since the only factor to be taken into regard is the effect which such systems actually have on the competitive situation.21

And it limited the application of this rule as follows: [A]n increase in the number of ‘simple’ selective distribution systems after an exemption has been granted must be taken into consideration when an application for renewal of that exemption is being considered, only in the special situation in which the relevant market was already so rigid and structured that the element of competition inherent in ‘simple’ systems is not sufficient to maintain workable competition.22

So, qualitative selection may infringe Article 101(1), but the existence of a large number of such systems is not sufficient on its own to allow the conclusion to be drawn that there is infringement. The decisive factor is the effect of those systems. In this particular case other forms of distribution continued to exist in the market, and wholesalers such as Metro could obtain the same type of products from producers other than SABA. Therefore, the Commission’s exemption Decision was upheld. The ECJ also stated that if a distribution system is identical in all practical respects to a system previously in operation that was the subject of an exemption Decision, the Commission may assume, in the absence of evidence to the contrary, that the new system also fulfils the conditions of Article 101(3). Under the current enforcement regime, in which the Commission no longer grants exemptions, this may imply that when a court has confirmed the application of exemption, the burden of proof of a change in market conditions lies on the party alleging that exemption should no longer apply.

4.1.4  For What Types of Goods May Selective Distribution be Used? In a number of cases it has been said that it is necessary, in assessing whether Article 101(1) is infringed, also ‘to consider whether the character of the product in question necessitates a selective distribution system in order to preserve its quality and ensure its proper use’.23 In the same case it was stated that it must be considered ‘whether those objectives are not already satisfied by national rules governing admission to the resale trade or the conditions of sale of the product in question’. If they are, then further rules imposed contractually may not be justified. This might well be the case for goods such as medicines or firearms, for example. The Commission and ECJ have between them accepted the necessity for selective distribution in marketing a very wide range of goods. These include 21

 Case 75/84 Metro (No 2) [1986] ECR 3021, [1987] 1 CMLR 118, paras 40–41.   Ibid, para 42.   L’Oréal (above n 4) para 16. See also Guidelines (above n 4) para 175.

22 23

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professional electronic equipment,24 televisions, radios and tape-recorders,25 perfume,26 photographic equipment,27 high quality clocks and watches,28 personal computers,29 newspapers,30 cars,31 jewellery,32 high-quality china tableware and ornaments33 and dental supplies including artificial teeth.34 In Villeroy & Boch, a case concerning china tableware, it was stated: [S]ome products or services, which are not simple products or services, possess certain characteristics which prevent them from being sold properly to the public without the intervention of specialist distributors.35

It was stated in Binon, a case on newspaper distribution, that a selective distribution system would not be prohibited under Article 101(1) ‘given the special nature of those products as regards their distribution’: As AMP rightly pointed out, newspapers and periodicals can, as a general rule, only be sold by retailers during an extremely limited period of time whereas the public expects each distributor to be able to offer a representative selection of press publications, in particular those of the national press. For their part, publishers undertake to take back unsold copies and this gives rise to a continuous exchange of those products between publishers and distributors.36

However, exemption was refused in a case involving distribution of tobacco products,37 partly on the grounds that the case was distinguishable from Metro (No 1) in that that Decision had involved the distribution of ‘highly technical, durable consumer goods so that traders had to be selected on the basis of qualitative criteria’. The Commission has also stated that plumbing fittings do not necessarily require any special form of distribution outlet, at least at wholesale level. The producers argued that the system, restricting wholesale supplies to plumbers, was justified on the grounds that . . . plumbing fittings were semi-finished products which, because of their technical complexity and the need for them to be installed, required competent advice and guidance and professional standards of workmanship in their installation.38 24

 Commission Notice re Sony España SA, [1993] OJ C275/3.   Metro (No 1) (above n 1). 26   L’Oréal (above n 4). 27   Kodak [1970] OJ L147/24, [1970] CMLR D19. 28   Omega (above n 2); and Junghans [1977] OJ L30/10, [1977] 1 CMLR D82. 29   IBM [1984] OJ L118/24, [1984] 2 CMLR 342 30   Binon (above n 3). 31   BMW (No 1) [1975] OJ L29/1, [1975] 1 CMLR D44. 32   Murat [1983] OJ L348/20, [1984] 1 CMLR 219. 33   Villeroy & Boch [1985] OJ L376/15, [1988] 4 CMLR 461. 34   Ivoclar [1985] OJ L369/1, [1988] 4 CMLR 781. Notice of the Commission’s intention to renew this exemption was published at [1993] OJ C251/3. 35   Villeroy & Boch (above n 33) para 22. 36   Binon (above n 3) para 32. 37   FEDETAB (above n 17). 38   Grohe [1985] OJ L19/17, [1988] 4 CMLR 612, para 6; and Ideal Standard [1985] OJ L20/38, [1988] 4 CMLR 627, para 6. 25

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The Commission rejected this argument: Since it is doubtful whether plumbing fittings can be considered as technically advanced products and since wholesalers do not generally sell directly to final consumers but to retailers, it is questionable, at least at wholesale level, whether the characteristics of the product necessitate a selective distribution system in order to preserve their quality and ensure their proper use.39

However, this should be seen in the context of a very restrictive system, the declared aim of which was to prevent the fittings coming into the hands of ironmongers, department stores and DIY enthusiasts, and for them to be available only to professional plumbing contractors. The main thrust of the Decision concerned the very restrictive nature of the system, which probably influenced the outcome of the Commission’s investigation more than did the nature of the goods. In summary, the cases suggest that almost any product may validly be the subject of some kind of selective distribution system without infringing Article 101, but only to the extent that the restrictions envisaged do not go beyond what is necessary for that particular product. For example, although selective distributions may in principle be used for high-quality cosmetics, the requirement that dealers be dispensing chemists will infringe Article 101(1).40 Also, it is important to be consistent in arguing for the necessity for selective distribution: the argument will not be convincing if simple mail order41 or an internet site not subject to equivalent criteria is used to distribute the same goods. However, the fact that the supplier does not exclusively use selective distribution systems to distribute its goods, and that the system is therefore not ‘impervious’, does not necessarily mean that it infringes Article 101.42 Where the relevant market share does not exceed 30 per cent, the block exemption on vertical restraints provides automatic exemption for certain categories of selective distribution agreements regardless of the goods or services concerned. However, if a number of selective distribution networks foreclose the market by ‘using selection criteria which are not required by the nature of the relevant goods’ then the block exemption may be dis-applied (see below section 4.2.2.3). 4.1.5  Clauses Not Violating Article 101(1) TFEU It is not possible categorically to state that particular clauses will never infringe Article 101(1). As was made clear in the Metro cases, even clauses enforcing the application of objective, qualitative selection criteria may, in the presence of certain market conditions, fall within the scope of this prohibition. However, it is 39

  Ibid, para 15.  Case T-19/91 Vichy v Commission [1992] ECR II-415. Vichy’s argument was not helped by the fact that it distributed through chemists in some countries but not in others. 41  But in Kenwood, mail order was accepted in combination with selective distribution because advice was available at the collection point where goods were delivered: [1993] OJ C67/9, [1993] 4 CMLR 389. 42   Metro v Cartier (above n 5); and Case T-88/92 Leclerc v Commission [1996] ECR II-1961, para 115. 40

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possible to make some useful generalisations about the type of clauses that usually fall outside the scope of Article 101(1). These include the clauses necessary to ensure that objective and qualitative selection criteria are enforced, and certain other clauses regarded as ancillary to the main agreement. 4.1.5.1  Objective and Qualitative Criteria The rule given in Metro that if a selective distribution system is not to infringe Article 101(1) then it must be based on objective and qualitative criteria, has been repeated in a number of ECJ judgments and Commission Decisions. In its vertical restraints Guidelines the Commission states: Purely qualitative selective distribution is in general considered to fall outside Article 101(1) for lack of anticompetitive effects, provided that three conditions are satisfied. First, the nature of the product in question must necessitate a selective distribution system, in the sense that such a system must constitute a legitimate requirement, having regard to the nature of the product concerned, to preserve its quality and ensure its proper use. Secondly, resellers must be chosen on the basis of objective criteria of a qualitative nature which are laid down uniformly for all potential resellers and are not applied in a discriminatory manner. Thirdly, the criteria laid down must not go beyond what is necessary.43

Note that the criteria must be necessary or beneficial for the sale of the particular type of goods in question if the agreements are not to fall within the prohibition in Article 101(1). From past cases it can be concluded that ‘objective criteria of a qualitative nature’ include those: • relating to the technical or professional training or qualifications required of a dealer or of his staff;44 • relating to the type of equipment and installations available on the premises of the sales outlet;45 • stipulating minimum quality levels in respect of materials or equipment used in servicing or after-sales care, whether or not the materials or equipment are supplied by the manufacturer or supplier;46 • requiring the goods to be sold in a specialised shop or at least in a specialised department of a larger shop, and requiring separate display in an attractive setting. This may extend to the obligation to display quality goods in such a way as to confer prestige on them, by providing them with an attractive individual setting and not placing them near goods of inferior quality.47 But it probably 43

  Para 175.   Metro (No 1) (above n 1).   Ibid. 46   D’Ieteren Motor Oils [1991] OJ L20/42. 47   Villeroy & Boch (above n 33). It should be noted that this was said in the context of a very competitive market and a system that encouraged retailers to sell competing goods and imposed no sales targets. Such clauses might be viewed more severely within less generous systems. 44 45

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• • • • • •

  selective distribution agreements and article 101(1)  141

does not extend to a clause going as far as to require that the sales outlet be situated near other shops selling luxury goods;48 imposing an obligation to take minimum supplies, keep minimum stocks and display a certain range of goods;49 requiring the sales outlets to have a certain appearance;50 stipulating particular opening hours;51 requiring the provision of after-sales service and repairs and the fulfilling of guarantees;52 requiring potential dealers to furnish evidence of financial means;53 and imposing quality standards relating to internet sales (see below). 4.1.5.2  Quality Standards for Internet Distribution

The Commission is keen to facilitate the development of online sales, not least as a means to allow consumers to shop outside their own Member States and thereby to strengthen the EU single market. It regards any unjustified restriction placed by a supplier on the use of the internet by its distributors not (as might be argued) as a legitimate choice of distribution method but rather as a restriction on resale that infringes Article 101(1). A requirement that distributors do not distribute through the internet at all is not regarded as a qualitative criterion. In fact, the Commission considers that an absolute prohibition on dealers selling through internet sites is a hardcore restriction.54 It is therefore presumed to infringe Article 101(1) unless it is ‘objectively necessary’.55 However, the Guidelines state that ‘the supplier may require quality standards for the use of the internet site to resell its goods, just as the supplier may require quality standards for a shop or for selling by catalogue or for advertising and promotion in general’.56 This presumably means not only that the layout and general presentation of the site may be subject to quality requirements but also that the supplier may, for example, stipulate the use of encryption for electronic payment. 48

  Baccarat, Commission Press Release IP/91/603, 1 July 1991.   Villeroy & Boch (above n 33); and Murat (above n 32). But such clauses have sometimes been judged to require exemption under Art 101(3) (see below section 4.2.3.6). 50   Junghans (above n 28); and Yves Saint Laurent Parfums [1992] OJ L12/24, [1993] 4 CMLR 120. 51  Case 210/81 Demo-Studio Schmidt v Commission [1983] ECR 3045, [1984] 1 CMLR 63. 52   IBM [1984] OJ L118/24, [1984] 2 CMLR 342. 53   Ibid. 54   See above ch 3 section 3.5.7.2. The question of whether an absolute ban on internet sales by approved dealers in a selective distribution system is always a hardcore restriction or whether in some circumstances it may not infringe Art 101(1), is at issue in Case C-439/09 Pierre Fabre, a preliminary reference from the Paris Cour d’appel pending before the ECJ. The Commission has also intervened as amicus curiae in the case before the French court. 55   The Commission is likely to interpret this concept strictly, probably confining it to the kind of situation referred to in the Guidelines, such as when it is necessary to avoid dangerous substances being sold to children. 56   Para 54. This is said in the context of the block exemption, but there is no reason why it should not apply more generally to assessment under Article 101. For more on internet sales, see above ch 3 sections 3.3.5.1 and 3.5.7.2. 49

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Examples of quality standards given in the Guidelines include the requirement that a distributor: • have one or more physical shops or showrooms. This means that it is permissible to exclude from a selective distribution network so-called ‘pure players’ who operate exclusively through a website; and • if it distributes through a third-party platform, meets certain standards and conditions, for example that customers visiting the distributor’s site do not pass though any site showing the name or logo of the third party.

The Guidelines require that quality standards for the internet be equivalent (but not identical) to those for physical outlets. Acceptable restrictions include: • a restriction on dealers selling more than a given quantity to an individual end-user (to prevent sales to unauthorised dealers) that might be stricter for online sales, depending on the circumstances; • a maximum practicable delivery deadline for online sales, whereas delivery to a customer present in a shop may be required to be immediate; • provision for an after-sales helpdesk for online sales; and • provision for a secure payments system for online sales.

4.1.5.3  What Other Obligations may be Imposed without Infringing Article 101(1) TFEU? If a distribution system is based on objective and qualitative criteria as described above, then the ECJ and Commission accept that the agreements making up the system may in addition contain certain ‘ancillary’ obligations necessary to maintain the system and still not fall within the terms of Article 101(1). These include obligations connected with the objective and qualitative criteria already discussed, such as: • the obligation on dealers to provide trading information enabling the manufacturer to check that sales are not being made to unauthorised dealers, and also information regarding the trading position, sales trends, the market situation, stocks and expected demand;57 • other obligations allowing checks to be made on whether dealers are observing the restrictions regarding resale; • the requirement that the manufacturer’s guarantee be honoured only in the case of goods bought from authorised retailers;58 • certain requirements relating to advertising;59 • the requirement that the manufacturer or producer’s consent be obtained by a dealer before participation in any kind of trade fair or exhibition;60 57

  BMW (No 1) (above n 31).   Metro v Cartier (above n 5).   BMW (No 1) (above n 31) para 30; and Villeroy & Boch (above n 33): ‘even if the obligation to promote sales of Villeroy & Boch goods cannot strictly be regarded as qualitative selection criteria compatible with Art [101(1)], they, are not to be considered in this case as giving rise to any appreciable restriction of competition’ (para 30, emphasis added). 60   BMW (No 1) (above n 31) para 32. 58 59

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exemption under article 101(3) tfeu  143

• the obligation to use the manufacturer’s name61 or trademarks62 in a specified manner; • obligations aimed at maintaining a distinction between the respective functions of wholesalers and retailers. These include terms prohibiting wholesalers from selling to end-users. This is because the Commission and ECJ consider that selective distribution systems involving two tiers of distribution could not function without such obligations: wholesalers might undercut retailers, since they do not have the same obligations regarding matters such as trained staff and appearance of premises.63 In Villeroy & Boch the Commission explained that ‘competition would be distorted if wholesalers, whose costs are in general proportionately lower precisely because of the marketing stage at which they operate, competed with retailers at the retail stage, in particular on supplies to private customers’.64 Similarly, in BMW (No 1)65 it was accepted that the supplier could legitimately agree that it would not itself sell to individual customers; • customer restrictions whereby the type of goods being supplied to the different groups of customer are sufficiently different. It was accepted in Villeroy & Boch that the kind of china supplied (i) to individuals, (ii) to hotels and restaurants and (iii) to trade customers for use as advertising material and publicity aids were different enough for a distribution system based on segregation of responsibility and channels for these different kinds of customer not to infringe Article 101(1). However, it is significant that the Commission emphasised the keenly competitive and very fragmented nature of the market in this case; and • the supplier’s exclusive right to appoint dealers. In Villeroy & Boch this was judged not to infringe Article 101(1), but in SABA (No 2)66 the Commission said that such a condition was too likely to be abused and required wholesalers to be able to appoint further distributors to the network on their own initiative under certain conditions.

4.2 

exemption under article 101(3) tfeu

4.2.1 Introduction If a selective distribution agreement includes clauses that infringe Article 101(1) then it will require exemption if it is not to be void and unenforceable under Article 101(2), and to incur the risk of fines. Such an exemption may be available either through the operation of the vertical restraints block exemption Regulation or when the agreement satisfies the four criteria laid down in Article 101(3). (If it 61

  Omega (above n 2).   In BMW (No 1) (above n 31) this was said to be part of the trademark right. 63   Eg, Commission Notice re Schott-Zwiesel-Glaswerke [1993] OJ C111/4. 64   Above n 33, para 36. 65   Above n 31. 66   Above n 20. 62

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concerns distribution of motor vehicles or their spare parts, or motor vehicle repair and maintenance services, then certain sector-specific rules, described later in this chapter, may be relevant.)

4.2.2  Exemption under Block Exemption Regulation 330/2010 The vertical restraints block exemption Regulation 330/201067 guarantees the validity of any contract falling within its terms. There is no need for any further examination of the contract if it satisfies the Regulation: it is fully valid and can be enforced in a national court. Chapter three has described the general requirements that an agreement must fulfil in order to benefit from the block exemption, including relevant market shares no greater than 30 per cent, as well as the absence of any fixed or minimum resale price or absolute territorial protection. Only issues specific to selective distribution arrangements will be discussed in this chapter. The Regulation defines a ‘selective distribution system’ as: . . . a distribution system where the supplier undertakes to sell the contract goods or services, either directly or indirectly, only to distributors selected on the basis of specified criteria and where these distributors undertake not to sell such goods or services to unauthorised distributors within the territory reserved by the supplier to operate that system.68

The specified criteria are not required to be objective or qualitative, so systems based on quantitative selection criteria are covered by the block exemption. Nor is there any limitation on the type of goods or services for which selective distribution may be used. However, the benefit of the block exemption may be withdrawn when anticompetitive effects result from the use of selective distribution for inappropriate products or from the use of criteria inappropriate to the type of product concerned. Similarly, if a number of selective distribution networks foreclose the market by ‘using selection criteria which are not required by the nature of the relevant goods’ then the block exemption may be dis-applied.69 4.2.2.1  Hardcore Restrictions Though resale restrictions are in principle hardcore, the Regulation states expressly that exemption applies to a selective distribution system when sales to unauthorised distributors by members of the system are restricted, provided the restriction only applies to sales into areas reserved by the supplier to operate that system (Article 4(b)(iii)). The Guidelines explain that this refers to territories ‘where the system is currently operated or where the supplier does not yet sell the contract 67

  Above n 6.   Art 1(1)(e).   See below and Guidelines (above n 4) paras 81 and 176.

68 69

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exemption under article 101(3) tfeu  145

products’ (paragraph 55), so no actual evidence of intention to extend the selective distribution to that territory is required. A selective distribution system will not benefit from the block exemption if it includes any of the hardcore restrictions listed in the Regulation, including the two following, which are specific to selective distribution: (i) The restriction of active or passive sales to end-users by members of a selective distribution system operating at the retail level of trade, without prejudice to the possibility of prohibiting a member of the system from operating out of an unauthorised place of establishment.70

This means that dealers cannot be restricted in the users or purchasing agents of users to whom they may sell. For example, they must be free to advertise and sell through the internet. But the Commission considers it legitimate, particularly in the context of selective distribution, to prevent a distributor from operating exclusively by internet and not maintaining a physical outlet.71 In addition, other appropriate ‘quality standards’ may be imposed in respect of any website (see above section 4.1.5.2). In its Guidelines the Commission interprets Article 4(c) as allowing selective distribution to be combined with exclusive distribution within the same territory in the sense that the supplier may commit himself to supplying only one dealer or a limited number of selective distributors in a given territory, provided there is no restriction on active or passive selling by those distributors (paragraph 152). Also, if in other territories the supplier operates an exclusive distribution system then it is permissible to protect the exclusive distributors by prohibiting active sales into their territories by the selective distributors (paragraph 56). Dealers can be prevented from running their business from different premises or from opening new outlets in different locations. In the case of a mobile outlet, such as an ice cream van, the Commission interprets this as allowing the supplier to define an area outside which the mobile outlet may not be operated (paragraph 57). End-users in this context do not include repairers or other service providers: this follows from the wording of Article 4(e). (ii) The restriction of cross-supplies between distributors within a selective distribution system including between distributors operating at different level of trade.72

Cross-supplies must be allowed throughout the network and as between approved distributors at any level of trade. This of course means that any restriction aimed at forcing distributors to obtain the contract products exclusively from a given 70

  Art 4(c).   See above section 4.1.5; and Guidelines, para 64. This is also the implication of the Commission’s informal clearance of Yves St Laurent’s selective distribution system for perfume: Commission Press Release IP/01/713, 17 May 2001. There are similarities with the Yves Saint Laurent Decision (above n 50), mainly upheld in Leclerc (above n 42), in which it was accepted that distributors be prohibited from operating solely by mail order. 72   Art 4(d). 71

146  4—selective distribution

[4.2]

source, such as an exclusive sourcing clause, will take the agreement outside the scope of the block exemption (paragraph 58). 4.2.2.2  Non-compete Obligations A clause imposing directly or indirectly any obligation that causes the members of the system not to sell the brands of particular competing suppliers will not have the benefit of exemption under the Regulation (Article 5(1)(c)). Note that as for other types of distribution, a general non-compete clause, obliging dealers not to sell any competing brands, is exempted provided it is for no more than five years. The Commission’s objection to the specifying of particular competing brands is that it could facilitate horizontal cooperation between competing suppliers using the same network of outlets so as to exclude specific competitors from those outlets, thereby foreclosing them from the market (paragraphs 69 and 182). However, the wording of Article 5 means that, unlike the hardcore restrictions listed in Article 4, this type of non-compete clause will not prevent the rest of the agreement from benefiting from exemption under the Regulation. 4.2.2.3  Withdrawal and Dis-application The possibility of withdrawal of the benefit of the block exemption (see above chapter three section 3.5.11) exists for all types of agreement, but the Regulation mentions that it may in particular happen in respect of the cumulative effect of several selective distribution networks in the same market.73 The Guidelines provide that where the share of the market covered by selective distribution is below 50 per cent, or where it exceeds 50 per cent but the aggregate market share of the five largest suppliers is below 50 per cent, there will not normally be any problem (paragraph 179). They also give an example of the type of situation in which the Commission might withdraw the benefit of the block exemption because of such a cumulative effect (paragraph 188). The block exemption applies regardless of the nature of the product concerned and the necessity for the use of selective distribution. However, the Guidelines mention that the Commission may withdraw the benefit of the exemption when a distribution system is not justified by the nature of the product and so does not bring about sufficient efficiency gains to counterbalance a significant reduction in competition between brands (paragraph 176). Another possibility is dis-application of the block exemption (see above chapter three section 3.5.11). The existence of several parallel selective distribution networks covering more than 50 per cent of a particular market may lead to the adoption by the Commission of a Regulation dis-applying the benefit of the block exemption in respect of specific restraints in distribution agreements in that market. The Guidelines mention that this may occur in particular when there is market 73

 Regulation 330/2010 (above n 6) recital 15. See also Guidelines, paras 75 and 179.

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exemption under article 101(3) tfeu  147

foreclosure due to the use of selection criteria that are not required by the nature of the goods or that discriminate against certain forms of distribution (paragraph 81).

4.2.3  Exemption under Article 101(3) TFEU outside the Block Exemption A number of restrictions sometimes found in selective distribution agreements, though usually infringing Article 101(1) and not covered by the block exemption, in particular because a relevant market share exceeds 30 per cent, may benefit from exemption by satisfying the four substantive criteria of Article 101(3) (see above chapter two section 2.4). As already described, the Commission recognises that selective distribution is often beneficial. In its Guidelines it refers in particular to the use of selective distribution to establish a quality reputation for a new product;74 to incentivise dealers to increase their marketing efforts and to avoid free-riding between distributors; to protect dealers’ sunk investments;75 to improve distribution efficiency; and to maintain brand image and quality standards.76 However, exceptional economic efficiencies will need to be proved where the relevant market shares are high. The Commission’s main competition concerns regarding selective distribution are: • reduction or elimination of intra-brand competition; • foreclosure of the purchase market, with certain resellers being unable to obtain supplies, especially where a number of suppliers use similar selective distribution systems; and • facilitation of collusion between suppliers or distributors.77

Generally, the stronger the market position of the supplier and the more selective distribution systems there are present on the market, the less likely it is that exemption will be available (paragraph 177). The Commission says in its Guidelines that although the existence of strong competitors can mean that any reduction in intra-brand competition is outweighed by the presence of strong inter-brand competition, when the majority of suppliers operate similar systems, this may lead to anticompetitive foreclosure or supplier collusion (paragraph 178). The existence of barriers to market entry (frequent in the case of the kind of branded goods for which selective distribution tends to be used) is also relevant (paragraph 180), as is distributor buyer power if it leads to collusion between a group of powerful distributors to exclude certain other distributors (paragraph 181). Also, competition problems are more likely to arise in mature markets than in rapidly developing or new markets (paragraph 184). 74   Most likely in the case of complex products or products that are difficult to judge before consumption (‘experience products’): para 107(c). 75   A location clause, which protects a dealer from other dealers opening up a trading outlet in the same area, may be appropriate in such cases (para 185). 76   Para 107(a)(c)(d)(f)(g) and (i). 77   Para 175.

148  4—selective distribution

[4.2]

Finally, exemption is unlikely when selective distribution is not necessary for the product in question. Selective distribution systems to solve free-rider issues or help create brand image are most likely to be exempted for new products, complex products, products that are difficult to judge before consumption (‘experience products’) and products difficult to judge even after consumption (‘credence products’) (paragraph 185). 4.2.3.1  Exclusivity and Territorial Protection Exclusive territories and territorial protection are sometimes features of selective distribution networks, in particular at the wholesale level, and generally infringe Article 101(1).78 This is because any restriction on active or passive sales by selected distributors to other selected distributors is hardcore. Therefore any form of territorial protection combined with selective distribution infringes Article 101(1) and requires exemption. Exemption will exceptionally be available when protected exclusivity is shown to be indispensable to protect substantial and relationship-specific investments made by the authorised dealers.79 Normally, it will be necessary that total territorial exclusivity is not conferred on wholesalers.80 In Yves Saint Laurent Parfums the Commission required removal of a term imposing an export ban but allowed it to be replaced by a prohibition on active sales by authorised retailers in Member States where a new product had not yet been launched, for one year from the first launch of the product in the European Union. This was justified on the basis that it was necessary so as not to jeopardise the official launch of the product in those retailers’ territories. Also, although in principle cross-supplies between distributors must be allowed, if appointed wholesalers are required to support retailers in their area by investing in promotional activities that cannot easily be provided for contractually, then a restriction on active sales by the wholesalers outside their territories to avoid freeriding is likely to satisfy Article 101(3).81 4.2.3.2  Customer Restrictions A supplier may reserve for itself the right to supply specific types of customers: in Peugeot82 the Commission had approved a standard agreement under which the supplier agreed not to sell to ordinary end-users but only to fleet buyers, government departments and certain Peugeot employees. 78

  Omega (above n 2).   Eg, Yves Saint Laurent Parfums (above n 50); and Commission Notice re Schott-Zwiesel-Glaswerke (above n 63). 80   See Ivoclar (above n 34). In Junghans (above n 28) an exclusive territory for wholesalers combined with an obligation not to market actively outside that territory was exempted. 81   Guidelines, para 63. 82   Above n 9. 79

[4.2]

exemption under article 101(3) tfeu  149

However, exemption will not apply when a supplier reserves to himself the exclusive right to supply models having different specifications to those normally required by local customers, since this affords a means of effectively eliminating competition and dividing markets. In Grohe and Ideal Standard customer restrictions were strongly condemned, and the distribution system was refused exemption. In these systems wholesalers were prohibited from supplying the supplier’s plumbing fittings to anyone except plumbing contractors, other approved wholesalers and specialised industrial firms for their own installation. In other words, ordinary retailers, whether traditional ironmongers or modern department stores, and therefore individual consumers who wished to buy parts to fit themselves, were prevented from obtaining supplies of these fittings.83 4.2.3.3  Non-competition Clauses Dealers are sometimes restricted from selling competing goods, or there may be provision for the supplier’s consent to be obtained before other goods are sold: such restrictions infringe Article 101(1) and exemption will be necessary.84 When the vertical restraints block exemption does not apply, the Guidelines state that obligations causing authorised dealers not to sell the brands of particular competing suppliers are unlikely to qualify for exemption where the aggregate market share of the five largest suppliers is 50 per cent or above, unless none of the suppliers imposing such an obligation is among these top five. This is aimed at avoiding horizontal collusion between suppliers (paragraph 182). The Commission also believes that non-compete clauses combined with selective distribution may lead to significant foreclosure effects, effectively excluding competing suppliers from the market, in which case exemption is unlikely. This is most likely in the case of either a dense network of authorised distributors or the cumulative effect of a number of similar networks (paragraph 183). At a time before any block exemption existed for selective distribution agreements, a prohibition on selling competing cars was exempted in BMW (No 1), though the non-competition clause relating to spare parts was only allowed to be of narrow scope: dealers were still required to be permitted to sell competing spare parts and accessories of comparable quality to customers, and when the safety of the car was not affected, the dealer had to be permitted to sell any kind of competing spare parts or accessories at all. 4.2.3.4  No Supply to Non-members of Network The obligation on members of a network not to supply for resale outside the network85 if the criteria for membership are not objective and qualitative generally 83

  Above n 38.   Junghans (above n 28). 85   In Metro (No 1) (above n 1) this obligation was characterised not as a restriction but as an accessory to the principal obligation: para 27. 84

150  4—selective distribution

[4.3]

infringes Article 101(1). If the criteria themselves satisfy the four Article 101(3) criteria, then this restriction will also be exempted. However, when granting an exemption in BMW (No 1) to a selective distribution system for car parts, the Commission noted with approval that despite the general rule against supply outside the network, dealers were free to supply spare parts to persons outside the network provided that these parts were to be used only for effecting repairs and not for resale. This requirement is also incorporated in the sector-specific rules relating to motor vehicle distribution (see below section 4.4.5). 4.2.3.5  Quantitative Selection Criteria ‘Quantitative’ criteria include limitations on the number of retail outlets with reference to a certain area or to a minimum number of inhabitants in the vicinity of an outlet, or requirements as to minimum turnover, and they restrict competition within the meaning of Article 101(1).86 The ECJ has stated that although quantitative selection criteria are ‘by definition’ restrictive of competition, they may be exempted under Article 101(3).87 However, in the past the Commission stressed that they will only be exempted in cases in which close cooperation between a supplier and his distributors is necessary and is not possible in the absence of such restrictions. Quantitative limitations on the number of distributors of dental equipment were exempted by the Commission in Ivoclar. Exemption was justified on the basis that it was necessary to keep the numbers manageable: ‘supplying a much larger number of distributors would be detrimental to [Ivoclar’s] objective of ensuring competent distribution of its products’.88 The Commission may now have become more generous in its approach. In its Guidelines it says that indirect quantitative criteria such as a minimum annual purchase requirement may be exempted if they do not go beyond what is necessary for the supplier to recoup sunk investments or realise economies of scale in distribution, provided they do not relate to a significant proportion of the distributor’s turnover in the type of product concerned (paragraph 179). It also gives an example of a situation in which a quantitative selective distribution system falling outside the scope of the block exemption could benefit from exemption (paragraph 187). 4.2.3.6  Other Obligations that May Qualify for Exemption Other requirements that have been exempted in the past include those to: • take part in setting up a network of dealers;89 86  Case 86/82 Hasselblad v Commission [1984] ECR 883, [1984] 1 CMLR 559. It is possible for selection criteria to appear qualitative but in fact to be quantitative if national legislation sets quotas for certain types of retailers: Vichy v Commission (above n 40) involved dispensing chemists. 87   Binon (above n 3) para 29. 88   Ivoclar (above n 34) para 20. 89   Metro (No 1) (above n 1).

[4.3]

clauses and conduct unlikely to benefit from exemption  151

• achieve a minimum scale of business, order minimum supplies and maintain minimum stocks;90 • provide specified after-sales or guarantee services;91 and • keep a full range of goods.92 However, in some cases such clauses have been held to fall outside the scope of Article 101(1) altogether. 4.2.3.7  Perfume and Luxury Cosmetics Selective distribution in the perfume and luxury cosmetics sector was at one time treated particularly leniently by the Commission, which stated that because of the very competitive market structure in this sector, it could be more generous in evaluating whether certain criteria, even quantitative, infringed Article 101(1).93 However, it later changed its approach, bringing the treatment of perfume distribution systems into line with that in other sectors, despite the fact that the perfume sector remains highly competitive. For example, quantitative limits on admission to a selective distribution system were not permitted in Yves Saint Laurent, nor in Parfums Givenchy.94 These decisions were appealed by distributors who had been refused authorisation, and the European General Court upheld them, except in respect of a clause allowing Yves St Laurent to treat applicant retailers less favourably if perfumery represented a minority of their activity.95

4.3 

clauses and conduct unlikely to benefit from exemption under article 101(3) tfeu

4.3.1 Introduction Certain types of clause or practice are virtually certain never to satisfy the four exemption criteria in Article 101(3). They also provide an indication of the likelihood of withdrawal of the benefit of the vertical restraints block exemption, in the event that the agreement falls within the terms of the block exemption Regulation.

90

  BMW (No 1) (above n 31); and Yves Saint Laurent Parfums (above n 50).   BMW (No 1) (above n 31). 92   Metro (No 2) (above n 21). 93   In its Fourth Annual Report on Competition Policy the Commission reported on its examination of the selective distribution systems operated by Dior and Lancôme, after which it came to the conclusion that, after certain clauses had been removed, the agreements fell outside the scope of Art 101(1) and therefore did not require exemption under Art 101(3). 94   [1992] OJ L236/11, [1993] 5 CMLR 579. 95  Case T-19/92 [1996] ECR II-1851; Leclerc (above n 42); and Case T-87/92 Kruidvat BVBA v Commission [1996] ECR II-1931, upheld in Case C-70/97 [1998] ECR I-7183, [1999] 4 CMLR 68. 91

152  4—selective distribution

[4.3]

4.3.2  Absolute Territorial Restrictions As in the case of other types of distribution contract, exemption will not normally be available for any term that tends to divide one area of the common market from another entirely. Thus, a term requiring a dealer not to supply end-users outside his territory will infringe Article 101(1) and not qualify for exemption. In the past the Commission frequently required the removal of an export ban from distribution agreements before granting exemption or negative clearance.96 Territorial division is sometimes attempted by imposing a surcharge on goods ordered by customers resident in a different Member State or territory. Such action will always infringe Article 101(1) and will not be exempted. It may also lead to fines being imposed. In BMW (No 1) the Commission exempted a selective distribution network through which BMW sold its cars, motorbikes and spare parts, and carried out repairs and other after-sales services in a number of EU countries. When the agreements making up the network had first been notified to the Commission, they had contained export bans on dealers. Exemption for these agreements was refused. It was only with respect to new agreements without such a prohibition that the Commission was prepared to grant an individual exemption to BMW under Article 101(3).97 Later, the distribution system came before the ECJ as a result of a complaint about a circular issued by BMW’s main distributor in Belgium to discourage its dealers from exporting cars, in particular to the United Kingdom. The Court condemned this behaviour, saying that it was an essential characteristic of the exempted agreement that dealers be able freely to sell cars to other BMW concessionaires and to end-users and their intermediaries.98 In Ford the finding that the car manufacturer had been acting so as to prevent parallel imports was accepted by the ECJ as justifying the Commission’s refusal even to consider the possibility of granting an exemption to that undertaking’s selective distribution system: [T]he Commission is not obliged to carry out a detailed examination of all the advantages and disadvantages likely to flow from a selective distribution system when it has good reason to believe that a manufacturer has used such a system to prevent parallel imports and thus artificially to partition the common market.99

Several car manufacturers have been heavily fined for operating selective distribution systems so as to partition national markets. The practices concerned include bonuses limited to domestic sales;100 instructions not to export backed up     96

  Eg, Peugeot (above n 9).   Above n 31.     98  Cases 32/78 etc BMW v Commission [1979] ECR 2435, [1980] 1 CMLR 370.     99   Ford (above n 11) para 46. 100  Case C-551/03 Opel Nederland [2006] ECR I-3173, [2006] 5 CMLR 1 (€43 million, reduced on appeal to €35 million).     97

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clauses and conduct unlikely to benefit from exemption  153

by threats to reduce deliveries; an obligation to require customers from outside the territory to pay a 15 per cent deposit when ordering;101 and hindering of crosssupply between authorised selective distributors.102 4.3.3  Refusal to Supply or Expulsion from Network As described above, the legality of a given selective distribution system depends partly on the existence of the possibility for dealers within the network to buy and sell the products in question from and to each other, and to supply end-users regardless of their place of residence. It is also dependent on the non-discriminatory application of objective criteria in appointing distributors. Therefore, if the exercise of this possibility of cross-supply is in practice discouraged in any way, the agreements will be illegal. This is the case, for example, if dealers are expelled or threatened with expulsion from the network if they supply dealers outside their own territory; it is also true if any kind of inducement is offered to dealers to discourage them from making such sales or purchases, or if contracts are in fact refused or terminated for reasons other than those to be found in the non-discriminatory application of legitimate selection criteria. In AEG103 the Court said of a selective distribution system in which the above rules were not respected: Such a practice must be considered unlawful where the manufacturer, with a view to maintaining a high level of prices or to excluding certain modern channels of distribution, refuses to approve distributors who satisfy the qualitative criteria of the system.104

It was argued that such refusal to appoint dealers was purely unilateral conduct which could not be subject to Article 101(1) because of the absence of an agreement or concerted practice. The Court rejected this argument. It considered that when a particular policy is being pursued (in this case the refusal to deal via the kind of outlets where low prices were likely to be charged), such refusals are . . . performed in the context of the contractual relations with authorised distributors inasmuch as their purpose is to guarantee observance of the agreements in restraint of competition which form the basis of contracts between manufacturers and approved distributors.105

The illegality of such conduct is dependent on its being systematic and not simply isolated instances of unjustified refusal to appoint. However, systematic conduct may be found on the basis of a relatively small number of occurrences.106 101  Case T-325/01 DaimlerChrysler [2005] ECR II-3319, [2007] 4 CMLR 559 (€71.825 million, reduced on appeal to €9.8 million). 102  Case C-167/04 JCB [2006] ECR I-8935, [2006] 5 CMLR 23 (€39.6 million, reduced on appeal to €30.9 million). 103   AEG (above n 10). 104   Ibid, para 37. 105   Ibid, para 39. 106   AEG (above n 10).

154  4—selective distribution

[4.3]

Under the old procedural rules, the Commission frequently imposed conditions when granting exemptions and comfort letters, in order to ensure that the freedom to appoint and terminate distributors was not abused. In SABA (No 2) the Commission agreed to renew the exemption it had granted to SABA’s selective distribution system only on condition that certain changes were made to the procedure for admission to the network of specialist distributors. The system was a two-tier one, consisting of wholesalers and of specialist retailers. Originally, SABA itself had sole responsibility for deciding whether or not a specialist distributor fulfilled the criteria for admission. The revised system allowed the wholesalers to admit to the network and supply with goods any retailer satisfying those criteria.107 Similarly, the Commission made it a condition of a comfort letter that it granted to Sony that there be an independent arbitration and appeals procedure for dealers and wholesalers refused entry into the network.108 In addition, written justification in advance was to be given to authorised dealers who were refused supplies. However, even if it finds that Article 101(1) has been infringed, the Commission has no power to order a supplier to supply a particular dealer, since this would interfere with the fundamental principle of freedom of contract.109

4.3.4  Exclusion of Internet or ‘Certain Modern Forms of Distribution’ As mentioned above, the Commission is politically strongly committed to fostering the development of online sales, not least as a means to allow consumers to shop outside their own Member States and thereby to strengthen the EU single market. It regards any unjustified restriction placed by a supplier on the use of the internet by its distributors as a restriction on resale which infringes Article 101(1). Any absolute prohibition on dealers selling through an internet site is a hardcore restriction.110 It is therefore presumed to infringe Article 101(1) unless it is ‘objectively necessary’111 and will only qualify for exemption in exceptional circumstances. The Commission takes an active interest in restrictions in selective distribution systems involving internet trading. It has fined Yamaha €2.56 million for fixing resale prices and for market-partitioning measures, including requiring its dealers to contact Yamaha before fulfilling internet orders.112 The Commission also closed 107   Above n 20. See also the conditions imposed in Yves Saint Laurent Parfums (above n 50) and Parfums Givenchy (above n 94). 108  Commission Press Release IP/95/736, 11 July 1995. 109  Case T-24/90 Automec v Commission (No 2) [1992] ECR 2223, [1992] 5 CMLR 431. 110   The question of whether an absolute ban on internet sales by approved dealers in a selective distribution system is always a hardcore restriction or whether in some circumstances it may not infringe Art 101(1) is at issue in Case C-439/09 Pierre Fabre, a preliminary reference from the Paris Cour d’appel pending before the ECJ. The Commission has also intervened as amicus curiae in the case before the French court. 111   This concept is likely to be interpreted strictly, probably being confined to the kind of situation referred to in the Guidelines, such as when it is necessary to avoid dangerous substances being sold to children. 112  Commission Press Release IP/03/1028, 16 July 2003, Decision available on the DG Comp website.

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clauses and conduct unlikely to benefit from exemption  155

an investigation into B&W’s selective distribution system, confirming by comfort letter that the block exemption applied, after B&W agreed to delete various clauses from its agreements, including a prohibition on distance sales via the internet.113 It has also intervened in a French court case which raises an important issue of internet selling within a selective distribution systems.114 Similarly, a system that excludes department stores even when they have suitable premises and staff will not normally be exempted. In Villeroy & Boch it was considered significant that the acceptance of, as well as specialist retailers, retail outlets having a specialised department, did not exclude ‘certain modern forms of distribution’ (paragraph 25). By this were meant department stores or other large outlets whose scale of operation permits them to charge lower prices than are charged by small, specialist shops selling the same goods. Provided that a specialised department is available and meets the selection criteria, admission cannot be refused on the basis that the shop deals in many other kinds of goods as well. This was explained in AEG: it was said that in many cases of selective distribution a certain amount of price rigidity is the inevitable price to be paid for the other types of competition (such as expert advice and after-sales service) that exist in consequence of the selective distribution system. This justification for price rigidity goes if new forms of distribution that enable lower prices to be charged – as well as the other forms of competition to be maintained – are excluded from the network. The Commission’s Guidelines mention its awareness that selective distribution is ‘particularly well suited to avoid pressure by price discounters (whether offline or online-only distributors) on the margins of the manufacturer, as well as on the margins of the authorised dealers’.115 Any system that excludes such distributors is unlikely to qualify for exemption (paragraph 179).

4.3.5  Resale Price-fixing Resale price-fixing in any form infringes Article 101(1) (see above chapter three section 3.3.7). This includes not only the laying down by a manufacturer of precise retail prices but also less restrictive forms of control such as agreement on the size of margins allowed.116 Volkswagen was heavily fined for fixing the resale prices to be applied by its selective distributors.117 However, in the context of selective distribution it may be permissible to prevent resellers from using expressions such as ‘cash-and-carry prices, self-service prices or takeaway prices’: in Grundig the Commission considered that such a restriction 113

  B&W, Commission Press Release IP/02/916, 24 June 2002.   Pierre Fabre (above n 54). 115   Para 178. 116   FEDETAB (above n 17). 117   The fine of €30.96 million was later annulled because no ‘agreement’ had been proved, Case C-74/04, [2006] ECR I-6585. 114

156  4—selective distribution

[4.4]

was a necessary part of maintaining quality standards and therefore did not infringe Article 101(1).118

4.3.6  Abolition of Wholesale Level Exemption or clearance is unlikely to be granted when a manufacturer, despite the fact that he wishes to distribute goods in a number of different Member States, envisages eliminating the wholesaler distribution level. This is because the Commission considers that parallel trade is more likely to be restricted in such circumstances.119 This indicates that selective distribution networks in which suppliers are vertically integrated as far as wholesale level but not at retail level, are more likely to raise competition issues than those that include independent wholesalers.

4.4 

motor vehicle distribution agreements

4.4.1 Introduction Most distribution agreements in the motor vehicle sector involve selective distribution,120 and the sector-specific rules applicable to distribution agreements for motor vehicles and their spare parts and for repair and after-sales service are therefore described in this chapter. However, the rules described here apply to all types of distribution arrangements in this sector. Until 31 May 2010, the motor vehicle sector was subject to a distinct legal regime. Although Articles 101 and 102 have always applied in this sector as in others, since 1985 there has been a separate block exemption Regulation, with motor vehicle agreements being excluded from the scope of the generally applicable vertical restraints block exemption. The Commission has now decided that this sector should become subject instead to the general block exemption on vertical restraints, but with some additional rules and guidance, and with a long transitional period in respect of agreements for distribution of new vehicles. The way in which this change has been implemented means that until 31 May 2013, there are three potentially applicable block exemptions and three respective guidance documents (all of which will be described in the rest of this chapter). The abundance of texts potentially applicable in this sector can be confusing, so the texts relevant in various situations are set out in Table 1.

118

  [1994] OJ L20/15, [1995] 4 CMLR 658, para 31.   Sony (above n 108). 120   Supplementary guidelines on vertical restraints in agreements for the sale and repair of motor vehicles and of the distribution of spare parts for motor vehicles, [2010] OJ C138/16 (‘Supplementary Guidelines’) para 42. 119

[4.4]

Type of Product

motor vehicle distribution agreements  157

Relevant Rules Until 31 May 2013

• Regulation 1400/2002 New motor vehicles • Explanatory Brochure

From 1 June 2013 • Regulation 330/2010 • Vertical Restraints Guidelines and Supplementary Guidelines

From 1 June 2010 Motor vehicle aftermarkets

Other (eg, used cars, agricultural machinery)

• Regulation 330/2010 and Regulation 461/2010 • Vertical Restraints Guidelines and Supplementary Guidelines From 1 June 2010 • Regulation 330/2010 • Vertical Restraints Guidelines

4.4.2 Background From the start of its competition enforcement activity the Commission has considered selective distribution as generally justified in the context of distributing and servicing motor vehicles and their spare parts. Early on, it received several notifications of such agreements, resulting in a number of Decisions granting individual exemptions. Following the ECJ judgment in BMW (No 1) the Commission adopted Regulation 123/85, granting automatic exemption for certain categories of motor vehicle distribution and servicing agreements. This was replaced in 1995 by Regulation 1475/95, which was itself replaced in 2002 by Regulation 1400/2002.121 The first motor vehicle block exemption, Regulation 123/85, created a specially favourable regime for motor vehicle distribution, on the basis that motor vehicles were technologically complex products requiring regular expert maintenance and repair, so that their distribution justified manufacturers in imposing some very restrictive contractual arrangements that would not have been acceptable in other product markets. Later, the Commission’s experience and, in particular, its observation of the continuing wide price differences between national markets caused it to change its stance radically, to the point that Regulation 1400/2002 is considerably stricter (except in regard to the market share threshold levels) in the limitations and obligations it imposes on vehicle manufacturers in comparison to both 121   BMW (above n 98). The respective Regulations are published at [1985] OJ L15/16; [1995] OJ L145/25; [2002] OJ L203/30. For more detail about the development of policy in this area, see the fourth edition of this book.

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its predecessor in the motor vehicle sector and also the generally applicable block exemption Regulation on vertical restraints. However, following the evaluation of Regulation 1400/2002 that the Commission undertook in order to decide what future policy should be on its expiry,122 it concluded that this sector would now be better governed by the generally applicable rules that apply to distribution agreements in other sectors, including the vertical restraints block exemption Regulation 330/2010. It found that markets for new vehicles were now much more competitive and that certain dealer protection provisions in Regulation 1400/2002 had not worked particularly well, and in any case these are not properly the concern of competition law. However, in order to allow dealers time to adapt to the new regime, it provided for a three-year transitional period during which Regulation 1400/2002 continues to apply to agreements for the sale of new vehicles. As for distribution of spare parts, as well as repair and maintenance services, the Commission concluded that the general rules should apply and that remaining concerns about lack of competition in these markets could be dealt with by adopting Regulation 461/2010, providing for three additional hardcore restrictions, which now apply in addition to those set out in Regulation 330/2010.

4.4.3  Sale of New Motor Vehicles: Until 31 May 2010 Until 31 May 2013, Regulation 1400/2002 continues to apply to vertical agreements relating to the conditions under which parties may purchase, sell or resell new motor vehicles.123 Much useful detail is contained in the introductory Recitals that precede the main body of the Regulation.124 As always with block exemptions, it is essential that an agreement fall strictly within the letter of the terms of the Regulation, or it will not apply. It should always be borne in mind that Regulation 1400/2002, in common with all block exemptions, does not impose a legally obligatory framework. Rather it offers a ‘safe harbour’ from the application of Article 101(1) to agreements that fulfil its criteria. Manufacturers remain free, at least in theory, to work outside the block exemption, by ensuring either that they do not infringe Article 101(1), for example, by appointing agents (see below chapter six), or that they fulfil the four substantive criteria of Article 101(3). In some cases the arrangements may repre122   See in particular the 2008 Evaluation Report and 2009 Commission Communication, both referred to in Recital 9 of Reg 461/2010; see also Commission Press Release IP/10/913, 9 July 2010, and the associated Report referred to there on price trends across the EU in this sector. 123   Art 2(1). The Regulation expired on 31 May 2010 in respect of distribution of spare parts and repair and maintenance services. 124   When Reg 1400/2000 entered into force, DG Comp produced an ‘explanatory brochure’ (EB). Note that the EB, not the more recent Supplementary guidelines (above n 120), continue to apply to new vehicle distribution until 31 May 2013: Supplementary Guidelines, paras 3 and 13.

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sent a small enough market share for them to benefit from the Commission’s Notice on agreements of minor importance.125 Regulation 1400/2002 is similar in structure to the general block exemption Regulation on vertical restraints described above in chapter three. Though it is stricter than that Regulation in a number of ways, it does offer a certain amount of flexibility, giving suppliers a number of options for organising their distribution structures. ‘Motor vehicle’ here means ‘a self-propelled vehicle intended for use on public roads and having three or more road wheels’ (Article 1(n)). The Commission considers that agricultural machinery falls outside the scope of this definition, since it is intended primarily for use on land.126 ‘New’ is not defined in the motor vehicle Regulation.127 Regulation 1400/2002 will normally not apply if the parties concerned or their connected undertakings128 are competitors, in particular when they are both manufacturers of motor vehicles (Article 2(3)). In such circumstances, there is too great a risk that the agreement is a means of reducing competition between the two manufacturers. However, the motor vehicle Regulation provides for some limited exceptions, in particular in the case of ‘dual distribution’ (whereby parties compete only at distribution level) or when a buyer’s total annual turnover does not exceed €100 million.129 This Regulation is not restricted in its application to agreements for retail sale. Many manufacturers of motor vehicles operate at least a two-tier system in which a different national distributor is responsible in each country for arranging distribution to local independent dealers in this territory. Block exemption can apply to agreements at these different levels. Examples of the kind of agreements potentially within the scope of this Regulation are those between: • a vehicle manufacturer or its subsidiary, and independent importers or wholesalers who are entrusted with supplying and management of the manufacturer’s distribution network; • a vehicle manufacturer or its subsidiary and individual members of its authorised network of distributors; • a vehicle manufacturer, a main distributor and a sub-distributor or agent; • a vehicle manufacturer and an association of small authorised or independent dealers who jointly buy vehicles.130

125   See above ch 2 section 2.2.8.3. An example is Porsche’s dealer network, which accounted for a market share of less than five per cent in every Member State in 2004: Commission Press Release IP/04/585, 3 May 2004. 126  Commission Press Release IP/90/917, 16 November 1990 (which concerned an earlier Regulation). 127   The Commission indicates that it is a question of trade usage: EB, Q39. In ARG/Unipart [1988] OJ L45/34 an individual exemption was granted in respect of second-hand cars. 128   See Art 1(2) for the definition of ‘connected undertakings’: it essentially includes all members of the same corporate group. 129   Art 2(3). Guidance on calculation of turnover is given in Art 9. 130   EB, Q3.

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Exemption under the motor vehicle Regulation applies to all such agreements, provided that certain market share thresholds are not exceeded and that no hardcore or ‘blacklisted’ restrictions are present, and certain other positive requirements are fulfilled. Agreements including clauses relating to intellectual property rights can be covered, provided those provisions are ancillary to the main distribution arrangements. As under the vertical restraints block exemption there is also a category of restrictions, mainly types of non-compete clauses, that do not benefit from exemption under the motor vehicle block exemption but do not necessarily prevent the rest of the agreement from so benefiting, provided they are severable under the relevant national law. 4.4.3.1  Market Share Thresholds Regulation 1400/2002 applies only if the relevant market share threshold is not exceeded. The basic rule here is that the supplier’s market share must not exceed 30 per cent of the relevant market on which it sells the vehicles or services. However, for quantitative selective distribution the threshold is 40 per cent, and no threshold at all applies to any qualitative selective distribution system.131 Article 8(2) provides some flexibility when the thresholds are exceeded for short periods. 4.4.3.2  Market Definition Before it is possible to assess the level of the relevant market shares and thus whether the relevant threshold is exceeded, the relevant product and geographic markets must be established. Given that the applicability or otherwise of the motor vehicle Regulation may well turn on the market share figures, market definition is key. As discussed above in chapter three, guidance may be sought from various sources.132 Article 3(1) of Regulation 1400/2002 states that the market to be considered is (except in the unusual case of ‘exclusive supply’) ‘the supplier’s market share on the relevant market on which it sells’, which means the wholesale rather than the retail market. A relevant market is one that includes all products or services that can be regarded as substitutable for each other. This Regulation requires substitutability to be looked at from the dealer’s point of view. DG Comp suggests that, at least at retail level, what is substitutable from his point of view ‘will normally be deter-

131   When a supplier agrees to sell particular goods or services only to one buyer in the EU (‘exclusive supply’, which is rare), then instead, the buyer’s share of the market on which it purchases those goods or services must not exceed 30 per cent (Arts 3(2) and 1(1)(e)). 132   In particular, the Commission Notice on the definition of relevant market, [1997] OJ C372/5; and EB, s 6.

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mined by the preferences of end-users’,133 but there are many circumstances in which the two will differ.134 As far as passenger cars are concerned, the Commission states that it has never defined the relevant market precisely in any of its Decisions.135 The narrowest likely definition is by industry ‘segment’, but at the other end of the spectrum, the effect of ‘chains of substitution’ (whereby, for example, certain cars in segment A are substitutable for some in segment B, and others in B are substitutable for some in C) could lead to the conclusion that there was one market for all passenger cars. As to the relevant geographic market, this will normally be national.136 4.4.3.3  Calculation of Market Share Article 8 states some rules as to how market shares are to be calculated for the purposes of this block exemption. These rules therefore prevail over other more general principles of market share calculation. Market share is based on the volume of all contract goods and corresponding goods sold by the supplier, together with other goods sold by the supplier which are regarded as substitutable by a dealer (taking into account possible chains of substitution). It is surprising that the reference is to volume rather than to value. Elsewhere,137 the Commission has required market shares to be calculated by reference to value, whereas here value data may be used only if volume data is not available. 4.4.3.4  Choice of Distribution Method A supplier can use both exclusive distribution and selective distribution, either at different levels of the supply chain or, at least theoretically, in different territories. Within one territory, however, if selective distribution is chosen, then no protection of an exclusive territory can also be given beyond the assurance that the supplier will appoint no other dealer in the territory. Depending on the relevant market shares, the selective distribution may be qualitative, quantitative or a combination of both, in which case it will count as quantitative for the purposes of the market share threshold rules. 133

  EB, 6.1.4.   For examples, and for further comments on the market share rules, see Houthoff Buruma and Liedekerke Wolters Waelbrock Kirkpatrick, ‘Flawed Reform of the Competition Rules for the European Motor Vehicle Sector’ (2003) 24(6) European Competition Law Review 254. 135   EB, 6.1. Guidance on market definition is available in some of the car distribution cases cited above at section 4.3.2. See also a study on market definition in the passenger car market produced for the Commission by F Verboven, September 2002, available on the DG Comp website. 136   EB, 6.1 and 6.2. 137   Not only elsewhere in Art 8 of this Regulation but also in the Commission’s Notice on agreements of minor importance (see above ch 2 section 2.2.8.3). Two completely different sets of data may therefore be needed to check whether that Notice or Reg 1400/2002 applies to a vehicle distribution agreement. 134

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Though it is possible in principle for a vehicle manufacturer to use different systems in different territories, this will not normally be an attractive option. For example, if selective distribution is used in territory A and exclusive distribution in territory B, dealers in A wanting to sell vehicles in B can be restricted to making passive138 sales to end-users or dealers in B, meaning that the exclusivity rights of dealers in B remain protected. However, dealers in B must be free to sell actively to end-users and to dealers (authorised and unauthorised) in A, so that distribution cannot be kept within the authorised selective distribution network (Article 4(1)(b) and (d)).139 In fact virtually all manufacturers have opted for selective distribution at retail level.140 This is because it is the only means available under the Regulation to maintain control over who is reselling vehicles. Qualitative selective systems have the advantage that there is no concern over market definition and the market share thresholds, since the Regulation exempts them regardless of market share, but in fact many manufacturers have chosen to use quantitative or mixed systems. 4.4.3.5  Prohibited ‘Hardcore’ Restrictions Article 4(1) includes seven types of restriction that prevent application of the block exemption to agreements for the distribution of new vehicles. It begins: ‘The exemption shall not apply to vertical agreements which, directly or indirectly, in isolation or in combination with other factors under the control of the parties, have as their object . . .’141 Therefore, if any such restrictions are present, either in the terms of the contract or in the way in which it is applied, the Regulation does not apply, and the agreement does not benefit from automatic exemption. The first five types of restriction essentially mirror the hardcore restrictions listed in the vertical restraints block exemption, covering resale price-fixing; various territorial and customer limitations; and restrictions on cross-supply in selective distribution. The comments about these hardcore restrictions made in chapter three apply here too. Examples of indirect hardcore restrictions of sales include: making dealer remuneration or bonuses, or purchase price, dependent on the destination of vehicles or the place of residence of the end purchaser; supply quotas based on sales territories smaller than the European Union; and discriminatory product supply (Recital 16). As to internet selling, a refusal to admit pure internet operators to a sales network does not take the agreement outside the scope of the block exemption (though such operators must be allowed to act as intermediaries for consumers). However, Recital 15 confirms that authorised dealers must be permitted to use the 138

  See EB, Q12.   That this is the intention is confirmed in Recital 13.   An exception is Suzuki, which is said to use exclusive distribution: F Verboven, ‘Efficiency Enhancing or Anti-competitive Vertical Restraints? Selective and Exclusive Car Distribution in Europe’ in B Lyons (ed), Cases in European Competition Policy: The Economic Analysis (Cambridge, Cambridge University Press, 2009). 141   Emphasis added. 139 140

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internet, including internet referral sites, even when they are restricted to making passive sales (though they may be required to have a traditional sales outlet). The vehicle supplier may require that such sites meet given quality standards. Email may also be used, but it is treated as an active rather than a passive selling method.142 Note that Article 4 refers to restrictions imposed by a supplier but does not place limitations on the independent conduct of dealers. A dealer may independently offer more favourable guarantee or servicing terms to his customers: for example, a dealer might decide to try to attract custom by offering two free services to anyone purchasing a car from him during a specific promotional period, even though the manufacturer only required him to offer one free service. In such a case, the Regulation does allow the more favourable terms to be fulfilled only in respect of customers purchasing from that individual distributor. The sixth hardcore restriction listed is any limitation on a dealer’s ability to sell any vehicle ‘which corresponds to a model within its contract range’. This is the so-called ‘availability clause’, originally intended in particular to allow customers in the United Kingdom and Ireland, where prices tended to be higher than in other Member States, to purchase right-hand drive vehicles abroad. The prohibition includes ‘discriminatory or objectively unjustified supply conditions, in particular those regarding delivery times and prices’.143 The seventh ensures that dealers are not required themselves to provide repair and maintenance services: they must be free to contract these out to the manufacturer’s authorised repairers. 4.4.3.6  Competing Goods and Services Article 5(1) makes unenforceable a number of restrictions concerning a dealer’s ability to deal in goods or services that compete with or are similar to those of his supplier. These include simple non-compete clauses and any other direct or indirect obligation causing members of a distribution system not to sell competing vehicles. Such restrictions are not block exempted and are therefore unenforceable. However, they will not affect the application of the Regulation to the rest of the agreement, provided that the national law applicable to the contract allows their severance. The meaning of ‘non-compete obligation’ is specific to this Regulation: it includes not only an outright prohibition in dealing in competing products and services but also any requirement that a buyer purchase more than 30 per cent of the value of his annual purchases144 of that type of product or service from the supplier or someone designated by the supplier. This is meant to ensure that a dealer should always be in a position to be a dealer for at least three different manufacturers. If a 30 per cent (or lower) requirement is to be exempted, it must 142

  See also EB, QQ44 and 45.  Recital 20; and see also EB, 5.1.1. 144   Art 1(1)(b). The equivalent figure in the vertical restraints block exemption Regulation is 80 per cent. See also EB, 4.5.1. 143

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allow those purchases to be made not only directly from the manufacturer but also from other network dealers, importers or suppliers. It is also specified that an obligation that a dealer sell competing vehicles in separate areas of his showroom does not amount to a non-compete obligation. Nor does provision for brand-specific staff, provided the supplier pays the additional costs involved.145 4.4.3.7 Leasing Similarly, any contract term hindering a dealer from selling leasing services will be unenforceable (Article 5(2)(a)), unless in the context of selective distribution, the leasing contracts used provide for a transfer of ownership or an option to purchase the vehicle prior to the expiry of the contract.146 4.4.3.8  Location of Premises Any restriction on a dealer in passenger cars and light commercial vehicles that ‘limits its ability to establish additional sales or delivery outlets at other locations within the common market where selective distribution is applied’ will be unenforceable (Article 5(2)(b)).147 However, even then, the supplier may continue to dictate the location of the primary establishment, and it will always be legitimate for a supplier to insist that the qualitative criteria for the area where the outlet is situated are satisfied by any additional outlet opened by a dealer or repairer. 4.4.3.9  Dealer Protection Regulation 1400/2002 makes exemption conditional on the inclusion of a number of contractual provisions intended to strengthen dealers’ positions with respect to their supplier. Any agreement between a supplier of new vehicles and a dealer must apply for a term of at least five years and provide for a minimum of six months’ notice by the supplier of its intention not to renew the agreement.148 Alternatively, if the agreement is for an indefinite period, the notice period for ‘regular’ termination must be at least two years: this is reduced to one year if either the supplier is obliged by domestic law or by special agreement to pay ‘appropriate’ compensation on termination of the agreement, or if termination is necessary in order to reorganise the whole or a substantial part of the network (Article 3(5)).149 145

  EB, 4.5.1. See also EB, QQ14 and 15 and 5.3.2.  Recital 1(1)(w); and see EB, 5.3.1.2. 147  Restrictions in respect of dealerships for other vehicles such as buses, coaches and lorries are valid except insofar as they limit the expansion of the dealer’s business at the authorised location. 148   The consequences of failure to do so are a matter of national law, according to DG Comp: EB, Q68. The same will be true of failure to fulfil other contractual terms on notice periods or the provision of reasons. 149   Whether a reorganisation is necessary is a question of fact in each case, to be proved by the supplier claiming that it is: eg, Case C-125/05 Vulcan Silkeborg A/S, [2006] ECR I-7637, [2007] 4 CMLR 25. 146

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These rules on notice periods apply only to the situation in which both parties have been fulfilling their obligations under the contract: they do not affect the possibility of more sudden termination for breach of contract when that is available under the applicable national law (EB, Q69). This does open up the possibility for manufacturers to act against the spirit of the rules by including clauses in the contract that allow them to terminate contracts with their dealers for very minor breaches, thereby making it relatively easy to find grounds for terminating a contract when they choose. The Regulation therefore makes exemption of any agreement involving a dealer conditional on the agreement requiring written and fully reasoned notice of termination (Article 3(4)).150 Dealers must also be entitled to agree to transfer their rights and obligations to any other member of the network of their choice (Article 3(3)). Recital 10 specifies that this applies as between operators ‘of the same type’, meaning that a dealer who does not also provide after-sales service cannot insist on transfer of his contract to an authorised repairer who is not also a dealer. The Regulation also requires that each of the parties to any agreement have the right to refer disputes over performance of contractual obligations to an independent expert or arbitrator, and this applies even if the agreement has been terminated under an express termination clause.151 National court action is also always an option in such situations (Article 3(6)). 4.4.3.10  Sales through Intermediaries Dealers must have the right to sell to intermediaries who buy on behalf of customers who have specifically authorised them to do so.152 Sales through intermediaries have caused particular problems in the past because they have sometimes been suspected of being used as a means for unauthorised distributors to obtain supplies of vehicles that a manufacturer wants, legitimately, to distribute exclusively through his authorised selective distribution network. Though customer limitations are in principle blacklisted, Article 4(1)(b)(iii) allows, in the context of selective distribution, the restriction of supplies to unauthorised distributors. Issues have arisen in the context of selective distribution systems for cars when customers have sought to obtain cars (usually in another country than their own in order to take advantage of lower prices) through an agent. In Peugeot v Commission153 Peugeot argued (in the context of a previous block exemption) that a professional intermediary placing orders on a regular rather than an occasional basis was really acting as a reseller, and on this basis Peugeot claimed to be entitled to order its distributors to refuse these intermediaries. The Commission, ultimately upheld by the ECJ, maintained that an agent does not cease to act as an 150   Examples of the kind of pro-competitive behaviour that suppliers might seek to prevent by terminating contracts in this way are sales to foreign consumers, sale of competing brands and subcontracting of after-sales services (Recital 9). 151  Case C-421/05 City Motors Group NV, [2007] ECR I-653. 152  Recital 14; and see also EB, 5.2. 153  Case C-322/93 [1994] ECR I-2727.

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agent simply because he does so on a regular basis: provided he is in possession of a specific order from a customer for each car, he is still acting as an agent, and so the block exemption applies. DG Comp takes the view that a supplier can only require its dealers to ensure that an intermediary has a prior signed and dated authorisation from the consumer to purchase a specified vehicle.154 The block exemption merely defines a category of relationship between supplier and dealer that may benefit from exemption from the prohibition set out in Article 101(1). It does not set out an obligatory distribution system in this sector for suppliers and distributors. Nor, therefore, can it be invoked to restrict the freedom of action of third parties such as intermediaries or parallel importers. The ECJ confirmed this when it rejected the argument that the motor vehicle Regulation prohibited an independent (unauthorised) dealer from acting simultaneously as an intermediary, whom distributors, under the Regulation, may not be prohibited from supplying, and as an unauthorised distributor of parallel imports. It stated that an earlier block exemption could not be interpreted . . . as prohibiting a trader who is outside the official distribution network for a given make of motor vehicle and is not an authorised intermediary within the meaning of that Regulation from acquiring new vehicles of that make by way of parallel imports and independently carrying on the business of marketing such vehicles.155

4.4.3.11  Withdrawal or Dis-application of Exemption The following are mentioned in the motor vehicle Regulation as examples of circumstances that may lead to withdrawal of the benefit of block exemption in a particular case. There is an important difference between, on the one hand, the conditions discussed above, breach of which leads to the Regulation being completely inapplicable, and on the other hand, the situations discussed below. The latter do not affect the application of the Regulation until the Commission has taken a formal Decision to the effect that the benefit of exemption is withdrawn. Such a Decision must be accompanied by the usual procedural requirements such as the right of interested parties to be heard. Examples given of situations that may lead to withdrawal are when: • market access is significantly restricted by the cumulative effect of parallel networks of similar agreements (most likely when selective distribution is common); or • competition is restricted on a market where one supplier is not exposed to effective competition from other suppliers; or • prices or conditions of supply differ substantially between geographic markets; or • discriminatory prices or sales conditions, or unjustifiably high supplements, such as those charged for right-hand drive vehicles, are applied within a geographic market.156 154

  EB, 5.2.  Case C-309/94 Nissan France [1996] ECR I-677, [1996] 4 CMLR 778, para 20. See also Case C-128/95 Fontaine v Aqueducs Automobiles [1997] ECR I-967, [1997] 5 CMLR 39; and Case C-226/94 Grand Garage Albigeois [1996] ECR I-651, [1996] 4 CMLR 778. 156   Art 6 and Recital 32. 155

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Previous versions of the Regulation also provided for withdrawal, but the Commission has never made use of this power, although arguably there have frequently been grounds for it. Article 6(2) provides that when appropriate, such withdrawal may be effected by a national competition authority in respect of the whole or part of its territory. Apart from withdrawal, another possibility is that the block exemption may be dis-applied by the Commission by Regulation when parallel networks of similar vertical restraints cover more than 50 per cent of a relevant market. Dis-application is similar to withdrawal in that it requires a formal act by the Commission, but it applies not to one specific distribution system but to particular restrictions contained in any agreement relating to a specified market. Such a Regulation cannot enter into force earlier than one year following its adoption (Article 7), so that companies concerned have time to adapt to the new situation. 4.4.4  Sale of New Vehicles: From 1 June 2013 As from 1 June 2013 Regulation 1400/2002 and its accompanying explanatory brochure will no longer apply to the distribution of new vehicles. Instead, the generally applicable vertical restraints block exemption Regulation 330/2010 and its accompanying Guidelines, described in the first part of this chapter and in chapter three, apply. In addition there is relevant guidance in the Supplementary Guidelines, described below. 4.4.4.1  Main Changes For selective distribution the change of regime will mean a lower market share threshold of 30 per cent for block exemption (as compared with the current thresholds of 40 per cent for quantitative selective distribution systems and no limit for qualitative systems), as well as the application of the 30 per cent threshold to the dealer as well as to the supplier. These changes considerably narrow the scope of block exemption. On the other hand, block exemption will then, in contrast with the current situation, be available for any type of distribution system, even when: • the supplier imposes a non-compete obligation in respect of up to 80 per cent of the dealer’s purchasing requirements (as compared with a current maximum of 30 per cent of requirements) or up to 100 per cent if the term of the restriction does not exceed five years; or • the dealer is prevented from opening additional sales outlets; or • the dealer is also required to provide repair and maintenance services; or • the agreement does not include various dealer protection clauses (eg, contract duration, notice periods) that are currently required.157 157  But the Supplementary Guidelines exert indirect pressure on suppliers to provide for such protective clauses by stating that adherence to an industry Code of Conduct will be taken into account in individual cases in which a supplier is alleged to have achieved anticompetitive results by exerting improper pressure on dealers: para 7.

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4.4.4.2  Non-compete Obligations The Supplementary Guidelines refer to the limits on non-compete (or ‘singlebranding’) obligations contained in Article 5 of the vertical restraints block exemption. They state that in the motor vehicle sector, indirect non-compete obligations may be imposed through practices such as the use of qualitative standards designed to discourage dealers from selling competing brands; bonuses conditional on selling exclusively one brand; target rebates; a requirement to set up a separate legal entity for any competing brand; or a requirement to have a separate showroom in a situation in which this is not economically viable.158 The Commission also makes it explicit that a non-compete obligation that is tacitly renewable beyond the maximum five-year term is not block exempted, and this includes situations in which a supplier uses obstacles, threats of termination or intimations that a non-compete obligation will be re-imposed before a dealer or new supplier has been able to recoup sunk investments.159 It also warns that the use of non-compete clauses as part of an overall strategy to eliminate a specific competing supplier would mean that Article 5(1)(c) of the vertical restraints block exemption would prevent such clauses being block exempted.160 When the block exemption market share thresholds and other conditions are satisfied but net anticompetitive effects arise out of non-compete obligations, the Commission or a national competition authority may withdraw the benefit of the block exemption. This may even be the case in some circumstances when the obligation relates to less than 80 per cent of the dealer’s purchasing requirements and so is outside the block exemption’s definition of a ‘non-compete obligation’. In addition, if parallel networks of similar restraints cover over 50 per cent of the market, then the Commission may dis-apply the block exemption to such restraints in that market.161 When an agreement including a non-compete obligation falls outside the scope of the block exemption, the general principles set out in the vertical restraints Guidelines apply (see above chapter three section 3.6.8). The supplier’s and dealer’s market shares will be relevant, and so too will be the total share of the market subject to such obligations. Outside the block exemption, even a minimum purchasing requirement set below 80 per cent may be treated as a non-compete obligation if it has the effect of preventing dealers from dealing in a competing brand.162

158

  Para 32.   Para 26.   Para 27. This type of concern may arise in particular if 40 per cent or more (or above 30 per cent when one supplier has a market share of over 30 per cent) of the market is subject to such non-compete obligations: para 34. 161   Paras 33–37. 162   Paras 40–41. 159 160

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4.4.4.3  Selective Distribution The Supplementary Guidelines reiterate the general legal principle that purely qualitative selective distribution normally falls outside Article 101(1), and quantitative selective distribution often requires exemption.163 They also emphasise that when agreements restrict parallel trade they cannot be expected to benefit from exemption. The Supplementary Guidelines cite many examples of direct and indirect restrictions on parallel trade, and they cite cases in which such arrangements have been found illegal by the Commission and European Courts.164 Leasing companies are regarded as end-users, and so dealers must remain free to sell to any leasing company it chooses.165 The same is true of intermediaries, whether or not they operate through the internet, though the dealer may be required to check before each purchase that the intermediary has a valid mandate which mentions the name and address of the customer.166 The Supplementary Guidelines also state that quantitative selective distribution will usually satisfy the requirements of Article 101(3) if the parties’ market shares do not exceed 40 per cent, unless particular selection criteria, such as a location clause, raise competition issues.

4.4.5  Sale of Spare Parts and Provision of Repair and Maintenance Services The sale of spare parts and provision of after-sales services such as repair and maintenance work are now subject to the general vertical restraints regime, but with the additional rules and guidance described below. Though the rules are now in some cases to be found in different texts, in substance there is almost no change from the regime that existed prior to 1 June 2010 under Regulation 1400/2002. The one crucial change is the introduction of a single 30 per cent market share threshold, which in practice removes the possibility of block exemption from almost all distribution systems in the motor vehicle aftermarket sector. 4.4.5.1  Market Definition The Commission tends to define the relevant market as brand-specific.167 On the basis of the Commission’s view, in most cases the relevant market shares are therefore well over 30 per cent and so cannot benefit from block exemption. This approach is questionable, particularly if supply-side substitutability (the 163

  Paras 42–44.   Paras 48–50; see also cases cited above at nn 100–2; and Peugeot Nederland v Commission (above n 13). 165   Para 51. 166   Para 52. 167   See Commission Press Releases IP/03/80, 20 January 2003 (Volkswagen and Opel) and IP/04/585, 3 May 2004 (Porsche), both of which involved the use of qualitative selective distribution for after-sales service providers. See also Supplementary Guidelines, paras 15 and 57. 164

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possibility of repairers switching from repairing one brand to repairing another brand) is taken into account. However, the Commission does recognise that in some cases (for example when fleet buyers making multiple purchases of vehicles take into account the lifetime costs of running the vehicles when making their initial purchasing decision), there may be a single market for the vehicle together with spare parts and repairs.168 4.4.5.2  Infringement of Article 101(1) TFEU The general principles of Article 101(1) described elsewhere in this book now apply in this sector. As well as the usual types of restriction that will be treated as having as their object the restriction of competition, the Commission considers that in this sector the three kinds of restriction set out in Article 5 of Regulation 461/2010 (see below) are also hardcore. The Supplementary Guidelines make it clear that even in a qualitative selective distribution system, there may be infringement of Article 101(1) unless full, nondiscriminatory access to technical information is ensured for all independent operators, including independent repairers, spare parts manufacturers and distributors, manufacturers of repair equipment or tools, publishers of technical information, automobile clubs and roadside assistance operators, and providers of inspection and testing services or training for repairers.169 Similarly, if a manufacturer’s warranty terms make the warranty conditional on repair work having been done only by authorised repairers, or only the manufacturer’s branded spare parts having been used, qualitative selective distribution may infringe Article 101(1); and in this case the agreement is unlikely to benefit from exemption under Article 101(3).170 The use of quantitative selection criteria is also likely to bring agreements within Article 101(1), as will a requirement that an authorised repairer also sell new vehicles. The latter type of obligation is unlikely to be exempted in the case of established brands. However, when the linking of the two activities is necessary for a limited period of time in order to provide sufficient incentive to dealers to launch a brand in a particular geographic market, such a requirement may fall outside the scope of Article 101(1).171 4.4.5.3  Block Exemption under Regulations 330/2010 and 461/2010 The generally applicable block exemption Regulation 330/2010 applies to agreements in motor vehicle aftermarkets only on condition that they do not include 168

  Para 57.   Paras 62–68. Concerns that four manufacturers were not giving adequate access to such information were resolved by the companies concerned making formal commitments to do so. See Commission Press Release IP/07/1332, 14 September 2007; Toyota [2007] OJ L329/52; General Motors (Opel) [2007] OJ L330/44; Fiat [2007] OJ L332/77; and DaimlerChrysler [2007] OJ L317/76. 170   Para 69. 171   Para 71. 169

[4.4]

motor vehicle distribution agreements  171

any of the five hardcore restrictions listed there, nor any of the three additional hardcore restrictions listed in Regulation 461/2010. These are restrictions: • on the sales of spare parts by members of a selective distribution system to independent repairers which use the parts for motor vehicle repair and maintenance; • agreed between a supplier of spare parts, repair tools or diagnostic or other equipment and a motor vehicle manufacturer, restricting the supplier’s ability to sell those goods to authorised or independent distributors or repairers, or to end-users;172 • agreed between a vehicle manufacturer which uses components for vehicle manufacture and the component supplier, restricting the supplier’s ability to place its trademark or logo effectively and in an easily visible manner on the components supplied or on spare parts. In practice block exemption will rarely be available to agreements relating to spare parts and after sales service because, as mentioned above, the Commission normally defines markets in this sector as brand-specific, and this means that the 30 per cent market share thresholds will hardly ever be satisfied. Agreements in these markets will therefore normally need to be assessed individually under Article 101(1) and (3). Regulation 461/2010 in practice therefore will more often serve to indicate what clauses are likely to give rise to a presumption of infringement and to be unlikely to qualify for exemption, than to provide block exemption.

172   The Supplementary Guidelines make it clear that ‘tooling arrangements’ will fall outside the scope of Art 101(1) only when the supplier makes a significant contribution in the form of tools, sharing development costs or providing necessary intellectual property rights or knowhow (para 23).

5

Franchising

key points • The legality of a franchise contract depends on the particular clauses included in it and on the market environment in which it operates. • Any clause (unless the contract involves only very small areas or parties) by which the franchisor seeks (i) to fix retail prices or (ii) to ban exports to other EU Member States will be void, and fines may be imposed by the European Commission or national competition authorities. It is permissible for the franchisor to indicate recommended prices to franchisees. • Any clause necessary to prevent the franchisor’s knowhow benefiting his competitors or potential competitors outside the franchise network is valid. • Any clause necessary for the maintenance of the identity and reputation of the franchise network is valid. • Other restrictions such as provision for territorial or customer exclusivity may render the contract void and open to the risk of fines unless an exemption applies. • An exemption applies if either (i) the contract fulfils all the conditions laid down in the vertical restraints block exemption Regulation, including relevant market shares of supplier and buyer of no more than 30 per cent; or (ii) the restrictions are necessary to bring about economic efficiencies.

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  key

texts

EU Regulations Commission Regulation (EU) 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 (‘vertical restraints block exemption’ or ‘block exemption’ or ‘Regulation’), [2010] OJ L102/1 (below Appendix 2) Commission Regulation (EC) 2790/1999 on the application of Article 81(3) of the Treaty to categories of vertical agreements and concerted practices, [1999] OJ L336/21 (expired but applicable to certain agreements until 31 May 2011)

EU Notices Commission Guidelines on vertical restraints (‘vertical restraints Guidelines’ or ‘Guidelines’), [2010] OJ C130/1 (below Appendix 3)

ECJ Judgments Case 161/84 Pronuptia de Paris GmbH v Pronuptia de Paris Irmgard Schillgalis [1986] ECR 353, [1986] 1 CMLR 414

Commission Decisions Charles Jourdan [1989] OJ L35/31, [1989] 4 CMLR 591 Computerland [1987] OJ L222/12 [1989] 4 CMLR 259 Pronuptia [1987] OJ L13/39, [1989] 4 CMLR 355 Servicemaster [1988] OJ L332/38, [1989] 4 CMLR 581 Yves Rocher [1987] OJ L8/49, [1988] 4 CMLR 592

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what is a franchise?  175

It is essential that this chapter be read in conjunction with chapter three for a full understanding of the treatment of franchising agreements. Unless otherwise stated, all references to Articles in this chapter (except for Articles 101 and 102 TFEU) refer to the vertical restraints block exemption Regulation 330/2010. Similarly, unless the context requires otherwise, all references to paragraphs refer to the vertical restraints Guidelines.

5.1 

what is a franchise?

5.1.1 Introduction ‘Franchising’ is not a technical legal term and has a number of different meanings commercially. In EU competition law, this expression has generally been used to refer to a means of distributing goods or services through a network of legally and financially independent retailers, but in such a way as to create an outward appearance of uniformity throughout the network. The uniformity may be manifested, for example, in the appearance of the retail outlet or the goods or in the use of particular trademarks or sales methods. Although many people associate franchising with fast food and fashion outlets, in fact it is a marketing formula that has been applied to the retailing of a very wide variety of goods and services. Since its first appearance in Europe in the 1970s it has been used to sell everything from pet dogs to hot dogs, and it has become extremely popular as a distribution method. For the manufacturer or supplier (franchisor) it is often an advantageous compromise between, on the one hand, the expense and risk of setting up many more sales outlets himself and, on the other hand, the loss of control involved in distributing his goods through completely independent distributors: it allows a network to be expanded very quickly without the substantial capital outlay that would otherwise be required. The retailer (franchisee) in his turn may be glad of the opportunity to take advantage of an already well-known name and image and the practical and technical help that the franchisor will give him in setting up and running his new business. There is only one judgment from the European Courts applying competition law to a franchising agreement. Nor are there many exemption Decisions of the Commission. The adoption in 1988 of a block exemption Regulation on franchise contracts (which has since expired) quickly obviated the need for notification in many cases and ensured that many franchise networks either were already valid or could be easily adjusted so as to bring them within the terms of the block exemption. It probably also discouraged the use of clauses that might take a franchising system outside the terms of that Regulation. There were no individual exemption Decisions on franchising agreements between 1989, when the original franchising block exemption entered into force, and 2004, when the Commission lost the power to grant individual exemptions.

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The franchising-specific Regulation was replaced in 2000 by a general block exemption Regulation on vertical restraints, which covered a wide range of distribution arrangements, including many franchise agreements; and this Regulation was itself replaced by a slightly amended block exemption in 2010. A wide range of franchising arrangements are automatically exempted by this block exemption, provided that the relevant market shares of the supplier and buyer do not exceed 30 per cent.

5.1.2  What is Treated as a Franchise under EU Law? The word ‘franchise’ is sometimes (particularly in the United States) used in a wide sense more or less synonymous with distributorship.1 It is not a technical legal expression, but in Europe the word generally connotes something along the following lines. It is a distribution method adopted by a manufacturer or supplier who has developed a well-known name and appearance for his product (usually involving knowhow and intellectual property rights). The supplier may manufacture the goods itself, or he may simply select goods produced by a third party. In the latter case the franchise may be described as a ‘business format’ franchise, since it is essentially a business format that is being exploited. In either case, the supplier will probably also have established an ‘image’ for his sales outlets, connected with the physical appearance of the outlets and the business methods applied. These names, trademarks and ‘images’ will be known by the public and attract customers who recognise these familiar signs. Service franchises, such as photocopy shops and hairdressing salons, are also a type of business format franchise. In order to capitalise on this public recognition and on the package of intellectual property and business knowhow it has created, the supplier (the franchisor) may license another, completely independent, person (a franchisee) to use the package. In return for the licence, it will demand royalties and maybe a lump sum. The franchisee will in return have the benefit of opening his outlet on the basis of a name and appearance readily recognisable to consumers, and on the basis of the franchisor’s business knowhow. Thus, a franchise is often attractive to an individual with little or no experience or reputation in the business but with a small amount of capital (perhaps a redundancy payment) to buy the franchise .

5.1.3  The European Commission and ECJ Perception of Franchising It was stated above that no general legal definition of franchising or a franchise agreement exists. It is not a technical legal expression in EU law: no consequences 1   This chapter discusses distribution (goods and services) franchising only. However, note that the term ‘franchise’ is used in other legal and commercial contexts in an extended sense to cover also production franchising (whereby franchisees are licensed to produce a particular product) or to refer to distribution arrangements that EU competition law treats as agency (see below ch 6).

[5.1]

what is a franchise?  177

necessarily flow from classifying any given distribution network as a franchise.2 The way in which a network is organised and, in particular, the terms of the agreements made between the franchisor and the franchisee differ widely from one franchise network to another. The European Court of Justice (ECJ) has made it clear that in principle the validity of any specific franchising contract will be decided on the basis of the individual terms included in that contract.3 In a number of respects the ECJ and the European Commission have tended to be more generous in their appraisal of a given clause in the context of a franchise network than of the same clause in a different kind of distribution system. It is therefore necessary to know what they consider the essential characteristics of franchising, since this may indicate whether or not a particular contractual restriction is likely to be treated leniently. The favourable treatment referred to above is due mainly to the conception that the Commission and the Court have of franchising as a system essentially advantageous to small business. It has been viewed as a means of allowing people who would not otherwise be able to set up in business independently to do so: they are enabled to do this through the use of the franchisor’s established reputation and the continuing help and advice that the franchisor makes available to the franchisee. Considerable importance is attached to this idea in the application of the competition rules to franchising. The provision by the franchisor to the franchisee of substantial knowhow is therefore a crucial element in the concept of franchising.4 In its Charles Jourdan5 Decision, the Commission listed the areas of knowhow and assistance provided as covering purchasing, decorating, stock, management, sale and advertising.6 It is therefore likely that, provided that a distribution agreement includes a sufficient degree of provision of knowhow and continuing help to the dealer, it will be treated with relative leniency. The Commission expressly confirms this in its vertical restraints Guidelines: In addition to the licence of [intellectual property rights], the franchisor usually provides the franchisee during the life of the agreement with commercial or technical assistance. The licence and the assistance are integral components of the business method being franchised. . .7

2  For the European Commission’s description of franchising, see Commission Guidelines on vertical restraints (‘vertical restraints Guidelines’ or ‘Guidelines’) [2010] OJ C130/1 (below Appendix 3) para 189. 3   Case 161/84 Pronuptia de Paris GmbH v Pronuptia de Paris Irmgard Schillgalis (‘Pronuptia ECJ’) [1986] ECR 353, [1986] CMLR 414. 4   Ibid, para 15: ‘the system gives traders who do not have the necessary experience access to methods which they could not have learned without considerable effort’. See also Yves Rocher [1987] OJ L8/49, [1988] 4 CMLR 592, para 39: ‘It . . . gives non-specialists access to the use of . . . proven trading methods.’ 5   [1989] OJ L35/31, [1989] 4 CMLR 591, para 11. 6   The Commission said that the knowhow was primarily commercial, although it also covered management aspects. It was ‘substantial’ and gave the trader ‘a clear advantage over competitors’. 7   Para 189.

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[5.2]

The more important the transfer of knowhow, the more likely it is that the restraints create efficiencies and/or are indispensable to protect the knowhow and that the vertical restraints fulfil the conditions of Article 101(3).8

On the other hand, an agreement designated as a franchise by the parties is not likely to be treated as such if it does not embody this kind of relationship. Furthermore, the favourable attitude taken to franchising is always subject to the economic context in which the network operates. In Yves Rocher, for example, the Commission prefaced its remarks with the explanation ‘having regard to existing structures of production and supply in the relevant market’.9

5.2 

application of article 101(1) tfeu to franchising

5.2.1  Do Franchising Contracts Infringe Article 101(1) TFEU? The answer to this question depends on the precise terms of the contract in question and the economic and market context. As for any other type of agreement, a term granting absolute territorial exclusivity to a franchisee or imposing on it fixed or minimum resale prices will almost certainly fall foul of Article 101(1). Very many franchising contracts contain clauses providing for some degree of territorial exclusivity, since in the absence of such exclusivity a potential franchisee would often not be prepared to make the necessary investment in setting up and equipping its outlet. Usually, the franchisee will be allotted a territory in which it is at least assured that no one else will be granted the right to exploit the franchise. For its part, the franchisee may well be required only to operate the franchise from the location specified in its contract so that it cannot either change location or open a second outlet. The ECJ in Pronuptia said that a territorial exclusivity clause, when combined with a clause prohibiting the opening of a second outlet, might infringe Article 101(1). Because the Court referred to this combination of clauses, and given that the Court10 and the Commission11 have accepted that sometimes territorial exclusivity is essential to the establishment of the network, it might be thought that a territorial exclusivity clause, like the many terms discussed below, could fall outside Article 101(1). In fact, neither the Court nor the Commission has confirmed this. Instead the Commission has consistently held that territorial exclusivity clauses require exemption under Article 101(3), even in the context of very competitive markets.12 In any case, such ‘exclusivity’ alone would give only limited     8

  Para 190(a).   Above n 4, para 39. 10   Pronuptia ECJ (above n 3) para 24. 11   Computerland [1987] OJ L222/12, [1989] 4 CMLR 259, para 33: ‘The restrictions . . . are indispensable to ensure the existence of the network: potential franchisees would not be willing to make the investments necessary . . . if they were not assured that no other Computerland outlets will be established in their near vicinity’. See also Yves Rocher (above n 4) para 63; and Charles Jourdan (above n 5) para 39. 12   Yves Rocher (above n 4) para 54.     9

[5.2]

application of article 101(1) tfeu to franchising  179

protection to a franchisee, since it would protect it only from competition from the franchisor itself, not from competition from other franchisees. The five (and only) Commission Decisions on franchising, all taken in the 1980s, followed this approach, namely that the infringement of Article 101(1) arose out of a combination of the territorial exclusivity with the prohibition on opening a second outlet from which to exploit the franchise. In Computerland this was the case even though each territory was less than one kilometre in radius, and franchisees were free to sell to customers outside their territory.13 However, in all five cases exemption was granted under Article 101(3). Provision for exclusive territories in franchise agreements will in practice be favourably treated. In particular, a degree of territorial exclusivity is often automatically exempted by the vertical restraints block exemption14 where the market shares of the parties do not exceed 30 per cent (see above chapter three section 3.5). In Pronuptia the Court also qualified its statement that exclusive territoriality would infringe Article 101(1) with the words ‘if it concerns a business symbol which is already well-known’ (paragraph 24). This requirement has not received much attention in individual Commission exemption Decisions. This may not now make that much difference in practice: most franchise agreements containing such a clause are automatically exempted by the block exemption provided the relevant market shares do not exceed 30 per cent. When the supplier’s share exceeds 30 per cent the franchise would presumably be ‘well-known’. As far as the requirement in Article 101(1) that the agreement affect trade between Member States is concerned, the ECJ stated expressly in Pronuptia that even if the franchise agreement is concluded between two parties in the same Member State it will affect trade between Member States if the franchisee is prevented from establishing itself in another Member State. In the Commission’s published decisions on franchising, all taken over 20 years ago, it paid little more than lip service to the notion that the surrounding economic circumstances and structure of the market should be taken into account in deciding whether a clause in a franchising agreement has a restrictive effect on competition.15 In every such Decision there has been a competitive market, and yet clauses giving a degree of territorial protection have apparently brought the agreement virtually automatically within the scope of Article 101(1). For example, in Computerland a franchise network for the sale of microcomputers was granted exemption rather than negative clearance, chiefly because of the clauses granting territorial exclusivity. This was despite the fact that the Commission found that there were around 10,000 authorised microcomputer dealers (excluding non- specialised retailers who also dealt in these goods) in Western Europe, of which 13

  Above n 11, para 7.   Commission Regulation (EU) 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 (‘vertical restraints block exemption’ or ‘block exemption’ or ‘Regulation’), [2010] OJ L102/1 (below Appendix 2). 15   Pronuptia ECJ (above n 3) para 27(1). 14

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[5.2]

fewer than one per cent were Computerland outlets. Furthermore, these outlets accounted for about three per cent of total EU sales, and in no Member State was the Computerland market share much above four per cent.16 Similarly, in Yves Rocher the Commission found the cosmetics market in question to be extremely competitive. Yves Rocher held 7.5 per cent of the French market, six per cent of the Belgian market and less than five per cent of the market in the other Member States in which it marketed cosmetics. Furthermore, the franchisor, though not permitted to open an outlet within the franchisee’s protected territory, could sell into the area by other means, including mail order.17 Even so, negative clearance was refused and exemption granted instead. Although there is no difference in practice between an agreement falling outside Article 101(1) and an exempted agreement, the point just discussed is not without significance. It could be crucial in a situation in which for some reason (such as too high a market share) the agreement falls outside the block exemption, and its validity is called into question. The burden of proving that Article 101(1) is infringed is on the party alleging the illegality of the agreement, whereas a party claiming the benefit of Article 101(3) bears the burden of establishing that the four criteria of Article 101(3) are met.18 Current enforcement policy on distribution agreements is rooted in an approach giving much more prominence to economic analysis and actual effects on the market, so similar cases arising now might well be treated differently. Since this new approach was formally introduced in 2000, however, there have been no formal Commission Decisions or European Court judgments assessing franchise agreements under Article 101, and so this speculation has not been tested.

5.2.2 The Pronuptia Judgment The only case in which the ECJ has applied Article 101 to franchising is the 1986 case of Pronuptia, in which a German court put a number of questions to the ECJ regarding the validity of a franchising contract in the light of EU competition law. This case came before the ECJ in the form of a request for a preliminary ruling. The plaintiff before the German court was a German subsidiary of the French franchisor ‘Pronuptia de Paris’, a distributor of wedding dresses and other wedding clothes and accessories. This subsidiary, Pronuptia de Paris Gmbh, had granted a franchise to a German franchisee, Mrs Schillgalis, for three separate territories in the Federal Republic, and a dispute had subsequently arisen over unpaid royalties claimed by the franchisor. The franchisee was relying on the argument that

16

  Computerland (above n 11) para 3.   Above n 4, para 19.   See above ch 2 section 2.4.1.

17 18

[5.2]

application of article 101(1) tfeu to franchising  181

the franchise contract was void and unenforceable for infringement of Article 101(1).19 The contract granted the franchisee the right to use the franchisor’s trademark in defined territories and to receive continuing assistance and advice from the franchisor on many aspects of running the business. The franchisor also agreed not to open a shop itself or by any other means supply third parties, nor to grant a trademark licence to anyone else in the allotted territories. The franchisee for her part promised: • to pay a 10 per cent royalty on all sales made; • to use the trademark only in connection with the retail shops in the specified territories; • to conduct business only from those specified retail shops, which were to conform to the specifications of the franchisor; • to purchase at least 80 per cent of her stock from the franchisor and the balance only from approved suppliers; • to cooperate over advertising, including that giving recommended prices; • not to compete with the franchisor anywhere in West Germany for one year after the end of the contract; and • not to assign the franchise without the franchisor’s consent. The Court first stressed that franchising contracts must be judged individually, according to the particular restrictive clauses present in them. It commented favourably on franchising as a legitimate way for the franchisor to exploit an asset that it had developed. It then went on to hold that most of the clauses in this fairly typical franchise contract were inherent in the nature of franchising itself, which could not function without them. Therefore, in accordance with the principle of ‘ancillary restrictions’ (see above chapter two section 2.2.8.4), these clauses did not infringe Article 101(1): In a system of distribution franchises of that kind, an undertaking which has established itself as a distributor on a given market and thus developed certain business methods grants independent traders, for a fee, the right to establish themselves in other markets using its business name and the business methods which have made it successful. Rather than a method of distribution, it is a way for an undertaking to derive financial benefit from its expertise without investing its own capital. Moreover, the system gives traders who do not have the necessary experience access to methods which they could not have learned without considerable effort and allows them to benefit from the reputation of the franchisor’s business name. . . Such a system, which allows the franchisor to profit from his success, does not itself interfere with competition. In order for the system to work, two conditions must be met.20 19   Such ‘Eurodefences’ are often regarded as the last resort of a scoundrel, put forward only in the absence of any more morally appealing defence. There may often be some justification for such a view, but awareness of this kind of risk should provide an incentive to parties to ensure that they do not leave themselves open to such a challenge. 20   Pronuptia ECJ (above n 3) para 15.

182  5—franchising

[5.3]

The two conditions were then set out. They are that • the franchisor’s knowhow be protected; and • the identity and reputation of the network be maintained.21 Each of these provides the justification for a set of clauses that ensure that these conditions are met. Because they are considered essential to the success of a franchising system (which would presumably not be able to exist or succeed without them), they are characterised as not infringing Article 101(1). The two groups of clauses associated with these two conditions were subsequently developed by the Commission through a number of Decisions and through the 1988 block exemption Regulation on franchise agreements, as well as the subsequent block exemptions and guidelines that replaced it. Below will be considered three groups of clauses generally considered to fall outside the prohibition contained in Article 101(1), either because they are necessary to fulfil one of the two conditions stated to be essential to the working of a franchise network or because they are irrelevant to competition. Next, exemption, either through the application of the block exemption Regulation on vertical restraints or by operation of Article 101(3), will be discussed. 5.3 

clauses not violating article 101(1) tfeu

5.3.1  Clauses Necessary for the Protection of a Franchisor’s Knowhow First, the franchisor must be able to communicate his knowhow to the franchisees and provide them with the necessary assistance in order to enable them to apply its [sic] methods, without running the risk that that knowhow and assistance might benefit competitors, even indirectly.22

The type of obligations undertaken by the franchisee and deemed necessary to fulfil this condition are as follows: (i)  Obligations of confidentiality A franchisor may oblige his franchisees to observe confidentiality towards confidential information and knowhow that he transmits to them. This may include the duty not to make disclosure to employees unless necessary and to pass on to employees to whom it is disclosed the same obligations of confidentiality.23 (ii)  A prohibition during the term of the contract on opening the same or a similar kind of shop in an area where it might compete with another franchisee, or generally on carrying on any kind of competing activities24 21

  Ibid, paras 15–16.   Ibid, para 16. 23   Computerland (above n 11) paras 5 and 22(i). 24   Pronuptia ECJ (above n 3) para 16. 22

[5.3]

clauses not violating article 101(1) tfeu  183

In Yves Rocher it was noted that such a clause did not prohibit a franchisee from carrying on a non-competing business, provided the franchisee’s personal commitment to the Yves Rocher franchise was ensured.25 In Computerland, the Commission required an absolute non-competition clause to be amended so as to allow franchisees to acquire financial interests in the capital of competing undertakings, although not to the extent that such participation would enable them to control those undertakings.26 A clause stipulating that a franchisee’s acquisition of a financial interest in a competing undertaking was permissible provided it did not involve the franchisee personally in taking part in competing activities was held not to infringe Article 101(1) in Yves Rocher.27 Even a clause limiting acquisition of a financial interest in the capital of a public company to a maximum of five per cent was held to be essential to the protection of the franchisor’s knowhow and therefore outside the terms of Article 101(1) in Servicemaster.28 However, two points should be noted about this Decision: • It concerns a service franchise, and the Commission stated in its Decision that the protection of knowhow was even more important in the context of a service franchise than in a distribution franchise, even though the two kinds of franchise could basically be treated in the same way (paragraph 6); • The Commission stated that such a clause could infringe Article 101(1), but it did not in the circumstances because the franchisees tended to be small undertakings for whom such a five per cent limit would not normally constitute a hindrance to business activity (paragraph 10). (iii)  A prohibition for a reasonable time after the termination of the contract on opening the same or similar kind of shop in an area where it might compete with another franchisee 29 Non-competition clauses lasting more than one year after the franchise contract comes to an end are unlikely to be considered necessary or to be exempted under Article 101(3). In Computerland a term of three years, with the restrictions on competing becoming gradually less strict over the three years, was considered excessive by the Commission and was not exempted. It was replaced with a one-year ban on competing within a radius of 10 kilometres of the original outlet. However, it was implied that even this reduced term was allowed partly on the basis that the very limited territorial restrictions imposed on franchisees by the contract meant that they had the opportunity during the term of the agreement to build up goodwill and clientele beyond the area immediately surrounding their franchise outlet.30 25

  Yves Rocher (above n 4) para 49.   Computerland (above n 11) para 22(ii). 27   Yves Rocher (above n 4) para 47. 28   [1988] OJ L332/38, [1989] 4 CMLR 581. 29   Pronuptia ECJ (above n 3) para 16. 30   Computerland (above n 11) para 22. 26

184  5—franchising

[5.3]

A one-year post-term ban on the franchisee opening a retail cosmetics store within its previous exclusive territory was held to fall outside Article 101(1) in Yves Rocher. It was pointed out that an ex-franchisee thus had the possibility of immediately setting up a shop anywhere else, including within the exclusive territory of another franchisee.31 However, in Charles Jourdan it was stated that a post-term competition ban would not have been justified ‘as the knowhow provided includes a large element of general commercial techniques, and second, as this type of franchise is primarily granted to retailers who are already experienced in selling shoes’.32 This suggests that the Commission did not consider the knowhow element of this franchise to be substantial enough to warrant generous treatment. But it was also stated in Computerland and Yves Rocher that although such a post-term competition ban may not infringe EU law, this does not prevent franchisees from benefiting from any rights to which they may be entitled under applicable national law.33 National law may be stricter in the kind of post-term competition bans it accepts. In such a case, the stricter, national law will apply, provided that it is seen as pursuing an objective other than the maintenance of competition, such as franchisee protection (see above chapter two section 2.7). (iv)  A prohibition on selling to a third party the sales outlet used to exploit the franchise,34 without the prior consent of the franchisor In Charles Jourdan a clause requiring the franchisor to be given first offer when a franchise outlet was to be sold, with the franchisor being given a month to make up his mind, was cleared.35 (v)  A prohibition on assigning in whole or in part the benefit of the franchise contract without the consent of the franchisor 36 5.3.2  Clauses Necessary to Maintain the Identity and Reputation of the Network Secondly, the franchisor must be able to take the measures necessary for maintaining the identity and reputation of the network bearing his business name or symbol.37

The types of clauses considered necessary to fulfil this condition are as follows.

31

  Yves Rocher (above n 4) para 48.   Charles Jourdan (above n 5) para 27.   Computerland (above n 11) para 22(iii); and Yves Rocher (above n 4) para 48. 34   Pronuptia ECJ (above n 3) para 16. 35   Charles Jourdan (above n 5) para 27. 36   Yves Rocher (above n 4) para 47. 37   Pronuptia ECJ (above n 3) para 17. 32 33

[5.3]

clauses not violating article 101(1) tfeu  185

(i)  Freedom to select franchisees and their managers Franchisees may be chosen freely by the franchisor.38 Nor is it necessary that such choice be made on the basis of objective and qualitative criteria, as has been required in the context of selective distribution systems. In Charles Jourdan a clause requiring advance approval by the franchisor of any manager employed to run a shop was accepted.39 In the Yves Rocher system, franchisees were chosen on the basis of personality, aptitude for the cosmetics business and performance in a training programme. The absence of any stated selection criteria was justified on the basis that it was the franchisor itself that trained the franchisees: Yves Rocher itself trains franchisees during an induction course with a view to setting up new franchise shops. It is logically entitled to choose its partners freely and turn down applicants who do not, in its view, have the personal qualities and business qualifications which it requires for the application of the formula it has developed.40

Similarly, in Computerland, a like system was said to be a ‘justified means of ensuring that every Computerland outlet is managed in keeping with the business standards developed by the franchisor’.41 It is hard to see any logical distinction between this situation and the selection of dealers being made by a manufacturer setting up a selective distribution network. It might seem that the considerations cited in Yves Rocher and Computerland could be satisfied by the application of objective, qualitative criteria of the sort a selective distributor is required to apply if the distribution network is to escape Article 101(1). The existence of a training programme seems to be important in the Commission’s eyes: it demonstrates the extent to which a franchisor is genuinely assisting his franchisees to run their franchises successfully. As stated earlier (see above section 5.1.3), the degree to which a franchisor acts as a trainer and advisor to his franchisee is likely to be crucial to obtaining this kind of generous treatment of any given distribution network. However, if this right to appoint franchisees were to be seen to be used in order to achieve resale price maintenance, by rejecting applicants likely to charge low prices, then it would as in other contexts be an infringement of Article 101(1). (ii)  An obligation on the franchisee to apply the business and trading methods developed by the franchisor and to use the knowhow and industrial property rights provided by the franchisor 42

38

  Ibid, para 20.   Charles Jourdan (above n 5) paras 8 and 27. 40   Yves Rocher (above n 4) para 41. 41   Computerland (above n 11) para 23. 42   Pronuptia ECJ (above n 3) para 18; and Yves Rocher (above n 4) para 43. 39

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[5.3]

(iii)  An obligation on the franchisee to use the franchisor’s knowhow, trademarks, trade names or other industrial property rights in a manner in keeping with their subject matter 43 (iv)  An obligation on the franchisee not to use the franchisor’s trademarks, trade names or other identifying marks anywhere other than at the agreed franchise location and to stop using them after termination of the contract 44 In Computerland, the Commission insisted that to this obligation be added the qualification that ex-franchisees be expressly entitled ‘to continue using innovations or improvements they have developed which are demonstrably separable from the Computerland system’.45 (v)  An obligation on the franchisee to devote his best efforts to the operation of the franchise outlet and not to carry on activities incompatible with being a franchisee 46 (vi)  A term prohibiting the franchisee from carrying on any activity at the outlet apart from exploiting the franchise 47 In the case of a ‘franchise corner’ situated in part of a larger shop, such a restriction must presumably be limited in application to the ‘corner’ only. (vii)  An obligation on the franchisee to use for the sales outlet the layout and decor, both interior and exterior, required by the franchisor 48 (viii)  An obligation on the franchisee to exploit the franchise from a particular location and not to change that location without the franchisor’s consent A clause simply confining the franchisee to exploiting the franchise from a specified location was stated by the Court to be compatible with Article 101(1).49 In Yves Rocher, the Court stated: The franchisor must also be able to participate in determining the location of the Beauty Centre with the franchisee, in their mutual interest: a bad choice might cause the franchisee to fail in business and indirectly damage the network’s reputation. In practice, Yves Rocher carries out a preliminary market and location survey, and proposes to the franchisee the most promising area. The exact location of the shop is determined by the 43

  Yves Rocher (above n 4) para 40.   Computerland (above n 11) para 23(ii). 45   Ibid. 46   Ibid, para 23(iv); and Yves Rocher (above n 4) para 49. 47   Computerland (above n 11) para 23(iv). 48   Pronuptia ECJ (above n 3) para 19; Computerland (above n 11) para 23(v); and Yves Rocher (above n 4) para 43. 49   Pronuptia ECJ (above n 3) para 19. 44

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clauses not violating article 101(1) tfeu  187

franchisee with the franchisor’s consent. In any event, the shop’s location is agreed upon in the general interest of all members of the chain.50

In Computerland, the Commission pointed out that in fact the location of sites was decided on the basis of objective criteria, and it stated: The main objective in setting up these criteria for site approval is to ensure that the success of the outlet is not hampered because of a possibly unfavourable location.51

Again, the only feature distinguishing this scenario from that of selective distribution (whereby such a clause infringes Article 101(1)) is that the franchisor is seen as helping the franchisee to make a decision that is in the franchisee’s and franchisor’s collective best interest: in a selective distribution system the supplier is assumed to be making the decision in his own best interests. This too shows the importance of characterising the franchisor as the franchisee’s helper if the agreement is to be treated by a court or competition authority as a franchise contract, with the leniency which that implies. This kind of obligation escapes Article 101(1) only to the extent that relocation may be refused only for reasons connected with maintaining the reputation of the franchise network.52 However, it should be noted that a restriction on opening a second shop when combined with an exclusive territory will generally violate Article 101(1) (see above section 5.2.1). This is explained by the ECJ on the basis that this combination of restrictions divides up the market. (ix)  An obligation on the franchisee not to sell competing goods A franchisor may, on certain conditions, prohibit a franchisee from selling any goods apart from those supplied or selected by the franchisor.53 The ECJ suggests that such a clause will escape Article 101(1) to the extent either that it is impractical to lay down quality specifications or that it is too expensive to ensure that such specifications are observed. The example given in Pronuptia of goods for which it is impractical to lay down quality specifications was that of fashion items, and it may be that this is true of many of the types of goods likely to be sold through franchise networks. In any case, such a clause cannot be used to prevent franchisees from obtaining those products from other franchisees in the network. The Commission stresses in its vertical restraints Guidelines that a non- compete obligation that is necessary to maintain the common identity and reputation of a franchised network does not infringe Article 101(1) and so does not require exemption. This is the case whatever the duration of the non-compete 50

  Yves Rocher (above n 4) para 42.   Computerland (above n 11) para 23(v). 52   Yves Rocher (above n 4) para 42. 53   Pronuptia ECJ (above n 3) para 21. This type of clause is treated more strictly outside the context of franchising. 51

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[5.3]

clause, provided it does not extend beyond the term of the franchise agreement itself.54 In the context of a service franchise the Commission has accepted a clause in which it was provided that franchisees might obtain supplies of cleaning materials of equivalent quality from third parties rather than from the franchisor. Qualities such as safety, non-toxicity, biodegradability and effectiveness were mentioned.55 Although these cannot all be measured in entirely objective terms, a clause that makes an attempt to introduce as much transparency and objectivity as possible into the situation is more likely to be looked on with favour by a court or authority. Nor is it at all clear what ‘too expensive’ covers: it will always be more expensive to ensure observance of quality specifications than of a blanket prohibition on the sale of any goods not supplied by the franchisor or with his approval. In a Decision involving a computer distribution franchise, the Commission stated: [G]iven the wide product range (there are over 3,000 items on [the franchisor’s] product list) and the very rapid technological evolution in this product market, it would be impracticable to ensure the necessary quality control by establishing objective quality specifications which franchisees could apply themselves. In fact, laying down objective standards could be detrimental to the franchisees’ freedom to sell the most up-to-date products, unless the specifications were constantly updated, an overly burdensome if not impossible task.56

In that system, a requirement of prior approval by the franchisor was accepted by the Commission. However, the Commission probably took into account the fact that the clause allowed for flexibility in certain circumstances, as well as the fact that franchisees in practice had considerable influence in proposing products for approval. In Yves Rocher it seems to have been accepted without question that the franchisee could be restricted to selling only goods bearing the Yves Rocher trademark. It was said that the sale of other goods would allow other producers to benefit unfairly from Yves Rocher’s reputation and knowhow and would detract from the identity of the network.57 ‘Accessories’, shop furnishings and products for beauty treatments could be obtained from other sources, though sale of these was subject to the prior approval of the franchisor. There is of course a distinction between the kind of system like that in Yves Rocher, in which the franchise is based on the sale of products through particular trademarks and symbols, which are placed on the goods themselves, and a system such as that in Computerland, in which the goods themselves bear no particular 54   Para 190(b). It also states that a non-compete restriction for the whole duration of the contract may also fall outside Art 101(1) on the separate basis that a supplier has made a substantial transfer of knowhow (para 148). 55   Servicemaster (above n 28) para 17. 56   Computerland (above n 11) para 23(vi). 57   Yves Rocher (above n 4) para 45.

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clauses not violating article 101(1) tfeu  189

signs or marks connecting them with the franchise network. Stricter controls could be expected to be acceptable in the former type of franchise.58 It must be possible, though, for the franchisee to obtain goods not connected with the ‘essential object’ of the franchise from whomsoever he pleases. The franchisor may still control the quality of these ancillary goods and interfere if they would damage the reputation of the network.59 (x)  An obligation on the franchisee to obtain the franchisor’s approval for the nature of any advertising to be done by the franchisee60 This is acceptable provided it is not used to influence prices advertised or charged by franchisees. In Yves Rocher it was explained by the Commission that such a clause enabled Yves Rocher to ensure that ‘the theme of natural beauty from plants, on which the network’s image [was] based’ was adhered to in all advertising material.61 It is also acceptable for an advertising and promotional levy to be collected from franchisees.62 (xi)  An obligation on the franchisee to sell only to end-users or to other franchisees In certain types of franchise this type of restriction will not infringe Article 101(1). This is the case when the goods, when passed on to other resellers, bear some mark or name connecting them with the franchise. Thus in Computerland the Court said: In certain franchise systems, for example where franchisees sell products bearing the franchisor’s name and/or trademark, the prohibition on resale by franchisees to resellers who do not belong to that franchise network is based on the legitimate concern that the name, trademark or business format could be damaged if the contract products were sold by resellers who do not have access to the franchisor’s knowhow and are not bound by the obligations aimed at preserving the reputation and unity of the network and its identifying marks.63

An example of such a system appears in Yves Rocher. In other circumstances, such as those of the Computerland system itself, such a restriction will violate Article 101 (1) and require exemption if it is to be valid. Article 101(1) will be infringed if franchisees are not allowed to obtain supplies from other franchisees. In Charles Jourdan the Commission requested that an 58   This difference is also evident in the Commission’s Decision in Pronuptia (‘Pronuptia EC ’) [1987] OJ L13/39, [1988] 4 CMLR 259, para 12(b). The Commission insisted that Pronuptia insert a clause making it clear that franchisees had the right ‘to purchase goods not connected with the essential object of the franchise business from suppliers of their choice, subject to ex post qualitative vetting by the franchisor’. 59   Ibid, para 25. 60   Pronuptia ECJ (above n 3) para 22; and Computerland (above n 11) para 23(vi). 61   Yves Rocher (above n 4) para 44. 62   Pronuptia EC (above n 58) para 26. 63   Computerland (above n 11) para 26.

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[5.3]

express clause permitting such cross-supply be inserted in the agreement used before exemption was granted.64 (xii)  An obligation on the franchisee to submit to inspections of the outlet,65 including checking of stock levels, accounts and balance sheets 66 In Yves Rocher, the express warning was made that ‘the Commission reserves its right to intervene in case these controls would [sic] be used by the franchisor to affect the freedom of the franchisees to fix their selling prices.’67 (xiii)  An obligation on the franchisee to supply regular reports and accounts 68

(xiv)  Recognition by the franchisee of the validity and ownership of the franchisor’s trademarks and trade names In Computerland, such a term was not objected to; however, it was pointed out that there was no restriction on the franchisee’s right to contest the franchisor’s industrial property rights.69 Such a non-contest clause would probably infringe Article 101(1). (xv)  An obligation on the franchisee to hold stocks and to make orders in advance according to a fixed timetable 70 (xvi)  Recommended prices The practice of recommending retail prices in the context of a franchising agreement does not infringe Article 101(1).71 As in other contexts, any attempt to enforce adherence to a fixed or minimum price that goes beyond simply informing dealers of recommended prices will be a serious breach of Article 101(1).72 In Pronuptia EC the Commission required Pronuptia to remove a clause requiring the franchisee not to harm the brand image of the franchisor by its pricing level.73 Such a clause was presumably considered to set some kind of implied minimum price rule.

64

  Charles Jourdan (above n 5) para 16.   Computerland (above n 11) para 23(viii). 66   Yves Rocher (above n 4) para 50. 67   Ibid. 68   Ibid; and Charles Jourdan (above n 5) para 27. 69   Computerland (above n 11) para 5. 70   Ibid, para 27. 71   Pronuptia ECJ (above n 3) para 25. 72   Yves Rocher (above n 4) para 51. See also Charles Jourdan (above n 5) paras 18 and 29. 73   Pronuptia EC (above n 58) para 12(c). 65

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clauses not violating article 101(1) tfeu  191

5.3.3  Clauses Irrelevant to Competition The following clauses may be included in franchising contracts without affecting their legality under Article 101, since the Commission does not consider them relevant to competition. However, this does not prevent the application of any relevant rules of national law. The following enumeration is by no means exhaustive and only reflects some clauses that have been the subject of comment by the Commission. (i)  An obligation on the franchisee to pay royalties or advertising contributions 74 In Computerland, however, the Commission required it to be specified that royalties were not payable on sales between franchisees.75 (ii)  An obligation on the franchisee to form a corporation 76 (iii)  An obligation on the franchisee to indicate its independent status This was characterised in Computerland as a measure of consumer protection. It was said to be desirable in that it puts the public on notice that the franchise outlet is the sole responsibility of the franchisee.77 (iv)  An obligation on the franchisee to indicate his name and address on the products he sells 78 (v)  Provisions relating to the terms and conditions of renewal of the franchise contract 79 (vi)  An obligation on a franchisee to take out insurance covering its civil liability and employers’ liability during the term of the contract Such a clause was included in the Yves Rocher agreement80 and was not objected to, probably because it was not relevant to competition.

74

  Computerland (above n 11) para 24(i); and Pronuptia EC (above n 58) para 26.   Computerland (above n 11) para 24.   Ibid, para 24(ii). 77   See also Yves Rocher (above n 4) para 17. 78   Computerland (above n 11) para 24(iv). 79   Ibid, para 24(v). 80   Yves Rocher (above n 4) para 17. 75 76

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5.4 

[5.4]

exemption under article 101(3) tfeu

If a franchising agreement includes clauses that infringe Article 101(1) then it will be void and unenforceable under Article 101(2), and incur the risk of fines and possibly damages claims, unless it is exempted. Exemption, when applicable, applies automatically. It may occur either through the operation of the vertical restraints block exemption Regulation or by satisfying the four substantive criteria set out in Article 101(3).

5.4.1  Vertical Restraints Block Exemption Regulation 330/2010 This block exemption Regulation81 grants automatic validity to any contract falling within its terms.82 If the block exemption applies then the contract is fully valid and can be enforced in a national court without the need for any formality. Regulation 330/2010 provides a very broad definition of ‘vertical restraints’ to which it applies (see above chapter three). Many franchising arrangements, including those based on agency and those incorporating selective distribution, fall within its scope and thereby benefit from automatic exemption. In particular, the block exemption expressly covers arrangements involving the assignment or use of intellectual property rights,83 provided they are ancillary to the main agreement: the intellectual property provisions must not ‘constitute the primary object’ of the agreement (Article 2(3)). The idea is to exempt agreements when the distribution of goods or services can be performed more effectively because such rights are assigned to or transferred for use by the buyer.84 Therefore, for example, when a franchisor licenses the use of his knowhow or of his trademark to assist a buyer in distributing goods or services, that does not create an obstacle to application of the block exemption. An agreement, on the other hand, that is essentially a trademark or technology licence or assignment, or an agreement for the manufacture of goods, will not be covered.85 The vertical restraints Guidelines (paragraphs 31–45) show that distribution franchising, for both goods and services, is clearly considered by the Commission to be included within the scope of the block exemption, but industrial or production franchising is not. The Guidelines set out in some detail the distinction between the kind of arrangements covered by the block exemption and those that fall outside its scope, and they state that the block exemption applies in the 81

  Above n 14.   It applies to all product sectors except for motor vehicles and their spare parts, repair and maintenance, which are to some extent covered by sector-specific rules (see above ch 4 section 4.4). 83   Defined as including ‘industrial property rights, knowhow, copyright and neighbouring rights’ (Art 1(1)(f)). 84  Guidelines, para 32. 85  However, Commission Regulation (EC) 772/2004 on the application of Art [101(3) TFEU] to categories of technology transfer agreements [2004] OJ L123/11 may apply to such agreements. 82

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exemption under article 101(3) tfeu  193

presence of intellectual property right (IPR) provisions when five conditions are fulfilled: • the IPR provisions must be part of a vertical agreement, meaning an agreement with conditions under which the parties may purchase, sell or resell certain goods or services: examples of agreements not covered include provision of a drink recipe combined with a licence to produce the drink, provision of a mould or master copy together with a licence to produce and distribute copies, a pure licence of a trademark or sign for merchandising purposes, sponsorship contracts permitting a party to advertise itself as an official sponsor of an event, and copyright licensing such as broadcasting contracts; • the IPRs must be assigned to or licensed for use by the buyer: the Guidelines go on to say that there can therefore be no subcontracting involving the transfer of knowhow to a subcontractor, suggesting that in this context the notion of IPRs extends to knowhow. However, the provision of specifications to the supplier, describing the goods or services to be supplied, is covered; • the IPR provisions must not constitute the primary object of the agreement; • the IPR provisions must be directly related to the use, sale or resale of goods or services by the buyer or its customers. In the case of franchising where marketing forms the object of the exploitation of the IPRs, the goods or services must be distributed by the master franchisee or the franchisees: the Guidelines state that the supply of a concentrated drink extract to be diluted before sale as a drink is permitted; and • the IPR provisions, in relation to the contract goods or services, must not contain restrictions of competition having the same object as vertical restraints which are not exempted under the block exemption. The Commission states that these five conditions are usually fulfilled in the case of franchising. Even when they are not, because the franchise concerns only or primarily IPRs, it will apply the same principles. The following obligation is ‘generally considered to be necessary to protect the franchisor’s intellectual property rights’ (paragraph 45) and so is exempted by the block exemption insofar as it infringes Article 101(1): . . . an obligation on the franchisee to inform the franchisor of infringements of licensed intellectual property rights, to take legal action against infringers or to assist the franchisor in any legal actions against infringers.86

Whether specific franchising arrangements benefit from the block exemption will also depend on whether the other criteria laid down in the block exemption are satisfied. First, neither the franchisor’s share of the market where it supplies, nor the franchisee’s share of the market on which it purchases, may exceed 30 per cent, subject to what is said about market definition below. Nor may any ‘blacklisted’ clauses (such as fixing of minimum resale prices or provision for absolute 86

  Para 45(e).

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territorial or customer group protection) be present. Those generally applicable criteria are considered in detail above in chapter three, and the focus in this chapter is on considerations specific to franchising. 5.4.1.1  Market Definition and Market Share In order to establish whether the 30 per cent thresholds are exceeded, the same general rules on market definition apply to franchising as they do to other forms of distribution. On a literal interpretation of the block exemption, one relevant market should be that on which the franchisor is active and so would comprise all franchise systems regarded as substitutable by potential franchisees. However, the Guidelines comment specifically on the relevant market in respect of franchising for the purposes of applying the block exemption, and they provide a different interpretation. First, they deal with distribution franchises, whereby the franchisor directly or indirectly provides goods which the franchisee resells: Where the vertical agreement, in addition to the supply of the contract goods, also contains IPR provisions – such as a provision concerning the use of the supplier’s trademark – which help the buyer to market the contract goods, the supplier’s market share on the market where it sells the contract goods is relevant.87

Then they discuss the case of business format franchising: Where a franchisor does not supply goods to be resold but provides a bundle of services and goods combined with IPR provisions which together form the business method being franchised, the franchisor needs to take account of its market share as a provider of a business method. For that purpose, the franchisor needs to calculate its market share on the market where the business method is exploited, which is the market where the franchisees exploit the business method to provide goods or services to end-users. The franchisor must base its market share on the value of the goods or services supplied by its franchisees on this market. On such a market, the competitors may be providers of other franchised business methods but also suppliers of substitutable goods or services not applying franchising.88

The reason for this approach is that the Commission considers that competition problems are more likely to arise on the market for the franchised goods or services than on the market for the franchise itself. Parties are well advised to take the Commission’s view into account, particularly as under EU law the Commission’s intention when drafting legislation is relevant to the interpretation of that legislation. But note that these special rules on market definition apply only for the purposes of delineating the scope of application of the block exemption and not to market definition in franchising generally. A different approach may be justified in some cases when applying Article 101(1) or (3).

87

  Para 92.   Ibid.

88

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exemption under article 101(3) tfeu  195

5.4.1.2  Non-compete Clauses As already described above in section 5.3.2, non-compete obligations contained in a franchise agreement will generally not infringe Article 101(1) at all, provided they are necessary to maintain the common identity and reputation of the franchised network. If they do infringe they may benefit from the block exemption.89 The Regulation defines a non-compete clause as any direct or indirect obligation causing the [franchisee] not to manufacture, purchase, sell or resell goods or services which compete with the contract goods or services, or any direct or indirect obligation on the [franchisee] to purchase from the [franchisor] or from another undertaking designated by the [franchisor] more than 80% of the [franchisee’s] total purchases of the contract goods or services and their substitutes.90

If an obligation contained in a franchise agreement fits within this definition, it is block exempted only if it is imposed for no more than five years (Article 5(1)(a)), unless the franchisee operates from the premises and land owned by the franchisor or leased by the franchisor from an unconnected third party, in which case it may last as long as the occupancy of those premises (Article 5(2)). An agreement tacitly renewable beyond five years will not be exempted, as it will be treated as of indefinite duration (Article 5(1). The Commission’s Guidelines (paragraph 45) state that the following obligations are ‘generally considered necessary to protect the franchisor’s intellectual property rights’ and so normally do not infringe Article 101(1) (see above section 5.3.1) and are exempted by the Regulation insofar as they infringe Article 101(1): (a) an obligation on the franchisee not to engage, directly or indirectly, in any similar business; (b) an obligation on the franchisee not to acquire financial interests in the capital of a competing undertaking,91 which would give the franchisee the power to influence the economic conduct of such undertaking.

5.4.1.3  Post-termination Non-compete Clauses Post-termination non-compete clauses are treated more leniently in the context of agreements in which substantial knowhow is transferred, as opposed to other types of distribution arrangement, which the Regulation does not exempt at all (Article 5(1)(b)). Franchise agreements are therefore effectively the only type of agreements in respect of which the Regulation is likely to exempt post-term noncompete clauses.92 They are exempted by the Regulation provided that they: 89   See above ch 3 section 3.5.8 for the general rules on the application of the block exemption to non-compete clauses. 90   Art 1(1)(d). 91   In this context, ‘competing undertaking’ should mean a business that competes on the market for the goods or services which are the subject of the franchise, regardless of whether or not this business is part of a franchise network. 92   Defined as ‘any direct or indirect obligation causing the buyer, after termination of the agreement, not to manufacture, purchase, sell or resell goods or services’ (Art 5(1)(b)).

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• relate to goods or services which compete with the contract goods or services; • are limited to the premises and land from which the buyer has operated during the contract period; • are indispensable to protect knowhow transferred by the supplier to the buyer; and • last no more than one year after termination of the agreement.93

The Regulation also makes it clear that it does not place any limit on the duration of a restriction on the use and disclosure of knowhow that has not entered the public domain (Article 5(3)). 5.4.1.4  Use of Knowhow Knowhow is defined as: a package of non-patented practical information, resulting from experience and testing by the supplier, which is secret, substantial and identified. . . ‘Secret’ means that the know­ how is not generally known or easily accessible; ‘substantial’ means that the knowhow is significant and useful to the buyer for the use, sale or resale of the contract goods or services; ‘identified’ means that the knowhow is described in a sufficiently comprehensive manner so as to make it possible to verify that it fulfils the criteria of secrecy and substantiality.94

The information must be non-patented: if the knowhow being passed on is of sufficiently scientific or technical nature to be patented, then the arrangement does not fall within the definition of knowhow for these purposes. But it is unlikely in the context of a distribution franchise that the knowhow would be patentable. The amount of testing and experience that there must be behind the knowhow is not specified, but presumably it means that the franchisor must himself have for some period of time worked in the business in which his franchisees will be engaged. Note that the experience and testing must be that of the franchisor; it is not sufficient that it has been done by someone independently of the franchisor. However, presumably independent agents, management consultants and market researchers working for the franchisor would also be able to fulfil this requirement on behalf of the franchisor. The requirement that the knowhow be ‘significant and useful’ to the franchisee is a personal one. In fact, potential franchisees are often new to the business in question and are looking for a ‘safe’ way to start up in business on their own. In such cases it should not be hard to satisfy this requirement. Even when a franchisee is already experienced, it should not be hard to establish that the knowhow (and not just the intellectual property rights and ‘image’) is in fact significant and useful to him. The knowhow must be described: apart from a written document, a videotape or course in the form of programmed instruction that the franchisee could use on a personal computer should be acceptable. 93

  Art 5(3).   Art 1(1)(g).

94

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exemption under article 101(3) tfeu  197

The following obligations relating to knowhow are ‘generally considered necessary to protect the franchisor’s intellectual property rights’ and so normally do not infringe Article 101(1) (see above section 5.3.1); they are exempted by the Regulation insofar as they infringe Article 101(1). They include: (c) an obligation on the franchisee not to disclose to third parties the knowhow provided by the franchisor as long as this knowhow is not in the public domain; (d) an obligation on the franchisee to communicate to the franchisor any experience gained in exploiting the franchise and to grant the franchisor and other franchisees a nonexclusive licence for the knowhow resulting from that experience. . .; (f) an obligation on the franchisee not to use knowhow licensed by the franchisor for purposes other than the exploitation of the franchise.95

An agreement may be exempted under the Regulation at the time of its conclusion, and then at some point the knowhow may cease to qualify as ‘knowhow’ for these purposes (for example, because it is no longer ‘secret’). This will affect the applicability of the block exemption to the extent that the agreement includes relevant restrictions connected to the knowhow. 5.4.1.5  Master Franchise Agreements The Guidelines state that master franchise agreements whereby a franchisor grants a master franchisee the right to exploit a franchise for the purposes of concluding franchise agreements with third-party franchisees can benefit from the block exemption (paragraph 44). This type of delegation will be particularly important in the context of networks spread over a number of different countries throughout the European Union, since the markets and therefore the commercial or technical assistance required may vary considerably between one Member State and another because of cultural, social and linguistic differences. This allows a franchisor to employ a resident and indigenous agent who is best equipped to take into account local conditions in doing the job in a particular country and still benefit from the block exemption. 5.4.1.6  Selective Distribution Franchises for the distribution of goods often operate through selective distribution, the franchisor appointing only franchisees who satisfy specified qualitative criteria and prohibiting franchisees from reselling to distributors who are not authorised franchisees. As described above, in the absence of territorial exclusivity this will often not infringe Article 101(1). However, if Article 101(1) is infringed, such arrangements can benefit from the block exemption provided that the specific rules laid down there for selective distribution are followed (see above chapter four). (Business format franchises are unlikely to incorporate selective 95

 Guidelines, para 45.

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[5.4]

distribution because there are no goods to be resold, and there is therefore no need to take measures to prevent unauthorised outlets obtaining the goods.) Under the Regulation, if selective distribution is used, franchisees may not be prohibited (within the franchisor’s selective distribution territory) from buying from and selling to other authorised franchisees, and they must remain free to make both active and passive sales to any consumer in any territory (Article 4(c)). An exclusive territory is permitted in the sense that the franchisor may agree to supply only a specified franchisee within that territory, but no other form of protection of that territory is allowed.96 A clause prohibiting the franchisee from selling the brands of particular competing suppliers does not preclude the block exemption from applying to the agreement, but that clause itself will not benefit from exemption and so will be void (Article 5(1)(c)). The Regulation allows a franchisor using selective distribution to benefit from exemption while imposing a location clause on franchisees, prohibiting them from operating out of unauthorised outlets. The Commission interprets this as meaning that they may be prevented both from running their business from different premises and from opening new outlets in different locations – but they may not be prevented from creating websites through which to distribute. The Commission also interprets the Regulation as meaning that if a dealer’s outlet is a mobile one, such as an ice cream van, an area may be defined outside which the mobile outlet cannot be operated. In the case of many types of goods and services – including ice cream – this will in practice provide effective territorial protection.97 However, in the absence of territorial exclusivity, such clauses probably fall outside Article 101(1) anyway in the context of franchise agreements. So this aspect of the Regulation would only represent an advantage when a location clause is combined with the limited degree of territorial exclusivity covered by the Regulation in the context of selective distribution. Franchisors wishing to benefit from the block exemption Regulation may therefore need to consider carefully whether to structure their franchises either so as to avoid falling within the definition of selective distribution, or else so as to benefit from the specific rules applicable to selective distribution. Essentially it will depend how important it is to the franchisor to keep complete control of which distributors are able to market its products. 5.4.1.7  Assignment of Franchise According to the Commission’s Guidelines, the following obligation is ‘generally considered necessary to protect the franchisor’s intellectual property rights’ and so normally does not infringe Article 101(1) (see above section 5.3.1) and is exempted by the Regulation insofar as it does infringe Article 101(1):

96

  Ibid, para 57.   Art 4(c); and Guidelines, para 57.

97

[5.4]

exemption under article 101(3) tfeu  199

(g) an obligation on the franchisee not to assign the rights and obligations under the franchise agreement without the franchisor’s consent.98

5.4.1.8  Withdrawal or Dis-application of the Block Exemption The Commission or national competition authorities may withdraw the benefit of the Regulation from a specific agreement when they find that it has effects incompatible with the conditions laid down in Article 101(3) (see above chapter three section 3.5.11) and in particular when . . . access to the relevant market or competition therein is significantly restricted by the cumulative effect of parallel networks of similar vertical restraints implemented by competing suppliers or buyers.99

There is also provision for the benefit of the Regulation to be dis-applied in respect of certain agreements containing specific restraints, in circumstances where parallel networks of similar vertical restraints cover more than 50 per cent of a relevant market (see above chapter three section 3.5.11).

5.4.2  Individual Exemption under Article 101(3) TFEU If a franchising contract includes no clauses infringing Article 101(1), then it is legal and fully enforceable from the point of view of EU competition law. But if it includes additional restrictions and does not fit within the terms of the block exemption, then it is exempt from the application of Article 101(1) only if it satisfies the four substantive criteria listed in Article 101(3). It is this second type of exemption that will now be discussed.100 There is no presumption that a franchising agreement falling outside the scope of the block exemption infringes Article 101(1) (Guidelines, paragraph 23). The block exemption and the Guidelines provide good sources of guidance in assessing what other kinds of agreements may benefit from exemption. The Commission recognises that some contractual restrictions ‘can help create brand image by imposing certain measures of uniformity and quality standardisation on the distributors’, thereby making the product more attractive and so increasing sales, and this may apply in franchising (paragraph 107(i)). As usual, restrictive terms will be judged in the context of the structural and dynamic characteristics of the market in question. In the context of franchising, the Guidelines emphasise that the more important the transfer of knowhow is to the agreement, the more likely the agreement is to be exempted (paragraph 190(a)). This is in keeping with the ECJ and Commission traditions of lenient treatment 98

  Para 45.   Block exemption, Recital 15; and Reg 1/2003, Art 29(2). 100   An example of a franchise arrangement likely to qualify for exemption under Art 101(3) is given by the Commission in its vertical restraints Guidelines, para 191. 99

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[5.4]

for franchising agreements, as long as the agreements provide for substantial effective assistance to franchisees. A prohibition on a franchisee’s opening further outlets, when combined with territorial exclusivity, will generally need to be exempted (see above section 5.2.1). In Computerland, franchisees were on certain conditions allowed to open ‘satellite’ stores in other locations.101 Even this freedom was not sufficient to take the agreement outside Article 101(1), but exemption was granted. Also, an obligation to sell only to end-users or other franchisees may violate Article 101(1) in the context of certain types of franchise but merit exemption. One such franchise was the system in Computerland. The Commission explained: [T]he Computerland name and trademark cover the business format as such, but not the microcomputer products being sold, which bear the name and trademark of each individual manufacturer. The prohibition on Computerland franchisees to sell the products to otherwise qualified resellers is thus restrictive.102

The point seems to be that in these circumstances there is nothing on the goods to connect them with the franchisor, and so its reputation cannot be affected by those goods being sold in outlets or in a way not controlled or approved by it. But such a clause may well be exempted on the grounds that the franchise is based on the premise that franchisees receive training and support which enables them better to serve their customers. This investment would be wasted, or at least diluted, if franchisees were allowed to ‘divert their efforts to activities other than retail sales and servicing’, according to the Commission in Computerland. On the other hand, there are certain clauses that will almost certainly not benefit from exemption. Essentially, any clause tending to divide the European Union into separate markets in which different prices and conditions can be applied is unlikely to be exempted. As a general rule, any attempt indirectly or directly to fix the prices that distributors may charge will also disqualify an agreement from exemption, although the Guidelines do suggest one type of situation in which the imposition of a fixed resale price may be exempted. This is when a franchisor wants to run a short-term low-price campaign, for around two to six weeks (paragraph 225). Exemption in these circumstances would allow coordinated advertising of the specific low price across his network.

101

  Above n 11, para 25.   Ibid, para 26.

102

6

Agency

key points • In order to be characterised as an ‘agent’ under EU competition law, a trader must bear no significant financial risk in relation to his activities as agent. It may also be relevant that the trader be integrated into the business of his principal, rather than trading to a large extent independently. • If a buyer is not an agent within this definition, then Article 101 applies to the agreement as it does to other distribution agreements between independent parties. • If a buyer is an agent within this definition, then Article 101 will not apply at all to any agreement between the agent and his principal insofar as it relates to contracts negotiated or concluded by the agent for his principal. • Even if a buyer is an agent within this definition, other provisions of an agency agreement, such as provision for exclusivity on either side, may still infringe Article 101(1), particularly when the agent is prohibited from acting for other principals. • If an agreement infringes Article 101(1), then it will be void and unenforceable unless (i) the contract fulfils all the conditions laid down in the vertical restraints block exemption Regulation, including relevant market shares of supplier and buyer of no more than 30 per cent or (ii) the restrictions are necessary to bring about economic efficiencies. • Most agency agreements are also required to conform to the requirements of a Directive intended to protect commercial agents. • Even if a Member State has not implemented the Directive or has implemented it incorrectly, it may still be possible to rely on the Directive in that Member State’s national courts.

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  key

texts

EU Regulations Commission Regulation (EU) 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 (‘vertical restraints block exemption’ or ‘block exemption’ or ‘Regulation’), [2010] OJ L102/1 (below Appendix 2) Commission Regulation (EC) 2790/1999 on the application of Article 81(3) of the Treaty to categories of vertical agreements and concerted practices, [1999] OJ L336/21 (expired but applicable to certain agreements until 31 May 2011)

EU Directives Council Directive 86/653/EEC on self-employed commercial agents [1986] OJ L382/17 (below Appendix 4)

EU Notices Commission Guidelines on vertical restraints (‘vertical restraints Guidelines’ or ‘Guidelines’), [2010] OJ C130/1 (below Appendix 3)

ECJ and EGC Judgments Cases 40 etc/73 Suiker Unie and Others v Commission [1975] ECR 1663, [1976] 1 CMLR 295 Case 311/85 Vlaamse Reisbureaus v Sociale Dienst [1987] ECR 3801, [1989] 4 CMLR 213 Case C-266/93 Bundeskartellamt v Volkswagen [1995] ECR I-3477, [1996] 4 CMLR 505 Case T-325/01 Daimler Chrysler v Commission [2005] ECR II-3319, [2007] 4 CMLR 559 Case C-217/05 CEEES v CEPSA [2006] ECR I-11987, [2007] 4 CMLR 181 Case C-279/06 CEPSA v Tobar [2008] ECR-I 6681, [2008] 5 CMLR 1327

[6.1]

  introduction  203

It is essential that this chapter be read in conjunction with chapter three for a full understanding of the treatment of agency agreements. Unless otherwise stated, all references to paragraphs in this chapter refer to the vertical restraints Guidelines.

6.1 

introduction

Agency is a relationship between principal and agent in which the agent identifies customers or suppliers and trades with them on behalf of his principal, in return for which the agent earns commission. The principal generally exercises a high degree of control over the agent, in particular over the terms on which the agent does business. The Commission defines an agent as: a legal or physical person vested with 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: • purchase of goods or services by the principal; or •  sale of goods or services supplied by the principal.1

The prohibition contained in Article 101(1) and discussed in earlier chapters is not applicable to certain provisions in agreements between an agent (as defined by EU competition law and discussed below) and his principal.2 It appears that this is because an agent is, at least for some purposes, considered not an independent economic entity but rather part of the principal’s economic entity or business3 and so is not in a position to influence competition on the market in question.4 There can therefore be considerable advantages to appointing distribution agents as opposed to independent distributors. Whatever the theoretical justification for the favourable treatment of agency agreements, its practical effect is as follows. If the agent is an agent for the purposes of EU competition law, then any restriction can be imposed on him in relation to the terms on which he conducts the principal’s business, just as competition law does not apply to restrictions imposed by an employer on the way an employee does business for the employer.5 The only exception to this is that the business 1  Commission Guidelines on vertical restraints (‘vertical restraints Guidelines’ or ‘Guidelines’) [2010] OJ C130/1 (below Appendix 3), para 12. 2   Ibid, para 18. 3   See Cases 40 etc/73 Suiker Unie v Commission [1975] ECR 1963, [1976] 1 CMLR 295, para 480; Case T-325/01 Daimler Chrysler v Commission [2005] ECR II-3319, [2007] 4 CMLR 559; Case C-217/05 CEEES v CEPSA [2006] ECR I-11987, [2007] 4 CMLR 181; and Case C-279/06 CEPSA v Tobar [2008] ECR-I 6681, [2008] 5 CMLR 1327. However, note that the Commission says that an agent ‘forms part of the principal’s activities’ (para 18) but also states clearly that principal and agent are separate undertakings: Guidelines (para 19). 4   Daimler Chrysler v Commission (above n 3) para 100. 5   However, national rules on restraint of trade may apply to this relationship.

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[6.2]

methods of dominant undertakings may constitute abuse whether they are distributing through independent dealers or agents (see above chapter two section 2.5). The Commission Guidelines include a section on the application of Article 101 to agency agreements. To a great extent the Guidelines correspond to the case law of the European Courts, which are the highest authority for the interpretation of EU law. In cases in which any differences cause difficulty, officials in the Commission’s Competition Directorate General (DG Comp) are normally willing to discuss specific situations and provide an informal indication of whether the Commission would be likely to consider a particular relationship to be one of agency or not. These special rules for agency do mean that it is of the utmost importance to know whom the Commission and the European Courts consider to be an agent for these purposes. In the first part of this chapter, therefore, the definition of this type of agency, which falls at least for some purposes outside the scope of Article 101, will be discussed. It will be seen that in practice the scope for taking advantage of this immunity for agents from the competition rules is fairly limited. Competition rules are not the only source of specific EU rules on agency. The Council has also adopted a Directive aimed at the protection of commercial agents.6 In the second part of this chapter the requirements of this Directive will be considered. Directives require national legislative measures to be taken in each Member State: it will therefore be necessary to consult sources on the relevant national law to find out how implementation has been carried out in the Member State concerned. Further, a Directive may sometimes have legal effects in a Member State even if it has not been implemented or has been incorrectly implemented in national law, and this possibility will also be discussed.

6.2 

agency and article 101 tfeu

The following description of the law as it now stands is based on cases decided by the European Court of Justice (ECJ) and European General Court (EGC) and on the Commission’s most recent statement of its policy, contained in its Guidelines on vertical restraints.

6.2.1  The Concept of ‘Agency’ It is important to notice that here, as always when applying EU competition rules, the legal form of the so-called ‘agency’ agreement and the designation that the parties give to the relationship are irrelevant. Similarly, whether the contracts are 6  Council Directive 86/653 on self-employed commercial agents [1986] OJ L382/17 (below Appendix 4).

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  agency and article 101 tfeu  205

concluded in an agent’s name or that of his principal does not affect the competition law analysis. What matters is the real nature of the arrangement in economic terms: this was confirmed explicitly in CEEES.7 Nor is it relevant that an agent has separate legal personality from the principal.8 Further, national law rules and categories are not conclusive of a party’s status as an agent for the purposes of EU law.9

6.2.2  The Legal Benefits of ‘Agency’ ‘Agency’ agreements enjoy a special status under EU competition law in that obligations imposed on an agent as to contracts negotiated or concluded on behalf of his principal do not fall within the scope of Article 101. The Guidelines refer to the following types of obligations as being outside the scope of Article 101 in the case of agency: • limitations on the territory in which the agent may sell the goods or services; • limitations on the customers to whom the agent may sell these goods or services; • the prices and conditions at which the agent must sell or purchase these goods or services.10

Several factors may be relevant in deciding whether a particular agency agreement falls within this privileged category, and they are examined in turn below. 6.2.2.1  Financial Risk According to the Commission’s Guidelines and, to a large extent, also the European Courts,11 the key factor is the financial risk assumed by the agent. The essential distinction drawn in the Guidelines and also used by the ECJ is that between, on the one hand, an agent and, on the other hand, an independent trader, who himself assumes financial risk in negotiating and entering into transactions. It was stressed, for example, in Volkswagen12 that the key distinction was between someone bearing ‘any of the risks resulting from the contracts negotiated on behalf of the principal’ and someone not bearing any such risk. For the Commission the ‘determining factor’ in deciding whether Article 101 is applicable is ‘the financial or commercial risk borne by the agent in relation to the activities for which it has been appointed as an agent by the principal’.13 Of course, anyone engaged in trade incurs certain financial risks, and it is not always easy to know precisely what type and degree of risk is meant. The Commission in     7

  CEEES v CEPSA (above n 3) para 46.   Ibid, para 44.   Ibid, para 9; and Guidelines, para 13. 10   Para 18. 11   See the cases cited above at n 3. 12  Case C-266/93 Bundeskartellamt v Volkswagen [1995] ECR I-3477, [1996] 4 CMLR 505. 13  Guidelines, para 13.     8     9

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[6.2]

its Guidelines has developed a definition of relevant ‘financial or commercial risk’ that refers to three types of risk.14 If the agent bears no or insignificant risks15 of any of these types then obligations under the agency agreement as to the contracts he negotiates or concludes fall outside the scope of Article 101. The three categories of risk are: • risks ‘directly related to the contracts concluded and/or negotiated by the agent on behalf of the principal, such as financing of stocks’; • risks ‘related to market-specific investments. These are investments specifically required for the type of activity for which the agent has been appointed by the principal, that is, which are required to enable the agent to conclude and/or negotiate this type of contract. Such investments are usually sunk, which means that upon leaving that particular field of activity the investment cannot be used for other activities or sold other than at a significant loss’; and • risks ‘related to other activities undertaken on the same product market, to the extent that the principal requires the agent to undertake such activities, but not as an agent on behalf of the principal but for its own risk’.16

The Guidelines include a long but not exhaustive list of examples of risks or costs that are relevant (paragraph 16). These include: • costs relating to supply or purchase, including transport costs; • costs or risks of maintaining stocks; • product liability towards third parties (unless the agent is at fault); • responsibility for customer’s non-performance (though agent may lose commission); • costs of advertising or other promotional activities; • market-specific (‘sunk’) investments; and • other activities in the same product market, required by the principal, unless financed by the principal.

Other sorts of risk such as those ‘related to the activity of providing agency services in general, such as the risk of the agent’s income being dependent on its success as an agent or general investments in for instance premises or personnel’ are not relevant.17 The first two of the three categories of relevant risk were first developed by the Commission in its 2000 vertical restraints guidelines, the predecessors to the current 2010 Guidelines. At that time they had not featured in the case law of the ECJ, but it subsequently endorsed them.18 Since the Commission first set out these two categories of risk in 2000 it has adopted only one Decision raising an important issue of agency, and its finding there that the type and level of risks borne by Daimler Chrysler’s German agents were such as to make them fully subject to 14   These three categories of risk are not as such explicitly set out in any European Court judgment or any Commission Decisions, but the cases to a large extent do support them. 15   Para 15. 16   Para 14. 17   Para 15. 18   CEEES v CEPSA (above n 3) para 51; and CEPSA v Tobar (above n 3) paras 38–39.

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  agency and article 101 tfeu  207

Article 101 was subsequently overturned by the EGC.19 The EGC attached importance to the facts that the sale price was fixed by the principal, the sale contract entered into force only when accepted by the principal, and agents did not buy new vehicles from the principal, nor were they required to hold new vehicles in stock. During this period the only other judgments were two ECJ cases,20 and both of these were preliminary rulings requested by Spanish courts and so are confined to interpretation of the law rather than its application to specific facts. Taking these three cases together, relevant risks appear to include: • • • • • • • • •

taking possession21 of goods when they are received from the supplier; costs linked to distribution, and in particular transport costs; costs of maintenance of stocks; responsibility for damage, such as loss or deterioration to goods (unless the agent has not complied with obligations to keep the goods in safe conditions); responsibility for damage caused by goods sold to third parties; risk that a purchaser for the goods is not found; risk of late or non-payment by the purchaser; investment in premises or equipment specific to the market; and investment in advertising campaigns.

The ECJ states clearly that if an agent bears any more than a ‘negligible’ share of such risks then the agreement is not one of agency for the purposes of Article 101.22 The third category of risk, newly introduced by the Commission in its 2010 Guidelines, does not come directly from case law. Rather, it appears to result from a broad reading of Daimler Chrysler.23 In that judgment the EGC appeared to establish a hierarchy of risks, under which risks related to activities beyond the sale of new cars were of limited relevance. In respect of transport costs, the cost of purchasing the required number of demonstration vehicles, the carrying out of repair work under the manufacturer’s guarantee, and the requirements to set up a workshop, provide after-sales servicing and acquire and stock spare parts, the EGC held that, on the facts, these gave rise to insufficient risk to rebut the conclusions on agency reached on the basis of the distribution of risks associated strictly with the sale of new cars. It stressed that these non-core risks were limited and related to activities ‘carried out on markets other than the market at issue . . . [and] do not of themselves operate to affect the relationship between the applicant and its agents’24 for these purposes. It seems that this third category is intended by the Commission to apply to situations in which a principal requires an agent to assume risks in respect of distribution of a different product or brand in the same product market as the agency 19

  Daimler Chrysler [2002] OJ L257/1, annulled on this point in Case T-352/01 (above n 3).   CEEES v CEPSA (above n 3); and CEPSA v Tobar (above n 3).   This expression, used by the ECJ in CEPSA v Tobar (above n 3) para 38, presumably refers to the taking of legal ownership. 22   CEEES v CEPSA (above n 3) para 61; and CEPSA v Tobar (above n 3) para 40. 23   Above n 3. 24   Ibid, para 113. 20 21

208  6—agency

[6.2]

product. This means, for example, that a distributor cannot be an agent for one brand or product and also be required to act as independent distributor for other brands or products within the same product market. This third category of risk should not normally affect the legality of ‘indirect fulfilment’,25 as the distributor is usually free to accept the supplier’s request to perform such deliveries and in any case cannot be said to be operating his independent distributorship because the supplier requires him to do so as part of the indirect fulfilment relationship. The introduction of a third category of risk might appear to narrow further the circumstances in which a distributor will be considered an agent, and indeed in some circumstances it may do so. However, in many other situations it has effectively broadened the scope of ‘agency’. This is because it indicates that the Commission no longer intends when carrying out its agency analysis to take into account risks assumed by an agent in activities in markets other than the market concerned by the agency relationship, as it did at the time of its Daimler Chrysler Decision. This implies that, as far as the Commission is concerned, risk in respect of food shops or cafes run by petrol retailers, for example, or after-sales and repair services offered by car dealers, are not relevant to the agency analysis. 6.2.2.2  Integration into the Principal’s Business In Suiker Unie,26 the first case in which the ECJ was called upon to pronounce on the application of Article 101 to agency agreements, the Court explained that if a party acts for the benefit of another party, obeying instructions and behaving generally in a way such as an employee might act, then it will be considered an agent. In such circumstances, it can be seen as an auxiliary organ integrated into the business and forming part of a single economic unity with that business.27 In this case the fact that the purported agents worked with a number of different principals was given as one of the reasons for not characterising them as agents. In Vlaamse Reisbureaus v Sociale Dienst,28 the claim that travel agents should escape the application of Article 101(1) in their relations with tour operators was rejected. The fact that the travel agents were acting in the name and on behalf of the tour operators was expressly said not to be sufficient to qualify them as agents. The grounds for regarding the travel agents as independent traders rather than agents were the following: [A] travel agent of the kind referred to . . . must be regarded as an independent agent who provides services on an entirely independent basis. He sells travel organised by a large number of different tour operators, and a tour operator sells travel through a very large 25

  See above ch 3, n 57.   Above n 3. 27   Ibid, para 480. When there is such economic unity then if the Commission is entitled to carry out an inspection at the principal’s premises, it will similarly be entitled to do so at the agent’s premises: Case T-66/99 Minoan Lines [2003] ECR II-5515. 28   Case 311/85 [1987] ECR 3801, [1989] 4 CMLR 213. 26

[6.2]

  agency and article 101 tfeu  209

number of agents. Contrary to the Belgian Government’s submissions, a travel agent cannot be treated as an auxiliary organ forming an integral part of a tour operator’s undertaking.29

According to this ECJ judgment, therefore, a true agent works only on behalf of one principal, as well as bearing no commercial risk with respect to the goods being sold: in other words, there must be an exclusive agency provision.30 The Commission’s Guidelines are in direct contradiction to this: after referring to financial or commercial risk as the determining factor, it states that ‘it is not material for the assessment [of agency] whether the agent acts for one or several principals.’31 This is despite the reiteration by the ECJ in 1995 in Volkswagen32 of the importance of the integration criterion: the Court in Volkswagen cited Suiker Unie and stressed the necessity that agents, as well as not bearing certain risks, ‘operate as auxiliary organs forming an integrated part of the principal’s undertaking’, as opposed to having a separate independent business that accounted for a large proportion of income.33 The Commission in Daimler Chrysler, citing Volkswagen, said that ‘the criterion of integration is, unlike risk allocation, not a separate criterion for distinguishing a commercial agent from a dealer,’ and before the EGC it argued that Volkswagen was to be interpreted as meaning that ‘the Court of Justice no longer treats the criterion of “integration” as being a separate concept from that of risk sharing.’34 The Commission’s approach in that case, as well as in its current Guidelines, indicates that it now understands integration not as a separate criterion but rather as being merely a restatement of the risk-based criterion. The most recent ECJ judgments35 appear largely to support this approach, looking to the type and level of risk assumed by the agent to assess whether he is ‘integrated’ into his principal’s business. The ECJ in CEEES starts by citing the Volkswagen judgment as authority that: agents can lose their character as independent traders only if they do not bear any of the risks resulting from the contracts negotiated on behalf of the principal and they operate as auxiliary organs forming an integral part of the principal’s undertaking.36

But it then immediately goes on to focus only on risk when assessing independence: 29

  Ibid, para 20.   The judgment was heavily criticised. See, eg, N Koch and G Marenco, ‘L’Article 85 du Traité et les Contrats d’Agence’ (1987) Cahiers de Droit Européen 603. It may be that such criticism gave the Commission the confidence to take a different line in its 2000 guidelines. As explained in the text, the most recent judgments endorse the Commission’s approach on this point. 31   Para 13, not materially amending the previous 2000 Guidelines. But, puzzlingly, as recently as 2004 the Commission relied on Vlaamse Reisbureaus and the relevance of ‘the fact that an agent acts for a number of companies’ in its fining Decision on Topps: Commission Press Release IP/04/682, 26 May 2004, Decision available on the DG Comp website. 32   Bundeskartellamt v Volkswagen (above n 12) para 19. 33   See below for discussion of the relevance of independent business activity to the agency analysis. 34   Daimler Chrysler (above n 3) para 65. 35   See ECJ cases cited above in n 3. 36   Above n 3, para 43 (emphasis added). 30

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[6.2]

[T]he decisive factor for the purposes of determining whether [the agent] is an economic operator is to be found [in the clauses of the agency agreement], implied or express, relating to the assumption of the financial and commercial risks linked to sales of goods to third parties.37

Of course, the facts of those cases did not clearly raise integration as a separate issue, in that they did not concern agents working for several principals or engaged as independent undertakings in significant business in the same market. However, in the slightly earlier judgment in Daimler Chrysler, in which the car dealers, as well as selling cars as agents, engaged in other types of business such as the provision of repair and after-sales services, and transport of cars for customers, the EGC said that ‘[i]n so far as application of Article [101] is concerned the question whether a principal and its agent . . . form a single economic unit, the agent being an auxiliary body forming part of the principal’s undertaking, is an important one.’38 It then went on to cite the comparison made in Suiker Unie between an agent and an employee. Finally, it may be observed that the integration criterion, if it does still have an independent existence, raises considerable conceptual difficulties to the extent that it requires an agent to act for only one principal. In this case, that an agent act for only one principal is at the same time both (i) a requirement for him to be treated as an agent under Article 101, and (ii) a reason for the agency agreement possibly to be prohibited under Article 101 (see below section 6.2.3)! It is probably for this reason that the Commission rejects this aspect of the integration criterion so emphatically in its Guidelines. Note that for the Commission, principal and agent are separate undertakings rather than, as the European Courts say, a ‘single economic unit’.39 The law is simpler, and arguably little is lost, if the separate ‘integration’ criterion is allowed to perish. 6.2.2.3  Independent Business Activity In Volkswagen, a relevant factor in deciding whether the agency agreement was within the scope of Article 101 was that the agents’ ‘principal business of sales and after-sales services is carried on, largely independently, in their own name and for their own account’,40 and a similar approach was taken in Suiker Unie. In other words, the agency accounted for a relatively small part of their business. In Daimler Chrysler the EGC took an apparently quite different approach. The agent had a significant repair and after-sales business (which was closely related to the market for the sale of new cars, which was the subject of the claimed agency), and the Commission argued that these activities prevented the overall relationship being one of agency. The EGC disagreed, holding that this was a different market 37   Ibid, para 46. See identical wording in CEPSA (above n 3) para 36; and similar wording in Daimler Chrysler (above n 3) para 87. 38   Daimler Chrysler (above n 3) para 86. 39  Guidelines, para 19. 40   Bundeskartellamt v Volkswagen (above n 12) para 19.

[6.2]

  agency and article 101 tfeu  211

from that of the agency, which concerned selling new cars, and so did not ‘operate to affect the relationship between the applicant and its agents under competition law as regards the market at issue in these proceedings’.41 Thus, the Court did not express an outright and absolute rejection of the relevance of business activity on other markets, but it went quite far in that direction. This was presumably the basis of the Commission’s implicit exclusion, in the framework of analysis set out in its Guidelines, of risks related to such activities. Independence may be shown in the freedom of a party to act as he chooses: in Pittsburgh, one of the elements that the Commission picked out as showing that the relationship was not one of agency was the fact that the party concerned was in a position to have refused to have taken part in the restrictive practices had it chosen. It was said to make most of its profits from selling both its own goods and those of third parties: thus it was not in a relationship of economic dependence on the other party to the contract.42 Companies over a certain size have generally not been characterised as agents. This is explicable on the basis that in practice a large company, even when carrying out the functions of an agent, is likely to be in a position to exert a certain pressure on its supplier and therefore to influence the distribution policies of its ‘principal’. As mentioned above, the Commission’s ‘third category’ of risk should not normally affect the legality of ‘indirect fulfilment’. On the other hand, if, as Volkswagen suggests, significant business activity on a different market in an independent capacity (that is, not as an agent) is a factor in determining whether a relationship is one of agency, this may make it more difficult to justify indirect fulfilment as an agency relationship. However, there is no reference in the Commission’s Guidelines, nor in the most recent ECJ judgments, to a requirement that an agent not also exercise an independent commercial activity.43 It is true that those cases did not raise the issue, but the most recent EGC judgment is Daimler Chrysler, in which this factor was not considered relevant.

6.2.3  When may Agency Agreements Infringe Article 101(1) TFEU? According to the Commission’s Guidelines, agency agreements fall outside Article 101 only for the purposes of obligations relating to the contracts negotiated or concluded on behalf of the principal. Other restrictions (such as exclusivity provisions that prevent the principal from appointing other agents in respect of a given type of transaction, customer or territory (‘exclusive agency’); or provisions preventing the agent from acting as agent or distributor for its principal’s competitors (‘non-compete’ or ‘single-branding’ clauses)) do potentially infringe Article 101, 41

  Daimler Chrysler (above n 3) para 113.   [1972] OJ L272/35, [1973] CMLR D2, para 11. 43   On the other hand, a fairly recent judgment pointing in the other direction is Minoan Lines (above n 27), in which the EGC referred to the ‘amount of independent business’ as a factor likely to prevent an undertaking being considered an agent for these purposes. 42

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even when the agent bears no significant commercial or financial risk.44 The Commission applied this approach in Repsol, a case about petrol stations, where it treated the ‘agency’ issue as irrelevant for the purposes of assessing a restriction on retailers acting for other suppliers.45 Though this appears to conflict with earlier ECJ cases such as Volkswagen, which suggest that Article 101 does not apply at all to agency relationships because the principal and agent constitute a single economic unit, the ECJ has more recently clearly confirmed the approach that the Commission has set out in its Guidelines. In CEEES it stated: [A]n agency contract may contain clauses concerning the relationship between the agent and the principal to which [Article 101] applies, such as exclusivity and non-competition clauses. In that connection it must be considered that, in the context of such relationships, agents are, in principle, independent economic operators, and such clauses are capable of infringing the competition rules insofar as they entail locking up the market concerned.46

In CEPSA, it said that in the context of agency, exclusivity and non-competition clauses were the ‘only’ type of clauses capable of falling within the scope of Article 101.47 The Commission’s Guidelines state that exclusive agency does not ‘in general’ have anticompetitive effects, implying that it may sometimes do so. Again, this is in conflict with ECJ judgments such as Suiker Unie and Vlaamse Reisbureaus,48 in which the fact that an agent works for only one principal is seen as an essential characteristic of agency and therefore of escape from the application of Article 101! The Guidelines say that single-branding and post-term non-compete provisions may infringe Article 101 if they lead to foreclosure on the market where the contract goods are sold or purchased. In the Commission Decision IMA Rules,49 the rules of a trade association of Dutch importers, processors and agents dealing in plywood required the agents of the association to work only on the basis of exclusive agency agreements and to deliver only to the association’s members. The Commission held that because these restrictions prevented anyone who might prefer to work through a number of agents or who was not an IMA member from engaging the services of agents working through the IMA, Article 101(1) was infringed. Exemption under Article 101(3) was refused because there was no evidence that the restrictions would bring about any improvement in distribution. 44   Para 19. Note that the Commission asserts that principal and agent are separate undertakings, which sits uncomfortably with the European Courts’ insistence, described above, on their forming a ‘single economic unit’. 45   The case was closed with formal commitments: Commission Press Release IP/06/495 and MEMO/06/163, 12 April 2006, Decision available on the DG Comp website. 46   Para 62. 47   Above n 3, para 48. 48   Above n 28. 49   [1980] OJ L318/1, [1981] 2 CMLR 498. See also Repsol (above n 45).

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Apart from exclusive agency and foreclosure effects, the other factor that may bring any agency agreement within Article 101 is that it facilitates collusion between competitors. The Guidelines give as examples situations in which a number of principals either use the same agents while collectively excluding other principals from using those agents, or else use them to collude on marketing strategy or to exchange sensitive market information between the principals.50

6.2.4  When may Non-agency Agreements Infringe Article 101(1) TFEU? If a particular distribution arrangement does not fall within the EU law definition of ‘agency’, then it may or may not infringe Article 101(1). There is no presumption of infringement. The status of such agreements under EU law depends, just as it does for other distribution agreements with independent dealers, on the terms of the agreement and the market situation both for the goods or services being sold through the agent and for the services provided by such an agent (see above chapter three). This will be the case in particular when an agent has a strong market position or is even dominant. It is clear that there will be an infringement if obligations imposed on the agents by a dominant undertaking, such as non-competition clauses, go further than is warranted by the circumstances, or if other competing suppliers are prevented from finding agents to distribute their goods because all or too many of the possible agents have been tied to a dominant undertaking by contracts that prevent them from being available to competitors of the dominant undertaking.51

6.2.5  Exemption under Article 101(3) TFEU If there is infringement of Article 101(1) it becomes necessary to decide whether the agreement is nevertheless exempted. Exemption may be conferred by a block exemption Regulation. If no block exemption is applicable, then, as in the case of any other agreement, the agreement will be exempted if it satisfies the four substantive requirements of Article 101(3). 6.2.5.1  Block Exemption Agreements that are agency agreements, whether in the technical sense of being the type of agency treated as outside the scope of Article 101 for some purposes or simply in the commercial sense of an agreement under which one party sells goods or services on behalf of another, may benefit from the vertical 50

  Para 20.   Suiker Unie (above n 3) para 486.

51

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restraints block exemption if those agreements satisfy the block exemption criteria.52 This will be possible only where the relevant market shares do not exceed 30 per cent (see above chapter three section 3.5 for this and the other block exemption criteria). When distribution of motor vehicles or their repair and after-sales services is concerned, sector-specific rules may apply (see above chapter four section 4.4). The block exemption may provide exemption for provisions such as the allocation to the agent of an exclusive territory or customer group, non-compete obligations lasting less than five years, or the setting by the principal of maximum or recommended prices. 6.2.5.2  Exemption under Article 101(3) TFEU Exemption under Article 101(3) applies when there is an economic efficiency justification for a restriction not exempted by the block exemption: the four substantive criteria of Article 101(3) must be satisfied (see above chapter two section 2.4.1 and chapter three section 3.6). Examples of provisions that will probably infringe Article 101(1) and will not normally benefit from exemption, either under the block exemption on vertical restraints or by individual exemption, are obligations preventing or restricting an agent from sharing his commission with the customer,53 restrictions on his ability to respond to unsolicited orders coming from outside his contract territory, and post-termination non-compete clauses.

6.3 

protection of commercial agents

6.3.1 Introduction Although not part of competition law, one of the main aims of Directive 86/653 on self-employed commercial agents (below Appendix 4) is to ensure as far as possible equal competitive conditions throughout EU territory so that principals and agents from one Member State compete on an equal basis with those operating in a different Member State. The harmonisation of some of the rules applicable to agents also has the effect of giving a minimum level of protection to agents throughout the European Union. Although the Directive does not provide any method by which the law applicable to an agency contract is determined, and parties may choose a non-EU law to govern their contracts, the regime is mandatory, 52  Commission Regulation (EU) 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 (‘vertical restraints block exemption’ or ‘block exemption’ or ‘Regulation’), [2010] OJ L102/1 (below Appendix 2). Its potential application to agency agreements is expressly mentioned: Art 1(1)(h). 53  Guidelines, para 49.

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and an agent carrying on his activity in the European Union cannot be deprived of protection under the Directive in this way.54 Much fuller protection would have been afforded to agents had the Directive provided some way of preventing differences in national laws being used to unfair advantage by principals. For example, Belgian law provides some elements of protection to agents that do not exist in French law. A supplier may therefore try to avoid application of the more stringent Belgian law by appointing a French agent for the territory of Belgium. Furthermore, in the case of many of the rules appearing in the Directive, it is not clear whether parties may agree to exclude wholly or in part the application of the rights and obligations provided for. The matter therefore falls to be decided by any mandatory national rule of the governing law of the agency contract.

6.3.2  Definition of Commercial Agent Only commercial agents as defined in the Directive are subject to its terms. For the purposes of the Directive, ‘commercial agent’ means a self-employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of another person (its ‘principal’) or to negotiate and conclude such transactions on behalf of and in the name of that principal (Article 1(2)). It does not extend to an agent who purchases in his own name goods from the principal, deducting his commission from the purchase price, and subsequently sells those goods to third parties in his own name but acting on behalf of the principal.55 The number of contracts concerned is not relevant: the Directive applies when an agent is given authority to conclude a single contract that is subsequently extended over several years, if the agent can be said to have had continuing authority to negotiate successive extensions to the contract.56 It is also irrelevant how the parties themselves label the relationship: a ‘sales representative’ may or may not be a ‘commercial agent’, depending on the nature of his activity. The definition expressly excludes company officers, partners, receivers, liquidators and trustees in bankruptcy (Article 1(3)). It also excludes unpaid agents and those operating on commodity exchanges or in the commodity market, as well as UK ‘Crown Agents’ (Article 2(2)). Given that the definition of commercial agent relates only to the sale or purchase of goods, agents in service industries who are not engaged in the sale of goods also fall outside the scope of the Directive. This excludes many common types of agent: travel and insurance agents, as well as musical, theatrical and 54  Case C-381/98 Ingmar v Eaton Leonard Technologies [2000] ECR I-9305, [2001] 1 CMLR 9 concerned an agency agreement between a principal based in California and an agent working within the EU, where the agency was contractually stated to be subject to the law of California. The judgment refers only to rights following termination of the agency contract, but the same principle probably applies to other rights under the Directive. 55  Case C-85/03 Mavrona v DES [2004] ECR I-1573. 56  Case C-3/04 Poseidon Chartering BV v Marianne Zeeschip VOF [2006] ECR I-2505.

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sporting agents, for example, are excluded. However, a number of Member States have included service industry agents within the scope of their implementing legislation, thereby extending protection to such agents. On the other hand, Member States also have the freedom when implementing the Directive to narrow the scope of protection by excluding those persons ‘whose activities as commercial agents are considered secondary by the law of the Member State’. The United Kingdom is one of the Member States that has taken this option.

6.3.3  Rights and Obligations Rights and obligations are addressed only in general terms. They provide a basic minimum and may not be derogated from by the parties (Article 5). The agent is required to ‘look after his principal’s interests and act dutifully and in good faith’ (Article 3(1)). This includes making proper efforts, keeping his principal informed and obeying his principal’s reasonable instructions (Article 3(2)). The principal is also obliged to act dutifully and in good faith (Article 4(1)). This includes providing the agent with all necessary documentation and information. In particular, the principal should give reasonable notice to the agent if it expects a significantly lower volume of commercial transactions than the agent would normally have expected (Article 4(2)). The agent also has the right to be informed within a reasonable time of the outcome of transactions procured by him for his principal (Article 4(3)).

6.3.4 Remuneration Member States have the right to retain or enact specific legislation concerning agents’ level of remuneration. Principal and agent are also free to agree privately between themselves on payment. However, in the absence of such legislation or agreement, an agent must be entitled to the customary local rate for the kind of goods he is selling or to a reasonable rate in the absence of any established custom (Article 6(1)). The following rules laid down by the Directive apply exclusively to payment by commission and not to other forms of payment. In some Member States these had the effect of considerably strengthening the position of the agent. Commission is payable during the contract period on all transactions concluded as a result of the agent’s action. If further business is done subsequently with a customer acquired by the agent for the same kind of business, the agent is entitled to commission on that subsequent business during the contract period (Article 7(1)). If the principal receives an order from such a customer during the agent’s contract period then it must pay the agent commission on that contract, even if the transaction is not actually concluded until the agency contract has run its term (Article 8(b)).

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It may alternatively be provided that when the agent is entrusted with a specific geographical area or group of customers, then during the contract period it is entitled to commission on all transactions with customers belonging to that area or group. Alternatively, similar provision for remuneration may be made in respect of an agent with an exclusive right to such an area or group of customers (Article 7 (2)). This applies even when the contract has been concluded without any action on the agent’s part. Whether the customer ‘belongs’ to the area or group is to be determined, when the customer is a legal person, by reference to where the customer actually carries on his commercial activities, though when this is not a single place, a number of other factors may be taken into account.57 However, there is no right to commission under Article 7(2) if the principal has not been involved in the transaction.58 Commission must become due to the agent as soon as the transaction has been or should have been executed by the principal according to the agreement made with the customer or has been executed by the customer. This protects the agent against non-performance or breach of contract by his principal. Actual payment shall not be made later than the date on which the customer has executed his part of the transaction or the last day of the month following the quarter during which the commission became due, whichever occurs first. Even if the transaction is concluded after the end of the contract period, so long as it is not too long after, the agent is entitled to commission if the transaction is mainly attributable to his efforts during the contract period (Article 8(a)). The above rules could give rise to a situation in which both a current and a previous agent were entitled to commission. In such circumstances it is the earlier agent who is entitled to the payment, ‘unless it is equitable because of the circumstances for the commission to be shared between the commercial agents’ (Article 9).

6.3.5 Information The agent is entitled to receive quarterly information on the amounts and breakdown of his commission. If Member States have national rules that permit the agent to inspect the principal’s books, these rules are to take precedence over those found in the Directive (Article 12).

6.3.6  Conclusion and Termination of Agency Contracts (Articles 13–16) Each party has the right to receive a written document relating to the contract. The right to receive such a document cannot be waived. Such a right does not prevent a 57

 Case C-104/95 Kontogeorgas v Kartonpak [1996] ECR I-6643, [1997] 1 CMLR 1093.  Case C-19/07 Heirs of Paul Chevassus-Marche v Groupe Danone [2008] ECR I-159, [2008] 2 CMLR 387. 58

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contract of agency itself being concluded, orally or tacitly. However, Member States may provide that agency contracts not at least evidenced in writing be invalid. Agency contracts may be concluded for a definite period. However, if such a contract continues to be performed after the expiration of the agreed period, the agreement is transformed automatically into an agreement for an indefinite period which can be terminated by notice. The period of notice cannot be shorter than one month for every expired contract year, with a maximum of three months or, if a Member State so prefers, a maximum of six months for six contract years and longer. If longer periods of notice are adopted, these should be identical for both agent and principal. Fixed period agreements are also subject to the cumulative notice provisions described above. However, the Directive does provide for the possibility of immediate termination by either party in certain circumstances. This may happen when one party fails to carry out all or part of his obligations or when ‘exceptional circumstances’ arise. ‘Exceptional circumstances’ probably refer to circumstances that under the law of the Member State concerned give grounds for immediate termination of the contract, such as force majeure.

6.3.7  Indemnification and Compensation (Articles 17–18) The Articles in the Directive that deal with indemnification and compensation for agents represent a political compromise. The principle of indemnification for agents at the termination or expiration of agency agreements was already applied in a number of Member States, including Germany and the Benelux countries. However, to others, such as the United Kingdom, the idea was unwelcome. These two positions had therefore to be accommodated in the final text of the Directive: eventually indemnification was provided for, but Member States were given the option of providing only for compensation for damage if they preferred. Whichever option applies, there can be no derogation from the rules to an agent’s detriment by the parties during the term of the contract (Article 19). Such derogation may be made only if it is clear that in every case it guarantees the agent an indemnity equal to or greater than that which would result from applying Article 17.59 An agent must notify his principal that he intends to make a claim for indemnity or compensation within a limitation period of one year of the termination of the contract. Indemnity or compensation is payable even if the contract ends as a result of the death of the agent. However, it is not payable when either the principal has terminated the agency contract because of default attributable to the commercial agent, which would justify immediate termination of the agency contract under national law,60 or the commercial agent has terminated the agency contract, 59

 Case C-465/04 Honyvem Informazioni Commerciali v De Zotti [2006] ECR I-2879.  Case C-203/09 Volvo Car Germany v Autohof Weidensdorf, 28 October 2010, held that national law may not refuse an agent indemnity, even if serious grounds justifying immediate termination of the contract existed at the time of the termination, if the agent’s default occurs after notice is given. 60

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unless such termination is justified by circumstances attributable to the principal or on the grounds of age, infirmity or illness of the commercial agent in consequence of which he cannot reasonably be required to continue his activities. Nor is it payable when, with the agreement of the principal, the commercial agent assigns his rights and duties under the agency contract to another person. 6.3.7.1 Indemnity Indemnity refers to payment in respect of business goodwill accumulated by an agent during the period of agency. If the indemnity option is chosen by the relevant Member State, then an agent is entitled to an indemnity if and to the extent that he has brought the principal new customers or has significantly increased the volume of business with existing customers, the principal continues to derive substantial benefits from the business with such customers, and the payment of this indemnity is equitable. The indemnification is calculated on the basis of the benefit accruing to the principal (not to the principal’s group61) and the commission lost by the agent, and it is not permissible for national law to place a limit on the amount of the indemnity of the actual amount of commission lost.62 However, the indemnity may not exceed an amount equivalent to the agent’s commissions for one year, calculated on the basis of the agent’s average annual commissions over the shorter of the preceding five years or the period that the agreement has been in force. However, if the agent thinks it suffers damage that exceeds the indemnification as calculated in this way, he is entitled to claim additional compensation. The Directive does not clearly indicate what type of damage is envisaged, but it is generally assumed that it refers to situations in which damages are available under national law principles for breach of contract or similar events. In 1996 the Commission produced a report63 on the application of Article 17 of the Directive, based on the responses to a questionnaire sent out to a wide variety of interested parties and authorities in each Member State. It found that most Member States chose the indemnity option, and problems have arisen as a result of the failure of the Directive to set out a method of calculation of the amount of the indemnity; only a ceiling on the amount is set. 6.3.7.2 Compensation The Directive provides an alternative rule that may be selected by Member States in preference to the rules on indemnity outlined above. France, for example, chose the compensation option. The UK implementing law allows parties a choice: if no choice is expressed, the compensation rule applies. In practice, application of the 61

 Case C-348/07 Semen Deutsche Tamoil GmbH [2009] ECR I-2341, [2009] 3 CMLR 389.   Ibid.  COM(96)364, 23 July 1996.

62 63

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law has led to some confusion, as neither concept was previously used in the United Kingdom.64 Under this alternative, compensation is granted for actual damage suffered only, not for goodwill accruing to the principal. This arises in particular when an agent is deprived of commission that proper performance of the agency contract would have procured him whilst providing the principal with substantial benefits linked to the commercial agent’s activities, or in circumstances that have not enabled the commercial agent to amortise the investments and expenses that he had incurred for the performance of the agency.

6.3.8  Post-term Restraint Clauses (Article 20) Clauses restricting an agent from carrying on his business after termination of the agreement are not generally acceptable, unless the restraint is imposed only on areas, groups of customers and types of goods that were covered by the agreement, and the restraint lasts no longer than two years. However, Member States’ national laws take precedence over these rules if they are more restrictive of such clauses.

6.3.9  National Implementing Measures EU Directives require incorporation into national law in order to be fully effective. Therefore, each Member State was required to enact implementing legislation in order to bring its national legislation into line with the requirements of this Directive. The original deadline for implementation was 1 January 1990, but it was not until 1995 that the Directive was implemented in all of the then 15 Member States. Since then the 10 Member States that joined on 1 May 2004 and the two that joined on 1 January 2007 were all required to have implemented the Directive by those dates respectively, and they have done so.65 In a number of Member States such as France, Germany and the Netherlands, compliance with the Directive involved little change to existing laws giving protection to commercial agents. In the United Kingdom and Ireland, however, the concepts involved were unfamiliar. The Directive gave these latter States a correspondingly longer period in which to adapt their legislation to the Directive. Until 1994 when the United Kingdom implemented the Directive, there was no statutory protection for agents there. Implementation represented the introduction of a 64   In Douglas King v Tunnock [2000] EuLR 531, [2000] IRLR 569 the Scottish Court of Appeal expressly relied on French law principles in holding that two years’ commission is generally appropriate compensation. 65   This is based on information supplied by the Member States to the Commission and published on the EUR-Lex database. It does not necessarily mean that implementation is in all cases complete and in conformity with the requirements of the Directive.

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number of completely new concepts into UK law, some of which UK courts have been called on to interpret. Some implementing laws go further than required by the Directive. For example, the French definition of an agent is wider than that required by the Directive, since it includes agents acting in respect of not only contracts for goods but also contracts for hire and for services. In some countries an issue arose over national obligations of registration by an agent in a national commercial register. In France, a 1958 Decree requires agents before they can start their activity to register with the Commercial Court of the district in which they are resident, and the French implementing legislation did not amend this obligation. As the Directive did not provide for any kind of registration, discussion arose in France as to whether such registration was still required and whether this registration should be considered as a condition to qualify as an agent. It now seems to be settled in France that registration is required only for agents (French or foreign) with a residence in France, with registration no longer a prerequisite to qualifying as an agent for the purposes of the Directive. Consequently, a nonregistered agent operating in France will benefit from the protective measures set out in the Directive and in French implementing legislation. In Italy, a similar issue arose and came before the ECJ. The Court confirmed that Member States were entitled to maintain a register of commercial agents but said that the Directive precluded a national rule ‘which makes the validity of an agency contract conditional upon the commercial agent being entered in the appropriate register’.66

6.3.10  Direct Effect of the Directive It may be that some Member States’ implementing legislation does not fully and correctly implement all aspects of the Directive. If the deadline for implementation of a Directive has passed (as it has for Directive 86/653), then in certain circumstances it may be possible to rely on it even in the absence of implementing legislation. This is also the case when a Directive has been incorrectly implemented. One important limitation on that principle in this context is that one private party cannot rely on the direct effect of an unimplemented or inadequately implemented Directive in order to establish an obligation on another private party. It would normally be necessary to be invoking the Directive as against the state or a state agency. However, the ECJ has ruled that national courts should, when interpreting national law, take into account the requirements of an unimplemented Directive (at a time when the State in question should have implemented the Directive). Again, the same applies in the case of an inadequately implemented 66  Case C-215/97 Bellone v Yokohama [1998] ECR I-2191, para 18. See also Case C-456/98 Centrosteel v Adipol [2000] ECR I-6007; and Case C-485/01 Caprini v Conservatore del registro delle imprese di Trento [2003] ECR I-2371.

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Directive. In practice, this could be used to create out of an incorrectly implemented Directive an obligation on another private party, provided that a national law in this field already existed to be ‘interpreted’. For example, national legislation might provide for the entitlement of an agent to commission in certain circumstances. If the national implementing law is ambiguous then the Directive should be relied on by a national court when interpreting the national law.67

67   See the further discussion of the direct effect of Directives and liability in damages above in ch 1 section 1.5.1.

7

The Future 7.1 

the legal framework

7.1.1 Background In the previous edition of this book I referred to the introduction in 2000 of the single, largely economic effects-based block exemption Regulation 2790/1999 for vertical restraints and the accompanying Guidelines as a ‘revolution’. That reform broke with the formalism and fragmentation of the previous approach to distribution agreements, and enforcement policy became much more focused on prohibiting only the most economically damaging distribution agreements. The latest 2010 changes to the legal framework broadly continue this trend and to a large extent constitute an invitation to those involved in enforcement to continue to develop a policy in which attention is paid above all to effects on markets and on consumers. In the earlier edition I also observed that this revolution seemed to have been a bloodless one, and ten years on this assessment apparently remains valid, at least on the surface. Between the introduction of the new rules in 2000 and the abolition of Commission exemption Decisions in 2004 there were no formal exemptions of any exclusive distribution or exclusive purchasing arrangements, nor of any selective distribution or franchising systems. While there has been a small handful of Commission infringement decisions, these have mainly concerned traditional ‘hardcore’ infringements such as resale price-fixing or export bans, rather than novel legal issues related to the change of approach. This is likely to continue to be the case, particularly as the vast majority of cases concerning distribution law agreements are now handled at national level (see below). Nor has the new approach given rise to any significant European General Court (EGC) or European Court of Justice (ECJ) rulings: there have not been, for example, judgments on the crucial distinction between ‘active’ and ‘passive’ sales.1 This trend is also likely to continue, given the likely paucity of Commission decisions available to be appealed and the rarity with which national courts take such issues to the ECJ. Even at an informal level, Commission officials have received relatively few queries in this area and have not once had recourse to their power to provide 1  Perhaps the most interesting distribution law judgment of this period was that dealing with GlaxoSmithKline’s refusal to supply Greek wholesalers with sufficient quantities of certain pharmaceuticals to allow them to export, but this issue was raised in the context of Article 102 TFEU and is linked to the specific difficulties faced by the pharmaceutical industry, which operates in a uniquely highly regulated environment. Cases C-468/06 etc Syfait II [2008] ECR I-7139, [2008] 5 CMLR 20.

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informal guidance. It was therefore not surprising, in the light of the competing demands on its resources, that DG Comp did not undertake the review of the vertical restraints Guidelines that was due to take place in 2004,2 instead postponing consideration of the rules until the expiry of the block exemption in 2010 became imminent. Indeed, one can speculate that there still would not have been any review at all if the Commission’s hand had not been forced by the circumstance of expiry of the block exemption. However, although on some level business appears to have found a way to live with the new rules, there are clearly markets and situations in which the rules are far from easy to apply. It is hard to know how many pro-competitive strategies have been rejected or abandoned in favour of strategies that, though they are economically less beneficial, present reduced competition law risk or uncertainty.3

7.1.2  2010 Block Exemption and Guidelines When the Commission did finally come to review its vertical restraints policy, it had to decide whether to renew or amend Regulation 2790/1999 or to abandon it altogether. While the latter option was not extensively discussed nor supported in many quarters, it would arguably have been the most satisfactory approach in principle. Since exemption now follows automatically from the fulfilling of the substantive criteria for exemption without the need for any administrative authorisation or declaration, block exemptions now purport to exempt agreements that are already exempted. More satisfactory from the point of view of principle would be to transform them into guidance notices for the relevant types of agreement. This may yet happen when the 2010 block exemption expires in 2022, though admittedly this would remove the high level of legal certainty afforded by block exemptions, which bind the Commission as well as national courts and authorities. On the other hand, it might have the benefit of increasing the focus on the actual effects of particular restrictions, as it is possible that the very existence of a ‘black list’ of prohibited clauses in the block exemption in practice perpetuates a greater presumption against such clauses than is merited or intended. In other words, the existence of the ‘black list’ may tend to close the mind of decisionmakers to the possibility of economic benefits and exemption, despite the more explicit mention of this possibility introduced in the 2010 Guidelines. Feedback from the over 150 respondents to the public consultation on Regulation 2790/1999 was very largely positive and in favour of maintaining the block exemption in existence. There was general recognition that companies falling below the 30 per cent market share threshold enjoyed considerably more commercial 2

  Commission Press Release IP/00/520, 24 May 2000.   Interestingly, the UK Office of Fair Trading (OFT) recently started to issue ‘short-form opinions’ ‘in response to concerns . . . that some forms of beneficial collaboration are currently not going ahead for fear of infringing competition law’, though these are available only for horizontal arrangements. The first such opinion concerned joint purchasing: OFT Press Release 44/10, 27 April 2010. 3

[7.1]   the legal framework  225

flexibility under the EU competition rules applicable to their distribution arrangements than had been the case under the old regime. Freedom of contract had become the general rule, albeit with a number of exceptions, there no longer being any need to fit within the straitjacket of the multiple and very detailed earlier block exemptions. This has continued to be a guiding principle in the review, with the Commission making it clear that, in the absence of market power, it favours an overall liberal and neutral regime for vertical restraints.4 While those with market shares above the 30 per cent threshold had had to learn to become more circumspect and to bear a greater burden of competition law compliance, they did not for the most part have fundamental criticisms to make. That is not to say that there were not issues that were raised, and two of them in particular generated much discussion and heated debate. These were the addition of a second market share threshold, which was intended to deal with issues of retailer power, and internet distribution. These are discussed in the following two sections. The new market share threshold was the only major change to the block exemption Regulation introduced in 2010. As far as revision of the Guidelines was concerned, apart from the extended guidance on internet distribution, the most significant novelty is probably the more generous approach to hardcore restrictions. The 2010 Guidelines, though they cannot and do not change the law, make it much clearer than before that there are no absolute or ‘per se’ prohibitions in EU competition law but only a rebuttable presumption of illegality in the case of certain types of restriction. They express this in terms of a reversal of the usual burden of proof: in these cases it is first for the party arguing in favour of the restriction to demonstrate pro-competitive effects and only then for the enforcing authority to assess the likely negative impact on competition. The most interesting example of this change is in the part of the Guidelines dealing with resale price maintenance (RPM). Whereas previously such restrictions were presumed to infringe Article 101(1), with no mention of the possibility of exemption under Article 101(3), the new Guidelines do now set out three examples of specific circumstances in which exemption could be justified. While the examples are narrowly circumscribed, and exemption cannot be expected to be available very often, the mere fact of their presence in the Guidelines marks an important change of atmosphere. An apparently more radical shift in approach to resale price maintenance occurred in 2007 in the United States, where the Leegin judgment replaced a longstanding US rule of ‘per se’ prohibition with a balancing of pro-competitive and anticompetitive effects under the ‘rule of reason’.5 This inevitably led to pressure 4   When the revised rules were adopted, Competition Commissioner Almunia said that they ensured consumer benefits while ‘leaving companies without market power essentially free to organise their sales network as they see best’: IP/10/445, 20 April 2010. 5   Leegin Creative Products v PSKS, 551 US 877 (2007). The ultimate legacy of the Supreme Court’s Leegin judgment remains uncertain, given a number of factors, including continuing uncertainty as to how courts will apply the rule of reason in RPM cases; conflicting laws at the state level; and proposed legislative repeal of Leegin. For descriptions and comparisons of the law on RPM in the EU and USA,

226 7—the future [7.1]

on the Commission to be much more permissive to such clauses, for example by removing them from the ‘black list’ of clauses that take an agreement outside the block exemption. However, the Commission has remained staunch in its commitment to a (rebuttable) presumption against legality of RPM, and in this it appears to be generally strongly supported by the Member States, which themselves regularly bring RPM cases and impose heavy fines.6 The burden therefore remains on those arguing in favour of RPM to establish its benefits. The first cases testing the new Guidelines on this point are awaited with great interest, whether they come from the Commission or European Courts, or from a national court or authority; and they will influence subsequent policy review. Subsequent events in the United States are also bound to be influential when these rules next come up for review in the European Union.

7.1.3  Article 102 TFEU The Regulation and Guidelines focus on Article 101 TFEU. But suppliers and distributors with high levels of market power are also subject to the Article 102 TFEU prohibition on abuse of a dominant position. In 2008 pressure for a more economics and effects-based approach to Article 102 cases than has characterised past Commission practice finally resulted in publication of ‘Guidance on the Commission’s Enforcement Priorities in Applying Article [102] to Abusive Exclusionary Conduct by Dominant Undertakings’.7 In it the Commission set out the types of exclusionary8 practices on which it intended to focus its enforcement resources, as well as how it would analyse single-firm conduct in that context. The guidance was expressly limited in a number of ways, not least in that it was explicitly said to be a statement not of the law but rather of enforcement priorities and of the framework of analysis that the Commission would apply in deciding whether to take action. Nevertheless, in some places it does appear to take a position on the law, and in practice many national courts and competition authorities now refer to it when interpreting both Article 102 and national equivalents. Such guidance cannot amend the wording of Article 102 or the related, often formalistic ECJ case law, but it can influence policy choices as to which cases the Commission pursues and how it approaches them. see A Jones, ‘Completion of the Revolution in Antitrust Doctrine on Restricted Distribution: Leegin and its Implications for EC Competition Law’ (2008) Antitrust Bulletin 903; and L Peeperkorn, ‘Resale Price Maintenance and its Alleged Efficiencies’ (2008) 4 ECJ 1. For arguments for more radical change, see, eg, Y Botteman and K J Kuilwijk, ‘(Minimum) Resale Price Maintenance under the New Guidelines: A Critique and A Suggestion’ (2010) 1 Competition Policy International Antitrust Journal. 6   See, eg, recent fines imposed by the German authority: ‘Bundeskartellamt imposes fine against Microsoft’, 8 April 2009’; ‘Bundeskartellamt imposes fine on CIBA Vision’, 25 September 2009; ‘Bundeskartellamt imposes fine on hearing aid manufacturer Phonak GmbH’, 15 October 2009 (press releases available on the Bundeskartellamt website). See also the UK case in which tobacco companies and retailers were fined a total of £225 million: Competition Act 1998 Decision of the OFT, case CE/2596-03 Tobacco, 15 April 2010. 7   [2009] OJ C45/7. 8   No guidance has so far been published on the other main category of abuse, exploitative abuse.

[7.2]   retailer power  227

Since then, Commission enforcement action has borne the hallmarks of the kind of thinking that lies behind the 2008 Guidance. For example, the Commission recognises in its 2008 Guidance that conditional rebates are not uncommon and can benefit consumers, and says that, rather than applying a per se rule, it will look at whether the rebate system may hinder entry or expansion of ‘as efficient competitors’. This will generally be the case when the effective price is below average avoidable cost, and when it is higher, other factors will be taken into account. In May 2009 the Commission applied these principles and broke its record for the highest fine ever on an individual firm in any antitrust case when it fined Intel €1.06 billion for abuse consisting of conditional rebates and making payments to PC manufacturers to delay the launch of systems incorporating competing microprocessors.9 In doing so the Commission went further in terms of analysing the actual effects of the abuse than is strictly required by the jurisprudence of the European Courts, thereby showing consistency with its averred commitment to introducing more economic rigour into its Article 102 decision-making. There is a clear message here that the Commission is adjusting its approach but also that it has an appetite on occasion for taking the most serious infringements all the way to an infringement Decision and is prepared to defend huge fines. At the same time, there has also been a clear trend towards closing many dominance cases by taking commitments from the companies concerned rather than proceeding to infringement decisions. This practice has the advantage for companies and authorities of reducing demand on resources and achieving a quicker end to cases. On the other hand, in practice this procedure requires companies to offer commitments without necessarily knowing the strength of the evidence that the Commission holds against them, and this can place them before difficult choices. From a policy point of view, too frequent use of commitments is not necessarily desirable. If there is no finding of infringement it makes it more difficult for private litigants to claim damages, and the absence of an infringement decision also reduces the amount of guidance available to others through fully reasoned decisions. But the procedural economies are significant and can in some cases assist the Commission in achieving policy outcomes that would not follow from an infringement Decision, so they can be expected to continue in regular use, with fining decisions the exception rather than the rule.

7.2 

retailer power

Much of EU competition law as applied to distribution systems has until recently proceeded on the assumption that buyers and retailers are the weaker parties in any distribution relationship. Indeed, in the context of motor vehicle distribution the sector-specific rules have provided significant distributor protection provisions, which arguably go beyond the proper remit of competition law. 9

  13 May 2009, available on the DG Comp website, appeal pending Case T-286/09.

228 7—the future [7.2]

But in recent years the Commission has come to the view that that the balance of power in some markets has shifted from supplier to retailer: for example, a supermarket is generally in a stronger position to decide no longer to stock a particular supplier’s product than is the supplier to decide no longer to make or supply the product. These issues are not solely the concern of competition law: in 2010 the Commission published a report identifying a number of barriers to crossborder development of retail services within the European Union. This includes a section on ‘Alleged abusive practices within the supply chain’,10 and it is possible that non-competition legislative or other measures may be put forward at EU level to deal with these issues. The relevant competition provisions therefore need to be seen as fitting into a broader picture of the Commission’s aim to maximise the efficiency and consumer benefits of retail trade. Retailer power may be exercised at either or both of two levels. Firstly, it may take the form of ‘buyer power’ exercised over the supplier, as in the example of the supermarket referred to above. This often tends to bring prices down, for example through negotiation of discounts, and this will bring consumer benefits if the lower prices are passed on to consumers. However, it can sometimes be damaging in its effects on suppliers or on competing retailers. Secondly, retailer power may be exercised downstream, in relation to consumers, if the retailer is in a position to charge excessive prices. Because of these concerns, the Commission, apparently supported by many Member States, introduced a dual market share threshold into the block exemption (whereas previously only one threshold applied in any given case) so that purchaser or retailer market power, as well as supplier power, would always be taken into account.11 The new threshold is intended in particular to deal with the cumulative effect of a number of separate agreements by which a powerful buyer ties up several suppliers who individually do not have market power and whose agreements would otherwise benefit from block exemption. This change narrows significantly the scope of application of the block exemption and also considerably increases the burden on parties when assessing whether the block exemption applies. Suppliers still, as before, need to assess and continually monitor their own market share, but they now also need to do the same in respect of their distributors’ market shares. This can raise practical and legal difficulties, and objections raised by interested parties during the consultation led to an adjustment of the proposal to refer to distributors’ share of their purchase market rather than of their resale market. This does make the task easier, but the basic principle of a dual threshold was retained in the final text. 10   ‘Towards More Efficient and Fairer Retail Services in the Internal Market for 2020’, COM (2010) 355, 5 July 2010; and accompanying staff working document (links provided in Commission Press Release IP/10/885, 5 July 2010). Suppliers’ main complaints related to retailer practices that shift unforeseen costs onto suppliers and make retrospective changes to agreed terms, to fees that retailers charge to suppliers and to excessive payment terms or late payment. 11   Commissioner Almunia said the change was intended ‘to take into account the fact that some buyers may also have market power with potentially negative effects on competition’: Commission Press Release, IP/10/445, 20 April 2010.

[7.3]   internet sales  229

Given the increased burden that the additional threshold places on parties to distribution agreements, it can be questioned whether it was necessary. One wonders why cases in which anticompetitive arrangements involving retailers with market power that benefited from the block exemption could not have been dealt with by withdrawal or dis-application of the block exemption. If such issues had been arising with any frequency one might have expected to have seen use being made of these mechanisms already. It will be interesting to see whether the new additional threshold results in a significant drop in the kind of problems that persuaded the Commission and the Member States to introduce this change. If not, there would be an argument for returning to the pre-2010 thresholds. Commission concerns over the power of certain retail groups, which led it to introduce this new market share threshold, also resulted in new sections in the Guidelines dealing with certain practices associated with powerful retailers.12 ‘Category management’, for example, involves the provision of advice by a leading supplier of a particular type of product to a retailer such as a supermarket. The supplier advises, in respect of its market segment, on the optimum allocation of shelf space to not only its own products but also competing products, as well as on pricing and other aspects of how best to satisfy consumer demand.13 While the provision of advice may have efficiency benefits and does not normally in itself infringe competition rules, it is easy to see how such a relationship may raise concerns, including information exchange between competing suppliers, foreclosure of other suppliers, enforcement of ‘recommended’ prices and horizontal price collusion. Similarly, ‘upfront access fees’ are normally benign, but the Guidelines point out possible competition concerns. The Guidelines, however, can only state general principles for assessment and do not provide clear answers in individual situations. As with possible exemption for RPM, only future decisional practice or perhaps ‘informal advice’ will clarify exactly what are the kind of circumstances in which objections will be raised to these practices.

7.3 

internet sales

The advent of the internet has changed the market environment in many sectors, as it means that consumers can easily compare prices and other conditions and make purchases, over a far wider area than was previously possible. This means that parallel imports or ‘grey goods’ (legitimate goods imported into country A from country B, where they are available more cheaply than in country A) are becoming a much greater problem for manufacturers and suppliers than before. There are also ‘free-riding’ issues: a purchaser may visit a physical shop to 12   For an assessment of these issues, see I Lianos, ‘New Kids on the Block: Retailer-Driven Vertical Practices and the New Regulation of Vertical Restraints in EU Competition Law’ (2010) 2 Competition Policy International Antitrust Journal. 13   Category management is not practised in all Member States. It is used in France, where it is currently the subject of a market study: Autorité de la concurrence, Décision n 10-SOA-02, 19 March 2010.

230 7—the future [7.3]

investigate the book or car he wants to buy, make his decision and then buy it more cheaply from an electronic distributor – though alternatively, the more focused, personalised advertising that many electronic traders are in a position to do may lead to traditional suppliers free-riding on them. Traditional prohibitions on active selling outside a distributor’s territory (which have always been and remain permitted under the block exemption) no longer provide an effective means of protection in these markets. Suppliers operating selective distribution systems also have concerns about the effect of the use of internet on their quality standards and brand image. At the same time distributors are frustrated if they are prohibited from selling through the internet when there is clearly consumer demand for the possibility of purchasing the products online. These concerns are part of a bigger picture in EU policy terms. There is a clear interface between the competition law issues raised by these developments and the broader ongoing debate regarding online commerce in the European Union, in particular the drive to bring maximum benefit from electronic commerce to European consumers.14 This is therefore perhaps the area in which the Commission is most likely to take distribution cases under the competition rules in the near future. Some of the most controversial competition law enforcement issues that have arisen in national distribution cases in recent years have concerned the extent to which suppliers may limit the internet sales activities of their distributors, and the most vigorous debate of all leading up the 2010 adoption of the revised legal framework for assessment of distribution agreements concerned the crucial question of the extent to which suppliers may or may not prohibit or limit the use by their independent distributors of internet sites to sell their products. The Commission made it clear that it sought to strike a balance between allowing consumers to take advantage of cross-border purchasing and protecting distributors that invest in marketing and promotion activities from other distributors that may ‘free-ride’ on those efforts.15 Some of the issues raised by internet selling were already addressed in the Commission’s 2000 Guidelines on vertical restraints, but a number of questions remained open, and the debate pitted strong opposing commercial interests against each other. Internet traders wanted as few restrictions on internet trade as possible to be permitted, whereas the luxury goods sector, in particular, argued for the right of suppliers to decide for themselves which channel they use to distribute their products. The result of this debate is a large amount of new material in the 2010 Guidelines, described in previous chapters of this book. The basic principles 14   See, eg, Online Commerce Round Table, 17 September 2008 and subsequent work, texts available in the ‘media’ section of the DG Comp website. See also Commission Press Release IP/09/1292, 9 September 2009 for details of an investigation into misleading advertising and unfair practices on websites selling consumer electronic goods, led by the EU Consumer Commissioner and covering 396 websites across the EU. 15   Commission Press Release IP/09/1197, 27 July 2009. But note that free-riding can happen in both directions: some customers carry out their research online and then go to a shop to buy, for example in order to have the item immediately.

[7.3]   internet sales  231

remain unchanged, but a considerable amount of additional guidance has been added. This extended guidance clearly draws on and is generally very much in line with national case law in this area.16 Notably, the distinction between active and passive sales has been maintained, although arguably it is no longer appropriate in the internet environment. For one thing, the multiple possibilities that technology now offers for distribution mean that retail markets are now so complex that this simple binary distinction can be difficult to apply. Also, the distinction was developed in the context of a shopping environment in which passive sales could occur only if a potential customer made a significant effort to contact or visit a seller in another territory than the one in which he was based. Now this can be done via the internet with negligible effort, so that the balance originally established by that distinction has shifted significantly. It may be that the current balance is the right one. However, it does appear that the decision generally to treat internet sales as passive sales is motivated at least in part by political and policy reasons connected with promotion of the single market and internet commerce and not wholly by competition law considerations. While the basic principle that distributors must be free to sell online is maintained, there is scope for suppliers to hedge this freedom about with plenty of conditions, such as those permitted in connection with the use of third party platforms. To the extent that the new framework turns out not to have struck the right balance and to have allowed the block exemption to exempt damagingly restrictive distribution systems that limit online sales unnecessarily, it will be important that the Commission and national authorities make use of the withdrawal and disapplication mechanisms available. However, their reluctance to use these mechan­ isms in the past17 is not encouraging in this respect. Similarly, authorities should be ready, for example through non-infringement decisions or the giving of informal guidance, to confirm the legality of restrictions not covered by the block exemption, in instances when there is evidence that these serve consumers’ best interests. On the other hand, it may be that in future this distinction becomes of decreasing importance. Because of the existence of internet trading, suppliers are likely to work with increasingly bigger territories, thereby reducing the impact of territorial sales limits, which may therefore become less common. In addition, it is possible that consumers will demand the convenience of internet shopping and will come to prefer to buy from suppliers whose goods are available online, to an even greater 16   Eg, French case law accepting that online distribution may be limited to the authorised retailers of selective distribution networks that already operate a physical retail outlet: Bijourama v Festina Cour d’appel de Paris, Case 2006-17900, 16 October 2007; SARL PMC Distribution vs SAS Pacific Creation, Cour d’appel de Paris, Case 07-04360, 18 April 2008; and Hi-fi/Home Cinema, Conseil de la concurrence, Decision 06-D-285, October 2006. See also R Saint-Esteben, O Billard and K-A Jouvensal, ‘On-line Reselling and Selective Distribution Networks: What Can Be Learnt from the French Experience?’ (2010) Journal of European Competition Law and Practice 245. 17   The new market share threshold was added into the block exemption because it was considered that as previously drafted it exempted anticompetitive agreements involving powerful retailers. But it does not appear that withdrawal or dis-application was ever used to deal with such situations.

232 7—the future [7.4]

extent than they do today. If so, competition rules allowing restrictions on internet selling, so hotly debated today, may become unimportant if suppliers no longer want to take advantage of them. 7.4 

eu and national enforcement

In May 2004 Council Regulation 1/2003 granted new powers to and placed new enforcement responsibilities on national competition authorities (NCAs) and national courts for the application of Articles 101 and 102. At the same time this reform, generally known as ‘modernisation’, required business and its advisers to take much greater responsibility for assessing their own agreements and practices. As a result of this decentralisation of enforcement and the often national dimension of the relevant markets, there are now vastly more distribution cases dealt with at national level than by the Commission, and this in turn has resulted in a fair amount of national case law in this area. Some examples on RPM and internet sales have already been cited above. The Commission reports that since 2004 the NCAs have dealt with cases in sectors including fresh tomatoes, petrol stations, perfumes and luxury goods, smart phones, acquisition of sport rights and TV content, and foreign-language teaching books.18 NCAs and courts have sometimes even taken up cases when the facts have already been considered by the Commission.19 Chief among the concerns raised at the time of the 2004 reform was the risk to the unity of interpretation of the EU rules posed by diverging decisions taken by the courts and authorities of 27 Member States. As a result, the Commission retained various powers enabling it to some extent to supervise and steer the application and development of the law. Since then it has perhaps unsurprisingly made almost no use of its most draconian power, which is to withdraw a case from an NCA—but that was always intended to be an option of last resort. Perhaps more unexpectedly, it has not so far, in over six years, used its powers to issue informal guidance or to take a ‘non-infringement’ decision. It has intervened in national court cases only very rarely, though it does respond to national court requests for opinions several times a year. Nor has the Commission taken many infringement decisions in distribution cases in recent years.20 All this means that there is very little guidance available through decision-making practice at EU level, so that in practice the Commission’s Guidelines represent almost the only indication of its approach, and so assume very great importance indeed. There is a fair amount of guidance available from cases decided at national level, though Member States vary considerably in the vigour with which they publicly 18

  MEMO/10/138, 20 April 2010.   Eg, a Spanish court looked, as it is perfectly entitled to do, at an issue that the Commission had already dealt with by means of an Article 9 commitments Decision: Carburantes Costa de la Luz v Repsol, Juzgado de lo Mercantil núm 6, Decision no 477/2007, 29 July 2007. 20   See F Dethmers and P Posthuma de Boer, ‘Ten Years On: Vertical Agreements under Article 81’ (2009) European Competition Law Review 424 for a review of Commission cases during this period. 19

[7.5]   damages claims  233

enforce competition law in respect of distribution agreements. Another key element of the ‘modernisation’ reform was the establishment of a cooperation mechanism between the Commission and national authorities within the European Competition Network (ECN). This has been key to the success of the reform but at the same time has limited the guidance publicly available. This cooperation covers procedural issues, but there is also extensive discussion of many substantive topics within the ECN. Such cooperation is clearly a positive element in competition law enforcement, but the fact that so many issues are aired and resolved behind closed doors may further reduce the amount of guidance available through decided cases. The failure of many Member States to ensure that relevant national court judgments are systematically reported to the Commission also contributes to this lack of published guidance.21 There is therefore a limited stream of information available to those trying to work out how the law is being applied to distribution agreements across the European Union, either at EU or national level. The Member States and their NCAs were actively involved in the drafting of the 2010 block exemption and Guidelines, replying to questionnaires about their experience with the existing rules and participating in several official consultations. They expressed strong support for the maintenance of the system of block exemption and accompanying Guidelines, so that a coherent approach to the application of the law can be expected most of the time. However, it is to be hoped that in the coming years the Commission will build on its 2010 texts by adopting some Decisions in the most difficult areas, or at least some informal guidance. To give just two examples, a non-infringement case concerning RPM would be helpful, as would a withdrawal of the benefit of the block exemption in a situation in which unjustifiably restrictive selective distribution criteria are being used to limit online sales.

7.5 

damages claims

The Commission recognised at the outset of its ‘modernisation’ project that optimum functioning of the new, more decentralised system would require a significant degree of harmonisation of national procedural rules. However, in order not to delay adoption of the reforms, it was decided in 2004 to include only a minimum of such procedural harmonisation. Once Regulation 1/2003 was in place, the Commission started actively considering what additional measures might be needed. Future reform is possible over a broad range of procedural issues, but the focus so far has been on facilitating private enforcement of Articles 101 and 102 through damages claims before national courts. Although Article 101 is regularly raised as a defence in legal disputes, damages claims are not yet common in EU Member States, in contrast to the situation in 21   Commercial initiatives are to some extent filling this gap, but access to such a resource should arguably not be limited to those in a position to pay for it.

234 7—the future [7.5]

the United States. When they are brought in the European Union, they are overwhelmingly based on hardcore cartel infringements such as price-fixing and market sharing between competing firms. There are a number of reasons for the relative rarity of damages claims based on competition law infringements. One is that the ‘damage’, such as the higher prices paid as a result of illegal restriction of parallel trade, is often not borne by the immediate purchasers (the wholesalers or distributors) but is passed down the chain to the final consumer. In such a situation an action by the immediate purchasers will be defeated in many jurisdictions by the so-called ‘passing-on defence’, on the grounds that they themselves have suffered no loss. Actions by those further down the chain who have actually suffered loss may be hampered by the nonexistence in some jurisdictions of class or representative actions by which a large number of small plaintiffs, all of whom have suffered loss as a result of the same anticompetitive behaviour, can jointly obtain redress. Moreover, in some jurisdictions an infringement finding by the NCA is not enough to found a damages claim, so that the illegal conduct will have to be proved anew. In 2003, the Commission commissioned a study of the availability of damages for competition law infringements and the barriers facing plaintiffs across the European Union, and a number of options, some of them quite radical, were put forward in a 2005 Green Paper. This was followed in 2008 by a White Paper, which discarded the most controversial ideas and set out proposals aimed at balanced treatment of plaintiffs’ and defendants’ interests, at the same time avoiding creating a ‘litigation culture’. Wouter Wils, a member of the European Commission’s Legal Service, has in his personal capacity put forward some interesting arguments against encouraging private enforcement claims,22 but it seems clear that the Commission views an increase in such actions as key to the success of competition law enforcement. A proposed Directive, which would have introduced some procedural harmonisation and other measures facilitating the bringing of such claims, circulated in 2009 but was never formally published. Commissioner Almunia made it clear when he took office in 2010 that while he supported such a measure, he preferred it to be developed in a broader context of consumer redress generally. This will inevitably delay further progress, but we can expect eventually to see decisive action in this direction. Regardless of changes in the law and even in the legal culture of the European Union, the option of bringing such a claim may remain unattractive in the context of distribution for commercial or practical reasons. A distributor may often be 22   He argues essentially that as far as stopping and deterring competition law violations are concerned, public enforcement is more effective because the authorities have greater investigative and sanctioning and prohibition powers; because they are motivated by the public interest rather than a private profit motive; and because it is less expensive. As for compensating victims, he argues that in practice private litigation rarely results in those responsible for the violation transferring their gain to those who have in fact been harmed: ‘Should Private Antitrust Enforcement be Encouraged in Europe?’ (2003) 26(3) World Competition 473. See also the response in C Jones, ‘Private Antitrust Enforcement in Europe: A Policy Analysis and Reality Check’ (2004) 27(1) World Competition 13.

[7.6]   economics  235

dependent on a supplier to obtain the products he needs and therefore may not wish to litigate against him. Similarly, a supplier may not want to antagonise his purchaser or retailer. Or a distributor excluded from a selective distribution network may not have the evidence to prove why he has been excluded from the network. Having said that, if damages claims do become more commonplace, then such cases may be brought. In the United States this is not unusual: the Leegin case on RPM, mentioned above, arose out of a damages claim by a retailer who had been expelled from a distribution network.

7.6 

economics

The 1996 edition of this book closed with the words: ‘it seems clear that arguments based on economic analysis of relevant markets and parties’ positions in those markets are likely to play an increasingly crucial role in the resolution of EC competition law questions’. The new policy on vertical restraints more than justified this comment, and yet the prediction seems to remain valid for each edition. In 2004, DG Comp’s first Chief Economist took office, with the avowed intent of ensuring a rigorous approach to economic arguments and evidence. Though much of his and his team’s work has been in the merger control field, they are also active in cases involving allegations of abuse of market dominance, and their presence undoubtedly influences policy and practice more generally. It is clear that the role of expert economists, both within the Commission and national enforcement bodies and in the private sector, will remain important in years to come. Economics will have a greater role to play in distribution cases if the more generous approach to hardcore restraints set out in the 2010 Guidelines is to become a reality. For example, until now economists have not been involved in RPM cases, but this may change if arguments that such arrangements bring about economic efficiencies become more common. It has been true for many years now that competition lawyers need to understand and pay attention to economic thinking, and in the area of distribution law its importance continues to grow.

Resources The books and websites mentioned below represent a small personal selection of those that I have found useful. All the books are recent enough to be fairly up to date, and all the online sources are accessible free of charge.

  eu law and institutions Books P Craig and G De Burca, EU Law: Texts, Cases and Materials, 4th edn (Oxford, Oxford University Press, 2007). T Hartley, The Foundations of European Community Law, 6th edn (Oxford, Oxford University Press, 2007). J Steiner, L Woods and C Twigg-Flesner, EU Law, 9th edn (Oxford, Oxford University Press, 2006).

Websites European Court of Justice and European General Court, http://curia.europa.eu Eur-Lex, http://eur-lex.europa.eu (This site provides the full text of the Official Journal L series and C series published since 1998. It also includes full-text versions of recent preparatory acts (COM docs), Treaties and EU legislation in force.)

  ec competition law and economics Books C Bellamy and G Child, European Community Law of Competition, 6th edn (Oxford, Oxford University Press, 2008) (2010 supplement available). S Bishop and C Walker, The Economics of EC Competition Law, 3rd edn (London, Sweet & Maxwell, 2010). D Broomhall and J Goyder (eds), Modernisation in Europe 2008 (London, Law Business Research, 2007). J Goyder and A Albors-Llorens, Goyder’s EC Competition Law, 5th edn (Oxford, Oxford University Press, 2009). A Jones and B Sufrin, EU Competition Law: Text, Cases and Materials, 4th edn (Oxford, Oxford University Press, 2011). C Kerse and N Khan, EC Antitrust Procedure, 5th edn (London, Sweet & Maxwell, 2005).

238  bibliography

V Korah, An Introductory Guide to EC Competition Law and Practice, 9th edn (Oxford, Hart Publishing, 2007). R O’Donoghue and A J Padilla, The Law and Economics of Article 82 EC (Oxford, Hart Publishing, 2006). R Whish, Competition Law, 6th edn (Oxford, Oxford University Press, 2009).

Websites Directorate General of Competition (DG Comp), http://ec.europa.eu//_en.html (This site provides information on activities of the DG Comp, press releases and publications, speeches and articles by officials, as well as legislation and policy documents, DG Comp Annual Reports and its Competition Policy Newsletter.) RBB Economics (economics of vertical restraints), http://www.rbbecon.com/‌publications/. html

  free movement of goods P Oliver, Oliver on Free Movement of Goods in the European Union, 5th edn (Oxford, Hart Publishing, 2010).

Appendix 1 Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU) Article 101 (1) 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. (2)  Any agreements or decisions prohibited pursuant to this article shall be automatically void. (3) 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:

240  appendix 1

(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. Article 102 Any abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it shall be prohibited as incompatible with the internal 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 such contracts.

Appendix 2 Vertical Restraints Block Exemption Regulation 330/2010 Commission Regulation (EU) No 330/2010 of 20 April 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, [2010] OJ L102/1 (Text with EEA relevance) THE EUROPEAN COMMISSION, Having regard to the Treaty on the Functioning of the European Union, Having regard to Regulation No 19/65/EEC of the Council of 2 March 1965 on the application of Article 85(3) of the Treaty to certain categories of agreements and concerted practices,1 and in particular Article 1 thereof, Having published a draft of this Regulation, After consulting the Advisory Committee on Restrictive Practices and Dominant Positions, Whereas: (1) Regulation No 19/65/EEC empowers the Commission to apply Article 101(3) of the Treaty on the Functioning of the European Union2 by regulation to certain categories of vertical agreements and corresponding concerted practices falling within Article 101(1) of the Treaty. (2) Commission Regulation (EC) No 2790/1999 of 22 December 1999 on the application of Article 81(3) of the Treaty to categories of vertical agreements and concerted practices3 defines a category of vertical agreements which the Commission regarded as normally satisfying the conditions laid down in Article 101(3) of the Treaty. In view of the overall positive experience with the application of that Regulation, which expires on 31 May 2010, and taking into account further experience acquired since its adoption, it is appropriate to adopt a new block exemption regulation. (3) The category of agreements which can be regarded as normally satisfying the conditions laid down in Article 101(3) of the Treaty includes vertical agreements for the purchase or sale of goods or services where those agreements are concluded between non-competing undertakings, between certain competitors or 1

  OJ 36, 6.3.1965, 533.   With effect from 1 December 2009, Article 81 of the EC Treaty has become Article 101 of the Treaty on the Functioning of the European Union. The two Articles are, in substance, identical. For the purposes of this Regulation, references to Article 101 of the Treaty on the Functioning of the European Union should be understood as references to Article 81 of the EC Treaty where appropriate. 3   OJ L 336, 29.12.1999, 21. 2

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by certain associations of retailers of goods. It also includes vertical agreements containing ancillary provisions on the assignment or use of intellectual property rights. The term ‘vertical agreements’ should include the corresponding concerted practices. (4)  For the application of Article 101(3) of the Treaty by regulation, it is not necessary to define those vertical agreements which are capable of falling within Article 101(1) of the Treaty. In the individual assessment of agreements under Article 101(1) of the Treaty, account has to be taken of several factors, and in particular the market structure on the supply and purchase side. (5) The benefit of the block exemption established by this Regulation should be limited to vertical agreements for which it can be assumed with sufficient certainty that they satisfy the conditions of Article 101(3) of the Treaty. (6) Certain types of vertical agreements can improve economic efficiency within a chain of production or distribution by facilitating better coordination between the participating undertakings. In particular, they can lead to a reduction in the transaction and distribution costs of the parties and to an optimisation of their sales and investment levels. (7) The likelihood that such efficiency-enhancing effects will outweigh any anticompetitive effects due to restrictions contained in vertical agreements depends on the degree of market power of the parties to the agreement and, therefore, on the extent to which those undertakings face competition from other suppliers of goods or services regarded by their customers as interchangeable or substitutable for one another, by reason of the products’ characteristics, their prices and their intended use. (8) It can be presumed that, where the market share held by each of the undertakings party to the agreement on the relevant market does not exceed 30%, vertical agreements which do not contain certain types of severe restrictions of competition generally lead to an improvement in production or distribution and allow consumers a fair share of the resulting benefits. (9)  Above the market share threshold of 30%, there can be no presumption that vertical agreements falling within the scope of Article 101(1) of the Treaty will usually give rise to objective advantages of such a character and size as to compensate for the disadvantages which they create for competition. At the same time, there is no presumption that those vertical agreements are either caught by Article 101(1) of the Treaty or that they fail to satisfy the conditions of Article 101(3) of the Treaty. (10) This Regulation should not exempt vertical agreements containing restrictions which are likely to restrict competition and harm consumers or which are not indispensable to the attainment of the efficiency-enhancing effects. In particular, vertical agreements containing certain types of severe restrictions of competition such as minimum and fixed resale prices, as well as certain types of territorial protection, should be excluded from the benefit of the block exemption established by this Regulation irrespective of the market share of the undertakings concerned.

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(11) In order to ensure access to or to prevent collusion on the relevant market, certain conditions should be attached to the block exemption. To this end, the exemption of non-compete obligations should be limited to obligations which do not exceed a defined duration. For the same reasons, any direct or indirect obligation causing the members of a selective distribution system not to sell the brands of particular competing suppliers should be excluded from the benefit of this Regulation. (12) The market share limitation, the non-exemption of certain vertical agreements and the conditions provided for in this Regulation normally ensure that the agreements to which the block exemption applies do not enable the participating undertakings to eliminate competition in respect of a substantial part of the products in question. (13) The Commission may withdraw the benefit of this Regulation, pursuant to Article 29(1) of Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty,4 where it finds in a particular case that an agreement to which the exemption provided for in this Regulation applies nevertheless has effects which are incompatible with Article 101(3) of the Treaty. (14) The competition authority of a Member State may withdraw the benefit of this Regulation pursuant to Article 29(2) of Regulation (EC) No 1/2003 in respect of the territory of that Member State, or a part thereof where, in a particular case, an agreement to which the exemption provided for in this Regulation applies nevertheless has effects which are incompatible with Article 101(3) of the Treaty in the territory of that Member State, or in a part thereof, and where such territory has all the characteristics of a distinct geographic market. (15) In determining whether the benefit of this Regulation should be withdrawn pursuant to Article 29 of Regulation (EC) No 1/2003, the anticompetitive effects that may derive from the existence of parallel networks of vertical agreements that have similar effects which significantly restrict access to a relevant market or competition therein are of particular importance. Such cumulative effects may, for example, arise in the case of selective distribution or non-compete obligations. (16) In order to strengthen supervision of parallel networks of vertical agreements which have similar anticompetitive effects and which cover more than 50% of a given market, the Commission may by regulation declare this Regulation inapplicable to vertical agreements containing specific restraints relating to the market concerned, thereby restoring the full application of Article 101 of the Treaty to such agreements, HAS ADOPTED THIS REGULATION:

4

  OJ L 1, 4.1.2003, 1.

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Article 1: Definitions (1)  For the purposes of this Regulation, the following definitions shall apply: (a) ‘vertical agreement’ means an agreement or concerted practice entered into between two or more undertakings, each of which operates, for the purposes of the agreement or the concerted practice, at a different level of the production or distribution chain, and relating to the conditions under which the parties may purchase, sell or resell certain goods or services; (b) ‘vertical restraint’ means a restriction of competition in a vertical agreement falling within the scope of Article 101(1) of the Treaty; (c) ‘competing undertaking’ means an actual or potential competitor; ‘actual competitor’ means an undertaking that is active on the same relevant market; ‘potential competitor’ means an undertaking that, in the absence of the vertical agreement, would, on realistic grounds and not just as a mere theoretical possibility, in case of a small but permanent increase in relative prices be likely to undertake, within a short period of time, the necessary additional investments or other necessary switching costs to enter the relevant market; (d) ‘non-compete obligation’ means any direct or indirect obligation causing the buyer not to manufacture, purchase, sell or resell goods or services which compete with the contract goods or services, or any direct or indirect obligation on the buyer to purchase from the supplier or from another undertaking designated by the supplier more than 80% of the buyer’s total purchases of the contract goods or services and their substitutes on the relevant market, calculated on the basis of the value or, where such is standard industry practice, the volume of its purchases in the preceding calendar year; (e) ‘selective distribution system’ means a distribution system where the supplier undertakes to sell the contract goods or services, either directly or indirectly, only to distributors selected on the basis of specified criteria and where these distributors undertake not to sell such goods or services to unauthorised distributors within the territory reserved by the supplier to operate that system; (f) ‘intellectual property rights’ includes industrial property rights, knowhow, copyright and neighbouring rights; (g) ‘knowhow’ means a package of non-patented practical information resulting from experience and testing by the supplier which is secret, substantial and identified: in this context, ‘secret’ means that the knowhow is not generally known or easily accessible; ‘substantial’ means that

  Appendix 2  245

the knowhow is significant and useful to the buyer for the use, sale or resale of the contract goods or services; ‘identified’ means that the knowhow is described in a sufficiently comprehensive manner so as to make it possible to verify that it fulfils the criteria of secrecy and substantiality; (h) ‘buyer’ includes an undertaking which, under an agreement falling within Article 101(1) of the Treaty, sells goods or services on behalf of another undertaking; (i) ‘customer of the buyer’ means an undertaking not party to the agreement which purchases the contract goods or services from a buyer which is party to the agreement. (2) For the purposes of this Regulation, the terms ‘undertaking’, ‘supplier’ and ‘buyer’ shall include their respective connected undertakings. ‘Connected undertakings’ means: (a) undertakings in which a party to the agreement, directly or indirectly: (i) has the power to exercise more than half the voting rights, or (ii) has the power to appoint more than half the members of the supervisory board, board of management or bodies legally representing the undertaking, or (iii) has the right to manage the undertaking’s affairs; (b) undertakings which directly or indirectly have, over a party to the agreement, the rights or powers listed in point (a); (c) undertakings in which an undertaking referred to in point (b) has, directly or indirectly, the rights or powers listed in point (a); (d) undertakings in which a party to the agreement, together with one or more of the undertakings referred to in points (a), (b) or (c), or in which two or more of the latter undertakings, jointly have the rights or powers listed in point (a); (e) undertakings in which the rights or the powers listed in point (a) are jointly held by: (i) parties to the agreement or their respective connected undertakings referred to in points (a) to (d); or (ii) one or more of the parties to the agreement or one or more of their connected undertakings referred to in points (a) to (d) and one or more third parties.

246  appendix 2

Article 2: Exemption (1) Pursuant to Article 101(3) of the Treaty and subject to the provisions of this Regulation, it is hereby declared that Article 101(1) of the Treaty shall not apply to vertical agreements. This exemption shall apply to the extent that such agreements contain vertical restraints. (2) The exemption provided for in paragraph 1 shall apply to vertical agreements entered into between an association of undertakings and its members, or between such an association and its suppliers, only if all its members are retailers of goods and if no individual member of the association, together with its connected undertakings, has a total annual turnover exceeding EUR 50 million. Vertical agreements entered into by such associations shall be covered by this Regulation without prejudice to the application of Article 101 of the Treaty to horizontal agreements concluded between the members of the association or decisions adopted by the association. (3) The exemption provided for in paragraph 1 shall apply to vertical agreements containing provisions which relate to the assignment to the buyer or use by the buyer of intellectual property rights, provided that those provisions do not constitute the primary object of such agreements and are directly related to the use, sale or resale of goods or services by the buyer or its customers. The exemption applies on condition that, in relation to the contract goods or services, those provisions do not contain restrictions of competition having the same object as vertical restraints which are not exempted under this Regulation. (4) The exemption provided for in paragraph 1 shall not apply to vertical agreements entered into between competing undertakings. However, it shall apply where competing undertakings enter into a nonreciprocal vertical agreement and: (a) the supplier is a manufacturer and a distributor of goods, while the buyer is a distributor and not a competing undertaking at the manufacturing level; or (b) the supplier is a provider of services at several levels of trade, while the buyer provides its goods or services at the retail level and is not a competing undertaking at the level of trade where it purchases the contract services. (5) This Regulation shall not apply to vertical agreements the subject matter of which falls within the scope of any other block exemption regulation, unless otherwise provided for in such a regulation. Article 3:  Market Share Threshold (1) The exemption provided for in Article 2 shall apply on condition that the market share held by the supplier does not exceed 30% of the relevant market on which it sells the contract goods or services and the market share held by the buyer

  Appendix 2  247

does not exceed 30% of the relevant market on which it purchases the contract goods or services. (2)  For the purposes of paragraph 1, where in a multi-party agreement an undertaking buys the contract goods or services from one undertaking party to the agreement and sells the contract goods or services to another undertaking party to the agreement, the market share of the first undertaking must respect the market share threshold provided for in that paragraph both as a buyer and a supplier in order for the exemption provided for in Article 2 to apply. Article 4: Restrictions that Remove the Benefit of the Block Exemption (Hardcore Restrictions) The exemption provided for in Article 2 shall not apply to vertical agreements which, directly or indirectly, in isolation or in combination with other factors under the control of the parties, have as their object: (a) the restriction of the buyer’s ability to determine its sale price, without prejudice to the possibility of the supplier to impose a maximum sale price or recommend a sale price, provided that they [sic] do not amount to a fixed or minimum sale price as a result of pressure from, or incentives offered by, any of the parties; (b) the restriction of the territory into which, or of the customers to whom, a buyer party to the agreement, without prejudice to a restriction on its place of establishment, may sell the contract goods or services, except: (i) the restriction of active sales into the exclusive territory or to an exclusive customer group reserved to the supplier or allocated by the supplier to another buyer, where such a restriction does not limit sales by the customers of the buyer, (ii) the restriction of sales to end-users by a buyer operating at the wholesale level of trade, (iii) the restriction of sales by the members of a selective distribution system to unauthorised distributors within the territory reserved by the supplier to operate that system, and (iv) the restriction of the buyer’s ability to sell components, supplied for the purposes of incorporation, to customers who would use them to manufacture the same type of goods as those produced by the supplier; (c) the restriction of active or passive sales to end-users by members of a selective distribution system operating at the retail level of trade, without prejudice to the possibility of prohibiting a member of the system from operating out of an unauthorised place of establishment;

248  appendix 2

(d) the restriction of cross-supplies between distributors within a selective distribution system, including between distributors operating at different levels of trade; (e) the restriction, agreed between a supplier of components and a buyer who incorporates those components, of the supplier’s ability to sell the components as spare parts to end-users or to repairers or other service providers not entrusted by the buyer with the repair or servicing of its goods. Article 5: Excluded Restrictions (1) The exemption provided for in Article 2 shall not apply to the following obligations contained in vertical agreements: (a) any direct or indirect non-compete obligation, the duration of which is indefinite or exceeds five years; (b) any direct or indirect obligation causing the buyer, after termination of the agreement, not to manufacture, purchase, sell or resell goods or services; (c) any direct or indirect obligation causing the members of a selective distribution system not to sell the brands of particular competing suppliers. For the purposes of point (a) of the first subparagraph, a non-compete obligation which is tacitly renewable beyond a period of five years shall be deemed to have been concluded for an indefinite duration. (2) By way of derogation from paragraph 1(a), the time limitation of five years shall not apply where the contract goods or services are sold by the buyer from premises and land owned by the supplier or leased by the supplier from third parties not connected with the buyer, provided that the duration of the non-compete obligation does not exceed the period of occupancy of the premises and land by the buyer. (3) By way of derogation from paragraph 1(b), the exemption provided for in Article 2 shall apply to any direct or indirect obligation causing the buyer, after termination of the agreement, not to manufacture, purchase, sell or resell goods or services where the following conditions are fulfilled: (a) the obligation relates to goods or services which compete with the contract goods or services; (b) the obligation is limited to the premises and land from which the buyer has operated during the contract period; (c) the obligation is indispensable to protect knowhow transferred by the supplier to the buyer;

  Appendix 2  249

(d) the duration of the obligation is limited to a period of one year after termination of the agreement. Paragraph 1(b) is without prejudice to the possibility of imposing a restriction which is unlimited in time on the use and disclosure of knowhow which has not entered the public domain. Article 6: Non-application of this Regulation Pursuant to Article 1(a) of Regulation No 19/65/EEC, the Commission may by regulation declare that, where parallel networks of similar vertical restraints cover more than 50% of a relevant market, this Regulation shall not apply to vertical agreements containing specific restraints relating to that market. Article 7:  Application of the Market Share Threshold For the purposes of applying the market share thresholds provided for in Article 3 the following rules shall apply: (a) the market share of the supplier shall be calculated on the basis of market sales value data, and the market share of the buyer shall be calculated on the basis of market purchase value data. If market sales value or market purchase value data are not available, estimates based on other reliable market information, including market sales and purchase volumes, may be used to establish the market share of the undertaking concerned; (b) the market shares shall be calculated on the basis of data relating to the preceding calendar year; (c) the market share of the supplier shall include any goods or services supplied to vertically integrated distributors for the purposes of sale; (d) if a market share is initially not more than 30% but subsequently rises above that level without exceeding 35%, the exemption provided for in Article 2 shall continue to apply for a period of two consecutive calendar years following the year in which the 30% market share threshold was first exceeded; (e) if a market share is initially not more than 30% but subsequently rises above 35%, the exemption provided for in Article 2 shall continue to apply for one calendar year following the year in which the level of 35% was first exceeded; (f) the benefit of points (d) and (e) may not be combined so as to exceed a period of two calendar years; (g) the market share held by the undertakings referred to in point (e) of the second subparagraph of Article 1(2) shall be apportioned equally to each

250  appendix 2

undertaking having the rights or the powers listed in point (a) of the second subparagraph of Article 1(2). Article 8:  Application of the Turnover Threshold 1.  For the purpose of calculating total annual turnover within the meaning of Article 2(2), the turnover achieved during the previous financial year by the relevant party to the vertical agreement and the turnover achieved by its connected undertakings in respect of all goods and services, excluding all taxes and other duties, shall be added together. For this purpose, no account shall be taken of dealings between the party to the vertical agreement and its connected undertakings or between its connected undertakings. 2. The exemption provided for in Article 2 shall remain applicable where, for any period of two consecutive financial years, the total annual turnover threshold is exceeded by no more than 10%. Article 9: Transitional Period The prohibition laid down in Article 101(1) of the Treaty shall not apply during the period from 1 June 2010 to 31 May 2011 in respect of agreements already in force on 31 May 2010 which do not satisfy the conditions for exemption provided for in this Regulation but which, on 31 May 2010, satisfied the conditions for exemption provided for in Regulation (EC) No 2790/1999. Article 10: Period of Validity This Regulation shall enter into force on 1 June 2010. It shall expire on 31 May 2022. This Regulation shall be binding in its entirety and directly applicable in all Member States. Done at Brussels, 20 April 2010. For the Commission The President José Manuel Barroso

Appendix 3 Commission Guidelines on Vertical Restraints (Text with EEA relevance) [2010] OJ C130/1 I. Introduction 1. Purpose of the Guidelines (1) These Guidelines set out the principles for the assessment of vertical agreements under Article 101 of the Treaty on the Functioning of the European Union1 (hereinafter ‘Article 101’).2 Article 1(1)(a) of Commission Regulation (EU) No 330/2010 of 20 April 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 practices3 (hereinafter referred to as the ‘Block Exemption Regulation’) (see paragraphs (24) to (46)) defines the term ‘vertical agreement’. These Guidelines are without prejudice to the possible parallel application of Article 102 of the Treaty on the Functioning of the European Union (hereinafter ‘Article 102’) to vertical agreements. These Guidelines are structured in the following way: — Section II (paragraphs (8) to (22)) describes vertical agreements which generally fall outside Article 101(1); — Section III (paragraphs (23) to (73)) clarifies the conditions for the application of the Block Exemption Regulation; — Section IV (paragraphs (74) to (85)) describes the principles concerning the withdrawal of the block exemption and the dis-application of the Block Exemption Regulation; — Section V (paragraphs (86) to (95)) provides guidance on how to define the relevant market and calculate market shares; 1   With effect from 1 December 2009, Articles 81 and 82 of the EC Treaty have become Articles 101 and 102 respectively of the Treaty on the Functioning of the European Union (‘TFEU’). The two sets of provisions are, in substance, identical. For the purposes of these Guidelines, references to Articles 101 and 102 of the TFEU should be understood as references to Articles 81 and 82 respectively of the EC Treaty where appropriate. The TFEU also introduced certain changes in terminology, such as the replacement of ‘Community’ by ‘Union’ and ‘common market’ by ‘internal market’. The terminology of the TFEU will be used throughout these Guidelines. 2  These Guidelines replace the Commission Notice – Guidelines on Vertical Restraints, OJ C 291, 13.10.2000, 1. 3   OJ L 102, 23.4.2010, 1.

252  appendix 3

— Section VI (paragraphs (96) to (229)) describes the general framework of analysis and the enforcement policy of the Commission in individual cases concerning vertical agreements. (2)  Throughout these Guidelines, the analysis applies to both goods and services, although certain vertical restraints are mainly used in the distribution of goods. Similarly, vertical agreements can be concluded for intermediate and final goods and services. Unless otherwise stated, the analysis and arguments in these Guidelines apply to all types of goods and services and to all levels of trade. Thus, the term ‘products’ includes both goods and services. The terms ‘supplier’ and ‘buyer’ are used for all levels of trade. The Block Exemption Regulation and these Guidelines do not apply to agreements with final consumers where the latter are not undertakings, since Article 101 only applies to agreements between undertakings. (3)  By issuing these Guidelines, the Commission aims to help companies conduct their own assessment of vertical agreements under EU competition rules. The standards set forth in these Guidelines cannot be applied mechanically, but must be applied with due consideration for the specific circumstances of each case. Each case must be evaluated in the light of its own facts. (4) These Guidelines are without prejudice to the case law of the General Court and the Court of Justice of the European Union concerning the application of Article 101 to vertical agreements. The Commission will continue to monitor the operation of the Block Exemption Regulation and Guidelines based on market information from stakeholders and national competition authorities and may revise this notice in the light of future developments and of evolving insight. (5) Article 101 applies to vertical agreements that may affect trade between Member States and that prevent, restrict or distort competition (‘vertical restraints’).4 Article 101 provides a legal framework for the assessment of vertical restraints, which takes into consideration the distinction between anticompetitive and procompetitive effects. Article 101(1) prohibits those agreements which appreciably restrict or distort competition, while Article 101(3) exempts those agreements which confer sufficient benefits to outweigh the anticompetitive effects.5 2.  Applicability of Article 101 to Vertical Agreements (6)  For most vertical restraints, competition concerns can only arise if there is insufficient competition at one or more levels of trade, that is, if there is some degree of market power at the level of the supplier or the buyer or at both levels. Vertical restraints are generally less harmful than horizontal restraints and may provide substantial scope for efficiencies. 4  See inter alia judgments of the Court of Justice in Joined Cases 56/64 and 58/64 Grundig-Consten v Commission [1966] ECR 299; Case 56/65 Technique Minière v Maschinenbau Ulm [1966] ECR 235; and judgment of the Court of First Instance in Case T-77/92 Parker Pen v Commission [1994] ECR II-549. 5   See Communication from the Commission, Notice – Guidelines on the application of Article 81(3) of the Treaty, OJ C 101, 27.4.2004, p. 97 for the Commission’s general methodology and interpretation of the conditions for applying Article 101(1) and in particular Article 101(3).

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(7) The objective of Article 101 is to ensure that undertakings do not use agreements – in this context, vertical agreements – to restrict competition on the market to the detriment of consumers. Assessing vertical restraints is also important in the context of the wider objective of achieving an integrated internal market. Market integration enhances competition in the European Union. Companies should not be allowed to re-establish private barriers between Member States where State barriers have been successfully abolished. II.  Vertical Agreements which Generally Fall Outside the Scope of Article 101(1) 1.  Agreements of Minor Importance and SMEs (8) Agreements that are not capable of appreciably affecting trade between Member States or of appreciably restricting competition by object or effect do not fall within the scope of Article 101(1). The Block Exemption Regulation applies only to agreements falling within the scope of application of Article 101(1). These Guidelines are without prejudice to the application of Commission Notice on agreements of minor importance which do not appreciably restrict competition under Article 81(1) of the Treaty establishing the European Community (de minimis)6 or any future de minimis notice. (9)  Subject to the conditions set out in the de minimis notice concerning hardcore restrictions and cumulative effect issues, vertical agreements entered into by non-competing undertakings whose individual market share on the relevant market does not exceed 15% are generally considered to fall outside the scope of Article 101(1).7 There is no presumption that vertical agreements concluded by undertakings having more than 15% market share automatically infringe Article 101(1). Agreements between undertakings whose market share exceeds the 15% threshold may still not have an appreciable effect on trade between Member States or may not constitute an appreciable restriction of competition.8 Such agreements need to be assessed in their legal and economic context. The criteria for the assessment of individual agreements are set out in paragraphs (96) to (229). (10) As regards hardcore restrictions referred to in the de minimis notice, Article 101(1) may apply below the 15% threshold, provided that there is an appreciable effect on trade between Member States and on competition. The applicable case-law of the Court of Justice and the General Court is relevant in this respect.9 6

  OJ C 368, 22.12.2001, 13.   For agreements between competing undertakings the de minimis market share threshold is 10% for their collective market share on each affected relevant market. 8   See judgment of the Court of First Instance in Case T-7/93 Langnese-Iglo v Commission [1995] ECR II-1533, paragraph 98. 9   See judgments of the Court of Justice in Case 5/69 Völk v Vervaecke [1969] ECR 295; Case 1/71 Cadillon v Höss [1971] ECR 351; and Case C-306/96 Javico v Yves Saint Laurent [1998] ECR I-1983, paragraphs 16 and 17. 7

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Reference is also made to the possible need to assess positive and negative effects of hardcore restrictions as described in particular in paragraph (47) of these Guidelines. (11) In addition, the Commission considers that, subject to cumulative effect and hardcore restrictions, vertical agreements between small and medium-sized undertakings as defined in the Annex to Commission Recommendation of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises10 are rarely capable of appreciably affecting trade between Member States or of appreciably restricting competition within the meaning of Article 101(1), and therefore generally fall outside the scope of Article 101(1). In cases where such agreements nonetheless meet the conditions for the application of Article 101(1), the Commission will normally refrain from opening proceedings for lack of sufficient interest for the European Union unless those undertakings collectively or individually hold a dominant position in a substantial part of the internal market. 2.  Agency Agreements 2.1  Definition of Agency Agreements (12)  An agent is a legal or physical person vested with 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: ­— purchase of goods or services by the principal, or ­— sale of goods or services supplied by the principal. (13) The determining factor in defining an agency agreement for the application of Article 101(1) is the financial or commercial risk borne by the agent in relation to the activities for which it has been appointed as an agent by the principal.11 In this respect it is not material for the assessment whether the agent acts for one or several principals. Neither is material for this assessment the qualification given to their agreement by the parties or national legislation. (14) There are three types of financial or commercial risk that are material to the definition of an agency agreement for the application of Article 101(1). First, there are the contract-specific risks which are directly related to the contracts concluded and/or negotiated by the agent on behalf of the principal, such as financing of stocks. Secondly, there are the risks related to market-specific investments. These are investments specifically required for the type of activity for which the agent has been appointed by the principal, that is, which are required to enable the agent to conclude and/or negotiate this type of contract. Such investments are 10

  OJ L 124, 20.5.2003, 36.   See judgment of the Court of First Instance in Case T-325/01 Daimler Chrysler v Commission [2005] ECR II-3319; judgments of the Court of Justice in Case C-21 7/05 Confederación Espanola de Empresarios de Estaciones de Servicio v CEPSA [2006] ECR I-11987; and Case C-279/06 CEPSA Estaciones de Servicio SA v LV Tobar e Hijos SL [2008] ECR I-6681. 11

  Appendix 3  255

usually sunk, which means that upon leaving that particular field of activity the investment cannot be used for other activities or sold other than at a significant loss. Thirdly, there are the risks related to other activities undertaken on the same product market, to the extent that the principal requires the agent to undertake such activities, but not as an agent on behalf of the principal but for its own risk. (15)  For the purposes of applying Article 101(1), the agreement will be qualified as an agency agreement if the agent does not bear any, or bears only insignificant, risks in relation to the contracts concluded and/or negotiated on behalf of the principal, in relation to market-specific investments for that field of activity, and in relation to other activities required by the principal to be undertaken on the same product market. However, risks that are related to the activity of providing agency services in general, such as the risk of the agent’s income being dependent upon its success as an agent or general investments in for instance premises or personnel, are not material to this assessment. (16)  For the purpose of applying Article 101(1), an agreement will thus generally be considered an agency agreement where property in the contract goods bought or sold does not vest in the agent, or the agent does not himself supply the contract services and where the agent: (a) does not contribute to the costs relating to the supply/purchase of the contract goods or services, including the costs of transporting the goods. This does not preclude the agent from carrying out the transport service, provided that the costs are covered by the principal; (b) does not maintain at its own cost or risk stocks of the contract goods, including the costs of financing the stocks and the costs of loss of stocks and can return unsold goods to the principal without charge, unless the agent is liable for fault (for example, by failing to comply with reasonable security measures to avoid loss of stocks); (c) does not undertake responsibility towards third parties for damage caused by the product sold (product liability), unless, as agent, it is liable for fault in this respect; (d) does not take responsibility for customers’ non-performance of the contract, with the exception of the loss of the agent’s commission, unless the agent is liable for fault (for example, by failing to comply with reasonable security or anti-theft measures or failing to comply with reasonable measures to report theft to the principal or police or to communicate to the principal all necessary information available to him on the customer’s financial reliability); (e) is not, directly or indirectly, obliged to invest in sales promotion, such as contributions to the advertising budgets of the principal; (f) does not make market-specific investments in equipment, premises or training of personnel, such as for example the petrol storage tank in the

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case of petrol retailing or specific software to sell insurance policies in case of insurance agents, unless these costs are fully reimbursed by the principal; (g) does not undertake other activities within the same product market required by the principal, unless these activities are fully reimbursed by the principal. (17) This list is not exhaustive. However, where the agent incurs one or more of the risks or costs mentioned in paragraphs (14), (15) and (16), the agreement between agent and principal will not be qualified as an agency agreement. The question of risk must be assessed on a case-by-case basis, and with regard to the economic reality of the situation rather than the legal form. For practical reasons, the risk analysis may start with the assessment of the contract-specific risks. If contract-specific risks are incurred by the agent, it will be enough to conclude that the agent is an independent distributor. On the contrary, if the agent does not incur contract-specific risks, then it will be necessary to continue further the analysis by assessing the risks related to market-specific investments. Finally, if the agent does not incur any contract-specific risks and risks related to market-specific investments, the risks related to other required activities within the same product market may have to be considered. 2.2  The Application of Article 101(1) to Agency Agreements (18) In the case of agency agreements as defined in section 2.1, the selling or purchasing function of the agent forms part of the principal’s activities. Since the principal bears the commercial and financial risks related to the selling and purchasing of the contract goods and services all obligations imposed on the agent in relation to the contracts concluded and/or negotiated on behalf of the principal fall outside Article 101(1). The following obligations on the agent’s part will be considered to form an inherent part of an agency agreement, as each of them relates to the ability of the principal to fix the scope of activity of the agent in relation to the contract goods or services, which is essential if the principal is to take the risks and therefore to be in a position to determine the commercial strategy: (a) limitations on the territory in which the agent may sell these goods or services; (b) limitations on the customers to whom the agent may sell these goods or services; (c) the prices and conditions at which the agent must sell or purchase these goods or services. (19) In addition to governing the conditions of sale or purchase of the contract goods or services by the agent on behalf of the principal, agency agreements often contain provisions which concern the relationship between the agent and the

  Appendix 3  257

principal. In particular, they may contain a provision preventing the principal from appointing other agents in respect of a given type of transaction, customer or territory (exclusive agency provisions) and/or a provision preventing the agent from acting as an agent or distributor of undertakings which compete with the principal (single-branding provisions). Since the agent is a separate undertaking from the principal, the provisions which concern the relationship between the agent and the principal may infringe Article 101(1). Exclusive agency provisions will in general not lead to anticompetitive effects. However, single-branding provisions and post-term non-compete provisions, which concern inter-brand competition, may infringe Article 101(1) if they lead to or contribute to a (cumulative) foreclosure effect on the relevant market where the contract goods or services are sold or purchased (see in particular Section VI.2.1). Such provisions may benefit from the Block Exemption Regulation, in particular when the conditions provided in Article 5 of that Regulation are fulfilled. They can also be individually justified by efficiencies under Article 101(3) as for instance described in paragraphs (144) to (148). (20)  An agency agreement may also fall within the scope of Article 101(1), even if the principal bears all the relevant financial and commercial risks, where it facilitates collusion. That could, for instance, be the case when a number of principals use the same agents while collectively excluding others from using these agents, or when they use the agents to collude on marketing strategy or to exchange sensitive market information between the principals. (21)  Where the agent bears one or more of the relevant risks as described in paragraph (16), the agreement between agent and principal does not constitute an agency agreement for the purpose of applying Article 101(1). In that situation, the agent will be treated as an independent undertaking, and the agreement between agent and principal will be subject to Article 101(1) as any other vertical agreement. 3.  Subcontracting Agreements (22)  Subcontracting concerns a contractor providing technology or equipment to a subcontractor that undertakes to produce certain products on the basis thereof (exclusively) for the contractor. Subcontracting is covered by Commission notice of 18 December 1978 concerning the assessment of certain subcontracting agreements in relation to Article 85(1) of the EEC Treaty12 (hereinafter ‘subcontracting notice’). According to that notice, which remains applicable, subcontracting agreements whereby the subcontractor undertakes to produce certain products exclusively for the contractor generally fall outside the scope of Article 101(1) provided that the technology or equipment is necessary to enable the subcontractor to produce the products. However, other restrictions imposed on the subcontractor such as the obligation not to conduct or exploit its own research and development 12

  OJ C 1, 3.1.1979, 2.

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or not to produce for third parties in general may fall within the scope of Article 101.13 III.  Application of the Block Exemption Regulation 1.  Safe Harbour Created by the Block Exemption Regulation (23)  For most vertical restraints, competition concerns can only arise if there is insufficient competition at one or more levels of trade, that is, if there is some degree of market power at the level of the supplier or the buyer or at both levels. Provided that they do not contain hardcore restrictions of competition, which are restrictions of competition by object, the Block Exemption Regulation creates a presumption of legality for vertical agreements depending on the market share of the supplier and the buyer. Pursuant to Article 3 of the Block Exemption Regulation, 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. In order for the block exemption to apply, the supplier’s and the buyer’s market share must each be 30% or less. Section V of these Guidelines provides guidance on how to define the relevant market and calculate the market shares. Above the market share threshold of 30%, there is no presumption that vertical agreements fall within the scope of Article 101(1) or fail to satisfy the conditions of Article 101(3) but there is also no presumption that vertical agreements falling within the scope of Article 101(1) will usually satisfy the conditions of Article 101(3). 2.  Scope of the Block Exemption Regulation 2.1  Definition of Vertical Agreements (24)  Article 1(1)(a) of the Block Exemption Regulation defines a ‘vertical agreement’ as ‘an agreement or concerted practice entered into between two or more undertakings each of which operates, for the purposes of the agreement or the concerted practice, at a different level of the production or distribution chain, and relating to the conditions under which the parties may purchase, sell or resell certain goods or services’. (25) The definition of ‘vertical agreement’ referred to in paragraph (24) has four main elements: (a) The Block Exemption Regulation applies to agreements and concerted practices. The Block Exemption Regulation does not apply to unilateral conduct of the undertakings concerned. Such unilateral conduct can fall within the scope of Article 102, which prohibits abuses of a dominant 13

  See paragraph 3 of the subcontracting notice.

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position. For there to be an agreement within the meaning of Article 101 it is sufficient that the parties have expressed their joint intention to conduct themselves on the market in a specific way. The form in which that intention is expressed is irrelevant as long as it constitutes a faithful expression of the parties’ intention. In case there is no explicit agreement expressing the concurrence of wills, the Commission will have to prove that the unilateral policy of one party receives the acquiescence of the other party. For vertical agreements, there are two ways in which acquiescence with a particular unilateral policy can be established. First, the acquiescence can be deduced from the powers conferred upon the parties in a general agreement drawn up in advance. If the clauses of the agreement drawn up in advance provide for or authorise a party to adopt subsequently a specific unilateral policy which will be binding on the other party, the acquiescence of that policy by the other party can be established on the basis thereof.14 Secondly, in the absence of such an explicit acquiescence, the Commission can show the existence of tacit acquiescence. For that it is necessary to show first that one party requires explicitly or implicitly the cooperation of the other party for the implementation of its unilateral policy and second that the other party complied with that requirement by implementing that unilateral policy in practice.15 For instance, if after a supplier’s announcement of a unilateral reduction of supplies in order to prevent parallel trade, distributors reduce immediately their orders and stop engaging in parallel trade, then those distributors tacitly acquiesce to the supplier’s unilateral policy. This can, however, not be concluded if the distributors continue to engage in parallel trade or try to find new ways to engage in parallel trade. Similarly, for vertical agreements, tacit acquiescence may be deduced from the level of coercion exerted by a party to impose its unilateral policy on the other party or parties to the agreement in combination with the number of distributors that are actually implementing in practice the unilateral policy of the supplier. For instance, a system of monitoring and penalties, set up by a supplier to penalise those distributors that do not comply with its unilateral policy, points to tacit acquiescence with the supplier’s unilateral policy if this system allows the supplier to implement in practice its policy. The two ways of establishing acquiescence described in this paragraph can be used jointly; (b) The agreement or concerted practice is between two or more undertakings. Vertical agreements with final consumers not operating as an undertaking are not covered by the Block Exemption Regulation. More 14   Judgment of the Court of Justice in Case C-74/04P Commission v Volkswagen AG [2006] ECR I-6585. 15   Judgment of the Court of First Instance in Case T-41/96 Bayer AG v Commission [2000] ECR II-3383.

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generally, agreements with final consumers do not fall under Article 101(1), as that article applies only to agreements between undertakings, decisions by associations of undertakings and concerted practices of undertakings. This is without prejudice to the possible application of Article 102; (c) The agreement or concerted practice is between undertakings each operating, for the purposes of the agreement, at a different level of the production or distribution chain. This means for instance that one undertaking produces a raw material which the other undertaking uses as an input, or that the first is a manufacturer, the second a wholesaler and the third a retailer. This does not preclude an undertaking from being active at more than one level of the production or distribution chain; (d) The agreements or concerted practices relate to the conditions under which the parties to the agreement, the supplier and the buyer, ‘may purchase, sell or resell certain goods or services’. This reflects the purpose of the Block Exemption Regulation to cover purchase and distribution agreements. These are agreements which concern the conditions for the purchase, sale or resale of the goods or services supplied by the supplier and/or which concern the conditions for the sale by the buyer of the goods or services which incorporate these goods or services. Both the goods or services supplied by the supplier and the resulting goods or services are considered to be contract goods or services under the Block Exemption Regulation. Vertical agreements relating to all final and intermediate goods and services are covered. The only exception is the automobile sector, as long as this sector remains covered by a specific block exemption such as that granted by Commission Regulation (EC) No 1400/2002 of 31 July 2002 on the application of Article 81(3) of the Treaty to categories of vertical agreements and concerted practices in the motor vehicle sector16 or its successor. The goods or services provided by the supplier may be resold by the buyer or may be used as an input by the buyer to produce its own goods or services. (26) The Block Exemption Regulation also applies to goods sold and purchased for renting to third parties. However, rent and lease agreements as such are not covered, as no good or service is sold by the supplier to the buyer. More generally, the Block Exemption Regulation does not cover restrictions or obligations that do not relate to the conditions of purchase, sale and resale, such as an obligation preventing parties from carrying out independent research and development which the parties may have included in an otherwise vertical agreement. In addition, Article 2(2) to (5) of the Block Exemption Regulation directly or indirectly excludes certain vertical agreements from the application of that Regulation. 16

  OJ L 203, 1.8.2002, 30.

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2.2  Vertical Agreements between Competitors (27)  Article 2(4) of the Block Exemption Regulation explicitly excludes ‘vertical agreements entered into between competing undertakings’ from its application. Vertical agreements between competitors are dealt with, as regards possible collusion effects, in the Commission Guidelines on the applicability of Article 81 of the EC Treaty to horizontal cooperation agreements.17 However, the vertical aspects of such agreements need to be assessed under these Guidelines. Article 1(1)(c) of the Block Exemption Regulation defines a competing undertaking as ‘an actual or potential competitor’. Two companies are treated as actual competitors if they are active on the same relevant market. A company is treated as a potential competitor of another company if, absent the agreement, in case of a small but permanent increase in relative prices it is likely that this first company, within a short period of time normally not longer than one year, would undertake the necessary additional investments or other necessary switching costs to enter the relevant market on which the other company is active. That assessment must be based on realistic grounds; the mere theoretical possibility of entering a market is not sufficient.18 A distributor that provides specifications to a manufacturer to produce particular goods under the distributor’s brand name is not to be considered a manufacturer of such own-brand goods. (28)  Article 2(4) of the Block Exemption Regulation contains two exceptions to the general exclusion of vertical agreements between competitors. These exceptions concern nonreciprocal agreements. Nonreciprocal agreements between competitors are covered by the Block Exemption Regulation where (a) the supplier is a manufacturer and distributor of goods, while the buyer is only a distributor and not also a competing undertaking at the manufacturing level, or (b) the supplier is a provider of services operating at several levels of trade, while the buyer operates at the retail level and is not a competing undertaking at the level of trade where it purchases the contract services. The first exception covers situations of dual distribution, that is, the manufacturer of particular goods also acts as a distributor of the goods in competition with independent distributors of its goods. In case of dual distribution it is considered that in general any potential impact on the competitive relationship between the manufacturer and retailer at the retail level is of lesser importance than the potential impact of the vertical supply agreement on competition in general at the manufacturing or retail level. The second exception covers similar situations of dual distribution, but in this case for services, when the supplier is also a provider of products at the retail level where the buyer operates. 17

  OJ C 3, 6.1.2001, 2. A revision of those Guidelines is forthcoming.   See Commission Notice on the definition of the relevant market for the purposes of Community competition law, OJ C 372, 9.12.1997, 5, paragraphs 20 to 24; the Commission’s Thirteenth Report on Competition Policy, point 55; and Commission Decision 90/410/EEC in Case No IV/32.009 Elopak/ Metal Box-Odin, OJ L 209, 8.8.1990, 15. 18

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2.3  Associations of Retailers (29)  Article 2(2) of the Block Exemption Regulation includes in its application vertical agreements entered into by an association of undertakings which fulfils certain conditions and thereby excludes from the Block Exemption Regulation vertical agreements entered into by all other associations. Vertical agreements entered into between an association and its members, or between an association and its suppliers, are covered by the Block Exemption Regulation only if all the members are retailers of goods (not services) and if each individual member of the association has a turnover not exceeding EUR 50 million. Retailers are distributors reselling goods to final consumers. Where only a limited number of the members of the association have a turnover exceeding the EUR 50 million threshold and where these members together represent less than 15% of the collective turnover of all the members combined, the assessment under Article 101 will normally not be affected. (30)  An association of undertakings may involve both horizontal and vertical agreements. The horizontal agreements must be assessed according to the principles set out in the Guidelines on the applicability of Article 81 of the EC Treaty to horizontal cooperation agreements.19 If that assessment leads to the conclusion that a cooperation between undertakings in the area of purchasing or selling is acceptable, a further assessment will be necessary to examine the vertical agreements concluded by the association with its suppliers or its individual members. The latter assessment will follow the rules of the Block Exemption Regulation and these Guidelines. For instance, horizontal agreements concluded between the members of the association or decisions adopted by the association, such as the decision to require the members to purchase from the association or the decision to allocate exclusive territories to the members must first be assessed as a horizontal agreement. Once that assessment leads to the conclusion that the horizontal agreement is not anticompetitive, an assessment of the vertical agreements between the association and individual members or between the association and suppliers is necessary. 2.4  Vertical Agreements Containing Provisions on Intellectual Property Rights (IPRs) (31) Article 2(3) of the Block Exemption Regulation includes vertical agree­ments containing certain provisions relating to the assignment of IPRs to or use of IPRs by the buyer in its application and thereby excludes all other vertical agreements containing IPR provisions from the Block Exemption Regulation. The Block Exemption Regulation applies to vertical agreements containing IPR provisions where five conditions are fulfilled:

19

  See paragraph (27).

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(a) The IPR provisions must be part of a vertical agreement, that is, an agreement with conditions under which the parties may purchase, sell or resell certain goods or services; (b) The IPRs must be assigned to, or licensed for use by, the buyer; (c) The IPR provisions must not constitute the primary object of the agreement; (d) The IPR provisions must be directly related to the use, sale or resale of goods or services by the buyer or its customers. In the case of franchising where marketing forms the object of the exploitation of the IPRs, the goods or services are distributed by the master franchisee or the franchisees; (e) The IPR provisions, in relation to the contract goods or services, must not contain restrictions of competition having the same object as vertical restraints which are not exempted under the Block Exemption Regulation. (32)  Such conditions ensure that the Block Exemption Regulation applies to vertical agreements where the use, sale or resale of goods or services can be performed more effectively because IPRs are assigned to or licensed for use by the buyer. In other words, restrictions concerning the assignment or use of IPRs can be covered when the main object of the agreement is the purchase or distribution of goods or services. (33) The first condition makes clear that the context in which the IPRs are provided is an agreement to purchase or distribute goods or an agreement to purchase or provide services and not an agreement concerning the assignment or licensing of IPRs for the manufacture of goods, nor a pure licensing agreement. The Block Exemption Regulation does not cover for instance: (a) agreements where a party provides another party with a recipe and licenses the other party to produce a drink with this recipe; (b) agreements under which one party provides another party with a mould or master copy and licenses the other party to produce and distribute copies; (c) sponsorship contracts concerning the right to advertise oneself as being an official sponsor of an event; (d) copyright licensing such as broadcasting contracts concerning the right to record and/or broadcast an event. (34) The second condition makes clear that the Block Exemption Regulation does not apply when the IPRs are provided by the buyer to the supplier, no matter whether the IPRs concern the manner of manufacture or of distribution. An agreement relating to the transfer of IPRs to the supplier and containing possible restrictions on the sales made by the supplier is not covered by the Block Exemption

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Regulation. That means, in particular, that subcontracting involving the transfer of knowhow to a subcontractor20 does not fall within the scope of application of the Block Exemption Regulation (see also paragraph (22)). However, vertical agreements under which the buyer provides only specifications to the supplier which describe the goods or services to be supplied fall within the scope of application of the Block Exemption Regulation. (35) The third condition makes clear that in order to be covered by the Block Exemption Regulation, the primary object of the agreement must not be the assignment or licensing of IPRs. The primary object must be the purchase, sale or resale of goods or services and the IPR provisions must serve the implementation of the vertical agreement. (36) The fourth condition requires that the IPR provisions facilitate the use, sale or resale of goods or services by the buyer or its customers. The goods or services for use or resale are usually supplied by the licensor but may also be purchased by the licensee from a third supplier. The IPR provisions will normally concern the marketing of goods or services. An example would be a franchise agreement where the franchisor sells goods for resale to the franchisee and licenses the franchisee to use its trademark and knowhow to market the goods or where the supplier of a concentrated extract licenses the buyer to dilute and bottle the extract before selling it as a drink. (37) The fifth condition highlights the fact that the IPR provisions should not have the same object as any of the hardcore restrictions listed in Article 4 of the Block Exemption Regulation or any of the restrictions excluded from the coverage of the Block Exemption Regulation by Article 5 of that Regulation (see paragraphs (47) to (69) of these Guidelines). (38) Intellectual property rights relevant to the implementation of vertical agreements within the meaning of Article 2(3) of the Block Exemption Regulation generally concern three main areas: trademarks, copyright and knowhow. Trademark (39)  A trademark licence to a distributor may be related to the distribution of the licensor’s products in a particular territory. If it is an exclusive licence, the agreement amounts to exclusive distribution. Copyright (40) Resellers of goods covered by copyright (books, software, etc) may be obliged by the copyright holder only to resell under the condition that the buyer, whether another reseller or the end-user, shall not infringe the copyright. Such obligations on the reseller, to the extent that they fall under Article 101(1) at all, are covered by the Block Exemption Regulation. (41)  Agreements, under which hard copies of software are supplied for resale and where the reseller does not acquire a licence to any rights over the software but 20

  See the subcontracting notice (referred to in paragraph (22)).

  Appendix 3  265

only has the right to resell the hard copies, are to be regarded as agreements for the supply of goods for resale for the purpose of the Block Exemption Regulation. Under that form of distribution, licensing the software only occurs between the copyright owner and the user of the software. It may take the form of a ‘shrinkwrap’ licence, that is, a set of conditions included in the package of the hard copy which the end-user is deemed to accept by opening the package. (42)  Buyers of hardware incorporating software protected by copyright may be obliged by the copyright holder not to infringe the copyright, and must therefore not make copies and resell the software or make copies and use the software in combination with other hardware. Such use restrictions, to the extent that they fall within Article 101(1) at all, are covered by the Block Exemption Regulation. Knowhow (43)  Franchise agreements, with the exception of industrial franchise agreements, are the most obvious example of where knowhow for marketing purposes is communicated to the buyer.21 Franchise agreements contain licences of intellectual property rights relating to trademarks or signs and knowhow for the use and distribution of goods or the provision of services. In addition to the licence of IPR, the franchisor usually provides the franchisee during the life of the agreement with commercial or technical assistance, such as procurement services, training, advice on real estate, financial planning, etc. The licence and the assistance are integral components of the business method being franchised. (44) Licensing contained in franchise agreements is covered by the Block Exemption Regulation where all five conditions listed in paragraph (31) are fulfilled. Those conditions are usually fulfilled as under most franchise agreements, including master franchise agreements, the franchisor provides goods and/or services, in particular commercial or technical assistance services, to the franchisee. The IPRs help the franchisee to resell the products supplied by the franchisor or by a supplier designated by the franchisor or to use those products and sell the resulting goods or services. Where the franchise agreement only or primarily concerns licensing of IPRs, it is not covered by the Block Exemption Regulation, but the Commission will, as a general rule, apply the principles set out in the Block Exemption Regulation and these Guidelines to such an agreement. (45) The following IPR-related obligations are generally considered necessary to protect the franchisor’s intellectual property rights and are, where these obligations fall under Article 101(1), also covered by the Block Exemption Regulation: (a) an obligation on the franchisee not to engage, directly or indirectly, in any similar business; (b) an obligation on the franchisee not to acquire financial interests in the capital of a competing undertaking such as would give the franchisee the power to influence the economic conduct of such undertaking; 21  Paragraphs 43–45 apply by analogy to other types of distribution agreements which involve the transfer of substantial knowhow from supplier to buyer.

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(c) an obligation on the franchisee not to disclose to third parties the knowhow provided by the franchisor as long as this knowhow is not in the public domain; (d) an obligation on the franchisee to communicate to the franchisor any experience gained in exploiting the franchise and to grant the franchisor, and other franchisees, a nonexclusive licence for the knowhow resulting from that experience; (e) an obligation on the franchisee to inform the franchisor of infringements of licensed intellectual property rights, to take legal action against infringers or to assist the franchisor in any legal actions against infringers; (f) an obligation on the franchisee not to use knowhow licensed by the franchisor for purposes other than the exploitation of the franchise; (g) an obligation on the franchisee not to assign the rights and obligations under the franchise agreement without the franchisor’s consent. 2.5  Relationship to Other Block Exemption Regulations (46)  Article 2(5) states that the Block Exemption Regulation does ‘not apply to vertical agreements the subject matter of which falls within the scope of any other block exemption regulation, unless otherwise provided for in such a regulation’. The Block Exemption Regulation does not therefore apply to vertical agreements covered by Commission Regulation (EC) No 772/2004 of 27 April 2004 on the application of Article 81(3) of the Treaty to categories of technology transfer agreements,22 Regulation 1400/2002 on the application of Article 81(3) of the Treaty to categories of vertical agreements and concerted practices in the motor vehicle sector23 or Commission Regulation (EC) No 2658/2000 of 29 November 2000 on the application of Article 81(3) of the Treaty to categories of specialisation agreements24 and Commission Regulation (EC) No 2659/2000 of 29 November 2000 on the application of Article 81(3) of the Treaty to categories of research and development agreements25 exempting vertical agreements concluded in connection with horizontal agreements, or any future regulations of that kind, unless otherwise provided for in such a regulation. 3.  Hardcore Restrictions under the Block Exemption Regulation (47)  Article 4 of the Block Exemption Regulation contains a list of hardcore restrictions which lead to the exclusion of the whole vertical agreement from the 22

  OJ L 123, 27.4.2004, 11.   See paragraph (25). 24   OJ L 304, 5.12.2000, 3. 25   OJ L 304, 5.12.2000, 7. 23

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scope of application of the Block Exemption Regulation.26 Where such a hardcore restriction is included in an agreement, that agreement is presumed to fall within Article 101(1). It is also presumed that the agreement is unlikely to fulfil the conditions of Article 101(3), for which reason the block exemption does not apply. However, undertakings may demonstrate pro-competitive effects under Article 101(3) in an individual case.27 Where the undertakings substantiate that likely efficiencies result from including the hardcore restriction in the agreement and demonstrate that in general all the conditions of Article 101(3) are fulfilled, the Commission will be required to effectively assess the likely negative impact on competition before making an ultimate assessment of whether the conditions of Article 101(3) are fulfilled.28 (48) The hardcore restriction set out in Article 4(a) of the Block Exemption Regulation concerns resale price maintenance (RPM), that is, agreements or concerted practices having as their direct or indirect object the establishment of a fixed or minimum resale price or a fixed or minimum price level to be observed by the buyer. In the case of contractual provisions or concerted practices that directly establish the resale price, the restriction is clear-cut. However, RPM can also be achieved through indirect means. Examples of the latter are an agreement fixing the distribution margin, fixing the maximum level of discount the distributor can grant from a prescribed price level, making the grant of rebates or reimbursement of promotional costs by the supplier subject to the observance of a given price level, linking the prescribed resale price to the resale prices of competitors, threats, intimidation, warnings, penalties, delay or suspension of deliveries or contract terminations in relation to observance of a given price level. Direct or indirect means of achieving price-fixing can be made more effective when combined with measures to identify price-cutting distributors, such as the implementation of a price monitoring system, or the obligation on retailers to report other members of the distribution network that deviate from the standard price level. Similarly, direct or indirect price-fixing can be made more effective when combined with measures which may reduce the buyer’s incentive to lower the resale price, such as the supplier printing a recommended resale price on the product or the supplier obliging the buyer to apply a most-favoured-customer clause. The same indirect means and the same ‘supportive’ measures can be used to make maximum or recommended 26  This list of hardcore restrictions applies to vertical agreements concerning trade within the Union. Insofar as vertical agreements concern exports outside the Union or imports/re-imports from outside the Union, see judgment of the Court of Justice in Case C- 306/96 Javico v Yves Saint Laurent [1998] ECR I-1983. In that judgment the ECJ held in paragraph 20 that ‘an agreement in which the reseller gives to the producer an undertaking that it will sell the contractual products on a market outside the Community cannot be regarded as having the object of appreciably restricting competition within the common market or as being capable of affecting, as such, trade between Member States’. 27   See in particular paragraphs 106 to 109 describing in general possible efficiencies related to vertical restraints and Section VI.2.10 on resale price restrictions. See for general guidance on this the Communication from the Commission, Notice – Guidelines on the application of Article 81(3) of the Treaty, OJ C 101, 2 7.4.2004, 97. 28   Although, in legal terms, these are two distinct steps, they may in practice be an iterative process where the parties and Commission in several steps enhance and improve their respective arguments.

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prices work as RPM. However, the use of a particular supportive measure or the provision of a list of recommended prices or maximum prices by the supplier to the buyer is not considered in itself as leading to RPM. (49) In the case of agency agreements, the principal normally establishes the sales price, as the agent does not become the owner of the goods. However, where such an agreement cannot be qualified as an agency agreement for the purposes of applying Article 101(1) (see paragraphs (12) to (21)) an obligation preventing or restricting the agent from sharing its commission, fixed or variable, with the customer would be a hardcore restriction under Article 4(a) of the Block Exemption Regulation. In order to avoid including such a hardcore restriction in the agreement, the agent should thus be left free to lower the effective price paid by the customer without reducing the income for the principal.29 (50) The hardcore restriction set out in Article 4(b) of the Block Exemption Regulation concerns agreements or concerted practices that have as their direct or indirect object the restriction of sales by a buyer party to the agreement or its customers, in as far as those restrictions relate to the territory into which or the customers to whom the buyer or its customers may sell the contract goods or services. This hardcore restriction relates to market partitioning by territory or by customer group. That may be the result of direct obligations, such as the obligation not to sell to certain customers or to customers in certain territories or the obligation to refer orders from these customers to other distributors. It may also result from indirect measures aimed at inducing the distributor not to sell to such customers, such as refusal or reduction of bonuses or discounts, termination of supply, reduction of supplied volumes or limitation of supplied volumes to the demand within the allocated territory or customer group, threat of contract termination, requiring a higher price for products to be exported, limiting the proportion of sales that can be exported or profit pass-over obligations. It may further result from the supplier not providing a Union-wide guarantee service under which normally all distributors are obliged to provide the guarantee service and are reimbursed for this service by the supplier, even in relation to products sold by other distributors into their territory.30 Such practices are even more likely to be viewed as a restriction of the buyer’s sales when used in conjunction with the implementation by the supplier of a monitoring system aimed at verifying the effective destination of the supplied goods, such as the use of differentiated labels or serial numbers. However, obligations on the reseller relating to the display of the supplier’s brand name are

29   See, for instance, Commission Decision 91/562/EEC in Case No IV/32.737 Eirpage, OJ L 306, 7.11.1991, 22, in particular recital (6). 30  If the supplier decides not to reimburse its distributors for services rendered under the Unionwide guarantee, it may be agreed with these distributors that a distributor which makes a sale outside its allocated territory, will have to pay the distributor appointed in the territory of destination a fee based on the cost of the services (to be) carried out including a reasonable profit margin. This type of scheme may not be seen as a restriction of the distributors’ sales outside their territory (see judgment of the Court of First Instance in Case T-67/01 JCB Service v Commission [2004] ECR II-49, paragraphs 136 to 145).

  Appendix 3  269

not classified as hardcore. As Article 4(b) only concerns restrictions of sales by the buyer or its customers, this implies that restrictions of the supplier’s sales are also not a hardcore restriction, subject to what is stated in paragraph (59) regarding sales of spare parts in the context of Article 4(e) of the Block Exemption Regulation. Article 4(b) applies without prejudice to a restriction on the buyer’s place of establishment. Thus, the benefit of the Block Exemption Regulation is not lost if it is agreed that the buyer will restrict its distribution outlet(s) and warehouse(s) to a particular address, place or territory. (51) There are four exceptions to the hardcore restriction in Article 4(b) of the Block Exemption Regulation. The first exception in Article 4(b)(i) allows a supplier to restrict active sales by a buyer party to the agreement to a territory or a customer group which has been allocated exclusively to another buyer or which the supplier has reserved to itself. A territory or customer group is exclusively allocated when the supplier agrees to sell its product only to one distributor for distribution in a particular territory or to a particular customer group and the exclusive distributor is protected against active selling into its territory or to its customer group by all the other buyers of the supplier within the Union, irrespective of sales by the supplier. The supplier is allowed to combine the allocation of an exclusive territory and an exclusive customer group by for instance appointing an exclusive distributor for a particular customer group in a certain territory. Such protection of exclusively allocated territories or customer groups must, however, permit passive sales to such territories or customer groups. For the application of Article 4(b) of the Block Exemption Regulation, the Commission interprets ‘active’ and ‘passive’ sales as follows: — ‘Active’ sales mean actively approaching individual customers by for instance direct mail, including the sending of unsolicited emails, or visits; or actively approaching a specific customer group or customers in a specific territory through advertisement in media, on the internet or other promotions specifically targeted at that customer group or targeted at customers in that territory. Advertisement or promotion that is only attractive for the buyer if it (also) reaches a specific group of customers or customers in a specific territory, is considered active selling to that customer group or customers in that territory. — ‘Passive’ sales mean responding to unsolicited requests from individual customers including delivery of goods or services to such customers. General advertising or promotion that reaches customers in other distributors’ (exclusive) territories or customer groups but which is a reasonable way to reach customers outside those territories or customer groups, for instance to reach customers in one’s own territory, are considered passive selling. General advertising or promotion is considered a reasonable way to reach such customers if it would be attractive for the buyer to undertake these investments also if they would not reach customers in other distributors’ (exclusive) territories or customer groups.

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(52) The internet is a powerful tool to reach a greater number and variety of customers than by more traditional sales methods, which explains why certain restrictions on the use of the internet are dealt with as (re)sales restrictions. In principle, every distributor must be allowed to use the internet to sell products. In general, where a distributor uses a website to sell products that is considered a form of passive selling, since it is a reasonable way to allow customers to reach the distributor. The use of a website may have effects that extend beyond the distributor’s own territory and customer group; however, such effects result from the technology allowing easy access from everywhere. If a customer visits the website of a distributor and contacts the distributor and if such contact leads to a sale, including delivery, then that is considered passive selling. The same is true if a customer opts to be kept (automatically) informed by the distributor and it leads to a sale. Offering different language options on the website does not, of itself, change the passive character of such selling. The Commission thus regards the following as examples of hardcore restrictions of passive selling given the capability of these restrictions to limit the distributor’s access to a greater number and variety of customers: (a) an agreement that the (exclusive) distributor shall prevent customers located in another (exclusive) territory from viewing its website or shall automatically re-route its customers to the manufacturer’s or other (exclusive) distributors’ websites. This does not exclude an agreement that the distributor’s website shall also offer a number of links to websites of other distributors and/or the supplier; (b) an agreement that the (exclusive) distributor shall terminate consumers’ transactions over the internet once their credit card data reveal an address that is not within the distributor’s (exclusive) territory; (c) an agreement that the distributor shall limit its proportion of overall sales made over the internet. This does not exclude the supplier requiring, without limiting the online sales of the distributor, that the buyer sells at least a certain absolute amount (in value or volume) of the products offline to ensure an efficient operation of its brick and mortar shop (physical point of sales), nor does it preclude the supplier from making sure that the online activity of the distributor remains consistent with the supplier’s distribution model (see paragraphs (54) and (56)). This absolute amount of required offline sales can be the same for all buyers, or determined individually for each buyer on the basis of objective criteria, such as the buyer’s size in the network or its geographic location; (d) an agreement that the distributor shall pay a higher price for products intended to be resold by the distributor online than for products intended to be resold offline. This does not exclude the supplier agreeing with the buyer a fixed fee (that is, not a variable fee where the sum increases with the realised offline turnover as this would amount indirectly to dual pricing) to support the latter’s offline or online sales efforts.

  Appendix 3  271

(53)  A restriction on the use of the internet by distributors that are party to the agreement is compatible with the Block Exemption Regulation to the extent that promotion on the internet or use of the internet would lead to active selling into, for instance, other distributors’ exclusive territories or customer groups. The Commission considers online advertisement specifically addressed to certain customers as a form of active selling to those customers. For instance, territory-based banners on third-party websites are a form of active sales into the territory where these banners are shown. In general, efforts to be found specifically in a certain territory or by a certain customer group is active selling into that territory or to that customer group. For instance, paying a search engine or online advertisement provider to have advertisements displayed specifically to users in a particular territory is active selling into that territory. (54)  However, under the Block Exemption the supplier may require quality standards for the use of the internet site to resell its goods, just as the supplier may require quality standards for a shop or for selling by catalogue or for advertising and promotion in general. This may be relevant in particular for selective distribution. Under the Block Exemption, the supplier may, for example, require that its distributors have one or more brick-and-mortar shops or showrooms as a condition for becoming a member of its distribution system. Subsequent changes to such a condition are also possible under the Block Exemption, except where those changes have as their object to directly or indirectly limit the online sales by the distributors. Similarly, a supplier may require that its distributors use third-party platforms to distribute the contract products only in accordance with the standards and conditions agreed between the supplier and its distributors for the distributors’ use of the internet. For instance, where the distributor’s website is hosted by a third-party platform, the supplier may require that customers do not visit the distributor’s website through a site carrying the name or logo of the third-party platform. (55) There are three further exceptions to the hardcore restriction set out in Article 4(b) of the Block Exemption Regulation. All three exceptions allow for the restriction of both active and passive sales. Under the first exception, it is permissible to restrict a wholesaler from selling to end-users, which allows a supplier to keep the wholesale and retail level of trade separate. However, that exception does not exclude the possibility that the wholesaler can sell to certain end-users, such as bigger end-users, while not allowing sales to (all) other end-users. The second exception allows a supplier to restrict an appointed distributor in a selective distribution system from selling, at any level of trade, to unauthorised distributors located in any territory where the system is currently operated or where the supplier does not yet sell the contract products (referred to as ‘the territory reserved by the supplier to operate that system’ in Article 4(b)(iii)). The third exception allows a supplier to restrict a buyer of components, to whom the components are supplied for incorporation, from reselling them to competitors of the supplier. The term ‘component’ includes any intermediate goods and the term ‘incorporation’ refers to the use of any input to produce goods.

272  appendix 3

(56) The hardcore restriction set out in Article 4(c) of the Block Exemption Regulation excludes the restriction of active or passive sales to end-users, whether professional end-users or final consumers, by members of a selective distribution network, without prejudice to the possibility of prohibiting a member of the network from operating out of an unauthorised place of establishment. Accordingly, dealers in a selective distribution system, as defined in Article 1(1)(e) of the Block Exemption Regulation, cannot be restricted in the choice of users to whom they may sell, or purchasing agents acting on behalf of those users except to protect an exclusive distribution system operated elsewhere (see paragraph (51)). Within a selective distribution system the dealers should be free to sell, both actively and passively, to all end-users, also with the help of the internet. Therefore, the Commission considers any obligations which dissuade appointed dealers from using the internet to reach a greater number and variety of customers by imposing criteria for online sales which are not overall equivalent to the criteria imposed for the sales from the brick-and-mortar shop as a hardcore restriction. This does not mean that the criteria imposed for online sales must be identical to those imposed for offline sales , but rather that they should pursue the same objectives and achieve comparable results and that the difference between the criteria must be justified by the different nature of these two distribution modes. For example, in order to prevent sales to unauthorised dealers, a supplier can restrict its selected dealers from selling more than a given quantity of contract products to an individual enduser. Such a requirement may have to be stricter for online sales if it is easier for an unauthorised dealer to obtain those products by using the internet. Similarly, it may have to be stricter for offline sales if it is easier to obtain them from a brick and mortar shop. In order to ensure timely delivery of contract products, a supplier may impose that the products be delivered instantly in the case of offline sales. Whereas an identical requirement cannot be imposed for online sales, the supplier may specify certain practicable delivery times for such sales. Specific requirements may have to be formulated for an online after-sales help desk, so as to cover the costs of customers returning the product and for applying secure payment systems. (57)  Within the territory where the supplier operates selective distribution, this system may not be combined with exclusive distribution as that would lead to a hardcore restriction of active or passive selling by the dealers under Article 4(c) of the Block Exemption Regulation, with the exception that restrictions can be imposed on the dealer’s ability to determine the location of its business premises. Selected dealers may be prevented from operating their business from different premises or from opening a new outlet in a different location. In that context, the use by a distributor of its own website cannot be considered to be the same thing as the opening of a new outlet in a different location. If the dealer’s outlet is mobile, an area may be defined outside which the mobile outlet cannot be operated. In addition, the supplier may commit itself to supplying only one dealer or a limited number of dealers in a particular part of the territory where the selective distribution system is applied.

  Appendix 3  273

(58) The hardcore restriction set out in Article 4(d) of the Block Exemption Regulation concerns the restriction of cross-supplies between appointed distributors within a selective distribution system. Accordingly, an agreement or concerted practice may not have as its direct or indirect object to prevent or restrict the active or passive selling of the contract products between the selected distributors. Selected distributors must remain free to purchase the contract products from other appointed distributors within the network, operating either at the same or at a different level of trade. Consequently, selective distribution cannot be combined with vertical restraints aimed at forcing distributors to purchase the contract products exclusively from a given source. It also means that within a selective distribution network, no restrictions can be imposed on appointed wholesalers as regards their sales of the product to appointed retailers. (59) The hardcore restriction set out in Article 4(e) of the Block Exemption Regulation concerns agreements that prevent or restrict end-users, independent repairers and service providers from obtaining spare parts directly from the manufacturer of those spare parts. An agreement between a manufacturer of spare parts and a buyer that incorporates those parts into its own products (original equipment manufacturer (OEM)), may not, either directly or indirectly, prevent or restrict sales by the manufacturer of those spare parts to end-users, independent repairers or service providers. Indirect restrictions may arise particularly when the supplier of the spare parts is restricted in supplying technical information and special equipment which are necessary for the use of spare parts by users, independent repairers or service providers. However, the agreement may place restrictions on the supply of the spare parts to the repairers or service providers entrusted by the original equipment manufacturer with the repair or servicing of its own goods. In other words, the original equipment manufacturer may require its own repair and service network to buy spare parts from it. 4. Individual Cases of Hardcore Sales Restrictions that May Fall Outside the Scope of Article 101(1) or May Fulfil the Conditions of Article 101(3) (60)  Hardcore restrictions may be objectively necessary in exceptional cases for an agreement of a particular type or nature31 and therefore fall outside Article 101(1). For example, a hardcore restriction may be objectively necessary to ensure that a public ban on selling dangerous substances to certain customers for reasons of safety or health is respected. In addition, undertakings may plead an efficiency defence under Article 101(3) in an individual case. This section provides some examples for (re)sales restrictions, whereas for RPM this is dealt with in section VI.2.10. (61)  A distributor which will be the first to sell a new brand or the first to sell an existing brand on a new market, thereby ensuring a genuine entry on the 31   See paragraph 18 of Communication from the Commission, Notice – Guidelines on the application of Article 81(3) of the Treaty, OJ C 101, 27.4.2004, 97.

274  appendix 3

relevant market, may have to commit substantial investments where there was previously no demand for that type of product in general or for that type of product from that producer. Such expenses may often be sunk and in such circumstances the distributor may not enter into the distribution agreement without protection for a certain period of time against (active and) passive sales into its territory or to its customer group by other distributors. For example such a situation may occur where a manufacturer established in a particular national market enters another national market and introduces its products with the help of an exclusive distributor and where this distributor needs to invest in launching and establishing the brand on this new market. Where substantial investments by the distributor to start up and/or develop the new market are necessary, restrictions of passive sales by other distributors into such a territory or to such a customer group which are necessary for the distributor to recoup those investments generally fall outside the scope of Article 101(1) during the first two years that the distributor is selling the contract goods or services in that territory or to that customer group, even though such hardcore restrictions are in general presumed to fall within the scope of Article 101(1). (62) In the case of genuine testing of a new product in a limited territory or with a limited customer group and in the case of a staggered introduction of a new product, the distributors appointed to sell the new product on the test market or to participate in the first round(s) of the staggered introduction may be restricted in their active selling outside the test market or the market(s) where the product is first introduced without falling within the scope of Article 101(1) for the period necessary for the testing or introduction of the product. (63) In the case of a selective distribution system, cross-supplies between appointed distributors must normally remain free (see paragraph (58)). However, if appointed wholesalers located in different territories are obliged to invest in promotional activities in ‘their’ territories to support the sales by appointed retailers and it is not practical to specify in a contract the required promotional activities, restrictions on active sales by the wholesalers to appointed retailers in other wholesalers’ territories to overcome possible free-riding may, in an individual case, fulfil the conditions of Article 101(3). (64) In general, an agreement that a distributor shall pay a higher price for products intended to be resold by the distributor online than for products intended to be resold offline (‘dual pricing’) is a hardcore restriction (see paragraph (52)). However, in some specific circumstances, such an agreement may fulfil the conditions of Article 101(3). Such circumstances may be present where a manufacturer agrees such dual pricing with its distributors because selling online leads to substantially higher costs for the manufacturer than offline sales. For example, where offline sales include home installation by the distributor but online sales do not, the latter may lead to more customer complaints and warranty claims for the manufacturer. In that context, the Commission will also consider to what extent the restriction is likely to limit internet sales and hinder the distributor to reach more and different customers.

  Appendix 3  275

5. Excluded Restrictions under the Block Exemption Regulation (65)  Article 5 of the Block Exemption Regulation excludes certain obligations from the coverage of the Block Exemption Regulation even though the market share threshold is not exceeded. However, the Block Exemption Regulation continues to apply to the remaining part of the vertical agreement if that part is severable from the non-exempted obligations. (66) The first exclusion is provided for in Article 5(1)(a) of the Block Exemption Regulation and concerns non-compete obligations. Non-compete obligations are arrangements that result in the buyer purchasing from the supplier or from another undertaking designated by the supplier more than 80% of the buyer’s total purchases of the contract goods and services and their substitutes during the preceding calendar year (as defined by Article 1 (1)(d) of the Block Exemption Regulation), thereby preventing the buyer from purchasing competing goods or services or limiting such purchases to less than 20% of total purchases. Where, in the first year after entering in the agreement, for the year preceding the conclusion of the contract no relevant purchasing data for the buyer are available, the buyer’s best estimate of its annual total requirements may be used. Such non-compete obligations are not covered by the Block Exemption Regulation where the duration is indefinite or exceeds five years. Non-compete obligations that are tacitly renewable beyond a period of five years are also not covered by the Block Exemption Regulation (see the second subparagraph of Article 5(1)). In general, non-compete obligations are exempted under that Regulation where their duration is limited to five years or less and no obstacles exist that hinder the buyer from effectively terminating the non-compete obligation at the end of the five-year period. If, for instance, the agreement provides for a five-year non-compete obligation and the supplier provides a loan to the buyer, the repayment of that loan should not hinder the buyer from effectively terminating the non-compete obligation at the end of the five-year period. Similarly, when the supplier provides the buyer with equipment which is not relationship-specific, the buyer should have the possibility to take over the equipment at its market asset value once the non-compete obligation expires. (67) The five-year duration limit does not apply when the goods or services are resold by the buyer ‘from premises and land owned by the supplier or leased by the supplier from third parties not connected with the buyer’. In such cases the noncompete obligation may be of the same duration as the period of occupancy of the point of sale by the buyer (Article 5(2) of the Block Exemption Regulation). The reason for this exception is that it is normally unreasonable to expect a supplier to allow competing products to be sold from premises and land owned by the supplier without its permission. By analogy, the same principles apply where the buyer operates from a mobile outlet owned by the supplier or leased by the supplier from third parties not connected with the buyer. Artificial ownership constructions, such as a transfer by the distributor of its proprietary rights over the land and

276  appendix 3

premises to the supplier for only a limited period, intended to avoid the five-year limit cannot benefit from this exception. (68) The second exclusion from the block exemption is provided for in Article 5(1)(b) of the Block Exemption Regulation and concerns post-term non-compete obligations on the buyer. Such obligations are normally not covered by the Block Exemption Regulation, unless the obligation is indispensable to protect knowhow transferred 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 to a maximum period of one year (see Article 5(3) of the Block Exemption Regulation). According to the definition in Article 1(1)(g) of the Block Exemption Regulation the knowhow needs to be ‘substantial’, meaning that the knowhow includes information which is significant and useful to the buyer for the use, sale or resale of the contract goods or services. (69) The third exclusion from the block exemption is provided for in Article 5(1)(c) of the Block Exemption Regulation and concerns the sale of competing goods in a selective distribution system. The Block Exemption Regulation covers the combination of selective distribution with a non-compete obligation, obliging the dealers not to resell competing brands in general. However, if the supplier prevents its appointed dealers, either directly or indirectly, from buying products for resale from specific competing suppliers, such an obligation cannot enjoy the benefit of the Block Exemption Regulation. The objective of the exclusion of such an obligation is to avoid a situation whereby a number of suppliers using the same selective distribution outlets prevent one specific competitor or certain specific competitors from using these outlets to distribute their products (foreclosure of a competing supplier which would be a form of collective boycott).32 6. Severability (70) The Block Exemption Regulation exempts vertical agreements on condition that no hardcore restriction, as set out in Article 4 of that Regulation, is contained in or practised with the vertical agreement. If there are one or more hardcore restrictions, the benefit of the Block Exemption Regulation is lost for the entire vertical agreement. There is no severability for hardcore restrictions. (71) The rule of severability does apply, however, to the excluded restrictions set out in Article 5 of the Block Exemption Regulation. Therefore, the benefit of the block exemption is only lost in relation to that part of the vertical agreement which does not comply with the conditions set out in Article 5. 7. Portfolio of Products Distributed through the Same Distribution System (72) Where a supplier uses the same distribution agreement to distribute several goods/services some of these may, in view of the market share threshold, be 32   An example of indirect measures having such exclusionary effects can be found in Commission Decision 92/428/EEC in Case No IV/33.542 Parfum Givenchy, OJ L 236, 19.8.1992, 11.

  Appendix 3  277

covered by the Block Exemption Regulation while others may not. In that case, the Block Exemption Regulation applies to those goods and services for which the conditions of application are fulfilled. (73) In respect of the goods or services which are not covered by the Block Exemption Regulation, the ordinary rules of competition apply, which means: (a) there is no block exemption but also no presumption of illegality; (b) if there is an infringement of Article 101(1) which is not exemptible, consideration may be given to whether there are appropriate remedies to solve the competition problem within the existing distribution system; (c) if there are no such appropriate remedies, the supplier concerned will have to make other distribution arrangements. Such a situation can also arise where Article 102 applies in respect of some products but not in respect of others.

IV.  Withdrawal of the Block Exemption and Dis-application of the Block Exemption Regulation 1.  Withdrawal Procedure (74) The presumption of legality conferred by the Block Exemption Regulation may be withdrawn where a vertical agreement, considered either in isolation or in conjunction 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). (75) The conditions of Article 101(3) may in particular not be fulfilled when access to the relevant market or competition therein is significantly restricted by the cumulative effect of parallel networks of similar vertical agreements practised by competing suppliers or buyers. Parallel networks of vertical agreements are to be regarded as similar if they contain restraints producing similar effects on the market. Such a situation may arise for example when, on a given market, certain suppliers practise purely qualitative selective distribution while other suppliers practise quantitative selective distribution. Such a situation may also arise when, on a given market, the cumulative use of qualitative criteria forecloses more efficient distributors. In such circumstances, the assessment must take account of the anticompetitive effects attributable to each individual network of agreements. Where appropriate, withdrawal may concern only a particular qualitative criterion or only the quantitative limitations imposed on the number of authorised distributors. (76) Responsibility for an anticompetitive cumulative effect can only be attributed to those undertakings which make an appreciable contribution to it. Agreements entered into by undertakings whose contribution to the cumulative

278  appendix 3

effect is insignificant do not fall under the prohibition provided for in Article 101(1)33 and are therefore not subject to the withdrawal mechanism. The assessment of such a contribution will be made in accordance with the criteria set out in paragraphs (128) to (229). (77)  Where the withdrawal procedure is applied, the Commission bears the burden of proof that the agreement falls within the scope of Article 101(1) and that the agreement does not fulfil one or several of the conditions of Article 101(3). A withdrawal decision can only have ex nunc effect, which means that the exempted status of the agreements concerned will not be affected until the date at which the withdrawal becomes effective. (78)  As referred to in recital 14 of the Block Exemption Regulation, the competition authority of a Member State may withdraw the benefit of the Block Exemption Regulation in respect of vertical agreements whose anticompetitive effects are felt in the territory of the Member State concerned or a part thereof, which has all the characteristics of a distinct geographic market. The Commission has the exclusive power to withdraw the benefit of the Block Exemption Regulation in respect of vertical agreements restricting competition on a relevant geographic market which is wider than the territory of a single Member State. When the territory of a single Member State, or a part thereof, constitutes the relevant geographic market, the Commission and the Member State concerned have concurrent competence for withdrawal. 2. Dis-application of the Block Exemption Regulation (79)  Article 6 of the Block Exemption Regulation enables the Commission to exclude from the scope of the Block Exemption Regulation, by means of regulation, parallel networks of similar vertical restraints where these cover more than 50% of a relevant market. Such a measure is not addressed to individual undertakings but concerns all undertakings whose agreements are defined in the regulation dis-applying the Block Exemption Regulation. (80)  Whereas the withdrawal of the benefit of the Block Exemption Regulation implies the adoption of a decision establishing an infringement of Article 101 by an individual company, the effect of a regulation under Article 6 is merely to remove, in respect of the restraints and the markets concerned, the benefit of the application of the Block Exemption Regulation and to restore the full application of Article 101(1) and (3). Following the adoption of a regulation declaring the Block Exemption Regulation inapplicable in respect of certain vertical restraints on a particular market, the criteria developed by the relevant case-law of the Court of Justice and the General Court and by notices and previous decisions adopted by the Commission will guide the application of Article 101 to individual agreements. 33   Judgment of the Court of Justice of 28 February 1991 in Case C- 234/89 Stergios Delimitis v Henninger Bräu AG [1991] ECR I-935.

  Appendix 3  279

Where appropriate, the Commission will take a decision in an individual case, which can provide guidance to all the undertakings operating on the market concerned. (81)  For the purpose of calculating the 50% market coverage ratio, account must be taken of each individual network of vertical agreements containing restraints, or combinations of restraints, producing similar effects on the market. Article 6 of the Block Exemption Regulation does not entail an obligation on the part of the Commission to act where the 50% market coverage ratio is exceeded. In general, dis-application is appropriate when it is likely that access to the relevant market or competition therein is appreciably restricted. This may occur in particular when parallel networks of selective distribution covering more than 50% of a market are liable to foreclose the market by using selection criteria which are not required by the nature of the relevant goods or which discriminate against certain forms of distribution capable of selling such goods. (82) In assessing the need to apply Article 6 of the Block Exemption Regulation, the Commission will consider whether individual withdrawal would be a more appropriate remedy. This may depend, in particular, on the number of competing undertakings contributing to a cumulative effect on a market or the number of affected geographic markets within the Union. (83)  Any regulation referred to in Article 6 of the Block Exemption Regulation must clearly set out its scope. Therefore, the Commission must first define the relevant product and geographic market(s) and, secondly, must identify the type of vertical restraint in respect of which the Block Exemption Regulation will no longer apply. As regards the latter aspect, the Commission may modulate the scope of its regulation according to the competition concern which it intends to address. For instance, while all parallel networks of single-branding type arrangements shall be taken into account in view of establishing the 50% market coverage ratio, the Commission may nevertheless restrict the scope of the dis-application regulation only to non-compete obligations exceeding a certain duration. Thus, agreements of a shorter duration or of a less restrictive nature might be left unaffected, in consideration of the lesser degree of foreclosure attributable to such restraints. Similarly, when on a particular market selective distribution is practised in combination with additional restraints such as non-compete or quantity-forcing on the buyer, the dis-application regulation may concern only such additional restraints. Where appropriate, the Commission may also provide guidance by specifying the market share level which, in the specific market context, may be regarded as insufficient to bring about a significant contribution by an individual undertaking to the cumulative effect. (84) Pursuant to Regulation No 19/65/EEC of 2 March 1965 of the Council on the application of Article 85(3) of the Treaty to certain categories of agreements and concerted practices,34 the Commission will have to set a transitional period of not less than six months before a regulation dis-applying the Block Exemption 34

  OJ 36, 6.3.1965, English special edition: OJ Series I Chapter 1965–1966, 35.

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Regulation becomes applicable. This should allow the undertakings concerned to adapt their agreements to take account of the regulation dis-applying the Block Exemption Regulation. (85)  A regulation dis-applying the Block Exemption Regulation will not affect the exempted status of the agreements concerned for the period preceding its date of application. V.  Market Definition and Market Share Calculation 1. Commission Notice on Definition of the Relevant Market (86) The Commission Notice on definition of the relevant market for the purposes of Community competition law35 provides guidance on the rules, criteria and evidence which the Commission uses when considering market definition issues. That Notice will not be further explained in these Guidelines and should serve as the basis for market definition issues. These Guidelines will only deal with specific issues that arise in the context of vertical restraints and that are not dealt with in that notice. 2. The Relevant Market for Calculating the 30% Market Share Threshold under the Block Exemption Regulation (87)  Under Article 3 of the Block Exemption Regulation, the market share of both the supplier and the buyer are decisive to determine if the block exemption applies. In order for the block exemption to apply, the market share of the supplier on the market where it sells the contract products to the buyer, and the market share of the buyer on the market where it purchases the contract products, must each be 30% or less. For agreements between small and medium-sized undertakings it is in general not necessary to calculate market shares (see paragraph (11)). (88) In order to calculate an undertaking’s market share, it is necessary to determine the relevant market where that undertaking sells and purchases, respectively, the contract products. Accordingly, the relevant product market and the relevant geographic market must be defined. The relevant product market comprises any goods or services which are regarded by the buyers as interchangeable, by reason of their characteristics, prices and intended use. The relevant geographic market comprises the area in which the undertakings concerned are involved in the supply and demand of relevant goods or services, in which the conditions of competition are sufficiently homogeneous, and which can be distinguished from neighbouring geographic areas because, in particular, conditions of competition are appreciably different in those areas. 35

  OJ C 372, 9.12.1997, 5.

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(89) The product market definition primarily depends on substitutability from the buyers’ perspective. When the supplied product is used as an input to produce other products and is generally not recognisable in the final product, the product market is normally defined by the direct buyers’ preferences. The customers of the buyers will normally not have a strong preference concerning the inputs used by the buyers. Usually, the vertical restraints agreed between the supplier and buyer of the input only relate to the sale and purchase of the intermediate product and not to the sale of the resulting product. In the case of distribution of final goods, substitutes for the direct buyers will normally be influenced or determined by the preferences of the final consumers. A distributor, as reseller, cannot ignore the preferences of final consumers when it purchases final goods. In addition, at the distribution level the vertical restraints usually concern not only the sale of products between supplier and buyer, but also their resale. As different distribution formats usually compete, markets are in general not defined by the form of distribution that is applied. Where suppliers generally sell a portfolio of products, the entire portfolio may determine the product market when the portfolios and not the individual products are regarded as substitutes by the buyers. As distributors are professional buyers, the geographic wholesale market is usually wider than the retail market, where the product is resold to final consumers. Often, this will lead to the definition of national or wider wholesale markets. But retail markets may also be wider than the final consumers’ search area where homogeneous market conditions and overlapping local or regional catchment areas exist. (90)  Where a vertical agreement involves three parties, each operating at a different level of trade, each party’s market share must be 30% or less in order for the block exemption to apply. As specified in Article 3(2) of the Block Exemption Regulation, where in a multi-party agreement an undertaking buys the contract goods or services from one undertaking party to the agreement and sells the contract goods or services to another undertaking party to the agreement, the block exemption applies only if its market share does not exceed the 30% threshold both as a buyer and a supplier. If, for instance, in an agreement between a manufacturer, a wholesaler (or association of retailers) and a retailer, a non-compete obligation is agreed, then the market shares of the manufacturer and the wholesaler (or association of retailers) on their respective downstream markets must not exceed 30% and the market share of the wholesaler (or association of retailers) and the retailer must not exceed 30% on their respective purchase markets in order to benefit from the block exemption. (91) Where a supplier produces both original equipment and the repair or replacement parts for that equipment, the supplier will often be the only or the major supplier on the after-market for the repair and replacement parts. This may also arise where the supplier (OEM supplier) subcontracts the manufacturing of the repair or replacement parts. The relevant market for application of the Block Exemption Regulation may be the original equipment market including the spare parts or a separate original equipment market and after-market depending on the circumstances of the case, such as the effects of the restrictions involved, the

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lifetime of the equipment and importance of the repair or replacement costs.36 In practice, the issue is whether a significant proportion of buyers make their choice taking into account the lifetime costs of the product. If so, it indicates there is one market for the original equipment and spare parts combined. (92)  Where the vertical agreement, in addition to the supply of the contract goods, also contains IPR provisions – such as a provision concerning the use of the supplier’s trademark – which help the buyer to market the contract goods, the supplier’s market share on the market where it sells the contract goods is relevant for the application of the Block Exemption Regulation. Where a franchisor does not supply goods to be resold but provides a bundle of services and goods combined with IPR provisions which together form the business method being franchised, the franchisor needs to take account of its market share as a provider of a business method. For that purpose, the franchisor needs to calculate its market share on the market where the business method is exploited, which is the market where the franchisees exploit the business method to provide goods or services to end-users. The franchisor must base its market share on the value of the goods or services supplied by its franchisees on this market. On such a market, the competitors may be providers of other franchised business methods but also suppliers of substitutable goods or services not applying franchising. For instance, without prejudice to the definition of such market, if there was a market for fast-food services, a franchisor operating on such a market would need to calculate its market share on the basis of the relevant sales figures of its franchisees on this market. 3. Calculation of Market Shares under the Block Exemption Regulation (93) The calculation of market shares needs to be based in principle on value figures. Where value figures are not available substantiated estimates can be made. Such estimates may be based on other reliable market information such as volume figures (see Article 7(a) of the Block Exemption Regulation). (94) In-house production, that is, production of an intermediate product for own use, may be very important in a competition analysis as one of the competitive constraints or to accentuate the market position of a company. However, for the purpose of market definition and the calculation of market share for intermediate goods and services, in-house production will not be taken into account. (95)  However, in the case of dual distribution of final goods, that is, where a producer of final goods also acts as a distributor on the market, the market definition and market share calculation need to include sales of their own goods made by the producers through their vertically integrated distributors and agents (see Article 36  See for example Commission Decision in Pelikan/Kyocera (1995), COM(96) 126 (not published), point 87, and Commission Decision 91/595/EEC in Case No IV/M.12 Varta/Bosch, OJ L 320, 22.11.1991, 26, Commission Decision in Case No IV/M.1094 Caterpillar/Perkins Engines, OJ C 94, 28.3.1998, 23, and Commission Decision in Case No IV/M.768 Lucas/Varity, OJ C 266, 13.9.1996, 6. See also point 56 of the Notice on the definition of the relevant market for the purposes of Community competition law (see paragraph 86).

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7(c) of the Block Exemption Regulation). ‘Integrated distributors’ are connected undertakings within the meaning of Article 1(2) of the Block Exemption Regulation.37 VI. Enforcement Policy in Individual Cases 1. The Framework of Analysis (96)  Outside the scope of the block exemption, it is relevant to examine whether in the individual case the agreement falls within the scope of Article 101(1) and if so whether the conditions of Article 101(3) are satisfied. Provided that they do not contain restrictions of competition by object and in particular hardcore restrictions of competition, there is no presumption that vertical agreements falling outside the block exemption because the market share threshold is exceeded fall within the scope of Article 101(1) or fail to satisfy the conditions of Article 101(3). Individual assessment of the likely effects of the agreement is required. Companies are encouraged to do their own assessment. Agreements that either do not restrict competition within the meaning of Article 101(1) or which fulfil the conditions of Article 101(3) are valid and enforceable. Pursuant to Article 1(2) of Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty38 no notification needs to be made to benefit from an individual exemption under Article 101(3). In the case of an individual examination by the Commission, the latter will bear the burden of proof that the agreement in question infringes Article 101(1). The undertakings claiming the benefit of Article 101(3) bear the burden of proving that the conditions of that paragraph are fulfilled. When likely anticompetitive effects are demonstrated, undertakings may substantiate efficiency claims and explain why a certain distribution system is indispensable to bring likely benefits to consumers without eliminating competition, before the Commission decides whether the agreement satisfies the conditions of Article 101(3). (97) The assessment of whether a vertical agreement has the effect of restricting competition will be made by comparing the actual or likely future situation on the relevant market with the vertical restraints in place with the situation that would prevail in the absence of the vertical restraints in the agreement. In the assessment of individual cases, the Commission will take, as appropriate, both actual and likely effects into account. For vertical agreements to be restrictive of competition by effect they must affect actual or potential competition to such an extent that on the relevant market negative effects on prices, output, innovation, or the variety or quality of goods and services can be expected with a reasonable degree of probability. The likely negative effects on competition must be appreciable.39 Appreciable anticompetitive effects are likely to occur when at least one of the parties has or 37   For these market definition and market share calculation purposes, it is not relevant whether the integrated distributor sells in addition products of competitors. 38   OJ L 1, 4.1.2003, 1. 39   See Section II.1.

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obtains some degree of market power and the agreement contributes to the creation, maintenance or strengthening of that market power or allows the parties to exploit such market power. Market power is the ability to maintain prices above competitive levels or to maintain output in terms of product quantities, product quality and variety or innovation below competitive levels for a not insignificant period of time. The degree of market power normally required for a finding of an infringement under Article 101(1) is less than the degree of market power required for a finding of dominance under Article 102. (98) Vertical restraints are generally less harmful than horizontal restraints. The main reason for the greater focus on horizontal restraints is that such restraints may concern an agreement between competitors producing identical or substitutable goods or services. In such horizontal relationships, the exercise of market power by one company (higher price of its product) may benefit its competitors. This may provide an incentive to competitors to induce each other to behave anticompetitively. In vertical relationships, the product of the one is the input for the other, in other words, the activities of the parties to the agreement are complementary to each other. The exercise of market power by either the upstream or downstream company would therefore normally hurt the demand for the product of the other. The companies involved in the agreement therefore usually have an incentive to prevent the exercise of market power by the other. (99) Such self-restraining character should not, however, be overestimated. When a company has no market power, it can only try to increase its profits by optimising its manufacturing and distribution processes, with or without the help of vertical restraints. More generally, because of the complementary role of the parties to a vertical agreement in getting a product on the market, vertical restraints may provide substantial scope for efficiencies. However, when an undertaking does have market power it can also try to increase its profits at the expense of its direct competitors by raising their costs and at the expense of its buyers and ultimately consumers by trying to appropriate some of their surplus. This can happen when the upstream and downstream company share the extra profits or when one of the two uses vertical restraints to appropriate all the extra profits. 1.1  Negative Effects of Vertical Restraints (100) The negative effects on the market that may result from vertical restraints which EU competition law aims at preventing are the following: (a) anticompetitive foreclosure of other suppliers or other buyers by raising barriers to entry or expansion; (b) softening of competition between the supplier and its competitors and/or facilitation of collusion amongst these suppliers, often referred to as reduction of inter-brand competition;40 40

  By collusion is meant both explicit collusion and tacit collusion (conscious parallel behaviour).

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(c) softening of competition between the buyer and its competitors and/or facilitation of collusion amongst these competitors, often referred to as reduction of intra-brand competition if it concerns distributors’ competition on the basis of the brand or product of the same supplier; (d) the creation of obstacles to market integration, including, above all, limitations on the possibilities for consumers to purchase goods or services in any Member State they may choose. (101)  Foreclosure, softening of competition and collusion at the manufacturers’ level may harm consumers in particular by increasing the wholesale prices of the products, limiting the choice of products, lowering their quality or reducing the level of product innovation. Foreclosure, softening of competition and collusion at the distributors’ level may harm consumers in particular by increasing the retail prices of the products, limiting the choice of price–service combinations and distribution formats, lowering the availability and quality of retail services and reducing the level of innovation of distribution. (102)  On a market where individual distributors distribute the brand(s) of only one supplier, a reduction of competition between the distributors of the same brand will lead to a reduction of intra-brand competition between these distributors, but may not have a negative effect on competition between distributors in general. In such a case, if inter-brand competition is fierce, it is unlikely that a reduction of intra-brand competition will have negative effects for consumers. (103) Exclusive arrangements are generally more anticompetitive than non­ exclusive arrangements. Exclusive arrangements, whether by means of express contractual language or their practical effects, result in one party sourcing all or practically all of its demand from another party. For instance, under a noncompete obligation the buyer purchases only one brand. Quantity-forcing, on the other hand, leaves the buyer some scope to purchase competing goods. The degree of foreclosure may therefore be less with quantity-forcing. (104)  Vertical restraints agreed for non-branded goods and services are in general less harmful than restraints affecting the distribution of branded goods and services. Branding tends to increase product differentiation and reduce substitutability of the product, leading to a reduced elasticity of demand and an increased possibility to raise price. The distinction between branded and non-branded goods or services will often coincide with the distinction between intermediate goods and services and final goods and services. (105) In general, a combination of vertical restraints aggravates their individual negative effects. However, certain combinations of vertical restraints are less anticompetitive than their use in isolation. For instance, in an exclusive distribution system, the distributor may be tempted to increase the price of the products as intra-brand competition has been reduced. The use of quantity-forcing or the setting of a maximum resale price may limit such price increases. Possible negative effects of vertical restraints are reinforced when several suppliers and their buyers organise their trade in a similar way, leading to so-called cumulative effects.

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1.2  Positive Effects of Vertical Restraints (106) It is important to recognise that vertical restraints may have positive effects by, in particular, promoting non-price competition and improved quality of services. When a company has no market power, it can only try to increase its profits by optimising its manufacturing or distribution processes. In a number of situations vertical restraints may be helpful in this respect since the usual arm’slength dealings between supplier and buyer, determining only price and quantity of a certain transaction, can lead to a suboptimal level of investments and sales. (107)  While trying to give a fair overview of the various justifications for vertical restraints, these Guidelines do not claim to be complete or exhaustive. The following reasons may justify the application of certain vertical restraints: (a) To solve a ‘free-rider’ problem. One distributor may free-ride on the promotion efforts of another distributor. That type of problem is most common at the wholesale and retail level. Exclusive distribution or similar restrictions may be helpful in avoiding such free-riding. Free-riding can also occur between suppliers, for instance where one invests in promotion at the buyer’s premises, in general at the retail level, that may also attract customers for its competitors. Non-compete type restraints can help to overcome free-riding.41 For there to be a problem, there needs to be a real free-rider issue. Free-riding between buyers can only occur on presales services and other promotional activities, but not on after-sales services for which the distributor can charge its customers individually. The product will usually need to be relatively new or technically complex or the reputation of the product must be a major determinant of its demand, as the customer may otherwise very well know what it wants, based on past purchases. And the product must be of a reasonably high value as it is otherwise not attractive for a customer to go to one shop for information and to another to buy. Lastly, it must not be practical for the supplier to impose on all buyers, by contract, effective promotion or service requirements. Free-riding between suppliers is also restricted to specific situations, namely to cases where the promotion takes place at the buyer’s premises and is generic, not brand-specific. (b) To ‘open up or enter new markets’. Where a manufacturer wants to enter a new geographic market, for instance by exporting to another country for the first time, this may involve special ‘first time investments’ by the distributor to establish the brand on the market. In order to persuade a local distributor to make these investments, it may be necessary to 41   Whether consumers actually benefit overall from extra promotional efforts depends on whether the extra promotion informs and convinces and thus benefits many new customers or mainly reaches customers who already know what they want to buy and for whom the extra promotion only or mainly implies a price increase.

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provide territorial protection to the distributor so that it can recoup these investments by temporarily charging a higher price. Distributors based in other markets should then be restrained for a limited period from selling on the new market (see also paragraph (61) in Section III.4). This is a special case of the free-rider problem described under point (a). (c) The ‘certification free-rider issue’. In some sectors, certain retailers have a reputation for stocking only ‘quality’ products. In such a case, selling through those retailers may be vital for the introduction of a new product. If the manufacturer cannot initially limit its sales to the premium stores, it runs the risk of being de-listed and the product introduction may fail. There may therefore be a reason for allowing for a limited duration a restriction such as exclusive distribution or selective distribution. It must be enough to guarantee introduction of the new product but not so long as to hinder large-scale dissemination. Such benefits are more likely with ‘experience’ goods or complex goods that represent a relatively large purchase for the final consumer. (d) The so-called ‘hold-up problem’. Sometimes there are client-specific investments to be made by either the supplier or the buyer, such as in special equipment or training. For instance, a component manufacturer that has to build new machines and tools in order to satisfy a particular requirement of one of its customers. The investor may not commit the necessary investments before particular supply arrangements are fixed. However, as in the other free-riding examples, there are a number of conditions that have to be met before the risk of under-investment is real or significant. Firstly, the investment must be relationship-specific. An investment made by the supplier is considered to be relationship-specific when, after termination of the contract, it cannot be used by the supplier to supply other customers and can only be sold at a significant loss. An investment made by the buyer is considered to be relationship-specific when, after termination of the contract, it cannot be used by the buyer to purchase and/or use products supplied by other suppliers and can only be sold at a significant loss. An investment is thus relationship-specific because it can only, for instance, be used to produce a brand-specific component or to store a particular brand and thus cannot be used profitably to produce or resell alternatives. Secondly, it must be a long-term investment that is not recouped in the short run. And thirdly, the investment must be asymmetric, that is, one party to the contract invests more than the other party. Where these conditions are met, there is usually a good reason to have a vertical restraint for the duration it takes to depreciate the investment. The appropriate vertical restraint will be of the noncompete type or quantity-forcing type when the investment is made by the supplier and of the exclusive distribution, exclusive customer allocation or exclusive supply type when the investment is made by the buyer.

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(e) The ‘specific hold-up problem that may arise in the case of transfer of substantial knowhow’. The knowhow, once provided, cannot be taken back and the provider of the knowhow may not want it to be used for or by its competitors. In as far as the knowhow was not readily available to the buyer, is substantial and indispensable for the operation of the agreement, such a transfer may justify a non-compete type of restriction, which would normally fall outside Article 101(1). (f) The ‘vertical externality issue’. A retailer may not gain all the benefits of its action taken to improve sales; some may go to the manufacturer. For every extra unit a retailer sells by lowering its resale price or by increasing its sales effort, the manufacturer benefits if its wholesale price exceeds its marginal production costs. Thus, there may be a positive externality bestowed on the manufacturer by such retailer’s actions and from the manufacturer’s perspective the retailer may be pricing too high and/or making too little sales efforts. The negative externality of too high pricing by the retailer is sometimes called the ‘double marginalisation problem’ and it can be avoided by imposing a maximum resale price on the retailer. To increase the retailer’s sales efforts selective distribution, exclusive distribution or similar restrictions may be helpful.42 (g) ‘Economies of scale in distribution’. In order to have scale economies exploited and thereby see a lower retail price for its product, the manufacturer may want to concentrate the resale of its products on a limited number of distributors. To do so, it could use exclusive distribution, quantity-forcing in the form of a minimum purchasing requirement, selective distribution containing such a requirement or exclusive sourcing. (h) ‘Capital market imperfections’. The usual providers of capital (banks, equity markets) may provide capital suboptimally when they have imperfect information on the quality of the borrower or there is an inadequate basis to secure the loan. The buyer or supplier may have better information and be able, through an exclusive relationship, to obtain extra security for its investment. Where the supplier provides the loan to the buyer, this may lead to non-compete or quantity-forcing on the buyer. Where the buyer provides the loan to the supplier, this may be the reason for having exclusive supply or quantity forcing on the supplier. (i) ‘Uniformity and quality standardisation’. A vertical restraint may help to create a brand image by imposing a certain measure of uniformity and quality standardisation on the distributors, thereby increasing the attractiveness of the product to the final consumer and increasing its sales. This can for instance be found in selective distribution and franchising. 42

  See, however, the previous footnote.

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(108) The nine situations listed in paragraph (107) make clear that under certain conditions, vertical agreements are likely to help realise efficiencies and the development of new markets and that this may offset possible negative effects. The case is in general strongest for vertical restraints of a limited duration which help the introduction of new complex products or protect relationship-specific investments. A vertical restraint is sometimes necessary for as long as the supplier sells its product to the buyer (see in particular the situations described in paragraph (107)(a), (e), (f), (g) and (i)). (109)  A large measure of substitutability exists between the different vertical restraints. As a result, the same inefficiency problem can be solved by different vertical restraints. For instance, economies of scale in distribution may possibly be achieved by using exclusive distribution, selective distribution, quantity-forcing or exclusive sourcing. However, the negative effects on competition may differ between the various vertical restraints, which plays a role when indispensability is discussed under Article 101(3). 1.3  Methodology of Analysis (110) The assessment of a vertical restraint generally involves the following four steps:43 (a) First, the undertakings involved need to establish the market shares of the supplier and the buyer on the market where they respectively sell and purchase the contract products. (b) If the relevant market share of the supplier and the buyer each do not exceed the 30% threshold, the vertical agreement is covered by the Block Exemption Regulation, subject to the hardcore restrictions and excluded restrictions set out in that Regulation. (c) If the relevant market share is above the 30% threshold for supplier and/ or buyer, it is necessary to assess whether the vertical agreement falls within Article 101(1). (d) If the vertical agreement falls within Article 101(1), it is necessary to examine whether it fulfils the conditions for exemption under Article 101(3). 1.3.1  Relevant Factors for the Assessment under Article 101(1) (111) In assessing cases above the market share threshold of 30%, the Commission will undertake a full competition analysis. The following factors are particularly relevant to establish whether a vertical agreement brings about an appreciable restriction of competition under Article 101(1): 43  These steps are not intended to present a legal reasoning that the Commission should follow in this order to take a decision.

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(a) nature of the agreement; (b) market position of the parties; (c) market position of competitors; (d) market position of buyers of the contract products; (e) entry barriers; (f) maturity of the market; (g) level of trade; (h) nature of the product; (i) other factors. (112) The importance of individual factors may vary from case to case and depends on all other factors. For instance, a high market share of the parties is usually a good indicator of market power, but in the case of low entry barriers it may not be indicative of market power. It is therefore not possible to provide firm rules on the importance of the individual factors. (113) Vertical agreements can take many shapes and forms. It is therefore important to analyse the nature of the agreement in terms of the restraints that it contains, the duration of those restraints and the percentage of total sales on the market affected by those restraints. It may be necessary to go beyond the express terms of the agreement. The existence of implicit restraints may be derived from the way in which the agreement is implemented by the parties and the incentives that they face. (114) The market position of the parties provides an indication of the degree of market power, if any, possessed by the supplier, the buyer or both. The higher their market share, the greater their market power is likely to be. This is particularly so where the market share reflects cost advantages or other competitive advantages vis-à-vis competitors. Such competitive advantages may, for instance, result from being a first mover on the market (having the best site, etc), from holding essential patents or having superior technology, from being the brand leader or having a superior portfolio. (115)  Such indicators, namely market share and possible competitive advantages, are used to assess the market position of competitors. The stronger the competitors are and the greater their number, the less risk there is that the parties will be able to individually exercise market power and foreclose the market or soften competition. It is also relevant to consider whether there are effective and timely counterstrategies that competitors would be likely to deploy. However, if the number of competitors becomes rather small and their market position (size, costs, R&D potential, etc) is rather similar, such a market structure may increase the risk of collusion. Fluctuating or rapidly changing market shares are in general an indication of intense competition.

  Appendix 3  291

(116) The market position of the parties’ customers provides an indication of whether or not one or more of those customers possess buyer power. The first indicator of buyer power is the market share of the customer on the purchase market. That share reflects the importance of its demand for possible suppliers. Other indicators focus on the position of the customer on its resale market, including characteristics such as a wide geographic spread of its outlets, own brands including private labels and its brand image amongst final consumers. In some circumstances, buyer power may prevent the parties from exercising market power and thereby solve a competition problem that would otherwise have existed. This is particularly so when strong customers have the capacity and incentive to bring new sources of supply on to the market in the case of a small but permanent increase in relative prices. Where strong customers merely extract favourable terms for themselves or simply pass on any price increase to their customers, their position does not prevent the parties from exercising market power. (117) Entry barriers are measured by the extent to which incumbent companies can increase their price above the competitive level without attracting new entry. In the absence of entry barriers, easy and quick entry would render price increases unprofitable. When effective entry, preventing or eroding the exercise of market power, is likely to occur within one or two years, entry barriers can, as a general rule, be said to be low. Entry barriers may result from a wide variety of factors such as economies of scale and scope, government regulations, especially where they establish exclusive rights, state aid, import tariffs, intellectual property rights, ownership of resources where the supply is limited due to for instance natural limitations,44 essential facilities, a first-mover advantage and brand loyalty of consumers created by strong advertising over a period of time. Vertical restraints and vertical integration may also work as an entry barrier by making access more difficult and foreclosing (potential) competitors. Entry barriers may be present at only the supplier or buyer level or at both levels. The question whether certain of those factors should be described as entry barriers depends particularly on whether they entail sunk costs. Sunk costs are those costs that have to be incurred to enter or be active on a market but that are lost when the market is exited. Advertising costs to build consumer loyalty are normally sunk costs, unless an exiting firm could either sell its brand name or use it somewhere else without a loss. The more costs are sunk, the more potential entrants have to weigh the risks of entering the market and the more credibly incumbents can threaten that they will match new competition, as sunk costs make it costly for incumbents to leave the market. If, for instance, distributors are tied to a manufacturer via a non-compete obligation, the foreclosing effect will be more significant if setting up its own distributors will impose sunk costs on the potential entrant. In general, entry requires sunk costs, sometimes minor and sometimes major. Therefore, actual competition is in general more effective and will weigh more heavily in the assessment of a case than potential competition. 44

  See Commission Decision 97/26/EC, Case No IV/M.619 Gencor/Lonrho, OJ L 11, 14.1.1997, 30.

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(118)  A mature market is a market that has existed for some time, where the technology used is well known and widespread and not changing very much, where there are no major brand innovations and in which demand is relatively stable or declining. In such a market, negative effects are more likely than in more dynamic markets. (119)  The level of trade is linked to the distinction between intermediate and final goods and services. Intermediate goods and services are sold to undertakings for use as an input to produce other goods or services and are generally not recognisable in the final goods or services. The buyers of intermediate products are usually well-informed customers, able to assess quality and therefore less reliant on brand and image. Final goods are, directly or indirectly, sold to final consumers that often rely more on brand and image. As distributors have to respond to the demand of final consumers, competition may suffer more when distributors are foreclosed from selling one or a number of brands than when buyers of intermediate products are prevented from buying competing products from certain sources of supply. (120) The nature of the product plays a role in particular for final products in assessing both the likely negative and the likely positive effects. When assessing the likely negative effects, it is important whether the products on the market are more homogeneous or heterogeneous, whether the product is expensive, taking up a large part of the consumer’s budget, or is inexpensive and whether the product is a one-off purchase or repeatedly purchased. In general, when the product is more heterogeneous, less expensive and resembles more a one-off purchase, vertical restraints are more likely to have negative effects. (121) In the assessment of particular restraints other factors may have to be taken into account. Among these factors can be the cumulative effect, that is, the coverage of the market by similar agreements of others, whether the agreement is ‘imposed’ (mainly one party is subject to the restrictions or obligations) or ‘agreed’ (both parties accept restrictions or obligations), the regulatory environment and behaviour that may indicate or facilitate collusion like price leadership, pre-announced price changes and discussions on the ‘right’ price, price rigidity in response to excess capacity, price discrimination and past collusive behaviour. 1.3.2  Relevant Factors for the Assessment under Article 101(3) (122) Restrictive vertical agreements may also produce pro-competitive effects in the form of efficiencies, which may outweigh their anticompetitive effects. Such an assessment takes place within the framework of Article 101(3), which contains an exception from the prohibition rule of Article 101(1). For that exception to be applicable, the vertical agreement must produce objective economic benefits, the restrictions on competition must be indispensable to attain the efficiencies, consumers must receive a fair share of the efficiency gains, and the agreement must

  Appendix 3  293

not afford the parties the possibility of eliminating competition in respect of a substantial part of the products concerned.45 (123) The assessment of restrictive agreements under Article 101(3) is made within the actual context in which they occur46 and on the basis of the facts existing at any given point in time. The assessment is sensitive to material changes in the facts. The exception rule of Article 101(3) applies as long as the four conditions are fulfilled and ceases to apply when that is no longer the case.47 When applying Article 101(3) in accordance with these principles it is necessary to take into account the investments made by any of the parties and the time needed and the restraints required to commit and recoup an efficiency-enhancing investment. (124) The first condition of Article 101(3) requires an assessment of what are the objective benefits in terms of efficiencies produced by the agreement. In this respect, vertical agreements often have the potential to help realise efficiencies, as explained in section 1.2, by improving the way in which the parties conduct their complementary activities. (125) In the application of the indispensability test contained in Article 101(3), the Commission will in particular examine whether individual restrictions make it possible to perform the production, purchase and/or (re)sale of the contract products more efficiently than would have been the case in the absence of the restriction concerned. In making such an assessment, the market conditions and the realities facing the parties must be taken into account. Undertakings invoking the benefit of Article 101(3) are not required to consider hypothetical and theoretical alternatives. They must, however, explain and demonstrate why seemingly realistic and significantly less restrictive alternatives would be significantly less efficient. If the application of what appears to be a commercially realistic and less restrictive alternative would lead to a significant loss of efficiencies, the restriction in question is treated as indispensable. (126) The condition that consumers must receive a fair share of the benefits implies that consumers of the products purchased and/or (re)sold under the vertical agreement must at least be compensated for the negative effects of the agreement.48 In other words, the efficiency gains must fully off-set the likely negative impact on prices, output and other relevant factors caused by the agreement. (127) The last condition of Article 101(3), according to which the agreement must not afford the parties the possibility of eliminating competition in respect of a substantial part of the products concerned, presupposes an analysis of remaining competitive pressures on the market and the impact of the agreement on such 45   See Communication from the Commission, Notice – Guidelines on the application of Article 81(3) of the Treaty, OJ C 101, 27.4.2004, 97. 46   See Judgment of the Court of Justice in Joined Cases 25/84 and 26/84 Ford [1985] ECR 2725. 47   See in this respect for example Commission Decision 1999/242/EC, Case No IV/36.237 TPS, OJ L 90, 2.4.1999, 6. Similarly, the prohibition of Article 101(1) also only applies as long as the agreement has a restrictive object or restrictive effects. 48   See paragraph 85 of Communication from the Commission, Notice – Guidelines on the application of Article 81(3) of the Treaty, OJ C 101, 27.4.2004, 97.

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sources of competition. In the application of the last condition of Article 101(3), the relationship between Article 101(3) and Article 102 must be taken into account. According to settled case law, the application of Article 101(3) cannot prevent the application of Article 102.49 Moreover, since Articles 101 and 102 both pursue the aim of maintaining effective competition on the market, consistency requires that Article 101(3) be interpreted as precluding any application of the exception rule to restrictive agreements that constitute an abuse of a dominant position.50 The vertical agreement may not eliminate effective competition, by removing all or most existing sources of actual or potential competition. Rivalry between undertakings is an essential driver of economic efficiency, including dynamic efficiencies in the form of innovation. In its absence, the dominant undertaking will lack adequate incentives to continue to create and pass on efficiency gains. Where there is no residual competition and no foreseeable threat of entry, the protection of rivalry and the competitive process outweighs possible efficiency gains. A restrictive agreement which maintains, creates or strengthens a market position approaching that of a monopoly can normally not be justified on the grounds that it also creates efficiency gains. 2.  Analysis of Specific Vertical Restraints (128) The most common vertical restraints and combinations of vertical restraints are analysed in the remainder of these Guidelines following the framework of analysis developed in paragraphs (96) to (127). Other restraints and combinations exist for which no direct guidance is provided in these Guidelines. They will, however, be treated according to the same principles and with the same emphasis on the effect on the market. 2.1 Single-Branding (129)  Under the heading of ‘single-branding’ fall those agreements which have as their main element the fact that the buyer is obliged or induced to concentrate its orders for a particular type of product with one supplier. That component can be found amongst others in non-compete and quantity-forcing on the buyer. A non-compete arrangement is based on an obligation or incentive scheme which makes the buyer purchase more than 80% of its requirements on a particular market from only one supplier. It does not mean that the buyer can only buy directly 49   See Judgment of the Court of Justice in Joined Cases C-395/96 P and C-396/96P Compagnie Maritime Belge [2000] ECR I-1365, paragraph 130. Similarly, the application of Article 101(3) does not prevent the application of the Treaty rules on the free movement of goods, services, persons and capital. These provisions are in certain circumstances applicable to agreements, decisions and concerted practices within the meaning of Article 101(1). See to that effect Judgment of the Court of Justice in Case C-309/99 Wouters [2002] ECR I-1577, paragraph 120. 50   See in this respect Judgment of the Court of First Instance in Case T- 51/89 Tetra Pak (I) [1990] ECR II-309. See also paragraph 106 of Communication from the Commission, Notice – Guidelines on the application of Article 81(3) of the Treaty, OJ C 101, 27.4.2004, 97.

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from the supplier, but that the buyer will not buy and resell or incorporate competing goods or services. Quantity-forcing on the buyer is a weaker form of noncompete, where incentives or obligations agreed between the supplier and the buyer make the latter concentrate its purchases to a large extent with one supplier. Quantity-forcing may for example take the form of minimum purchase requirements, stocking requirements or non-linear pricing, such as conditional rebate schemes or a two-part tariff (fixed fee plus a price per unit). A so-called ‘English clause’, requiring the buyer to report any better offer and allowing him only to accept such an offer when the supplier does not match it, can be expected to have the same effect as a single-branding obligation, especially when the buyer has to reveal who makes the better offer. (130) The possible competition risks of single-branding are foreclosure of the market to competing suppliers and potential suppliers, softening of competition and facilitation of collusion between suppliers in case of cumulative use and, where the buyer is a retailer selling to final consumers, a loss of in-store interbrand competition. Such restrictive effects have a direct impact on inter-brand competition. (131)  Single-branding is exempted by the Block Exemption Regulation where the supplier’s and buyer’s market share each do not exceed 30% and are subject to a limitation in time of five years for the non-compete obligation. The remainder of this section provides guidance for the assessment of individual cases above the market share threshold or beyond the time limit of five years. (132) The capacity for single-branding obligations of one specific supplier to result in anticompetitive foreclosure arises in particular where, without the obligations, an important competitive constraint is exercised by competitors that either are not yet present on the market at the time the obligations are concluded, or that are not in a position to compete for the full supply of the customers. Competitors may not be able to compete for an individual customer’s entire demand because the supplier in question is an unavoidable trading partner at least for part of the demand on the market, for instance because its brand is a ‘must-stock item’ preferred by many final consumers or because the capacity constraints on the other suppliers are such that a part of demand can only be provided for by the supplier in question.51 The market position of the supplier is thus of main importance to assess possible anticompetitive effects of single-branding obligations. (133) If competitors can compete on equal terms for each individual customer’s entire demand, single-branding obligations of one specific supplier are generally unlikely to hamper effective competition unless the switching of supplier by customers is rendered difficult due to the duration and market coverage of the single-branding obligations. The higher its tied market share, that is, the part of its market share sold under a single-branding obligation, the more significant foreclosure is likely to be. Similarly, the longer the duration of the single-branding 51   Judgment of the Court of First Instance in Case T-65/98 Van den Bergh Foods v Commission [2003] ECR II-4653, paragraphs 104 and 156.

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obligations, the more significant foreclosure is likely to be. Single-branding obligations shorter than one year entered into by non-dominant companies are generally not considered to give rise to appreciable anticompetitive effects or net negative effects. Single-branding obligations between one and five years entered into by non-dominant companies usually require a proper balancing of pro- and anticompetitive effects, while single-branding obligations exceeding five years are for most types of investments not considered necessary to achieve the claimed efficiencies or the efficiencies are not sufficient to outweigh their foreclosure effect. Single-branding obligations are more likely to result in anticompetitive fore­closure when entered into by dominant companies. (134)  When assessing the supplier’s market power, the market position of its competitors is important. As long as the competitors are sufficiently numerous and strong, no appreciable anticompetitive effects can be expected. Foreclosure of competitors is not very likely where they have similar market positions and can offer similarly attractive products. In such a case, foreclosure may, however, occur for potential entrants when a number of major suppliers enter into singlebranding contracts with a significant number of buyers on the relevant market (cumulative effect situation). This is also a situation where single-branding agreements may facilitate collusion between competing suppliers. If, individually, those suppliers are covered by the Block Exemption Regulation, a withdrawal of the block exemption may be necessary to deal with such a negative cumulative effect. A tied market share of less than 5% is not considered in general to contribute significantly to a cumulative foreclosure effect. (135) In cases where the market share of the largest supplier is below 30% and the market share of the five largest suppliers is below 50%, there is unlikely to be a single or a cumulative anticompetitive effect situation. Where a potential entrant cannot penetrate the market profitably, it is likely to be due to factors other than single-branding obligations, such as consumer preferences. (136) Entry barriers are important to establish whether there is anticompetitive foreclosure. Wherever it is relatively easy for competing suppliers to create new buyers or find alternative buyers for their product, foreclosure is unlikely to be a real problem. However, there are often entry barriers, both at the manufacturing and at the distribution level. (137) Countervailing power is relevant, as powerful buyers will not easily allow themselves to be cut off from the supply of competing goods or services. More generally, in order to convince customers to accept single-branding, the supplier may have to compensate them, in whole or in part, for the loss in competition resulting from the exclusivity. Where such compensation is given, it may be in the individual interest of a customer to enter into a single-branding obligation with the supplier. But it would be wrong to conclude automatically from this that all single-branding obligations, taken together, are overall beneficial for customers on that market and for the final consumers. It is in particular unlikely that consumers as a whole will benefit if there are many customers and the single-branding obligations, taken together, have the effect of preventing the entry or expansion of competing undertakings.

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(138) Lastly, ‘the level of trade’ is relevant. Anticompetitive foreclosure is less likely in case of an intermediate product. When the supplier of an intermediate product is not dominant, the competing suppliers still have a substantial part of demand that is free. Below the level of dominance an anticompetitive foreclosure effect may however arise in a cumulative effect situation. A cumulative anticompetitive effect is unlikely to arise as long as less than 50% of the market is tied. (139) Where the agreement concerns the supply of a final product at the wholesale level, the question whether a competition problem is likely to arise depends in large part on the type of wholesaling and the entry barriers at the wholesale level. There is no real risk of anticompetitive foreclosure if competing manufacturers can easily establish their own wholesaling operation. Whether entry barriers are low depends in part on the type of wholesaling, that is, whether or not wholesalers can operate efficiently with only the product concerned by the agreement (for example ice cream) or whether it is more efficient to trade in a whole range of products (for example frozen foodstuffs). In the latter case, it is not efficient for a manufacturer selling only one product to set up its own wholesaling operation. In that case, anticompetitive effects may arise. In addition, cumulative effect problems may arise if several suppliers tie most of the available wholesalers. (140)  For final products, foreclosure is in general more likely to occur at the retail level, given the significant entry barriers for most manufacturers to start retail outlets just for their own products. In addition, it is at the retail level that single-branding agreements may lead to reduced in-store inter-brand competition. It is for these reasons that for final products at the retail level, significant anticompetitive effects may start to arise, taking into account all other relevant factors, if a non-dominant supplier ties 30% or more of the relevant market. For a dominant company, even a modest tied market share may already lead to significant anticompetitive effects. (141)  At the retail level, a cumulative foreclosure effect may also arise. Where all suppliers have market shares below 30%, a cumulative anticompetitive foreclosure effect is unlikely if the total tied market share is less than 40% and withdrawal of the block exemption is therefore unlikely. That figure may be higher when other factors like the number of competitors, entry barriers etc are taken into account. Where not all companies have market shares below the threshold of the Block Exemption Regulation but none is dominant, a cumulative anticompetitive foreclosure effect is unlikely if the total tied market share is below 30%. (142)  Where the buyer operates from premises and land owned by the supplier or leased by the supplier from a third party not connected with the buyer, the possibility of imposing effective remedies for a possible foreclosure effect will be limited. In that case, intervention by the Commission below the level of dominance is unlikely. (143) In certain sectors, the selling of more than one brand from a single site may be difficult, in which case a foreclosure problem can better be remedied by limiting the effective duration of contracts.

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(144)  Where appreciable anticompetitive effects are established, the question of a possible exemption under Article 101(3) arises. For non-compete obligations, the efficiencies described in points (a) (free-riding between suppliers), (d), (e) (hold-up problems) and (h) (capital market imperfections) of paragraph (107) may be particularly relevant. (145) In the case of an efficiency as described in paragraph (107)(a), (107)(d) and (107)(h), quantity-forcing on the buyer could possibly be a less restrictive alternative. A non-compete obligation may be the only viable way to achieve an efficiency as described in paragraph (107)(e) (hold-up problem related to the transfer of knowhow). (146) In the case of a relationship-specific investment made by the supplier (see paragraph (107)(d)), a non-compete or quantity-forcing agreement for the period of depreciation of the investment will in general fulfil the conditions of Article 101(3). In the case of high relationship-specific investments, a non-compete obligation exceeding five years may be justified. A relationship-specific investment could, for instance, be the installation or adaptation of equipment by the supplier when this equipment can be used afterwards only to produce components for a particular buyer. General or market-specific investments in (extra) capacity are normally not relationship-specific investments. However, where a supplier creates new capacity specifically linked to the operations of a particular buyer, for instance a company producing metal cans which creates new capacity to produce cans on the premises of or next to the canning facility of a food producer, this new capacity may only be economically viable when producing for this particular customer, in which case the investment would be considered to be relationship-specific. (147)  Where the supplier provides the buyer with a loan or provides the buyer with equipment which is not relationship-specific, this in itself is normally not sufficient to justify the exemption of an anticompetitive foreclosure effect on the market. In case of capital market imperfection, it may be more efficient for the supplier of a product than for a bank to provide a loan (see paragraph (107)(h)). However, in such a case the loan should be provided in the least restrictive way and the buyer should thus in general not be prevented from terminating the obligation and repaying the outstanding part of the loan at any point in time and without payment of any penalty. (148) The transfer of substantial knowhow (paragraph (107)(e)) usually justifies a non-compete obligation for the whole duration of the supply agreement, as for example in the context of franchising. (149) Example of non-compete obligation The market leader in a national market for an impulse consumer product, with a market share of 40%, sells most of its products (90%) through tied retailers (tied market share 36%). The agreements oblige the retailers to purchase only from the market leader for at least four years. The market leader is especially strongly represented in the more densely populated areas like the capital. Its competitors, 10 in number, of which some are only locally available, all have much smaller market shares, the biggest having 12%. Those 10 competitors together supply another

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10% of the market via tied outlets. There is strong brand and product differentiation in the market. The market leader has the strongest brands. It is the only one with regular national advertising campaigns. It provides its tied retailers with special stocking cabinets for its product. The result on the market is that in total 46% (36% + 10%) of the market is foreclosed to potential entrants and to incumbents not having tied outlets. Potential entrants find entry even more difficult in the densely populated areas where foreclosure is even higher, although it is there that they would prefer to enter the market. In addition, owing to the strong brand and product differentiation and the high search costs relative to the price of the product, the absence of in-store inter-brand competition leads to an extra welfare loss for consumers. The possible efficiencies of the outlet exclusivity, which the market leader claims result from reduced transport costs and a possible hold-up problem concerning the stocking cabinets, are limited and do not outweigh the negative effects on competition. The efficiencies are limited, as the transport costs are linked to quantity and not exclusivity and the stocking cabinets do not contain special knowhow and are not brand-specific. Accordingly, it is unlikely that the conditions of Article 101(3) are fulfilled. (150) Example of quantity-forcing A producer X with a 40% market share sells 80% of its products through contracts which specify that the reseller is required to purchase at least 75% of its requirements for that type of product from X. In return X is offering financing and equipment at favourable rates. The contracts have a duration of five years in which repayment of the loan is foreseen in equal instalments. However, after the first two years buyers have the possibility to terminate the contract with a six-month notice period if they repay the outstanding loan and take over the equipment at its market asset value. At the end of the five-year period the equipment becomes the property of the buyer. Most of the competing producers are small, twelve in total with the biggest having a market share of 20%, and engage in similar contracts with different durations. The producers with market shares below 10% often have contracts with longer durations and with less generous termination clauses. The contracts of producer X leave 25% of requirements free to be supplied by competitors. In the last three years, two new producers have entered the market and gained a combined market share of around 8%, partly by taking over the loans of a number of resellers in return for contracts with these resellers. Producer X’s tied market share is 24% (0,75 × 0,80 × 40%). The other producers’ tied market share is around 25%. Therefore, in total around 49% of the market is foreclosed to potential entrants and to incumbents not having tied outlets for at least the first two years of the supply contracts. The market shows that the resellers often have difficulty in obtaining loans from banks and are too small in general to obtain capital through other means like the issuing of shares. In addition, producer X is able to demonstrate that concentrating its sales on a limited number of resellers allows him to plan its sales better and to save transport costs. In the light of the efficiencies on the one hand and the 25% non-tied part in the contracts of

300  appendix 3

producer X, the real possibility for early termination of the contract, the recent entry of new producers and the fact that around half the resellers are not tied on the other hand, the quantity-forcing of 75% applied by producer X is likely to fulfil the conditions of Article 101(3). 2.2  Exclusive Distribution (151) In an exclusive distribution agreement, the supplier agrees to sell its products to only one distributor for resale in a particular territory. At the same time, the distributor is usually limited in its active selling into other (exclusively allocated) territories. The possible competition risks are mainly reduced intrabrand competition and market partitioning, which may facilitate price discrimination in particular. When most or all of the suppliers apply exclusive distribution, it may soften competition and facilitate collusion, both at the suppliers’ and distributors’ level. Lastly, exclusive distribution may lead to foreclosure of other distributors and therewith reduce competition at that level. (152) Exclusive distribution is exempted by the Block Exemption Regulation where both the supplier’s and buyer’s market share each do not exceed 30%, even if combined with other non-hardcore vertical restraints, such as a non-compete obligation limited to five years, quantity-forcing or exclusive purchasing. A combination of exclusive distribution and selective distribution is only exempted by the Block Exemption Regulation if active selling in other territories is not restricted. The remainder of this section provides guidance for the assessment of exclusive distribution in individual cases above the 30% market share threshold. (153) The market position of the supplier and its competitors is of major importance, as the loss of intra-brand competition can only be problematic if inter-brand competition is limited. The stronger the position of the supplier, the more serious is the loss of intra-brand competition. Above the 30% market share threshold, there may be a risk of a significant reduction of intra-brand competition. In order to fulfil the conditions of Article 101(3), the loss of intra-brand competition may need to be balanced with real efficiencies. (154) The position of the competitors can have a dual significance. Strong competitors will generally mean that the reduction in intra-brand competition is outweighed by sufficient inter-brand competition. However, if the number of competitors becomes rather small and their market position is rather similar in terms of market share, capacity and distribution network, there is a risk of collusion and/or softening of competition. The loss of intra-brand competition can increase that risk, especially when several suppliers operate similar distribution systems. Multiple exclusive dealerships, that is, when different suppliers appoint the same exclusive distributor in a given territory, may further increase the risk of collusion and/or softening of competition. If a dealer is granted the exclusive right to distribute two or more important competing products in the same territory, inter-brand competition may be substantially restricted for those brands. The higher the cumulative market share of the brands distributed by the exclusive

  Appendix 3  301

multiple-brand dealers, the higher the risk of collusion and/or softening of competition and the more inter-brand competition will be reduced. If a retailer is the exclusive distributor for a number of brands this may have as result that if one producer cuts the wholesale price for its brand, the exclusive retailer will not be eager to transmit this price cut to the final consumer as it would reduce its sales and profits made with the other brands. Hence, compared to the situation without multiple exclusive dealerships, producers have a reduced interest in entering into price competition with one another. Such cumulative effect situations may be a reason to withdraw the benefit of the Block Exemption Regulation where the market shares of the suppliers and buyers are below the threshold of the Block Exemption Regulation. (155) Entry barriers that may hinder suppliers from creating new distributors or finding alternative distributors are less important in assessing the possible anticompetitive effects of exclusive distribution. Foreclosure of other suppliers does not arise as long as exclusive distribution is not combined with single-branding. (156)  Foreclosure of other distributors is not an issue where the supplier which operates the exclusive distribution system appoints a high number of exclusive distributors on the same market and those exclusive distributors are not restricted in selling to other non-appointed distributors. Foreclosure of other distributors may however become an issue where there is buying power and market power downstream, in particular in the case of very large territories where the exclusive distributor becomes the exclusive buyer for a whole market. An example would be a supermarket chain which becomes the only distributor of a leading brand on a national food retail market. The foreclosure of other distributors may be aggravated in the case of multiple exclusive dealership. (157)  Buying power may also increase the risk of collusion on the buyers’ side when the exclusive distribution arrangements are imposed by important buyers, possibly located in different territories, on one or several suppliers. (158)  Maturity of the market is important, as loss of intra-brand competition and price discrimination may be a serious problem in a mature market but may be less relevant on a market with growing demand, changing technologies and changing market positions. (159) The level of trade is important as the possible negative effects may differ between the wholesale and retail level. Exclusive distribution is mainly applied in the distribution of final goods and services. A loss of intra-brand competition is especially likely at the retail level if coupled with large territories, since final consumers may be confronted with little possibility of choosing between a high-price/ high-service and a low-price/low-service distributor for an important brand. (160)  A manufacturer that chooses a wholesaler to be its exclusive distributor will normally do so for a larger territory, such as a whole Member State. As long as the wholesaler can sell the products without limitation to downstream retailers there are not likely to be appreciable anticompetitive effects. A possible loss of intra-brand competition at the wholesale level may be easily outweighed by efficiencies obtained in logistics, promotion etc, especially when the manufacturer is

302  appendix 3

based in a different country. The possible risks for inter-brand competition of multiple exclusive dealerships are, however, higher at the wholesale than at the retail level. Where one wholesaler becomes the exclusive distributor for a significant number of suppliers, not only is there a risk that competition between these brands is reduced, but also that there is foreclosure at the wholesale level of trade. (161)  As stated in paragraph (155), foreclosure of other suppliers does not arise as long as exclusive distribution is not combined with single-branding. But even when exclusive distribution is combined with single-branding anticompetitive foreclosure of other suppliers is unlikely, except possibly when the single-branding is applied to a dense network of exclusive distributors with small territories or in case of a cumulative effect. In such a case it may be necessary to apply the principles on single-branding set out in section 2.1. However, when the combination does not lead to significant foreclosure, the combination of exclusive distribution and single-branding may be pro-competitive by increasing the incentive for the exclusive distributor to focus its efforts on the particular brand. Therefore, in the absence of such a foreclosure effect, the combination of exclusive distribution with non-compete may very well fulfil the conditions of Article 101(3) for the whole duration of the agreement, particularly at the wholesale level. (162) The combination of exclusive distribution with exclusive sourcing increases the possible competition risks of reduced intra-brand competition and market partitioning which may facilitate price discrimination in particular. Exclusive distribution already limits arbitrage by customers, as it limits the number of distributors and usually also restricts the distributors in their freedom of active selling. Exclusive sourcing, requiring the exclusive distributors to buy their supplies for the particular brand directly from the manufacturer, eliminates in addition possible arbitrage by the exclusive distributors, which are prevented from buying from other distributors in the system. As a result, the supplier’s possibilities to limit intra-brand competition by applying dissimilar conditions of sale to the detriment of consumers are enhanced, unless the combination allows the creation of efficiencies leading to lower prices to all final consumers. (163) The nature of the product is not particularly relevant to the assessment of possible anticompetitive effects of exclusive distribution. It is, however, relevant to an assessment of possible efficiencies, that is, after an appreciable anticompetitive effect is established. (164) Exclusive distribution may lead to efficiencies, especially where investments by the distributors are required to protect or build up the brand image. In general, the case for efficiencies is strongest for new products, complex products, and products whose qualities are difficult to judge before consumption (so-called experience products) or whose qualities are difficult to judge even after consumption (so-called credence products). In addition, exclusive distribution may lead to savings in logistic costs due to economies of scale in transport and distribution. (165) Example of exclusive distribution at the wholesale level On the market for a consumer durable, A is the market leader. A sells its product through exclusive wholesalers. Territories for the wholesalers correspond to the

  Appendix 3  303

entire Member State for small Member States, and to a region for larger Member States. Those exclusive distributors deal with sales to all the retailers in their territories. They do not sell to final consumers. The wholesalers are in charge of promotion in their markets, including sponsoring of local events, but also explaining and promoting the new products to the retailers in their territories. Technology and product innovation are evolving fairly quickly on this market, and presale service to retailers and to final consumers plays an important role. The wholesalers are not required to purchase all their requirements of the brand of supplier A from the producer himself, and arbitrage by wholesalers or retailers is practicable because the transport costs are relatively low compared to the value of the product. The wholesalers are not under a non-compete obligation. Retailers also sell a number of brands of competing suppliers, and there are no exclusive or selective distribution agreements at the retail level. On the EU market of sales to wholesalers A has around 50% market share. Its market share on the various national retail markets varies between 40% and 60%. A has between 6 and 10 competitors on every national market. B, C and D are its biggest competitors and are also present on each national market, with market shares varying between 20% and 5%. The remaining producers are national producers, with smaller market shares. B, C and D have similar distribution networks, whereas the local producers tend to sell their products directly to retailers. On the wholesale market described in this example, the risk of reduced intrabrand competition and price discrimination is low. Arbitrage is not hindered, and the absence of intra-brand competition is not very relevant at the wholesale level. At the retail level, neither intra- nor inter-brand competition are hindered. Moreover, inter-brand competition is largely unaffected by the exclusive arrangements at the wholesale level. Therefore it is likely, even if anticompetitive effects exist, that also the conditions of Article 101(3) are fulfilled. (166) Example of multiple exclusive dealerships in an oligopolistic market On a national market for a final product, there are four market leaders, which each have a market share of around 20%. Those four market leaders sell their product through exclusive distributors at the retail level. Retailers are given an exclusive territory which corresponds to the town in which they are located or a district of the town for large towns. In most territories, the four market leaders happen to appoint the same exclusive retailer (‘multiple dealership’), often centrally located and rather specialised in the product. The remaining 20% of the national market is composed of small local producers, the largest of these producers having a market share of 5% on the national market. Those local producers sell their products in general through other retailers, in particular because the exclusive distributors of the four largest suppliers show in general little interest in selling less well-known and cheaper brands. There is strong brand and product differentiation on the market. The four market leaders have large national advertising campaigns and strong brand images, whereas the fringe producers do not advertise their products at the national level. The market is rather mature, with stable demand and no major product and technological innovation. The product is relatively simple.

304  appendix 3

In such an oligopolistic market, there is a risk of collusion between the four market leaders. That risk is increased through multiple dealerships. Intra-brand competition is limited by the territorial exclusivity. Competition between the four leading brands is reduced at the retail level, since one retailer fixes the price of all four brands in each territory. The multiple dealership implies that, if one producer cuts the price for its brand, the retailer will not be eager to transmit this price cut to the final consumer as it would reduce its sales and profits made with the other brands. Hence, producers have a reduced interest in entering into price competition with one another. Inter-brand price competition exists mainly with the lowbrand-image goods of the fringe producers. The possible efficiency arguments for (joint) exclusive distributors are limited, as the product is relatively simple, the resale does not require any specific investments or training and advertising is mainly carried out at the level of the producers. Even though each of the market leaders has a market share below the threshold, the conditions of Article 101(3) may not be fulfilled and withdrawal of the block exemption may be necessary for the agreements concluded with distributors whose market share is below 30% of the procurement market. (167) Example of exclusive distribution combined with exclusive sourcing Manufacturer A is the European market leader for a bulky consumer durable, with a market share of between 40% and 60% in most national retail markets. In Member States where it has a high market share, it has less [sic] competitors with much smaller market shares. The competitors are present on only one or two national markets. A’s long time policy is to sell its product through its national subsidiaries to exclusive distributors at the retail level, which are not allowed to sell actively into each other’s territories. Those distributors are thereby incentivised to promote the product and provide presales services. Recently the retailers are in addition obliged to purchase manufacturer A’s products exclusively from the national subsidiary of manufacturer A in their own country. The retailers selling the brand of manufacturer A are the main resellers of that type of product in their territory. They handle competing brands, but with varying degrees of success and enthusiasm. Since the introduction of exclusive sourcing, A applies price differences of 10% to 15% between markets with higher prices in the markets where it has less competition. The markets are relatively stable on the demand and the supply side, and there are no significant technological changes. In the high-price markets, the loss of intra-brand competition results not only from the territorial exclusivity at the retail level but is aggravated by the exclusive sourcing obligation imposed on the retailers. The exclusive sourcing obligation helps to keep markets and territories separate by making arbitrage between the exclusive retailers, the main resellers of that type of product, impossible. The exclusive retailers also cannot sell actively into each other’s territory and in practice tend to avoid delivering outside their own territory. As a result, price discrimination is possible, without it leading to a significant increase in total sales. Arbitrage by consumers or independent traders is limited due to the bulkiness of the product.

  Appendix 3  305

While the possible efficiency arguments for appointing exclusive distributors may be convincing, in particular because of the incentivising of retailers, the possible efficiency arguments for the combination of exclusive distribution and exclusive sourcing, and in particular the possible efficiency arguments for exclusive sourcing, linked mainly to economies of scale in transport, are unlikely to outweigh the negative effect of price discrimination and reduced intra-brand competition. Consequently, it is unlikely that the conditions of Article 101(3) are fulfilled. 2.3  Exclusive Customer Allocation (168) In an exclusive customer allocation agreement, the supplier agrees to sell its products to only one distributor for resale to a particular group of customers. At the same time, the distributor is usually limited in its active selling to other (exclusively allocated) groups of customers. The Block Exemption Regulation does not limit the way an exclusive customer group can be defined; it could for instance be a particular type of customers defined by their occupation but also a list of specific customers selected on the basis of one or more objective criteria. The possible competition risks are mainly reduced intra-brand competition and market partitioning, which may in particular facilitate price discrimination. Where most or all of the suppliers apply exclusive customer allocation, competition may be softened and collusion, both at the suppliers’ and the distributors’ level, may be facilitated. Lastly, exclusive customer allocation may lead to foreclosure of other distributors and therewith reduce competition at that level. (169) Exclusive customer allocation is exempted by the Block Exemption Regulation when both the supplier’s and buyer’s market share does not exceed the 30% market share threshold, even if combined with other non-hardcore vertical restraints such as non-compete, quantity-forcing or exclusive sourcing. A combination of exclusive customer allocation and selective distribution is normally a hardcore restriction, as active selling to end-users by the appointed distributors is usually not left free. Above the 30% market share threshold, the guidance provided in paragraphs (151) to (167) applies also to the assessment of exclusive customer allocation, subject to the specific remarks in the remainder of this section. (170) The allocation of customers normally makes arbitrage by the customers more difficult. In addition, as each appointed distributor has its own class of customers, non-appointed distributors not falling within such a class may find it difficult to obtain the product. Consequently, possible arbitrage by non-appointed distributors will be reduced. (171) Exclusive customer allocation is mainly applied to intermediate products and at the wholesale level when it concerns final products, where customer groups with different specific requirements concerning the product can be distinguished. (172) Exclusive customer allocation may lead to efficiencies, especially when the distributors are required to make investments in for instance specific equipment, skills or knowhow to adapt to the requirements of their group of customers.

306  appendix 3

The depreciation period of these investments indicates the justified duration of an exclusive customer allocation system. In general the case is strongest for new or complex products and for products requiring adaptation to the needs of the individual customer. Identifiable differentiated needs are more likely for intermediate products, that is, products sold to different types of professional buyers. Allocation of final consumers is unlikely to lead to efficiencies. (173) Example of exclusive customer allocation A company has developed a sophisticated sprinkler installation. The company has currently a market share of 40% on the market for sprinkler installations. When it started selling the sophisticated sprinkler it had a market share of 20% with an older product. The installation of the new type of sprinkler depends on the type of building that it is installed in and on the use of the building (office, chemical plant, hospital etc). The company has appointed a number of distributors to sell and install the sprinkler installation. Each distributor needed to train its employees for the general and specific requirements of installing the sprinkler installation for a particular class of customers. To ensure that distributors would specialise, the company assigned to each distributor an exclusive class of customers and prohibited active sales to each others’ exclusive customer classes. After five years, all the exclusive distributors will be allowed to sell actively to all classes of customers, thereby ending the system of exclusive customer allocation. The supplier may then also start selling to new distributors. The market is quite dynamic, with two recent entries and a number of technological developments. Competitors, with market shares between 25% and 5%, are also upgrading their products. As the exclusivity is of limited duration and helps to ensure that the distributors may recoup their investments and concentrate their sales efforts first on a certain class of customers in order to learn the trade, and as the possible anticompetitive effects seem limited in a dynamic market, the conditions of Article 101(3) are likely to be fulfilled. 2.4  Selective Distribution (174)  Selective distribution agreements, like exclusive distribution agreements, restrict the number of authorised distributors on the one hand and the possibilities of resale on the other. The difference with exclusive distribution is that the restriction of the number of dealers does not depend on the number of territories but on selection criteria linked in the first place to the nature of the product. Another difference with exclusive distribution is that the restriction on resale is not a restriction on active selling to a territory but a restriction on any sales to non-authorised distributors, leaving only appointed dealers and final customers as possible buyers. Selective distribution is almost always used to distribute branded final products. (175) The possible competition risks are a reduction in intra-brand competition and, especially in case of cumulative effect, foreclosure of certain type(s) of distributors and softening of competition and facilitation of collusion between suppliers or buyers. To assess the possible anticompetitive effects of selective

  Appendix 3  307

distribution under Article 101(1), a distinction needs to be made between purely qualitative selective distribution and quantitative selective distribution. Purely qualitative selective distribution selects dealers only on the basis of objective criteria required by the nature of the product such as training of sales personnel, the service provided at the point of sale, a certain range of the products being sold etc.52 The application of such criteria does not put a direct limit on the number of dealers. Purely qualitative selective distribution is in general considered to fall outside Article 101(1) for lack of anticompetitive effects, provided that three conditions are satisfied. First, the nature of the product in question must necessitate a selective distribution system, in the sense that such a system must constitute a legitimate requirement, having regard to the nature of the product concerned, to preserve its quality and ensure its proper use. Secondly, resellers must be chosen on the basis of objective criteria of a qualitative nature which are laid down uniformly for all and made available to all potential resellers and are not applied in a discriminatory manner. Thirdly, the criteria laid down must not go beyond what is necessary.53 Quantitative selective distribution adds further criteria for selection that more directly limit the potential number of dealers by, for instance, requiring minimum or maximum sales, by fixing the number of dealers, etc. (176) Qualitative and quantitative selective distribution is exempted by the Block Exemption Regulation as long as the market share of both supplier and buyer each do not exceed 30%, even if combined with other non-hardcore vertical restraints, such as non-compete or exclusive distribution, provided active selling by the authorised distributors to each other and to end-users is not restricted. The Block Exemption Regulation exempts selective distribution regardless of the nature of the product concerned and regardless of the nature of the selection criteria. However, where the characteristics of the product54 do not require selective distribution or do not require the applied criteria, such as for instance the requirement for distributors to have one or more brick-and-mortar shops or to provide specific services, such a distribution system does not generally bring about sufficient efficiency enhancing effects to counterbalance a significant reduction in intra-brand competition. Where appreciable anticompetitive effects occur, the benefit of the Block Exemption Regulation is likely to be withdrawn. In addition, the remainder of this section provides guidance for the assessment of selective distribution in individual cases which are not covered by the Block Exemption Regulation or in the case of cumulative effects resulting from parallel networks of selective distribution. 52   See for example judgment of the Court of First Instance in Case T- 88/92 Groupement d’achat Édouard Leclerc v Commission [1996] ECR II-1961. 53   See judgments of the Court of Justice in Case 3 1/80 L’Oréal v PVBA [1980] ECR 3775, paragraphs 15 and 16; Case 26/76 Metro I [1977] ECR 1875, paragraphs 20 and 21; Case 107/82 AEG [1983] ECR 3151, paragraph 35; and judgment of the Court of First Instance in Case T-19/91 Vichy v Commission [1992] ECR II- 415, paragraph 65. 54   See for example judgments of the Court of First Instance in Case T- 19/92 Groupement d’achat Edouard Leclerc v Commission [1996] ECR II-1851, paragraphs 112 to 123; Case T-88/92 Groupement d’achat Edouard Leclerc v Commission [1996] ECR II-1961, paragraphs 106 to 117; and the case law referred to in the preceding footnote.

308  appendix 3

(177) The market position of the supplier and its competitors is of central importance in assessing possible anticompetitive effects, as the loss of intra-brand competition can only be problematic if inter-brand competition is limited. The stronger the position of the supplier, the more problematic is the loss of intrabrand competition. Another important factor is the number of selective distribution networks present in the same market. Where selective distribution is applied by only one supplier on the market, quantitative selective distribution does not normally create net negative effects provided that the contract goods, having regard to their nature, require the use of a selective distribution system and on condition that the selection criteria applied are necessary to ensure efficient distribution of the goods in question. The reality, however, seems to be that selective distribution is often applied by a number of the suppliers on a given market. (178) The position of competitors can have a dual significance and plays in particular a role in case of a cumulative effect. Strong competitors will mean in general that the reduction in intra-brand competition is easily outweighed by sufficient inter-brand competition. However, when a majority of the main suppliers apply selective distribution, there will be a significant loss of intra-brand competition and possible foreclosure of certain types of distributors as well as an increased risk of collusion between those major suppliers. The risk of foreclosure of more efficient distributors has always been greater with selective distribution than with exclusive distribution, given the restriction on sales to non-authorised dealers in selective distribution. That restriction is designed to give selective distribution systems a closed character, making it impossible for non-authorised dealers to obtain supplies. Accordingly, selective distribution is particularly well suited to avoid pressure by price discounters (whether offline or online-only distributors) on the margins of the manufacturer, as well as on the margins of the authorised dealers. Foreclosure of such distribution formats, whether resulting from the cumulative application of selective distribution or from the application by a single supplier with a market share exceeding 30%, reduces the possibilities for consumers to take advantage of the specific benefits offered by these formats such as lower prices, more transparency and wider access. (179)  Where the Block Exemption Regulation applies to individual networks of selective distribution, withdrawal of the block exemption or dis-application of the Block Exemption Regulation may be considered in case of cumulative effects. However, a cumulative effect problem is unlikely to arise when the share of the market covered by selective distribution is below 50%. Also, no problem is likely to arise where the market coverage ratio exceeds 50%, but the aggregate market share of the five largest suppliers (CR5) is below 50%. Where both the CR5 and the share of the market covered by selective distribution exceed 50%, the assessment may vary depending on whether or not all five largest suppliers apply selective distribution. The stronger the position of the competitors which do not apply selective distribution, the less likely other distributors will be foreclosed. If all five largest suppliers apply selective distribution, competition concerns may arise with respect to those agreements in particular that apply quantitative selection criteria by

  Appendix 3  309

directly limiting the number of authorised dealers or that apply qualitative criteria, such as a requirement to have one or more brick-and-mortar shops or to provide specific services, which forecloses certain distribution formats. The conditions of Article 101(3) are in general unlikely to be fulfilled if the selective distribution systems at issue prevent access to the market by new distributors capable of adequately selling the products in question, especially price discounters or onlineonly distributors offering lower prices to consumers, thereby limiting distribution to the advantage of certain existing channels and to the detriment of final consumers. More indirect forms of quantitative selective distribution, resulting for instance from the combination of purely qualitative selection criteria with the requirement imposed on the dealers to achieve a minimum amount of annual purchases, are less likely to produce net negative effects, if such an amount does not represent a significant proportion of the dealer’s total turnover achieved with the type of products in question and it does not go beyond what is necessary for the supplier to recoup its relationship-specific investment and/or realise economies of scale in distribution. As regards individual contributions, a supplier with a market share of less than 5% is in general not considered to contribute significantly to a cumulative effect. (180) Entry barriers are mainly of interest in the case of foreclosure of the market to non-authorised dealers. In general, entry barriers will be considerable as selective distribution is usually applied by manufacturers of branded products. It will in general take time and considerable investment for excluded retailers to launch their own brands or obtain competitive supplies elsewhere. (181)  Buying power may increase the risk of collusion between dealers and thus appreciably change the analysis of possible anticompetitive effects of selective distribution. Foreclosure of the market to more efficient retailers may especially result where a strong dealer organisation imposes selection criteria on the supplier aimed at limiting distribution to the advantage of its members. (182)  Article 5(1)(c) of the Block Exemption Regulation provides that the supplier may not impose an obligation causing the authorised dealers, either directly or indirectly, not to sell the brands of particular competing suppliers. Such a condition aims specifically at avoiding horizontal collusion to exclude particular brands through the creation of a selective club of brands by the leading suppliers. That kind of obligation is unlikely to be exemptible when the CR5 is equal to or above 50%, unless none of the suppliers imposing such an obligation belongs to the five largest suppliers on the market. (183)  Foreclosure of other suppliers is normally not a problem as long as other suppliers can use the same distributors, that is, as long as the selective distribution system is not combined with single-branding. In the case of a dense network of authorised distributors or in the case of a cumulative effect, the combination of selective distribution and a non-compete obligation may pose a risk of foreclosure to other suppliers. In that case, the principles set out in section 2.1 on singlebranding apply. Where selective distribution is not combined with a non-compete obligation, foreclosure of the market to competing suppliers may still be a problem

310  appendix 3

where the leading suppliers apply not only purely qualitative selection criteria, but impose on their dealers certain additional obligations such as the obligation to reserve a minimum shelf space for their products or to ensure that the sales of their products by the dealer achieve a minimum percentage of the dealer’s total turn­ over. Such a problem is unlikely to arise if the share of the market covered by selective distribution is below 50% or, where this coverage ratio is exceeded, if the market share of the five largest suppliers is below 50%. (184)  Maturity of the market is important, as loss of intra-brand competition and possible foreclosure of suppliers or dealers may be a serious problem on a mature market but is less relevant on a market with growing demand, changing technologies and changing market positions. (185)  Selective distribution may be efficient when it leads to savings in logistical costs due to economies of scale in transport and that may occur irrespective of the nature of the product (paragraph (107)(g)). However, such an efficiency is usually only marginal in selective distribution systems. To help solve a free-rider problem between the distributors (paragraph (107)(a)) or to help create a brand image (paragraph (107)(i)), the nature of the product is very relevant. In general, the case is strongest for new products, complex products, products whose qualities are difficult to judge before consumption (so-called experience products) or whose qualities are difficult to judge even after consumption (so-called credence products). The combination of selective distribution with a location clause, protecting an appointed dealer against other appointed dealers opening up a shop in its vicinity, may in particular fulfil the conditions of Article 101(3) if the combination is indispensable to protect substantial and relationship-specific investments made by the authorised dealer (paragraph (107)(d)). (186) To ensure that the least anticompetitive restraint is chosen, it is relevant to see whether the same efficiencies can be obtained at a comparable cost by for instance service requirements alone. (187) Example of quantitative selective distribution On a market for consumer durables, the market leader (brand A) with a market share of 35%, sells its product to final consumers through a selective distribution network. There are several criteria for admission to the network: the shop must employ trained staff and provide presales services, there must be a specialised area in the shop devoted to the sales of the product and similar hi-tech products, and the shop is required to sell a wide range of models of the supplier and to display them in an attractive manner. Moreover, the number of admissible retailers in the network is directly limited through the establishment of a maximum number of retailers per number of inhabitants in each province or urban area. Manufacturer A has 6 competitors in that market. Its largest competitors, B, C and D, have market shares of respectively 25, 15 and 10%, whilst the other producers have smaller market shares. A is the only manufacturer to use selective distribution. The selective distributors of brand A always handle a few competing brands. However, competing brands are also widely sold in shops which are not member of A’s selective distribution network. Channels of distribution are various: for instance,

  Appendix 3  311

brands B and C are sold in most of A’s selected shops, but also in other shops providing a high-quality service and in hypermarkets. Brand D is mainly sold in highservice shops. Technology is evolving quite rapidly in this market, and the main suppliers maintain a strong quality image for their products through advertising. On that market, the coverage ratio of selective distribution is 35%. Inter-brand competition is not directly affected by the selective distribution system of A. Intrabrand competition for brand A may be reduced, but consumers have access to low-service/low-price retailers for brands B and C, which have a comparable quality image to brand A. Moreover, access to high-service retailers for other brands is not foreclosed, since there is no limitation on the capacity of selected distributors to sell competing brands, and the quantitative limitation on the number of retailers for brand A leaves other high-service retailers free to distribute competing brands. In this case, in view of the service requirements and the efficiencies these are likely to provide and the limited effect on intra-brand competition the conditions of Article 101(3) are likely to be fulfilled. (188) Example of selective distribution with cumulative effects On a market for a particular sports article, there are seven manufacturers, whose respective market shares are: 25%, 20%, 15%, 15%, 10%, 8% and 7%. The five largest manufacturers distribute their products through quantitative selective distribution, whilst the two smallest use different types of distribution systems, which results in a coverage ratio of selective distribution of 85%. The criteria for access to the selective distribution networks are remarkably uniform amongst manufacturers: the distributors are required to have one or more brick-and-mortar shops, those shops are required to have trained personnel and to provide presale services, there must be a specialised area in the shop devoted to the sales of the article and a minimum size for this area is specified. The shop is required to sell a wide range of the brand in question and to display the article in an attractive manner, the shop must be located in a commercial street, and that type of article must represent at least 30% of the total turnover of the shop. In general, the same dealer is appointed selective distributor for all five brands. The two brands which do not use selective distribution usually sell through less specialised retailers with lower service levels. The market is stable, both on the supply and on the demand side, and there is strong brand image and product differentiation. The five market leaders have strong brand images, acquired through advertising and sponsoring, whereas the two smaller manufacturers have a strategy of cheaper products, with no strong brand image. On that market, access by general price discounters and online-only distributors to the five leading brands is denied. Indeed, the requirement that this type of article represents at least 30% of the activity of the dealers and the criteria on presentation and presales services rule out most price discounters from the network of authorised dealers. The requirement to have one or more brick-and-mortar shops excludes online-only distributors from the network. As a consequence, consumers have no choice but to buy the five leading brands in high-service/high-price shops. This leads to reduced inter-brand competition between the five leading brands.

312  appendix 3

The fact that the two smallest brands can be bought in low-service/low-price shops does not compensate for this, because the brand image of the five market leaders is much better. Inter-brand competition is also limited through multiple dealership. Even though there exists some degree of intra-brand competition and the number of retailers is not directly limited, the criteria for admission are strict enough to lead to a small number of retailers for the five leading brands in each territory. The efficiencies associated with these quantitative selective distribution systems are low: the product is not very complex and does not justify a particularly high service. Unless the manufacturers can prove that there are clear efficiencies linked to their network of selective distribution, it is probable that the block exemption will have to be withdrawn because of its cumulative effects resulting in less choice and higher prices for consumers. 2.5 Franchising (189) Franchise agreements contain licences of intellectual property rights relating in particular to trademarks or signs and knowhow for the use and distribution of goods or services. In addition to the licence of IPRs, the franchisor usually provides the franchisee during the life of the agreement with commercial or technical assistance. The licence and the assistance are integral components of the business method being franchised. The franchisor is in general paid a franchise fee by the franchisee for the use of the particular business method. Franchising may enable the franchisor to establish, with limited investments, a uniform network for the distribution of its products. In addition to the provision of the business method, franchise agreements usually contain a combination of different vertical restraints concerning the products being distributed, in particular selective distribution and/or non-compete and/or exclusive distribution or weaker forms thereof. (190) The coverage by the Block Exemption Regulation of the licensing of IPRs contained in franchise agreements is dealt with in paragraphs (24) to (46). As for the vertical restraints on the purchase, sale and resale of goods and services within a franchising arrangement, such as selective distribution, non-compete obligations or exclusive distribution, the Block Exemption Regulation applies up to the 30% market share threshold.55 The guidance provided in respect of those types of restraints applies also to franchising, subject to the following two specific remarks: (a) The more important the transfer of knowhow, the more likely it is that the restraints create efficiencies and/or are indispensable to protect the knowhow and that the vertical restraints fulfil the conditions of Article 101(3); (b) A non-compete obligation on the goods or services purchased by the franchisee falls outside the scope of Article 101(1) where the obligation is 55

  See also paragraphs (86) to (95), in particular paragraph (92).

  Appendix 3  313

necessary to maintain the common identity and reputation of the franchised network. In such cases, the duration of the non-compete obligation is also irrelevant under Article 101(1), as long as it does not exceed the duration of the franchise agreement itself. (191) Example of franchising A manufacturer has developed a new format for selling sweets in so-called fun shops where the sweets can be coloured specially on demand from the consumer. The manufacturer of the sweets has also developed the machines to colour the sweets. The manufacturer also produces the colouring liquids. The quality and freshness of the liquid is of vital importance to producing good sweets. The manufacturer made a success of its sweets through a number of own retail outlets all operating under the same trade name and with the uniform fun image (style of layout of the shops, common advertising, etc). In order to expand sales the manufacturer started a franchising system. The franchisees are obliged to buy the sweets, liquid and colouring machine from the manufacturer, to have the same image and operate under the trade name, pay a franchise fee, contribute to common advertising and ensure the confidentiality of the operating manual prepared by the franchisor. In addition, the franchisees are only allowed to sell from the agreed premises, to sell to end-users or other franchisees and are not allowed to sell other sweets. The franchisor is obliged not to appoint another franchisee nor operate a retail outlet himself in a given contract territory. The franchisor is also under the obligation to update and further develop its products, the business outlook and the operating manual and make these improvements available to all retail franchisees. The franchise agreements are concluded for a duration of 10 years. Sweet retailers buy their sweets on a national market from either national producers that cater for national tastes or from wholesalers which import sweets from foreign producers in addition to selling products from national producers. On that market the franchisor’s products compete with other brands of sweets. The franchisor has a market share of 30% on the market for sweets sold to retailers. Competition comes from a number of national and international brands, sometimes produced by large diversified food companies. There are many potential points of sale of sweets in the form of tobacconists, general food retailers, cafeterias and specialised sweet shops. The franchisor’s market share of the market for machines for colouring food is below 10%. Most of the obligations contained in the franchise agreements can be deemed necessary to protect the intellectual property rights or maintain the common identity and reputation of the franchised network and fall outside Article 101(1). The restrictions on selling (contract territory and selective distribution) provide an incentive to the franchisees to invest in the colouring machine and the franchise concept and, if not necessary to, at least help maintain the common identity, thereby offsetting the loss of intra-brand competition. The non-compete clause excluding other brands of sweets from the shops for the full duration of the agreements does allow the franchisor to keep the outlets uniform and prevent

314  appendix 3

competitors from benefiting from its trade name. It does not lead to any serious foreclosure in view of the great number of potential outlets available to other sweet producers. The franchise agreements of this franchisor are likely to fulfil the conditions for exemption under Article 101(3) in as far as the obligations contained therein fall under Article 101(1). 2.6  Exclusive Supply (192)  Under the heading of exclusive supply fall those restrictions that have as their main element that the supplier is obliged or induced to sell the contract products only or mainly to one buyer, in general or for a particular use. Such restrictions may take the form of an exclusive supply obligation, restricting the supplier to sell to only one buyer for the purposes of resale or a particular use, but may for instance also take the form of quantity-forcing on the supplier, where incentives are agreed between the supplier and buyer which make the former concentrate its sales mainly with one buyer. For intermediate goods or services, exclusive supply is often referred to as industrial supply. (193) Exclusive supply is exempted by the Block Exemption Regulation where both the supplier’s and buyer’s market share does not exceed 30%, even if combined with other non-hardcore vertical restraints such as non-compete. The remainder of this section provides guidance for the assessment of exclusive supply in individual cases above the market share threshold. (194) The main competition risk of exclusive supply is anticompetitive fore­ closure of other buyers. There is a similarity with the possible effects of exclusive distribution, in particular when the exclusive distributor becomes the exclusive buyer for a whole market (see section 2.2, in particular paragraph (156)). The market share of the buyer on the upstream purchase market is obviously important for assessing the ability of the buyer to impose exclusive supply which forecloses other buyers from access to supplies. The importance of the buyer on the downstream market is, however, the factor which determines whether a competition problem may arise. If the buyer has no market power downstream, then no appreciable negative effects for consumers can be expected. Negative effects may arise when the market share of the buyer on the downstream supply market as well as the upstream purchase market exceeds 30%. Where the market share of the buyer on the upstream market does not exceed 30%, significant foreclosure effects may still result, especially when the market share of the buyer on its downstream market exceeds 30% and the exclusive supply relates to a particular use of the contract products. Where a company is dominant on the downstream market, any obligation to supply the products only or mainly to the dominant buyer may easily have significant anticompetitive effects. (195) It is not only the market position of the buyer on the upstream and downstream market that is important but also the extent to and the duration for which it applies an exclusive supply obligation. The higher the tied supply share, and the longer the duration of the exclusive supply, the more significant the

  Appendix 3  315

foreclosure is likely to be. Exclusive supply agreements shorter than five years entered into by non-dominant companies usually require a balancing of pro- and anticompetitive effects, while agreements lasting longer than five years are for most types of investments not considered necessary to achieve the claimed efficiencies or the efficiencies are not sufficient to outweigh the foreclosure effect of such long-term exclusive supply agreements. (196) The market position of the competing buyers on the upstream market is important as it is likely that competing buyers will be foreclosed for anticompetitive reasons, that is, to increase their costs, if they are significantly smaller than the foreclosing buyer. Foreclosure of competing buyers is not very likely where those competitors have similar buying power and can offer the suppliers similar sales possibilities. In such a case, foreclosure could only occur for potential entrants, which may not be able to secure supplies when a number of major buyers all enter into exclusive supply contracts with the majority of suppliers on the market. Such a cumulative effect may lead to withdrawal of the benefit of the Block Exemption Regulation. (197) Entry barriers at the supplier level are relevant to establishing whether there is real foreclosure. In as far as it is efficient for competing buyers to provide the goods or services themselves via upstream vertical integration, foreclosure is unlikely to be a real problem. However, there are often significant entry barriers. (198) Countervailing power of suppliers is relevant, as important suppliers will not easily allow themselves to be cut off from alternative buyers. Foreclosure is therefore mainly a risk in the case of weak suppliers and strong buyers. In the case of strong suppliers, the exclusive supply may be found in combination with noncompete obligations. The combination with non-compete obligations brings in the rules developed for single-branding. Where there are relationship-specific investments involved on both sides (hold-up problem) the combination of exclusive supply and non-compete obligations that is, reciprocal exclusivity in industrial supply agreements may often be justified, in particular below the level of dominance. (199) Lastly, the level of trade and the nature of the product are relevant for foreclosure. Anticompetitive foreclosure is less likely in the case of an intermediate product or where the product is homogeneous. Firstly, a foreclosed manufacturer that uses a certain input usually has more flexibility to respond to the demand of its customers than the wholesaler or retailer has in responding to the demand of the final consumer for whom brands may play an important role. Secondly, the loss of a possible source of supply matters less for the foreclosed buyers in the case of homogeneous products than in the case of a heterogeneous product with different grades and qualities. For final branded products or differentiated intermediate products where there are entry barriers, exclusive supply may have appreciable anticompetitive effects where the competing buyers are relatively small compared to the foreclosing buyer, even if the latter is not dominant on the downstream market. (200) Efficiencies can be expected in the case of a hold-up problem (paragraph (107)(d) and (107)(e)), and such efficiencies are more likely for intermediate

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products than for final products. Other efficiencies are less likely. Possible economies of scale in distribution (paragraph (107)(g)) do not seem likely to justify exclusive supply. (201) In the case of a hold-up problem and even more so in the case of economies of scale in distribution, quantity-forcing on the supplier, such as minimum supply requirements, could well be a less restrictive alternative. (202) Example of exclusive supply On a market for a certain type of components (intermediate product market) supplier A agrees with buyer B to develop, with its own knowhow and considerable investment in new machines and with the help of specifications supplied by buyer B, a different version of the component. B will have to make considerable investments to incorporate the new component. It is agreed that A will supply the new product only to buyer B for a period of five years from the date of first entry on the market. B is obliged to buy the new product only from A for the same period of five years. Both A and B can continue to sell and buy respectively other versions of the component elsewhere. The market share of buyer B on the upstream component market and on the downstream final goods market is 40%. The market share of the component supplier is 35%. There are two other component suppliers with around 20–25% market share and a number of small suppliers. Given the considerable investments, the agreement is likely to fulfil the conditions of Article 101(3) in view of the efficiencies and the limited foreclosure effect. Other buyers are foreclosed from a particular version of a product of a supplier with 35% market share and there are other component suppliers that could develop similar new products. The foreclosure of part of buyer B’s demand to other suppliers is limited to maximum 40% of the market. 2.7  Upfront Access Payments (203)  Upfront access payments are fixed fees that suppliers pay to distributors in the framework of a vertical relationship at the beginning of a relevant period, in order to get access to their distribution network and remunerate services provided to the suppliers by the retailers. This category includes various practices such as slotting allowances,56 the so-called pay-to-stay fees,57 payments to have access to a distributor’s promotion campaigns, etc. Upfront access payments are exempted under the Block Exemption Regulation when both the supplier’s and buyer’s market share does not exceed 30%. The remainder of this section provides guidance for the assessment of upfront access payments in individual cases above the market share threshold. (204)  Upfront access payments may sometimes result in anticompetitive foreclosure of other distributors if such payments induce the supplier to channel its products through only one or a limited number of distributors. A high fee may 56

  Fixed fees that manufacturers pay to retailers in order to get access to their shelf space.  Lump sum payments made to ensure the continued presence of an existing product on the shelf for some further period. 57

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make that a supplier wants to channel a substantial volume of its sales through this distributor in order to cover the costs of the fee. In such a case, upfront access payments may have the same downstream foreclosure effect as an exclusive supply type of obligation. The assessment of that negative effect is made by analogy to the assessment of exclusive supply obligations (in particular paragraphs (194) to (199)). (205) Exceptionally, upfront access payments may also result in anticompetitive foreclosure of other suppliers where the widespread use of upfront access payments increases barriers to entry for small entrants. The assessment of that possible negative effect is made by analogy to the assessment of single-branding obligations (in particular paragraphs (132) to (141)). (206) In addition to possible foreclosure effects, upfront access payments may soften competition and facilitate collusion between distributors. Upfront access payments are likely to increase the price charged by the supplier for the contract products since the supplier must cover the expense of those payments. Higher supply prices may reduce the incentive of the retailers to compete on price on the downstream market, while the profits of distributors are increased as a result of the access payments. Such reduction of competition between distributors through the cumulative use of upfront access payments normally requires the distribution market to be highly concentrated. (207)  However, the use of upfront access payments may in many cases contribute to an efficient allocation of shelf space for new products. Distributors often have less information than suppliers on the potential for success of new products to be introduced on the market and, as a result, the amount of products to be stocked may be suboptimal. Upfront access payments may be used to reduce this asymmetry in information between suppliers and distributors by explicitly allowing suppliers to compete for shelf space. The distributor may thus receive a signal of which products are most likely to be successful since a supplier would normally agree to pay an upfront access fee if it estimates a low probability of failure of the product introduction. (208)  Furthermore, due to the asymmetry in information mentioned in paragraph (207), suppliers may have incentives to free-ride on distributors’ promotional efforts in order to introduce suboptimal products. If a product is not successful, the distributors will pay part of the costs of the product failure. The use of upfront access fees may prevent such free-riding by shifting the risk of product failure back to the suppliers, thereby contributing to an optimal rate of product introductions. 2.8  Category Management Agreements (209) Category management agreements are agreements by which, within a distribution agreement, the distributor entrusts the supplier (the ‘category captain’) with the marketing of a category of products including in general not only the supplier’s products, but also the products of its competitors. The category

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captain may thus have an influence on for instance the product placement and product promotion in the shop and product selection for the shop. Category management agreements are exempted under the Block Exemption Regulation when both the supplier’s and buyer’s market share does not exceed 30%. The remainder of this section provides guidance for the assessment of category management agreements in individual cases above the market share threshold. (210)  While in most cases category management agreements will not be problematic, they may sometimes distort competition between suppliers, and finally result in anticompetitive foreclosure of other suppliers, where the category captain is able, due to its influence over the marketing decisions of the distributor, to limit or disadvantage the distribution of products of competing suppliers. While in most cases the distributor may not have an interest in limiting its choice of products, when the distributor also sells competing products under its own brand (private labels), the distributor may also have incentives to exclude certain suppliers, in particular intermediate range products. The assessment of such upstream foreclosure effect is made by analogy to the assessment of single-branding obligations (in particular paragraphs (132) to (141)) by addressing issues like the market coverage of these agreements, the market position of competing suppliers and the possible cumulative use of such agreements. (211) In addition, category management agreements may facilitate collusion between distributors when the same supplier serves as a category captain for all or most of the competing distributors on a market and provides these distributors with a common point of reference for their marketing decisions. (212) Category management may also facilitate collusion between suppliers through increased opportunities to exchange via retailers sensitive market information, such as for instance information related to future pricing, promotional plans or advertising campaigns.58 (213)  However, the use of category management agreements may also lead to efficiencies. Category management agreements may allow distributors to have access to the supplier’s marketing expertise for a certain group of products and to achieve economies of scale as they ensure that the optimal quantity of products is presented timely and directly on the shelves. As category management is based on customers’ habits, category management agreements may lead to higher customer satisfaction as they help to better meet demand expectations. In general, the higher the inter-brand competition and the lower consumers’ switching costs, the greater the economic benefits achieved through category management. 2.9 Tying (214) Tying refers to situations where customers that purchase one product (the tying product) are required also to purchase another distinct product (the tied 58  Direct information exchange between competitors is not covered by the Block Exemption Regulation, see Article 2(4) of that Regulation and paragraphs 27–28 of these Guidelines.

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product) from the same supplier or someone designated by the latter. Tying may constitute an abuse within the meaning of Article 102.59 Tying may also constitute a vertical restraint falling under Article 101 where it results in a single-branding type of obligation (see paragraphs (129) to (150)) for the tied product. Only the latter situation is dealt with in these Guidelines. (215)  Whether products will be considered as distinct depends on customer demand. Two products are distinct where, in the absence of the tying, a substantial number of customers would purchase or would have purchased the tying product without also buying the tied product from the same supplier, thereby allowing stand-alone production for both the tying and the tied product.60 Evidence that two products are distinct could include direct evidence that, when given a choice, customers purchase the tying and the tied products separately from different sources of supply, or indirect evidence, such as the presence on the market of undertakings specialised in the manufacture or sale of the tied product without the tying product,61 or evidence indicating that undertakings with little market power, particularly on competitive markets, tend not to tie or not to bundle such products. For instance, since customers want to buy shoes with laces and it is not practicable for distributors to lace new shoes with the laces of their choice, it has become commercial usage for shoe manufacturers to supply shoes with laces. Therefore, the sale of shoes with laces is not a tying practice. (216) Tying may lead to anticompetitive foreclosure effects on the tied market, the tying market, or both at the same time. The foreclosure effect depends on the tied percentage of total sales on the market of the tied product. On the question of what can be considered appreciable foreclosure under Article 101(1), the analysis for single-branding can be applied. Tying means that there is at least a form of quantity-forcing on the buyer in respect of the tied product. Where in addition a non-compete obligation is agreed in respect of the tied product, this increases the possible foreclosure effect on the market of the tied product. The tying may lead to less competition for customers interested in buying the tied product, but not the tying product. If there is not a sufficient number of customers that will buy the tied product alone to sustain competitors of the supplier on the tied market, the tying can lead to those customers facing higher prices. If the tied product is an important complementary product for customers of the tying product, a reduction of alternative suppliers of the tied product and hence a reduced availability of that product can make entry onto the tying market alone more difficult. (217) Tying may also directly lead to prices that are above the competitive level, especially in three situations. Firstly, if the tying and the tied product can be used 59   Judgment of the Court of Justice in Case C-333/94P Tetrapak v Commission [1996] ECR I-5951, paragraph 37. See also Communication from the Commission, Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive conduct by dominant undertakings, OJ C 45, 24.2.2009, 7. 60   Judgment of the Court of First Instance in Case T-201/04 Microsoft v Commission [2007] ECR II-3601, paragraphs 917, 921 and 922. 61   Judgment of the Court of First Instance in Case T-30/89 Hilti v Commission [1991] ECR II-1439, paragraph 67.

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in variable proportions as inputs to a production process, customers may react to an increase in price for the tying product by increasing their demand for the tied product while decreasing their demand for the tying product. By tying the two products the supplier may seek to avoid this substitution and as a result be able to raise its prices. Secondly, when the tying allows price discrimination according to the use the customer makes of the tying product, for example the tying of ink cartridges to the sale of photocopying machines (metering). Thirdly, when in the case of long-term contracts or in the case of after-markets with original equipment with a long replacement time, it becomes difficult for the customers to calculate the consequences of the tying. (218) Tying is exempted under the Block Exemption Regulation when the market share of the supplier, on both the market of the tied product and the market of the tying product, and the market share of the buyer, on the relevant upstream markets, do not exceed 30%. It may be combined with other vertical restraints, which are not hardcore restrictions under that Regulation, such as non-compete obligations or quantity-forcing in respect of the tying product, or exclusive sourcing. The remainder of this section provides guidance for the assessment of tying in individual cases above the market share threshold. (219) The market position of the supplier on the market of the tying product is obviously of central importance to assess possible anticompetitive effects. In general, this type of agreement is imposed by the supplier. The importance of the supplier on the market of the tying product is the main reason why a buyer may find it difficult to refuse a tying obligation. (220) The market position of the supplier’s competitors on the market of the tying product is important in assessing the supplier’s market power. As long as its competitors are sufficiently numerous and strong, no anticompetitive effects can be expected, as buyers have sufficient alternatives to purchase the tying product without the tied product, unless other suppliers are applying similar tying. In addition, entry barriers on the market of the tying product are relevant to establish the market position of the supplier. When tying is combined with a non-compete obligation in respect of the tying product, this considerably strengthens the position of the supplier. (221)  Buying power is relevant, as important buyers will not easily be forced to accept tying without obtaining at least part of the possible efficiencies. Tying not based on efficiency is therefore mainly a risk where buyers do not have significant buying power. (222)  Where appreciable anticompetitive effects are established, the question whether the conditions of Article 101(3) are fulfilled arises. Tying obligations may help to produce efficiencies arising from joint production or joint distribution. Where the tied product is not produced by the supplier, an efficiency may also arise from the supplier buying large quantities of the tied product. For tying to fulfil the conditions of Article 101(3), it must, however, be shown that at least part of these cost reductions are passed on to the consumer, which is normally not the case when the retailer is able to obtain, on a regular basis, supplies of the same or equivalent

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products on the same or better conditions than those offered by the supplier which applies the tying practice. Another efficiency may exist where tying helps to ensure a certain uniformity and quality standardisation (see paragraph (107)(i)). However, it needs to be demonstrated that the positive effects cannot be realised equally efficiently by requiring the buyer to use or resell products satisfying minimum quality standards, without requiring the buyer to purchase these from the supplier or someone designated by the latter. The requirements concerning minimum quality standards would not normally fall within the scope of Article 101(1). Where the supplier of the tying product imposes on the buyer the suppliers from which the buyer must purchase the tied product, for instance because the formulation of minimum quality standards is not possible, this may also fall outside the scope of Article 101(1), especially where the supplier of the tying product does not derive a direct (financial) benefit from designating the suppliers of the tied product. 2.10  Resale Price Restrictions (223)  As explained in section III.3, resale price maintenance (RPM), that is, agreements or concerted practices having as their direct or indirect object the establishment of a fixed or minimum resale price or a fixed or minimum price level to be observed by the buyer, are treated as a hardcore restriction. Where an agreement includes RPM, that agreement is presumed to restrict competition and thus to fall within Article 101(1). It also gives rise to the presumption that the agreement is unlikely to fulfil the conditions of Article 101(3), for which reason the block exemption does not apply. However, undertakings have the possibility to plead an efficiency defence under Article 101(3) in an individual case. It is incumbent on the parties to substantiate that likely efficiencies result from including RPM in their agreement and demonstrate that all the conditions of Article 101(3) are fulfilled. It then falls to the Commission to effectively assess the likely negative effects on competition and consumers before deciding whether the conditions of Article 101(3) are fulfilled. (224) RPM may restrict competition in a number of ways. Firstly, RPM may facilitate collusion between suppliers by enhancing price transparency on the market, thereby making it easier to detect whether a supplier deviates from the collusive equilibrium by cutting its price. RPM also undermines the incentive for the supplier to cut its price to its distributors, as the fixed resale price will prevent it from benefiting from expanded sales. Such a negative effect is particularly plausible where the market is prone to collusive outcomes, for instance if the manufacturers form a tight oligopoly, and a significant part of the market is covered by RPM agreements. Second, by eliminating intra-brand price competition, RPM may also facilitate collusion between the buyers, that is, at the distribution level. Strong or well organised distributors may be able to force or convince one or more suppliers to fix their resale price above the competitive level and thereby help them to reach or stabilise a collusive equilibrium. The resulting loss of price competition seems especially problematic when the RPM is inspired by the buyers, whose

322  appendix 3

collective horizontal interests can be expected to work out negatively for consumers. Third, RPM may more generally soften competition between manufacturers and/or between retailers, in particular when manufacturers use the same distributors to distribute their products and RPM is applied by all or many of them. Fourth, the immediate effect of RPM will be that all or certain distributors are prevented from lowering their sales price for that particular brand. In other words, the direct effect of RPM is a price increase. Fifth, RPM may lower the pressure on the margin of the manufacturer, in particular where the manufacturer has a commitment problem, that is, where it has an interest in lowering the price charged to subsequent distributors. In such a situation, the manufacturer may prefer to agree to RPM, so as to help it to commit not to lower the price for subsequent distributors and to reduce the pressure on its own margin. Sixth, RPM may be implemented by a manufacturer with market power to foreclose smaller rivals. The increased margin that RPM may offer distributors, may entice the latter to favour the particular brand over rival brands when advising customers, even where such advice is not in the interest of these customers, or not to sell these rival brands at all. Lastly, RPM may reduce dynamism and innovation at the distribution level. By preventing price competition between different distributors, RPM may prevent more efficient retailers from entering the market or acquiring sufficient scale with low prices. It also may prevent or hinder the entry and expansion of distribution formats based on low prices, such as price discounters. (225)  However, RPM may not only restrict competition but may also, in particular where it is supplier driven, lead to efficiencies, which will be assessed under Article 101(3). Most notably, where a manufacturer introduces a new product, RPM may be helpful during the introductory period of expanding demand to induce distributors to better take into account the manufacturer’s interest to promote the product. RPM may provide the distributors with the means to increase sales efforts and if the distributors on this market are under competitive pressure this may induce them to expand overall demand for the product and make the launch of the product a success, also for the benefit of consumers.62 Similarly, fixed resale prices, and not just maximum resale prices, may be necessary to organise in a franchise system or similar distribution system applying a uniform distribution format a coordinated short-term low-price campaign (2 to 6 weeks in most cases) which will also benefit the consumers. In some situations, the extra margin provided by RPM may allow retailers to provide (additional) presales services, in particular in case of experience or complex products. If enough customers take advantage from such services to make their choice but then purchase at a lower price with retailers that do not provide such services (and hence do not incur these costs), high-service retailers may reduce or eliminate these services that enhance the demand for the supplier’s product. RPM may help to prevent such free-riding at the distribution level. The parties will have to convincingly demonstrate that the 62  This assumes that it is not practical for the supplier to impose on all buyers by contract effective promotion requirements. See also paragraph 107(a).

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RPM agreement can be expected to not only provide the means but also the incentive to overcome possible free-riding between retailers on these services and that the presales services overall benefit consumers as part of the demonstration that all the conditions of Article 101(3) are fulfilled. (226) The practice of recommending a resale price to a reseller or requiring the reseller to respect a maximum resale price is covered by the Block Exemption Regulation when the market share of each of the parties to the agreement does not exceed the 30% threshold, provided it does not amount to a minimum or fixed sale price as a result of pressure from, or incentives offered by, any of the parties. The remainder of this section provides guidance for the assessment of maximum or recommended prices above the market share threshold and for cases of withdrawal of the block exemption. (227) The possible competition risk of maximum and recommended prices is that they will work as a focal point for the resellers and might be followed by most or all of them and/or that maximum or recommended prices may soften competition or facilitate collusion between suppliers. (228) An important factor for assessing possible anticompetitive effects of maximum or recommended resale prices is the market position of the supplier. The stronger the market position of the supplier, the higher the risk that a maximum resale price or a recommended resale price leads to a more or less uniform application of that price level by the resellers, because they may use it as a focal point. They may find it difficult to deviate from what they perceive to be the preferred resale price proposed by such an important supplier on the market. (229)  Where appreciable anticompetitive effects are established for maximum or recommended resale prices, the question of a possible exemption under Article 101(3) arises. For maximum resale prices, the efficiency described in paragraph (107)(f) (avoiding double marginalisation) may be particularly relevant. A maximum resale price may also help to ensure that the brand in question competes more forcefully with other brands, including own-label products, distributed by the same distributor.

Appendix 4 Council Directive 86/653 on Self-Employed Commercial Agents Council Directive of 18 December 1986 on the coordination of the laws of the Member States relating to self-employed commercial agents (86/653/EEC) OJ L 382, 31/12/1986, 17–21 THE COUNCIL OF THE EUROPEAN COMMUNITIES, Having regard to the Treaty establishing the European Economic Community, and in particular Articles 57(2) and 100 thereof, Having regard to the proposal from the Commission,1 Having regard to the opinion of the European Parliament,2 Having regard to the opinion of the Economic and Social Committee,3 Whereas the restrictions on the freedom of establishment and the freedom to provide services in respect of activities of intermediaries in commerce, industry and small craft industries were abolished by Directive 64/224/EEC;4 Whereas the differences in national laws concerning commercial representation substantially affect the conditions of competition and the carrying-on of that activity within the Community and are detrimental both to the protection available to commercial agents vis-à-vis their principals and to the security of commercial transactions; whereas moreover those differences are such as to inhibit substantially the conclusion and operation of commercial representation contracts where principal and commercial agents are established in different Member States; Whereas trade in goods between Member States should be carried on under conditions which are similar to those of a single market, and this necessitates approximation of the legal systems of the Member States to the extent required for the proper functioning of the common market; whereas in this regard the rules concerning conflict of laws do not, in the matter of commercial representation, remove the inconsistencies referred to above, nor would they even if they were made uniform, and accordingly the proposed harmonization is necessary notwithstanding the existence of those rules; Whereas in this regard the legal relationship between commercial agent and principal must be given priority; 1

  OJ No C 13, 18.1.1977, 2; OJ No C 56, 2.3.1979, 5.   OJ No C 239, 9.10.1978, 17. 3   OJ No C 59, 8.03.1978, 31. 4   OJ No 56, 4.4.1964, 869/64. 2

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Whereas it is appropriate to be guided by the principles of Article 117 of the Treaty and to maintain improvements already made, when harmonizing the laws of the Member States relating to commercial agents; Whereas additional transitional periods should be allowed for certain Member States which have to make a particular effort to adapt their regulations, especially those concerning indemnity for termination of contract between the principal and the commercial agent, to the requirements of this Directive, HAS ADOPTED THIS DIRECTIVE: Chapter I:  Scope Article 1 1. The harmonisation measures prescribed by this Directive shall apply to the laws, regulations and administrative provisions of the Member States governing the relations between commercial agents and their principals. 2. For the purposes of this Directive, ‘commercial agent’ shall mean a selfemployed intermediary who has continuing authority to negotiate the sale or the purchase of goods on behalf of another person, hereinafter called the ‘principal’, or to negotiate and conclude such transactions on behalf of and in the name of that principal. 3.  A commercial agent shall be understood within the meaning of this Directive as not including in particular: — a person who, in his capacity as an officer, is empowered to enter into commitments binding on a company or association, — a partner who is lawfully authorized to enter into commitments binding on his partners, — a receiver, a receiver and manager, a liquidator or a trustee in bankruptcy. Article 2 1. This Directive shall not apply to: — commercial agents whose activities are unpaid, — commercial agents when they operate on commodity exchanges or in the commodity market, or — the body known is the Crown Agents for Overseas Governments and Administrations, as set up under the Crown Agents Act 1979 in the United Kingdom, or its subsidiaries.

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2. Each of the Member States shall have the right to provide that the Directive shall not apply to those persons whose activities as commercial agents are considered secondary by the law of that Member State. Chapter II: Rights and Obligations Article 3 1. In performing has activities a commercial agent must look after his principal’s interests and act dutifully and in good faith. 2. In particular, a commercial agent must: (a) make proper efforts to negotiate and, where appropriate, conclude the transactions he is instructed to take care of; (b) communicate to his principal all the necessary information available to him; (c) comply with reasonable instructions given by his principal. Article 4 1. In his relations with his commercial agent a principal must act dutifully and in good faith. 2.  A principal must in particular: (a) provide his commercial agent with the necessary documentation relating to the goods concerned; (b) obtain for his commercial agent the information necessary for the performance of the agency contract, and in particular notify the commercial agent within a reasonable period once he anticipates that the volume of commercial transactions will be significantly lower than that which the commercial agent could normally have expected. 3.  A principal must, in addition, inform the commercial agent within a reasonable period of his acceptance, refusal, and of any non-execution of a commercial transaction which the commercial agent has procured for the principal. Article 5 The parties may not derogate from the provisions of Articles 3 and 4.

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Chapter III: Remuneration Article 6 1. In the absence of any agreement on this matter between the parties, and without prejudice to the application of the compulsory provisions of the Member States concerning the level of remuneration, a commercial agent shall be entitled to the remuneration that commercial agents appointed for the goods forming the subject of his agency contract are customarily allowed in the place where he carries on his activities. If there is no such customary practice a commercial agent shall be entitled to reasonable remuneration taking into account all the aspects of the transaction. 2.  Any part of the remuneration which varies with the number or value of business transactions shall be deemed to be commission within the meaning of this Directive. 3.  Articles 7 to 12 shall not apply if the commercial agent is not remunerated wholly or in part by commission. Article 7 1.  A commercial agent shall be entitled to commission on commercial transactions concluded during the period covered by the agency contract: (a) where the transaction has been concluded as a result of his action; or (b) where the transaction is concluded with a third party whom he has previously acquired as a customer for transactions of the same kind. 2.  A commercial agent shall also be entitled to commission on transactions concluded during the period covered by the agency contract: — either where he is entrusted with a specific geographical area or group of customers, — or where he has an exclusive right to a specific geographical area or group of customers, and where the transaction has been entered into with a customer belonging to that area or group. Member State shall include in their legislation one of the possibilities referred to in the above two indents. Article 8 A commercial agent shall be entitled to commission on commercial transactions concluded after the agency contract has terminated: (a) if the transaction is mainly attributable to the commercial agent’s efforts during the period covered by the agency contract and if the transaction

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was entered into within a reasonable period after that contract terminated; or (b) if, in accordance with the conditions mentioned in Article 7, the order of the third party reached the principal or the commercial agent before the agency contract terminated. Article 9 A commercial agent shall not be entitled to the commission referred to in Article 7, if that commission is payable, pursuant to Article 8, to the previous commercial agent, unless it is equitable because of the circumstances for the commission to be shared between the commercial agents. Article 10 1. The commission shall become due as soon as and to the extent that one of the following circumstances obtains: (a) the principal has executed the transaction; or (b) the principal should, according to his agreement with the third party, have executed the transaction; or (c) the third party has executed the transaction. 2. The commission shall become due at the latest when the third party has executed his part of the transaction or should have done so if the principal had executed his part of the transaction, as he should have. 3. The commission shall be paid not later than on the last day of the month following the quarter in which it became due. 4.  Agreements to derogate from paragraphs 2 and 3 to the detriment of the commercial agent shall not be permitted. Article 11 1. The right to commission can be extinguished only if and to the extent that: — it is established that the contract between the third party and the principal will not be executed, and — that face is due to a reason for which the principal is not to blame. 2.  Any commission which the commercial agent has already received shall be refunded if the right to it is extinguished. 3.  Agreements to derogate from paragraph 1 to the detriment of the commercial agent shall not be permitted.

  Appendix 4  329

Article 12 1. The principal shall supply his commercial agent with a statement of the commission due, not later than the last day of the month following the quarter in which the commission has become due. This statement shall set out the main components used in calculating the amount of commission. 2.  A commercial agent shall be entitled to demand that he be provided with all the information, and in particular an extract from the books, which is available to his principal and which he needs in order to check the amount of the commission due to him. 3.  Agreements to derogate from paragraphs 1 and 2 to the detriment of the commercial agent shall not be permitted. 4. This Directive shall not conflict with the internal provisions of Member States which recognize the right of a commercial agent to inspect a principal’s books. Chapter IV: Conclusion and Termination of the Agency Contract Article 13 1. Each party shall be entitled to receive from the other on request a signed written document setting out the terms of the agency contract including any terms subsequently agreed. Waiver of this right shall not be permitted. 2. Notwithstanding paragraph 1 a Member State may provide that an agency contract shall not be valid unless evidenced in writing. Article 14 An agency contract for a fixed period which continues to be performed by both parties after that period has expired shall be deemed to be converted into an agency contract for an indefinite period. Article 15 1.  Where an agency contract is concluded for an indefinite period either party may terminate it by notice. 2. The period of notice shall be one month for the first year of the contract, two months for the second year commenced, and three months for the third year commenced and subsequent years. The parties may not agree on shorter periods of notice. 3.  Member States may fix the period of notice at four months for the fourth year of the contract, five months for the fifth year and six months for the sixth and subsequent years. They may decide that the parties may not agree to shorter periods.

330  appendix 4

4. If the parties agree on longer periods than those laid down in paragraphs 2 and 3, the period of notice to be observed by the principal must not be shorter than that to be observed by the commercial agent. 5.  Unless otherwise agreed by the parties, the end of the period of notice must coincide with the end of a calendar month. 6. The provision of this Article shall apply to an agency contract for a fixed period where it is converted under Article 14 into an agency contract for an indefinite period, subject to the proviso that the earlier fixed period must be taken into account in the calculation of the period of notice. Article 16 Nothing in this Directive shall affect the application of the law of the Member States where the latter provides for the immediate termination of the agency contract: (a) because of the failure of one party to carry out all or part of his obligations; (b) where exceptional circumstances arise. Article 17 1.  Member States shall take the measures necessary to ensure that the commercial agent is, after termination of the agency contract, indemnified in accordance with paragraph 2 or compensated for damage in accordance with paragraph 3. 2.  (a) The commercial agent shall be entitled to an indemnity if and to the extent that: — he has brought the principal new customers or has significantly increased the volume of business with existing customers and the principal continues to derive substantial benefits from the business with such customers, and — the payment of this indemnity is equitable having regard to all the circumstances and, in particular, the commission lost by the commercial agent on the business transacted with such customers. Member States may provide for such circumstances also to include the application or otherwise of a restraint of trade clause, within the meaning of Article 20; (b) The amount of the indemnity may not exceed a figure equivalent to an indemnity for one year calculated from the commercial agent’s average annual remuneration over the preceding five years and if the contract goes back less than five years the indemnity shall be calculated on the average for the period in question; (c) The grant of such an indemnity shall not prevent the commercial agent from seeking damages.

  Appendix 4  331

3. The commercial agent shall be entitled to compensation for the damage he suffers as a result of the termination of his relations with the principal. Such damage shall be deemed to occur particularly when the termination takes place in circumstances: — depriving the commercial agent of the commission which proper performance of the agency contract would have procured him whilst providing the principal with substantial benefits linked to the commercial agent’s activities, — and/or which have not enabled the commercial agent to amortize the costs and expenses that he had incurred for the performance of the agency contract on the principal’s advice. 4. Entitlement to the indemnity as provided for in paragraph 2 or to compensation for damage as provided for under paragraph 3, shall also arise where the agency contract is terminated as a result of the commercial agent’s death. 5. The commercial agent shall lose his entitlement to the indemnity in the instances provided for in paragraph 2 or to compensation for damage in the instances provided for in paragraph 3, if within one year following termination of the contract he has not notified the principal that he intends pursuing his entitlement. 6. The Commission shall submit to the Council, within eight years following the date of notification of this Directive, a report on the implementation of this Article, and shall if necessary submit to it proposals for amendments. Article 18 The indemnity or compensation referred to in Article 17 shall not be payable: (a) where the principal has terminated the agency contract because of default attributable to the commercial agent which would justify immediate termination of the agency contract under national law; (b) where the commercial agent has terminated the agency contract, unless such termination is justified by circumstances attributable to the principal or on grounds of age, infirmity or illness of the commercial agent in consequence of which he cannot reasonably be required to continue his activities; (c) where, with the agreement of the principal, the commercial agent assigns his rights and duties under the agency contract to another person. Article 19 The parties may not derogate from Articles 17 and 18 to the detriment of the commercial agent before the agency contract expires.

332  appendix 4

Article 20 1. For the purposes of this Directive an agreement restricting the business activities of a commercial agent following termination of the agency contract is hereinafter referred to as a restraint of trade clause. 2.  A restraint of trade clause shall be valid only if and to the extent that: (a) it is concluded in writing; and (b) it relates to the geographical area or the group of customers and the geographical area entrusted to the commercial agent and to the kind of goods covered by his agency under the contract. 3.  A restraint of trade clause shall be valid for not more than two years after termination of the agency contract. 4. This Article shall not affect provisions of national law which impose other restrictions on the validity or enforceability of restraint of trade clauses or which enable the courts to reduce the obligations on the parties resulting from such an agreement. Chapter V:  General and final provisions Article 21 Nothing in this Directive shall require a Member State to provide for the disclosure of information where such disclosure would be contrary to public policy. Article 22 1.  Member States shall bring into force the provisions necessary to comply with this Directive before 1 January 1990. They shall for with inform the Commission thereof. Such provisions shall apply at least to contracts concluded after their entry into force. They shall apply to contracts in operation by 1 January 1994 at the latest. 2.  As from the notification of this Directive, Member States shall communicate to the Commission the main laws, regulations and administrative provisions which they adopt in the field governed by this Directive. 3.  However, with regard to Ireland and the United Kingdom, 1 January 1990 referred to in paragraph 1 shall be replaced by 1 January 1994. With regard to Italy, 1 January 1990 shall be replaced by 1 January 1993 in the case of the obligations deriving from Article 17. Article 23 This Directive is addressed to the Member States.

  Appendix 4  333

Done at Brussels, 18 December 1986. For the Council The President M. JOPLING

Index absolute export bans  75 abuse of dominance see dominance abuse advertising obligations  96, 142, 189, 191 Advisory Committee on Restrictive Practices and Dominant Positions  60 Advocate General’s opinion  9 after-sales provision obligation  96 agency  26, 202–22 advantages 203 block exemption  213–14 collusion 213 commercial see commercial agents concept 204–5 definition 203 Directive 204 exclusivity 211–12 exemption criteria (Art 101(3))  214 financial risk  205–8 categories 206–8 third category  207–8, 211 Guidelines 204 independent business activity  210–11 independent trader, distinction  205 indirect fulfilment  208, 211 infringement 211–13 integration criterion  208–10 key texts  202–3 legal benefits  205–11 non-agency agreements  213 non-compete clauses  211–12 post-termination 214 principal/agent relationship  203 restrictions 203–4 agreements distribution see distribution agreements exclusive see exclusive distribution horizontal distribution agreements  21, 75, 123–5 of minor importance  32 scope 22–3 selective see selective distribution simple/complex 23 unilateral conduct  23, 133–4 vertical see vertical distribution agreements void, declaration to be  33–4 anticompetitive object/effect, requirement  30–3 agreements of minor importance  32 ancillary restrictions  32–3 background 30 categories of restrictions  33

effect restrictions  31 object restrictions  30–1 Antitrust Reports (CMLR)  11 artistic copyright licence agreements  99 associations of goods retailers  104–5 beer distribution  122 blacklisted clauses see hardcore restrictions block exemption  21, 72n, 75–6, 97–114 agency 213–14 agreements between competitors 99–100 outside exemption 98 basic principle  97–8 black list clauses  105, 224, 226 dis-application 114 dominance abuse and  125 duration 112–13 franchising see under franchising goods retailers’ associations  104–5 individual exemption and  115 intellectual property see under intellectual property rights legal framework review  224–6 market share calculation 101–2 cap on  98, 100 definitions of market  100–1 geographic market 101 thresholds  100–2, 225 motor vehicles see under motor vehicle distribution agreements non-compete clauses see under non-compete clauses non-exhaustive list  98–9 prohibited clauses see hardcore restrictions review of law  224–6 scope 98–100 selective distribution see under selective distribution, exemption technology transfer block exemption  99 third country distribution  100 tying see under tying practices Vertical Restraints Block Exemption Regulation 330/2010  98, Appendix 2 withdrawal 113–14 book prices  88–9, 118 bottling agreements  99 branded/non-branded goods  77, 80–1 bundling practices  44

336  index car industry see motor vehicle distribution agreements category management individual exemption  123 retailer power  229 vertical distribution agreements  95–6 Charter of Fundamental Rights  9 china tableware/ornaments  138 clocks 138 CMLR (Common Market Law Reports)  11 commercial agents  214–22 basic protection  214–15 commission 216–17 information 217 compensation 218–20 contracts, conclusion/termination  217–18 definition 215–16 Directive  214–15, Appendix 4 direct effect 221–2 national implementation measures  220–1 indemnification 218–19 post-term restraint clause  220 remuneration 216–17 rights/obligations 216 see also agency Commission see European Commission Common Market Law Reports (CMLR)  11 competition law see EU competition law complaints to Commission see under European Commission complete ranges, obligation to stock  90 concerted practices  24–5 cosmetics  139, 151 Council of Ministers  2 Court of Justice of the European Union  4 cross-border trade, distribution law  17 cross-supplies 145–6 damages decentralised system  233–5 EU competition law  54 national enforcement  54 passing-on defence  234 public law enforcement, as alternative  234n rarity 233–4 unattractiveness 234–5 dealers, appointment  143 decisions by associations  24 EC see under European Commission dental supplies  138 direct effect  11–13 basic principle  11–12 directives 13 regulations 12 treaty provisions  12 directives 7–8 direct effect  13

discriminatory pricing practices  22 distribution agreements agency distribution  72 basic elements  71–3 car industry see motor vehicle distribution agreements competition law and  73–5 dual distribution agreements  103 exclusive see exclusive distribution franchising arrangements  72–3 Guidelines  73, 74 horizontal distribution agreements  21, 75, 123–5 internet see internet distribution/sales joint distribution agreements  124–5 key texts  70–1 motor vehicle see motor vehicle distribution agreements object restrictions  31 in practice  75 selective see selective distribution vertical see vertical distribution agreements see also agreements distribution law see EU distribution law dominance abuse  38–46 abuse, meaning of  42 abusive practices  42–6 Advisory Committee on Restrictive Practices and Dominant Positions  60 barriers to entry  41 basic issues  38–40 block exemption and  125 bundling practices  44 categories of abuse  42–3 Commission enforcement priorities  226–7 conditional rebates  43–4, 227 discrimination 46 dominance, meaning of  40–1 enforcement priorities  226–7 excessive pricing  46 exclusive supply  43–4 exemptions 43 formalistic approach  39–40 Guidance 39 internal market  41–2 market share thresholds  41 meaning of abuse  42 meaning of dominance  40–1 predatory pricing  22, 43 price squeeze  46 refusal to honour guarantee  46 refusal to supply  45 structure of market  41 TFEU Article 102  38–9 tying see under tying practices double marginalisation  118 dual distribution agreements  103

  index  337 EC (European Community), Treaty  1 EC-US Cooperation Agreement  68 ECHR (European Convention on Human Rights) 9 ECJ see European Court of Justice ECN (European Competition Network)  233 EEA (European Economic Area) Agreement  47, 67–8 EEC (European Economic Community)  1n effect restrictions  31 EGC see European General Court EGC (European General Court)  4–6 electronic equipment  138 English clauses  94 EU see European Union EU competition law agreements see agreements basic provisions  21–2 complaints to Commission see under European Commission concerted practices  24–5 damages 54 decisions by associations  24 distribution see EU distribution law dominance see dominance abuse economic effects-based approach  223–4, 235 enforcement see European Commission extraterritorial application  46–7 fundamental rights  9 institutional roles  50–5 international agreements  47, 67–8 key texts  20 market definition  26–7 modernisation  49, 232–3 procedural issues  49–50 prohibitions 22 exemption see exemptions from competition law restrictions see anticompetitive object/effect, requirement trade between member states, effect on  28–30 undertakings  25–6, 40 see also national competition authorities EU distribution law  15–17, 223–7 binding/non-binding legislation  16–17 competition law and  15 consultative mechanisms  16 cross-border trade  17 economic effects-based approach  223–4, 235 free movement of goods and  15–16 self-regulation 16 vertical restraints policy review  224–6 EU law fundamental rights  9 general principles  9–10 national law and  11–13 official texts  10–11 supremacy 13–14

see also sources of law European Commission  1n, 2–3 behavioural/structural remedies  60–1 commitments 63 complaints to factors 65–6 formal 66 obligation to follow up  66–7 rules  66 confidentiality 58 decisions  8, 60–3 behavioural/structural remedies  60–1 exemption decisions 223 informal/formal  60 infringement decisions 60–1 Official Journal notices  60 public interest guidance  64 review/appeals  62 statement of objections  60 enforcement powers  3, 50–1 fines  60, 61–2 aggravating/mitigating circumstances  61 basic amount 61 highest  62 imposition period 60 for procedural infringements  62 formal/informal guidance  64–5 application for 65 guidance, formal/informal  64–5 hearings 59 informal guidance  64–5 inspections 56–8 circumstances 56–7 complainants’ access to files  58 officials’ powers 57 record of 57–8 interim measures  62–3 investigations 55–6 legal professional privilege  59 Official Journal notices  60 power to take statements  58 private parties and  65–7 requests for information  56 third parties’ access to files  58 European Community (EC)  1 European Competition Network (ECN)  233 European Convention on Human Rights (ECHR) 9 European Council  2 European Court of Justice (ECJ)  4–6 background 4 competition law enforcement  51–2 court reports  10–11 infringement proceedings  5 judgments 8–9 judicial review  4–5 member states  5 preliminary ruling  5–6

338  index European Court of Justice (ECJ) (cont.): preliminary rulings for NCAs  52 structure 4 European Court Reports  10–11 European Economic Area (EEA) Agreement  47, 67–8 European Economic Community (EEC)  1n European General Court (EGC)  4–6 background 4 competition law enforcement  51–2 court 10–11 judgments 8–9 judicial review  4–5 private parties  5 structure 4 European Parliament  3–4 European Union (EU) background 1 institutions 2–6 member states  1 official languages  1 pillars 1 sources see sources of law exclusive customer allocation  121 exclusive distribution  21, 72, 78–81 basic agreement  78 block exemption  78–81 factors 80 concerns about  78 individual exemption  119–20 as infringement  78–9 internet selling  108 national networks  81 in practice  81 suppliers  78, 81 exclusive sourcing individual exemption  121–2 vertical distribution agreements  94 exclusive supply individual exemption  121 vertical distribution agreements  81 exclusively allocated territory  106–8 active sales ban  107 active/passive sales, distinction  106, 107 basic exemption  106 distributor’s non-exemption obligations 107–8 internet sales see internet sales joint exclusivity  106 partial exclusivity  106–7 exemption block exemptions see block exemption consumers’ benefits  36 elimination of competition  36–7 four requirements (Art 101(3))  34–7 indispensability 36 individual see individual exemption procedural changes  38

production/distribution/technical/economic benefits 35 export restrictions  81–5 indirect restrictions  82, 83–4 as infringement  81–3 nature of restriction  82 new products/markets  85 parallel trade  84–5, 95 fidelity rebate schemes  22 fixed retail price maintenance  87 fixed/minimum resale prices franchising 200 hardcore clauses  105 resale price-fixing  87–8 franchising  21, 72–3, 174–200 accounts 190 advance orders, timetable  190 advertising obligations  189, 191 assigning benefit without consent  184 assignment of franchise  198–9 block exemption  192–9 withdrawal/dis-application 199 business format  176 business/trading methods  185 competition, clauses irrelevant to  191 confidentiality obligations  182–3 corporation forming  191 definitions  175, 176 end-users, sale to  189–90, 200 EU law and  176–7 extended use  176n favourable treatment  177–8 fixed price-fixing  200 franchisee’s obligations  185–91 independent status  191 individual exemption  199–200 industrial property rights  185–6 infringement 178–82 insurance cover  191 intellectual property rights  193, 197 key texts  174–5 knowhow assistance and 177–8 ceasing to qualify  197 definition 196 description 196 non-patented 196 obligation 185–6 protection 182–4 requirements 196–7 significant and useful  196 testing/experience  196 location exploitation  186–7 market definition/market share  194, 200 master agreements  197 name and address, indication on product  191

  index  339 network’s identity/reputation  184–91 non-compete clauses  182–4, 195 post-termination clauses  184, 195–6 time limits  183–4 non-compete obligation  187–9 non-infringement criteria  182 other franchisees, sale to  189–90, 200 outlet inspection  190 operation 186 restrictions  200 Pronuptia judgment  180–2 recommended prices  190 Regulation 175–6 renewal terms and conditions  191 reports 190 royalties 191 sale of outlet to third party  184 selection freedom  185 selective distribution  197–8 separate markets  200 service franchises  183, 188 stock holding, timetable  190 territorial exclusivity  178–80 trade marks/trade names  186, 188–9, 190 trademarks/trade names  186, 190 in US  176 free movement of goods, distribution law and 15–16 free-riding practices  119, 229–30 general principles of law  9–10 geographic market  26, 27 goods retailers’ associations  104–5 grey goods  229 guarantee refusal to honour  46 services obligation  96 Guidelines agency 204 distribution agreements  73, 74 review (2010)  224–6 hardcore restrictions  105–10 basic principles  105 motor vehicles see under motor vehicle distribution agreements OEM sales to end-users/independent repairers 110 resale prices see fixed/minimum resale prices restrictions see resale restrictions selective distribution see selective distribution vertical distribution agreements  75 health and safety restrictions  96 horizontal distribution agreements  21, 75, 123–5 ‘hub and spoke’ system  25

individual exemption  114–23 basic principle  114 block exemption and  115 burden of proof  114–15 category management see under category management exclusive customer allocation  121 exclusive distribution  119–20 exclusive sourcing see exclusive sourcing exclusive supply see exclusive supply market structure/share factors  116, 117 non-compete clauses see non-compete clauses positive effects of restrictions  115–16 pro-competitive effects  117 RPM see resale price maintenance selective distribution  132 territorial protection  119–20 tying see under tying practices upfront access payments see under upfront access payments industrial supply and bottling agreements  99 infringement decisions  60–1 intellectual property rights block exemption  102–3 franchising 193 knowhow see under franchising vertical distribution agreements  95 inter-brand competition  77 international agreements  47, 67–8 International Competition Network  68 internet distribution/sales active/passive distinction  231–2 enforcement issues  230–1 exclusion 154–5 exemption 108 future developments  229–32 market effects  229–30 motor vehicle distribution agreements  162–3 quality standards  141–2 vertical distribution agreement and  86 jewellery 138 joint distribution agreements  124–5 joint production/purchasing agreements  125 knowhow see under franchising leasing, supply of goods for  99 legal professional privilege  59 Lisbon Treaty  1 maintenance services see under motor vehicle distribution agreements manufacturer’s name  143 market definition  26–7 franchising 194 motor vehicle distribution agreements  160–1 market division  81–6

340  index market integration  21 market share block exemption see under block exemption distribution agreements  75–6 dominance abuse  41 franchising  194, 200 motor vehicle distribution agreements  160, 161 market-sharing 31 maximum prices  88 medicines, prohibition on sale to children  96 Metro criteria  134–7 minimum retail price maintenance  87 mobile outlets  145 motor vehicle distribution agreements  99, 138, 144, 156–71 background 157–8 block exemptions  158–60 withdrawal/dis-application  166–7 choice of distribution method  161–2 competition issues  159 dealer protection  164–5 definition of motor vehicle  159 hardcore restrictions  162–3 indirect hardcore restrictions  162 intermediaries, sales through  165–6 internet selling  162–3 key texts  157 leasing 164 levels of sale  159 location of premises  164 market definition  160–1 market share thresholds  160 new vehicle sales post-1 June 2013  167–9 pre-31 May 2010  158–67 non-compete obligation  163–4, 168 non-exemptions 160–6 regime change  156 Regulation provisions  158–60 restrictions on dealers  163 safe harbour function  158 selective distribution  169 spare parts/repair/maintenance services  169–71 background 169 block exemption 170–1 hardcore restrictions 171 infringement 170 market definition 169–70 qualitative/quantitative criteria 170 national competition authorities (NCAs)  52–3, 232 case allocation with Commission  52–3 complaints to  66 information exchange with Commission  53 powers 52

preliminary ECJ rulings  52 requests for assistance  52 see also EU competition law national enforcement  53–5, 232–3 advantages 54 Commission involvement  232, 233 cooperation mechanism  233 damages 54 limitations 54–5 powers  53–4, 232 requests for information from Commission 55 national law  47–9 basic issues  47–8 EU law and  11–13 national bodies  49 sharing of competence  48–9 see also EU law NCAs see national competition authorities networks expulsion from network  153–4 network effect  96–7, 133–4 non-supply to non-members  149–50 newspapers  118, 138 non-agency agreements  213 non-compete clauses/obligation  89, 90–3 agency 211–12 basic definition  90 block exemption  110–12 basic principle 110 definition 110–11 during term of agreement  111 post-term obligations 111–12 selective distribution see under selective distribution time limits 112 duration 92 franchising see under franchising individual exemption  121–2 as infringement  91–3 market share/structure issues  93 motor vehicle distribution agreements  163–4, 168 restrictions 90–1 selective distribution  112, 146 non-linear pricing  90 notices 8 object restrictions  30–1 OECD (Organisation for Economic Co-operation and Development)  68 OEM see original equipment manufacturers Official Journal of the European Union 10 official texts  10–11 opinions 8 Organisation for Economic Co-operation and Development (OECD)  68 original equipment manufacturers (OEM)

  index  341 agreements 99 sales to end-users/independent repairers  110 parallel trade  84–5, 95, 119–20 imports 229 perfume products  138, 151 personal computers  138 photographic equipment  138 plumbing fittings  138–9 Positive Comity Agreement (EU and US)  68 predatory pricing  22, 43 prices see resale price-fixing private parties  65–7 product market  26, 27 prohibited clauses see hardcore restrictions purchase agreements  99 pyramid selling  16–17 quantity discounts/forcing  90 quantity-forcing 121–2 radios 138 reciprocal/non-reciprocal agreements  103 recommendations 8 recommended prices  88 regulations 7 direct effect  12 renting, supply of goods for  99 repair services see under motor vehicle distribution agreements resale agreements  99 resale price maintenance (RPM)  117–19 economic efficiencies  118 fixed/minimum 117–18 Guidelines (2010)  225–6 maximum/recommended 118–19 resale price-fixing  21, 31, 75, 87–9 anticompetitive effects  88 book prices  88–9 maximum/recommended prices  88 selective distribution  155–6 see also fixed/minimum resale prices resale restrictions  105–9 basic principles  105–6 captive use obligation  109 components resold to competing manufacturers 109 exclusively allocated territory  106–8 internal use only sale  105 sales to particular customer categories  108 selective distribution to unauthorised distributors 109 wholesalers supplying end-users  108–9 restrictions on where or to whom a buyer may sell see resale restrictions see also anticompetitive object/effect, requirement; export restrictions; hardcore restrictions

restrictive practices, Advisory Committee on Restrictive Practices and Dominant Positions 60 retail agreements  99 retailer power  227–9 dual market share threshold  228–9 levels 228 powerful retailer practices  229 supplier/retailer balance  227–8 royalties 191 rule of reason  225 sale agreements  99 selective distribution  21, 99, 128–71 absolute territorial restrictions  152–3 ancillary obligations  142–3 benefits 130–1 car industry see motor vehicle distribution agreements Commission concerns  131–2 cosmetics  139, 151 criteria 130 cross-supplies 110 customer restrictions  148–9 definition  13, 144 exclusion of internet  154–5 exclusivity/territorial protection  148 exemption 143–51 basic options 143–4 block exemption  132–3, 139, 144–7 exclusivity/territorial protection 148 four criteria (Art 101(3))  147–8 individual exemption 132 non-compete clauses  112, 146, 149 non-supply to non-members of network 149–50 other requirements 150–1 perfume/cosmetics 139, 151 quantitative criteria 150 withdrawal/dis-application 146–7 expulsion from network  153–4 franchising 197–8 hardcore restrictions  144–5 individual exemption  132 infringement 131–2 internet see internet distribution, quality standards key texts  128–9, 130 Metro criteria  134–7 motor industry see motor vehicle distribution agreements motor vehicle distribution agreements  169 non-compete clauses  112, 146, 149 non-exemption 151–6 absolute territorial restrictions  152–3 background 151 exclusion of internet  154–5 expulsion from network  153–4

342  index selective distribution (cont.): non-exemption (cont.): refusal to supply  153–4 resale price-fixing  155–6 wholesale level, abolition  156 non-infringement  131, 139–40 non-supply to non-members of network 149–50 objective/qualitative criteria  140–1 perfume products  139, 151 quantitative criteria  150 refusal to supply  153–4 resale price-fixing  155–6 selection criteria  130 simple systems  136–7 to all end end-users  109 types of goods  130, 137–9 unilateral conduct  23, 133–4 wholesale level, abolition  156 self-regulation 16 share of shelf restrictions  90 shop/warehouse, location restrictions  105 single market imperative  21 single-branding see non-compete clauses software supply  103 sources of law  6–10 Advocate General’s opinion  9 communications 8 courts see European Court of Justice; European General Court decision 8 directives 7–8 general principles see under EU law notices 8 opinions 8 recommendations 8 regulations 7 Treaty on the Functioning of the European Union (TFEU)  1, 6–7 direct effect  12 spare parts see under motor vehicle distribution agreements subcontracting arrangements  99 supremacy of EU law  13–14 tape-recorders 138 technology transfer block exemption  99 televisions 138 territorial protection block exemption  78–81 individual exemption  119–20 texts, official  10–11 tobacco products  138 trademarks/trade names  143 franchising  186, 190 travel agents  208–9 Treaty on the Functioning of the European Union (TFEU)  1, 6–7

Articles 101 and 102  Appendix 1 Treaty of Rome  1 tying practices block exemption  112 dominance abuse  44 individual exemption  123 vertical distribution agreements  94–5 undertakings  25–6, 40 unilateral conduct  23, 133–4 United States cooperation with EU  68 damages in  233–4 franchises in  176 rule of reason  225 upfront access payments individual exemption  123 retailer power  229 vertical distribution agreements  95, 96 vertical distribution agreements  21, 31, 71–2, 73, 74 advertising obligation  96 after-sales provision obligation  96 category management see under category management customer restrictions  86 definition 99 English clauses  94 exclusive distribution see exclusive distribution exclusive sourcing see exclusive sourcing exclusive supply see exclusive supply exports see export restrictions guarantee services obligation  96 hardcore restrictions  75 health and safety restrictions  96 individual exemption see individual exemption intellectual property see intellectual property rights internet sales  86 key authorities  76 market context  77 market division internet sales 86 see also export restrictions market share  75–6 medicines, prohibition on sale to children  96 negative effects  76–7 network effect  96–7 non-compete see non-compete clauses resale price-fixing see resale price-fixing single-branding see non-compete clauses territorial protection  78–81 tying see under tying practices upfront access payments see under upfront access payments

  index  343 Vertical Restraints Block Exemption Regulation 330/2010  98, Appendix 2 vertical restraints Commission Guidelines  Appendix 3 policy review  224–6 warehouse, location restrictions  105 watches 138

wholesalers exclusivity 120 supplying end-users  108, 143 wholesale agreements  99 wholesale level, abolition  156 Wils, Wouter  234 World Trade Organization (WTO), working group 68