“Vertical Agreements” And Free Competition: The Risks For Companies
Recently there were published, two decisions of the Competition Commission, following an ex officio investigation in the production and placing on the market of margarine and butter. By virtue of these decisions heavy fines have been imposed on the companies involved, which also cover almost the whole of the relevant market, for illegal “vertical agreements” with their distributors.
Vertical agreements are the agreements among undertakings operating at different levels of the production or distribution chain (e.g. producer – wholesaler or retailer – distributor). Unlike horizontal agreements (which mean agreements among competitors), vertical agreements are not considered illegal per se under antitrust laws. Thus, they are not exempt from national and European legislation to protect free competition.
The conclusion (even tacitly) of vertical agreements on terms that unlawfully restrict competition, raises heavily fines (up to 30% of the company’s gross annual revenue from the products concerned by the infringement – cumulatively for each fiscal year with an infringement).
Here are the “risky” terms that most commonly appear in similar agreements:
(a) Resale Pricing
Often, companies want to determine the sales prices at which the distributors resell their products. Such an (explicit or “covert”) contractual term is not permitted because it, definitely, restricts intrabrand competition and gives rise to sanctions.
The justification often put forward by companies is both well-known and serious: the introduction of a single resale price precludes the possibility of selling products at lower cost (in order to avoid actions falling under Antitrust law). But it has, rightly, been rejected by the case law.
Only the recommended or maximum value reference is allowed. Provided, however, that there is no commitment from distributors to meet them.
(b) Geographical Restriction of Sales
Often a ban on sales by the distributor to customers outside the specific geographical area assigned to it is agreed. What is critical here, is the distinction between active and passive sales.
It is considered permissible to prohibit active sales (i.e. sales requiring the active customer approach on the part of the distributor) outside the area reserved exclusively by the producer company. Instead, the distributor should always remain free to conduct passive sales (i.e. responding to customer’s spontaneous approach) even outside its exclusive area.
(c) Restriction On Competition
The non – competition clause is permissible only if its duration does not exceed five years and the market share of each party does not exceed 30%. If these conditions are not met, the relevant clause is examined on a case by case basis.
The European legislator has recorded all the above terms as “hardcore restrictions”, the existence of which, in agreements between a company and its distributors, is considered illegal.
Conclusion: It is crucial that prior to developing a company’s commercial policy on the vertical agreements that it is interested in entering into with distributors-wholesalers-retailers, it should be preceded by close cooperation with the legal counsel of the company. It seems to be the only way to avoid the risk of imposing severe fines that may even threaten the very existence of the company.
Υ.Γ. The article has been published in Greek, in MAKEDONIA Newspaper (November 11, 2018).