#5314 - Vertical Agreements And The Vber - Competition Law

Vertical Agreements and the VBER

Competition Law LLM

Notes

Introduction 3

Application of Art 101 TFEU to Vertical Agreements 3

Types of Arrangements 4

Agency Agreements 4

Exclusive Distribution Agreements 4

Selective Distribution Agreements 4

Franchising Agreements 5

Restrictive Clauses 5

Exclusive Dealing / Minimum-Quantity Obligations 5

Resale Price Maintenance 6

Formal / de facto export bans 6

Online Sales Bans 6

Art 102 6

Block Exemptions 7

Commission Regulation 330/2010 7

Art 2(1) 7

Art 2(2) 7

Art 2(3) 7

Art 2(4) 8

Art 2(5) 8

Art 3(1) 8

Art 3(2) 8

Article 4 – Hard-core Restrictions 8

Article 4(a) 8

Article 4(b) 8

Article 4(c) 8

Article 4(d) 8

Article 4(e) 8

Article 5 - Severable 9

Article 5(1)(a) 9

Article 5(1)(b) 9

Article 5(1)(c) 9

Vertical Block Exemption Regulation

This area is quite black-letter but does include some discussion of policy considerations, which can be very important here. Vertical agreements are more justifiable than horizontal agreements because they are more necessary for the market structure to work at all – you need some kind of distribution in order for the market to operate, or goods just sit and stagnate. Some would go as far as to say that vertical agreements should never be the subject of competition law. Bork (1978), for example, states that exclusive dealing (as seen in cases such as Delimitis) is welfare improving.

The reason we might like vertical integration is because it lowers transaction costs (Coase) and because it might reduce the risk of “double marginalisation”, where there is monopoly profit at more than one level of the supply chain. Harvard Schoolers would disagree – this is just a leveraging of monopoly profits from one sector to another.

Article 101 doesn’t apply to single economic entities, see Viho (Parker Pens).

Deutsche Telecom

Could squeeze margins at both wholesale and retail level.

Guilty of an offence under Article 101, despite this being a vertical agreement.

Vertical integration is an alternative to vertical agreements, but integration is still problematic, and not available to all firms – some firms want to specialise in one part of the chain of production. However, increasingly (Apple) firms are integrating downward, if not always upward.

Why might a lack of agreement be problematic? For this we turn to the ‘free-rider problem’ – some parties expend resources and other parties take advantage of that expenditure without contributing anything. This means that there is no incentive for the distributor, for example, to invest in services – sunglasses being bought on the Internet after trying them on in a fancy shop with excellent customer service, nice lighting, mirrors etc. This is a reason, but is it a justification? Bork argues that all vertical restraints should be per se legal in the USA – a manufacturer can never extract monopoly profits through vertical restraints, and the efficiency arguments fall on the side of being in favour of vertical restraints. This doesn’t apply to disguised horizontal restraints or cartels, though. EU law goes against this, and looks at Art 101 TFEU as a potential barrier – hub and spoke collusion is more likely now, and this fits with Bork’s analysis.

The free-rider problem only holds for the first time someone uses a service anyway – after that, price competition becomes more important.

Consten and Grundig

Exclusive dealership arrangement that applied for France, coupled with TM protection, which had the effect of preventing imports.

The TM protection insulated the market, so the court turned its back on STM, and said that this is an absolute territorial restriction. Thus, they ignored the economic context, and looked at the object only.

This was a vertical agreement – obviously it applies, if it has the object or effect of restricting competition.

Appointment of an agent to sell – you want to sell to the customer but you don’t want to meet them. A true agency agreement falls outside Art 101(1) TFEU, because the agent is not actually part of the deal, which is between the manufacturer and the customer – the agent is part of the same undertaking. This is true to the extent that the agreement is between the seller and the buyer, but the agreement between the agent and the principle itself might still be brought under Art 101(1), especially if there are non-competitive agreements.

CEPSA

Spanish petroleum giant made a distribution agreement with a petrol station company, where the stations would assume risk for products, and would have to spend its own money supporting the CEPSA credit and loyalty card schemes. All the while, CEPSA slowly decreased commission. Breach of contract claim, defence of competition making the contract void. Was this an agency agreement?

CJEU said that the decisive factor in determining independence is the agreement itself, and the question of risk. The idea here is who has assumed the risk of the contract - both financial and commercial. If the agent bears some risk, but it's negligible, Art 101 is not engaged, but once you're over that, it might be engaged.

This is where a manufacturer appoints a specific distributor only.

STM

Contract contained an exclusive right of sale, but didn't prevent parallel imports and exports, so market was not insultated.

Court took a permissive approach to 'object or effect' - a relatively thorough analysis was required - court needed to take into account the precise purpose of the agreement, and the economic context. If you can't show it, only then do you look at effects.

Nungesser

Open exclusive licence for maize seeds in Germany, only entity so licenced. The licensee agreed not to compete with the German producer, but no territorial protection.

Not a breach of competition - licensee would only make such an investment if it had a degree of protection.

More than one distributor, but you specify criteria that they must fulfil in order to be a distributor.

Metro

Salva had a selective distribution system with qualitative criteria in order to join the retail network. Metro was a Cash and Carry attempting to gain access to the Salva distribution network. Commission had exempted it under Art 101(3), noting that one of the requirements was that the orders had to be prospective for a 6-month period. This allowed Salva to plan for the future, with its workforce and orders.

As long as this was applied in a non-discriminatory manner, this restriction was okay under Art 101(1) - not an object restriction. Court said that a contribution to stability in employment could constitute a benefit under Art 101(3).

However, quantitative criteria would not be allowed.

Pierre Fabre

French company produced very nice cosmetics - policy of restricting sales to B+M pharmacies - de facto ban on Internet sales. Objective restriction of competition unless it can be objectively justified.

Don't need a secret cartel - contract provision constituted an objective restriction of competition – had the object of restricting parallel trade.

However, it has been recognised that there are legitimate reasons, such as maintaining a specialist service, which can justify an agreement of this nature. There are four conditions (Pierre Fabre)

1. Objective qualitative criteria, not quantitative (number of sellers determines acceptance)

2. Uniform application, no discrimination

3. Proportional – doesn’t go beyond what is necessary

4. Characteristics of product in question necessitate such a network in order to maintain quality / ensure proper use (Cosmeto-Vigilance didn’t cut it, but a luxury good might, though brand won’t). Advice might be accepted – Analogous to KerOptika and DocMorris

KerOptika

Ban on Internet sales of contact lenses in Hungary.

Appears to suggest that Dassonville covers the CSAs. However, no evidence that the court is doing anything peculiar, as it cites Keck. Goes on to say that applying the paragraph 16 provisos, we can see that it applies to all traders in the territory. Deprives traders in other states.

DocMorris

German law prohibited the Internet sale of pharmaceutical and para-pharm products.

Court says it's a CSA, and applies that para 16 provisos. Says that the rule applies to all affected traders, and same burden in law, but on the burden in fact, there is a key difference. Thus, breach. German argued public health - Court held this only applied to pharm, not para-pharm.

These are big business, particularly in fast food. They supply products, and support, and you pay a franchise fee. These are okay, as long as there are no restrictive clauses.

ProNuptia de Paris

Franchising agreement for wedding dresses - terms in the agreement that were strictly necessary for the business were on their face non-competitive.

The licence overall was competitive, so acceptable. The restrictive provisions were held to be compatible to the extent that they were strictly necessary.

N.B. All we’re saying here is that they don’t have the object of restricting competition, but it may be that they have the effect of restriction competition.

Delimitis

Pub leased from a brewery. Under the contract, needed to buy a minimum quantity from the brewery, with a penalty fee if purchasing fell below this. Delimitis argued that the lease was void - had the effect of restricting competition.

CJEU pointed to the benefits from the contract, but did...