DISTRIBUTION CONTRACTS, COMPETITION RESTRICTIONS AND VERTICAL AGREEMENTS

Both European and Spanish Competition law has always dedicated special attention to Distribution Contracts. It has also focused frequently on other contracts called ‘verticals’ like supply, or industrial or intellectual property licences, or even agents contacts. There is a long tradition of Community regulations and European and Spanish jurisprudence.

The starting point in this connection between distribution contracts / vertical contracts and Competition Law is the Functioning of the European Union Treaty in Art. 101 (previously Art. 81 of the European Union’s Treaty). We share a clear position: pro freedom of competition, contra collusive agreements.

Based on this, the Community institutions have created a world of exceptions, among them, a complex system of exemptions prohibiting VERTICAL AGREEMENTS. Key to this system is COMMISSION RULING  330/2010 of 20^th April: it applies Art. 101.3 of the Functioning of the European Union Treaty to vertical agreements and concerted practices.

This ruling was introduced to substitute the old Ruling 2790/1999 of 22nd Dec.1999 related to the application of Art. 81.3 in the Vertical Agreements  and Concerted Practices Treaty with small modifications. It defines some Vertical Agreements which comply with the conditions of Art. 101.3 of the Treaty.

The Ruling starts in its first Article with some definitions, for example, it defines what Vertical Agreements are: agreements or concerted practices between companies which (i) operate on different levels in the production or distribution chain; and (ii) it refers to the conditions in which the parties can acquire, sell or re-sell goods or services.

It extends the ‘Competitor’ concept to ‘Potential Competitor’: the company which could undertake investments to penetrate the relevant market in a short period, if it increased its prices.

It makes clear that the ‘No Competition Clause’ can be a prohibition to compete, directly or indirectly, including obliging the Supplier– or the designated company – to acquire more than 80% of purchases of contracted goods and their substitutes.

It clearly defines Intellectual Property and Know-How, understandably with ramifications in other areas of law like Unfair Competition. ‘Rights to Intellectual Property’, in a very wide sense, include industrial property, technical knowledge, copyright and related rights. ‘Commercial Knowledge’ is non-patented practical information resulting from experience and testing and which is secret, substantial and identified.

GENERAL PRINCIPLE: EXEMPTION – THAT MEANS FREEDOM of REGULATION IN VERTICAL CONTRACTS

Looking now at the regulation itself, the general principle of the Ruling (in its 2^nd Art.) is that the ‘Vertical Restrictions’ of Vertical Agreements can be exempt. That means, that these restrictions can be included in contracts without being nulled: neither the contracts nor the restrictions.

These exemptions are applied in agreements between companies, but also in agreements between an association and its members or suppliers, if (i) all the members are retailers and, (ii) no association member has a volume of business superior to 50 million euros per year.

In principle, Vertical Agreements between competitors are not exempt; in other words, they are prohibited. But they are allowed if they are not reciprocated and the Supplier is: (a) a manufacturer and distributor, and the Purchaser is a distributor but does not compete in manufacturing, or (b) he offers services on a different level of commercial activity, and the purchaser is a retailer and does not compete on a commercial level.

An important point is the MARKET SHARE THRESHOLD which is extended to the purchaser’s market. Contracts are ‘exempt’ (or allowed) in which (i) the Supplier does not exceed 30% of the market in which he is selling, and (ii) the Purchaser does not exceed 30% of the market in which he is buying.

These are the general rules. The rest of the Ruling establishes – in a similar way to the previous one of 1989 – a complex system of ‘exemptions to exemptions’: forbidden restrictions and clauses.

FORBIDDEN RESTRICTIONS: VOIDING THE CONTRACT

Art. 4 states what ESPECIALLY SERIOUS RESTRICTIONS are. In these contracts, practical agreements, the 2^nd Article’s exemption does not apply. These restrictions are forbidden in the broadest terms: when they can exist, either directly or indirectly, alone or with other factors.

The Purchaser’s freedom, therefore, cannot be restricted when fixing a sales price. Even though the Supplier can (i) impose a maximum selling price, or (ii) recommend a price.

The territory cannot be limited nor the Purchaser’s clientele. Sales can be limited in some cases.

FORBIDDEN RESTRICTIONS: VOIDING THE CLAUSE

Art. 5 states which restrictions are prohibited without making the contract null. The clause in question would only be void if the Contract can survive without it.

Forbidding competition is EXCLUDED RESTRICTION for an indefinite period or for more than five years. Forbidding tacitly renewable competition is considered indefinite.

Restricting the Purchaser to manufacture, purchase, sell or re-sell is also prohibited after the Agreement has expired. But the use and disclosure of technical knowledge, which are not in the public domain, can have unlimited restrictions.

In the same way, the prohibition of Selective Distributors to sell brands from identified competitors is void.

The Purchaser can be forbidden to compete post-contract if: (a) the goods and services are competitive, or (b) the Purchaser is limited to the premises which he occupies, or (c) it is indispensable to protect transferred technical knowledge, or (d) it  is limited to a year after the Agreements expires.

NON APPLICATION OF THE REGULATION

If there are Vertical Restriction parallel networks which encompass more than 50% of a related market, the Commission can declare this Ruling to not be applied to Vertical Agreements.

APPLYING THE MARKET SHARE THRESHOLD

In order to calculate the market thresholds – from when they come into play – the following rules are applied. The Supplier’s market share has to be calculated on a basis of sales value in the market; that of the purchaser, on a basis of purchase value in the market.

The market share is calculated on data from the previous year.

PERIOD OF APPLICATION

The new Regulation came into force on 1st June 2010 and expires on 31st May 2022.

Santiago Nadal