Vertical Agreements and EU Competition Law

Astrid Ablasser-Neuhuber and René Plank^*

bpv Hügel Rechtsanwälte

The EU antitrust regime does not only apply to anti-competitive horizontal agreements, decisions or concerted practices and the abuse of a dominant position but also covers vertical agreements or concerted practices. Whereas horizontal practices are entered into between enterprises operating on the same level of the production chain, vertical agreements or concerted practices exist if they are entered into between independent firms operating on different levels of the production chain (ie, non-competitors). The respective business relationships may pertain to the sale and purchase of certain goods or services but also licence agreements like the licensing of technology or trademarks.
The term ‘agreement’ is interpreted widely, and any act that is the expression of a concurrence of wills of the undertakings operating on different trade levels is deemed to constitute an agreement. The mere conduct of the parties may also constitute an agreement, in particular the tacit acquiescence of dealers in a selective distribution system. A ‘concerted practice’ is deemed to exist where contact between competitors occurs with a meeting of minds to cooperate rather than to compete and where there is a causal link between the contacts and the subsequent course of conduct. Thus, there is only a difference in intensity compared to tacit acquiescence, which constitutes an agreement.
Vertical relationships (also called vertical restraints) may fall foul of article 81(1) of the EC Treaty, if they affect trade between member states and have as their object or effect the prevention, restriction or distortion of competition within the Common Market. Vertical agreements have to be assessed in light of the circumstances specific to each case, since it depends on the environment whether vertical restraints increase or decrease welfare. A recent discussion focuses on the application of a more economic approach in the context of resale price maintenance, following the 2007 Leegin landmark judgment by the US Supreme Court. It would appear that the European Commission’s Directorate General for Competition (DG Comp) remains reluctant to introduce a comparable rule-of-reason analysis. However, even per se prohibitions may be lifted if convincing evidence demonstrates positive economic effects of vertical restraints. This discussion will play a prominent role in the upcoming review of the EU legal framework on vertical restraints (see below).
In principle, anti-competitive agreements are null and void pursuant to article 81(2) of the EC Treaty, which may affect the enforceability of an agreement or of certain clauses thereof – such as non-compete clauses or territorial protection clauses – before national courts.
However, agreements, decisions and concerted practices caught by article 81(1) of the EC Treaty, which satisfy the conditions set out in article 81(3) of the EC Treaty, shall not be prohibited, no prior decision to that effect being required.¹ Pursuant to article 81(3), the prohibition contained in article 81(1) may be declared inapplicable to anti-competitive agreements that lead to an improvement in the production or distribution of products, or support technical or economic progress and do not impose restrictions that are not indispensable to the achievement of these targets and do not afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products or services. With regard to these conditions, the Commission follows the detailed guidance set out in the general Guidelines on the application of article 81(3) of the EC Treaty (OJ 2004 C 101/97, paragraph 5) also with regard to agreements covered by the guidelines on vertical restraints, horizontal co-operation agreements and technology transfer agreements. In principle, undertakings involved in such agreements have to assess themselves whether a vertical agreement within the scope of article 81(1) of the EC Treaty may nevertheless be admissible pursuant to article 81(3).
The EU Commission has set up certain ‘safe harbours’ for undertakings by enacting so-called Block Exemption Regulations (BERs) that set out certain principles as to when vertical agreements and concerted practices that have an anti-competitive object or effect and would be prohibited under article 81 (1) of the EC Treaty may nevertheless be admissible because they fulfil the criteria of article 81(3) of the EC Treaty. If an agreement falls within the scope of a BER, the agreement is permissible, guaranteeing the enforceability of the agreement before national courts (see Guidelines on the application of Article 81(3), paragraph 2) and granting protection from antitrust prosecution. In principle, the Vertical Block Exemption Regulation (Regulation No. 2790/1999; vBER) and the Block Exemption Regulation for the Motor Vehicle Sector (Regulation No. 1400/2002; the Motor Vehicle BER) are the most important when dealing with agreements on the distribution of goods or services. Furthermore, the Block Exemption Regulation on Technology Transfer Agreements (Regulation No. 772/2004; TTBER) provides a legal framework for technology licensing.
Outside this safe harbour, the Guidelines on Vertical Restraints (OJ 2000 C 291/1; Vertical Guidelines) and the Guidelines on Technology Transfer Agreements (OJ 2004 C 101/2; TT Guidelines) published by the European Commission facilitate the assessment under article 81(3) of the EC Treaty.
In this chapter, the main principles of the vBER, the Motor Vehicle BER and, briefly, the TTBER will be summarised.

Vertical Block Exemption Regulation²

On 1 June 2000, the vBER became operational and will be in force until 31 May 2010. It is accompanied by the Vertical Guidelines. The vBER covers a large number of different vertical agreements. It does not apply, however, to vertical agreements containing intellectual property right (IPR) provisions (except provisions relating to the assignment of IPRs to or the use of IPRs by the buyer; Vertical Guidelines, paragraph 30) and vertical agreements whose subject matter falls within the scope of another block exemption regulation (paragraph 45 of the Vertical Guidelines, in particular motor vehicle agreements and technology transfer agreements; see below). A technical review of the vBER has been initiated within DG Comp. DG Comp has already announced that it will hold public consultations on the issue. The publication of the new vBER is not expected before early 2010. In principle, an extension of the present regime of the vBER is likely. Modifications may remain rather limited and may concern, in particular, the introduction of more specific rules on internet and online sales and the treatment of resale price maintenance.

Application of the vBER

The vBER applies to all types of vertical agreements and concerted practices, provided:
• the supplier’s (or, in the case of exclusive supply obligations, the buyer’s) market share does not exceed 30 per cent;
• the agreement does not contain hard-core restrictions (vBER, article 4); and
• certain non-compete obligations remain within the limits set out in article 5 of the vBER.

In certain circumstances, the application of the vBER can be withdrawn by an individual decision of the European Commission, or the national competition authorities (vBER, articles 6 and 7). In addition, the Commission can enact a regulation declaring the vBER generally inapplicable to certain agreements containing specific restraints (vBER, article 8).

Scope of the vBER

According to the vBER, article 81(1) of the EC Treaty does not apply to certain agreements or concerted practices entered into between two or more undertakings. The following criteria must be met for the vBER to apply:
• an agreement or concerted practice exists (decisions by associations of undertakings are not exempted by the vBER);
• the parties, for the purposes of the agreement, operate at different levels of the production or distribution chain; and
• the agreement relates to the conditions under which certain goods or services are purchased, sold or resold.

Therefore, agreements such as those on exclusive dealing, exclusive purchasing, exclusive supply, franchising, selective distribution and non-genuine agency agreements (Vertical Guidelines, paragraphs 13ff) within the scope of article 81 of the EC Treaty are covered by the vBER. A genuine agency agreement exists if the agent bears none or only insignificant risks in relation to the contracts concluded or negotiated for the principal, and consequently generally fall outside the scope of article 81(1) (Vertical Guidelines, paragraph 15).
According to vBER, article 2(4), agreements between competing undertakings may also qualify for exemption if the vertical agreement is non-reciprocal, and one of the following criteria is met:
• the buyer has a total annual turnover not exceeding €100 million (including the sales of the whole group);
• the supplier is a manufacturer and a distributor of goods, and the buyer is a distributor and does not manufacture goods competing with the contract goods (dual distribution of goods); or
• the supplier is a provider of services at several trade levels, and the buyer does not provide competing services at the trade level where it purchases the contract services (dual distribution of services).

The exemption applies to vertical agreements entered into between an association of undertakings and its members, or between an association and its suppliers, only if:
• all of its members are retailers of goods; and
• no individual member of the association has a total annual turnover exceeding €50 million (including the whole group’s turnover).
Vertical agreements containing IPR provisions are covered only if they do not constitute the primary object of the agreement and are directly related to the use, sale or resale of goods or services by the buyer or its customers (vBER, article 2).
The vBER does not cover any restrictions or obligations that do not relate to the conditions of purchase, sale and resale (paragraph 25 of the Vertical Guidelines).
The vBER does not apply to vertical agreements with a subject matter that falls within the scope of any other BER (vBER, article 2(5)).

Market-share thresholds

Vertical agreements within the scope of article 2 of the vBER can only benefit from the vBER if certain market shares are not exceeded. The supplier may not have a market share in excess of 30 per cent of the relevant market on which he sells the contract goods or services. In the case of exclusive supply obligations, the market-share threshold applies to the buyer.
To calculate the relevant market share, first the relevant product and geographic markets must be defined. As regards market definition, the general rules apply.³ In a second step the market share must be calculated on the basis of the market sales value of the contract goods or services and other goods or services sold by the supplier.
The market-share test must be carried out every year on the basis of data relating to the preceding calendar year. The benefit of the vBER, however, will not always be lost immediately if the market share exceeds the 30 per cent threshold (vBER, article 9(2)).

Hard-core restrictions

The vBER does not apply to vertical agreements that, directly or indirectly, in isolation or in combination with other factors under the control of the parties, have certain anti-competitive objects. These so called hard-core restrictions or ‘black clauses’ are listed in vBER, article 4. If an agreement contains just one black clause, the whole agreement loses the benefit of the vBER.

Price restrictions

A restriction on the buyer’s ability to determine his or her sale price amounts to a hard-core restriction. The imposition of maximum sales prices or price recommendations is not prohibited if this does not amount to a fixed or a minimum sale price as a result of pressure from, or incentives offered by, any of the parties.

Restriction of sales to certain territories or customers

Provisions that restrict the territory into which, or the customers to whom, the buyer may sell the contract goods or services are, in principle, prohibited. There are, however, exceptions to this rule, making certain restrictions admissible, such as:
• restrictions of active sales (see below) into the exclusive territory or to certain groups of customers reserved by the supplier or allocated by the supplier to another buyer;
• restrictions of sales to end-users by a buyer operating at the wholesale level of trade( however, see the special rules on selective distribution systems discussed below); and
• restrictions on buyers selling 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.

The Vertical Guidelines contain definitions of the terms ‘active sales’ and ‘passive sales’ (paragraph 50). ‘Active sales’ means actively approaching individual customers inside another distributor’s exclusive territory or exclusive consumer group. In contrast, ‘passive sales’ means responding to unsolicited requests from individual customers, including delivery of goods or services to them. The Vertical Guidelines make it clear that passive sales include general advertising or promotion in the media or on the internet that reaches customers in other distributors’ exclusive territories or customer groups and are a reasonable way of reaching customers outside those territories or customer groups (paragraph 51).
A restriction on active sales may not limit sales by the customers of the buyer. Therefore, a supplier can neither forbid his customers from selling his products or services via the internet without an objective justification, nor reserve such sales to himself.

Restrictions regarding selective distribution systems

The term ‘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, where these distributors undertake not to sell such goods or services to unauthorised distributors.
The restriction of active or passive sales to end-users by members of a selective distribution system operating at the retail level of trade is prohibited. The restriction of cross-supplies between distributors within a selective distribution system is also prohibited, including those between distributors operating at different levels of trade. But it is generally admissible to prevent a member of the system from operating out of an unauthorised place of establishment.

Restrictions regarding spare parts

Suppliers may not be barred from selling components as spare parts to end-users, repairers or other service providers not entrusted by the buyer with the repair or servicing of its goods. Buyers can, however, be prohibited from selling to competitors of the supplier components supplied for the purpose of incorporation.

Conditions and non-compete obligations

The vBER contains specific rules regarding non-compete clauses (article 5). Certain types of clauses imposing obligations are excluded from the application of the vBER. The inclusion of such a clause in an agreement does not make the vBER inapplicable to the whole agreement, but the provision in question will be subject to individual assessment under article 81(3) of the EC Treaty.

Non-compete obligations

A non-compete obligation is any direct or indirect obligation that requires that the buyer either:
• does not manufacture, purchase, sell or resell goods or services that compete with the contract goods or services; or
• purchases from the supplier, or from another undertaking designated by the supplier, more than 80 per cent of the buyer’s total purchases of the contract goods or services. The 80 per cent test must be carried out on an annual basis.

The vBER does not cover any direct or indirect non-compete obligation for an indefinite period of time or in excess of five years. Non-compete obligations that are tacitly renewable beyond a period of five years are held to have been concluded indefinitely.
This time limit does not apply, however, where the buyer sells the contract goods or services from premises and land owned by the supplier, or leased by the supplier from third parties not connected with the buyer. Here, the duration of the non-compete obligation may not exceed the period of occupancy of the premises and land by the buyer.

Post-contractual obligations

Any direct or indirect obligation causing the buyer not to manufacture, purchase, sell or resell goods or services after termination of the agreement is not covered by the vBER, unless this obligation:
• relates to goods or services that compete with the contract goods or services;
• is limited to the premises and land from which the buyer has operated during the contract period;
• is indispensable to protect know-how transferred by the supplier to the buyer; or
• is limited to a period of one year after termination of the agreement.

Non-compete clauses in selective distribution systems

Direct or indirect obligations requiring that members of a selective distribution system are not to sell the brands of particular competing suppliers are not covered by the vBER.

Guidelines on Vertical Restraints

The Guidelines on Vertical Restraints set out the principles for the assessment of vertical agreements under article 81 of the EC Treaty, as follows:
• section I sets out general principles of the application of article 81 to vertical agreements;
• in section II, vertical agreements that generally fall outside the scope of article 81(1) are discussed, with a focus on agreements of minor importance, SMEs and agency agreements;
• section III contains Commission guidance on the application of the vBER;
• section IV describes the principles concerning the withdrawal and non-application of the vBER;
• section V addresses market definition and market-share calculation issues; and
• section VI describes the general framework of analysis and the enforcement policy of the Commission in individual cases, in particular cases not covered by the vBER.

The principles laid down in the Vertical Guidelines are not formally binding and are subject to review by the European courts on a case-by-case basis. Nevertheless, they offer helpful if not always comprehensive guidance on various issues regarding vertical restraints and thus complement the vBER.

The Motor Vehicle BER

The Motor Vehicle BER covers the distribution of motor vehicles and spare parts, as well as servicing agreements.
The concept of the Motor Vehicle BER closely follows the Commission’s approach in the vBER. As under the vBER, article 81(1) of the EC Treaty does not apply to certain agreements or concerted practices entered into between two or more undertakings, each of which operates, for the purposes of the agreement, at a different level of the production or distribution chain. The agreement must relate to the conditions under which the parties may purchase, sell or resell motor vehicles, spare parts for motor vehicles or repair and maintenance services for motor vehicles.
Consequently, agreements on exclusive dealing, exclusive purchasing, exclusive supply, franchising, selective distribution and non-genuine agency agreements (Vertical Guidelines, paragraphs 13ff) within the scope of article 81 of the EC Treaty are covered by the Motor Vehicle BER.
As under the vBER, vertical agreements that fall within the scope of the Motor Vehicle BER can only benefit from the BER if certain market shares (30 per cent; 40 per cent for quantitative selective systems) are not exceeded.
In addition, the Motor Vehicle BER contains a list of provisions that must be included in the vertical agreements in order to benefit from the block exemption. These ‘mandatory provisions’ include:
• the distributor’s or repairer’s right to transfer the rights and obligations resulting from the vertical agreement to another distributor or repairer within the distribution system;
• the supplier’s obligation to provide detailed reasons in the case of the termination of an agreement;
• a minimum termination period of two years on behalf of the supplier, unless the supplier is obliged by law or a special agreement to pay appropriate compensation on termination, or the termination is necessary to reorganise the whole or a substantial part of the network, in which case the termination period must be at least one year; alternatively, the minimum contract period must be at least five years; and
• a provision that the parties may refer disputes regarding the fulfilment of their contractual obligations to an independent expert third party or arbitrator.

The approach to hard-core restrictions and non-compete obligations of the Motor Vehicle BER is similar to that contained in the vBER, but details the specific needs of the agreements covered, that is, not only pure distribution but also issues regarding servicing, access to spare parts and technology for independent operators.
Under the Motor Vehicle BER, suppliers have to decide whether they want to distribute their products through an exclusive or a selective distribution system. In the case of (quantitative and qualitative) selective distribution systems, all members of the system must be able to actively sell their products throughout the EU. Since 30 September 2005, location clauses are no longer exempted.
On 28 May 2008 the European Commission adopted an evaluation report on the Motor Vehicle BER and launched a public consultation in the context of the expiry of the present BER on 31 May 2010. The report concludes that for new vehicles, competition between car manufacturers has intensified. However, it also acknowledged that this intensification in inter-brand competition was mainly due to factors other than the Motor Vehicle BER, such as manufacturing over-capacity, technological innovation and closer integration of markets. The report proposes less complex rules for the future.

Technology Transfer BER

The TTBER generally covers technology transfer agreements entered into between undertakings, permitting the production of contract products. Technology transfer agreements may be concluded between competitors, but often they have a vertical nature, for example, if one company grants another, which is and will remain active on different markets, a licence to produce a certain type of good with its technology. The TTBER entered into force in its current version on 1 May 2004. The current TTBER tries to follow an economic approach and aims not to hinder the licensing of technology and exploitation of intellectual property rights, which in most cases improves economic efficiency and strengthens the incentive for innovation.
Article 2 of the TTBER exempts all technology transfer agreements permitting the production of contract goods. A technology transfer agreement is defined as a patent licensing agreement, a know-how licensing agreement or a mixed patent, know-how or software copyright licensing agreement (including any such agreement containing provisions that relate to the sale and purchase of products or to the licensing of other intellectual property rights, if these provisions do not constitute the primary object of the agreement and are directly related to the production of the goods).
The concept of the TTBER closely follows the concept of the vBER. The undertakings involved have to meet a market share test. In case of non-competitors, the market share of each of the parties may not exceed 30 per cent on the relevant technology and product market; in case of competitors, the combined market share of the parties may not exceed 20 per cent.
Like the vBER, the TTBER blacklists certain clauses, prohibiting hard-core restrictions leading to the non-application of the TTBER for the whole agreement (article 4). The TTBER also lists restrictions leading to the non-applicability of the exemption granted in the TTBER with regard to the respective clause (article 5). Both categories of prohibited clauses are stricter for competing undertakings than for non-competitors.
If all conditions for the application of the TTBER are fulfilled, the exemption applies as long as the intellectual property right that is licensed has not expired, lapsed or been declared invalid (and in the case of know-how, generally for as long as the know-how remains secret).
In individual cases, the Commission may withdraw the benefit of the regulation.
The Commission has also issued TT Guidelines which explain the application of the TTBER, the complex blacklisted prov
isions of article 4 of the TTBER and the clauses listed in article 5. The guidelines also give guidance with regard to agreements outside the scope of the TTBER (in particular if the market share thresholds are exceeded).

Notes

* This article is based on the long-standing contributions to this publication prepared under the auspices of Rainer Roniger (23 May 1964 to 21 August 2006).
1 See, in particular, 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 Treaty, OJ 2003 L 1/1.
2 The Commission has issued a number of further Block Exemption Regulations for specific industries which may contain vertical elements. These will not be considered in this article.
3 Vertical Guidelines, paragraph 88; see also, in particular, the Commission Notice on Definition of the Relevant Market for the Purposes of Community Competition Law of 9 December 1997, OJ 1997 C 372, p 5-13.

An extract from The European Antitrust Review 2009