Jochen P Beck, Tom S Pick

Hammonds LLP

Commercial Agreements: Aspects of Competition Law Companies Need to Consider When Assessing their Validity

Commercial agreements are important to every day business life. Companies enter into agreements with suppliers and customers (vertical agreements) or competitors (horizontal agreements) virtually on a daily basis. Where commercial agreements impact on cross-border economic activity between EU member states and restrict the behaviour of one or more parties to the agreement the application of the EU competition rules needs to be considered.

Of utmost importance in this regard is article 81 of the EC Treaty. Article 81(1) prohibits all agreements between two or more companies, which affect trade between member states and which have as their object or effect the prevention, restriction or distortion of competition within the EU. Such agreements are automatically void, unless they also produce pro-competitive benefits that outweigh their anti-competitive effects. Article 81(3) consequently exempts agreements which restrict competition from the general prohibition of article 81(1) if they contribute to improving the production or distribution of goods or promote technical or economic progress and allow consumers a fair share of resulting benefits. The restrictions must in addition be indispensable to the attainment of the objective of the agreement and not allow the parties to eliminate competition in respect of a substantial part of the products in question.

In drafting commercial agreements parties must therefore, in principle, conduct a careful two-step competitive assessment of each contract provision. In the first step they must assess whether a contractual clause is capable of preventing, restricting or distorting competition. If this is the case parties must ask, in the second step, whether such a restriction might nevertheless be justified in the light of article 81(3). Notwithstanding this, the competitive assessment may be less detailed where agreements fall within the application of a block exemption regulation (BER). BERs provide a presumption of legality for certain (types of) agreements and exempt them from the prohibition contained in article 81(1) if they meet the conditions set out therein.

Commercial agreements that either have no appreciable effect on trade between member states¹ or do not appreciably restrict competition² (provided they do not contain severe anti-competitive restraints (commonly referred to as hard-core restrictions)) fall outside the scope of application of article 81(1). National competition rules remain applicable to such agreements.

This chapter outlines the key principles for assessing commercial agreements under article 81. The focus lies on the application of article 81 to vertical and horizontal agreements. For completeness, the chapter also briefly addresses technology transfer agreements and sector specific BERs.

Hard-core restrictions and excluded restrictions

Hard-core restrictions are the most severe forms of restrictions of competition. They always infringe article 81(1).³ Commercial agreements containing hard-core restrictions cannot benefit from the safe harbour created by BERs. The entire agreement, not merely the contract clause containing the hard-core restriction, must be assessed individually but is only rarely capable of benefiting from an individual exemption under article 81(3).

The categories of hard-core restrictions in relation to vertical agreements are contained in the Verticals BER,⁴ and include certain resale price maintenance practices (such as minimum- or fixed-resale prices),⁵ territorial and customer sales restrictions, certain types of restriction relating specifically to selective distribution systems, and certain restrictions imposed on manufacturers of spare parts for incorporation into final products. In relation to horizontal agreements,⁶ the categories of hard-core restrictions include price fixing, limitation of output or sales and the allocation of markets or customers.

The Verticals BER also contains provisions on excluded restrictions.⁷ Under the Verticals BER these relate to non-compete obligations exceeding five years, certain prohibitions on a buyer not to manufacture, purchase, sell or resell competing goods or services after termination of the agreement with the supplier, and obligations prohibiting a member of a selective distribution system to sell brands of particular competing suppliers. Excluded restrictions are less severe than hard-core restrictions. They do not, however, benefit from the safe harbour of a BER and must be assessed individually under article 81(3). If the clause can be severed the remainder of the agreement may still benefit from the BER. It is therefore important to include appropriate (severability) contract clauses in commercial agreements. Absent of such clauses an excluded restriction might render the entire agreement void (as is the case with hard-core restrictions).

Vertical agreements

Vertical agreements are agreements between companies operating at different levels of the market, such as between a manufacturer of goods and a wholesaler, or between a wholesaler and a retailer. They are the most common type of commercial agreement. Vertical agreements can improve economic efficiencies within a chain of production and distribution by facilitating better coordination between the participating companies. They can lead to a reduction of transaction and distribution costs, optimise the parties' sales and investment levels and open up new markets for a supplier's products and services. The Commission's position is therefore that vertical agreements are generally less harmful than horizontal agreements. Typical forms of vertical agreements include:

Distribution agreements

Including exclusive distribution, whereby a supplier agrees to sell its products to only one distributor for resale in a specific territory;⁸ sole distribution, under which a supplier appoints one distributor to resell its products in a particular territory and reserves the right to sell the contract product itself in the same territory; non-exclusive distribution, under which the supplier retains the right to appoint other distributors and sell itself in the same territory; and selective distribution, whereby the supplier agrees to sell its products only to certain approved distributors (chosen on the basis of specific, pre-defined selection criteria), who in turn agree only to supply to final customers or other approved distributors within the network.

Franchise agreements

Where one party allows another to exploit its intellectual property and know-how for the provision of goods and services, usually with a fee being paid to the franchisor and extensive control being retained by the franchisor over the way in which the franchisee operates its business.

Agency agreements

Which may fall within the scope of article 81(1) depending on the degree of independence of the agent. As a general rule, the greater the financial and commercial risk assumed by the agent, the more likely it is not a 'true' agent-principal relationship and the more likely it will be subject to article 81. True agency agreements do not fall under article 81 because the agent does not bear any (or only insignificant) risks in relation to the contracts concluded on behalf of the principal.

The approach to assessing vertical agreements in light of article 81 is largely centred on two sources: the Verticals BER, and the Commission's Guidelines on Vertical Restraints⁹ (Verticals Guidelines).

Verticals BER and the safe harbour

The key provision of the Verticals BER is the 'safe harbour' clause. As a general rule the prohibition of article 81(1) shall not apply to vertical agreements where the supplier's market share does not exceed 30 per cent of the relevant market in which the supplier sells its contract products or services. Only in case of the vertical agreement containing an exclusive supply obligation is the market share of the buyer relevant. In such a case it is the buyer's market share that must not exceed 30 per cent of the relevant market on which it purchases the contract products or services for the agreement to benefit from the safe harbour.¹⁰ As mentioned above, agreements containing hard-core restrictions and contract provisions falling under the category of excluded restrictions cannot benefit from this automatic exemption irrespective of the market share held by the supplier or buyer.

The Commission is entitled to not apply the Verticals BER in situations where parallel networks of similar vertical restraints cover more than 50 per cent of a relevant market. Equally, the benefit of the Verticals BER can be withdrawn by the Commission (or by national competition authorities with regard to their territory) if a vertical agreement, in isolation or in conjunction with other agreements, has certain effects that conflict with the exemption criteria set out in article 81(3).

Assessment under the Verticals Guidelines

If the parties cannot benefit from the Verticals BER, they need to self-assess whether their agreement is compatible with article 81. The Verticals Guidelines are intended to assist companies in this analysis by providing guidance on the application of article 81 outside the safe harbour of the Verticals BER. Importantly, the Verticals Guidelines state that there is no presumption that agreements falling outside the Verticals BER are caught by article 81(1) or fail to satisfy the exemption conditions contained in article 81(3).¹¹

In self-assessing their agreements parties must take into account a number of factors,¹² including the market position of the supplier, competitors and the buyer, possible barriers to entry into the market, the maturity of the market, the level of trade and the nature of the products concerned by the agreement. Additional factors might be the cumulative effect of similar agreements, the duration of the agreement or whether the agreement is mutually agreed or imposed by one contract party and the regulatory environment.

Should parties find that, based on the assessment of these factors, their commercial agreement is likely to restrict competition within the meaning of article 81(1) they must analyse whether it can benefit from the exemption of article 81(3). According to the Verticals Guidelines reasons that may justify the inclusion of vertical restraints include preventing free-riding, opening up or entering new markets, or economies of scales in distribution.¹³ Vertical agreements where one party is dominant are less likely to benefit from an article 81(3) exemption.¹⁴ A rebuttable presumption of dominance applies where a company has a market share of above 50 per cent, while a market share of below 40 per cent will usually mean that dominance is unlikely.¹⁵

The current Verticals BER and accompanying Verticals Guidelines will expire in May 2010. The Commission is currently working on a revised version of the regulation as well as the guidelines, which shall replace the current legal documents. It has launched public consultations and published drafts of the Verticals BER and Guidelines on its website on 28 July 2009.¹⁶ The revised Verticals BER and Verticals Guidelines suggest amendments taking into account market developments during the last years, in particular, the increased buyer power of large retailers¹⁷ and evolutions in the area of internet sales.¹⁸

Horizontal agreements

Horizontal agreements are agreements between companies operating at the same level in the production and distribution chain, that is, between actual or potential competitors. Horizontal agreements can be categorised into two broad categories, those that are considered illegal in themselves (without recourse needed to their anti-competitive effects on the market) and those that are not necessarily harmful to competition and where their potential anti-competitive effects on the market needs to be assessed on a case-by-case basis. The Commission acknowledges that such cooperation agreements can lead to substantial economic benefits by allowing parties to share commercial risks, save costs, pool know-how and launch innovation faster to the overall benefit of consumers.¹⁹ In the following the focus will be on the second category of agreement.

Assessment under the Horizontal Guidelines

In its Guidelines on the application of article 81 to horizontal cooperation agreements²⁰ (Horizontal Guidelines) the Commission sets out the principles for analysis under article 81 in respect of the most common forms of horizontal cooperation agreements.

R&D agreements

Tend to increase overall R&D activity of the parties. They may relate to outsourcing of certain activities, joint improvement of existing technology or cooperation concerning completely new products.

Production and specialisation agreements

May take the form of joint production through a joint venture or through specialisation or certain subcontracting²¹ arrangements where one party agrees to carry out the production of a certain product.

Purchasing agreements

Relate to the joint buying of products. The activities can be carried out by a jointly controlled company, by a company in which a number of different firms hold a smaller stake, by a contract arrangement or by a more discrete form of cooperation. Purchasing agreements are often concluded by small and medium-sized enterprises to achieve volumes and discounts that larger competitors are capable of attracting.

Commercialisation agreements

Concern cooperation between competitors in selling, distribution and promotion of products. These forms of agreements have a wide-ranging scope depending on the specific activities undertaken.

Standardisation agreements

Aim at setting technical and quality requirements that products (current or future) and production processes or methods must comply with.

Environmental agreements

Involve parties agreeing to attempt to abate pollution or achieve specific environmental objectives in accordance with the EC Treaty.

As a basic principle the Horizontal Guidelines set out that agreements do not fall under article 81(1) if they do not imply a coordination of the parties' competitive behaviour. Such types of horizontal agreements include cooperation between non-competitors, cooperation between competitors that cannot independently carry out the activity in question and cooperation concerning an activity which does not influence competition. To the contrary, horizontal cooperation agreements that involve price fixing, output limitation or sharing of markets or customers are considered most harmful and normally fall under article 81(1) and are almost always prohibited.²²

For horizontal cooperation agreements not falling under either of the two above categories parties must carefully assess the actual competitive effects of the agreement. The position of the parties in the markets affected by the horizontal cooperation will generally be the starting point for the analysis. If the parties have a low combined market share, it is unlikely that the agreement will have restrictive effects. Likewise, if one of two parties has only an insignificant market share and does not possess important resources, even a high-combined market share will normally not indicate a restrictive effect on competition. In addition to the parties' market shares, a competitive assessment should include the position and number of competitors, namely, the market concentration. Other relevant factors are the stability of the market over time, entry barriers, the likelihood of market entries, the powers of buyers and suppliers as well as the nature of the products concerned.²³

If the parties' conclude that a horizontal cooperation agreement falls under the prohibition of article 81(1), they must assess whether it might nevertheless be exempted under article 81(3). The Horizontal Guidelines as well as the Commission's Guidelines on the application of article 81(3) of the Treaty²⁴ provide further assistance in the assessment.

In addition to the general guidance, the Horizontal Guidelines set out specific rules for assessing each of the above types of horizontal cooperation agreements. Thereby the Commission specifies which agreements may or may not be caught by article 81(1) and which agreements require a more detailed analysis.

Horizontal agreements concerning R&D²⁵ and specialisation of production²⁶ are additionally governed by specific BERs (R&D BER, Specialisation BER). The R&D BER establishes a safe harbour for horizontal agreements if the parties' combined market shares do not exceed 25 per cent²⁷ with regard to products capable of being improved or replaced by the products arising from the R&D. The exemption lasts for the duration of the R&D activities. In the case of consequent joint exploitation it may be prolonged for an additional seven years from the time the concerned products enter the EU market. The Specialisation BER exempts certain agreements concerning specialisation of production, such as unilateral and reciprocal specialisation agreements and joint production agreements, from the prohibition of article 81(1) if the parties' combined market shares do not exceed 20 per cent on the markets concerned by the specialisation agreement. Under both BERs the inclusion of hard-core restrictions will prevent the application of the automatic exemption.

Both BERs will expire at the end of 2010. The Commission is therefore currently reviewing the EU regime applicable to horizontal cooperation agreements. During December 2008 and January 2009 it invited stakeholders to share their experience on the application of the R&D and Specialisation BERs and the Horizontal Guidelines. Draft versions of those legal documents are currently expected to be published for public consultations at the end of 2009/beginning of 2010.

Technology transfer agreements

Technology transfer agreements are agreements between two companies which relate to the licensing of industrial property rights (patents, know-how and software copyrights, or a combination of those) for the production of products under the licensed technology. Both horizontal and vertical agreements are covered. The Technology Transfer BER contains a safe harbour for such agreements provided certain market share thresholds are not exceeded and provided the agreement does not contain any of the hard-core restrictions set out therein.

Under the BER, technology transfer agreements will be exempt from the prohibition contained in article 81 if the parties are competitors with a combined market share not in excess of 20 per cent on the affected relevant product and technology market. Agreements between non-competitors are exempt provided their respective market shares do not exceed 30 per cent on the affected relevant product and technology market.²⁸ As mentioned above, agreements containing hard-core restrictions and contract provisions falling under the category of excluded restrictions cannot benefit from this automatic exemption irrespective of the parties market shares.²⁹

If an agreement falls outside the safe harbour of the Technology Transfer BER, the parties must self-assess their agreement to determine whether it produces anti-competitive effects. The Commission's Guidelines on the application of article 81 to technology transfer agreements³⁰ provide assistance for companies in assessing the compatibility of this type of agreement with article 81.

Other sector-specific rules

In addition to the above-mentioned BERs and Guidelines, the Council and Commission have adopted several sector specific rules, such as for the motor vehicle sector,³¹ air transport sector,³² shipping liner consortia,³³ transport by rail, road and inland waterway³⁴ and the insurance sector.³⁵ Companies active in these sectors must observe these sector-specific rules when entering into commercial agreements.

***

Commercial agreements are important tools for companies' business activities. Some forms of agreements, in particular between competitors, can severely restrict competition to the detriment of other market participants and ultimately the consumer who suffers higher prices, reduced choice and lower quality products. However, many commercial agreements lead to substantial economic benefits and enable companies to compete efficiently on the market.

Companies wishing to enter into commercial agreements are required to self-assess whether their commercial agreements are capable of violating article 81. BERs facilitate this process by providing a presumption of legality for certain types of agreements and exempt them from the application of article 81(1) altogether. Above the safe harbour thresholds the Commission's Horizontal and Verticals Guidelines provide useful assistance in the self-assessment. Where parties cannot justify an anti-competitive contract clause under article 81(3) they are well advised to redraft or exclude the clause as they otherwise risk unenforceability of the entire agreement.

Notes

1.

Commission Notice on guidelines of the effect on trade concept contained in articles 81 and 82 of the Treaty, OJ 2004 C101/81. The appreciability criterion is measured against the position of the relevant companies on the market for the products concerned (in terms of market shares) and their relative importance concerning the products (in terms of turnover).

2.

Commission Notice on agreements of minor importance that do not appreciably restrict competition under article 81(1) of the Treaty establishing the European Community (de minimis), OJ 2001 C368/13. According to para 7, agreements between competitors are de minimis if their combined market shares do not exceed 10 per cent on any of the markets affected by the agreement. Agreements between non-competitors are de minimis if the parties' individual market shares do not exceed 15 per cent on any of the markets affected by the agreement.

3.

Note that according to para 47 of the draft Verticals Guidelines, published by the European Commission for consultation on 28 July 2009, the inclusion of hard-core restrictions in a vertical agreement gives (merely) rise to the presumptions that the agreement falls within article 81(1) and that it is unlikely to fulfil the conditions of article 81(3). However, this presumption is rebuttable and companies may plead an efficiency defence under article 81(3) in individual cases.

4.

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 practices, OJ 1999 L336/21, article 4.

5.

Suppliers may impose a maximum sales price or recommend a sales price.

6.

Commission Notice - Guidelines on the applicability of article 81 of the EC Treaty to horizontal co-operation agreements, OJ 2001 C3/2, para 25.

7.

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 practices, OJ 1999 L336/21, article 5.

8.

Usually this will include restrictions on active sales into territories that have been allocated to other distributors.

9.

Commission Notice - Guidelines on Vertical Restraints, OJ 2000 C291/1.

10.

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 practices, OJ 1999 L336/21, article 3.

11.

Commission Notice - Guidelines on Vertical Restraints, OJ 2000 C291/1, para 62.

12.

Commission Notice - Guidelines on Vertical Restraints, OJ 2000 C291/1, paras 120-133.

13.

Commission Notice - Guidelines on Vertical Restraints, OJ 2000 C291/1, para 136 referring to paras 115 to 118.

14.

Commission Notice - Guidelines on Vertical Restraints, OJ 2000 C291/1, para 135.

15.

Communication from the Commission - Guidance on the Commission's enforcement priorities in applying article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings, OJ 2009 C45/7, para 14.

16.

See http://ec.europa.eu/competition/consultations/2009_vertical_agreements/index.html.

17.

In this context the European Commission proposes an amendment to article 3 of the Verticals BER, according to which the safe harbour of the Verticals BER applies only on condition that the market share held by each party to the agreement does not exceed 30 per cent.

18.

The draft Verticals Guidelines in particular further clarify the notion of active and passive Internet sales and explain the Commission's view on certain conditions on internet sales.

19.

Commission Notice - Guidelines on the applicability of article 81 of the EC Treaty to horizontal cooperation agreements, OJ 2001 C3/2, para 3.

20.

Commission Notice - Guidelines on the applicability of article 81 of the EC Treaty to horizontal cooperation agreements, OJ 2001 C3/2.

21.

Subcontracting agreements are generally vertical agreements subject to certain exceptions. One of these exceptions is subcontracting agreements between competitors and it is in this respect that the Horizontal Guidelines apply.

22.

Commission Notice - Guidelines on the applicability of article 81 of the

23.

Commission Notice - Guidelines on the applicability of article 81 of the EC Treaty to horizontal cooperation agreements, OJ 2001 C3/2, paras 27-30.

24.

Commission Notice - Guidelines on the application of article 81(3) of the Treaty, OJ 2004 C101/97.

25.

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 agreements, OJ 2000 L304/7.

26.

Commission Regulation (EC) No. 2658/2000 of 29 November 2000 on the application of article 81(3) of the Treaty to categories of specialisation agreements, OJ 2000 L304/3.

27.

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 agreements, OJ 2000 L304/7, article 4(2). According to article 4(1), no market share threshold applies to R&D cooperation between non-competitors.

28.

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, OJ 2004 L123/11, article 3.

29.

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, OJ 2004 L123/11, articles 4 and 5.

30.

Commission Notice - Guidelines on the application of article 81 of the EC Treaty to technology transfer agreements, OJ 2004 C 101/2.

31.

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 sector, OJ 2002 L203/30. For the latest developments see the Communication from the Commission - The Future Competition Law Framework applicable to the motor vehicle sector (COM 388 final), available at http://ec.europa.eu/competition/sectors/motor_vehicles/documents/communication.pdf.

32.

Council Regulation (EC) No. 487/2009 of 25 May 2009 on the application of article 81(3) of the Treaty to certain categories of agreements and concerted practices in the air transport sector, OJ 2009 L148/1. There are currently no Commission Regulations in force.

33.

Council Regulation (EC) No. 246/2009 of 26 February 2009 on the application of article 81(3) of the Treaty to certain categories of agreements, decisions and concerted practices between liner shipping companies (consortia), OJ 2009 L79/1. Commission Regulation (EC) No. 823/2000 of 19 April 2000 on the application of article 81(3) of the Treaty to certain categories of agreements, decisions and concerted practices between liner shipping companies (consortia), OJ 2000 L100/24 as amended is currently under review. The Commission Regulation will expire on 25 April 2005. A preliminary draft regulation replacing Regulation 823/2000 thereafter was published in OJ 2008 C266/1.

34.

Council Regulation (EC) No. 169/2009 of 26 February 2009 applying rules of competition to transport by rail, road and inland waterway (Codified version) (Text with EEA relevance) OJ 2009 L61/1.

35.

Commission Regulation (EC) No. 358/2003 of 27 February 2003 on the application of article 81(3) of the Treaty to certain categories of agreements, decisions and concerted practices in the insurance sector, OJ 2003 L53/8.

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