EU Competition Law Forbids Companies

On 1st June 2010, the new EU Vertical Block Exemption Regulation [2] (VBER) and the accompanying new Vertical Restraints Guidelines [3] (“New Guidelines”) came into force. Their scope of application covers all agreements between economic operators at different economic stages. These agreements are referred to as “vertical” agreements entered into between a supplier and a distributor which have an economic consequence within the European Union.

Companies are obliged to carry out self-assessment to check the compatibility of their agreements with Article 101 of the Treaty on the Functioning of the European Union (TFEU), as under EU law there is no longer a procedure available by which companies can notify their agreements to the Commission for a clearance [4] .

Article 101(1) (TFEU) prohibits agreements and arrangements having as their object or effect, the restriction of competition in the EU [5] . Article 101(2) provides that such restrictive agreements are void. The Commission and national regulators in the EU have powers to impose heavy fines on parties to agreements that infringe Article 101.

However, this broad prohibition under Article 101(1) is mitigated under Article 101(3) which, together with implementing legislation, authorizes the EU Commission to exempt certain agreements if the restrictive provisions contained are outweighed by the economic benefits they create. The Commission has issued ‘block exemptions’ which lay down criteria under which specific categories of agreements can be considered exempt from the application of Article 101(1). A vertical agreement containing at least one restriction, listed in Article 4 VBER, is automatically excluded from the benefit of the VBER altogether, irrespective of the parties’ market share [6] . The hardcore restrictions include restraints on the buyer’s ability to determine its sale price, and any prohibitions on distributors responding to unsolicited orders from out side their territories, also known as passive sale.

These are considered as serious restrictions on competition that should in most cases be prohibited because of the harm they may cause to consumers. The consequence of including such a hardcore restriction in an agreement is that the whole vertical agreement is excluded from the scope of application of the Regulation [7] .

In the context of this article, it is appropriate to focus on these two issues of “re-sail price maintenance” and “passive sales”.

A passive sale takes place when a distributor responds to unsolicited requests from individual customers including delivery of goods to such customers. Also the practice of advertising on the internet or other media which can in effect reach out to customers in areas assigned to any other distributor is also regarded as passive sale. Although the Guidelines acknowledge that online promotion are passive but para.53 of the Regulation suggest that this can be regarded active when online advertisement is specifically addressed to certain customers.

In distributorship agreements; the difference between active and passive selling is significant in regards to the use of websites by distributors as well as for the competition law. Subject to the language used in the contract, active selling may produce a breach of the agreement but passive selling can not be regarded as amounting to a breach of a distributorship agreement under EU law. Advertising which is not aimed directly at customers in areas of other distributors is seen as a necessary tool of passive sales. Therefore, any contractual term that has the effect of restricting a distributor’s right to advertise could also amount to a hardcore restriction [8] .

It is well established under the EU law regarding competition that a contract can not put restrictions on the distributor’s right to use the internet as a medium for sales of goods and advertisement in-order to restrain him from making cross-border sales or sales to excluded customer groups and such measures will be seen as hardcore restrictions [9] .

The measures which may be regarded as restrictions on passive sale can be summarized as (a) a compulsion on the distributor to deny access to customers from excluded territories to its website, (b) the condition to divert such customers to the supplier’s or its relevant distributor’s website in the excluded territory(c) the requirement to decline online sales requests from customers residing in excluded territories (d) requiring a distributor to pay a greater amount for products which are to be resold online than for products intended to be resold off-line [10] (e) limit the number of sales made through the website [11] .

The (VBER) applies only where selective distributors are allowed to make active and passive sale to end-users and to other authorized distributors [12] . As a result, a selective distributor should in principle be also allowed to sell the products via the internet [13] .

In Consten and Grundig v Commission, the ECJ found that an exclusive distribution agreement in which the distributor was to enjoy an absolute territorial protection restricted competition by object [14] . The Court started by analyzing the contractual obligation imposed on the parties. In this agreement, Grundig, the supplier, undertook not to deliver, even indirectly to third parties, products which were intended for the area covered by the contract. This protected Consten, the distributor, from direct and indirect competition from Grundig. Further, in its distribution agreements, Grundig prohibited all its distributors from exporting Grinding’s products outside their contract areas. This in effect limited the sale of products from the area of one distributor to the areas of other distributors. The analysis of the agreement in its legal context showed that the agreement “results in the isolation of the French market and makes it possible to charge for the products in question prices which are sheltered from all effective competition” [15] .

In its case law since Consten and Grundig v Commission, the ECJ has consistently stated that agreements which segregate national markets and try to prevent all cross border trade restrict competition.

Another case where a contract clause gave a distributor absolute territorial protection was found to restrict competition is BMW v ALD Auto-Leasing [16] .BMW, a motor vehicle manufacturer, circulated a letter to its authorized dealers in Germany, prohibiting them from supplying cars to leasing companies that made cars available to customers residing outside the contract territory of the distributor. The Court established that the letter became a part of the agreement within the meaning of Article 81(1). The ECJ found that “by virtue of the agreement in question” the BMW dealers were given absolute territorial protection regarding the supply of leasing companies situated within their territories [17] .Thus wording of the agreement alone in this case served to be sufficient enough for the finding of an anti-competitive object and the court need not had to analyze the legal and economic context of the agreement in question.

In 2009, the Commission submitted written observations in one case before the Paris Court of Appeal, relating to a restriction of on-line sales in selective distribution agreements [18] . The Commission observed that a general prohibition of on-line sales imposed by the supplier on its selected distributors is an infringement by object under former Article 81(1) EC, which is not block-exempted under Regulation 2790/1999. The Commission also observed that the notion of “objective justification”, stated in point51 of the Guidelines on Vertical Restraints, should be interpreted strictly and shall not replace the analysis of efficiencies under Article 81(3) EC (now Article 101). In general, only exceptional circumstances, external to the parties, may be considered as an objective justification for restrictions by object. If however the supplier proves that the conditions of Article 81(3) EC are fulfilled, the agreement may be individually exempted under that Article [19] .

In relation to the application of Article 81 EC (now Article 101), the Court has held that an agreement between producer and distributor which might tend to restore the national divisions in trade between Member States might be such as to frustrate the objective of the Treaty to achieve the integration of national markets through the establishment of a single market [20] . Thus on a number of occasions the Court has held agreements aimed at partitioning national markets according to national borders or making the interpenetration of national markets more difficult, in particular those aimed at preventing or restricting parallel exports, to be agreements whose object is to restrict competition within the meaning of that Treaty article [21] .

Resale Price Maintenance

The obligation on distributors and retailers of minimum or fixed resale prices comes under the scope of Article (101) of the EC Treaty. It is very doubtful that individual exemption would be granted to minimum or fixed resale price maintenance, which is regarded as “hard-core” restrictions [22] . However, recommended resale price can be differentiated from it and the Guidelines recognize it as lawful to impose a maximum resale price, provided in each case that such provisions do not amount to fixed or minimum resale prices as a result of pressure from, or incentives offered by any of the parties [23] .

It follows from the case law of the ECJ that resale price maintenance restricts competition by object [24] .This was clearly stated in Binon [25] : “It should be observed in the first place that provisions which fix the prices to be observed in contracts with third parties constitute, of themselves, a restriction on competition within the meaning of Article 81(1) which refers to agreements which fix selling prices as an example of an agreement prohibited by the Treaty”.

The Commission had contended before the Court that “any price fixing agreement constitutes, of itself, a restriction on competition” [26] .The Court followed the approach, basing the result on a literal interpretation of Article 81(1) (a).

In Binon, the ECJ found reason to distinguish between horizontal and vertical price fixing ,however, the underlying rationale remained to be that horizontal and vertical price fixing are equally harmful to competition.

Also in SPRL Louis Erauw-Jacquery v La Hesbignonne SC, the ECJ expressly equated vertical price fixing with horizontal price fixing.

In this connection it must be pointed out that Article (101) of the Treaty expressly mentions as being incompatible with the common market agreements which “directly or indirectly fix purchase or selling prices or any other trading conditions”. According to the judgment of the national court the plaintiff in the main proceedings concluded with other growers agreements identical to the contested agreement, as a result of which those agreements have the same effects as a price system fixed by a horizontal agreement. In such circumstances the object and effect of such a provision is to restrict competition within the common market [27] .

According to Article 101(1)(a) (TFEU),agreement directly or indirectly fixing purchase or selling prices which may affect trade between Member States (de minims [28] ) and which have as an object or effect the prevention, restriction or distortion of competition within the internal market is prohibited as incompatible with the internal market.