EU Competition Law And Distribution Agreements – Part 1

EU legislation, under Article 101(1) of the Treaty on the Functioning of the European Union (“TFEU”), prohibits:-

“all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Members States and which have as their object or effect the prevention, restriction or distortion of competition within the internal market”.

This rule enshrines one of the core functions of competition law which is to protect consumers from anti-competitive agreements.

Article 101(3) provides an exception to this general rule where an agreement

1. Contributes to “improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit;” and
2. Does not impose on the undertakings concerned restrictions which are not indispensable to the attainment of the objectives of Article 101 TFEU; and
3. Does not allow the parties to eliminate competition in respect of a substantial part of the products in question.

This is the first of a two part series which will focus on the impact of EU competition law on Distribution Agreements with a cross border relationship which thus fall within TFEU.

This first article will focus on the distinction between an Agency and Distribution Agreement and Block Exemption 330/2010.

Agency v Distribution

The first obstacle to overcome for any supplier is to consider whether an agent or a distributor should be appointed to sell their products.  The significance of this decision must not be understated.

In an agency arrangement, the agent sells the goods on behalf of the principal.  Title of the goods does not move from the principal to the agent.  An agent will get the benefit of the Commercial Agents Regulations which entitles the agent to commission in respect of transactions, not only during the term of the agreement, but in some instances, after termination.

However a true agency agreement, where the agent bears no significant financial or commercial risk and simply negotiates and concludes transactions on behalf of their principal, does not fall within the grasp of competition law.

On the other hand, a distributor acts independently of the principal.  In such an arrangement, the distributor buys the products from the principal and sells them on to customers with a view to making a profit.  A distributor has no right to compensation on termination.

A distribution agreement is a form of “Vertical Agreement”, i.e. where two or more undertakings operate at different levels of the production or distribution chain, and accordingly falls within the remit of Article 101 TFEU.

Block Exemption 330/2010 (“the Block Exemption”)

Common clauses found in a Distribution Agreement often render such agreements anti-competitive by their nature.  For this reason, the Block Exemption was introduced by the EU to set out the permissible parameters of a Distribution Agreement or indeed for any form of Vertical Agreement.

The benefit of the Block Exemption is limited to Vertical Agreements for which it can be assumed with sufficient certainty that they satisfy the conditions of Article 101 (1) TFEU.

1. The Presumption
   Where the market share held by each of the parties in a Distribution Agreement falls below 30% and there are no severe restrictions on competition it is presumed that the agreement will lead to an improvement in the market, with consumers ultimately benefiting from the arrangement.
2. The Hard-Core Restrictions
   If a Distribution Agreement contains a hard-core restriction the entire agreement falls outside of the Block Exemption and the parties must embark on the difficult task of showing that the agreement is in compliance with competition law.Some examples of a hard-core restriction include:-
   • setting a minimum resale price;
   • a restriction on the distributor selling in certain territories or to certain customer groups.  Thus, it is permissible to assign to a distributor an exclusive geographical market, however a prohibition on the distributor fulfilling non-solicited orders from outside the territory is a hard-core restriction; or
   • a restriction on a distributors ability to sell spare parts.
3. The Excluded Restrictions
   In order to fall within the Block Exemption the agreement must also not include any “Excluded Restrictions” which include:-

   3.1. any direct or indirect non-compete obligation, the duration of which is indefinite or exceeds five years.  This five year period does not apply to goods or services which are sold by the distributor from premises and land owned by the supplier or leased by the suppliers from third parties;

   3.2.  any direct or indirect obligation causing the distributor, after termination of the agreement, not to manufacture, purchase, sell or resell goods or services, unless certain criteria are met.

   3.3. any direct or indirect obligation causing the members of a selective distribution system not to sell the brands of particular competing suppliers.

   Even if a Distribution Agreement contains an Excluded Restriction, the agreement may still have the benefit of the Block Exemption if the offending clause is capable of being severed from the agreement. In those circumstances, the remaining parts of the Distribution Agreement can continue to survive.  An unlawful excluded restriction cannot be severed from an agreement if such severance would destroy the fundamental nature of the agreement.

   The UK case of Prophet PLC v Huggett [2014] EWCA Civ 1013 has determined that a court will only sever an unenforceable provision if:-

   • it is clear something has gone with the drafting of the clause;
   • the clause is capable of being removed without the necessity of adding to or modifying the working of what remains after the provisions have been deleted (the “Blue Pencil” rule);

   However, the judge in this case warned, “If there is a clear choice between an interpretation of the proviso that gives rise to an apparent absurdity and one that achieves a commercially common sense result, a court will ordinarily favour the latter interpretation”.
   
   In the Prophet case, the judge held that there was no basis on which the judge could re-cast the parties’ bargain as “Prophet made its… bed and now must lie on it”.

4. Beware
   These rules are not conclusive.  When examining a particular clause in a Distribution Agreement the parties need to be wary and self-assess in each individual case whether the agreement is anti-competitive in nature and thus in breach of Article 101(3) TFEU.  The Block Exemption will not protect an agreement which has a restrictive effect on competition.

In Part 2 of this series we will discuss the De Minimis Notice, how Intellectual Property Rights in Distribution Agreements are governed, the Technology Block Exemption and the penalties that apply to a breach of Article 101(3) TFEU.

For further information on the above, please contact Paul Keane at pkeane@reddycharlton.ie