The Vertical Agreements Block Exemption
This guide is based on UK law. It was written in April
2008.
A vertical agreement is one entered between two or more parties,
each of which operates for the purposes of the agreement at a
different level of the production chain, where the
primary purpose of the agreement is to purchase, sell or resell
goods or services.
Vertical agreements that satisfy the criteria of the Vertical
Agreements Block Exemption (the 'VABE') are exempt from competition
law scrutiny.
In order for the VABE to apply:
- the parties must enter into a vertical agreement (see
below);
- the supplier (or, on occasion the buyer) must have a market
share not exceeding 30%; and
- there must be no hardcore restrictions in the agreement.
What are vertical agreements?
Vertical agreements include distribution (exclusive and
selective), franchising, supply and agency arrangements between
non-competitors (i.e. those who do not compete in the product
market which is the subject of the agreement). The VABE provides
for agreements between competitors to benefit from the block
exemption only in very limited circumstances.
Market share
Normally, the VABE will only apply if the supplier's share of
the market on which it sells the relevant goods or services does
not exceed 30%. Where a supplier is under an obligation to only
supply the goods or services to a single buyer (an 'exclusive
supply obligation'), it is the buyer's rather than the supplier's
share of the relevant market that must not exceed 30%.
Hardcore restrictions
If the agreement contains one or more of the following
restrictions (or contains an obligation that has the same effect as
one of these restrictions), the automatic exemption provided by the
VABE will not apply to the whole agreement:
- restrictions on the buyer's ability to determine its own prices
(i.e. no minimum or fixed prices can be agreed, although minimum
sales prices and recommended prices are usually acceptable);
- territorial and customer restrictions generally, though
prohibiting the buyer/distributor from actively seeking customers
in a territory or from a customer group that has been reserved for
the supplier, or another buyer/distributor is permitted in certain
circumstances, as is restricting all sales to end users by a
wholesale buyer);
- territorial and customer restrictions on sales within a
"selective distribution system", where buyers are chosen on the
basis of pre-determined criteria (although a supplier may restrict,
amongst others, a distributor in a selective distribution system
from selling to other dealers who are not "authorised"); or
- restrictions on sales of components (though buyers may be
prohibited from selling the component on to competitors of the
supplier, suppliers may not be barred from selling components as
spare parts to end-users, repairers or other service providers on
the aftermarket of the buyer's product).
Excluded restrictions
If the agreement contains an 'excluded restriction' (see below)
the exemption provided by the VABE will not apply to that specific
restriction. Nevertheless, the rest of the agreement may still
benefit from the block exemption provided the conditions of the
VABE, mentioned above, are fulfilled and the restriction in
question can be severed from the rest of the agreement. If the
restriction is not severable, the agreement in its entirety will
not benefit from the automatic exemption provided by the block
exemption.
The excluded restrictions are:
- restricting the buyer from purchasing, or otherwise dealing
with, competing products of the purchased products, directly or
indirectly (e.g. this will include the situation where the buyer is
obliged to buy more than 80% of its total purchases of the product
from the supplier) for more than five years;
- restricting the buyer from competing after the termination of
the agreement, except where the restriction is limited to one year,
is necessary for the protection of know-how and is limited to the
same premises and land from which the buyer has operated during the
agreement; or
- restricting members of selective distribution systems from
selling particular competing brands.
Outside the scope of VABE
If the vertical agreement does not conform to the criteria set
out in the VABE, it will not benefit from the block exemption, but
it does not necessarily follow that the agreement is automatically
void or unenforceable.
In this situation, the parties must first legally assess whether
the agreement is likely to breach the prohibition. If an analysis
determines, on balance, that the agreement does not breach the
prohibition, then the parties do not need to consider the matter
any further.
If the agreement does fall within the prohibition however, the
parties must go on to evaluate whether the benefits of the
agreement justify imposing such restrictions on competition and
whether the agreement satisfies the criteria for individual
exemption as set out below:
- Does the agreement contain efficiency benefits? (In other
words, does it improve the production or distribution of goods or
services or promote technical or economic progress?);
- Does it allow consumers a fair share of the resulting
benefit?;
- Does it limit any restraints on competition to those absolutely
necessary to gain the efficiency benefits mentioned above?;
and
- Does it not substantially eliminate competition?
If an agreement contains one or more of the hardcore
restrictions mentioned above it will be very unlikely to benefit
from an individual exemption.
Contacts
If you would like any advice on the application of the VABE or
the requirements for individual exemption to one of your
agreements, please get in touch.
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