The European Commission takes a dim view of cartels, price-fixing and anti-competitive practices, but it does make exceptions for certain types of agreements made between undertakings operating at different levels of the supply chain.
Under EU law (specifically article 101 of the Treaty on the Functioning of the European Union), there is a general ban on agreements and practices that might affect trade between EU member states and which might prevent, restrict or distort competition within the internal market. Article 101 provides a list of examples of such prohibited agreements, including price-fixing agreements, market-sharing arrangements and agreements to limit or control levels of production (all of which can loosely be described as cartel-type activities), as well as contracts which impose supplementary obligations on parties that have no connection to the contract (that is, tie-in arrangements).
Agreements banned under Article 101 are void and unenforceable. Nevertheless, contracting parties can benefit from an exception to the general prohibition either by satisfying certain conditions on a self-assessment basis or by fulfilling the requirements of the Block Exemption Regulation, which automatically exempts a defined category of agreement. The requirements that need to be satisfied for an exemption to apply are as follows:
- The agreement contributes to improving the production or distribution of goods, or it promotes technical or economic progress
- Consumers are allowed a fair share of the resulting benefit
- The agreement does not impose unnecessary or disproportionate restrictions on the contracting parties, and
- The agreement does not give rise to the possibility of eliminating competition in respect of a substantial part of the products in question.
An agreement which falls within the Block Exemption Regulation is deemed to satisfy these conditions. As a result, the parties to ‘vertical agreements’ – that is, agreements made between undertakings operating at different levels of the supply chain, such as distribution, supply and franchise agreements – should try to model their agreements so that they fall within the parameters of the Block Exemption Regulation.
New Block Exemption Regulation
Under the new Block Exemption Regulation which came into force on 1 June (and is valid until 31 May 2022) certain categories of vertical agreements and concerted practices are automatically exempt from the application of Article 101. The new regulation replaces the previous block exemption rules, which had been in place for ten years.
Safe Harbour Rules
In order to benefit from the Block Exemption Regulation, the supplier concerned cannot have a market share of more than 30% of the market in which it sells the contract goods or services and the buyer concerned (the distributor or retailer) cannot have a market share of more than 30% of the market in which it purchases the contract goods or services. The market share requirements are referred to as the ‘safe harbour’ within which an exemption can apply.
If an agreement contains a ‘hardcore restriction’, it cannot benefit from the Block Exemption Regulation. Hardcore restrictions include retail price maintenance, market partitioning (limiting the territory and customers to whom a buyer may sell the goods or services) and limits on ‘passive sales’ (sales made in response to unsolicited requests from customers). Taking into account the increasing importance of online sales, the Commission in its guidelines looks at the application of the Block Exemption Regulation to Internet selling. Sales through distributor websites are treated as a form of passive selling and therefore cannot be restricted. On the other hand, sending unsolicited marketing emails to potential customers is considered a form of active selling and restrictions can be imposed.
In general, authorised distributors must be free to sell the contract products or services on their websites as well as through traditional retail outlets. Exceptions exist, including permitted limitations for health and safety reasons or the imposition of required quality standards for the use of an Internet site to resell goods.
The Block Exemption Regulation will not apply to certain ‘excluded restrictions’ contained in vertical agreements. The excluded restrictions include non-compete obligations which are indefinite or longer than five years and post-agreement non-compete obligations imposed on the buyer.