Vertical Agreements Unbound

Introduction
Drawbacks with Old Rules
Change at EU level
Main Features
Conclusion

Introduction

Recent changes to competition law have simplified the regime governing exclusive distribution, franchise and similar arrangements. These arrangements are described as 'vertical agreements' because they are between enterprises operating at different levels in the supply chain for the same product or services.

Until recently, appointing an exclusive distributor or a franchisee to market products required compliance with detailed and complex rules set out in a series of 'category licences' issued by the Competition Authority. These category licences covered agreements dealing with exclusive distribution of goods of all kinds; exclusive purchasing of motor fuels; exclusive purchasing of liquified petroleum gas in cylinders; and franchising.

Drawbacks with Old Rules

While the old system had the advantage of eliminating the need for individual agreements which conformed to the terms of the relevant category licence to be notified to the authority, the length and complexity of the licences required considerable work to ensure such compliance.

Although the system was modelled on almost identical regulations adopted by the European Commission under European Union competition rules, it had been widely criticized. It was argued that it was unnecessary and inappropriate for competition regulators to specify the detailed terms of 'vertical agreements'. Such agreements frequently have positive effects on competition by facilitating market entry or expansion by suppliers, encouraging the development of specialized distribution services and promoting inter-brand competition. Competition is threatened by such agreements only if they involve a risk of foreclosure of the market to other competitors. In the absence of market dominance at the level of either supplier or distributor, this is unlikely to occur.

Change at EU level

The European Commission is now finalising proposals to replace the current EU regulations relating to vertical agreements with a simpler and more flexible regime. The Competition Authority has not waited for the European Commission to complete this process and has introduced its own revised regime for vertical agreements under the Competition Acts. (It is important to remember that agreements which may affect trade between EU member states will still need to have regard to the European Commission's existing block exemptions relating to vertical agreements pending the introduction of any modified regime.)

Main Features

The main features of the new regime for national vertical agreements are as follows:

• the new regulations take the form of a 'category certificate' and a 'category licence'. Agreements which comply with the certificate or licence benefit from them without the need for individual notification to the authority;
  
  
• the category certificate provides that agreements to which it applies fall outside the prohibition of restrictive agreements in Section 4(1) of the Competition Act, 1991. The certificate applies where neither party to the agreement holds a market share in excess of 20% of the 'relevant market'. By its nature, the certificate is unlimited in time;
  
  
• the category licence, on the other hand, applies to agreements which, although caught by the prohibition in Section 4(1), are deemed to be exempt from it. It will apply where neither party holds more than 40% of the 'relevant market'. The licence applies from January 1 1999 until December 31 2003;
  
  
• the following categories of bilateral agreements are covered by the new regime:
  
  
• exclusive distribution agreements;
• exclusive purchasing agreements;
• franchising agreements covering goods or services (but not industrial or wholesale franchising agreements);
• selective distribution agreements;
• non-exclusive distribution agreements (certificate only);
• exclusive purchase agreements for the resale of motor fuels provided that the agreement does not exceed 10 years in duration and does not incorporate a first option to renew on termination (licence only).
  
  
• the following 'hard-core' restrictions cannot be included in an agreement that is to benefit from the certificate or licence:
  
  
• restrictions on the freedom of the re-seller to determine its own resale prices (however, recommended resale prices are permitted subject to specified conditions);
• absolute protection for the re-seller against sales from outside the exclusive territory;
• any post-termination restrictions not to compete (except in the case of franchise agreements which are allowed to incorporate a one-year post-termination prohibition on competition by the ex-franchisee).

Conclusion

The new category certificate and category licence are to be welcomed. They recognise the positive contribution which vertical agreements normally make to economic life. While the use of market share thresholds introduces a degree of uncertainty for enterprises with market shares close to those thresholds, this seems a small price to pay for a more realistic assessment of the effect on competition of such agreements. In practice, this new approach will eliminate the need to consider the possible application of the Competition Acts to the vast majority of such agreements.

For further information on this topic please contact Gerald FitzGerald at McCann FitzGerald by telephone (+353 1 829 0000) or by fax (+353 1 829 0010) or by e-mail ([email protected]).
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