Marcel Meinhardt Sandro Travaglini April 14 2022 Competition Commission penalises German tobacco company for territorial restrictions in distribution agreements Lenz & Staehelin | Competition & Antitrust - Switzerland Marcel Meinhardt, Sandro Travaglini Competition & Antitrust FactsDecisionCommentThe Competition Commission (ComCo) has once again imposed penalties on a foreign company for including/maintaining absolute territorial protection clauses in its distribution agreements. This serves as a reminder that clauses which prohibit distribution outside the assigned territory – and thus potentially into Switzerland – apparently still exist in certain (mostly older) distribution agreements. These clauses should be promptly revised to avoid substantial penalties under Swiss competition law.FactsIn its recent decision,(1) ComCo assessed whether the German company Pöschl, the world's largest producer of snuff and Germany's leading manufacturer of tobacco products, had entered into unlawful agreements with its distribution partners that restricted competition. Under some of the distribution agreements between Pöschl and its distributors, the latter were prohibited from selling contract goods outside their contract territory or from supplying them to third parties outside their respective contract territories. For example, the distribution agreements contained clauses stating that:The Customer is prohibited from marketing the supplied goods beyond the Territory or to deliver them to third parties for the purpose of marketing outside the Territory.or that:The Customer shall refrain from marketing or selling the Products to third parties outside the Territory and from supplying the Products to third parties for the purpose of marketing or selling them outside the Territory.DecisionWith regard to the above clauses, ComCo first reiterated that the Swiss Cartel Act (CartA) applies to all practices that may have effects in Switzerland, even if they originate in another country (so-called "effects doctrine"). Therefore, agreements between foreign manufacturers and distributors may also be subject to the CartA.ComCo then argued that the clauses that prohibited the distributors from marketing and selling the contract goods outside the respective contract territory (ie, specific countries other than Switzerland) also prevented them from fulfilling unsolicited orders from Swiss retailers and consumers. As this led to the exclusion of both active and passive sales to Switzerland, ComCo concluded that the respective provisions conferred absolute territorial protection.Under the CartA, clauses in distribution agreements regarding the allocation of territories to the extent that (passive) sales by other distributors into these territories are not permitted are regarded as hardcore restriction. Such hardcore restrictions are generally unlawful and subject to fines of up to 10% of the group turnover achieved in Switzerland in the preceding three financial years, unless they can be justified on grounds of economic efficiency.In the present case, no such efficiencies could be demonstrated, thus ComCo fined Pöschl. However, the fine was reduced by 60%, resulting in a final amount of approximately 270,000 Swiss francs (plus procedural costs of 85,000 Swiss francs), as the company:cooperated extensively with ComCo;submitted a voluntary disclosure;voluntarily informed its distributors that passive sales to Swiss customers are permissible (thus ending the unlawful behaviour); andconcluded an amicable settlement with ComCo.CommentComCo's Pöschl decision algins with a series of similar Swiss decisions on vertical territorial protection agreements. Following the leading cases of Gaba, Nikon and BMW, where fines totalling over 170 million Swiss francs were imposed, ComCo has consistently pursued and sanctioned vertical agreements resulting in absolute territorial protection and foreclosure on the Swiss market.ComCo's recent decision, therefore, does not come as a surprise. However, it serves as a reminder that even years after these leading cases, similarly problematic territorial protection clauses seem to have persisted in foreign distribution agreements to this day. This includes, in particular, so-called "EEA clauses" in (mostly older) European distribution agreements, which allow exports to other countries within the European Economic Area (EEA) but prohibit exports outside the EEA, such as to Switzerland, and thus prevent passive sales and parallel imports from abroad into Switzerland.Under the CartA, such agreements are unlawful and subject to fines. ComCo assumes this to be well-known also to foreign companies. Moreover, such agreements are likely to remain in the focus of the Swiss competition authorities, as they harbour the potential to sustain high price levels in the Swiss market, an issue that also prompted the recent introduction of the concept of relative market power and a ban on geo-blocking into Swiss competition law.In view of this, foreign companies in particular should review their existing distribution agreements and repeal any existing territorial protection clauses that directly or indirectly prohibit passive sales into Switzerland as soon as possible in order to avoid exposure to potential fines under Swiss competition law.For more information please contact Marcel Meinhardt or Sandro Travaglini at Lenz & Staehelin by telephone (+41 58 450 80 00) or email ([email protected] or [email protected]). The Lenz & Staehelin website can be accessed at www.lenzstaehelin.com.Endnotes(1) RPW 2021/4, 837 et seqq. – Pöschl Tabakprodukte.