Regulation of the distribution relationshipCompeting products
Are restrictions on the distribution of competing products in distribution agreements enforceable, either during the term of the relationship or afterwards?
This is an issue governed by principles of EU competition law and likely to be similar in all states within the European Union and EEA. Post Brexit, UK law may begin to diverge. Non-compete obligations are dealt with under the VRBE and to the extent they comply with its conditions, will be enforceable.
For the purposes of the VRBE, a ‘non-compete obligation’ includes any direct or indirect obligation causing the buyer not to manufacture, purchase, sell or resell goods or services; as well as any direct or indirect obligation on the buyer to purchase from the supplier or someone designated by the supplier more than 80 per cent of the buyer’s total requirements of that product or its substitutes. To benefit from the protection of the VRBE and ensure enforceability, the non-compete should not exceed five years’ duration or be indefinite (an obligation that is automatically renewable is regarded as indefinite). A longer duration is permissible only where the contract goods or services are sold by the buyer from premises and land owned by the supplier or leased by the supplier from third parties. In those circumstances, the duration of the non-compete should not exceed the period of occupancy of the premises by the distributor. The exemption cannot be relied upon to exempt an agreement between competing undertakings, unless one of them has turnover below €100m except where the appointment is non-reciprocal and the supplier Is both a manufacturer and a supplier of goods but the buyer is only a supplier, not a manufacturer or where the supplier provides services at several levels of trade and the buyer is at the retail level and is not a competing undertaking at the level at which it purchases.
A post-term non-compete obligation will not benefit from the VRBE unless:
- it is limited to goods or services that compete with the contract goods or services;
- it is limited to the premises and land from which the buyer has operated during the contract period;
- it is indispensable to protect know-how transferred by the supplier to the buyer; and
- it is limited to a period of one year after termination of the agreement.
This is without prejudice to the possibility of imposing a post-termination restriction which is unlimited time on the use and disclosure of know-how which has not entered the public domain.
Restrictions in agreements that are de minimis or essential for the protection of the reputation and identity of the brand or network are not caught.
In selective distribution, resellers can be prohibited from selling competing products in general, as long as the duration of that obligation is not capable of exceeding five years and the obligation is not targeted so as to exclude ‘particular competing suppliers’.
Clauses that are not automatically given protection and enforceability by the VRBE would have to be individually assessed under article 101(3) TFEU to determine whether on their facts they merit being exempted and unenforceable (and therefore their position is much more uncertain).
In an agency relationship, preventing an agent from acting for a competing principal is commonly dealt with in the agreement but, if not, it may be implied either from correspondence or from the agent’s obligation to act ‘dutifully and in good faith’ under Regulation 3 of the Agency Regulations, and in accordance with the other general fiduciary responsibilities of an agent at common law. However, that will be affected by knowledge and delay or acquiescence on the part of the principal. In Rossetti Marketing v Diamond Sofa Co Limited  EWCA Civ 1021, the court initially ruled that the fact the agent had an agency selling competing goods was not a fundamental breach of contract so the agent was still entitled to compensation when the principal terminated that agency. The judge noted that the principal had known for some time that the agent had a competing agency selling sofas for a competing brand.
The principal appealed this to the Court of Appeal, which looked more closely at exactly what the principal knew about the agent’s other agency and when. It came to the opposite conclusion, ruling that the principal had not initially understood that the agent would be selling goods that were directly competing with his own. Therefore, the principal could not be held to have consented and selling directly competing goods was, in this instance, held to be a fundamental breach of contract.
Principals should bear in mind that requiring an agent to take on a product that competes or conflicts with other products handled for other principals may entitle the agent to terminate and claim compensation or indemnity. Restrictions on agents selling competing products may also infringe competition law in certain circumstances if the non-compete obligations have significant foreclosure effects on a relevant market.
After termination of an agreement to which the Commercial Agents (Council Directive) Regulations 1993 apply, a restraint can be imposed on an agent handling competing products but subject to a maximum of two years.Prices
May a supplier control the prices at which its distribution partner resells its products? If not, how are these restrictions enforced?
In distribution arrangements, competition law requires that a supplier does not dictate the prices at which its distribution partner resells its products, whether directly or indirectly (known as resale price maintenance or RPM). RPM is classified as a hardcore infringement and, as such, it is irrelevant that the parties have low market shares or are otherwise insignificant in market terms.
Online markets and competition (and other issues for consumers) are a major area of focus for the UK CMA and, in particular, tackling RPM and online minimum advertised pricing restraints that create price floors. It is difficult (though conceivably possible) to justify these practices on efficiency grounds (eg, to prevent free riding, improve customer service or protect brand image) under article 101 TFEU.
Recommended or maximum sales prices (but not minimum prices) are acceptable but should be analysed carefully to ensure they do not, in effect, constitute indirect resale price maintenance. Other forms of indirect resale price maintenance include:
- fixing maximum discounts from prescribed prices;
- making supplier rebates and reimbursement of promotional costs subject to downstream pricing level;
- linking price to competitors’ resale prices; and
- threats, intimidation, warnings, penalties, delay or suspension of deliveries or contract terminations.
A ban on supplying discounting outlets would be regarded as interference in pricing policy except where the ban was imposed in the context of protecting the allure and prestigious image of a brand or mark in a selective distribution system (which bestows on the goods an aura of luxury) and the discounting involved a breach of a trademark licence (Copad SA v Christian Dior, Case C-59/08). Suppliers operating selective distribution systems may also be able to restrict authorised retailers from using third party online marketplaces (see question 19).
The VRBE Guidelines of the European Commission suggest an efficiency defence is available in the following very limited circumstances in relation to RPM that is used:
- during the introductory period of expanding demand;
- for a coordinated short-term low-price campaign (two to six weeks) in a franchise system; or
- in relation to complex or experience products, the extra margin would allow distributors to provide additional pre-sales services where free-riding is a problem.
There has been an upturn in enforcement of RPM at UK and EU level in recent years.
In 2013, the CMA issued infringement decisions against mobility scooter suppliers for bans imposed on online sales and online advertising of prices below a recommended resale price even where actual prices in the showroom were unrestrained. Such a practice reduces transparency and increases search costs. The fact that these restraints were imposed in the sale of mobility scooters for less mobile individuals heightened their impact - web searches being all the more important for those who would find it challenging to visit bricks and mortar outlets. In May 2017, the CMA imposed substantial fines on suppliers in the light fittings sectors, finding that they had illegally engaged in online resale price maintenance with some of their retailers in specifying the minimum prices that the retailers could advertise for sales of the suppliers’ products over the internet (see question 15).
In a first for UK competition enforcement, in 2016, the CMA also fined a supplier of posters, Trod Limited, for agreeing with a competing supplier that they would not undercut each other on Amazon Marketplace. Automated pricing software was used to implement this agreement.
The European Commission issued fines exceeding €111 million (in July 2018) to four consumer electronics manufacturers for restricting their online retailers from setting their own retail prices These restrictions were enforced by way of threats or sanctions, such as blocking of supplies. Pricing algorithms were used that automatically adapted retail prices to those of competitors, and sophisticated monitoring tools allowed the manufacturers to effectively track resale price setting in the distribution network and to intervene swiftly in case of price decreases. The European Commission opened an investigation following its e-commerce sector inquiry. RPM remains an enforcement focus for the European Commission.
In agency relationships, the principal can retain complete control over the price at which its agent resells its products provided the agency relationship is regarded as ‘genuine agency’. The determining factor is the financial or commercial risk borne by the agent in relation to the contract activities: those directly related to the contracts entered into by the agent for the principal; and those associated with investment for entry to the market - usually ‘sunk’ costs. When the agent bears no such risks, or insignificant risks, its activities are not economically distinct from the principal’s, and article 101 TFEU does not apply. If an agency agreement lies outside article 101 TFEU, all clauses that are an inherent part of the agency agreement are free from scrutiny. The principal may legitimately restrict the customers to whom, or the territory in which, the agent sells the goods, and also dictate the price and conditions for sale through the agent. If an agent cannot be regarded as a ‘genuine agent’, it must be permitted to use its commission to offer discounts to customers. It is often unclear whether platforms or online portals should be regarded as true agents. Agency agreements have been considered in a number of cases involving digital platforms, but the authorities have shied away from concluding on the issue.
May a supplier influence resale prices in other ways, such as suggesting resale prices, establishing a minimum advertised price policy, announcing it will not deal with customers who do not follow its pricing policy, or otherwise?
A supplier is entitled to suggest resale prices (commonly referred to as recommended resale prices or RRPs) but should avoid applying any incentives or pressure to abide by those RRPs as this would be likely to be viewed as indirect RPM. The UK’s competition authority has taken action against agreements not to advertise discounted prices.
The CMA fined a supplier of light fittings (National Lighting Company Group) for a minimum advertised pricing policy that restricted the price at which retailers could sell the supplier’s products online. In the CMA’s view, these arrangements restricted the retailers’ ability to sell their products online at independently determined prices, reducing price competition between competing retailers and contributing to keeping prices artificially high.
The CMA has previously concluded that the application of a minimum advertised price (MAP) policy genuinely restricted in practice the ability of resellers to determine their online sales prices at a price below the MAP, and therefore amounted to RPM in respect of online sales of the product (see, for example, commercial catering equipment sector: investigation into anticompetitive practices). The European Commission would likely adopt similar reasoning and consider minimum advertised pricing policies as an indirect means of RPM that do not benefit from the VRBE.
Unilateral minimum retail pricing policies are not accepted. Announcing a minimum resale price and refusing to supply those distributors that did not observe it (as per the US Colgate doctrine) would probably be regarded as indirect RPM and involving consensus or acquiescence.
There are other ways in which a supplier can attempt to influence pricing, which fall short of RPM. For example, it can oblige distributors to follow its instructions with regard to advertising, provided that those instructions do not seek to regulate the advertising of prices or conditions of sale. This does not prevent a supplier from encouraging the distributor to achieve optimum brand positioning, provided there are no incentives offered or pressure applied to price at, or above, a notified recommended resale price.
A supplier may set a maximum resale price provided it does not, in effect, mean a fixed resale price.
May a distribution contract specify that the supplier’s price to the distributor will be no higher than its lowest price to other customers?
The prevalence of retail most-favoured-nation (MFN) clauses in the context of online platforms such as online travel agents, price comparison websites (PCWs) and online marketplaces, such as Amazon marketplace, iBookstore, Booking.com, Expedia and so on, has been highlighted by recent competition investigations across the European Union. When adopted by such platforms in their agreements with the providers or sellers seeking to reach consumers through the platforms, MFN clauses can ensure that the provider or seller does not charge a higher price on their platform than it does when selling directly, on another platform or via another channel.
In the UK, the competition authorities considered online hotel booking sites and their restraint on a hotel group offering room-only rates at prices lower than the rates offered by the price comparison sites. Initially, the UK authorities accepted commitments from the hotel group, IHG, from Booking.com and Expedia that allowed this hotel group to offer discounts to a closed group of members. This was successfully challenged by a metasearch site, Skyscanner Ltd, on process grounds and eventually the competition authority closed the file without determining whether the MFN was lawful.
In its investigation into the UK private motor insurance sector, the CMA drew a distinction between the use of what it termed narrow and wide MFNs in agreements between private motor insurance providers and PCWs. Although it recognised that MFNs on PCWs may result in efficiencies (such as reducing search costs for customers), the CMA concluded that widely drafted MFNs were not necessary to achieve those benefits. Therefore, it found that narrow MFNs, which require that the price on the insurer’s own website is no cheaper than that offered to the PCW, were acceptable. Wide MFNs, which ensure the price offered to the PCW is no higher than the price offered directly or via any other channel, were prohibited by means of an order applicable in respect of significant PCWs (the Private Motor Insurance Market Investigation Order 2015).
However, there is still much uncertainty with different approaches being taken in EU jurisdictions. The German competition authorities came down against narrow MFNs in the Booking.com case, whereas other national competition authorities have accepted commitments permitting narrow MFNs. Elsewhere in Europe, notably France, Italy, Austria and Switzerland, moves were made in 2017 to legislate to ban price parity clauses.
In 2016, the CMA sent a questionnaire to a large sample of hotels in the UK as part of a joint monitoring project, in partnership with the European Commission and nine other competition agencies in the EU. This project is looking at how changes to hotel room pricing terms, and other recent developments, have affected the market, in particular, whether the Europe-wide removal by online travel agents Expedia and Booking.com of certain ‘rate parity’ or ‘most-favoured-nation’ clauses in their standard contracts with hotels in July 2015 has affected the market. The European Commission and 10 national competition authorities published a report in 2017 on the use of such price parity clauses in the hotel booking sector which indicated that the improvements made by online travel agents ‘go in the right direction’. The CMA subsequently announced in October 2017 that it was opening an investigation under its consumer law powers into hotel booking websites to determine whether consumers were able to get the best deal. It launched enforcement action in June 2018 to ensure booking sites complied with the law.
The CMA also looked at MFNs in the context of online auction services in 2017 that concluded after the CMA accepted undertakings from ATG Media, the market leader in online bidding services, to stop restricting customers from using rival platforms (ie, a wide MFN).
In January 2017, Amazon responded to European Commission concerns about parity clauses contained in contracts between Amazon and e-book publishers that required those publishers to inform Amazon about more favourable or alternative terms offered to Amazon’s competitors and offer Amazon similar terms and conditions. Amazon agreed to scrap these clauses for a period of five years from August 2017.
In September 2017, the CMA opened an investigation into MFN clauses in ComparetheMarket’s contracts with home insurers. In November 2018, it provisionally found that these clauses are in breach of UK and EU competition law as they prevented home insurance providers from offering lower prices elsewhere.
Another common form of pricing clause found in commercial agreements is the ‘price matching’ or ‘English’ clause. In such a clause, the supplier promises to (or is given the right to) match the lowest price offered to the distributor by any other supplier. This may be of benefit to the distributor by guaranteeing that it receives the best price available, but can potentially result in de facto exclusivity in favour of the supplier (see Rangers Football Club and Sports Direct (SDI Retail Services Ltd v Rangers Football Club Ltd  EWHC 2772 (24 October 2018)).
In contrast to the complex retail MFNs that are widely under investigation, MFNs in distribution agreements may not always be problematic. They are particularly likely to raise competition concerns where the customer benefiting from the clause is dominant and the effect of the clause is to reduce the incentive of the supplier to offer other customers discounts, thereby aligning prices at a higher level than would otherwise be the case. This may not be very likely in most distribution scenarios and, in the absence of other restrictive effects, narrow MFNs may be enforceable. Each case should be assessed on the facts.
Are there restrictions on a seller’s ability to charge different prices to different customers, based on location, type of customer, quantities purchased, or otherwise?
On 3 December 2018, new rules came into force in the European Union and in the UK to prohibit the practice known as ‘geo-blocking’. Geo-blocking affects sales made online: as soon as the credit card details reveal the location of the customer, the customer is directed to a local website that may charge higher prices. The new rules, set out in Regulation (EU) 2018/302 and the UK Geo-Blocking (Enforcement) Regulations 2018, identify three situations where geo-blocking is not justified:
- the sale of goods without physical delivery - if a Belgian customer wishes to buy a refrigerator and finds the best deal on a German website, the customer will be entitled to order the product and collect it at the trader’s premises or organise delivery himself to his home;
- the sale of electronically supplied services - if a Bulgarian consumer wishes to buy hosting services for their website from a Spanish company, they will now have access to the service, can register and buy this service without having to pay additional fees compared to a Spanish consumer; and
- the sale of services provided in a specific physical location - an Italian family can buy a trip directly to an amusement park in France without being redirected to an Italian website.
However, suppliers are free to choose not to supply cross-border customers and need not harmonise their prices with those in other jurisdictions.
At the wholesale level, EU and UK competition law would step in where a supplier’s discrimination in price is designed to penalise the independent resellers: for low resale prices; for selling into a territory of another dealer (except where a geographical restraint is permissible); or for selling over the internet. Pricing to discourage any of these activities would also be caught. Price discrimination devised to restrict where buyers can resell the products will also infringe article 101 TFEU. This typically involves ‘dual pricing policies’, which offer discounts for products that are resold only locally or charge a premium price for products intended for export. Dual pricing will rarely be regarded as unilateral conduct. Rather, such policies are the result of vertical agreements between the supplier and distributor that have as their object or effect the restriction of intra-brand competition contrary to article 101(1) TFEU. In the GlaxoSmithKline (GSK) case, the ECJ concluded that, for an agreement to exist, it is sufficient for the parties to show a joint intention to conduct themselves on the market in a specific way. Signing the sales conditions (which contained dual pricing) and returning them to GSK indicated GSK’s and the wholesalers’ joint intention to adhere to the conduct and limit parallel trade. In the GSK case, the ECJ agreed that the dual pricing practised by GSK in Spain to deter (or make more expensive) purchases destined for export was an infringement of article 101 but did require that the Commission should not have refused to consider efficiency arguments before assessing them.
European Commission guidance provides that a dual-pricing agreement between a supplier and an independent distributor may fulfil the conditions of article 101(3) TFEU in some limited circumstances. For example, where offline sales include installation by the distributor but online sales do not, the latter may lead to more customer complaints and warranty claims and may therefore justify different pricing on- and offline.
Discriminatory pricing that places a trading partner at a competitive disadvantage by dominant companies (including discrimination based on nationality or location) for customers who are equivalent is prohibited unless the difference in treatment can be objectively justified (eg, by genuine cost savings or market conditions). The competitive disadvantage must be shown to distort competition for the discriminatory pricing practice to be unlawful (see the judgment of the ECJ in Case C-525/16, MEO - Serviços de Comunicações e Multimédia SA dated 19 April 2018). A dominant company is permitted to set different prices between various member states where there are already distinct geographical markets and the differences relate to the variations in the conditions of marketing and competition.Geographic and customer restrictions
May a supplier restrict the geographic areas or categories of customers to which its distribution partner resells? Are exclusive territories permitted? May a supplier reserve certain customers to itself? If not, how are the limitations on such conduct enforced? Is there a distinction between active sales efforts and passive sales that are not actively solicited, and how are those terms defined?
Generally, buyers (and their customers) should, in principle, be free to resell within the EEA without restraint. Restricting sales by the buyer outside specified territories or specified customers is a serious restriction permissible only under certain conditions, whether imposed directly (by contract) or indirectly (eg, by an incentive scheme). Schemes designed to monitor the destination of goods (eg, differentiating serial numbers) may be regarded as illegally facilitating market partitioning. The European Commission is currently investigating video game publishers and tour operators for restrictions in agreements with online distributors that they suspect discriminate between customers based on where they live (‘geoblocking’) and lead to partitioning of markets (see question 17).
However, there are some limited exceptions that allow market partitioning to some degree.
Exclusive distribution rights
A supplier may legally prevent a buyer from selling actively to customer groups or territories reserved exclusively for the supplier or to another buyer. ‘Active sales’ means actively approaching individual customers by, for instance, sending unsolicited emails or advertisements on the internet that are specifically targeted at customers in that territory. The supplier must not restrict a buyer’s ability to make passive sales into reserved areas (ie, sales in response to unsolicited demand).
Consequently, other than the limited circumstances below, suppliers cannot offer distributors within the EEA absolute territorial protection from parallel imports from other EEA territories even where they have an exclusive distribution network.
Territories or customer groups that are not allocated exclusively (ie, non-exclusive appointments or customers or territories reserved to supplier non-exclusively) cannot be protected either from active or passive sales.
However, restrictions on all sales, even passive sales, are acceptable in some exceptional cases, such as where they are necessary to create a new product market or to introduce an existing product on a new market. Even restraints on parallel imports will be acceptable for two years, insofar as intended to protect a distributor in a new geographical market.Online sales
May a supplier restrict or prohibit e-commerce sales by its distribution partners?
Suppliers should not impose an outright ban on internet selling by their distributors. This is regarded as a serious infringement of EU and, accordingly, UK competition law. In August 2017, the CMA fined Ping Europe Limited (Ping) for banning two of its retailers from selling online. Sales via the internet are generally viewed as passive (which cannot be restricted), except where adverts or marketing efforts are specifically aimed at customers in other territories. The ECJ has confirmed that internet sales must also be permitted by authorised distributors appointed in a selective distribution network (Case C-439/09 Pierre Fabre Dermo-Cosmétique SAS v Président de l’Autorité de la concurrence and Ministre de l’Économie, de l’Industrie et de l’Emploi). This means that online sales cannot be subject to geographical restrictions. The payment of ‘invasion fees’ would likely be considered as an indirect means of restricting internet sales, unless fees are in some way justified, for example, to cover the cost of repairs or servicing.
The ECJ has made an important distinction between an outright ban on internet sales by authorised distributors and the prevention of the discernible use of third-party platforms or marketplaces such as eBay and Amazon. In a case involving a reference from the German courts for a preliminary ruling, Coty Germany GmbH v Parfumerie Akzente GmbH, Case-230/16, the ECJ held that restrictions on third-party platforms are justified by the legitimate objective of preserving the quality and luxury image of the goods in question. This is subject to the proviso that the third-party platforms are subject to objective, qualitative criteria, which do not go beyond what is necessary to preserve the quality of the goods, and such criteria must be applied uniformly, and not in a discriminatory manner, to all potential platforms. It may be permissible to prevent online sales to protect brand image more generally in respect of non-luxury products, but this has not yet been tested. This type of restriction does not prevent distributors selling the goods online via their own websites or via third-party platforms that are not ‘discernible’ to the consumer.
There is a suggestion that any distribution system that qualifies under the VRBE could also have a platform ban, as such a ban is not a restriction of passive sales or a customer restriction.
There have been no EU cases on restriction on the use of price comparison websites by distributors, but it is possible that these may not be looked upon as favourably. In the Coty case, the court found the fact that authorised distributors could still advertise on price comparison websites to be a persuasive factor, suggesting that such a restriction may not be treated in the same way as a platform ban. Such websites are important in driving traffic to distributors’ own websites. The German Supreme Court has ruled that Asics cannot impose a general ban on dealers using price comparison websites in the absence of any qualitative conditions. The Court did not consider running shoes to be luxury goods.
In December 2018, the EC fined Guess for imposing various restrictions on retailers in its selective distribution network:
- a ban on retailers using Guess brand names and trademarks in online search advertising;
- a requirement for retailers to obtain specific authorisation from Guess to make online sales (even though the retailers had already met the requirements for admission to Guess’s selective distribution network);
- a ban on retailers selling to consumers located outside the retailers’ allocated territories;
- restrictions on cross-selling between authorised wholesalers and retailers; and
- restrictions on the prices at which retailers could sell Guess products.
The EC found that these restrictions prevented retailers from advertising and selling Guess products cross-border, leading to artificially high retail prices in some member states. In addition to breaching competition law, some of these restrictions also breached Regulation (EU) 2018/302 and the UK Geo-Blocking (Enforcement) Regulations 2018 (see question 17 and 20). The EC’s full infringement decision is expected to be made available in early 2019.Refusal to deal
Under what circumstances may a supplier refuse to deal with particular customers? May a supplier restrict its distributor’s ability to deal with particular customers?
Provided a supplier is not dominant, it can unilaterally refuse to deal with particular customers without breaching competition law.
A supplier can restrict a distributor’s appointment to supplying a particular customer group, thereby preventing active sales by that distributor to other customers, provided those other customers are exclusively allocated to another distributor or reserved by the supplier. However, a distributor should not be prevented from making passive sales to customers outside its exclusive customer group or territory. The EC was investigating publishers of video games for ‘geoblocking’ (ie, preventing online customers in certain countries from benefiting from cheaper prices in neighbouring countries (see question 17). In particular, it looked at whether agreements with online distributors prevent consumers from buying (or distributors from selling) activation codes in eastern Europe, where they are cheaper, for use in Western markets.
However, under the new Regulation (EU) 2018/302 and the UK Geo-Blocking (Enforcement) Regulations 2018, the provision of (non-audiovisual) copyright protected content services (such as e-books, on-line music, software and videogames) is not subject to the Regulation’s prohibition of applying different general conditions of access for reasons related to a customer’s nationality, residence or establishment, including by refusing to provide such services to customers from other member states. These services do still remain subject to the Regulation’s prohibition to block or limit access to online interfaces on the basis of the nationality, residence or establishment of the customer. Where cross-border provision of these services takes place, the trader is prevented from discriminating the electronic payment means on the basis of the customer’s ‘nationality’.
A supplier can also prevent a distributor from selling to consumers, thereby keeping the wholesale and retail level of trade separate. However, it cannot otherwise agree with a distributor that it should not deal with particular customers. There are ‘soft measures’ that can be taken by suppliers to highlight to distributors the benefits of focusing on their allocated customers or territory. Such measures should not amount to an agreement, however, and distributors should not be penalised for doing so. Seemingly unilateral acts can be viewed as consensual. Where the supplier has established a selective distribution system or network it can prevent its distributors or dealers selling to resellers that are not approved members of that network.Competition concerns
Under which circumstances might a distribution or agency agreement be deemed a reportable transaction under merger control rules and require clearance by the competition authority? What standards would be used to evaluate such a transaction?
It is highly unlikely that entering into a distribution agreement in itself would amount to a merger that could be subject to the merger control provisions of the Enterprise Act 2002 as amended by the Enterprise and Regulatory Reform Act 2013. There would have to be circumstances where a business obtains in relation to another:
- a controlling interest (de jure or legal control);
- de facto control (control of commercial policy); and
- material influence (ability materially to influence commercial policy).
The lowest threshold of material influence can be established through a range of factors, most obviously voting rights where shares above 15 per cent can be held to give material influence (and, in some cases, the authorities have required divestment to well below 10 per cent in order to remove influence judged to be otherwise undesirable under relevant criteria). This assessment of influence may also occur where the minority shareholder is accorded special voting rights or veto rights, board representation or there is financial interdependence.
Acquiring rights of distribution in itself is unlikely to constitute a merger but where an entity, rights, a brand name, assets and contracts are acquired that may constitute the transfer of a business. The distribution rights may, however, be a factor taken into account in the assessment of influence. A good example in the United Kingdom was Heineken’s acquisition of control over two Diageo subsidiaries:
The CMA considers that Heineken has already, on 7 October 2015, acquired legal control over D&G which owned the Target Brands and material influence over the Target Brands in Great Britain. This acquisition of material influence is further supported by the Manufacturing, Bottling, Selling, Distribution, and Marketing Agreement that is currently in place between D&G (now controlled by Heineken) and Diageo GB. However, with the transfer of the licence and distribution rights of the Target Brands to Heineken, Heineken will acquire a higher level of control (legal control) over these brands.
The merger control authority in the UK is the CMA and it has set out a range of relevant factors:
The transfer of customer records is likely to be important in assessing whether an enterprise has been transferred.
- The application of the TUPE regulations would be regarded as a strong factor in favour of a finding that the business transferred constitutes an enterprise.
- The CMA would normally (although not inevitably) expect a transfer of an enterprise to be accompanied by some consideration for the goodwill obtained by the purchaser. The presence of a price premium being paid over the value of the land and assets being transferred would be indicative of goodwill being transferred.
4.9 Outsourcing arrangements involving ongoing supply arrangements will not generally result in enterprises ceasing to be distinct, but may do so where, for example, they involve the permanent (or long-term) transfer of assets, rights and/or employees to the outsourcing service supplier and where those may be used to supply services other than to the original owner/employer. The CMA will assess whether, overall, the assets, rights and employees transferred to the outsourcing service supplier are such as to constitute an enterprise under the principles set out above.
Mergers: Guidance on the CMA’s jurisdiction and procedure (CMA2)
The assessment of the merger, assuming it constitutes a ‘merger’ under the UK regime, will ultimately be whether the transaction is found to result, or is expected to result, in a substantial lessening of competition in the UK. In the distribution context, the issue will often be whether there is foreclosure of a supplier or of a distributor. Not every transaction that is a merger is examined; there is no obligation to pre-notify, although, where the authorities have jurisdiction, it may be sensible to do so. The authorities have no jurisdiction to look at a merger unless as a result of the transaction the merged entity’s share of supply or purchases, of goods or services of a particular description in the UK or a substantial part of the UK, exceed 25 per cent, or such a share of supply (not to be confused with market share) is increased. If the target acquired has a turnover of at least £70 million in the UK, the authorities also have jurisdiction irrespective of the share of supply.
As a result of the Enterprise Act 2002 (Turnover Test) (Amendment) Order 2018 (Turnover Test Order 2018), which came into effect from 11 June 2018, investments in the defence, dual use, quantum tech and CPU sectors are subject to a reduced threshold of £1 million for triggering a relevant merger situation (which may result in an investigation by the UK CMA). Additionally, the Enterprise Act 2002 (Share of Supply Test) (Amendment) Order 2018 (Supply Test Order 2018), which also came into effect from 11 June 2018, provides that the acquisition of a company in one of the above sectors (with a 25 per cent share of supply of goods or services in the UK pre-merger) will also trigger a relevant merger situation.
Do your jurisdiction’s antitrust or competition laws constrain the relationship between suppliers and their distribution partners in any other ways? How are any such laws enforced and by which agencies? Can private parties bring actions under antitrust or competition laws? What remedies are available?
The UK competition authority, the CMA, has powers to intervene and conduct studies of particular markets and this could impact on distributor supplier relationships. An example is the investigation of the market for aggregates, cement and ready mixed concrete, which resulted in divestment orders and a ban on supplies issuing generic price announcement letters. The CMA has also investigated the role of digital comparison tools across a range of product and service markets and has identified concerns about lack of transparency over whether suppliers can influence how products are presented on such tools as well as potential competition concerns about whether certain clauses in contracts between suppliers and providers of tools could limit price competition or innovation, or restrict market entry. A report published in 2017 set out a number of recommendations for online comparison tools, including clearly displaying product and price information, and informing users on how their personal data will be used. This also triggered an investigation into a particular price comparison website’s contracts with home insurers to determine whether they were pushing up the prices for consumers (see question 16).
Court actions under competition law
Parties can bring actions of various kinds for breaches of competition law. Those that have suffered loss as a result of a breach of competition law will have a claim in damages. Such claims can be stand-alone claims (where the claimant needs to prove the breach of competition law, causation and loss) or ‘follow-on’ actions (where the claimant can rely upon a decision of a competition authority finding that a party has breached competition law as proof of that breach). In a follow-on action, the claimant must, therefore, prove only causation and loss.
In the distribution context, a distributor may be able to claim damages if, for example, the supplier has been engaged in price-fixing with other suppliers and the prices paid by the distributor are higher than they might otherwise have been, but the distributor would have to show it did not pass on any overcharge. Suppliers or distributors may face claims for damages for abuse of a dominant position. Labinvesta raised proceedings in November and December 2016 against a supplier of consumables used in medical treatment and its subsidiary distributors, alleging that the defendants had unlawfully refused to supply products to Labinvesta for onward distribution in Belarus (CAT Case No. 1273/5/7/16). This case has now been withdrawn.
Similarly, a party may be able to claim damages even if it is a party to an agreement that is anticompetitive provided the party seeking to claim damages was in a weaker position than the other party in the negotiation of the contract such that it was not genuinely free to choose the terms of the contract (Courage v Crehan  QB 507).
Damages in the UK are generally compensatory. Punitive damages are not available in the UK for breach of contract.
More commonly in distribution disputes, parties can use competition law to defend court action if, for example, the clauses being sued upon are unenforceable because they restrict competition.
However, in the case of James McCabe v Scottish Courage  EWHC 538 (Comm), regarding the severability of an exclusivity provision that was potentially anticompetitive, the court held an exclusivity provision (which was unlawful) could not be severed from the agreement as to do so would damage the fundamental nature of the agreement between the parties and that the clause was instrumental in inducing the supplier to enter into the contract in the first place. If the clause is unlawful and is key to the agreement, the whole agreement is unenforceable.
Parties can bring an action in the Competition Appeal Tribunal (CAT) or the High Court for damages or for injunctions. The CAT obtained additional powers in respect of stand-alone damages claims for competition law breach and for injunctions as a result of the Consumer Rights Act 2015 from 1 October 2015. Its jurisdiction to issue injunctions does not extend to Scotland. It also introduced an opt-out collective claim procedure to operate alongside an opt-in procedure. The first opt-out collective claim was raised as a ‘follow-on’ action for damages arising from the OFT Mobility Scooters decision that found a manufacturer of mobility scooters guilty of prohibiting online advertising of prices below the manufacturer’s recommended retail prices (Dorothy Gibson v Pride Mobility Products Ltd, CAT Case No. 1257/7/7/16). This was subsequently abandoned after the CAT ordered that the scope of the claimants’ arguments be narrowed to reflect only the loss that they themselves suffered and that more economic data should be provided to support their claim. A second-class action was dismissed by the CAT in July 2017. A former financial services ombudsman sought damages on behalf of millions of consumers on the basis of a 2007 European Commission decision that said that MasterCard had been charging customers anticompetitive card fees for 18 years (Walter Hugh Merricks v Mastercard and others, CAT Case No. 1266/7/7/16) but was unsuccessful in convincing the Tribunal that he could quantify the loss suffered by each member of the class or prove the harm he alleged occurred. Permission from both the Administrative Court of the High Court and the Court of Appeal to challenge the ruling has been granted.
The Consumer Rights Act (CRA) 2015 introduced a ‘fast-track’ procedure, intended to make it quicker and cheaper to obtain a remedy for harm suffered as the result of anticompetitive behaviour, with limited exposure to costs risk. Though intended to make it easier for individuals and small and medium-sized entities, it is not restricted to them. To be suitable for the ‘fast-track’, a case must be brought to trial within no more than six months of allocation and, in general, the trial must take no longer than three days. Therefore, it was thought that use of the ‘fast track’ might be restricted to straightforward cases involving few parties and not requiring significant disclosure or extensive expert evidence. The procedure has proved popular, particularly in cases involving an alleged abuse of a dominant position. One such case proceeded to trial (Socrates Training Limited v The Law Society of England and Wales, CAT  CAT 10), with others settling. Although the ‘fast track’ might have been thought suitable only for cases in which the relief sought is limited to a finding of infringement and the grant of an injunction (eg, to restrain further infringement, to require a resumption of supplies or to grant access to an ‘essential facility’), most cases have also involved a claim for damages. In 2016, a claim for damages that followed from the European Commission’s Polyurethane Foam decision was refused allocation to the fast track as it raised complex issues that could not be dealt with in three days (Breasley Pillows Limited and Others v Vita Cellular Foams (UK) Limited and Others  CAT 8).