Q&A: vertical agreements in Brazil

Vertical agreements

Do any special rules or exemptions apply to the assessment of anticompetitive agreements between undertakings active at different levels of the supply chain in digital markets in your jurisdiction?

There are no special rules or exemptions under Brazilian competition law that apply to the assessment of anticompetitive agreements between undertakings active at different levels of the supply chain in digital markets.

Anticompetitive agreements between undertakings that fall under the broad category of ‘vertical restraints’ or ‘vertical agreements’ typically include certain types of practices by manufacturers or suppliers related to the resale of their products. In the majority of cases, these agreements are pro-competitive and produce efficiencies that benefit consumers. Notwithstanding, vertical restraints can also generate concerns in certain circumstances where they may foreclose rivals (restricting inter-brand competition) or significantly reduce intra-brand competition in markets where there is a low degree of inter-brand competition.

While most investigations into vertical restraints do not involve digital markets, the Federal Competition Agency (CADE)’s precedents regarding traditional industries indicate that vertical restraints are subject to an effects-based approach that resembles the full-blown ‘rule of reason’ developed in the US case law. In brief, CADE has the burden to prove that (1) an undertaking holds a dominant position and (2) its behaviour results in anticompetitive effects. If CADE can prove that these two criteria are fulfilled, a given vertical restraint will be deemed unlawful unless the defendant can show that its behaviour creates (3) pro-competitive efficiencies that compensate its anticompetitive effects.

How has the competition authority in your jurisdiction addressed absolute bans on online sales in digital markets?

There are no precedents involving online sales bans or online platform bans in Brazil. In any event, such behaviour would likely be examined following an effects-based or rule of reason approach.

How has the competition authority in your jurisdiction addressed online resale price maintenance?

CADE has not concluded any specific investigation of online resale price maintenance in digital markets to date. In any event, the investigative unity (SG) has indicated that online resale price maintenance (RPM) should be analysed under the same framework CADE developed to assess RPM in traditional industries (see CADE v Technos).

Since the mid-1990s, CADE’s precedents have consolidated the view that suggested or recommended prices do not raise competition concerns. To be admitted as such, however, suggested or recommended prices should not be followed by any mechanism that fosters or punishes the adoption of such prices by resellers, as CADE recently reiterated in the business review request submitted by fuel distributor Ipiranga.

RPM either as price ceiling or a price floor is normally subject to lengthy scrutiny. While CADE has previously indicated that maximum prices (price ceilings) might be less harmful than minimum prices (price floors), there is no exemption to maximum prices.

CADE has consolidated the use of the rule of reason to assess RPM conduct, but since 2013 it follows a more rigorous framework in this line of cases – once it is established that the player implementing an RPM policy holds a dominant position, CADE will work under the assumption that the conduct produces negative effects. Therefore, CADE will demand from the defendant detailed explanations as to the impacts of the conduct and the business justifications. It means CADE has shifted the burden of proof in these cases, imposing on defendants the burden to produce evidence that the conduct is unable to harm competition (eg, there is still sufficient inter-brand competition) or that it produces substantial efficiencies to the benefit of consumers (that outweigh the reduction in intra-brand competition).

This rigorous approach towards RPM cases was first employed in a precedent from 2011 (Procon v SKF). In a recent business review request submitted by Ipiranga, however, CADE indicated that a presumption of anticompetitive effects will only be used in cases where the RPM policy was implemented as part of an agreement among suppliers or retailers to coordinate prices, and that RPM policies implemented as a legitimate business strategy by manufacturers would be subject to the standard rule of reason approach.

CADE usually considers that controlling advertised prices may result in similar effects to RPM. In a recent business review request submitted by tyre manufacturer Michelin, a CADE commissioner indicated that controlling advertised prices in e-commerce platforms may result in the exact same effects as an RPM strategy. In this scenario, advertised prices and final prices would necessarily be the same – in contrast to physical retailers, which can offer discounts in relation to advertised prices after negotiating with each customer.

How has the competition authority in your jurisdiction addressed geoblocking and other territorial restrictions?

CADE has not launched any investigation of geoblocking and other territorial restrictions related to online sales to date.

In any event, CADE considered territorial restrictions in other cases that provide some standards that may be applicable to an eventual investigation of geoblocking. First, CADE reviewed a few cases related to ‘radius clauses’, which ban shopping mall tenants from opening stores within a certain radius from the shopping mall. Under CADE’s precedents, radius clauses are subject to a rule of reason standard – in 2016, the majority of CADE’s Tribunal rejected a proposal from one of the commissioners to declare radius clauses unlawful per se (MPFRS v Shopping Iguatemi and others).

Nonetheless, CADE is usually sceptical of justifications to radius clauses. In precedents issued in the early 2000s (eg, CADE v Condomínio Shopping Center Iguatemi), CADE held that radius clauses may be anticompetitive for their potential to make it impossible for rival shopping malls to offer a competitive ‘tenant mix’ to customers. This understanding was confirmed years later in MPFRS v Shopping Iguatemi and others, where CADE imposed fines on seven shopping centres for adopting radius clauses. While the agency did not set safe harbours in that case, it held that the following elements are critical to determine whether such clauses are lawful:

• duration;
• whether they only banned tenants from opening stores under the same brand or if they banned tenants from opening any stores in the same line of business; and
• if there were justifications to the extension of the geographic radius.

In addition to the cases related to radius clauses, CADE’s case law on territorial restrictions is scant. There are two precedents regarding clauses imposed by vehicle manufacturers to prevent dealerships from actively making sales to customers located outside of designated geographical areas (MPFSP v Car makers and MPF v Scania and others). These cases indicate that a rule of reason standard is applicable. In MPF v Scania and others, CADE cleared the defendant after finding that it held less than 30 per cent of the relevant market; and in MPFSP v Car makers, CADE cleared the defendants after finding that the territorial restrictions imposed were necessary to eliminate free-riding and increased inter-brand competition.

How has the competition authority in your jurisdiction addressed supplier-imposed restrictions on distributors’ use of online platforms or marketplaces and restrictions on online platform operators themselves?

CADE has not launched any investigation of supplier-imposed restrictions on distributors’ use of online platforms or marketplaces to date. In any event, such behaviour would likely be examined by CADE following an effects-based or rule of reason approach.

With regards to selective distribution systems, there is no recent case involving digital markets. More generally, however, selective distribution normally does not raise antitrust concerns in Brazil, unless it is part of a vertically integrated firm’s strategy to exclude rival distributors and dominate a downstream market. Although there are very few precedents, it is possible to infer that selective distribution systems would be subject to a rule of reason standard.

In Inox-Tech v APERAM, CADE investigated APERAM Inox América do Sul for discriminating its distributors of stainless steel. APERAM held an alleged monopoly in stainless steel production, supplying authorised distributors, while AMIB Serviços, an undertaking part of APERAM’s economic group, also competed in the stainless-steel distribution market. After receiving complaints from distributors, CADE opened an investigation and found evidence that APERAM was (1) offering more favourable commercial conditions to AMIB to harm independent distributors and (2) creating difficulties for imports of stainless steel. In 2015, APERAM signed a consent decree with CADE, agreeing to cease both practices completely.

It is also worth mentioning an almost two-decades-old precedent that involved Microsoft’s selective distribution system (SDE v Microsoft and TBA). In that case, CADE imposed a fine on Microsoft and a distributor named TBA after finding that Microsoft, which held 90 per cent of the software market, recurrently altered the criteria that qualified undertakings as authorised distributors to make sure that TBA was its sole authorised distributor for sales to the federal government, thus eliminating intra-brand competition and raising prices in public bids. However, it is important to highlight that this precedent should be taken with caution: since that ruling, issued in the early 2000s, CADE has never again held that ‘discrimination’ by suppliers that are not vertically integrated could be anticompetitive.

Therefore, undertakings should be careful with selective distribution systems, especially if they hold a dominant position in upstream markets, they are vertically integrated, and their commercial policy favours the distributors it owns or that are part of its economic group at the expense of independent distributors. Moreover, the existence of pro-competitive justifications should play a relevant role in determining whether a selective distribution system is lawful.

How has the competition authority in your jurisdiction addressed restrictions on using or bidding for a manufacturer’s brand name for the purposes of targeted online advertising?

CADE has not launched any investigation of supplier-imposed restrictions on using or bidding for a manufacturer’s brand name for the purposes of targeted online advertising to date. In any event, such behaviour would likely be examined by CADE following an effects-based or rule of reason approach.

How has the competition authority in your jurisdiction addressed most-favoured-nation clauses?

Similar to investigations in Europe, CADE investigated whether the adoption of most favoured nation (MFN) or parity clauses by online travel agencies in contracts with hotels could harm competition (FOHB v Booking.com, Decolar.com and Expedia). Like most cases in Europe, the investigation in Brazil ended with a settlement with online travel agents agreeing to remove ‘wide’ price parity clauses, but retaining ‘narrow’ clauses.

This investigation ended with a settlement, so there is no final decision by CADE on the matter. In any event, the decision that accepts the settlement proposals contains important guidance. In brief, wide clauses would restrict hotels from offering better terms to competing travel platforms. CADE indicated that wide clauses could limit price competition and raise barriers for entrants as hotels would not be able to pass on to consumers lower commissions charged from entrants or travel agents willing to compete more aggressively. All companies investigated in Brazil agreed to remove this provision. On the other hand, narrow clauses only prohibit better offers on the hotel’s own website, and CADE indicated they were legitimate given the need to prevent free-riding (platforms invest considerably in their websites to attract users, and would suffer if consumers were able to find a hotel via the platform and then book at a lower price via the hotel’s own website). As a result, travel agents continue to enforce narrow price parity provisions.

CADE is also investigating gym aggregator GymPass for adopting MFN clauses and entering into exclusivity arrangements with gyms. In February 2022, CADE issued a preliminary injunction to prohibit exclusive agreements and MFN clauses adopted by GymPass, including provisions that barred gyms from offering daily passes to consumers at lower prices than those charged by GymPass. The majority vote noted concerns with ‘tipping effects’ and argued that GymPass’ behaviour was especially concerning because it was a first mover, capable of generating cross-side network effects. Therefore, arrangements restricting a significant number of gyms from contracting with rival platforms could effectively block entry as aggregator platforms are only capable of attracting customers if they can offer users a relevant pool of gyms for use. The investigation is still ongoing, so there is no final decision by CADE on the matter.   

How has the competition authority in your jurisdiction addressed vertical restraints imposed in multisided digital markets? How have potential efficiency arguments been addressed?

In Rappi v iFood, CADE is investigating whether exclusivity arrangements with restaurants entered into by the biggest food delivery platform in Brazil have harmed competition. The SG acknowledged that exclusivity agreements with restaurants signed by iFood may result in foreclosure of rival delivery platforms. In particular, the SG mentioned that, since it operates in a multisided market, iFood’s behaviour may result in ‘tipping effects’, namely, the domination of the market by only one platform. The SG also highlighted that exclusivity agreements signed by iFood were likely to result in efficiencies. Nonetheless, the SG held that the risk of harm to competition was significant and issued a preliminary injunction to prohibit new exclusive agreements by iFood.

Similarly, in Total Pass v. GymPass, CADE is investigating gym aggregator platform GymPass for adopting MFN clauses and entering into exclusivity arrangements with gyms. CADE acknowledged that MFN clauses and exclusive arrangements adopted by GymPass may result in foreclosure of rival platforms, noting that GymPass’ behaviour could lead to ‘tipping effects’ since it operates in a two-sided market. CADE found that there was no evidence of efficiencies generated by GymPass’ arrangements and decided to impose an injunction prohibiting MFN clauses and exclusivity arrangements except for gyms where GymPass made financial investments.                    

Have any other key issues emerged in your jurisdiction in relation to the application of competition law to vertical agreements in digital markets?

No.