This publication explains how the European competition rules are applied to “vertical agreements”,
i.e. agreements for the sale or purchase of goods or services between parties operating (for the purpose of the particular agreement) at different levels of the supply chain.
It considers the operation of the European Commission’s vertical agreements block exemption regulation (VABER)1 and the Commission’s accompanying Vertical Guidelines which set out the principles for the assessment of vertical agreements under Article 101 of the Treaty on the Functioning of the European Union.2 It also considers the stricter rules applicable to the motor vehicle sector in the Commission’s motor vehicle block exemption regulation (MVBER).3 Further detail on key stages of the analysis of vertical agreements is provided in the Annexes to this publication.
Businesses use various different types of vertical agreements to get their goods and services to market. The concept of “vertical agreement” covers the purchase or supply of intermediate goods (e.g. raw materials or goods subjected to further processing by the customer), finished goods (e.g. for resale by a dealer active at the wholesaling or retailing level) or services. It also covers agency agreements. Vertical agreements that look similar in form can have very different substantive effects on competition – just as different types of agreements can have similar competitive effects – depending on factors such as the conditions of competition in the markets concerned, and the parties’ strengths in those markets.
The Article 101(1) prohibition applies where an agreement or concerted practice – formal or informal, written or unwritten – between two or more “undertakings” (usually businesses), which may affect trade between Member States, has the object or effect of preventing, restricting or distorting competition to an appreciable extent. Even if an agreement falls within the scope of Article 101(1), it may be exempt from the prohibition if it has countervailing competitive benefits or efficiencies under Article 101(3). Some vertical agreements fall outside the scope of Article 101(1), such as agreements with final customers (not operating as undertakings), intra-group agreements and some agency agreements: see Annex 1.
“Vertical restraints” (restrictions in vertical agreements) tend to be considered less harmful than “horizontal restraints” (restrictions in agreements between undertakings operating at the same level(s) of production or distribution). This reflects the following:
Vertical agreements: In a vertical relationship the product of one party is the input of the other. This means that the exercise of market power by one party – whether the upstream supplier or the downstream buyer – may harm the commercial position of the other party. Parties to a vertical agreement therefore usually have an incentive to prevent each other from imposing
1 Commission Regulation (EU) 330/2010 on the application of the Treaty of the Functioning of the European Union to categories of vertical agreements and concerted practices (OJ 2010 L102/1, 23.4.2010). This block exemption replaced Commission Regulation
(EC) 2790/1999 and came into force on 1 June 2010 expires on 31 May 2022. It was incorporated into the EEA competition rules by EEA Joint Committee Decision No. 077/2010 (amending Annex XIV to the EEA Agreement).
2 Commission Guidelines on Vertical Restraints (OJ 2010 C131/01, 19.5.2010). The EFTA Surveillance Authority has adopted equivalent guidelines. The Commission has also published a more concise brochure on the competition rules for supply and distribution agreements.
3 Commission Regulation (EU) 461/2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices in the motor vehicle sector (OJ 2010 L129/52, 28.5.2010). MVBER applies to vertical agreements relating to the motor vehicle aftermarket, which includes the purchase, sale or resale of spare parts or
provision of repair and maintenance services. The general VABER applies to the purchase, sale or resale of motor vehicles.
unreasonable restrictions. For most vertical agreements, serious competition concerns only arise if there is insufficient inter-brand competition in the markets affected by the agreement, i.e. if the supplier (and/or buyer) has a high degree of market power.
Horizontal agreements: In a horizontal relationship – in particular between actual or realistic potential competitors – the exercise of market power by one party (to the potential detriment of third parties) may actually also benefit the other party. The Commission is therefore generally more wary of cooperation between parties active at the same level in the supply chain, particularly where the agreement has the object of fixing prices, limiting production or sharing markets or customers.4
Accordingly, many vertical agreements either fall outside the Article 101(1) prohibition altogether or satisfy the exemption criteria of Article 101(3).5 Where this is not the case, restrictive provisions in the agreement will be void by virtue of Article 101(2) (and possibly under Article 102 in the case of dominant companies). In serious cases, the Commission’s Directorate-General for Competition and/or the Member States’ national competition authorities (NCAs) may investigate, and declare the restrictive provisions, and possibly the whole agreement, void and may impose fines. The NCAs play a significant role in the enforcement of Articles 101 and 102 in accordance with Council Regulation 1/2003.6 The Commission and NCAs cooperate with each other within the framework of the European Competition Network (ECN) to coordinate investigations or allocate cases. Third parties may also bring claims for damages in the national courts of Member States.
The VABER and MVBER provide “safe harbours” for agreements if certain formal conditions are satisfied, regardless of whether they may have positive or negative effects on competition in the relevant market. The VABER and Vertical Guidelines are available for any vertical agreement, including industrial supply contracts, selective distribution systems, agency arrangements or non- exclusive purchasing and distribution arrangements. Companies are not expected to squeeze their vertical arrangements into the straitjackets of agreements covered by previous block exemptions (on exclusive distribution, exclusive purchasing or franchising, for example). That said, the MVBER impose stricter requirements on the motor vehicle sector.
Despite the general improvements brought about by this effects-focused approach, the Commission continues to proceed on the basis that some vertical agreements can raise serious competition
4 In the field of “horizontal cooperation”, block exemptions are available for R&D agreements and specialisation agreements. The Commission has also adopted guidelines on the applicability of Art. 101 to horizontal cooperation. These block exemptions and
Horizontal Guidelines are considered in more detail in the Slaughter and May publication on The EU competition rules on horizontal agreements. The Horizontal Guidelines focus in particular on R&D Agreements, production agreements (e.g. joint production,
specialisation and outsourcing agreements and subcontracting between competitors), purchasing agreements, commercialisation agreements and agreements on standards. They do not cover other forms of agreements between competitors such as minority
shareholdings and strategic alliances; nor do they cover joint ventures notifiable under the EU Merger Regulation (see the Slaughter and May publication on The EU Merger Regulation).
5 Agency agreements are not caught by Art. 101(1) if the principal bears the commercial and financial risks related to the selling and purchasing of contract goods and services and obligations imposed on the agent in relation to the contracts concluded and or negotiated on behalf of the principal (see also Annex 1). However, agency agreements containing single branding provisions and
post-term non-compete provisions may infringe Art. 101(1) if they lead to or contribute to a (cumulative) foreclosure effect. Agency agreements may also fall within the scope of Art. 101(1) where a number of principals coordinate their activities by using the same agent.
6 This Implementing Regulation fundamentally changed the way in which Arts. 101 and 102 are enforced (Council Regulation (EC) 1/2003; OJ 2003 L1/1, 4.1.2003). Its objectives were: to facilitate more rigorous enforcement against blatant infringements such as cartels (inter alia by abolishing the system of notifying agreements to the Commission to obtain individual exemptions under Art.
101(3)); to allow decentralisation of the application of the rules (in particular the Art. 101(3) exemption criteria) to the NCAs and national courts; and to simplify enforcement procedures.
concerns (depending on the relevant market structure and the market positions of the parties). The VABER has fixed an Article 101 “market power” threshold at 30% – well below the level of 40-50% at which issues of Article 102 “dominance” generally arise. It is rarely easy to determine with certainty the precise extent of the product and geographic markets affected by a vertical agreement. Often it will be necessary to consider the potential effects of an agreement by reference to various alternative relevant markets. The relevant party might satisfy the 30% threshold by reference to one market analysis, but a narrower market definition may mean that the threshold is exceeded. If so, a more detailed assessment of the applicability of Article 101(1) and
(3) will generally need to be undertaken.
One of the aims of the more effects-focused approach was to reduce the Commission’s workload of relatively non-controversial vertical arrangements. For companies with market shares above the 30% threshold, however, there remains the risk of litigation and/or third party complaints seeking to take advantage of some of the uncertainties raised by the market share tests for block exemption treatment. That said, it should be remembered that the Commission’s Vertical Guidelines are merely a tool to be deployed by parties (and the Commission, NCAs and courts) in undertaking a case-by-case analysis of whether a particular agreement is compatible with the principles of
Articles 101 and 102. Further guidance can also be drawn from the European Courts’ judgments and from Commission practice in other cases. For example, there are a number of useful precedents analysing vertical restraints in selective distribution networks, franchising agreements and agency schemes. Where appropriate, these should be considered in addition to the Commission’s own Guidelines.
The current VBER will expire on 31 May 2022. In September 2020 the Commission published a Staff Working Document summarising its findings of its evaluation of the VBER and the Vertical Guidelines. The Commission commenced a review of the VBER and Vertical Guidelines in October 2018 to decide whether it should let the VBER lapse, prolong its duration, or revise it in light of certain developments in the market since 2010 (particularly the emergence of online platforms). In its Staff Working Document, the Commission summarised the market developments and identified a number of issues that it believes need addressing to make the VBER and Guidelines fit for purpose. The Commission subsequently launched the impact assessment phase of its review. The Commission aims to publish a draft of the revised rules over the course of 2021.
2. Focus on effects on competition
Vertical agreements which merely establish basic terms for a specific sale and purchase transaction (price, quantity, quality, etc.) will not normally restrict competition within the meaning of Article 101; however, restrictive effects on competition may arise where an agreement involves restraints on the supplier or buyer (e.g. on the customers to whom the buyer may resell the products). The Vertical Guidelines (at paragraphs 100 to 105) describe the potential negative effects of vertical restraints which EU competition law aims to prevent. These potential effects on competition all relate essentially to the possibility of market foreclosure of competitors and/or the prospect of consumers having to pay higher prices (or receiving lower quality goods or services):
Entry barriers: The raising of barriers to market entry or expansion may foreclose other suppliers or buyers from the market. If competitors are partially or completely foreclosed from a significant part of the market, this may result in prices being higher and consumers having less choice than would otherwise have been the case; Inter-brand competition: The reduction of inter-brand competition may facilitate collusion between competing suppliers (or buyers) on matters such as pricing. This extends not only to explicit collusion (unlawful price-fixing or market sharing) but also to tacit collusion (conscious parallel behaviour in oligopolistic markets); Intra-brand competition: Some vertical restraints may reduce intra-brand competition (i.e. between distributors of the same brand). These potential negative effects are generally less harmful if there is a significant degree of inter-brand competition; and Barriers to cross-border trade: Some vertical restraints may result in market partitioning and the creation of obstacles to EU market integration, in particular limitations on the freedom of consumers to purchase goods/services in any Member State they choose.
If a vertical agreement (or a network of agreements) has any of these negative effects to an appreciable extent on a relevant market within the EU, the Article 101(1) prohibition is likely to be applicable. Appraising whether particular arrangements have any of these effects involves looking at the conditions of competition in the markets concerned and the parties’ strengths in those markets. The Commission’s 1997 Market Definition Notice describes factors to take into account when defining relevant markets for these and other purposes: see Annex 2.7 For most vertical restraints, competition concerns only arise if at least one of the parties has a significant level of market power. Market power (which can exist below levels of Article 102 dominance) describes the situation where the constraints which would usually ensure that an undertaking behaves in a competitive manner are not working effectively. It implies the ability to raise prices consistently and profitably above competitive levels (resulting in supra-competitive prices and supra-normal profits).8
Some vertical agreements may be able to benefit from the Commission's 2014 Notice on agreements of minor importance.9 This De Minimis Notice states that the Commission will not normally initiate proceedings under Article 101 against agreements between SMEs (small and medium-sized
7 Commission Notice on the definition of relevant market for the purposes of Community competition law (OJ 1997 C372/03, 9.12.1997).
8 If one of the parties enjoys a dominant position in any relevant product or service market (whether across Europe as a whole or within a relevant national or regional market which constitutes a substantial part of the EU), Art. 102 may also apply.
9 Notice on agreements of minor importance which do not appreciably restrict competition under Article 101(1) of the Treaty on the Functioning of the European Union (De Minimis Notice) (OJ 2014 C291/1, 30.8.2014).
enterprises with fewer than 250 employees, and annual turnover not exceeding €50 million or assets not exceeding €43 million).10 The Notice also states that larger companies should not face investigation where the parties' combined market shares in the relevant markets do not exceed the following thresholds:
15% for agreements between non-competitors, i.e. between parties who are not actual or realistic potential competitors in the same product market (irrespective of whether they are active in the same geographic market); 10% for agreements between competitors (including situations of "dual distribution", e.g. where the supplier is also active at the buyer's level of distribution). This 10% threshold also applies where it is difficult to classify the agreement as being between competitors or non-competitors); and 5% where access to the market is foreclosed by the cumulative effect of parallel networks of similar vertical agreements by several companies.
An agreement can only benefit from the De Minimis Notice if it does not have as its object the prevention, restriction or distortion of competition. Agreements containing price fixing, output limitation or market sharing restrictions will therefore not benefit from the Notice. Similarly, agreements containing any hardcore restrictions as defined by current or future Commission block exemption regulations will not benefit from the Notice.
A vertical agreement between parties whose market shares exceed the relevant market share threshold may nevertheless fall outside Article 101(1) if the agreement does not have an appreciable effect on competition.
It should also be remembered that the prohibitions under Articles 101(1) and 102 only apply if the agreement or conduct may affect trade between Member States. For these purposes, the European Court of Justice has confirmed that “it must be possible to foresee with a sufficient degree of probability, on the basis of a set of objective factors of law or of fact, that they may have an influence, direct or indirect, actual or potential, on the pattern of trade between Member States in such a way as to cause concern that they might hinder the attainment of a single market between Member States. Moreover, that effect must not be insignificant”. For further details, see the Commission's 2004 Notice setting out Guidelines on the effect on trade concept.11 Insofar as vertical restraints are intended to apply outside of the EEA, they will not be capable of affecting trade between Member States and so should not be caught by the EU competition rules. If the agreement does not affect trade between Member States (e.g. because it relates to trade purely within a Member State), national competition legislation may be applicable.
10 This definition is based on the definition of SME in the Annex to Commission Recommendation of 6 May 2003 (OJ 2003 L124/36, 20.5.2003).
11 Guidelines on the effect on trade concept contained in Articles 81 and 82 of the Treaty (OJ 2004 C101/81, 27.4.2004). This Notice is of particular relevance for the regime under Regulation 1/2003. If a NCA is applying national competition law to an agreement or contract which has an effect on trade between Member States, it is required also to apply Arts. 101 and/or 102; if an agreement meets the criteria of Art. 101(3) or comes within a Commission block exemption, it may not be prohibited by national competition law, except that an NCA may apply stricter national laws prohibiting or sanctioning unilateral conduct.
3. The “safe harbours” of the VABER and MVBER
The various steps involved in the application of the EU competition rules to vertical agreements are illustrated by the flowchart at Annex 3.
The VABER and MVBER are not available for agreements relating to the licensing or assignment of intellectual property rights if those IPR provisions constitute the primary object of the agreement: see Annex 4 (and the separate Slaughter and May publication on The EU competition rules on intellectual property licensing). The availability of the block exemptions is also limited in the case of vertical agreements involving competing undertakings or retailer buying groups.
The VABER and MVBER each set out various categories of “hardcore” (or “blacklisted”) restrictions which remove the benefit of the block exemption, including price-fixing or resale price maintenance, as well as certain territorial or sales restrictions: see Annex 5. These are restrictions which are considered to have such an obvious restrictive effect on competition that they can be presumed to be caught by the Article 101(1) prohibition irrespective of the market shares of the undertakings concerned and are unlikely to meet the Article 101(3) exemption criteria: however this is a rebuttable presumption and is not a per se rule. This leaves open the possibility for undertakings to plead an efficiency defence under Article 101(3) in an individual case. Conversely, a vertical agreement which does not contain any of these hardcore restrictions is automatically eligible for the Article 101(3) exemption through the “safe harbour” of the applicable block exemption, provided it meets the block exemption’s other conditions (see Annex 3).
Among the VABER’s other conditions is a requirement that the market share threshold held by each of the parties to the agreement (both buyer and supplier) does not exceed 30% on any of the relevant markets affected by the agreement. When considering the market share of the supplier, the relevant market is that where it sells the contract products to the buyer; when considering the market share of the buyer, the relevant market is that where it buys the contract products (see Annex 2).
Finally, in order for the entire agreement to benefit from the VABER, the agreement must not contain certain non-exempted restrictions: see Annex 6. For example, non-compete provisions or obligations imposed on the buyer are generally only permitted under the VABER if their duration is limited to a period of five years or less. However, if an agreement contains any such restrictions and they are severable from the rest of the agreement, the remainder of the agreement may still benefit from the VABER.
The “safe harbours” provided by the VABER and MVBER are subject to the following caveats:
Commission withdrawals: The Commission may by decision withdraw the benefit of the relevant block exemption if it finds in a particular case that the vertical agreement, whether in isolation or in conjunction with other similar agreements, nevertheless has certain effects which are incompatible with the Article 101(3) exemption criteria.12 In these circumstances the Commission has the burden of proof that the agreement infringes Article 101(1) and does not meet the Article 101(3) criteria. In particular, the VABER and MVBER provide that the Commission may withdraw the benefit of the block exemption where access to the relevant market (or competition therein) is significantly restricted by the “cumulative effect” of parallel networks of vertical agreements with similar substantive effects operated by competing suppliers/buyers;
12 Recital 13 VABER; Vertical Guidelines, paras. 74 to 78; Recital 21 MVBER; Art. 29(1) of Council Regulation 1/2003.
Member State withdrawals: A NCA may likewise withdraw the benefit of the relevant block exemption in respect of its territory for any particular case where vertical agreements have effects incompatible with the Article 101(3) exemption criteria in that Member State (or a part thereof) – but only if the territory has all the characteristics of a distinct geographic market;13 and Network effects: The Commission may by Regulation declare that the relevant block exemption does not apply to specified types of agreements on a particular market where:
there are parallel networks of vertical agreements with similar substantive effects, and these networks together cover more than 50% of the relevant market.14
13 Recital 14 VABER; Vertical Guidelines, para. 78; Recital 22 MVBER; Art. 29(2) of Council Regulation 1/2003.
14 Art. 6 VABER; Vertical Guidelines, paras. 79 to 85; Art. 6 MVBER.
4. Outside the “safe harbours” – case-by-case analysis
Where a vertical agreement does not qualify for exemption under the VABER, it may still be appraised favourably in accordance with the principles of Articles 101 and, if applicable, 102.15 This appraisal involves a full analysis of the agreement’s effects on competition. The Vertical Guidelines
– together with the Commission’s 2004 Guidelines on the application of Article 101(3)16 – aim to assist businesses in undertaking this assessment.17 For a summary of the issues which the Guidelines suggest should be taken into account, see Annex 7. As already indicated, the key issues for this assessment tend to be:
the structure of competition on the relevant markets and degree of market power exercised by the parties; and whether the operation of the vertical agreement (or network of agreements) will have appreciable market foreclosure effects on competitors and/or result in higher prices for consumers.
This full Article 101 analysis first involves identifying whether Article 101(1) is applicable at all, i.e. whether the vertical agreement (or network of agreements) appreciably restricts or limits competition. This is a question of fact and degree requiring an examination of all relevant surrounding market circumstances (taking account of the factors listed at Part A of Annex 7).
If the Commission or a NCA investigates a vertical agreement, they have the burden of proof in determining that the agreement is caught by Article 101(1). If they find that Article 101(1) is applicable, the parties may still be able to substantiate efficiency claims and benefits (i.e. to fall within Article 101(3)) in which case the Commission or NCA must examine whether the Article 101(3) criteria are met. This is a four-limb test (considered further at Part B of Annex 7), requiring the parties to demonstrate that the vertical agreement:
offers efficiency gains by contributing to improving production and/or distribution or to promoting technical or economic progress. The Vertical Guidelines identify a non-exhaustive list of nine potential positive efficiency effects (as listed at Part B.1 of Annex 7); offers consumer a fair share of these efficiency gains; does not impose on the undertakings concerned any vertical restraints which are not indispensable to the attainment of these efficiency gains; and does not afford the undertakings concerned the possibility of eliminating competition in respect of a substantial part of the market in question.
Where there is litigation over a vertical agreement, the national court must first assess whether it is caught by Article 101(1) and, if so, whether a relevant block exemption applies. If the agreement
15 While the same is technically true for vertical agreements in the motor vehicle sector if they do not automatically qualify for exemption under the MVBER, the nature of that block exemption (specifically devised to take account of the dynamics of competition in that sector, including the cumulative effect of distribution networks operated by the motor vehicle industry) is such that there will be greater pressures to come within its strict terms.
16 Guidelines on the application of Article 101(3) of the Treaty (OJ 2004 C101/97, 27.4.2004).
17 Companies are encouraged to do their own assessment without involving the Commission or NCAs (Vertical Guidelines, paras. 3 and 96). In limited circumstances where a case nevertheless gives rise to genuine uncertainty because it presents novel or unresolved questions regarding the application of Arts. 101 or 102, the parties may wish to seek informal guidance from the Commission. In 2004 the Commission issued a Notice setting out the framework within which it will assess whether to issue such a guidance letter. The Commission publishes non-confidential versions of such guidance letters on its website.
does not qualify for block exemption treatment, the court must assess whether it meets the Article 101(3) criteria. Under the regime established by Council Regulation 1/2003, national courts are able to rule directly on whether the criteria are satisfied.
In seeking to identify which types of vertical agreements are likely to have the negative effects and potential benefits outlined above, the Commission’s Vertical Guidelines provide guidance on how 10 common types of vertical restraints are analysed. The main elements and examples of each of these common vertical restraints are outlined at Annex 8, which also considers issues relevant to their competitive assessment. A particular vertical agreement may contain combinations of these different type of restraints:
Single branding: where the buyer is restricted to placing all or most of its orders with one particular supplier. Exclusive distribution: where the supplier agrees to sell the contract goods to only one distributor for resale in a particular territory. The distributor is usually prevented from actively selling into other (exclusively allocated) territories. Exclusive customer allocation: where the supplier agrees to sell its products to only one distributor for resale to a particular group of customers. The distributor is usually prevented from actively selling to other (exclusively allocated) groups of customers. Selective distribution: where the supplier restricts the number of authorised distributors and their possibilities of resale to non-authorised distributors. Franchising: where the supplier licenses intellectual property rights relating in particular to trademarks or signs and know-how for the use and distribution of goods or services. Such agreements often contain a combination of clauses concerning selective and exclusive distribution as well as non-compete clauses. Exclusive supply: where the supplier is obliged or induced to sell the contract products only or mainly to one buyer. Upfront access payments: where the supplier pays a fixed fee to a distributor in order to get access to its distribution network and remunerate services provided to the suppliers by the retailers. Category management: where the distributor or retailer entrusts the supplier with the marketing and/or product selection of a category of products, including those of competitors. Tying: where a customer of one product is obliged to purchase another distinct product. This will fall under Article 101(1) if it results in a single-branding obligation.
Resale price maintenance: where the buyer's freedom to determine its resale prices is restricted.