The Swiss Federal Administrative Court (Court) has rejected an appeal of Gaba International AG (Gaba) against a decision of the Swiss Competition Commission which had imposed a fine of 4.8 million Swiss francs on Gaba for a distribution agreement with Gebro Pharma GmbH, the Austrian licensee of Gaba (Gebro), that limited parallel imports of Elmex toothpaste into Switzerland.
Implications for your business
With its decision, the Court has blessed the established practice of the Swiss Competition Commission (ComCo) to consider vertical territorial restrictions hard-core violations that are subject to sanctions under the Swiss Cartel Act. The case also confirms that the Swiss competition authorities scrutinize foreign agreements which are deemed to affect competition in Switzerland due to their actual or potential effects on the Swiss market. The Court considered the following:
- The Swiss Cartel Act is applicable and the ComCo can open an investigation if an agreement (even if foreign) prohibits exports from a certain territory outside of Switzerland, even if the agreement does not explicitly prohibit imports to Switzerland; such prohibition is deemed implied.
- A significant anticompetitive effect will be assumed if the Swiss territory is absolutely foreclosed by outright preventing a foreign dealer from selling into Switzerland, regardless of the parties’ market share. In other words: the restriction of passive (unsolicited) sales is a significant restriction by its qualitative nature regardless of quantitative considerations.
- Consequently, agreements which allow sales activities of a dealer solely within a certain foreign territory and thus prohibit active and passive sales from such foreign territory to any other territory indirectly ban parallel imports into Switzerland and therefore unlawfully restrict competition, if no justification on grounds of economic efficiency can be availed of.
- A selective distribution system can only justify the resulting restraint of competition if the nature of the product requires a selective distribution system, e.g. to preserve its quality and to ensure its proper use. This was not the case for Elmex toothpaste and even if it had been so, passive sales to end-users and authorized dealers would still have had to be possible while sales to non-authorized dealers could have been prevented.
- Agreements regarding direct or indirect price fixing or the (absolute) allocation of territories are subject to a fine (up to 10 per cent of the company’s turnover achieved in Switzerland in the preceding three financial years) not only if they eliminate effective competition, but also if they significantly restrict competition, unless they can be justified on grounds of economic efficiency. Since the agreement was considered to significantly restrict competition and could not be justified, the fine was upheld.
The investigation was launched in 2006 after Denner, a major Swiss discount retailer, filed an antitrust complaint with the ComCo on 30 November 2005.
On 30 November 2009, the ComCo imposed a fine against Gaba and Gebro. The ComCo concluded in its decision that a license agreement between these companies dated 1 February 1982, which prevented exports from Austria, had to be qualified as an unlawful territorial restriction since the parties thereby also restricted parallel imports from Austria to Switzerland.
The incriminating clause in the license agreement read as follows:
Gebro Pharma GmbH shall produce and distribute the contractual products solely in the agreed territory [Austria] and neither directly nor indirectly export the contractual products to any other country.
With its ruling of 19 December 2013, the Court upheld ComCo’s decision. The Court held that in this case, the legal presumption of eliminating effective competition can be rebutted on the basis of residual interbrand and intrabrand competition. Nevertheless, the agreement significantly restricts competition, since the restriction of parallel imports is a significant restriction by its nature. While it remains possible to justify such clauses on grounds of economic efficiency, this argument did not prevail in this case. The appellants unsuccessfully argued that the agreement was justified due to a selective distribution system. The Court dismissed this argument and stated that the nature of the product (toothpaste) does not require a selective distribution system. Additionally, the Court denied the direct applicability of the EU Technology Transfer Block Exemption Regulation and ruled that even if this regulation were applicable by analogy, the agreement would not fulfill its criteria.
Since the Court qualified the agreement as unlawful, the question of a possible sanction arose. It is still a matter for debate as to whether a company can only be sanctioned if the legal presumption of eliminating effective competition is applicable or also if the presumption can be rebutted but the agreement still significantly restricts competition. The Court agreed with the latter argument and confirmed the fine of 4.8 million Swiss francs on Gaba International AG. The decision is not yet final and open to appeal before the Swiss Federal Supreme Court. Gaba and Gebro have already announced their intention to appeal. The other leading cases on vertical restraints (Nikon and BMW) are still pending with the Court. It will now be interesting to see if the Court will uphold those ComCo decisions in light of the Gaba decision.
Actions to consider
The following actions are recommended:
- Do not draft agreements that generally prohibit exports and thereby implicitly also passive sales where such prohibition could affect the Swiss market.
- Revise existing agreements on a regular basis and immediately amend agreements that generally prohibit exports or passive sales where such prohibition could affect the Swiss market.
- A selective distribution system must be established in accordance with applicable EU/Swiss laws in order to justify a restriction of competition; however, passive sales (to end-users) and cross-supplies to authorized dealers must remain possible.
The case shows that the scope of the Swiss Cartel Act is interpreted widely by the Swiss competition authorities and Swiss courts. It is considered to be applicable if an agreement could affect the Swiss market (effects doctrine).
Agreements which allow sales activities of a party solely within a certain territory and thus prohibit active and passive sales outside of the agreed territory (e.g. a distribution partner can only sell the products in a certain country or in the EU/EEA) indirectly ban parallel imports into Switzerland and are therefore unlawful and subject to fines under Swiss competition law.
By not considering quantitative criteria when assessing the significance of the restraint, the Court went even beyond ComCo’s practice and (willingly or not) anticipated a potential reform of the Swiss Cartel Act which is still pending before the Swiss Parliament, namely that certain contract clauses are almost per se illegal.