On 1 December 2010, the Competition Authority introduced new rules governing the application of Irish competition law to "vertical agreements" which are - in competition law terms - agreements between businesses operating at different levels of the production or distribution chain, relating to the conditions under which the persons or companies concerned can purchase, sell or resell certain goods or services. This includes motor fuel resale agreements.
Previously, exclusive purchase agreements concluded between suppliers and independent service stations for the resale of petroleum products at retail level (known as "solus agreements") were dealt with under a separate sector specific regime. This old regime, most recently in the form of the Motor Fuels Category Declaration (Decision No. D/08/001), expired on 30 November 2010.
Since 1 December 2010, solus agreements are covered by the Competition Authority’s new general Category Declaration in respect of Vertical Agreements and Concerted Practices (Decision No. D/10/001) (the “Vertical Restraints Declaration”). The Vertical Restraints Declaration brings Ireland in line with the EU’s position on vertical agreements under the EU Vertical Restraints Block Exemption Regulation (Commission Regulation (EU) No. 330/2010 of 20 April 2010). The Vertical Restraints Declaration exempts certain categories of agreements and concerted practices from the general prohibition on anti-competitive practices which is contained in the Competition Act 2002 (as amended) (the “Competition Act”) where certain conditions are met.
Change in Permitted Duration of Exclusivity
One of the most significant changes for suppliers of fuel resulting from the introduction of the Vertical Restraints Declaration is a reduction in the permitted duration of exclusivity in fuel supply or resale agreements from ten years to five years in situations where the service station operator is an independent retailer and the premises is not owned by the fuel supplier.
General Prohibition on Anti-Competitive Agreements
Under Irish competition law (specifically Section 4 of the Competition Act), there is a general prohibition on agreements and practices which have as their object or effect the prevention, restriction or distortion of competition in trade in any goods or services in the State or in any part of the State. Examples of anti-competitive agreements which may in certain circumstances be prohibited under Section 4 include price-fixing agreements, market-sharing arrangements and exclusive purchasing obligations. Agreements prohibited under Section 4 are void and unenforceable. Irish competition law provides an exemption from the above prohibition if certain conditions are satisfied. Irish competition law allows the Competition Authority to grant an automatic exemption to a defined category of agreement by what is known as a Category Declaration and the Vertical Restraints Declaration is an example of this. As a result, it is important for contracting parties to vertical agreements, such as solus agreements, to benefit from the exemption to the general prohibition by ensuring that the agreement falls within the terms of the Vertical Restraints Declaration so as to provide legal certainty from an Irish competition law perspective.
Application of the Declaration to Motor Fuel Resale Agreements
Certain conditions must be met for the Vertical Restraints Declaration to exempt a motor fuel resale agreement from the general prohibition on vertical restraints. The conditions include the following:
- 30% Market Share Rule: Firstly, to benefit from the Vertical Restraints Declaration, the market share held by the supplier must not be greater than 30% of the relevant market on which it sells the contract goods and services and the market share held by the buyer must not exceed 30% of the relevant market on which it buys the contract goods and services.
- Hard Core Restrictions: if the agreement includes a "hard core restriction", the whole agreement is excluded from the benefit of the Vertical Restraints Declaration. The Vertical Restraints Declaration does not apply to agreements which directly or indirectly have as their object a hard core restriction, including the following:
- The restriction of the buyer's ability to determine its sale price. Therefore, suppliers cannot set fixed or minimum resale prices, however they are permitted to impose maximum sale prices or recommend a sale price.
- The restriction of the territory into which, or of the customers to whom, a buyer may sell the contract goods or services (subject to certain exceptions).
- Soft Core Restrictions - Non-Compete Obligations: The Vertical Restraints Declaration specifies a number of obligations which cannot benefit from the exemption, although the exemption may continue to apply to the rest of the agreement. The Declaration does not apply to certain obligations in vertical agreements including the following:
- Non-Compete Clause: Any direct or indirect non-compete obligation, the duration of which is indefinite or exceeds five years. A non-compete obligation which is tacitly renewable beyond a period of five years is deemed to have been concluded for an indefinite duration. As mentioned above, under the old regime, the time limit for such non-compete obligations in solus agreements was ten years rather than five, therefore the new Vertical Restraints Declaration is stricter in this regard. The five year time limit does not apply where the goods or services are sold by the buyer from premises and land owned by the supplier or leased by the supplier from third parties not connected with the buyer, provided that the duration of the non-compete obligation does not exceed the period of occupancy of the premises and land by the buyer. Therefore, where a service station is owned by the fuel supplier, the noncompete obligation on the retailer can apply for as long as the retailer is in occupation of the service station.
- Post-Termination Non-Compete: Any direct or indirect obligation causing the buyer, after termination of the agreement, not to manufacture, purchase, sell or resell goods or services. There is an exception however permitting post-termination non-compete obligations of one year in duration where certain conditions are fulfilled, namely the non-compete obligation relates to competing goods or services, is limited to the service station which the buyer operated during the contract period and the obligation is indispensible to protect know-how transferred by the supplier to the buyer.
Transitional Period and Duration of Declaration
The Declaration provides for a transitional period until 31 May 2011 during which existing agreements and concerted practices which were entered into prior to 1 December 2010 and which comply with the previous Declaration in Respect of Vertical Agreements and Concerted Practices (Declaration No. D/03/01) shall continue to benefit from an exemption up to 31 May, 2011. It should be noted that the Declaration does not make transitional arrangements for agreements which benefitted from the old Motor Fuels Category Declaration. All vertical agreements, including solus agreements, entered into from 1 December 2010 should be drafted so as to fall within the terms of the new Declaration and thereby benefit from legal certainty.
The Declaration expires on 1 December 2020.