When may a vertical agreement be prohibited?
Vertical agreements may contain restrictions that negatively affect competition at the supplier and/or distributor level for products and services. Such restrictions can, for example, exclude other suppliers or buyers from the market or weaken competition between competing suppliers or buyers, thereby harming consumers as well.
A reduction in intra-brand competition (i.e., competition between distributors of products or services from the same supplier) is unlikely to harm consumers if inter-brand competition (i.e., competition between distributors of products or services from different suppliers) is strong.
The potential negative effects of vertical restrictions are amplified if multiple suppliers and their buyers act similarly, leading to a cumulative effect.
Agreements containing hardcore restrictions are likely to be prohibited
The most serious restrictions on competition, i.e. hardcore restrictions, are likely to restrict competition and harm consumers. A vertical agreement that contains one or more hardcore restrictions is excluded from the block exemption entirely, regardless of the market shares of the parties involved. In this situation, the permissibility of the agreement must be assessed individually. However, it is unlikely that an agreement containing a hardcore restriction could produce efficiencies that outweigh the resulting harm to competition.
Agreements containing hardcore restrictions include all contractual provisions and practical measures related to the same contractual relationship that aim to:
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The distributor must have the right to determine the resale price of the product or service it sells.
It is prohibited to set a fixed or minimum resale price for the distributor directly, e.g., in the terms of the agreement, or indirectly, e.g., through various incentives or penalties. Indirect resale price maintenance occurs, for example, when the distributor is imposed a so-called minimum advertised price that prevents the distributor from advertising the product or service at a lower price.
Maximum resale prices and recommended prices may be permissible if they do not effectively amount to the imposition of a minimum resale price.
Case examples
In the case concerning Isojoen Konehalli (IKH) (2023), the Supreme Administrative Court found that IKH had imposed retail prices of its products in its joint online store with authorised resellers and, for certain resellers, also in their own online stores. The imposition of resale prices in the joint online store was evident from the terms of the agreement concerning the online store, while for the resellers’ own online stores, the resale prices were imposed, among other things, by various measures pressuring compliance with minimum price levels.
In the case concerning Iittala (2011), the Market Court found that the terms included in distribution agreements regarding the resale prices of Iittala products constituted an imposition of a minimum resale price.
In decisions regarding consumer electronics (2018), the European Commission found that suppliers had imposed minimum resale prices for their distributors by restricting the ability of online distributors to independently determine their resale prices. Suppliers had, for example, threatened resellers with penalties and suspended deliveries of their products to distributors who did not comply with the minimum resale price.
Read more about the Commission’s consumer electronics decisions
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A distributor generally has the right to determine for itself to whom and where it sells the supplier’s products.
However, restrictions on sales areas or customers may be permissible in the following cases:
- The active sales of the seller and its direct customers are restricted to an area or customer group that is exclusively designated for the supplier or at most five other sellers (the so-called exclusive distribution system).
- In active sales, the seller approaches the customer. In passive sales, the seller responds to customer inquiries. For example, maintaining one’s own website is generally considered passive sales.
- The active or passive sales of the seller and its direct customers to unauthorised distributors are restricted within the area of a selective distribution system.
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- In a selective distribution system, the supplier commits to supplying products only to distributors that meet certain criteria. Consequently, authorised distributors commit to not selling products to unauthorised distributors in areas where the distribution system is used.
- The location of the seller’s point of sale or warehouse is restricted.
- NOTE: However, the establishment of an online store cannot be prohibited.
- The active or passive sales of the wholesaler to end-users are restricted.
- The buyer of a component is restricted from reselling components to customers who would use them to manufacture similar products to those produced by the supplier.
Case examples
In a decision (2024), the European Commission found that Mondelēz, a manufacturer of chocolate, biscuit, and coffee products, had violated competition rules regarding vertical agreements. Mondelēz had, among other things, restricted the sales areas or customers of seven wholesalers. These wholesalers had sought to exploit price differences for Mondelēz products between member states. Additionally, Mondelēz had prohibited ten of its authorized resellers, which were part of an exclusive distribution system in certain member states, from responding to inquiries from customers located in other member states without prior approval from Mondelēz.
In a decision regarding licensed products (2019), the Commission found that the licensor, Sanrio, had anti-competitively restricted sales areas and customers. Sanrio had prohibited or prevented licensees from actively and passively selling outside the designated areas.
- The active sales of the seller and its direct customers are restricted to an area or customer group that is exclusively designated for the supplier or at most five other sellers (the so-called exclusive distribution system).
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An authorised distributor must be allowed to sell the supplier’s products and services to all end-users, whether they are consumers or other businesses.
However, the supplier may require that the authorised seller operates only at the supplier-authorised location and refrains from active sales to areas or customers that are exclusively designated for the supplier or its specific other distributors.
Case examples
In the case concerning Lastentarvike Oy (2009), there was a restrictive clause included in a resale agreement within a selective distribution system. The Market Court found that the requirement to not sell products to end-users outside the area reserved for the distributor and the distributor’s commitment to not sell products via the internet constituted prohibited active and passive sales restrictions within a selective distribution system.
In its decision regarding Guess (2018), the European Commission found, among other things, that the prohibitions imposed on authorised distributors to advertise and sell the supplier’s products online without prior approval from the supplier constituted a restriction of competition. Also, the contractual terms and other restrictions that prevented Guess’s authorised distributors from actively and passively selling to consumers residing outside the designated area for distributors constituted a prohibited sales restriction within a selective distribution system.
In the Pierre Fabre case (2011), it was stated that selective distribution systems are permissible if the distributors are selected based on objective and qualitative criteria and the criteria apply equally to all potential distributors, provided that the characteristics of the product to be distributed require a selective distribution system to maintain the quality of the product and that the established criteria do not exceed what is necessary. A clause in the distribution agreement that effectively prevented the sale of the supplier’s products via the internet and thus restricted the distributor’s active and passive sales to end customers could not be considered necessary for maintaining a selective distribution system. Therefore, the contractual clause was prohibited.
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Authorised distributors must be allowed to purchase products and services from other authoriszed distributors.
Authorised distributors cannot be required to obtain products sold in the distribution system from only a specific source.
Case example
In the Guess decision (2018), there were restrictive contractual terms regarding competition in a selective distribution system. The contractual terms restricted the sale of Guess products to other authorized distributors within the selective distribution system.
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Distributors and their customers must have the right to use the internet to sell the supplier’s products and services.
Restrictions on online sales or online advertising can effectively prevent the use of the internet. A distributor must not be:
- Prohibited from establishing its own online store;
- Prevented from using the supplier’s trademark or product name in the online store;
- Required to operate solely from a physical point of sale;
- Required to sell products or services only in the presence of specialised personnel;
- Prevented from using an entire online advertising channel, such as a price comparison service.
Other restrictions on online sales or advertising may be permissible. Such restrictions may include, for example, requiring the buyer to pay a different wholesale price for products sold online than for those sold offline (so-called dual pricing), setting quality or content requirements for online advertising, or prohibiting the use of the supplier’s product name in the distributor’s domain name.
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A component manufacturer must have the right to sell components directly, for example, to end-users or repair and maintenance businesses.
Therefore, agreements between the component manufacturer and the buyer must not directly or indirectly prevent or restrict end-users, independent repair shops, wholesalers, and service providers from obtaining spare parts directly from the parts manufacturer.
The hardcore restriction may occur, for example, when the restriction targets the manufacturer’s ability to provide technical information or special equipment necessary for the use of those spare parts by end-users, independent repair shops, or service providers.
Certain restrictions must be assessed on a case-by-case basis to benefit from the block exemption
Certain vertical restrictions that hinder market access fall outside the block exemption regardless of the parties’ market shares. The permissibility of such a restriction must be assessed individually. However, other parts of the agreement may beenfit from the block exemption.
Read more about agreements covered by block exemption
Outside the block exemption are:
- A non-compete obligation that lasts more than 5 years or for an indefinite period.
- NOTE: With a non-compete obligation, the buyer either:
- Is not allowed to manufacture, purchase, sell, or resell products or services that compete with those covered by the vertical agreement, or
- Is required to purchase more than 80% of its total purchases from the supplier.
- NOTE: However, a non-compete obligation longer than 5 years, renewed silently, may be permissible if the buyer can effectively switch suppliers after the 5-year period ends.
- NOTE: With a non-compete obligation, the buyer either:
- A non-compete obligation that is in effect after the termination of the vertical agreement.
- NOTE: Such a non-compete obligation is permissible if:
- Its duration is no more than one year,
- It is necessary to protect the supplier’s know-how, and
- It is limited to the buyer’s operational location during the contractual relationship.
- NOTE: Such a non-compete obligation is permissible if:
- A prohibition on selling certain competing brands in a selective distribution system.
- An obligation imposed by online intermediary service providers (so-called platforms) on buyers of their services, stating that the buyer must not offer, sell, or resell products or services to end-users on more favorable terms through competing platforms (so-called wide parity obligation).
Agreements falling outside the block exemption must be assessed on a case-by-case basis
Vertical agreements that fall outside the block exemption must be assessed on a case-by-case basis. Chapter 8 of the Vertical Guidelines describes how certain vertical agreements that fall outside the block exemption are evaluated. However, agreements not explicitly mentioned in that chapter are assessed according to the same principles.
Chapter 8 of the Vertical Guidelines addresses, among other things, the following vertical restrictions and their evaluation:
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Single branding refers to agreements that either require or encourage the buyer to concentrate its orders for a certain type of product with a single supplier.
In practice, single branding may manifest as a non-compete arrangement or quantity forcing. In a non-compete arrangement, the buyer is required or encouraged to make at least 80% of its purchases in certain markets from only one supplier, either directly or indirectly. Quantity forcing is a weaker form of non-compete. Quantity forcing means that the buyer concentrates its purchases largely with one supplier due to obligations or incentives agreed upon with the supplier. Quantity forcing may manifest as a minimum purchase requirement or a conditional rebate scheme.
Case example
In the case of Van den Bergh Foods (2003), there was a non-compete clause. In a distribution agreement for individually packaged ice creams, the retailers acting as distributors were required not to use the free freezers supplied by the supplier for storing ice creams not made by the supplier. Such a contractual clause was deemed to effectively lead to single branding, considering the specific circumstances of the case.
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Exclusive supply refers to restrictions that oblige or induce the supplier to sell the contract products only or mainly to one buyer.
An exclusive supply arrangement may take the form of either an exclusive supply obligation imposed on the supplier or, for example, as quantitative obligations that encourage the supplier to concentrate its sales mainly with one buyer.
The main competition risks arising from exclusive supply arrangements relate to the foreclosure of other buyers from the market. The decisive factor for the realisation of competition risks is the buyer’s market power on the downstream market. Where the buyer’s market share does not exceed 30 % in the markets where it sells products purchased under an exclusive supply arrangement, significant consumer harm is unlikely. Additionally, the extent to which the exclusive supply obligation is used, how long it is in effect, and whether competing buyers have purchasing power relative to the buyer involved in the supply arrangement are also significant.
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An online marketplace is an e-commerce platform that brings together merchants and potential customers, providing them with direct purchasing opportunities.
Suppliers may wish to restrict their buyers’ ability to use online marketplaces for various reasons, such as protecting brand image or preventing the sale of counterfeit products. Such restrictions can range from a complete prohibition on the use of marketplaces to restrictions on the use of online marketplaces that do not meet certain quality requirements. Restrictions or prohibitions on the use of marketplaces may benefit from the block exemption and thus be permissible, provided that the purpose of the agreement is not to prevent the use of the internet for selling products or services and that the general conditions for applying the block exemption are met.
Restrictions on the use of online marketplaces are often found in selective distribution systems. Even then, restrictions on the use of marketplaces, such as those requiring compliance with certain quality standards, must not exceed what is necessary and proportionate to maintain the quality of the products or services being distributed and to ensure their proper use.
The main competition risk associated with restrictions on the use of marketplaces is the reduction of intra-brand competition at the distribution level. In assessing potential anti-competitive effects, factors such as the degree of inter-brand competition, the type and scope of restrictions on the use of marketplaces, and the significance of the sales channel in the relevant markets are taken into account.
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Parity obligations require that the supplier offers products and/or services to its contractual partner on terms that are at least as favorable as those offered to certain other parties or in certain other sales channels. In addition to pricing, the terms may relate to, for example, the need for inventory or availability.
Retail-level parity obligations concern the terms under which goods or services are offered to end-users. The party imposing the obligations may be an online intermediary service provider that imposes obligations on buyers of its services, e.g., businesses that sell through it. In this case, parity obligations may relate either to terms offered through competing platforms (so-called wide parity obligations) or to terms offered through the sellers’ direct sales channels (so-called narrow parity obligations). Wide retail-level parity obligations may also refer to obligations that concern both competing platforms and the sellers’ direct sales channels.
Other than parity obligations concerning competing platforms may benefit from the block exemption. Parity obligations concerning competing platforms fall outside the benefit of the block exemption because they are more likely to cause anti-competitive effects than other types of parity obligations, and their anti-competitive nature must therefore be assessed on a case-by-case basis. Parity obligations concerning competing platforms may weaken competition between platforms, facilitate potential anti-competitive cooperation between them, and hinder the entry of new platforms into the market.
Narrow parity obligations prevent buyers of intermediary services from offering prices and terms in their direct sales channels, such as their own online stores, that are more favorable than those they offer on the platform imposing the obligation. This means that, unlike in the case of parity obligations concerning competing platforms, suppliers may be able to offer more favorable terms to end-users through another platform. The anti-competitive effects of narrow parity obligations are generally considered to be milder than those of parity obligations concerning competing platforms, and therefore the potential efficiency benefits produced by such obligations are likely to outweigh their negative effects.