Supply and distribution agreements are agreements between undertakings at different levels of the production or distribution chain (vertical agreements) relating to the purchase and sales of certain goods or services. Typical vertical agreements include the distribution agreements between manufacturers and retailers, manufacturers and wholesalers and wholesalers and retailers. An industrial supply agreement between a manufacturer of a component and a producer of a product using that component is also a vertical agreement.
Vertical agreements which simply determine the price and quantity for a specific sale and purchase transaction do not normally restrict competition. But a competition restriction may be involved when the agreement contains restrictions on the distributor or buyer. The most common vertical agreements include single branding (non-compete obligation), exclusive distribution, customer allocation, selective distribution, franchising, exclusive supply, tying and recommended and maximum resale prices.
Competition rules for supply and distribution agreements
The implementing Regulation of EU competition rules was reformed and the Finnish national regulation was harmonised with the EU competition rules in 2004. In addition to the national competition legislation, the EU competition rules are hence valid in Finland. The FCCA applies both the national legislation an the EU rules to agreements and practices which may significantly affect trade between Member States.
Competition restrictions contained in supply and distribution agreements are prohibited under Section 5 of the Competition Act and Article 101 on the Treaty on the Functioning of the European Union (TFEU). The provisions are similar by content, and they are interpreted in a uniform manner, so it makes no difference for companies which provision is applied.
Not all supply and distribution agreements are automatically unlawful, however. This is because the arrangements may, for example, fall within the exception of Section 6.
Self-assessment of lawfulness
Undertakings shall estimate themselves whether their arrangements comply with the law. Since the Competition Act is applied uniformly with the EU competition rules, undertakings should resort to the Block Exemption Regulation on vertical agreements and pertinent Guidelines. The Block Exemption Regulation (BER) and the Guidelines are also applicable to a large extent to the assessment of domestic competition restrictions. It should be remembered, however, that the Commission's regulations have been drafted considering the restrictions which may affect trade between the Member States.
When assessing lawfulness, it should be borne in mind that the arrangement may also fall outside the scope of application of the Competition Act as a whole. This may happen for example when the agreement may be deemed to have minor importance in a manner referred to in Section 5. The European Commission has given a de minimis notice, according to which it will use market share limits as limit values in assessing minor importance.
Agency agreements between the principal and an agent do not usually fall within the scope of Section 5 of the Competition Act either. The agreement falls outside the scope of application of Section 5 if the financial or commercial risk borne by the agent is non-existent or insignificant in relation to the activities for which he has been appointed as an agent by the principal. When genuine agency agreements are involved, sales or purcasing activities are are among the tasks of the principal even if the agent is a separate undertaking. If a genuine agency agreement is not involved, Section 5 may become applicable.
Some subcontracting agreements may also fall outside the scope of application of Section 5. More specific instructions on the topic can be found in the Commission's Notice on subcontracting.
BER contains presupposition of lawfulness
According to the BER on vertical restraints, Commission Regulation (EU) No 330/2010 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, a vertical agreement is presumed to be lawful if the buyer and the supplier have only limited market power (market share of a certain size). It is further required that the agreement does not contain so-called hardcore restrictions. An agreement that fulfills these requirements gains the benefit of the BER, because it can be assumed that the agreement will not restrict competition and if it does, its positive effects outweigh its negative effects.
The BER on vertical restraints is in principle applied to all vertical agreements concerning the sales of goods or services. The exemption does not hence concern rental or leasing agreements, as these do not involve sales. As a rule, the BER is not applied to agreements on which concern the assignment and licensing of immaterial rights, such as patents. The BER covers provisions on immaterial rights only when these are ancillary provisions of a vertical agreement and facilitate the purchase, sales or resales of good or services referred to in the agreement from the point of view of the buyer.
Even if the BER is applied to all vertical agreements in principle, it is not applied to vertical agreements between competitors. However, the BER is applied to vertical agreements between competitors when the agreement is not reciprocal. It is required that the buyer does not manufacture competiting products but is the supplier's competitor only on the distribution level (manufacturer sells his products directly and via distributors).
Importance of market shares in assessing lawfulness
The competitive concerns of distribution agreements depend on the structure of the market and the position of the undertakings on the market.
Under the BER and the supplementary Guidelines, the restraints contained in the distribution agreements between undertakings are not usually considered to cause competitive concerns if both the supplier's market share on the market where it sells the contract products to sellers, and the buyer's market share on the market where it purchases the contract products, is 30 per cent or less. A further requirement is that the agreements do not contain any of the hardcore restrictions of the BER described below.
If the 30 per cent market share threshold is exceeded, the agreement is not covered by the BER.
Irrespective of market shares, the vertical agreements shall not contain any of the hardcore restrictions set out in the BER. One example of such conditions is imposing a resale price. The supplier cannot set a price for a product which the distributors would be obliged to follow. However, the imposition of maximum resale prices or the recommendation of the resale prices is normally not prohibited.
The Market Court imposed a fine of EUR 3 million on Iittala Group Oy Ab for resale price maintenance (RPM) practices taking place between 2005 and 2007. In its ruling, the Market Court agreed with the proposal made by the Consumer and Competition Authority in 2010 in relation to the violation. The Market Court considered Iittala’s conduct to have constituted price-fixing, which is a serious antitrust offence. Iittala’s objective was to raise prices and prevent resellers from competing. Consumers are likely to have paid higher prices for some of the best-known Iittala products (for example the Kivi candle holder, the Maribowl, the Moomin products, the Teema series, Aalto glassware and KoKo products) because of the RPM. The conduct arose from a common practice used by the entire Iittala organisation, not just by individuals. RPM was an established and systematic method that appeared in all of Iittala’s activities for at least two and a half years. Market Court Decision of 20/12/2011, reg.no. 159/10/KR, no. 594/11 (in Finnish).
As a rule, all distributors may sell their products through the Internet as well. The supplier may require, however, that the distributor has one or more brick and mortar shops or showrooms where customers can see the products. A total ban of Internet sales is considered a serious competition restraint which is not covered by the BER.
In the Pierre Fabre case, the Court of Justice of the European Union decreed that the obligation to sell products on physical premises constituted a de facto ban on online sales. The clause was given in relation to a selective distribution system and required distributors to sell cosmetic and personal hygiene products only from physical premises with the presence of a qualified pharmacist. In reality, these requirements constituted a ban on using the internet to sell these products. The Court of Justice considered that there was no objective justification for the clause, considering the nature of the products in question. Case C‑439/09, Pierre Fabre Dermo-Cosmétique (2011, I-09419).
As a rule, market partitioning by territory or customer group is also prohibited. Distributors must be free to decide where and to whom they sell. Clauses restricting parallel imports constitute an example of market sharing. Parallel imports refer to trading done outside of an official network of distributors. Parallel imports mostly arise because an operator wishes to benefit from the difference in two countries’ price levels by importing goods from a cheaper country into a more expensive country.
There are several ways in which parallel imports can be restricted, including banning sales to anyone other than authorised distributors, banning sales to areas outside a particular area, and requiring that orders coming from outside the distribution network be redirected to other distributors.
In the GlaxoSmithKline case, the Court of Justice of the European Union judged that agreements trying to prevent or limit parallel imports in principle seek to restrict competition, and that this principle is also applicable to the pharmaceutical industry. Therefore, in order to judge that an agreement is anti-competitive, it is not necessary to find evidence of its causing harm to end consumers. This constituted a statement by the Court that the competition regulations of the Treaty Establishing the EEC also seek to protect the EU’s internal market. Joined cases C-501/06 P, C-513/06 P, C-515/06 P and C-519/06 P, GlaxoSmithKline (2009, I-9291).
There are some exceptions to the prohibition, however, which are presented in more detail in the Commission's Guidelines (see sections 51–55). More about the selective distribution systems cf. case 26/76, Metro v. Comission C‑439/09, Pierre Fabre Dermo-Cosmétique ( 2011, I-09419).
The BER does not exempt some obligations imposed on the members of a selective distribution system either. For example, restrictions cannot be imposed on authorised dealers as to which end users they may sell their products. Authorised dealers shall also be able to freely sell products to other authorised dealers in the network, or to buy products from them.
Agreements where the end users, independent repairers or other service providers are prevented from obtaining spare parts directly from their manufacturers are not covered by the BER. Any agreements between the manufacturer of spare parts and the buyer incorporating them into its own product may not prevent or restrict the right of the manufacturer to sell the spare parts directly to end users, independent repairers or service providers.
Incorporating the above-mentioned unlawful restraints into the agreement shall lead to the whole agreement being excluded from the scope of application of the BER. Agreements containing hardcore restrictions are hence prohibited in almost all situations, irrespective of market shares. However, the most serious restraints may be allowed in exceptional cases if the undertakings are able to demonstrate that the arrangement still produces efficiency benefits which fulfil the criteria of Section 6 of the Competition Act. Generally, it is reasonable to assume that agreements and practices containing serious competition restraints shall be prohibited.
Other competition restraints excluded from the BER
If the distribution agreement does not contain any of the hardcore restrictions and the 30 per cent market share is not exceeded as regards either the supplier of the buyer, the agreement is generally found to be covered by the BER.
However, the BER mentions certain obligations which are always excluded from the scope of the BER. But unlike regarding the hardcore restrictions, in these situations, the whole agreement shall not necessarily be excluded from the BER. Non- exempted are e.g. certain non-compete obligations and obligations which have the effect that members of a selective distribution system do not sell the products of specific competing suppliers.
Distribution and delivery agreements not covered by the BER shall not necessarily be illegal. Undertakings shall assess and ascertain themselves that their agreements comply with the requirements of the competition rules.
Guidelines assist in assessing lawfulness
Supply and distribuion agreements which are not covered by the BER are not necessarily unlawful. Undertakings shall ascertain themselves that their agreements fulfill the criteria of the competition rules.
The Guidelines on vertical restraints are intended to assist undertakings to assess the lawfulness of agreements concerning which the market share thresholds of the BER are axceeded. The Guidelines also excplicate the interpretation of the BER on vertical restraints. The Guidelines confirm the general rules on the assessment of vertical restraints and present the criteria that are applied in the assessment of the most common forms of vertical restraints.
When drafting supply and distribution agreements, undertakings are advised to get acquainted with the entire content of the Guidelines. The general sections of the guidelines should also be read carefully, since the individual sections do not necessarily provide enough information to assess the lawfulness of the restraint.
Further information: FCCA's Enforcement 1 and 2 Units
Further information on the restrictions and competition rules on vertical agreements can be be found in the following brochure.
The competition rules for supply and distribution agreements