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You are here: BAILII >> Databases >> Irish Competition Authority Decisions >> Irish Competition Authority Decisions (Notice Division) >> Notice in respect of Agreements between Suppliers and Resellers [2002] IECA 2 (Notice) (1 July 2002) URL: http://www.bailii.org/ie/cases/IECA/Notice/2002/2.html Cite as: [2002] IECA 2 (Notice) |
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COMPETITION AUTHORITY
NOTICE IN RESPECT OF AGREEMENTS BETWEEN
SUPPLIERS AND RESELLERS
Decision No. N/02/002
Date: 1 July 2002
Page 2
NOTICE
IN RESPECT OF AGREEMENTS BETWEEN SUPPLIERS AND RESELLERS.
Introduction
1. Section 4(1) of the Competition Act, 2002 (“the Act”) provides that:
'all agreements between undertakings, decisions by associations of undertakings
and concerted 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 are prohibited and void.'
2. Section 30(1) of the Act provides that:
‘the Authority shall have …the following functions:
(d) to publish notices containing practical guidance as to how the provisions
of this Act may be complied with;’
3. Under the provisions of the Competition Act 1991 (now revoked) a large number of
agreements involving exclusive and non-exclusive distribution, exclusive purchasing,
franchising and selective distribution were notified to the Authority. The Authority
dealt with many of those notified agreements through a combination of category
licences and individual certificates and licences. The Authority concluded that, in
certain circumstances, non-price vertical restraints were not anti-competitive and
identified a category of such agreements which, in its opinion, did not contravene
Section 4(1) of the Competition Act, 1991. In those circumstances, the Authority
deemed it appropriate to issue, on 4 December 1998, a Category Certificate/Licence in
respect of Agreements between Suppliers and Resellers, pursuant to the provisions of
Section 4(4)(a) of the Competition Act 1991 as amended. That Certificate now stands
revoked by operation of Schedule 2, para. 3(1)(a) of the 2002 Act. The Authority
therefore deems it appropriate that it should issue a Notice in the terms of the Category
Certificate.
4. This Notice applies to vertical agreements between undertakings which operate at
different stages in the supply chain in respect of the same product or service, whereby
one party supplies the products concerned to the other for resale. It therefore includes,
for example, agreements between manufacturers, importers and suppliers (referred to
collectively hereafter as ‘suppliers’) on the one hand and distributors, wholesalers and
retailers on the other (referred to collectively hereafter as ‘resellers’). The vertical
agreements concerned include exclusive and non-exclusive distribution, exclusive
purchasing, franchising and selective distribution. Such commercial agreements apply
to a wide range of goods and services.
5. Exclusive distribution incorporates an obligation, either explicit or implicit, on the
supplier to sell a good or service only to one particular distributor in a certain territory.
Exclusive purchasing is an obligation on the buyer, or an incentive scheme agreed
between the supplier and the buyer, which makes the latter, by the express language of
Page 3
the contract or its practical effect, purchase a particular good or service exclusively from
the supplier or third party designated by that supplier.
6. A franchise agreement consists essentially of an agreement whereby one party grants to
the other the right to exploit a package of intellectual property rights relating to trade
marks, trade names, shop signs, utility models, designs, copyrights, know-how or
patents, for the resale of goods or the provisions of services to end users. “Knowhow”
means a package of non-patented practical information, resulting from
experience and testing by the franchiser, which is secret, substantial and identified.
The agreement usually includes restrictions in relation to the assignment or use of
intellectual property rights, and the agreement usually involves also the exclusive
distribution or exclusive purchasing of goods and/or services. The term “franchise
agreement” includes master franchise agreements, whereby one undertaking, the
franchiser, grants the other, the master franchisee, in exchange for direct or indirect
financial consideration, the right to exploit a franchise for the purposes of concluding
franchise agreements with third parties, the franchisees.
7. In selective distribution agreements, a manufacturer usually agrees to supply only to
dealers satisfying certain professional or technical requirements, while the approved
dealers undertake not to purchase or sell the contract goods and/or services from
wholesalers or retailers outside the territory. As a general rule, the establishment of a
selective distribution agreement depends on the nature of the product; for example,
with qualitative selection agreements, the manufacturer may define the professional or
technical criteria required by the dealer; with quantitative distribution agreements, the
manufacturer limits the number of dealers purely on quantitative grounds. Selective
distribution agreements may involve a combination of both qualitative and quantitative
features.
8. Non-exclusive distribution consists of agreements between suppliers and resellers for
the distribution of goods and services which do not either implicitly or explicitly
allocate specific territories to the reseller, involve any restriction on the reseller
dealing in competing products, or any exclusive purchasing obligations.
Agreement Between Undertakings
9. Section 3(1) of the Act defines an undertaking as “a person being an individual, a body
corporate or an unincorporated body of persons engaged for gain in the production,
supply or distribution of goods or the provision of a service.” The Supreme Court has
ruled that the phrase “for gain” is to be interpreted as “for a charge or payment.” Thus
the definition of undertaking is quite wide ranging and it is clear that firms come within
this definition. This decision relates to agreements between parties whereby one party
supplies goods or services to the other for resale, so that, in effect, both parties to such
agreements are engaged for gain either in the production, supply or distribution of goods
and/or the provision of services and are therefore undertakings.
Applicability of Section 4(1)
Page 4
10. There has been much economic analysis of non-price vertical restraints. The main
conclusions of such analysis are that such restraints may or may not have anticompetitive
effects, depending on the particular circumstances in which they operate.
From the point of view of competition policy, it is best to distinguish cases in which
vertical restraints have an overall positive effect from those which are not welfare
enhancing. The Authority notes that vertical agreements facilitate the promotion of
sales of a product and lead to intensive marketing and to continuity of supplies while
at the same time rationalising distribution. For example, the use of own transport
facilities allows larger distributors to rationalise their deliveries, while reducing costs.
Vertical restraints in many cases facilitate inter-brand competition between the
products of different manufacturers. The appointment of an exclusive distributor, for
example, who will take over sales promotion, customer services and carrying of
stocks, is often the most effective way, and sometimes indeed the only way, for the
manufacturer to enter a market and compete with other manufacturers who are already
present.
11. The Authority is also of the view that vertical agreements generally lead to an
improvement in distribution because the supplier is able to concentrate his sales
activities and he does not need to maintain numerous business relations with a large
number of dealers. In the case of domestic firms, it is often preferable for the supplier
to concentrate on production and to delegate the distribution function to a specialist
distributor who already possesses the necessary organisation and dealer contacts.
Particularly in the case of international trade, difficulties resulting from linguistic,
legal and other differences are more easily overcome by the appointment of a
distributor located in the territory.
12. The Authority considers that, on the basis of current economic thinking, vertical
restraints in general should not be considered to be a priori anti-competitive. While
negative effects can arise, these are unlikely to have any significant economic effects
in the absence of any significant degree of market power at either supplier or
distributor/retailer level. The Authority is of the view that where neither the supplier
nor the reseller have a market share in excess of 20% of the relevant market, they are
extremely unlikely to have a sufficient degree of market power for any non-price
vertical restraints to have an adverse effect on competition. Nor in such
circumstances does the agreement create the possibility of foreclosing a significant
share of the market to competitors at either the upstream or the downstream level. In
such circumstances, non-price vertical restraints may generally be considered to have
neither the object nor the effect of preventing, restricting or distorting competition and
therefore do not, in the opinion of the Authority, contravene Section 4(1). Where
either party has more than 20% of the relevant market, it may enjoy a degree of market
power. Economic analysis suggests that, in those circumstances, non-price vertical
agreements may have anti-competitive effects and may therefore contravene Section
4(1).
Non Exclusive Distribution
13. In many instances, suppliers supply goods and/or services to resellers on foot of nonexclusive
distribution agreements. Such agreements do not either implicitly or
explicitly allocate specific territories to the reseller, involve any restriction on the
reseller dealing in competing products, or any exclusive purchasing obligations. Such
Page 5
non-exclusive arrangements, whereby the supplier simply supplies goods and/or
services for resale to a reseller without any restriction on the commercial freedom of
either party, do not, in the Authority’s opinion, prevent, restrict or distort competition
and do not, therefore, contravene Section 4(1). For the avoidance of doubt, the
Authority believes that where de facto the supplier enters an agreement with only a
single reseller within the territory, such an agreement constitutes an exclusive
agreement.
Clauses which Contravene Section 4(1)
14. In the Authority’s opinion, the following restrictions are likely to have an adverse
effect on competition and therefore contravene Section 4(1):
a) Resale price maintenance (RPM).
b) Clauses which provide absolute territorial protection.
c) iPost-term non-compete clauses. An exception is made in the case of franchise
agreements for durations not greater than one year.
(a) Resale Price Maintenance
15. A limitation on a distributor in a vertical agreement in determining his own resale
prices constitutes a restriction on competition. In particular, the distributor might be
required to sell at a price fixed by the supplier, or at a price not less than nor more
than that indicated by the supplier. The Authority regards such limitations on the
reseller's freedom to determine his own prices as representing the enforcement of, or
being conducive to, resale price maintenance. As RPM prevents price competition
between resellers in respect of the products in question, and given that it may also be
used to facilitate cartel arrangements at either the supplier or distributor level, such
arrangements, in the Authority’s opinion, contravene Section 4(1).
16. The Authority has considered the validity of the argument that suppliers should be
allowed to impose maximum resale prices. Maximum prices may boost sales volumes
by lowering prices to consumers and protect brand reputation by preventing price
increases. The Authority is also of the view that maximum prices would enable
franchisers to encourage outlets to engage in price promotions nation-wide. On the
other hand, the Authority is also aware of the view that maximum pricing may lead to
collusion amongst manufacturers to raise prices and may, effectively, amount to fixedprice
RPM. The Authority believes that, while prices may be specified as maximum
prices, there may be a tacit understanding, or it may be the customary practice, that
such prices are the prices charged by resellers so that, in effect, the arrangements have
the effect of fixing resale prices. Consequently, in the Authority’s opinion, maximum
RPM may be anti-competitive in certain circumstances and it is unable to conclude
that, in general, it does not contravene Section 4(1).
17. Suppliers may recommend prices and, provided retailers are free to set their resale
prices, the recommending of prices by suppliers does not, in the Authority’s opinion,
contravene Section 4(1). However, the Authority believes that any covert or tacit
understanding that resellers must adhere to the prices recommended by the supplier
would amount to RPM, would be anti-competitive and contravene Section 4(1).
Page 6
For this Notice to apply, any price recommendation must:
(i) inform the reseller that he is free to set his own prices;
(ii) contain no reference to the margins resulting from applying any
recommended price;
(iii) involve no requirement to display such a recommended price; and
(iv) provide that no measures are taken to secure adherence to such price.
(b) Absolute Territorial Protection
18. In the Authority’s view, any provisions or combination of provisions which prevent
resellers outside a territory allocated to a particular reseller from supplying customers
in that territory in response to requests from such customers, restrict competition.
This may also take the form of requiring the distributor not to supply anyone who
might resell the products outside the territory. Where the agreement is one of a
number for different territories, each with the same requirement, this provides each
(exclusive) distributor with absolute territorial protection. They are assured that they
are the only source of supply of the products in the territory, and that other resellers
and users are unable to obtain the products from any source whatsoever outside the
territory. This effectively eliminates any competition to a distributor in respect of the
contract products i.e. it eliminates any possibility of intra-brand competition.
(c) Post-term limitations
19. Any restrictions which apply after the termination of the agreement also, in the
Authority’s opinion, generally contravene Section 4(1). In the case of franchise
agreements, however, a limited post-term non-compete clause of one year or less does
not, in the Authority’s opinion, contravene Section 4(1), as it is an ancillary restriction
needed to protect the goodwill of the franchiser. It is an essential feature of a franchise
agreement that the franchiser provides the franchisee with the necessary information,
training, intellectual property and other technical know-how to operate the business.
Clearly, it would not be in the franchiser’s interests to provide such know-how if the
franchisee could simply terminate the agreement and use the information provided to
compete with the business - this would effectively prevent the operation of franchise
type arrangements. A post-term restriction on the franchisee is necessary to protect the
goodwill of the franchiser. In the Authority’s opinion, a post-term non-compete
restriction limited to 12 months from the termination of a franchise agreement does
not contravene Section 4(1).
Special Rules for Particular Sectors.
20. The Authority has concluded, in the case of various forms of non-price vertical
restraint, that, as a general rule, where the relevant market share held by both parties
to the agreement is below 20%, the agreement is not anti-competitive. However, in
markets where such arrangements between suppliers and resellers are the norm, so
Page 7
that a large part of the products in question are supplied for resale on the basis of such
agreements, certain types of arrangements may restrict competition. In particular,
where all, or the majority of, potential resellers have entered into exclusive purchase
commitments, such arrangements could prevent new suppliers from entering the
market by blocking access to all or most of the possible resellers, resulting in the
foreclosure of the market. The Authority has identified motor fuels as a particular
area where this problem arises. In the case of motor fuels, the vast majority of noncompany
owned outlets are supplied on foot of 10-year exclusive purchase agreements
with the major oil companies. The Authority believes that such agreements have
resulted in a degree of foreclosure in that market, since they impede the entry of new
suppliers to the market, and that they therefore restrict competition and contravene
Section 4(1). The Authority has also identified the market for liquefied petroleum
gas (LPG) supplied for resale in cylinders as a market where similar foreclosure
problems arise. It believes that exclusive purchase agreements for such cylinder LPG
also result in a degree of market foreclosure and therefore contravene Section 4(1).
The Decision
21. The Competition Authority has decided to publish a Notice that it has formed the
following opinion: on the basis of the facts in its possession, vertical agreements
between suppliers and distributors of the kind described in the Notice do not
contravene Section 4(1) of the Competition Act, 2002.
Page 8
Competition Authority Notice
In Respect of Agreements Between Suppliers and Resellers
Article 1.
This Notice is published by the Competition Authority, pursuant to Section 30(1)(d) of the
Competition Act 2002, in respect of agreements (as defined in Article 2 below), to which only
two undertakings are party and whereby one party, the supplier, agrees with the other, the
reseller, to supply certain goods and/or services for resale within the State or any part of the
State.
Article 2.
Subject to the provisions of Articles 5 to 7 this Notice applies to the following categories of
agreement:-
(a) exclusive distribution, whereby the supplier agrees with the reseller to supply the goods
and services for resale within the State or a defined area of the State only to that reseller;
(b) exclusive purchasing, whereby the reseller agrees with the supplier to purchase the
products concerned only from the supplier, or another undertaking specified by the supplier;
(c) franchising, whereby one party grants to the other the right to exploit a package of
industrial or intellectual property rights relating to trade marks, trade names, shop signs,
utility models, designs, copyrights, know-how or patents, for the resale of goods or the
provision of services to end users. “Know-how” means a package of non-patented practical
information, resulting from experience and testing by the franchiser, which is secret,
substantial and identified;
(d) selective distribution, whereby the supplier agrees with the reseller to supply goods and
services only to those resellers satisfying certain professional or technical requirements, while
the reseller agrees not to purchase such goods from, or sell them to, wholesalers or retailers
outside the territory. Such agreements may include quantitative limits on the numbers of
resellers to be appointed within the State or a defined part thereof;
(e) non-exclusive distribution, whereby the supplier agrees with the reseller to supply the
goods and services for resale within the State or a defined area of the State to the reseller but
without any restriction on supplying other resellers within that territory. Where de facto the
supplier enters an agreement with only a single reseller within the territory, such an
agreement does not constitute a non-exclusive agreement.
Article 3.
Subject to the provisions of Articles 5 to 7, the Competition Authority is of the opinion, on
the basis of the facts in its possession, that non-exclusive distribution agreements as defined
in Article 2(e) do not contravene Section 4(1) of the Competition Act, 2002
Page 9
Article 4.
Subject to the provisions of Articles 5 to 7, the Competition Authority is of the opinion, on
the basis of the facts in its possession, that an agreement in any of the categories defined in
Article 2(a), (b), (c) and (d) does not contravene Section 4(1) of the Competition Act 2002,
provided neither party to the agreement has a share in excess of 20% of the relevant market.
Article 5.
Notwithstanding the provisions of Article 2, this Notice does not apply to any agreement
which involves:-
(a) any restriction on the freedom of the reseller to determine his own resale prices. However,
suppliers may recommend resale prices, provided:
i) such recommendations indicate that the reseller is free to set his own resale prices;
ii) the recommendation makes no references to margins arising from applying the
recommended price;
iii) there is no requirement to display the recommended price; and
iv) no inducements are offered to secure compliance with the recommended price.
(b) any provision or combination of provisions which prevent resellers outside a territory
allocated to a particular reseller from supplying customers in that territory in response to
requests from such customers;
(c) any non-compete restrictions which apply after the termination of the agreement, other
than the keeping of confidential and secret business information. An exception is made in the
case of franchise agreements, provided that the duration of such non-compete restrictions
does not exceed one year after the termination of the agreement.
Article 6.
Notwithstanding the provisions of Article 2, this Notice does not apply to exclusive
purchasing agreements in respect of (a) liquefied petroleum gas for resale in cylinders, or (b)
motor fuels.
Article 7.
Notwithstanding the provisions of Article 2, this Notice does not apply to agreements
between suppliers of identical goods or services, or of goods or services which are considered
by users as equivalent in view of their characteristics, price and intended use.
Article 8.
The Authority may amend this Notice from time to time, in particular, to exclude a particular
category of goods or services, where, in its opinion, the cumulative effects of any existing
agreements is such as to prevent effective entry to the market by a new supplier.
Page 10
Article 9
This Notice will apply from I July 2002 to 31 December 2003
For the Competition Authority
______________________
Dr John Fingleton
Chairperson
1 July 2002