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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

 


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