Friday, June 18, 2010
Posted by D. Daniel Sokol
Magdalena Brenning-Louko, Andrei Gurin, Luc Peeperkorn, & Katja Viertiö (DG Comp) provide an overview of Vertical Agreements: New Competition Rules for the Next Decade.
ABSTRACT: On 20 April 2010 the Commission adopted a new Block Exemption Regulation applicable to vertical agreements (hereinafter "the Regulation"). At the same time it adopted the contents of accompanying Guidelines on vertical restraints ("the Guidelines"), which were subsequently formally adopted in all official languages of the Union by Vice-President Almunia on behalf of the Commission on 10 May 2010. Both of these instruments will be applicable from 1 June 2010.
The competition rules embodied in these instruments are particularly important given the pervasiveness of vertical agreements. Vertical agreements are agreements between firms operating at different levels of the production or distribution chain for the sale and purchase of intermediate products and the purchase and resale of final products. Typical examples of vertical agreements are distribution agreements between manufacturers and distributors, or supply agreements between a manufacturer of a component and a producer of a product using that component. Because each firm has to purchase certain inputs and most firms need to sell their products to producers further downstream or to distributors, most companies are concerned by these rules.
These instruments also play an important part in ensuring a consistent approach to vertical restraints under Article 101 of the Treaty on the Functioning of the European Union, as enforcement has mostly been carried out by the national competition authorities and national courts since the 2004 decentralisation. Vertical restraints are restrictions of competition included in vertical agreements which may foreclose and/or segment markets and facilitate collusion. For instance, vertical agreements which have as their main element the fact that the manufacturer sells to only one buyer or a limited number of buyers (exclusive distribution or selective distribution) may lead to foreclosure of other buyers and/or to collusion between buyers. Similarly, non-compete obligations which prohibit distributors from purchasing and reselling competing products may foreclose new manufacturers and make the market positions of incumbent manufacturers rigid.
The new rules were adopted following a review process that was launched in the spring of 2008 because of the expiry of the Block Exemption Regulation of 1999 ("the 1999 Regulation") on 31 May 2010. The Commission services took stock of enforcement with the national competition authorities and a consensus was quickly reached confirming that the architecture put in place in 1999 had worked well and only needed some up-dating and clarification. This was subsequently confirmed by a public consultation which elicited a very high response rate.
The 1999 Regulation and Guidelines on vertical restraints formed the very first package of a new generation of block exemption regulations and guidelines inspired by a more economic and effects-based approach, which was subsequently implemented in other antitrust areas. Under this approach, in order to conduct a proper assessment of a vertical agreement, it is necessary to analyse its likely effects on the market. For companies lacking significant market power (i.e. whose market share is below 30 percent), the 1999 Regulation provided for a block exemption, because it is presumed that vertical agreements concluded between such companies will either have no anticompetitive effects or, if they do, that the positive effects will outweigh any negative ones. In contrast, for vertical agreements concluded by companies whose market share exceeds 30 percent, there is no such safe harbour, but there is no presumption that the agreement is illegal either: it is necessary to assess the agreement's negative effects and positive effects on the market (under Article 101(1) and Article 101(3), respectively). The 1999 Regulation was accompanied by Guidelines which assist companies in making this assessment, and which have proved particularly important since the discontinuation, in 2004, of the former notification system whereby companies had to notify their agreements to the Commission in order to obtain an exemption.
It was decided to maintain this architecture, but to adapt and update it in the light of two major developments since 1999, namely a considerable increase in online sales, and enforcers' increased attention to and experience with the possible anticompetitive effects of a buyer's market power. This short article does not deal with all the aspects of the Regulation and Guidelines, but focuses instead on the novelties and clarifications introduced by these recently adopted texts.