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Vertical Agreements Notes

LPC Law Notes > International Competition and Anti-Trust Notes

This is an extract of our Vertical Agreements document, which we sell as part of our International Competition and Anti-Trust Notes collection written by the top tier of Cambridge And Oxilp And College Of Law students.

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1. Appreciate the pro and anti-competitive effects of vertical agreements

2. Understand the methods employed in vertical agreements to restrict competition

3. Identify the criteria contained in the European Commission's Regulation 330/2010 (Vertical Restraints Block Exemption ('VRBE'))

4. Apply the VRBE to the terms of a draft distribution agreement

5. Develop drafting skills Definition ? set out in VRBE: agreements ... entered into between two or more undertakings each of which operates, for the purposes of the agreement or the concerted practice, at a different level of the production or distribution chain, and relating to the conditions under which the parties may purchase, sell or resell certain goods or services. (Article 1(1)(a)) Outcome 1 - pro and anti competitive effects of vertical agreements Outcome 2 - methods employed in vertical agreements to restrict competition

Inter-brand competition

Intra- brand competition

Resale price maintenance

Anti-competitive Describes the competitive dynamic relating to the different brands of the same product e.g. levis, lee, diesel
- Inter-brand competition relates to how these brands compete against each other in order to gain greater sales E.g. single purchasing agreement
- Retailer agrees to supply just one brand of product, which means that other brands are restricted
- Other brands route to market and consumer is restricted due to single branding agreement
- Route to market must be in fact restricted o Will be dependent on the power of the retailer o Market share must be reviewed and known by the legal adviser
- Describes the competition dynamic relating to the same branded product E.g. manufacturer attempts to prevent or reduce competition between those that stock product
- For example when a manufacturer insist all stores sell product at same price which removes the opportunity for stores to sell competitively to induce customers
- Customers are forced to buy product at a fixed price irrespective of where they purchase the product
- Form of price fixing
- Resale price maintenance occurs where, for-

Limited distribution agreementSingle Branding Group---example, a manufacturer insists that its products can only be sold at a certain price (max, min, recommended) The main competition concern with these types of arrangements is the reduction of intra-brand competition Often accompanied with market partitioning to stop undermining of the brand by other sellers by creating an export ban between markets From a competition law perspective, market partitioning impacts on intrabrand competition, as it will remove competition between retailer A and B In these agreements, the manufacturer sells to only one or a limited number of buyers At its most extreme, where only one buyer is allocated this can eliminate intra-brand competition In these types of arrangements, the buyer is rewarded, or forced, to buy its requirement for a particular product from one supplier. For example, the buyer will buy one brand of computer, rather than stocking a number of competing products Often, this may not matter because brand owners two and three will simply get their products to market via other retailers However, if the retailer is a particularly significant player on the market, and is the only, or one of a very limited number of routes via which the product in question can get to the relevant market, then there is a clear impact on interbrand competition Therefore consideration of market conditions, including the parties' market share would normally need to be considered Pro-competitive effects Possibility for vertical agreements to increase competitive dynamic on market In fact vertical agreements are often required as a commercial solution to get product to market (e.g. where the manufacturer has little or no experience in a sector) Without ability to enter vertical agreements there may be difficulties with the product getting to market The competition rules relating to vertical arrangements must be sufficiently robust in order to prohibit anti-competitive behaviour, but also sufficiently flexible to allow parties to enter into useful commercial arrangements Competition law needs to ensure that the protection granted to distributors goes no further than necessary and stifles competition

Resale price maintenance-

Limited Distribution Agreement-Single Branding-

There may be perfectly legitimate reasons for a manufacturer to suggest a price at which its goods should be sold If the price of the product is too high, the number of products sold may be less than the manufacturer would hope for. If the price is too low, then the manufacturer's brand could be damaged Looked at like this, a recommended resale price becomes a perfectly legitimate commercial practice So we can see that the rules must acknowledge the diversity of the commercial environment and the business arrangements within it. They need to be flexible enough to allow certain types of pricing strategy, such as setting a maximum or recommended retail price, whilst ensuring that this never amounts to the setting of fixed or minimum prices, which is always prohibited The new distributor is likely to take on financial risk when agreeing to distribute a new product. It'll have to invest in things such as premises, employees and stock, and in some industries this initial investment by the distributor will be considerable The new distributor, not unreasonably, will want some reassurance that the other distributors in the network will not target its customers and thereby undermine its business If no reassurance can be given because the competition rules are too inflexible, potential distributors may simply be unwilling to take on the financial risk. If this is the case, consumers in the new territory will be denied easy access to the product A manufacturer entering a new market may want to be sure that its distributor or retailer is devoting their attention to the manufacturer's product In fact when a new product comes onto a market, there may be competition between retailers to secure the single branding agreement However, the longer the arrangement goes on, the more the pro-competitive effects will be reduced, and the greater the potential impact on inter-brand competition

Outcome 2 - methods employed in vertical agreements to restrict competition Outcome 3 - criteria contained in the European Commission's Regulation 330/2010 (Vertical Restraints Block Exemption ('VRBE')) Vertical agreements under Art 101(1) TFEU Requirements Must be between two or more undertakings for vertical
- Parent and subsidiary agreement o Will not generally come within Art 101(1) as are made between undertakings but within the same economic entity
- Agency agreements o Single economic entity principle also relates to agreements between principal and agent o Rules are contained in VRBE and guidelines o Determining factor is the financial risk borne by the agent o If financial or commercial risk is borne by the principal to the extent that the agent is not able to exercise independent economic activity then there will be no anti-competitive restriction - parties are the same economic entity o If the agent takes on commercial or financial risk - Art 101(1) will apply o Financial or commercial risk is defined in paragraphs 12-21 of Guidelines o Factors to take into account of whether financial or commercial risk has been taken on by agent include:
? Whether agent pays for sales or promotional material
? Whether agent maintains stock at its own costs
? Whether agent offers after sales advice/service o The more of these the agent does the more likely the agent has assumed financial and commercial risk and therefore will be caught by Art 101(1) ECJ's approach
- Consten and Grundig: a distortion of competition to distribution is enough to trigger 101(1) agreement
- The agreement in Consten and Grundig breached 101(1)(c). The agreement in STM did not. Why? The agreement in Consten: o The supplier promised:
? Not to appoint other distributors
? Not to supply direct to customers in

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