Ws8 - Distribution Agreements Consolidated

WS 8 – DISTRIBUTION AGREEMENTS Introduction to Question structure EC OR UK Article 81

State that Art 81 prohibits: ‘all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market.’

Article 81(2)

‘Any agreement or decisions prohibited pursuant to this article shall be automatically void.’

Chapter I Prohibition

Section 2 Competition Act 1998: ‘agreements between undertakings, decisions by associations of undertakings or concerted practices which: (a) may affect trade within the UK, and (b) have as their object or effect the prevention, restriction or distortion of competition within the UK, are prohibited unless they are exempt.’ 2(4) says any agreement prohibited by section 2(1) is void

Article 81 EC - Does agreement infringe article 81 or the chapter I prohibition?

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What type of agreement is it? 1. Exclusive Distribution Agreement S agrees not to appoint another distributor in D’s territory and to not supply goods itself in that territory. Therefore, D is the only outlet for goods in the territory (excluding passive sales from elsewhere) S commonly requires D not to sell competing products and meet sales targets. 2. Sole Distribution Agreement S agrees not to appoint another distributor in D’s territory but retains the right to sell the goods in D’s territory himself. 3. Selective Distribution Agreement – for luxury products or tech products S controls who D can sell to. Helps maintain brand image and luxuriousness of item Allows customers a specialist and official after-sales or repair service, if goods so require.

2 Does agreement infringe article 81 or the chapter I prohibition?

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Requirements to infringe: 1

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Art 81(1) requires either:

•

Agreements: o State whether the agreement is:  Formal  Informal  Non-binding  Verbal o Look at terms of the agreement – look out for “D buys from S” and “D can resale”.

• •

decisions by associations of undertakings – trade associations decisions by concerted practices

Between two or more undertakings. State that the two undertakings (companies) are independent of each other

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Which may affect trade to an appreciable extent (NAOMI) between member states (article 81) or UK (Ch.I) TEST – is the effect felt in the UK OR is it beyond one MS border?? For example: • only one distributor for an area – therefore only 1 route between UK and an MS Is the relevant agreement/decision/practice alters or has the potential to alter the natural flow of trade between member states. NB – look for hint in the question – normally told to discuss either EC or UK or both?

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Object or effect is the prevention, restriction or distortion of competition within the common market (article 81) or within the UK (Chapter I) Art 81(1) & Chapter I (s.2) wording is the same:

The following list if from Art.81(1).. if within here then term is OBJECT: (a) (b) (c) (d)

directly or indirectly fix purchase or selling prices or any other trading conditions; limit or control production, markets, technical development, or investment; share markets or sources of supply; apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; (e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts. object – look at specific terms of agreement effect – look at impact on common market NB – do not consider the intentions of the parties Clause

Object Is it in the Art 81(1) / CH I list?

Effect

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2. consequence of infringement

Breach of article 81: (i.e. affects trade between member states) a.

81(2) says offending term is void. Agreement is void unless term can be severed which is unlikely. So agreement is unenforceable.

b.

EC commission can fine the parties up to 10% of worldwide turnover under article 23 of regulation 1/2003 for both parties

c.

EC shall order the parties to cease infringing activities and investigate parties

d.

As article 81 is directly effective, third parties suffering loss from infringement can bring claims for damages and / or injunctions in national courts.

e.

If OFT is investigating – Dir disqualified for max 15 years s9A CDPA86

Breach of Chater I prohibition: (i.e. only affects trade within UK) a.

Agreement void under S.2(4) Comp Act – unenforceable NB – beware – where S is trying to stop a D selling outside of his exclusive area – can be used as defence by D because if agreement is VOID then he can continue breaching the ban… should inform client not to sue D.. advice would be to renegotiate the terms.

3(1). Can the parties avoid Article 81 infringement?

b.

Office of Fair Trading (NCA) OFT can fine parties up to 10% of worldwide turnover.

c.

Third parties suffering loss from infringement can bring claims for damages.

d.

Directors of offending companies can be disqualified for up to 15 years under the Enterprise Act 2002.- but only if OFT get involved.

s.9A

ARTICLE 81 INFRINGEMENT (CH I infringement below) Argue situation falls outside scope of article 81. Two important examples: parent and subsidiary and ‘genuine agency agreements.’

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Avoidance methods: 1

Severance Check how many terms are anti-comp.. • • •

Only if there is some substance left in the agreement. Are the terms central to the agreement Use the Blue pencil test..

If there are many terms that need to be severed then this option is not available. 2

Notice on Agreements Of Minor Importance (NAOMI) Para 1 says agreements do not fall under 81(1) if effect on trade is not appreciable. Para 4 says that if notice applies, the commission will not initiate proceedings or a fine. - DISADVANTAGE – this is only a notice – non binding Third parties may still claim though. Requirements for protection: 1. Vertical agreement between undertakings 2. if undertakings are competitors then neither has an individual market share exceeding 10% of relevant markets affected by agreement, or if undertakings are non-competitors, neither has an individual market share exceeding 15% of relevant markets affected by agreement. (para 7) NB – Making this less advantageous than the BLOCK EXEMPTION because the % is lower. 3. Para 11 states the agreement must not contain any ‘hardcore’ restrictions which are: if horizontal:   

price –fixing limiting output/sales allocation of markets or consumers

if vertical:  

restricting B’s ability to determine price restricting territory B may sell to

N.B. Restricting territory does not include:  

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restriction of active sales into exclusive territory of someone else restriction of sales to end users by a buyer operating at the wholesale level of trade

NAAT NOT strictly an avoidance technique… simply indicates which jurisdictional law applies. TEST – MARKET SHARE: 

if share exceeds 5% = presumption is that there is an effect on trade between MS’s therefore EC law applies.

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3(2). Can parties avoid Chapter I prohibition? 21.2.6

CHAPTER 1 PROHIBITION INFRINGEMENT

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Avoidance methods: 1

Severance Check how many terms are anti-comp.. Blue pencil test.. If there are many terms that need to be severed then this option is not available.

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Notice on Agreements Of Minor Importance (NAOMI) The APPRTECIABILITY test is used in the UK. Essentially the same as NAOMI criteria: Para 1 says agreements do not fall under 81(1) if effect on trade is not appreciable. Para 4 says that if notice applies, the commission will not initiate proceedings or a fine. - DISADVANTAGE – this is only a notice – non binding Third parties may still claim though. Requirements for protection: 1. Vertical agreement between undertakings 2. if undertakings are competitors then neither has an individual market share exceeding 10% of relevant markets affected by agreement, or if undertakings are non-competitors, neither has an individual market share exceeding 15% of relevant markets affected by agreement. (para 7) NB – Making this less advantageous than the BLOCK EXEMPTION because the % is lower. 3. Para 11 states the agreement must not contain any ‘hardcore’ restrictions which are: if horizontal:   

price –fixing limiting output/sales allocation of markets or consumers

if vertical:  

restricting B’s ability to determine price restricting territory B may sell to

N.B. Restricting territory does not include:  

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restriction of active sales into exclusive territory of someone else restriction of sales to end users by a buyer operating at the wholesale level of trade

NAAT NOT strictly an avoidance technique… simply indicates which jurisdictional law applies. TEST – MARKET SHARE:  

if share exceeds 5% = presumption is that there is an effect on trade between MS’s therefore EC law applies. If share does not exceed 5% = presumption there is no effect therefore national law

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Advice to client

Advice depends on: 

If agreement still draft then advice to remove or amend terms



If too late and contentious then advice of consequences and penalties

Article 82 EC – MOST PROBABLY MCQ IN EXAM

Article 82:

Such abuse may, in particular, consist in:

Question Structure

‘Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market insofar as it may affect trade between Member States.’ (a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions (b) limiting production, markets or technical development to the prejudice of consumers (c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage (d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of the contracts. 1. one or more undertakings

2. of a dominant position? (a) Product market – Test – to what extent are products interchangeable?? ⇒ If the PM is narrow = high dominance (larger share of smaller market) ⇒ If the PM is wide = low dominance (smaller share of larger market)

(b) Geographic market – Test – to what extent are trading conditions the same? ⇒ Smaller area the more unique the product eg Haggis

(c) Dominance is presumed at 40%, yet the presumption is rebuttable. 3. Abuse of that position? Essentially behaviour which is not normal commercial behaviour and is detrimental to consumers or competitors. Can affect consumers, such as high prices or limiting supply, or competitors such as predatory pricing. 4. Abuse effects trade between MS / within UK Effect on trade must be appreciable 5.

The Chapter II Prohibition

Consequences: Same as Art 81.

Section 18 Competition Act 1998: ‘..any conduct on the part of one or more undertakings which amounts to the abuse of a dominant position in a market is prohibited if it may affect trade within the UK.’ 18(2) details examples of conduct which may amount to abuse:

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(a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions (b) limiting production, markets or technical development to the prejudice of consumers (c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of the contracts.

Question involving amending terms so that they comply with the Block Exemption: CLAUSE

WHY ANTI-COMP?

DOES B/E DEAL WITH THE ISSUE

ADVICE TO CLIENT

Exclusivity

NOT prohibited

N/A

Minimum purchase order

Non-compete obligation Art 5(a)

1. Remove 2. Amend:  limit it to less than 5 years (art5(a)  reduce to less than 80% to comply with art 1(b)

Price fixing

Art 4(a) – Hardcore prohibition

1. Remove 2. Amend so that there is a maximum or a recommended price (Art 4(a)) (only minimum is hardcore)

Export Ban

Depends on whether active of passive: - Active = D goes to C - Passive = C goes to D (internet)

1. Amend so that any reference to the internet/email is removed

IF passive: NOT allowed under Art 4(b) IF active: Allowed only if territory of another exclusive disti OR if supplier reserved for itself

Not to sell competing products

Non Compete obligation Art 5(a)

1. Limit to less than 5 years

Blanket export ban

Export ban under Art 4(b)

1. Remove 2. Amend so that it only bans active sales in territory of another exclusive disti OR supplier reserved area.

No Challenge of IPRS (trademarks)

Not prohibited

Leave it in Background – Seller could prevent competitors from selling their products in the market using IP rights (sue for breach and get injunction stopping them selling). Effect – this stops the D from suing the S on trademark issues. If D sues S for

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TM then they could potentially lose out as unable to sell due to injunctions etc. Restraint of trade

Non compete obligation Art 5(b)

1. Amend – reduce the time frame to 1 year to comply with Art 5(b) minimum. MUST be competing goods

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