(i) Common vertical restraints
The most common vertical restraints in the EU according to the European Commission’s Guidelines on Vertical Restraints are:
- Single branding: Single branding results from an obligation or incentive that makes the buyer place all its orders for particular products with only one supplier. It does not mean that the buyer can only buy directly from the supplier but rather that it will not buy and resell competing goods or services. The anti-competitive risks resulting from single branding include:
- Foreclosure of the market to competing and potential suppliers;
- Facilitation of collusion between suppliers;
- If the buyer is a retailer (selling to consumers), a loss of in-store inter-brand competition.
- Exclusive distribution or exclusive (long-term) supply: In an exclusive distribution contract, the supplier agrees to sell its products only to one distributor for resale in a particular territory, a market segment or a particular category of customers. Often, the distributor is also itself limited in its active[1] selling efforts on other territories or markets. The anti-competitive risks include reduced intra-brand competition and market partitioning, which may, in particular, facilitate price discrimination.
- Selective distribution: Like exclusive distribution agreements, selective distribution agreements restrict both the number of authorised distributors and their possibilities of resale. Unlike with exclusive distribution agreements, selective distribution:
- does not restrict the number of dealers based on the number of territories, but selects based on the nature of the product; and
- it is not a restriction on active selling into a territory but rather a restriction on any sales to non-authorised distributors.
- Selective distribution is almost always used to distribute branded products through appointed dealers and targeted customers.
- The anti-competitive risks include reduced intra-brand competition and, especially in case of cumulative effect, foreclosure of a certain type or types of distributors and facilitation of collusion between suppliers or buyers.
- Franchising: Typically, franchise agreements entail a licence of intellectual property rights including trademarks, logos and know-how for the use and distribution of goods or services. In addition to the licence, the franchisor usually provides the franchisee with commercial and technical assistance. The licence and the assistance are integral components of the business concept being franchised. Franchising enables the franchisor to establish, with limited investments, a uniform distribution network.
The anti-competitive risks include the agreement on several vertical restraints concerning the products being distributed (e.g. selective distribution, non-compete clauses and exclusive distribution).
- Exclusive supply: Exclusive supply means that there is only one buyer in the territory to which the supplier may sell a particular final product. For intermediate goods or services, exclusive supply means that there is only one buyer in the agreed territory or that there is only one buyer in the territory for the purposes of a specific use. The anti-competitive risk of exclusive supply is the foreclosure of other buyers.
- Tying: see section 5.6(d).
- Recommended and maximum resale prices: When a supplier influences a buyer or distributor, possibly through an incentive, not to resell below a recommended price or below a maximum price, this is considered equivalent to fixed or minimum prices, and therefore prohibited. The anti-competitive risk is that such pricing policies operate as a focal point for resellers and might be followed by most or all of them. They may then facilitate collusion between suppliers.
Whether a vertical agreement indeed restricts competition and whether the benefits outweigh the anti-competitive effects requires an assessment of the facts and circumstances of the case at hand. The criteria and benchmarks to be applied in the EU are discussed in section 5.6(b)(iii).
[1] ‘Active’ sales mean actively approaching individual customers inside another distributor’s exclusive territory or exclusive customer group for example by direct mail or visits, or actively approaching a specific customer group or customers in a specific territory allocated exclusively to another distributor through advertisement in media or other promotions specifically targeted at that customer group or targeted at customers in that territory; or establishing a warehouse or distribution outlet in another distributor’s exclusive territory.