(ii) Common violations in vertical agreements

A number of common violations in vertical agreements are identified below. Due to the fact that U.S. antitrust law does not clearly define various categories, the emphasis will be on EU competition law. Nevertheless, the result of an assessment under U.S. antitrust law will often be the same.

Non-compete clauses. Under certain circumstances it may be possible to prohibit a distributor or licensee to sell or manufacture competing products. Local regulations must be consulted. For instance, in the EU, this is possible during the first five years of a distribution or licence agreement. Therefore, parties may not agree to prohibit the following:

  • The manufacture and sale of competing products in a distribution agreement for the duration of more than five years from the effective date of the agreement;
  • The manufacture and sale of competing products or services in a licence agreement including the distribution of the licensed products for the duration of more than five years from the effective date of the agreement;
  • The manufacture and sale of competing products or services beyond the duration of the agreement.

In the U.S., the authorities have also been acting against non-compete obligations in the acquisition and joint venture context between competitors. Non-compete clauses are always evaluated under the rule of reason, which involves an assessment and balancing of the pro- and anti-competitive effects in the case at hand.

(Long-term) supply agreements. Most provisions in a (long-term) supply or manufacturing agreement do not affect free competition. However, the following should be kept in mind. In the EU it is prohibited to:

  • Conclude an exclusive supply agreement if the buyer is a dominant market party (as regards the supplied product);
  • Agree on exclusive supply of products if the supplier is capable of producing the product without the support and know-how (incl. intellectual property rights) of the customer;
  • Forbid the customer or supplier to compete with their own developed products, improvements or new applications of the relevant technology to the extent that these are severable from the know-how of the supplied product;
  • Influence (contractually or de facto) the resale prices charged by the customer.

It is permitted to:

  • Agree on exclusive supply if the buyer’s market share is below 30 percent;
  • Establish requirements relating to quality, quality control, specifications, raw materials, packing materials, quantities and terms of delivery;
  • Forbid the supplier to use the know-how or technical means for other purposes than for supplying the customer, as long as the protection of the customer’s know-how is the sole purpose of such prohibition.

Distributorships: resale pricing. In addition to the various prohibitions mentioned in section 5.6(a)(i), a supplier or manufacturer may not set the resale prices charged by the distributor. In the EU, it is prohibited to:

  • Set the resale prices of any product for distributors or dealers;
  • State resale prices in price lists, catalogues, order forms, displays, price labels, packings, brochures, etc.;
  • Require the distributor to adhere to a recommended resale price;
  • Coordinate the price policy with the distributor according to the market situation;
  • Prohibit the distributor from granting rebates or discounts;
  • Provide the distributor with formulas to calculate prices;
  • State the profit margin of the distributor;
  • Prescribe minimum resale prices;
  • Systematically monitor the resale prices of the distributor;
  • Terminate the agreement with a distributor because of its refusal to adhere to recommended resale prices.

The following is permitted:

  • Giving non-binding price recommendations for resale prices of branded products, if no direct or indirect pressure is exercised or any incentive is offered to enforce such recommendation, and provided that there is no market dominance;
  • Impose maximum resale prices;
  • Mark all statements of resale prices as ‘recommended resale prices’[1].

Businesses should refrain from imposing resale prices and undertaking any resale price maintenance initiative.

Patent, trademark and copyright licenses. Patent, copyright, know-how or trademark licences in the EU are subject to various limitations. It is prohibited to:

  • Contractually exclude the possibility of the licensee to challenge the secrecy of the licensed know-how, trademarks or patents;
  • Contractually exclude the possibility of the licensee to challenge the validity of the licensed patent;
  • Set the sales price for the licensee’s product.

In patent and know-how licence agreements, parties should be free to compete with their own developed products, improvements or new applications of the technology to the extent that these are independent from the licensee’s initial know-how. Nevertheless, it is prohibited to:

  • Oblige the licensee to grant an exclusive licence to the licensor or a third party for any own severable improvement and new application of the licensed technology;
  • Restrict either party from competing with the other party in research and development, manufacture, use or sale of any own developed product, improvement and new application of the technology in question.

It is permitted to oblige the licensee to grant a non-exclusive licence to the licensor for improvements and new applications of the licensed technology.

Refusal to sell. Exclusivity of the distributor, customer, franchisee or licensee might appear from facts unrelated to a ‘non-exclusive’ supply agreement. A refusal to sell to another distributor or customer may raise anti-competitive concerns and also might constitute an abuse of a dominant market position. A supplier or manufacturer should not apply (entirely) subjectively motivated criteria for excluding certain (groups of) distributors or customers. Similar customers should be treated equally. It is prohibited to:

  • Refuse to sell to a customer that meets the same requirements as other customers;
  • Reduce supplies to comparable customers in different ways without an objective justification.

It is, on the other hand, allowed to refuse to sell to:

  • Existing or new customers provided that such refusal is reasonable and proportionate to protect commercial interests;
  • A customer due to insufficient capacity or an event of force majeure in production.

Export bans and parallel trade. Parallel trade is a consequence of free trade within a given territory. In the EU, the following is prohibited:

  • Imposing export bans, unless this is required by law;
  • Prescribing the partner not to export the product upon an inquiry by a customer from outside the territory;
  • Refusing orders from partners exporting the products due to territory restrictions.

It is permitted to:

  • Prohibit an active marketing policy outside the agreed territory (internet advertising should not be prohibited) if the company’s market share is below 30 percent;
  • Inform the other party about country differences affecting the product’s acceptance in another country or other legal requirements in another country;
  • Unilaterally limit the number of products sold to a partner due to capacity reasons.

[1]           Such non-binding price recommendations may, under certain circumstances, be prohibited under Swiss or other national competition law.

Continue