(iii) EU assessment criteria of possible violation (market dominancy)

Whether a vertical agreement in fact restricts competition or whether the benefits outweigh the anti-competitive effects requires an assessment of the case at hand.[1] The EU adopted the Block Exemption Regulation[2] which determines that certain categories of vertical agreements as well as license agreements on technology transfer do not violate EU competition law if certain requirements are met.

Dominant market party. The assessment whether or not a vertical agreement violates competition law requires a comparison of the effects of the agreement compared to the likely market situation without such contractual restraints. Anticompetitive effects are likely to occur when a party has or obtains some degree of market power and the agreement contributes to the creation, maintenance or strengthening of that market power or allows the parties to exploit such market power.

Relevant-market definition. The contracting parties need to define the relevant market in order to establish the market share of the supplier or the buyer. Determination of the relevant market requires a combination of the ‘product market’ and the ‘geographic market’.[3]

  • Product market. The relevant product market comprises all products and services that are considered interchangeable or substitutable by the consumer due to their functionalities, prices and intended use. All relevant market conditions should be taken into account including the recent past, results of studies on the elasticity of demand, the views of customers and competitors, consumer preferences, barriers and costs associated with switching demand to other products, and different categories of customer and price discrimination.
  • Geographic market. The relevant geographic market comprises the area in which the companies concerned are involved in the supply of products or services and in which the conditions of competition are sufficiently homogeneous. It may, for example, cover the world, several continents, a single continent, several countries (g. the EU or EEA), a single country and even parts of a country.

Relevant market: assessment. The relevant market must be assessed on a case-by-case basis. The geographic market is to be determined by looking at the market shares of the relevant parties, the prices charged and any price differentials. Market shares provide a useful indication of the market power of a company. Low market shares are generally a good indicator for the absence of substantial market power: with market shares below 30 percent, dominance is unlikely. The demand-side substitutability (i.e. of customers) also plays a role: can customers readily switch to a similar product in response to a small but permanent price increase (between 5 and 10 percent)? The supply-side substitutability (i.e. of suppliers) should also be assessed: can other suppliers readily switch production to the relevant products and sell these on the relevant market?

The Block Exemption Regulation. The EU Block Exemption Regulation contains certain conditions under which vertical agreements are exempted from the prohibitions stipulated in EU competition law[4]. The first requirement is that the agreement does not contain any of the hardcore restrictions mentioned below. The second requirement concerns a market share cap of 30 percent for both suppliers and buyers. Finally, the Block Exemption Regulation contains conditions relating to three specific restrictions.

Hardcore restrictions. The Block Exemption Regulation contains hardcore restrictions that lead to the exclusion of the whole agreement from benefitting from the exemptions of the Block Exemption Regulation, even if the market shares are below 30 percent. Hardcore restrictions are considered to severely restrict competition because of the likelihood of harm caused to consumers. They are prohibited at all times:

  • Price setting. The first hardcore restriction concerns resale price maintenance (‘RPM’): a supplier is not allowed to fix the (minimum) price at which distributors may resell its products.
  • Market allocation. The second hardcore restriction concerns contractual provisions that limit the territory on which the buyer may sell, or limiting the consumers to whom may be sold. This hardcore restriction relates to market partitioning by territory or by category of customers. A distributor must remain free to decide where and to whom it sells. The Block Exemption Regulation contains exceptions to this rule, which, for example, enable companies to operate an exclusive distribution system or a selective distribution system.
  • Selective or exclusive distribution. Selected distributors, while being prohibited to sell to unauthorised distributors, cannot be restricted in the end-users to whom they may sell. Furthermore, a distributor must remain free to sell or purchase the contract goods to or from other appointed distributors within the network.
  • Supply of spare parts. A supply contract between a manufacturer of components or spare parts and a buyer which incorporates these components into its own products may not prevent or restrict sales by the manufacturer of these spare parts to end-users, independent repairers or service providers.

The 30 percent market share cap. The Block Exemption Regulation covers a vertical agreement if neither the buyer nor the supplier (or manufacturer) of the goods or services has a market share exceeding 30 percent. For the supplier (or manufacturer), the market share must be determined based on the relevant supply market (i.e. the market on which it sells the goods or services). For the buyer, the market share is determined by reference to the relevant purchase market (i.e. the market on which it purchases the goods or services).

The excluded restrictions. The regulation applies to all vertical restraints other than the hardcore restrictions. Three vertical restraints contain specific conditions:

  • Non-compete obligations during the contract;
  • Non-compete obligations after termination of the contract;
  • The exclusion of specific brands in a selective distribution system.

When the conditions are not fulfilled, these vertical restraints cannot benefit from the exemptions. Nevertheless, the Block Exemption Regulation still applies to the remaining part of the vertical agreement if that part is severable (i.e. can operate independently) from the non-exempted vertical restraints.

[1]           Treatment of certain vertical agreements in the U.S. differs from that of the EU.

[2]           Regulation (EU) No 330/2010.

[3]           See also: Guidance on the Commission’s enforcement priorities in applying Article 82 EC Treaty to abusive exclusionary conduct by dominant undertakings.

[4]           Article 101(1) Treaty on the Functioning of the European Union.