The Vertical Agreements Block Exemption

Out-Law Guide | 27 May 2008 | 3:34 pm | 3 min. read

A vertical agreement is one entered into between two or more parties, each of which operates for the purposes of the agreement at a different level of the production chain, where the primary purpose of the agreement is to purchase, sell or resell goods or services.

Vertical agreements that satisfy the criteria of the Vertical Agreements Block Exemption (VABE) are exempt from the prohibition on anti-competitive agreements contained in article 101 of the Treaty on the Functioning of the European Union (the Prohibition). However, rules which apply to dominant companies continue to apply.

In order for the VABE to apply:

the parties must enter into a vertical agreement (see below);

the market share of each of the parties to the agreement must not exceed 30%; and

there must be no hardcore restrictions in the agreement.

What are vertical agreements?

Vertical agreements include distribution (exclusive and selective), franchising, supply and agency arrangements between non-competitors (i.e. those who do not compete in the product market which is the subject of the agreement). The VABE provides for agreements between competitors to benefit from the block exemption only in very limited circumstances.

Market share

The VABE will only apply if the market share of each of the parties to the agreement on any of the relevant markets affected by the agreement does not exceed 30%.

Hardcore restrictions

If the agreement contains one or more of the following restrictions (or contains an obligation that has the same effect as one of these restrictions), the automatic exemption provided by the VABE will not apply to the whole agreement:

restrictions on the buyer's ability to determine its own prices (i.e. no minimum or fixed prices can be agreed, although maximum sales prices and recommended prices are usually acceptable);

territorial and customer restrictions generally, though prohibiting the buyer/distributor from actively seeking customers in a territory or from a customer group that has been reserved for the supplier or another buyer/distributor, is permitted in certain circumstances, as is restricting all sales to end users by a wholesale buyer);

territorial and customer restrictions on sales within a "selective distribution system", where buyers are chosen on the basis of pre-determined criteria (although a supplier may restrict, amongst others, a distributor in a selective distribution system from selling to other dealers who are not "authorised"); or

restrictions on sales of components (though buyers may be prohibited from selling the component on to competitors of the supplier, suppliers may not be barred from selling components as spare parts to end-users, repairers or other service providers on the aftermarket of the buyer's product).

Excluded restrictions

If the agreement contains an 'excluded restriction' (see below) the exemption provided by the VABE will not apply to that specific restriction. Nevertheless, the rest of the agreement may still benefit from the  VABE provided the conditions mentioned above, are fulfilled and the restriction in question can be severed from the rest of the agreement. If the restriction is not severable, the agreement in its entirety will not benefit from the automatic exemption provided by the VABE.

The excluded restrictions are:

restricting the buyer from purchasing, or otherwise dealing with, competing products of the purchased products, directly or indirectly (e.g. this will include the situation where the buyer is obliged to buy more than 80% of its total purchases of the product from the supplier) for more than five years (non-compete obligations);

restricting the buyer from competing after the termination of the agreement, except where the restriction is limited to one year, is necessary for the protection of know-how and is limited to the same point of sale from which the buyer has operated during the agreement; or

restricting members of selective distribution systems from selling particular competing brands.

Outside the scope of VABE

If the vertical agreement does not conform to the criteria set out above, it will not benefit from the VABE, but it does not necessarily follow that the agreement is automatically void or unenforceable.

In this situation, the parties must first legally assess whether the agreement is likely to breach the Prohibition. If an analysis determines, on balance, that the agreement does not breach the Prohibition, then the parties do not need to consider the matter any further.

If the agreement does fall within the Prohibition however, the parties must go on to evaluate whether the benefits of the agreement justify imposing such restrictions on competition and whether the agreement satisfies the criteria for individual exemption as set out below:

Does the agreement contain efficiency benefits? (In other words, does it improve the production or distribution of goods or services or promote technical or economic progress?);

Does it allow consumers a fair share of the resulting benefit?;

Does it impose any restraints on competition other than those absolutely necessary to gain the efficiency benefits mentioned above?; and

Does it not substantially eliminate competition?

If an agreement contains one or more of the hardcore restrictions mentioned above it will be very unlikely to benefit from an individual exemption.