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A vertical agreement1
This occurs when two or more undertakings which operate at different levels of the production/distribution chain enter into an agreement, for example, agreements between producers and retailers. The undertakings involved do not in any event compete with each other because they operate at different levels of the market. The most popular vertical agreements are distribution agreements and franchising agreements. The ECJ in Joined Cases 56 and 58/64 Consten and Grundig confirmed that vertical agreements are within the scope of Article 101 TFEU in the following words: Article [Article 101 TFEU] refers in a general way to all agreements which distort competition within the Common Market [Internal market] and does not lay down any distinction between those agreements based on whether they are made between competitors operating at the same level in the economic process or between non-competing persons operating at different levels. In principle, no distinction can be made where the Treaty does not make any distinction.
Vertical Agreements
The Commissions Vertical Guidelines provide the methodology for assessment of whether a vertical agreement infringes Article 101(1) TFEU and if so, whether it may be justified under Article 101(3) TFEU. Para. 110 of the Vertical Guidelines sets out nine factors relevant to the assessment carried out under Article 101(1) TFEU such as The nature of the agreement; The market position of the parties; The market position of competitors; The position of the buyers of the contract products; Entry barriers; The maturity of the market; The level of trade affected by the agreement The nature of the product; and, Other factors, examples of which are given in para. 121 of the Vertical Guidelines, e.g. whether there is a cumulative effect within the market of similar vertical agreements, whether a restriction under the agreement was imposed by one party on the other rather than agreed by them, and the regulatory environment.
http://europa.eu/legislation_summaries/competition/firms/cc0007_en.htm
Franchising agreements
The nature of franchising agreements is that they contain licences of intellectual property rights relating to trademarks or signs or know-how for the use and distribution of goods and services, and that the franchisor provides technical and commercial assistance to the franchisee during the life of the agreement. The franchisee gets to exercise the rights in question and, in exchange, the franchisee pays a franchise fee for the use of the particular business method. Franchising agreements usually
Friday, March 21, 2014 contain a combination of different vertical restraints relating to the manner in which the products must be distributed. (Case 161/84 Pronuptia)2.Pronuptia de Paris GmbH v Pronuptia de Paris Irmgard Schillgallis. The case was concerned with franchising arrangements for wedding apparel. Under the franchise, the franchisor granted the franchisee the exclusive right to use the Pronuptia mark for a certain area; it agreed not to open another shop in that area, or aid any third party to do so; and it assisted the franchisee in setting up the store, providing the know-how etc. In return the franchisee, who remained the owner of the business, agreed to use the Pronuptia name; to pay the franchisor a royalty on turnover; to purchase 80% of its requirements for wedding dresses from the franchisor; and not to compete with any Pronuptia business. The Court noted the diversity in types of franchise agreement: there were service, production, and distribution franchise agreements. The judgment is directed at distribution franchises.
Commission Regulation 330/2010 of 20 April 2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices
Regulation 330/2010 entered into force on 1 June 2010 and is expected to expire on 31 May 2022
Regulation 330/2010
Friday, March 21, 2014 It applies in the following agreements: 1. All vertical agreements between non-competitors where the supplier of goods or services under the agreement has a share in the relevant product market of less than 30 per cent and the market share of the buyer does not exceed 30 per cent of the relevant market. Vertical agreements entered into between an association of undertakings and its members, or between such an association and its suppliers if: (i) all the members of the association are retailers of goods (not services); and, (ii) each member has a turnover not exceeding 50 million. Vertical non-reciprocal agreements between competitors within the market share thresholds specified in point 1 above but only if: (i) the supplier is a manufacturer and a distributor of goods while the buyer is only a distributor and not a competing undertaking at the manufacturing level; or, (ii) the supplier supplies services at several levels of trade while the buyer does not provide competing services at the same level at which it purchases the contract services. To vertical agreements containing provisions relating to the assignment /use of IPRs and which are within the market share threshold specified in point 1 where five conditions are satisfied.
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Para 23 of the Vertical Guidelines states that hard-core restrictions set out in Article 4 of the Regulation restrict competition by object. As a result, they can only be justified under Article 101(3) TFEU
Friday, March 21, 2014 (iv) restrictions on sales, active and passive, of goods or services which are supplied for the purpose of incorporation into other products which would compete with those of the supplier. Article 4 (c) prohibits restrictions of active or passive sales to users, whether professional end users or final customers, by members of a selective distribution system operating at the retail level of trade; Article 4 (d) prohibits restriction of cross-supplies between distributors within a selective distribution system, including between distributors at different levels of trade; and, Article 4 (e) prohibits restrictions which prevent end-users, i.e. repairers and service providers, from obtaining spare parts directly from the manufacturers of those parts, in a situation where repairers and service providers are not entrusted by the buyer with the repair or servicing of its goods.