In Respect of Agreements between Suppliers and Resellers - Category/Certificate Licence
DECISION No 528
Abstract to follow
Section 4(1) of the Competition Act, 1991 states that “all agreements between undertakings, decisions by associations of undertakings and concerted practices which have as their object or effect the prevention, restriction or distortion of competition in trade in any goods or services in the State or in any part of the State are prohibited and void.” Section 4(4), as amended by Section5of the Competition (Amendment) Act, 1996, provides that:
“4(a) The Authority may certify that in its opinion, on the basis of the facts in its possession:
(i) an agreement, decision or concerted practice, or(ii) a category of agreements, decisions or concerted practices, does not contravene subsection (1).(b) Where a certificate under this subsection covers a category of agreements, decisions or concerted practices, any agreements, decisions or concerted practices (as the case may be) within that category need not be notified under Section 7 to benefit from the certificate.”
2. Under Section 4(2), the Authority may grant a licence in the case of any agreement or category of agreements which,
“having regard to all relevant market conditions, contributes to improving the production of goods or provision of services or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit and which does not:
(i) impose on the undertakings concerned terms which are not indispensable to the attainment of those objectives;(ii) afford undertakings the possibility of eliminating competition in respect of a substantial part of the products or services in question”.
3. Since October 1991, a large number of agreements involving exclusive and non-exclusive distribution, exclusive purchasing, franchising and selective distribution have been notified to the Authority. The Authority has previously dealt with many of these notified agreements through a combination of category licences and individual certificates and licences. The Authority has reviewed its existing category licences and individual certificates and licences for non-price vertical restraints. The Authority has concluded that, in certain circumstances, non-price vertical restraints are not anti-competitive and has identified a category of such agreements which, in its opinion, do not contravene Section 4(1) of the Competition Act, 1991. The Authority has identified a second category of such agreements which may normally be regarded as satisfying the conditions for the grant of a licence laid down in Section 4(2).
The Subject of the Decision
4. This decision applies to vertical agreements between undertakings which operate at different stages in the supply chain in respect of the same product or service, whereby one party supplies the products concerned to the other for resale. It therefore includes, for example, agreements between manufacturers, importers and suppliers (referred to collectively hereafter as ‘suppliers’) on the one hand and distributors, wholesalers and retailers on the other (referred to collectively hereafter as ‘resellers’). The vertical agreements concerned include exclusive and non-exclusive distribution, exclusive purchasing, franchising and selective distribution. Such commercial agreements apply to a wide range of goods and services.
5. Exclusive distribution incorporates an obligation, either explicit or implicit, on the supplier to sell a good or service only to one particular distributor in a certain territory. Exclusive purchasing is an obligation on the buyer, or an incentive scheme agreed between the supplier and the buyer, which makes the latter, by the express language of the contract or its practical effect, purchase a particular good or service exclusively from the supplier or third party designated by that supplier.
6. A franchise agreement consists essentially of an agreement, whereby one party grants to the other the right to exploit a package of intellectual property rights relating to trade marks, trade names, shop signs, utility models, designs, copyrights, know-how or patents, for the resale of goods or the provisions of services to end users. “Know-how” means a package of non-patented practical information, resulting from experience and testing by the franchisor, which is secret, substantial and identified. The agreement usually includes restrictions in relation to the assignment or use of intellectual property rights, and the agreement usually involves also the exclusive distribution or exclusive purchasing of goods and/or services. The term “franchise agreement” includes master franchise agreements, whereby one undertaking, the franchisor, grants the other, the master franchisee, in exchange for direct or indirect financial consideration, the right to exploit a franchise for the purposes of concluding franchise agreements with third parties, the franchisees.
7. In selective distribution agreements, a manufacturer usually agrees to supply only to dealers satisfying certain professional or technical requirements, while the approved dealers undertake not to purchase or sell the contract goods and/or services from wholesalers or retailers outside the territory. As a general rule, the establishment of a selective distribution agreement depends on the nature of the product; for example, with qualitative selection agreements, the manufacturer may define the professional or technical criteria required by the dealer; with quantitative distribution agreements, the manufacturer limits the number of dealers purely on quantitative grounds. Selective distribution agreements may involve a combination of both qualitative and quantitative features.
8. Non-exclusive distribution consists of agreements between suppliers and resellers for the distribution of goods and services which do not either implicitly or explicitly allocate specific territories to the reseller, involve any restriction on the reseller dealing in competing products, or any exclusive purchasing obligations.
Agreement Between Undertakings
9. Section 3(1) of the Competition Act defines an undertaking as “a person being an individual, a body corporate or an unincorporated body of persons engaged for gain in the production, supply or distribution of goods or the provision of a service.” The Supreme Court has ruled that the phrase for gain is to be interpreted as “for a charge or payment.” Thus the definition of undertaking is quite wide ranging and it is clear that firms come within this definition. This decision relates to agreements between parties whereby one party supplies goods or services to the other for resale, so that, in effect, both parties to such agreements are engaged for gain either in the production, supply or distribution of goods and/or the provision of services and are therefore undertakings.
Applicability of Section 4(1)
10. There has been much economic analysis of non-price vertical restraints. The main conclusions of such analysis are that such restraints may or may not have anti-competitive effects, depending on the particular circumstances in which they operate. From the point of view of competition policy, it is best to distinguish cases in which vertical restraints have an overall positive effect from those which are not welfare enhancing. The Authority notes that vertical agreements facilitate the promotion of sales of a product and lead to intensive marketing and to continuity of supplies while at the same time rationalising distribution. For example, the use of own transport facilities allows larger distributors to rationalise their deliveries, while reducing costs. Vertical restraints in many cases facilitate inter-brand competition between the products of different manufacturers. The appointment of an exclusive distributor, for example, who will take over sales promotion, customer services and carrying of stocks, is often the most effective way, and sometimes indeed the only way, for the manufacturer to enter a market and compete with other manufacturers who are already present.
11. The Authority is also of the view that vertical agreements generally lead to an improvement in distribution because the supplier is able to concentrate his sales activities and he does not need to maintain numerous business relations with a large number of dealers. In the case of domestic firms, it is often preferable for the supplier to concentrate on production and to delegate the distribution function to a specialist distributor who already possesses the necessary organisation and dealer contacts. Particularly in the case of international trade, difficulties resulting from linguistic, legal and other differences are more easily overcome by the appointment of a distributor located in the territory.
12. The Authority considers that, on the basis of current economic thinking, vertical restraints in general should not be considered to bea priorianti-competitive. While negative effects can arise, these are unlikely to have any significant economic effects in the absence of any significant degree of market power at either supplier or distributor/retailer level. The Authority is of the view that where neither the supplier nor the reseller have a market share in excess of 20% of the relevant market, they are extremely unlikely to have a sufficient degree of market power for any non-price vertical restraints to have an adverse effect on competition. Nor in such circumstances does the agreement create the possibility of foreclosing a significant share of the market to competitors at either the upstream or the downstream level. In such circumstances, non-price vertical restraints may generally be considered to have neither the object nor the effect of preventing, restricting or distorting competition and therefore do not, in the opinion of the Authority, contravene Section 4(1).
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