Can price fixing in distribution agreements ever be lawful? A few months ago the European Court of Justice (“ECJ”) was asked to consider for the first time whether, in certain situations, a distribution agreement that provided for price fixing might be lawful.
Competition law is concerned with preventing anti-competitive practices within certain arrangements. In the context of an exclusive distribution agreement, this can be where a manufacturer establishes set prices at which its products are to be resold by distributors. The objective is to control prices across the distribution chain and, as a result, restrict price competition downstream. In doing so, the manufacturer seeks to impose resale price maintenance (“RPM”).
Under EU and UK competition law, RPM and other forms of price fixing in distribution agreements are considered “hardcore restrictions” as they are regarded as inherently anti-competitive. These restrictive provisions are automatically considered unlawful if included in distribution agreements.
The distribution agreements were made between Super Bock Bebidas, a Portuguese beer and bottled water manufacturer, and its exclusive distributors, which were appointed for almost all of Portugal. The remainder of Portugal was supplied directly by Super Bock itself.
Between 2006 to 2017, Super Bock imposed tight controls over the commercial conditions under which its network of independent distributors had to resell its products. This included fixing minimum resale prices and requiring its distributors to report relevant data on resale to Super Bock.
If distributors failed to comply with the prices set by Super Bock, it took “retaliatory measures”. These included:
removing financial incentives, such as trade discounts on the purchase of products; and
refusing to supply and replenish stocks.
Under EU competition law, agreements between businesses “which may affect trade between member states and which have as their object or effect the prevention, restriction or distortion of competition” are prohibited.
The Portuguese National Competition Authority (“NCA”) assessed whether these agreements presented “a sufficient degree of harm to competition”. It decided that Super Bock’s conduct amounted to RPM and therefore infringed competition law. As a result, the NCA imposed a fine of EUR 24 million on Super Bock and two senior individuals.
Following several appeals by Super Bock, the Lisbon Court of Appeal asked the ECJ to answer various questions on the interpretation of specific elements of EU competition law.
What does this judgment mean?
The ECJ had to consider the interplay between the concepts of “hardcore restrictions” and “restriction of competition by object”.
Although sounding somewhat theoretical, the two concepts play a critical role in both EU and UK competition laws.
“Restriction of competition by object” refers to conduct or anti-competitive practices that are inherently harmful to competition to the extent that no further consideration into their impact or effect is necessary. One of the answers sought from the ECJ was whether price fixing in vertical agreements – such as distribution agreements – constituted in and of itself an infringement by object which did not require prior consideration of whether that agreement was sufficiently harmful.
Whilst an initial look at the answer provided by the ECJ may suggest that it has relaxed certain restrictions on pricing, specifically that agreements containing hardcore restrictions are now allowed, this is not the case. The ECJ came to the conclusion that the two concepts are not interchangeable and do not necessarily overlap.
The ECJ decided that even if an agreement contains a hardcore restriction (such as RPM), it is not automatically classified as a “restriction of competition by object”. This is because the ECJ decided that regard must be had to the content of an agreement’s provisions, its objectives, and the legal and economic context of which it forms a part. As a result it is only after this assessment has been undertaken, and it is found that the agreement presents a sufficient degree of harm to competition, can a distribution agreement fixing minimum sales prices be found to contain a “restriction of competition by object”.
However, where a manufacturer seeks to rely on an agreement’s pro-competitive effects, this may give rise to reasonable doubt as to whether the agreement caused a sufficient degree of harm to competition. This approach is comparable to the position under US competition (anti-trust) law where, in considering the lawfulness of RPM, anti-competitive effects are balanced against pro-competitive business arrangements. As a result the lawfulness of RPM provisions in distribution agreements in the US will depend on the specific circumstances and the effect they have on the market. In contrast hardcore restrictions will always be considered unlawful in distribution agreements in the EU.
Although the UK left the EU, price fixing, and competition issues in general, remain an issue both within the UK and EU. Price fixing in either the UK or the EU can impact both internal as well as cross-border trade.
The decision by the ECJ will be relevant for UK businesses doing business within the EU. It can also be expected that the UK’s competition regulator, the Competition and Markets Authority (“CMA”), will give close consideration following the ECJ’s decision when the CMA has to consider similar issues.
Distribution agreements, as well as other vertical agreements, should be reviewed and negotiated carefully to ensure that they do not contain any clauses that suggest or contain fixed or minimum resale prices.
Parties in any supply chain should seek legal advice when dealing with any competition law provisions to ensure that they do not fall foul of these rules in respect of the law of the countries in which they operate.
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