Competition law and its effect on agency agreements

April 1, 2014

Agency agreements, unlike distributorship agreements, do not give rise to competition law issues. Correct?

Genuine

The answer is largely so in the case of “genuine” agency agreements, that is where the agent bears no, or only insignificant, financial and commercial risk.

Guidance provided by the European Commission explains that risks related to the provision of agency services in general by the agent, including the risk of the income of the agent being dependent on his success, are not material for assessing the effect of competition law on the agreement.

In the case of “genuine” agency agreements, the agent lacks independence from the principal and he is treated as part of the same economic entity. In such a situation, no competition law issues arise and the principal can:

  • freely set the price and conditions on which the agent must sell or buy the goods or services;
  • impose limits on the territory in which the agent may sell the goods or services; and
  • impose limits on the customers to whom the agent may sell the goods or services. 

False

However, an agency agreement will not be qualified as “genuine” and competition law issues may arise if, for example, title to the contract goods bought or sold vests in the agent at any time, or the agent himself supplies the services. Furthermore, if the agent contributes to the costs relating to the supply or purchase of the goods or services, or undertakes responsibility towards third parties for damage caused by the particular product sold, these factors also indicate that the agreement is not “genuine”.

True and false

However, agency agreements often contain provisions in respect of exclusivity as well as non-compete restrictions. Despite being contained within a “genuine” agreement, the European Court has decided that these restrictions might, in fact, still give rise to competition law issues to the extent that they “entail locking up the market concerned”. Such competition concerns arise because, when agreeing these restrictions, the two parties are acting independently of each other and are not treated as one entity.

A foreclosure effect on the relevant market will infringe competition law where, for example, it prevents potential entrants to the market and softens competition. However, under an exemption to the competition law regime, this will only be the case where at least one party to the agreement holds a large share of the relevant market for which the products are bought or sold. Accordingly, where any such restrictive provisions are included in an agency agreement, the parties need to consider how they can avoid falling foul of competition law.


Related pages:

Agency, Distribution and International Trade more

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