EFTA surveillance authority

Guidelines on Vertical Restraints

(2002/C 122/01)

CONTENTS

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A. The present notice is issued pursuant to the rules of the Agreement on the European Economic Area (EEA Agreement) and the Agreement between the EFTA States on the establishment of a Surveillance Authority and a Court of Justice (Surveillance and Court Agreement).

B. The European Commission has issued a notice entitled "Guidelines on vertical restraints"(1). That non-binding act sets out the principles which the European Commission follows for the assessment of vertical agreements under Article 81 EC.

C. The EFTA Surveillance Authority considers the above-mentioned act to be EEA relevant. In order to maintain equal conditions of competition and to ensure a uniform application of the EEA competition rules throughout the European Economic Area, the EFTA Surveillance Authority adopts the present notice under the power conferred upon it by Article 5(2)(b) of the Surveillance and Court Agreement. It intends to follow the principles and rules laid down in this notice when applying the relevant EEA rules to a particular case.

D. The present Notice replaces the Authority's Notice concerning the acts referred to in points 2 and 3 of Annex XIV to the EEA Agreement (Commission Reg. (EEC) No 1983/83 and (EEC) 1984/83) on the application of Article 53(3) of the EEA Agreement to categories of exclusive distribution and purchasing agreements(2).

I. INTRODUCTION

1. Purpose of the Guidelines

(1) These Guidelines set out the principles for the assessment of vertical agreements under Article 53 of the EEA Agreement. What are considered vertical agreements is defined in Article 2(1) of the act referred to in point 2 of Annex XIV to the EEA Agreement [Regulation (EEC) No 2790/1999(3)] on the application of Article 53(3) of the EEA Agreement to categories of vertical agreements and concerted practices (the "Block Exemption") (see paragraphs 23 to 45). These Guidelines are without prejudice to the possible parallel application of Article 54 of the EEA Agreement to vertical agreements. The Guidelines are structured in the following way:

- Section II (paragraphs 8 to 20) describes vertical agreements which generally fall outside Article 53(1);

- Section III (paragraphs 21 to 70) comments on the application of the Block Exemption;

- Section IV (paragraphs 71 to 87) describes the principles concerning the withdrawal of the Block Exemption and the disapplication of the Block Exemption;

- Section V (paragraphs 88 to 99) addresses market definition and market share calculation issues;

- Section VI (paragraphs 100 to 229) describes the general framework of analysis and the enforcement policy of the EFTA Surveillance Authority in individual cases concerning vertical agreements.

(2) Throughout these Guidelines the analysis applies to both goods and services falling within the scope of the EEA Agreement(4), although certain vertical restraints are mainly used in the distribution of goods. Similarly, vertical agreements can be concluded for intermediate and final goods and services. Unless otherwise stated, the analysis and arguments in the text apply to all types of goods and services and to all levels of trade. The term "products" includes both goods and services. The terms "supplier" and "buyer" are used for all levels of trade.

(3) By issuing these Guidelines the EFTA Surveillance Authority aims to help companies to make their own assessment of vertical agreements under the EEA competition rules. The standards set forth in these Guidelines must be applied in circumstances specific to each case. This rules out a mechanical application. Each case must be evaluated in the light of its own facts. The EFTA Surveillance Authority will apply the Guidelines(5) reasonably and flexibly.

(4) These Guidelines are without prejudice to the interpretation that may be given by the EFTA Court, the Court of Justice of the European Communities and the Court of First Instance in relation to the application of Articles 81 EC(6) and 53 of the EEA Agreement to vertical agreements.

2. Applicability of Article 53 to vertical agreements

(5) Article 53 of the EEA Agreement applies to vertical agreements that may affect trade between States within the territory covered by the EEA Agreement and that prevent, restrict or distort competition (hereinafter referred to as "vertical restraints")(7). For vertical restraints, Article 53 provides an appropriate legal framework for assessment, recognising the distinction between anti-competitive and pro-competitive effects: Article 53(1) prohibits those agreements which appreciably restrict or distort competition, while Article 53(3) allows for exemption of those agreements which confer sufficient benefits to outweigh the anti-competitive effects.

(6) For most vertical restraints, competition concerns can only arise if there is insufficient inter-brand competition, i.e. if there is some degree of market power at the level of the supplier or the buyer or at both levels. If there is insufficient inter-brand competition, the protection of inter- and intra-brand competition becomes important.

(7) The protection of competition is the primary objective of EEA competition policy, as this enhances consumer welfare and creates an efficient allocation of resources. In applying the EEA competition rules, the EFTA Surveillance Authority will adopt an economic approach which is based on the effects on the market; vertical agreements have to be analysed in their legal and economic context. However, in the case of restrictions by object as listed in Article 4 of the Block Exemption, the EFTA Surveillance Authority is not required to assess the actual effects on the market. Within the scope of the EEA Agreement, market integration is an additional goal of EEA competition policy(8). Companies should not be allowed to recreate private barriers within the territory covered by the EEA Agreement where State barriers have been successfully abolished.

II. VERTICAL AGREEMENTS WHICH GENERALLY FALL OUTSIDE ARTICLE 53(1)

1. Agreements of minor importance and SMEs

(8) Agreements which are not capable of appreciably affecting trade within the territory covered by the EEA Agreement or capable of appreciably restricting competition by object or effect are not caught by Article 53(1). The Block Exemption applies only to agreements falling within the scope of application of Article 53(1). These Guidelines are without prejudice to the application of the present or any future "de minimis" notice(9).

(9) Subject to the conditions set out in points 11, 18 and 20 of the "de minimis" notice concerning hardcore restrictions and cumulative effect issues, vertical agreements entered into by undertakings whose market share on the relevant market does not exceed 10 % are generally considered to fall outside the scope of Article 53(1). There is no presumption that vertical agreements concluded by undertakings having more than 10 % market share automatically infringe Article 53(1). Agreements between undertakings whose market share exceeds the 10 % threshold may still not have an appreciable effect on trade between States within the territory covered by the EEA Agreement or may not constitute an appreciable restriction of competition(10). Such agreements need to be assessed in their legal and economic context. The criteria for the assessment of individual agreements are set out in paragraphs 100 to 229.

(10) As regards hardcore restrictions defined in the "de minimis" notice, Article 53(1) may apply below the 10 % threshold, provided that there is an appreciable effect on trade between States within the territory covered by the EEA Agreement and on competition. The applicable case-law of the EFTA Court, the Court of Justice of the European Communities and the Court of First Instance is relevant in this respect(11). Reference is also made to the particular situation of launching a new product or entering a new market which is dealt with in these Guidelines (paragraph 119, point 10).

(11) In addition, the EFTA Surveillance Authority considers that, subject to cumulative effect and hardcore restrictions, agreements between small and medium-sized undertakings as defined in the EFTA Surveillance Authority Decision No 112/96/COL of 11 September 1996(12) are rarely capable of appreciably affecting trade between the Contracting Parties to the EEA Agreement or of appreciably restricting competition within the meaning of Article 53(1), and therefore generally fall outside the scope of Article 53(1). In cases where such agreements nonetheless meet the conditions for the application of Article 53(1), the EFTA Surveillance Authority will normally refrain from opening proceedings for lack of sufficient interest under the EEA Agreement unless those undertakings collectively or individually hold a dominant position in a substantial part of the territory covered by the EEA Agreement.

2. Agency agreements

(12) Paragraphs 12 to 20 replace the Notice on exclusive dealing contracts with commercial agents of 1994(13). They must be read in conjunction with the act referred to in point 30 of Annex VII to the EEA Agreement [Council Directive 86/653/EEC on the co-ordination of the laws of the Member States relating to self-employed commercial agents(14)]. Agency agreements cover the situation in which a legal or physical person (the agent) is vested with the power to negotiate and/or conclude contracts on behalf of another person (the principal), either in the agent's own name or in the name of the principal, for the:

- purchase of goods or services by the principal, or

- sale of goods or services supplied by the principal.

(13) In the case of genuine agency agreements, the obligations imposed on the agent as to the contracts negotiated and/or concluded on behalf of the principal do not fall within the scope of application of Article 53(1). The determining factor in assessing whether Article 53(1) is applicable is the financial or commercial risk borne by the agent in relation to the activities for which he has been appointed as an agent by the principal. In this respect it is not material for the assessment whether the agent acts for one or several principals. Non-genuine agency agreements may be caught by Article 53(1), in which case the Block Exemption and the other sections of these Guidelines will apply.

(14) There are two types of financial or commercial risk that are material to the assessment of the genuine nature of an agency agreement under Article 53(1). First there are the risks which are directly related to the contracts concluded and/or negotiated by the agent on behalf of the principal, such as financing of stocks. Secondly, there are the risks related to market-specific investments. These are investments specifically required for the type of activity for which the agent has been appointed by the principal, i.e. which are required to enable the agent to conclude and/or negotiate this type of contract. Such investments are usually sunk, if upon leaving that particular field of activity the investment cannot be used for other activities or sold other than at a significant loss.

(15) The agency agreement is considered a genuine agency agreement and consequently falls outside Article 53(1) if the agent does not bear any, or bears only insignificant, risks in relation to the contracts concluded and/or negotiated on behalf of the principal and in relation to market-specific investments for that field of activity. In such a situation, the selling or purchasing function forms part of the principal's activities, despite the fact that the agent is a separate undertaking. The principal thus bears the related financial and commercial risks and the agent does not exercise an independent economic activity in relation to the activities for which he has been appointed as an agent by the principal. In the opposite situation the agency agreement is considered a non-genuine agency agreement and may fall under Article 53(1). In that case the agent does bear such risks and will be treated as an independent dealer who must remain free in determining his marketing strategy in order to be able to recover his contract- or market-specific investments. Risks that are related to the activity of providing agency services in general, such as the risk of the agent's income being dependent upon his success as an agent or general investments in for instance premises or personnel, are not material to this assessment.

(16) The question of risk must be assessed on a case-by-case basis, and with regard to the economic reality of the situation rather than the legal form. Nonetheless, the EFTA Surveillance Authority considers that Article 53(1) will generally not be applicable to the obligations imposed on the agent as to the contracts negotiated and/or concluded on behalf of the principal where property in the contract goods bought or sold does not vest in the agent, or the agent does not himself supply the contract services and where the agent:

- does not contribute to the costs relating to the supply/purchase of the contract goods or services, including the costs of transporting the goods. This does not preclude the agent from carrying out the transport service, provided that the costs are covered by the principal;

- is not, directly or indirectly, obliged to invest in sales promotion, such as contributions to the advertising budgets of the principal;

- does not maintain at his own cost or risk stocks of the contract goods, including the costs of financing the stocks and the costs of loss of stocks and can return unsold goods to the principal without charge, unless the agent is liable for fault (for example, by failing to comply with reasonable security measures to avoid loss of stocks);

- does not create and/or operate an after-sales service, repair service or a warranty service unless it is fully reimbursed by the principal;

- does not make market-specific investments in equipment, premises or training of personnel, such as for example the petrol storage tank in the case of petrol retailing or specific software to sell insurance policies in case of insurance agents;

- does not undertake responsibility towards third parties for damage caused by the product sold (product liability), unless, as agent, he is liable for fault in this respect;

- does not take responsibility for customers' non-performance of the contract, with the exception of the loss of the agent's commission, unless the agent is liable for fault (for example, by failing to comply with reasonable security or anti-theft measures or failing to comply with reasonable measures to report theft to the principal or police or to communicate to the principal all necessary information available to him on the customer's financial reliability).

(17) This list is not exhaustive. However, where the agent incurs one or more of the above risks or costs, then Article 53(1) may apply as with any other vertical agreement.

(18) If an agency agreement does not fall within the scope of application of Article 53(1), then all obligations imposed on the agent in relation to the contracts concluded and/or negotiated on behalf of the principal fall outside Article 53(1). The following obligations on the agent's part will generally be considered to form an inherent part of an agency agreement, as each of them relates to the ability of the principal to fix the scope of activity of the agent in relation to the contract goods or services, which is essential if the principal is to take the risks and therefore to be in a position to determine the commercial strategy:

- limitations on the territory in which the agent may sell these goods or services;

- limitations on the customers to whom the agent may sell these goods or services;

- the prices and conditions at which the agent must sell or purchase these goods or services.

(19) In addition to governing the conditions of sale or purchase of the contract goods or services by the agent on behalf of the principal, agency agreements often contain provisions which concern the relationship between the agent and the principal. In particular, they may contain a provision preventing the principal from appointing other agents in respect of a given type of transaction, customer or territory (exclusive agency provisions) and/or a provision preventing the agent from acting as an agent or distributor of undertakings which compete with the principal (non-compete provisions). Exclusive agency provisions concern only intra-brand competition and will in general not lead to anti-competitive effects. Non-compete provisions, including post-term non-compete provisions, concern inter-brand competition and may infringe Article 53(1) if they lead to foreclosure on the relevant market where the contract goods or services are sold or purchased (see Section VI.2.1).

(20) An agency agreement may also fall within the scope of Article 53(1), even if the principal bears all the relevant financial and commercial risks, where it facilitates collusion. This could for instance be the case when a number of principals use the same agents while collectively excluding others from using these agents, or when they use the agents to collude on marketing strategy or to exchange sensitive market information between the principals.

III. APPLICATION OF THE BLOCK EXEMPTION

1. Safe harbour created by the Block Exemption

(21) The Block Exemption creates a presumption of legality for vertical agreements depending on the market share of the supplier or the buyer. Pursuant to Article 3 of the Block Exemption, it is in general the market share of the supplier on the market where it sells the contract goods or services which determines the applicability of the Block Exemption. This market share may not exceed the threshold of 30 % in order for the Block Exemption to apply. Only where the agreement contains an exclusive supply obligation, as defined in Article 1(c) of the Block Exemption, is it the buyer's market share on the market where it purchases the contract goods or services which may not exceed the threshold of 30 % in order for the Block Exemption to apply. For market share issues see Section V (paragraphs 88 to 99).

(22) From an economic point of view, a vertical agreement may have effects not only on the market between supplier and buyer but also on markets downstream of the buyer. The simplified approach of the Block Exemption, which only takes into account the market share of the supplier or the buyer (as the case may be) on the market between these two parties, is justified by the fact that below the threshold of 30 % the effects on downstream markets will in general be limited. In addition, only having to consider the market between supplier and buyer makes the application of the Block Exemption easier and enhances the level of legal certainty, while the instrument of withdrawal (see paragraphs 71 to 87) remains available to remedy possible problems on other related markets.

2. Scope of the Block Exemption

(i) Definition of vertical agreements

(23) Vertical agreements are defined in Article 2(1) of the Block Exemption as "agreements or concerted practices entered into between two or more undertakings each of which operates, for the purposes of the agreement, at a different level of the production or distribution chain, and relating to the conditions under which the parties may purchase, sell or resell certain goods or services".

(24) There are three main elements in this definition:

- the agreement or concerted practice is between two or more undertakings. Vertical agreements with final consumers not operating as an undertaking are not covered. More generally, agreements with final consumers do not fall under Article 53(1), as that article applies only to agreements between undertakings, decisions by associations of undertakings and concerted practices. This is without prejudice to the possible application of Article 54 of the EEA Agreement;

- the agreement or concerted practice is between undertakings each operating, for the purposes of the agreement, at a different level of the production or distribution chain. This means for instance that one undertaking produces a raw material which the other undertaking uses as an input, or that the first is a manufacturer, the second a wholesaler and the third a retailer. This does not preclude an undertaking from being active at more than one level of the production or distribution chain;

- the agreements or concerted practices relate to the conditions under which the parties to the agreement, the supplier and the buyer, "may purchase, sell or resell certain goods or services". This reflects the purpose of the Block Exemption to cover purchase and distribution agreements. These are agreements which concern the conditions for the purchase, sale or resale of the goods or services supplied by the supplier and/or which concern the conditions for the sale by the buyer of the goods or services which incorporate these goods or services. For the application of the Block Exemption both the goods or services supplied by the supplier and the resulting goods or services are considered to be contract goods or services. Vertical agreements relating to all final and intermediate goods and services are covered. The only exception is the automobile sector, as long as this sector remains covered by a specific block exemption such as that granted by the act referred to in point 4a of Annex XIV of the EEA Agreement (Regulation (EC) No 1475/95(15)). The goods or services provided by the supplier may be resold by the buyer or may be used as an input by the buyer to produce his own goods or services.

(25) The Block Exemption also applies to goods sold and purchased for renting to third parties. However, rent and lease agreements as such are not covered, as no good or service is being sold by the supplier to the buyer. More generally, the Block Exemption does not cover restrictions or obligations that do not relate to the conditions of purchase, sale and resale, such as an obligation preventing parties from carrying out independent research and development which the parties may have included in an otherwise vertical agreement. In addition, Articles 2(2) to (5) directly or indirectly exclude certain vertical agreements from the application of the Block Exemption.

(ii) Vertical agreements between competitors

(26) Article 2(4) of the Block Exemption explicitly excludes from its application "vertical agreements entered into between competing undertakings". Vertical agreements between competitors will be dealt with, as regards possible collusion effects, in forthcoming Guidelines on the applicability of Article 53 to horizontal cooperation(16). However, the vertical aspects of such agreements need to be assessed under these Guidelines. Article 1(a) of the Block Exemption defines competing undertakings as "actual or potential suppliers in the same product market", irrespective of whether or not they are competitors on the same geographic market. Competing undertakings are undertakings that are actual or potential suppliers of the contract goods or services or goods or services that are substitutes for the contract goods or services. A potential supplier is an undertaking that does not actually produce a competing product but could and would be likely to do so in the absence of the agreement in response to a small and permanent increase in relative prices. This means that the undertaking would be able and likely to undertake the necessary additional investments and supply the market within 1 year. This assessment has to be based on realistic grounds; the mere theoretical possibility of entering a market is not sufficient(17).

(27) There are three exceptions to the general exclusion of vertical agreements between competitors, all three being set out in Article 2(4) and relating to non-reciprocal agreements. Non-reciprocal means, for instance, that while one manufacturer becomes the distributor of the products of another manufacturer, the latter does not become the distributor of the products of the first manufacturer. Non-reciprocal agreements between competitors are covered by the Block Exemption where (1) the buyer has a turnover not exceeding EUR 100 million, or (2) the supplier is a manufacturer and distributor of goods, while the buyer is only a distributor and not also a manufacturer of competing goods, or (3) the supplier is a provider of services operating at several levels of trade, while the buyer does not provide competing services at the level of trade where it purchases the contract services. The second exception covers situations of dual distribution, i.e. the manufacturer of particular goods also acts as a distributor of the goods in competition with independent distributors of his goods. A distributor who provides specifications to a manufacturer to produce particular goods under the distributor's brand name is not to be considered a manufacturer of such own-brand goods. The third exception covers similar situations of dual distribution, but in this case for services, when the supplier is also a provider of services at the level of the buyer.

(iii) Associations of retailers

(28) Article 2(2) of the Block Exemption includes in its application vertical agreements entered into by an association of undertakings which fulfils certain conditions and thereby excludes from the Block Exemption vertical agreements entered into by all other associations. Vertical agreements entered into between an association and its members, or between an association and its suppliers, are covered by the Block Exemption only if all the members are retailers of goods (not services) and if each individual member of the association has a turnover not exceeding EUR 50 million. Retailers are distributors reselling goods to final consumers. Where only a limited number of the members of the association have a turnover not significantly exceeding the EUR 50 million threshold, this will normally not change the assessment under Article 53.

(29) An association of undertakings may involve both horizontal and vertical agreements. The horizontal agreements have to be assessed according to the principles set out in the forthcoming Guidelines on the applicability of Article 53 to horizontal cooperation. If this assessment leads to the conclusion that a cooperation between undertakings in the area of purchasing or selling is acceptable, a further assessment will be necessary to examine the vertical agreements concluded by the association with its suppliers or its individual members. The latter assessment will follow the rules of the Block Exemption and these Guidelines. For instance, horizontal agreements concluded between the members of the association or decisions adopted by the association, such as the decision to require the members to purchase from the association or the decision to allocate exclusive territories to the members have to be assessed first as a horizontal agreement. Only if this assessment is positive does it become relevant to assess the vertical agreements between the association and individual members or between the association and suppliers.

(iv) Vertical agreements containing provisions on intellectual property rights (IPRs)

(30) Article 2(3) of the Block Exemption includes in its application vertical agreements containing certain provisions relating to the assignment of IPRs to or use of IPRs by the buyer and thereby excludes from the Block Exemption all other vertical agreements containing IPR provisions. The Block Exemption applies to vertical agreements containing IPR provisions when five conditions are fulfilled:

- The IPR provisions must be part of a vertical agreement, i.e. an agreement with conditions under which the parties may purchase, sell or resell certain goods or services;

- The IPRs must be assigned to, or for use by, the buyer;

- The IPR provisions must not constitute the primary object of the agreement;

- The IPR provisions must be directly related to the use, sale or resale of goods or services by the buyer or his customers. In the case of franchising where marketing forms the object of the exploitation of the IPRs, the goods or services are distributed by the master franchisee or the franchisees;

- The IPR provisions, in relation to the contract goods or services, must not contain restrictions of competition having the same object or effect as vertical restraints which are not exempted under the Block Exemption.

(31) These conditions ensure that the Block Exemption applies to vertical agreements where the use, sale or resale of goods or services can be performed more effectively because IPRs are assigned to or transferred for use by the buyer. In other words, restrictions concerning the assignment or use of IPRs can be covered when the main object of the agreement is the purchase or distribution of goods or services.

(32) The first condition makes clear that the context in which the IPRs are provided is an agreement to purchase or distribute goods or an agreement to purchase or provide services and not an agreement concerning the assignment or licensing of IPRs for the manufacture of goods, nor a pure licensing agreement. The Block Exemption does not cover for instance:

- agreements where a party provides another party with a recipe and licenses the other party to produce a drink with this recipe;

- agreements under which one party provides another party with a mould or master copy and licenses the other party to produce and distribute copies;

- the pure licence of a trade mark or sign for the purposes of merchandising;

- sponsorship contracts concerning the right to advertise oneself as being an official sponsor of an event;

- copyright licensing such as broadcasting contracts concerning the right to record and/or the right to broadcast an event.

(33) The second condition makes clear that the Block Exemption does not apply when the IPRs are provided by the buyer to the supplier, no matter whether the IPRs concern the manner of manufacture or of distribution. An agreement relating to the transfer of IPRs to the supplier and containing possible restrictions on the sales made by the supplier is not covered by the Block Exemption. This means in particular that subcontracting involving the transfer of know-how to a subcontractor(18) does not fall within the scope of application of the Block Exemption. However, vertical agreements under which the buyer provides only specifications to the supplier which describe the goods or services to be supplied are covered by the Block Exemption.

(34) The third condition makes clear that in order to be covered by the Block Exemption the primary object of the agreement must not be the assignment or licensing of IPRs. The primary object must be the purchase or distribution of goods or services and the IPR provisions must serve the implementation of the vertical agreement.

(35) The fourth condition requires that the IPR provisions facilitate the use, sale or resale of goods or services by the buyer or his customers. The goods or services for use or resale are usually supplied by the licensor but may also be purchased by the licensee from a third supplier. The IPR provisions will normally concern the marketing of goods or services. This is for instance the case in a franchise agreement where the franchisor sells to the franchisee goods for resale and in addition licenses the franchisee to use his trademark and know-how to market the goods. Also covered is the case where the supplier of a concentrated extract licenses the buyer to dilute and bottle the extract before selling it as a drink.

(36) The fifth condition signifies in particular that the IPR provisions should not have the same object or effect as any of the hardcore restrictions listed in Article 4 of the Block Exemption or any of the restrictions excluded from the coverage of the Block Exemption by Article 5 (see paragraphs 46 to 61).

(37) Intellectual property rights which may be considered to serve the implementation of vertical agreements within the meaning of Article 2(3) of the Block Exemption generally concern three main areas: trade marks, copyright and know-how.

Trade mark

(38) A trade mark licence to a distributor may be related to the distribution of the licensor's products in a particular territory. If it is an exclusive licence, the agreement amounts to exclusive distribution.

Copyright

(39) Resellers of goods covered by copyright (books, software, etc.) may be obliged by the copyright holder only to resell under the condition that the buyer, whether another reseller or the end user, shall not infringe the copyright. Such obligations on the reseller, to the extent that they fall under Article 53(1) at all, are covered by the Block Exemption.

(40) Agreements under which hard copies of software are supplied for resale and where the reseller does not acquire a licence to any rights over the software but only has the right to resell the hard copies, are to be regarded as agreements for the supply of goods for resale for the purpose of the Block Exemption. Under this form of distribution the licence of the software only takes place between the copyright owner and the user of the software. This may take the form of a "shrink wrap" licence, i.e. a set of conditions included in the package of the hard copy which the end user is deemed to accept by opening the package.

(41) Buyers of hardware incorporating software protected by copyright may be obliged by the copyright holder not to infringe the copyright, for example not to make copies and resell the software or not to make copies and use the software in combination with other hardware. Such use-restrictions, to the extent that they fall within Article 53(1) at all, are covered by the Block Exemption.

Know-how

(42) Franchise agreements, with the exception of industrial franchise agreements, are the most obvious example where know-how for marketing purposes is communicated to the buyer. Franchise agreements contain licences of intellectual property rights relating to trade marks or signs and know-how for the use and distribution of goods or the provision of services. In addition to the licence of IPR, the franchisor usually provides the franchisee during the life of the agreement with commercial or technical assistance, such as procurement services, training, advice on real estate, financial planning etc. The licence and the assistance are integral components of the business method being franchised.

(43) Licensing contained in franchise agreements is covered by the Block Exemption if all five conditions listed in point 30 are fulfilled. This is usually the case, as under most franchise agreements, including master franchise agreements, the franchisor provides goods and/or services, in particular commercial or technical assistance services, to the franchisee. The IPRs help the franchisee to resell the products supplied by the franchisor or by a supplier designated by the franchisor or to use those products and sell the resulting goods or services. Where the franchise agreement only or primarily concerns licensing of IPRs, such an agreement is not covered by the Block Exemption, but it will be treated in a way similar to those franchise agreements which are covered by the Block Exemption.

(44) The following IPR-related obligations are generally considered to be necessary to protect the franchisor's intellectual property rights and are, if these obligations fall under Article 53(1), also covered by the Block Exemption:

(a) an obligation on the franchisee not to engage, directly or indirectly, in any similar business;

(b) an obligation on the franchisee not to acquire financial interests in the capital of a competing undertaking such as would give the franchisee the power to influence the economic conduct of such undertaking;

(c) an obligation on the franchisee not to disclose to third parties the know-how provided by the franchisor as long as this know-how is not in the public domain;

(d) an obligation on the franchisee to communicate to the franchisor any experience gained in exploiting the franchise and to grant it, and other franchisees, a non-exclusive licence for the know-how resulting from that experience;

(e) an obligation on the franchisee to inform the franchisor of infringements of licensed intellectual property rights, to take legal action against infringers or to assist the franchisor in any legal actions against infringers;

(f) an obligation on the franchisee not to use know-how licensed by the franchisor for purposes other than the exploitation of the franchise;

(g) an obligation on the franchisee not to assign the rights and obligations under the franchise agreement without the franchisor's consent.

(v) Relationship to other block exemptions

(45) Article 2(5) states that the Block Exemption does not apply to vertical agreements the subject matter of which falls within the scope of any other block exemptions. This means that the Block Exemption does not apply to vertical agreements covered by the act referred to in point 5 of Annex XIV to the EEA Agreement on technology transfer [European Commission Regulation (EC) No 240/96(19)], the act referred to in point 4a of Annex XIV to the EEA Agreement for car distribution [European Commission Regulation (EC) No 1475/95(20)] or the acts referred to in point 6 and 7 of Annex XIV to the EEA Agreement respectively exempting vertical agreements concluded in connection with horizontal agreements [Regulations (EEC) No 417/85 (15)(21) and (EEC) No 418/85(22)], or any future regulations of that kind incorporated into the EEA Agreement.

3. Hardcore restrictions under the Block Exemption

(46) The Block Exemption contains in Article 4 a list of hardcore restrictions which lead to the exclusion of the whole vertical agreement from the scope of application of the Block Exemption. This list of hardcore restrictions applies to vertical agreements concerning trade within the territory covered by the EEA Agreement. In so far as vertical agreements concern exports outside the EEA or imports/re-imports from outside EEA see the judgment in Javico v Yves Saint Laurent(23). Individual exemption of vertical agreements containing such hardcore restrictions is also unlikely.

(47) The hardcore restriction set out in Article 4(a) of the Block Exemption concerns resale price maintenance (RPM), that is agreements or concerted practices having as their direct or indirect object the establishment of a fixed or minimum resale price or a fixed or minimum price level to be observed by the buyer. In the case of contractual provisions or concerted practices that directly establish the resale price, the restriction is clear cut. However, RPM can also be achieved through indirect means. Examples of the latter are an agreement fixing the distribution margin, fixing the maximum level of discount the distributor can grant from a prescribed price level, making the grant of rebates or reimbursement of promotional costs by the supplier subject to the observance of a given price level, linking the prescribed resale price to the resale prices of competitors, threats, intimidation, warnings, penalties, delay or suspension of deliveries or contract terminations in relation to observance of a given price level. Direct or indirect means of achieving price fixing can be made more effective when combined with measures to identify price-cutting distributors, such as the implementation of a price monitoring system, or the obligation on retailers to report other members of the distribution network who deviate from the standard price level. Similarly, direct or indirect price fixing can be made more effective when combined with measures which may reduce the buyer's incentive to lower the resale price, such as the supplier printing a recommended resale price on the product or the supplier obliging the buyer to apply a most-favoured-customer clause. The same indirect means and the same "supportive" measures can be used to make maximum or recommended prices work as RPM. However, the provision of a list of recommended prices or maximum prices by the supplier to the buyer is not considered in itself as leading to RPM.

(48) In the case of agency agreements, the principal normally establishes the sales price, as the agent does not become the owner of the goods. However, where an agency agreement falls within Article 53(1) (see paragraphs 12 to 20), an obligation preventing or restricting the agent from sharing his commission, fixed or variable, with the customer would be a hardcore restriction under Article 4(a) of the Block Exemption. The agent should thus be left free to lower the effective price paid by the customer without reducing the income for the principal(24).

(49) The hardcore restriction set out in Article 4(b) of the Block Exemption concerns agreements or concerted practices that have as their direct or indirect object the restriction of sales by the buyer, in as far as those restrictions relate to the territory into which or the customers to whom the buyer may sell the contract goods or services. That hardcore restriction relates to market partitioning by territory or by customer. That may be the result of direct obligations, such as the obligation not to sell to certain customers or to customers in certain territories or the obligation to refer orders from these customers to other distributors. It may also result from indirect measures aimed at inducing the distributor not to sell to such customers, such as refusal or reduction of bonuses or discounts, refusal to supply, reduction of supplied volumes or limitation of supplied volumes to the demand within the allocated territory or customer group, threat of contract termination or profit pass-over obligations. It may further result from the supplier not providing an EEA-wide guarantee service, whereby all distributors are obliged to provide the guarantee service and are reimbursed for this service by the supplier, even in relation to products sold by other distributors into their territory. These practices are even more likely to be viewed as a restriction of the buyer's sales when used in conjunction with the implementation by the supplier of a monitoring system aimed at verifying the effective destination of the supplied goods, e.g. the use of differentiated labels or serial numbers. However, a prohibition imposed on all distributors to sell to certain end users is not classified as a hardcore restriction if there is an objective justification related to the product, such as a general ban on selling dangerous substances to certain customers for reasons of safety or health. It implies that also the supplier himself does not sell to these customers. Nor are obligations on the reseller relating to the display of the supplier's brand name classified as hardcore.

(50) There are four exceptions to the hardcore restriction in Article 4(b) of the Block Exemption. The first exception allows a supplier to restrict active sales by his direct buyers to a territory or a customer group which has been allocated exclusively to another buyer or which the supplier has reserved to itself. A territory or customer group is exclusively allocated when the supplier agrees to sell his product only to one distributor for distribution in a particular territory or to a particular customer group and the exclusive distributor is protected against active selling into his territory or to his customer group by the supplier and all the other buyers of the supplier inside the territory covered by the EEA Agreement. The supplier is allowed to combine the allocation of an exclusive territory and an exclusive customer group by for instance appointing an exclusive distributor for a particular customer group in a certain territory. This protection of exclusively allocated territories or customer groups must, however, permit passive sales to such territories or customer groups. For the application of Article 4(b) of the Block Exemption, the EFTA Surveillance Authority interprets "active" and "passive" sales as follows:

- "Active" sales mean actively approaching individual customers inside another distributor's exclusive territory or exclusive customer group by for instance direct mail or visits; or actively approaching a specific customer group or customers in a specific territory allocated exclusively to another distributor through advertisement in media or other promotions specifically targeted at that customer group or targeted at customers in that territory; or establishing a warehouse or distribution outlet in another distributor's exclusive territory.

- "Passive" sales mean responding to unsolicited requests from individual customers including delivery of goods or services to such customers. General advertising or promotion in media or on the Internet that reaches customers in other distributors' exclusive territories or customer groups but which is a reasonable way to reach customers outside those territories or customer groups, for instance to reach customers in non-exclusive territories or in one's own territory, are passive sales.

(51) Every distributor must be free to use the Internet to advertise or to sell products. A restriction on the use of the Internet by distributors could only be compatible with the Block Exemption to the extent that promotion on the Internet or sales over the Internet would lead to active selling into other distributors' exclusive territories or customer groups. In general, the use of the Internet is not considered a form of active sales into such territories or customer groups, since it is a reasonable way to reach every customer. The fact that it may have effects outside one's own territory or customer group results from the technology, i.e. the easy access from everywhere. If a customer visits the website of a distributor and contacts the distributor and if such contact leads to a sale, including delivery, then that is considered passive selling. The language used on the website or in the communication normally plays no role in that respect. Insofar as a website is not specifically targeted at customers primarily inside the territory or customer group exclusively allocated to another distributor, for instance with the use of banners or links in pages of providers specifically available to these exclusively allocated customers, the website is not considered a form of active selling. However, unsolicited e-mails sent to individual customers or specific customer groups are considered active selling. The same considerations apply to selling by catalogue. Notwithstanding what has been said before, the supplier may require quality standards for the use of the Internet site to resell his goods, just as the supplier may require quality standards for a shop or for advertising and promotion in general. The latter may be relevant in particular for selective distribution. An outright ban on Internet or catalogue selling is only possible if there is an objective justification. In any case, the supplier cannot reserve to itself sales and/or advertising over the Internet.

(52) There are three other exceptions to the second hardcore restriction set out in Article 4(b) of the Block Exemption. All three exceptions allow for the restriction of both active and passive sales. Thus, it is permissible to restrict a wholesaler from selling to end users, to restrict an appointed distributor in a selective distribution system from selling, at any level of trade, to unauthorised distributors in markets where such a system is operated, and to restrict a buyer of components supplied for incorporation from reselling them to competitors of the supplier. The term "component" includes any intermediate goods and the term "incorporation" refers to the use of any input to produce goods.

(53) The hardcore restriction set out in Article 4(c) of the Block Exemption concerns the restriction of active or passive sales to end users, whether professional end users or final consumers, by members of a selective distribution network. This means that dealers in a selective distribution system, as defined in Article 1(d) of the Block Exemption, cannot be restricted in the users or purchasing agents acting on behalf of these users to whom they may sell. For instance, also in a selective distribution system the dealer should be free to advertise and sell with the help of the Internet. Selective distribution may be combined with exclusive distribution provided that active and passive selling is not restricted anywhere. The supplier may therefore commit itself to supplying only one dealer or a limited number of dealers in a given territory.

(54) In addition, in the case of selective distribution, restrictions can be imposed on the dealer's ability to determine the location of his business premises. Selected dealers may be prevented from running their business from different premises or from opening a new outlet in a different location. If the dealer's outlet is mobile ("shop on wheels"), an area may be defined outside which the mobile outlet cannot be operated.

(55) The hardcore restriction set out in Article 4(d) of the Block Exemption concerns the restriction of cross-supplies between appointed distributors within a selective distribution system. This means that an agreement or concerted practice may not have as its direct or indirect object to prevent or restrict the active or passive selling of the contract products between the selected distributors. Selected distributors must remain free to purchase the contract products from other appointed distributors within the network, operating either at the same or at a different level of trade. This means that selective distribution cannot be combined with vertical restraints aimed at forcing distributors to purchase the contract products exclusively from a given source, for instance exclusive purchasing. It also means that within a selective distribution network no restrictions can be imposed on appointed wholesalers as regards their sales of the product to appointed retailers.

(56) The hardcore restriction set out in Article 4(e) of the Block Exemption concerns agreements that prevent or restrict end-users, independent repairers and service providers from obtaining spare parts directly from the manufacturer of these spare parts. An agreement between a manufacturer of spare parts and a buyer who incorporates these parts into his own products [original equipment manufacturer (OEM)], may not, either directly or indirectly, prevent or restrict sales by the manufacturer of these spare parts to end users, independent repairers or service providers. Indirect restrictions may arise in particular when the supplier of the spare parts is restricted in supplying technical information and special equipment which are necessary for the use of spare parts by users, independent repairers or service providers.

However, the agreement may place restrictions on the supply of the spare parts to the repairers or service providers entrusted by the original equipment manufacturer with the repair or servicing of his own goods. In other words, the original equipment manufacturer may require his own repair and service network to buy the spare parts from it.

4. Conditions under the Block Exemption

(57) Article 5 of the Block Exemption excludes certain obligations from the coverage of the Block Exemption even though the market share threshold is not exceeded. However, the Block Exemption continues to apply to the remaining part of the vertical agreement if that part is severable from the non-exempted obligations.

(58) The first exclusion is provided in Article 5(a) of the Block Exemption and concerns non-compete obligations. Non-compete obligations are obligations that require the buyer to purchase from the supplier or from another undertaking designated by the supplier more than 80 % of the buyer's total purchases during the previous year of the contract goods and services and their substitutes (see the definition in Article 1(b) of the Block Exemption), thereby preventing the buyer from purchasing competing goods or services or limiting such purchases to less than 20 % of total purchases. Where for the year preceding the conclusion of the contract no relevant purchasing data for the buyer are available, the buyer's best estimate of his annual total requirements may be used. Such non-compete obligations are not covered by the Block Exemption when their duration is indefinite or exceeds five years. Non-compete obligations that are tacitly renewable beyond a period of five years are also not covered by the Block Exemption. However, non-compete obligations are covered when their duration is limited to five years or less, or when renewal beyond five years requires explicit consent of both parties and no obstacles exist that hinder the buyer from effectively terminating the non-compete obligation at the end of the five-year period. If for instance the agreement provides for a five-year non-compete obligation and the supplier provides a loan to the buyer, the repayment of that loan should not hinder the buyer from effectively terminating the non-compete obligation at the end of the five-year period; the repayment needs to be structured in equal or decreasing instalments and should not increase over time. This is without prejudice to the possibility, in the case for instance of a new distribution outlet, to delay repayment for the first one or two years until sales have reached a certain level. The buyer must have the possibility to repay the remaining debt where there is still an outstanding debt at the end of the non-compete obligation. Similarly, when the supplier provides the buyer with equipment which is not relationship-specific, the buyer should have the possibility to take over the equipment at its market asset value at the end of the non-compete obligation.

(59) The five-year duration limit does not apply when the goods or services are resold by the buyer "from premises and land owned by the supplier or leased by the supplier from third parties not connected with the buyer". In such cases the non-compete obligation may be of the same duration as the period of occupancy of the point of sale by the buyer (Article 5(a) of the Block Exemption). The reason for this exception is that it is normally unreasonable to expect a supplier to allow competing products to be sold from premises and land owned by the supplier without his permission. Artificial ownership constructions intended to avoid the five-year limit cannot benefit from this exception.

(60) The second exclusion from the Block Exemption is provided for in Article 5(b) of the Block Exemption and concerns post term non-compete obligations. Such obligations are normally not covered by the Block Exemption, unless the obligation is indispensable to protect know-how transferred by the supplier to the buyer, is limited to the point of sale from which the buyer has operated during the contract period, and is limited to a maximum period of one year. According to the definition in Article 1(f) of the Block Exemption the know-how needs to be "substantial", meaning "that the know-how includes information which is indispensable to the buyer for the use, sale or resale of the contract goods or services".

(61) The third exclusion from the Block Exemption is provided for in Article 5(c) of the Block Exemption and concerns the sale of competing goods in a selective distribution system. The Block Exemption covers the combination of selective distribution with a non-compete obligation, obliging the dealers not to resell competing brands in general. However, if the supplier prevents his appointed dealers, either directly or indirectly, from buying products for resale from specific competing suppliers, such an obligation cannot enjoy the benefit of the Block Exemption. The objective of the exclusion of this obligation is to avoid a situation whereby a number of suppliers using the same selective distribution outlets prevent one specific competitor or certain specific competitors from using these outlets to distribute their products (foreclosure of a competing supplier which would be a form of collective boycott)(25).

5. No presumption of illegality outside the Block Exemption

(62) Vertical agreements falling outside the Block Exemption will not be presumed to be illegal but may need individual examination. Companies are encouraged to do their own assessment without notification. In the case of an individual examination by the EFTA Surveillance Authority, the latter will bear the burden of proof that the agreement in question infringes Article 53(1). When appreciable anti-competitive effects are demonstrated, undertakings may substantiate efficiency claims and explain why a certain distribution system is likely to bring about benefits which are relevant to the conditions for exemption under Article 53(3).

6. No need for precautionary notification

(63) Pursuant to Article 4(2) of Chapter II of Protocol 4 to the Surveillance and Court Agreement, as last amended by Agreement between the EFTA States of 11th May 2000(26), vertical agreements can benefit from an exemption under Article 53(3) from their date of entry into force, even if notification occurs after that date. This means in practice that no precautionary notification needs to be made. If a dispute arises, an undertaking can still notify the competent authority under the EEA Agreement(27), in which case the EFTA Surveillance Authority, if notified, can exempt the vertical agreement with retroactive effect from the date of entry into force of the agreement if all four conditions of Article 53(3) are fulfilled. A notifying party does not have to explain why the agreement was not notified earlier and will not be denied retroactive exemption simply because it did not notify earlier. Any notification will be reviewed on its merits. This amendment to Article 4(2) of Chapter II of Protocol 4 to the Surveillance and Court Agreement should eliminate artificial litigation before national courts and thus strengthen the civil enforceability of contracts. It also takes account of the situation where undertakings have not notified because they assumed the agreement was covered by the Block Exemption.

(64) Since the date of notification no longer limits the possibility of exemption by the EFTA Surveillance Authority, national courts have to assess the likelihood that Article 53(3) will apply in respect of vertical agreements falling within Article 53(1). If such likelihood exists, they should suspend proceedings pending adoption of a position by the EFTA Surveillance Authority. However, national courts may adopt interim measures pending the assessment by the EFTA Surveillance Authority of the applicability of Article 53(3), in the same way as they do when they refer a preliminary question to the EFTA Court under Article 34 of the Surveillance and Court Agreement. No suspension is necessary in respect of injunction proceedings, where national courts themselves are empowered to assess the likelihood of application of Article 53(3)(28).

(65) Unless there is litigation in national courts or complaints, notifications of vertical agreements will not be given priority in the EFTA Surveillance Authority's enforcement policy. Notifications as such do not provide provisional validity for the execution of agreements. Where undertakings have not notified an agreement because they assumed in good faith that the market share threshold under the Block Exemption was not exceeded, the EFTA Surveillance Authority will not impose fines.

7. Severability

(66) The Block Exemption exempts vertical agreements on condition that no hardcore restriction, as set out in Article 4, is contained in or practised with the vertical agreement. If there are one or more hardcore restrictions, the benefit of the Block Exemption is lost for the entire vertical agreement. There is no severability for hardcore restrictions.

(67) The rule of severability does apply, however, to the conditions set out in Article 5 of the Block Exemption. Therefore, the benefit of the Block Exemption is only lost in relation to that part of the vertical agreement which does not comply with the conditions set out in Article 5.

8. Portfolio of products distributed through the same distribution system

(68) Where a supplier uses the same distribution agreement to distribute several goods/services some of these may, in view of the market share threshold, be covered by the Block Exemption while others may not. In that case, the Block Exemption applies to those goods and services for which the conditions of application are fulfilled.

(69) In respect of the goods or services which are not covered by the Block Exemption, the ordinary rules of competition apply, which means:

- there is no block exemption but also no presumption of illegality;

- if there is an infringement of Article 53(1)which is not exemptable, consideration may be given to whether there are appropriate remedies to solve the competition problem within the existing distribution system;

- if there are no such appropriate remedies, the supplier concerned will have to make other distribution arrangements.

This situation can also arise where Article 54 applies in respect of some products but not in respect of others.

9. Transitional period

(70) The Block Exemption applies from 1 June 2000. Article 12 of the Block Exemption provides for a transitional period for vertical agreements already in force before 1 June 2000 which do not satisfy the conditions for exemption provided in the Block Exemption, but which do satisfy the conditions for exemption under the block exemptions which expired on 31 May 2000 (the acts referred to at points 2 and 3 of Annex XIV to the EEA Agreement before the changes brought about by EEA Joint Committee Decision No. 18/2000 came into force on 1 June 2000 [European Commission Regulations (EEC) No 1983/83, (EEC) No 1984/83 and (EEC) No 4087/88)]. The EFTA Surveillance Authority's Notice concerning these outgoing acts also ceases to apply on 31 May 2000. The latter agreements may continue to benefit from the outgoing acts until 31 December 2001. Agreements of suppliers with a market share not exceeding 30 % who signed with their buyers non-compete agreements with a duration exceeding five years are covered by the Block Exemption if on 1 January 2002 the non-compete agreements have no more than five years to run.

IV. WITHDRAWAL OF THE BLOCK EXEMPTION AND DISAPPLICATION OF THE BLOCK EXEMPTION

1. Withdrawal procedure

(71) The presumption of legality conferred by the Block Exemption may be withdrawn if a vertical agreement, considered either in isolation or in conjunction with similar agreements enforced by competing suppliers or buyers, comes within the scope of Article 53(1) and does not fulfil all the conditions of Article 53(3). This may occur when a supplier, or a buyer in the case of exclusive supply agreements, holding a market share not exceeding 30 %, enters into a vertical agreement which does not give rise to objective advantages such as to compensate for the damage which it causes to competition. This may particularly be the case with respect to the distribution of goods to final consumers, who are often in a much weaker position than professional buyers of intermediate goods. In the case of sales to final consumers, the disadvantages caused by a vertical agreement may have a stronger impact than in a case concerning the sale and purchase of intermediate goods. When the conditions of Article 53(3) are not fulfilled, the EFTA Surveillance Authority may, in cases where it is competent to act by virtue of the provisions of Article 56 of the EEA Agreement, withdraw the benefit of the Block Exemption under Article 6 and establish an infringement of Article 53(1).

(72) Where the withdrawal procedure is applied by the EFTA Surveillance Authority, the latter bears the burden of proof that the agreement falls within the scope of Article 53(1) and that the agreement does not fulfil all four conditions of Article 53(3).

(73) The conditions for an exemption under Article 53(3) may in particular not be fulfilled when access to the relevant market or competition therein is significantly restricted by the cumulative effect of parallel networks of similar vertical agreements practised by competing suppliers or buyers. Parallel networks of vertical agreements are to be regarded as similar if they contain restraints producing similar effects on the market. Similar effects will normally occur when vertical restraints practised by competing suppliers or buyers come within one of the four groups listed in paragraphs 104 to 114. Such a situation may arise for example when, on a given market, certain suppliers practise purely qualitative selective distribution while other suppliers practise quantitative selective distribution. In such circumstances, the assessment must take account of the anti-competitive effects attributable to each individual network of agreements. Where appropriate, withdrawal may concern only the quantitative limitations imposed on the number of authorised distributors. Other cases in which a withdrawal decision may be taken include situations where the buyer, for example in the context of exclusive supply or exclusive distribution, has significant market power in the relevant downstream market where he resells the goods or provides the services.

(74) Responsibility for an anti-competitive cumulative effect can only be attributed to those undertakings which make an appreciable contribution to it. Agreements entered into by undertakings whose contribution to the cumulative effect is insignificant do not fall under the prohibition provided for in Article 53(1)(29) and are therefore not subject to the withdrawal mechanism. The assessment of such a contribution will be made in accordance with the criteria set out in paragraphs 137 to 229.

(75) A withdrawal decision can only have ex nunc effect, which means that the exempted status of the agreements concerned will not be affected until the date at which the withdrawal becomes effective.

(76) Under Article 7 of the Block Exemption, the competent authority of an EEA State may withdraw the benefit of the Block Exemption in respect of vertical agreements whose anti-competitive effects are felt in the territory of the EEA State concerned or a part thereof, which has all the characteristics of a distinct geographic market. Where an EFTA State has not enacted legislation enabling the national competition authority to apply EEA competition law or at least to withdraw the benefit of the Block Exemption, the EFTA State may ask the EFTA Surveillance Authority to initiate proceedings to this effect.

(77) The European Commission and the EFTA Surveillance Authority share, in accordance with the provisions of Article 56 of the EEA Agreement regarding the allocation of cases between the two authorities, the exclusive power to withdraw the benefit of the Block Exemption in respect of vertical agreements restricting competition on a relevant geographic market which is wider than the territory of a single EEA State. When the territory of a single EEA State, or a part thereof, constitutes the relevant geographic market, the competent surveillance authority and the EEA State concerned have concurrent competence for withdrawal. Often, such cases lend themselves to decentralised enforcement by national competition authorities. However, the EFTA Surveillance Authority reserves the right, within the EFTA pillar, to take on certain cases displaying a particular interest under the EEA Agreement, such as cases raising a new point of law.

(78) National decisions of withdrawal must be taken in accordance with the procedures laid down under national law and will only have effect within the territory of the EEA State concerned. Such national decisions must not prejudice the uniform application of the EEA competition rules and the full effect of the measures adopted in implementation of those rules(30). Compliance with this principle implies that national competition authorities must carry out their assessment under Article 53 in the light of the relevant criteria developed by the EFTA Court, the Court of Justice of the European Communities and the Court of First Instance and in the light of notices and previous decisions adopted by the European Commission and the EFTA Surveillance Authority.

(79) The EFTA Surveillance Authority considers that the consultation mechanisms provided for in its Notice on cooperation between national competition authorities and the EFTA Surveillance Authority(31) should be used to avert the risk of conflicting decisions and duplication of procedures.

2. Disapplication of the Block Exemption

(80) Article 8 of the Block Exemption enables the competent surveillance authority to exclude from the scope of the Block Exemption parallel networks of similar vertical restraints where these cover more than 50 % of a relevant market. Such a measure is not addressed to individual undertakings but concerns all undertakings whose agreements are defined in the act disapplying the Block Exemption.

(81) Whereas the withdrawal of the benefit of the Block Exemption under Article 6 implies the adoption of a decision establishing an infringement of Article 53 by an individual company, the effect of an act under Article 8 is merely to remove, in respect of the restraints and the markets concerned, the benefit of the application of the Block Exemption and to restore the full application of Article 53(1) and (3). Following the adoption of an act declaring the Block Exemption inapplicable in respect of certain vertical restraints on a particular market, the criteria developed by the relevant case-law of the EFTA Court, the Court of Justice of the European Communities and the Court of First Instance and by notices and previous decisions adopted by the EFTA Surveillance Authority and the European Commission will guide the application of Article 53 to individual agreements. Where appropriate, the EFTA Surveillance Authority will take a decision in an individual case which can provide guidance to all the undertakings operating on the market concerned.

(82) For the purpose of calculating the 50 % market coverage ratio, account must be taken of each individual network of vertical agreements containing restraints, or combinations of restraints, producing similar effects on the market. Similar effects normally result when the restraints come within one of the four groups listed in paragraphs 104 to 114.

(83) Article 8 does not entail an obligation on the part of the competent surveillance authority to act where the 50 % market-coverage ratio is exceeded. In general, disapplication is appropriate when it is likely that access to the relevant market or competition therein is appreciably restricted. This may occur in particular when parallel networks of selective distribution covering more than 50 % of a market make use of selection criteria which are not required by the nature of the relevant goods or discriminate against certain forms of distribution capable of selling such goods.

(84) In assessing the need to apply Article 8, the competent surveillance authority will consider whether individual withdrawal would be a more appropriate remedy. This may depend, in particular, on the number of competing undertakings contributing to a cumulative effect on a market or the number of affected geographic markets within the EEA.

(85) Any act adopted under Article 8 must clearly set out its scope. This means, first, that the competent surveillance authority must define the relevant product and geographic market(s) and, secondly, that it must identify the type of vertical restraint in respect of which the Block Exemption will no longer apply. As regards the latter aspect, the competent surveillance authority may modulate the scope of its disapplication act according to the competition concern which it intends to address. For instance, while all parallel networks of single-branding type arrangements shall be taken into account in view of establishing the 50 % market coverage ratio, the competent surveillance authority may nevertheless restrict the scope of the disapplication act only to non-compete obligations exceeding a certain duration. Thus, agreements of a shorter duration or of a less restrictive nature might be left unaffected, in consideration of the lesser degree of foreclosure attributable to such restraints. Similarly, when on a particular market selective distribution is practised in combination with additional restraints such as non-compete or quantity-forcing on the buyer, the disapplication act may concern only such additional restraints. Where appropriate, the competent surveillance authority may also provide guidance by specifying the market share level which, in the specific market context, may be regarded as insufficient to bring about a significant contribution by an individual undertaking to the cumulative effect.

(86) The transitional period of not less than six months that the competent surveillance authority will have to set under Article 8(2) should allow the undertakings concerned to adapt their agreements to take account of the act disapplying the Block Exemption.

(87) An act disapplying the Block Exemption will not affect the exempted status of the agreements concerned for the period preceding its entry into force.

V. MARKET DEFINITION AND MARKET SHARE CALCULATION ISSUES

1. EFTA Surveillance Authority Notice on definition of the relevant market

(88) The EFTA Surveillance Authority Notice on definition of the relevant market for the purpose of competition law within the EEA(32) provides guidance on the rules, criteria and evidence which the EFTA Surveillance Authority uses when considering market definition issues. That Notice will not be further explained in these Guidelines and should serve as the basis for market definition issues. These Guidelines will only deal with specific issues that arise in the context of vertical restraints and that are not dealt with in the general notice on market definition.

2. The relevant market for calculating the 30 % market share threshold under the Block Exemption

(89) Under Article 3 of the Block Exemption, it is in general the market share of the supplier that is decisive for the application of the Block Exemption. In the case of vertical agreements concluded between an association of retailers and individual members, the association is the supplier and needs to take into account its market share as a supplier. Only in the case of exclusive supply as defined in Article 1(c) of the Block Exemption is it the market share of the buyer, and only that market share, which is decisive for the application of the Block Exemption.

(90) In order to calculate the market share, it is necessary to determine the relevant market. For this, the relevant product market and the relevant geographic market must be defined. The relevant product market comprises any goods or services which are regarded by the buyer as interchangeable, by reason of their characteristics, prices and intended use. The relevant geographic market comprises the area in which the undertakings concerned are involved in the supply and demand of relevant goods or services, in which the conditions of competition are sufficiently homogeneous, and which can be distinguished from neighbouring geographic areas because, in particular, conditions of competition are appreciably different in those areas.

(91) For the application of the Block Exemption, the market share of the supplier is his share on the relevant product and geographic market on which he sells to his buyers(33). In the example given in paragraph 92, this is market A. The product market depends in the first place on substitutability from the buyers' perspective. When the supplied product is used as an input to produce other products and is generally not recognisable in the final product, the product market is normally defined by the direct buyers' preferences. The customers of the buyers will normally not have a strong preference concerning the inputs used by the buyers. Usually the vertical restraints agreed between the supplier and buyer of the input only relate to the sale and purchase of the intermediate product and not to the sale of the resulting product. In the case of distribution of final goods, what are substitutes for the direct buyers will normally be influenced or determined by the preferences of the final consumers. A distributor, as reseller, cannot ignore the preferences of final consumers when he purchases final goods. In addition, at the distribution level the vertical restraints usually concern not only the sale of products between supplier and buyer, but also their resale. As different distribution formats usually compete, markets are in general not defined by the form of distribution that is applied. Where suppliers generally sell a portfolio of products, the entire portfolio may determine the product market when the portfolios and not the individual products are regarded as substitutes by the buyers. As the buyers on market A are professional buyers, the geographic market is usually wider than the market where the product is resold to final consumers. Often, this will lead to the definition of national markets or wider geographic markets.

(92) In the case of exclusive supply, the buyer's market share is his share of all purchases on the relevant purchase market(34). In the example below, this is also market A.

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(93) Where a vertical agreement involves three parties, each operating at a different level of trade, their market shares will have to be below the market share threshold of 30 % at both levels in order to benefit from the Block Exemption. If for instance, in an agreement between a manufacturer, a wholesaler (or association of retailers) and a retailer, a non-compete obligation is agreed, then the market share of both the manufacturer and the wholesaler (or association of retailers) must not exceed 30 % in order to benefit from the Block Exemption.

(94) Where a supplier produces both original equipment and the repair or replacement parts for this equipment, the supplier will often be the only or the major supplier on the after-market for the repair and replacement parts. This may also arise where the supplier (OEM supplier) subcontracts the manufacturing of the repair or replacement parts. The relevant market for application of the Block Exemption may be the original equipment market including the spare parts or a separate original equipment market and after-market depending on the circumstances of the case, such as the effects of the restrictions involved, the lifetime of the equipment and importance of the repair or replacement costs(35).

(95) Where the vertical agreement, in addition to the supply of the contract goods, also contains IPR provisions - such as a provision concerning the use of the supplier's trademark - which help the buyer to market the contract goods, the supplier's market share on the market where he sells the contract goods is decisive for the application of the Block Exemption. Where a franchisor does not supply goods to be resold but provides a bundle of services combined with IPR provisions which together form the business method being franchised, the franchisor needs to take account of his market share as a provider of a business method. For that purpose, the franchisor needs to calculate his market share on the market where the business method is exploited, which is the market where the franchisees exploit the business method to provide goods or services to end users. The franchisor must base his market share on the value of the goods or services supplied by his franchisees on this market. On such a market the competitors may be providers of other franchised business methods but also suppliers of substitutable goods or services not applying franchising. For instance, without prejudice to the definition of such market, if there was a market for fast-food services, a franchisor operating on such a market would need to calculate his market share on the basis of the relevant sales figures of his franchisees on this market. If the franchisor, in addition to the business method, also supplies certain inputs, such as meat and spices, then the franchisor also needs to calculate his market share on the market where these goods are sold.

3. The relevant market for individual assessment

(96) For individual assessment of vertical agreements not covered by the Block Exemption, additional markets may need to be investigated besides the relevant market defined for the application of the Block Exemption. A vertical agreement may not only have effects on the market between supplier and buyer but may also have effects on downstream markets. For an individual assessment of a vertical agreement the relevant markets at each level of trade affected by restraints contained in the agreement will be examined:

(i) For "intermediate goods or services" that are incorporated by the buyer into his own goods or services, vertical restraints generally have effects only on the market between supplier and buyer. A non-compete obligation imposed on the buyer for instance may foreclose other suppliers but will not lead to reduced in-store competition downstream. However, in cases of exclusive supply the position of the buyer on his downstream market is also relevant because the buyer's foreclosing behaviour may only have appreciable negative effects if he has market power on the downstream market.

(ii) For "final products" an analysis limited to the market between supplier and buyer is less likely to be sufficient since vertical restraints may have negative effects of reduced inter-brand and/or intra-brand competition on the resale market, that is on the market downstream of the buyer. For instance, exclusive distribution may not only lead to foreclosure effects on the market between the supplier and the buyer, but may above all lead to less intra-brand competition in the resale territories of the distributors. The resale market is in particular important if the buyer is a retailer selling to final consumers. A non-compete obligation agreed between a manufacturer and a wholesaler may foreclose this wholesaler to other manufacturers but a loss of in-store competition is not very likely at the wholesale level. The same agreement concluded with a retailer may however cause this added loss of in-store inter-brand competition on the resale market.

(iii) In cases of individual assessment of an "after-market", the relevant market may be the original equipment market or the after-market depending on the circumstances of the case. In any event, the situation on a separate after-market will be evaluated taking account of the situation on the original equipment market. A less significant position on the original equipment market will normally reduce possible anti-competitive effects on the after-market.

4. Calculation of the market share under the Block Exemption

(97) The calculation of the market share needs to be based in principle on value figures. Where value figures are not available substantiated estimates can be made. Such estimates may be based on other reliable market information such as volume figures (see Article 9(1) of the Block Exemption).

(98) In-house production, that is production of an intermediate product for own use, may be very important in a competition analysis as one of the competitive constraints or to accentuate the market position of a company. However, for the purpose of market definition and the calculation of market share for intermediate goods and services, in-house production will not be taken into account.

(99) However, in the case of dual distribution of final goods, i.e. where a producer of final goods also acts as a distributor on the market, the market definition and market share calculation need to include the goods sold by the producer and competing producers through their integrated distributors and agents (see Article 9(2)(b) of the Block Exemption). "Integrated distributors" are connected undertakings within the meaning of Article 11 of the Block Exemption.

VI. ENFORCEMENT POLICY IN INDIVIDUAL CASES

(100) Vertical restraints are generally less harmful than horizontal restraints. The main reason for treating a vertical restraint more leniently than a horizontal restraint lies in the fact that the latter may concern an agreement between competitors producing identical or substitutable goods or services. In such horizontal relationships the exercise of market power by one company (higher price of its product) may benefit its competitors. This may provide an incentive to competitors to induce each other to behave anti-competitively. In vertical relationships the product of the one is the input for the other. This means that the exercise of market power by either the upstream or downstream company would normally hurt the demand for the product of the other. The companies involved in the agreement therefore usually have an incentive to prevent the exercise of market power by the other.

(101) However, this self-restraining character should not be over-estimated. When a company has no market power it can only try to increase its profits by optimising its manufacturing and distribution processes, with or without the help of vertical restraints. However, when it does have market power it can also try to increase its profits at the expense of its direct competitors by raising their costs and at the expense of its buyers and ultimately consumers by trying to appropriate some of their surplus. This can happen when the upstream and downstream company share the extra profits or when one of the two uses vertical restraints to appropriate all the extra profits.

(102) In the assessment of individual cases in respect of which it has jurisdiction, the EFTA Surveillance Authority will adopt an economic approach in the application of Article 53 to vertical restraints. This will limit the scope of application of Article 53 to undertakings holding a certain degree of market power where inter-brand competition may be insufficient. In those cases, the protection of inter-brand and intra-brand competition is important to ensure efficiencies and benefits for consumers.

1. The framework of analysis

1.1. Negative effects of vertical restraints

(103) The negative effects on the market that may result from vertical restraints which EEA competition law aims at preventing are the following:

(i) foreclosure of other suppliers or other buyers by raising barriers to entry;

(ii) reduction of inter-brand competition between the companies operating on a market, including facilitation of collusion amongst suppliers or buyers; by collusion is meant both explicit collusion and tacit collusion (conscious parallel behaviour);

(iii) reduction of intra-brand competition between distributors of the same brand;

(iv) the creation of obstacles to market integration, including, above all, limitations on the freedom of consumers to purchase goods or services in any EEA State they may choose.

(104) Such negative effects may result from various vertical restraints. Agreements which are different in form may have the same substantive impact on competition. To analyse these possible negative effects, it is appropriate to divide vertical restraints into four groups: a single branding group, a limited distribution group, a resale price maintenance group and a market partitioning group. The vertical restraints within each group have largely similar negative effects on competition.

(105) The classification into four groups is based upon what can be described as the basic components of vertical restraints. In paragraphs 103 to 136, the four different groups are analysed. In paragraphs 137 to 229, vertical agreements are analysed as they are used in practice because many vertical agreements make use of more than one of these components.

Single branding group

(106) Under the heading of "single branding" come those agreements which have as their main element that the buyer is induced to concentrate his orders for a particular type of product with one supplier. This component can be found amongst others in non-compete and quantity-forcing on the buyer, where an obligation or incentive scheme agreed between the supplier and the buyer makes the latter purchase his requirements for a particular product and its substitutes only, or mainly, from one supplier. The same component can be found in tying, where the obligation or incentive scheme relates to a product that the buyer is required to purchase as a condition of purchasing another distinct product. The first product is referred to as the "tied"product and the second is referred to as the "tying" product.

(107) There are four main negative effects on competition: (1) other suppliers in that market cannot sell to the particular buyers and this may lead to foreclosure of the market or, in the case of tying, to foreclosure of the market for the tied product; (2) it makes market shares more rigid and this may help collusion when applied by several suppliers; (3) as far as the distribution of final goods is concerned, the particular retailers will only sell one brand and there will therefore be no inter-brand competition in their shops (no in-store competition); and (4) in the case of tying, the buyer may pay a higher price for the tied product than he would otherwise do. All these effects may lead to a reduction in inter-brand competition.

(108) The reduction in inter-brand competition may be mitigated by strong initial competition between suppliers to obtain the single branding contracts, but the longer the duration of the non-compete obligation, the more likely it will be that this effect will not be strong enough to compensate for the reduction in inter-brand competition.

Limited distribution group

(109) Under the heading of "limited distribution" come those agreements which have as their main element that the manufacturer sells to only one or a limited number of buyers. This may be to restrict the number of buyers for a particular territory or group of customers, or to select a particular kind of buyers. This component can be found amongst others in:

- exclusive distribution and exclusive customer allocation, where the supplier limits his sales to only one buyer for a certain territory or class of customers;

- exclusive supply and quantity-forcing on the supplier, where an obligation or incentive scheme agreed between the supplier and the buyer makes the former sell only or mainly to one buyer;

- selective distribution, where the conditions imposed on or agreed with the selected dealers usually limit their number;

- after-market sales restrictions which limit the component supplier's sales possibilities.

(110) There are three main negative effects on competition: (1) certain buyers within that market can no longer buy from that particular supplier, and this may lead in particular in the case of exclusive supply, to foreclosure of the purchase market, (2) when most or all of the competing suppliers limit the number of retailers, this may facilitate collusion, either at the distributor's level or at the supplier's level, and (3) since fewer distributors will offer the product it will also lead to a reduction of intra-brand competition. In the case of wide exclusive territories or exclusive customer allocation the result may be total elimination of intra-brand competition. This reduction of intra-brand competition can in turn lead to a weakening of inter-brand competition.

Resale price maintenance group

(111) Under the heading of "resale price maintenance" (RPM) come those agreements whose main element is that the buyer is obliged or induced to resell not below a certain price, at a certain price or not above a certain price. This group comprises minimum, fixed, maximum and recommended resale prices. Maximum and recommended resale prices, which are not hardcore restrictions, may still lead to a restriction of competition by effect.

(112) There are two main negative effects of RPM on competition: (1) a reduction in intra-brand price competition, and (2) increased transparency on prices. In the case of fixed or minimum RPM, distributors can no longer compete on price for that brand, leading to a total elimination of intra-brand price competition. A maximum or recommended price may work as a focal point for resellers, leading to a more or less uniform application of that price level. Increased transparency on price and responsibility for price changes makes horizontal collusion between manufacturers or distributors easier, at least in concentrated markets. The reduction in intra-brand competition may, as it leads to less downward pressure on the price for the particular goods, have as an indirect effect a reduction of inter-brand competition.

Market partitioning group

(113) Under the heading of "market partitioning" come agreements whose main element is that the buyer is restricted in where he either sources or resells a particular product. This component can be found in exclusive purchasing, where an obligation or incentive scheme agreed between the supplier and the buyer makes the latter purchase his requirements for a particular product, for instance beer of brand X, exclusively from the designated supplier, but leaving the buyer free to buy and sell competing products, for instance competing brands of beer. It also includes territorial resale restrictions, the allocation of an area of primary responsibility, restrictions on the location of a distributor and customer resale restrictions.

(114) The main negative effect on competition is a reduction of intra-brand competition that may help the supplier to partition the market and thus hinder market integration. This may facilitate price discrimination. When most or all of the competing suppliers limit the sourcing or resale possibilities of their buyers this may facilitate collusion, either at the distributors' level or at the suppliers' level.

1.2. Positive effects of vertical restraints

(115) It is important to recognise that vertical restraints often have positive effects by, in particular, promoting non-price competition and improved quality of services. When a company has no market power, it can only try to increase its profits by optimising its manufacturing or distribution processes. In a number of situations vertical restraints may be helpful in this respect since the usual arm's length dealings between supplier and buyer, determining only price and quantity of a certain transaction, can lead to a sub-optimal level of investments and sales.

(116) While trying to give a fair overview of the various justifications for vertical restraints, these Guidelines do not claim to be complete or exhaustive. The following reasons may justify the application of certain vertical restraints:

1) To "solve a 'free-rider' problem". One distributor may free-ride on the promotion efforts of another distributor. This type of problem is most common at the wholesale and retail level. Exclusive distribution or similar restrictions may be helpful in avoiding such free-riding. Free-riding can also occur between suppliers, for instance where one invests in promotion at the buyer's premises, in general at the retail level, that may also attract customers for its competitors. Non-compete type restraints can help to overcome this situation of free-riding. For there to be a problem, there needs to be a real free-rider issue. Free-riding between buyers can only occur on pre-sales services and not on after-sales services. The product will usually need to be relatively new or technically complex as the customer may otherwise very well know what he or she wants, based on past purchases. And the product must be of a reasonably high value as it is otherwise not attractive for a customer to go to one shop for information and to another to buy. Lastly, it must not be practical for the supplier to impose on all buyers, by contract, effective service requirements concerning pre-sales services.

Free-riding between suppliers is also restricted to specific situations, namely in cases where the promotion takes place at the buyer's premises and is generic, not brand specific.

2) To "open up or enter new markets". Where a manufacturer wants to enter a new geographic market, for instance by exporting to another country for the first time, this may involve special "first time investments" by the distributor to establish the brand in the market. In order to persuade a local distributor to make these investments it may be necessary to provide territorial protection to the distributor so that he can recoup these investments by temporarily charging a higher price. Distributors based in other markets should then be restrained for a limited period from selling in the new market. This is a special case of the free-rider problem described under point 1.

3) The "certification free-rider issue". In some sectors, certain retailers have a reputation for stocking only "quality" products. In such a case, selling through these retailers may be vital for the introduction of a new product. If the manufacturer cannot initially limit his sales to the premium stores, he runs the risk of being de-listed and the product introduction may fail. This means that there may be a reason for allowing for a limited duration a restriction such as exclusive distribution or selective distribution. It must be enough to guarantee the introduction of the new product but not so long as to hinder large-scale dissemination. Such benefits are more likely with "experience" goods or complex goods that represent a relatively large purchase for the final consumer.

4) The so-called "hold-up problem". Sometimes there are client-specific investments to be made by either the supplier or the buyer, such as in special equipment or training. For instance, a component manufacturer that has to build new machines and tools in order to satisfy a particular requirement of one of his customers. The investor may not commit the necessary investments before particular supply arrangements are fixed.

However, as in the other free-riding examples, there are a number of conditions that have to be met before the risk of under-investment is real or significant. Firstly, the investment must be relationship-specific. An investment made by the supplier is considered to be relationship-specific when, after termination of the contract, it cannot be used by the supplier to supply other customers and can only be sold at a significant loss. An investment made by the buyer is considered to be relationship-specific when, after termination of the contract, it cannot be used by the buyer to purchase and/or use products supplied by other suppliers and can only be sold at a significant loss. An investment is thus relationship-specific because for instance it can only be used to produce a brand-specific component or to store a particular brand and thus cannot be used profitably to produce or resell alternatives. Secondly, it must be a long-term investment that is not recouped in the short run. And thirdly, the investment must be asymmetric; i.e. one party