Commission notice - Guidelines on Vertical Restraints (Text with EEA relevance.)
Date: 2000-10-13
Institutions: European Commission
Subjects: competition law, competition policy, vertical agreement

13.10.2000

EN

Official Journal of the European Communities

C 291/1

I

(Information)

COMMISSION

COMMISSION NOTICE

Guidelines on Vertical Restraints

(2000/C 291/01)

(Text with EEA relevance)

CONTENTS

Paragraphs

Page

I.

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.

2.

Purpose of the Guidelines

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Applicability of Article 81 to vertical agreements . . . . . . . . . . . . . . . . . . . . . . .

II.

VERTICAL AGREEMENTS WHICH GENERALLY FALL OUTSIDE ARTICLE 81(1)

Agreements of minor importance and SMEs . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1-7

1-4

5-7

8-20

8-11

Agency agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12-20

1.

2.

III.

APPLICATION OF THE BLOCK EXEMPTION REGULATION . . . . . . . . . . . . . . . . . . .

1.

2.

3.

4.

5.

6.

7.

8.

9.

Safe harbour created by the Block Exemption Regulation . . . . . . . . . . . . . . . .

Scope of the Block Exemption Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Hardcore restrictions under the Block Exemption Regulation . . . . . . . . . . . . .

Conditions under the Block Exemption Regulation . . . . . . . . . . . . . . . . . . . . . .

No presumption of illegality outside the Block Exemption Regulation . . . . .

No need for precautionary notification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Portfolio of products distributed through the same distribution systeme . . .

Transitional period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

21-70

21-22

23-45

46-56

57-61

62

63-65

66-67

68-69

70

3

3

3

4

4

4

6

6

6

11

13

14

14

15

15

15

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

1.

2.

Withdrawal procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Disapplication of the Block Exemption Regulation . . . . . . . . . . . . . . . . . . . . . .

V.

MARKET DEFINITION AND MARKET SHARE CALCULATION ISSUE . . . . . . . . . .

1.

2.

3.

4.

Commission Notice on definition of the relevant market . . . . . . . . . . . . . . . . .

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

The relevant market for individual assessment . . . . . . . . . . . . . . . . . . . . . . . . . .

Calculation of the market share under the Block Exemption Regulation . . . .

71-87

71-79

80-87

88-99

88

89-95

96

97-99

VI.

ENFORCEMENT POLICY IN INDIVIDUAL CASES . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

100-229

1.

The framework of analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.1. Negative effects of vertical restraints . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.2.

Positive effects of vertical restraints . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.3. General rules for the evaluation of vertical restraints . . . . . . . . . . . . . .

1.4. Methodology of analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.4.1. Relevant factors for the assessment under Article 81(1) . . . . . . . . . . . .

1.4.2. Relevant factors for the assessment under Article 81(3) . . . . . . . . . . . .

2.

Analysis of specific vertical restraints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.1.

Single branding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

103-136

103-114

115-118

119

120-136

121-133

137-229

137-229

138-160

2.2.

Exclusive distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

161-177

2.3.

Exclusive customer allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

178-183

2.4.

Selective distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

184-198

2.5.

Franchising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

199-201

2.6.

Exclusive supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

202-214

2.7.

Tying . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

215-224

2.8. Recommended and maximum resale price . . . . . . . . . . . . . . . . . . . . . . .

225-228

2.9. Other vertical restraints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

229

16

16

17

18

18

18

19

20

20

21

21

22

24

26

26

28

28

28

32

35

36

39

40

42

44

44

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I.

INTRODUCTION

1.

Purpose of the Guidelines

(1)

These Guidelines set out the principles for the assess-
ment of vertical agreements under Article 81 of the
EC Treaty. What are considered vertical agreements is
defined in Article 2(1) of Commission Regulation
(EC) No 2790/1999 of 22 December 1999 on the
application of Article 81(3) of the Treaty to categories
of vertical agreements and concerted practices (1)
(Block Exemption Regulation) (see paragraphs 23 to
45). These Guidelines are without prejudice to the
possible parallel application of Article 82 of the Treaty
to vertical agreements. The Guidelines are structured
in the following way:

— Section II (paragraphs 8 to 20) describes vertical
outside

generally

fall

agreements which
Article 81(1);

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

— Section IV (paragraphs 71 to 87) describes the
principles concerning the withdrawal of the block
exemption and the disapplication of the Block Ex-
emption Regulation;

— 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 enforce-
ment policy of the Commission in individual
cases concerning vertical agreements.

Throughout these Guidelines the analysis applies to
both goods and services, 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.

By issuing these Guidelines the Commission aims to
help companies to make their own assessment of
vertical agreements under the EC competition rules.
The standards set forth in these Guidelines must be
applied in circumstances specific to each case. This

(2)

(3)

(1) OJ L 336, 29.12.1999, p. 21.

rules out a mechanical application. Each case must be
evaluated in the light of its own facts. The Commission
will apply the Guidelines reasonably and flexibly.

(4)

These Guidelines are without prejudice to the
interpretation that may be given by the Court of First
Instance and the Court of Justice of the European Com-
munities in relation to the application of Article 81 to
vertical agreements.

2.

Applicability of Article 81 to vertical agreements

(5)

(6)

(7)

Article 81 of the EC Treaty applies to vertical agree-
ments that may affect trade between Member States
and that prevent, restrict or distort competition (here-
inafter referred to as ‘vertical restraints’) (2). For vertical
restraints, Article 81 provides an appropriate legal
framework for assessment, recognising the distinction
between anti-competitive and pro-competitive effects:
Article 81(1) prohibits those agreements which appre-
ciably
competition, while
distort
Article 81(3) allows for exemption of those agree-
ments which confer sufficient benefits to outweigh the
anti-competitive effects.

restrict

or

there is insufficient

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

there is insufficient

If

The protection of competition is the primary objective
of EC competition policy, as this enhances consumer
welfare and creates an efficient allocation of resources.
In applying the EC competition rules, the Commission
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 Regulation, the
Commission is not required to assess the actual effects
on the market. Market integration is an additional goal
of EC competition policy. Market integration enhances
competition in the Community. Companies should
not be allowed to recreate private barriers between
Member States where State barriers have been success-
fully abolished.

(2) See inter alia judgment of the Court of Justice of the European
Communities in Joined Cases 56/64 and 58/64 Grundig-Consten
v Commission [1966] ECR 299; Case 56/65 Technique Minière v
Machinenbau Ulm [1966] ECR 235; and of the Court of First
Instance of the European Communities in Case T-77/92 Parker
Pen v Commission [1994] ECR II 549.

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II.

VERTICAL AGREEMENTS WHICH GENERALLY FALL
OUTSIDE ARTICLE 81(1)

(11)

1.

Agreements of minor importance and SMEs

(8)

(9)

Agreements which are not capable of appreciably
affecting trade between Member States or capable of
appreciably restricting competition by object or effect
are not caught by Article 81(1). The Block Exemption
Regulation applies only to agreements falling within
the scope of application of Article 81(1). These Guide-
lines are without prejudice to the application of the
present or any future ‘de minimis’ notice (1).

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 agree-
ments 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 81(1). There is no presumption that vertical
agreements concluded by undertakings having more
than 10 % market
share automatically infringe
Article 81(1). Agreements between undertakings who-
se market share exceeds the 10 % threshold may still
not have an appreciable effect on trade between
Member States or may not constitute an appreciable
restriction of competition (2). Such agreements need to
be assessed in their legal and economic context.
The criteria for the assessment of individual agree-
ments are set out in paragraphs 100 to 229.

(10)

As regards hardcore restrictions defined in the ‘de
minimis’ notice, Article 81(1) may apply below the
10 % threshold, provided that there is an appreciable
effect on trade between Member States and on compe-
tition. The applicable case-law of the Court of Justice
and the Court of First Instance is relevant in this
respect (3). 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).

(13)

In addition, the Commission considers that, subject to
cumulative effect and hardcore restrictions, agree-
ments between small and medium-sized undertakings
as defined in the Annex to Commission Recommen-
dation 96/280/EC (4) are rarely capable of appreciably
affecting trade between Member States or of appreci-
ably restricting competition within the meaning of
Article 81(1), and therefore generally fall outside the
scope of Article 81(1). In cases where such agreements
nonetheless meet the conditions for the application
of Article 81(1), the Commission will normally refrain
from opening proceedings for lack of sufficient Com-
munity interest unless those undertakings collectively
or individually hold a dominant position in a substan-
tial part of the common market.

2.

Agency agreements

(12)

Paragraphs 12 to 20 replace the Notice on exclusive
dealing contracts with commercial agents of 1962 (5).
They must be read in conjunction with Council Direc-
tive 86/653/EEC (6).

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.

In the case of genuine agency agreements, the obli-
gations 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
81(1). The determining factor in assessing whether
Article 81(1) is applicable is the financial or commer-
cial 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 81(1),
in which case the Block
Exemption Regulation and the other sections of these
Guidelines will apply.

(1) See Notice on agreements of minor importance of 9 December

1997, OJ C 372, 9.12.1997, p. 13.

(3) See judgment of the Court of

(2) See judgment of the Court of First Instance in Case T-7/93
Langnese-Iglo v Commission [1995] ECR II-1533, paragraph 98.
Justice in Case 5/69 Völk v
Vervaecke [1969] ECR 295; Case 1/71 Cadillon v Höss [1971]
ECR 351 and Case C-306/96 Javico v Yves Saint Laurent [1998]
ECR I-1983, paragraphs 16 and 17.

(4) OJ L 107, 30.4.1996, p. 4.
(5) OJ 139, 24.12.1962, p. 2921/62.
(6) OJ L 382, 31.12.1986, p. 17.

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(14)

(15)

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 81(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.

The agency agreement is considered a genuine agency
agreement and consequently falls outside Article 81(1)
if the agent does not bear any, or bears only insignifi-
cant, 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 agree-
ment and may fall under Article 81(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 invest-
ments. 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 assess-
ment.

(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 Commission considers that Article 81(1) will gen-
erally 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
including the costs of
of the contract goods,
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
the above risks or costs,
incurs one or more of
then Article 81(1) may apply as with any other
vertical agreement.

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(18)

If an agency agreement does not fall within the scope
of application of Article 81(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 81(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 pro-
visions). 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
infringe
Article 81(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).

competition

and may

III.

1.

(21)

(22)

APPLICATION OF THE BLOCK EXEMPTION REGU-
LATION

Safe harbour created by the Block Exemption
Regulation

The Block Exemption Regulation creates a presump-
tion of legality for vertical agreements depending on
the market share of the supplier or the buyer. Pursuant
to Article 3 of the Block Exemption Regulation, 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 exemp-
tion. 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 Regulation, 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).

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 Regulation, 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 Regulation easier and enhances
the level of legal certainty, while the instrument of
withdrawal (see paragraphs 71 to 87) remains avail-
able to remedy possible problems on other related
markets.

2.

Scope of the Block Exemption Regulation

(i)

Definition of vertical agreements

(20)

An agency agreement may also fall within the scope
of Article 81(1), even if the principal bears all the
financial and commercial risks, where it
relevant
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.

(23)

Vertical agreements are defined in Article 2(1) of
the Block Exemption Regulation 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’.

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(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 under-
taking are not covered; More generally, agree-
ments with final consumers do not fall under
Article 81(1), as that article applies only to agree-
ments between undertakings, decisions by associ-
ations of undertakings and concerted practices.
This is without prejudice to the possible appli-
cation of Article 82 of the Treaty;

— the agreement or concerted practice is between
undertakings each operating, for the purposes of
the agreement, at a different level of the pro-
duction 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 supplier and the buyer,

— the agreements or concerted practices relate to
the conditions under which the parties to the
‘may
agreement,
purchase, sell or resell certain goods or services’.
This reflects the purpose of the Block Exemption
Regulation 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 Regulation
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 Commission
Regulation (EC) No 1475/95 (1). 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 Regulation also applies to goods
sold and purchased for renting to third parties.
However, rent and lease agreements as such are not

(1) OJ L 145, 29.6.1995, p. 25.

covered, as no good or service is being sold by the
supplier to the buyer. More generally,
the Block
Exemption Regulation 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 appli-
cation of the Block Exemption Regulation.

(ii)

Vertical agreements between competitors

(26)

Article 2(4) of
the Block Exemption Regulation
explicitly excludes from its application ‘vertical agree-
ments entered into between competing undertakings’.
Vertical agreements between competitors will be dealt
with, as regards possible collusion effects,
in the
forthcoming Guidelines on the
applicability of
Article 81 to horizontal cooperation (2). However, the
vertical aspects of such agreements need to be assessed
under these Guidelines. Article 1(a) of
the Block
Exemption Regulation defines competing undertak-
ings 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 (3).

(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

(2) Draft text published in OJ C 118, 27.4.2000, p. 14.
(3) See Commission Notice on the definition of the relevant market
for the purposes of Community competition law, OJ C 372,
9.12.1997, p. 5, at paras. 20-24, the Commission’s Thirteenth
Report on Competition Policy, point 55, and Commission
Decision 90/410/EEC in Case No IV/32.009 — Elopak/Metal Box-
Odin, OJ L 209, 8.8.1990, p. 15.

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the level of

products of the first manufacturer. Non-reciprocal
agreements between competitors are covered by the
Block Exemption Regulation 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
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)

(29)

the Block Exemption Regulation
Article 2(2) of
includes in its application vertical agreements entered
into by an association of undertakings which fulfils
certain conditions and thereby excludes from the
Block Exemption Regulation vertical agreements
entered into by all other associations. Vertical agree-
ments entered into between an association and its
members, or between an association and its suppliers,
are covered by the Block Exemption Regulation 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 associ-
ation have a turnover not significantly exceeding the
EUR 50 million threshold,
this will normally not
change the assessment under Article 81.

this assessment

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 81 to horizontal cooperation.
If
leads to the conclusion that a
cooperation between undertakings in the area of
purchasing or selling is acceptable, a further assess-
ment will be necessary to examine the vertical agree-
ments concluded by the association with its suppliers
or its individual members. The latter assessment will
follow the rules of the Block Exemption Regulation
and these Guidelines. For instance, horizontal agree-
ments concluded between the members of the associ-
ation 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)

(30)

Vertical agreements containing provisions on intellectual
property rights (IPRs)

Article 2(3) of
the Block Exemption Regulation
includes in its application vertical agreements contain-
ing certain provisions relating to the assignment of
IPRs to or use of IPRs by the buyer and thereby
excludes from the Block Exemption Regulation all
other vertical agreements containing IPR provisions.
The Block Exemption Regulation applies to vertical
agreements containing IPR provisions when five con-
ditions 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 exploi-
tation of the IPRs, the goods or services are
distributed by the master franchisee or the fran-
chisees;

— 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 Regulation.

(31)

These conditions ensure that the Block Exemption
Regulation 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.

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(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 Regulation 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;

(36)

— 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;

(37)

sells to the franchisee goods for resale and in addition
licenses the franchisee to use his trade mark 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.

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 Regulation or any of the
restrictions excluded from the coverage of the Block
Exemption Regulation by Article 5 (see paragraphs 46
to 61).

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

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

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

The second condition makes clear that the Block
Exemption Regulation 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 Regulation. This
means in particular that subcontracting involving the
transfer of know-how to a subcontractor (1) does not
fall within the scope of application of the Block
Exemption Regulation. 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
Regulation.

The third condition makes clear that in order to
be covered by the Block Exemption Regulation 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.

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

(33)

(34)

(35)

(1) See Notice on subcontracting, OJ C 1, 3.1.1979, p. 2.

T r a d e m a r k

(38)

A trade mark licence to a distributor may be related to
the distribution of the licensor’s products in a particu-
lar territory. If it is an exclusive licence, the agreement
amounts to exclusive distribution.

C o p y r i g h t

(39)

(40)

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 81(1) at all,
are covered by the Block Exemption Regulation.

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
Regulation. 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.

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(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 81(1) at all, are covered by the
Block Exemption Regulation.

K n o w - h o w

(42)

(43)

Franchise agreements, with the exception of industrial
franchise agreements, are the most obvious example
where know-how for marketing purposes is communi-
cated 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.

Licensing contained in franchise agreements is covered
by the Block Exemption Regulation if all five con-
ditions listed in point 30 are fulfilled. This is usually
the case, as under most franchise agreements, includ-
ing master franchise agreements, the franchisor pro-
vides 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 Regulation, but it will be treated in a
way similar to those franchise agreements which are
covered by the Block Exemption Regulation.

(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 81(1), also covered by the Block
Exemption Regulation:

(b)

(c)

(d)

(e)

(f)

(g)

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;

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;

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;

an obligation on the franchisee to inform the
franchisor of infringements of licensed intellec-
tual property rights, to take legal action against
infringers or to assist the franchisor in any legal
actions against infringers;

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

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 exemption regulations

(45)

Article 2(5) states that the Block Exemption Regulation
does ‘not apply to vertical agreements the subject
matter of which falls within the scope of any other
block exemption regulation.’ This means that the
Block Exemption Regulation does not apply to vertical
agreements covered by Commission Regulation (EC)
No 240/96 (1) on technology transfer, Commission
Regulation (EC) No 1475/1995 (2) for car distribution
and (EEC)
or Regulations
No 418/85 (4) exempting vertical agreements con-
cluded in connection with horizontal agreements, as
last amended by Regulation (EC) No 2236/97 (5) or
any future regulations of that kind.

(EEC) No 417/85 (3)

(a)

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

(1) OJ L 31, 9.2.1996, p. 2.
(2) OJ L 145, 29.6.1995, p. 25.
(3) OJ L 53, 22.2.1985, p. 1.
(4) OJ L 53, 22.2.1985, p. 5.
(5) OJ L 306, 11.11.1997, p. 12.

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3.

Hardcore restrictions under the Block Exemption
Regulation

(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 81(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 Regulation. The agent should thus be left
free to lower the effective price paid by the customer
without reducing the income for the principal (1).

The hardcore restriction set out in Article 4(b) of the
Block Exemption Regulation 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
a Community-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.

(1) See, for instance, Commission Decision 91/562/EEC in Case
No IV/32.737 — Eirpage, OJ L 306, 7.11.1991, p. 22, in particu-
lar point (6).

The Block Exemption Regulation 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 Regu-
lation. This list of hardcore restrictions applies to
vertical agreements concerning trade within the Com-
munity.
In so far as vertical agreements concern
exports outside the Community or imports/re-imports
from outside the Community see the judgment in
Javico v Yves Saint Laurent. Individual exemption of
vertical agreements containing such hardcore restric-
tions is also unlikely.

(49)

(46)

(47)

The hardcore restriction set out in Article 4(a) of the
Block Exemption Regulation 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 rec-
ommended prices work as RPM. However, the pro-
vision of a list of recommended prices or maximum
prices by the supplier to the buyer is not considered
in itself as leading to RPM.

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(50)

There are four exceptions to the hardcore restriction
in Article 4(b) of the Block Exemption Regulation. 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
Community. The supplier is allowed to combine the
allocation of an exclusive territory and an exclusive
customer group by for instance appointing an exclus-
ive distributor for a particular customer group in a
certain territory. This protection of exclusively allo-
cated 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
the Commission interprets
Exemption Regulation,
‘active’ and ‘passive’ sales as follows:

— ‘Active’ sales mean actively approaching individ-
ual customers inside another distributor’s exclus-
ive territory or exclusive customer group by
for instance direct mail or visits; or actively
approaching a specific customer group or cus-
tomers 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 compat-
ible with the Block Exemption Regulation to the extent
that promotion on the Internet or sales over the
Internet would lead to active selling into other distribu-
In
tors’ exclusive territories or customer groups.

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 web site 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 plays normally no role in that respect.
Insofar as a web site 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 con-
siderations apply to selling by catalogue. Notwith-
standing 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)

(53)

There are three other exceptions to the second hardco-
re restriction set out in Article 4(b) of the Block
Exemption Regulation. 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 ‘com-
ponent’ includes any intermediate goods and the term
to
‘incorporation’ refers to the use of any input
produce goods.

The hardcore restriction set out in Article 4(c) of the
Block Exemption Regulation 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 Regulation, 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

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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.

However, the agreement may place restrictions on the
supply of the spare parts to the repairers or service
providers entrusted by the original equipment manu-
facturer 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.

(54)

(55)

(56)

in the case of selective distribution,
In addition,
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.

The hardcore restriction set out in Article 4(d) of the
Block Exemption Regulation 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 exclus-
for instance exclusive
ively from a given source,
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.

The hardcore restriction set out in Article 4(e) of the
Block Exemption Regulation 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
these spare
restrict sales by the manufacturer of
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
information and special equip-
supplying technical
ment which are necessary for the use of spare parts by
independent repairers or service providers.
users,

4.

Conditions under the Block Exemption Regu-
lation

(57)

(58)

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

The first exclusion is provided in Article 5(a) of
the Block Exemption Regulation 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
Regulation), thereby preventing the buyer from pur-
chasing 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 require-
ments may be used. Such non-compete obligations
are not covered by the Block Exemption Regulation
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 Regulation. 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
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-com-
pete obligation at the end of the five-year period; the
repayment needs to be structured in equal or decreas-
ing instalments and should not increase over time.
This is without prejudice to the possibility, in the case

the five year period.

If

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(59)

(60)

(61)

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.

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 Regulation). 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 per-
mission. Artificial ownership constructions intended
to avoid the five-year limit cannot benefit from this
exception.

tor or certain specific competitors from using these
outlets to distribute their products (foreclosure of a
competing supplier which would be a form of collec-
tive boycott) (1).

5.

No presumption of illegality outside the Block
Exemption Regulation

(62)

Vertical agreements falling outside the Block Exemp-
tion Regulation 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 Commission, the latter will bear the burden
of proof that the agreement in question infringes
Article 81(1). When appreciable
anti-competitive
effects are demonstrated, undertakings may substan-
tiate 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 81(3).

6.

No need for precautionary notification

(63)

The second exclusion from the block exemption is
provided for in Article 5(b) of the Block Exemption
Regulation and concerns post
term non-compete
obligations. Such obligations are normally not covered
by the Block Exemption Regulation, unless the obli-
gation is indispensable to protect know-how trans-
ferred 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
Regulation 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’.

The third exclusion from the block exemption is
provided for in Article 5(c) of the Block Exemption
Regulation and concerns the sale of competing goods
in a selective distribution system. The Block Exemption
Regulation covers the combination of selective distri-
bution with a non-compete obligation, obliging the
dealers not to resell competing brands in general.
However,
the supplier prevents his appointed
from buying
dealers, either directly or indirectly,
products for resale from specific competing suppliers,
such an obligation cannot enjoy the benefit of the
Block Exemption Regulation. The objective of the
exclusion of this obligation is to avoid a situation
whereby a number of suppliers using the same selec-
tive distribution outlets prevent one specific competi-

if

Pursuant to Article 4(2) of Council Regulation No 17
of 6 February 1962, First Regulation implementing
Articles 85 and 86 of the Treaty (2), as last amended by
Regulation (EC) No 1216/1999 (3), vertical agreements
can benefit from an exemption under Article 81(3)
from their date of entry into force, even if notification
occurs after that date. This means in practice that no
If a
precautionary notification needs to be made.
dispute arises, an undertaking can still notify,
in
which case the Commission can exempt the vertical
agreement with retroactive effect from the date of
entry into force of the agreement if all four conditions
of Article 81(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 Regulation No 17
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
Regulation.

(1) An example of indirect measures having such exclusionary effects
can be found in Commission Decision 92/428/EEC in Case
No IV/33.542 — Parfum Givenchy (OJ L 236, 19.8.1992, p. 11).

(2) OJ 13, 21.2.1962, p. 204/62.
(3) OJ L 148, 15.6.1999, p. 5.

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(64)

Since the date of notification no longer limits the
possibility of exemption by the Commission, national
courts have to assess the likelihood that Article 81(3)
will apply in respect of vertical agreements falling
within Article 81(1). If such likelihood exists, they
should suspend proceedings pending adoption of a
position by the Commission. However, national courts
may adopt interim measures pending the assessment
by
of
of
Article 81(3), in the same way as they do when they
refer a preliminary question to the Court of Justice
under Article 234 of the EC Treaty. No suspension is
necessary in respect of injunction proceedings, where
national courts themselves are empowered to assess
the likelihood of application of Article 81(3) (1).

the Commission

applicability

the

(65)

Unless there is litigation in national courts or com-
plaints, notifications of vertical agreements will not be
given priority in the Commission’s enforcement pol-
icy. Notifications as such do not provide provisional
validity for the execution of agreements. Where under-
takings have not notified an agreement because they
assumed in good faith that the market share threshold
under
the Block Exemption Regulation was not
exceeded, the Commission will not impose fines.

7.

Severability

(66)

(67)

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

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

(1) Case C-234/89 Delimitis v Henninger Bräu [1991] ECR I-935, at

paragraph 52.

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 Regulation while others may
not. In that case, the Block Exemption Regulation
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 Regulation, the ordi-
nary rules of competition apply, which means:

— there is no block exemption but also no presump-

tion of illegality;

— if there is an infringement of Article 81(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 82 applies
in respect of some products but not in respect of
others.

9.

Transitional period

(70)

The Block Exemption Regulation applies from 1 June
2000. Article 12 of the Block Exemption Regulation
provides for a transitional period for vertical agree-
ments already in force before 1 June 2000 which do
not satisfy the conditions for exemption provided in
the Block Exemption Regulation, but which do satisfy
the conditions for exemption under the Block Exemp-
tion Regulations which expired on 31 May 2000
(Commissions Regulations (EEC) No 1983/83, (EEC)
No 1984/83 and (EEC) No 4087/88). The Commission
Notice concerning Regulations (EEC) Nos 1983/83
and 1984/83 also ceases to apply on 31 May 2000.
The latter agreements may continue to benefit from
these outgoing Regulations 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 Regulation
if on 1 January 2002 the non-compete agreements
have no more than five years to run.

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IV.

WITHDRAWAL OF THE BLOCK EXEMPTION AND
DISAPPLICATION OF THE BLOCK EXEMPTION
REGULATION

1.

Withdrawal procedure

(71)

The presumption of legality conferred by the Block
Exemption Regulation may be withdrawn if a vertical
agreement, considered either in isolation or in con-
junction with similar agreements enforced by compet-
ing suppliers or buyers, comes within the scope of
Article 81(1) and does not fulfil all the conditions of
Article 81(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 81(3) are not
fulfilled, the Commission may withdraw the benefit of
the Block Exemption Regulation under Article 6 and
establish an infringement of Article 81(1).

(72) Where the withdrawal procedure is applied, the Com-
mission bears the burden of proof that the agreement
falls within the scope of Article 81(1) and that the
agreement does not fulfil all four conditions of Article
81(3).

(73)

The conditions for an exemption under Article 81(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 para-
graphs 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 distri-
bution. In such circumstances, the assessment must

(74)

(75)

(76)

(77)

take account of the anti-competitive effects attribu-
table to each individual network of agreements. Where
appropriate, withdrawal may concern only the quanti-
tative limitations imposed on the number of author-
ised 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.

Responsibility for an anti-competitive cumulative
effect can only be attributed to those undertakings
which make an appreciable contribution to it. Agree-
ments entered into by undertakings whose contri-
bution to the cumulative effect is insignificant do not
fall under the prohibition provided for in Article
81(1) (1) and are therefore not subject to the with-
drawal mechanism. The assessment of such a contri-
bution will be made in accordance with the criteria set
out in paragraphs 137 to 229 .

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

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

The Commission has the exclusive power to withdraw
the benefit of the Block Exemption Regulation in
respect of vertical agreements restricting competition
on a relevant geographic market which is wider than
the territory of a single Member State. When the
territory of a single Member State, or a part thereof,
constitutes the relevant geographic market, the Com-
mission and the Member State concerned have concur-
rent competence for withdrawal. Often, such cases
lend themselves to decentralised enforcement by
national competition authorities. However, the Com-
mission reserves the right to take on certain cases
displaying a particular Community interest, such as
cases raising a new point of law.

(1) Judgment in the Delimitis Case.

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(78)

National decisions of withdrawal must be taken in
accordance with the procedures laid down under
law and will only have effect within the
national
territory of the Member State concerned. Such national
decisions must not prejudice the uniform application
of the Community competition rules and the full effect
of the measures adopted in implementation of those
rules (1). Compliance with this principle implies that
national competition authorities must carry out their
assessment under Article 81 in the light of the relevant
criteria developed by the Court of Justice and the
Court of First Instance and in the light of notices and
previous decisions adopted by the Commission.

(79)

The Commission considers that
the consultation
mechanisms provided for in the Notice on cooperation
between national competition authorities and the
Commission (2) should be used to avert the risk of
conflicting decisions and duplication of procedures.

2.

Disapplication of the Block Exemption Regulation

(80)

Article 8 of the Block Exemption Regulation enables
the Commission to exclude from the scope of the
Block Exemption Regulation, by means of regulation,
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 regulation disapplying the Block Exemp-
tion Regulation.

(81) Whereas the withdrawal of the benefit of the Block
Exemption Regulation under Article 6 implies the
adoption of a decision establishing an infringement of
Article 81 by an individual company, the effect of a
regulation 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
Regulation and to restore the full application of Article
81(1) and (3). Following the adoption of a regulation
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
Court of Justice and the Court of First Instance and
by notices and previous decisions adopted by the
Commission will guide the application of Article 81
to individual agreements. Where appropriate,
the
Commission will take a decision in an individual case,
which can provide guidance to all the undertakings
operating on the market concerned.

(1) Judgment of the Court of Justice in Case 14/68 Walt Wilhelm and
Others v Bundeskartellamt [1969] ECR 1, paragraph 4, and
judgment in Delimitis.

(2) OJ C 313, 15.10.1997, p. 3, points 49 to 53.

(82)

(83)

(84)

(85)

For the purpose of calculating the 50 % market
coverage ratio, account must be taken of each individ-
containing
ual network of vertical
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.

agreements

Article 8 does not entail an obligation on the part of
the Commission 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.

In assessing the need to apply Article 8, the Com-
mission 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 Community.

Any regulation adopted under Article 8 must clearly
set out its scope. This means, first, that the Com-
mission must define the relevant product and geo-
graphic market(s) and, secondly, that it must identify
the type of vertical restraint in respect of which the
Block Exemption Regulation will no longer apply.
As regards the latter aspect, the Commission may
modulate the scope of its regulation 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
Commission may nevertheless restrict the scope of
the disapplication regulation only to non-compete
obligations exceeding a certain duration. Thus, agree-
ments 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 regulation
may concern only such additional restraints. Where
appropriate, the Commission may also provide guid-
ance by specifying the market share level which, in the
specific market context, may be regarded as insuf-
ficient to bring about a significant contribution by an
individual undertaking to the cumulative effect.

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The transitional period of not less than six months
that the Commission will have to set under Article
8(2) should allow the undertakings concerned to
adapt their agreements to take account of the regu-
lation disapplying the Block Exemption Regulation.

the conditions of competition are sufficiently homo-
geneous, and which can be distinguished from neigh-
bouring geographic areas because, in particular, con-
ditions of competition are appreciably different in
those areas.

A regulation disapplying the Block Exemption Regu-
lation will not affect the exempted status of the
agreements concerned for the period preceding its
entry into force.

(91)

(86)

(87)

V.

1.

(88)

2.

(89)

(90)

MARKET DEFINITION AND MARKET SHARE CAL-
CULATION ISSUES

Commission Notice on definition of the relevant
market

The Commission Notice on definition of the relevant
market for the purposes of Community competition
law (1) provides guidance on the rules, criteria and
evidence which the Commission uses when consider-
ing 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.

The relevant market for calculating the 30 %
market share threshold under the Block Exemp-
tion Regulation

Under Article 3 of the Block Exemption Regulation, 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 Regulation is it the market share
of the buyer, and only that market share, which is
decisive for the application of the Block Exemption
Regulation.

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 com-
prises 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

(1) OJ C 372, 9.12.1997, p. 5.

to the sale of

For the application of the Block Exemption Regulation,
the market share of the supplier is his share on the
relevant product and geographic market on which he
sells to his buyers. (2) In the example given in para-
graph 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
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 distri-
bution 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. (3) In the example below, this is also
market A.

(2) For example,

the Dutch market

for new replacement

truck
and bus tyres in the Michelin case (Case 322/81 Nederlandsche
Banden-Industrie Michelinv Commission [1983] ECR 3461),
the various meat markets in the Danish slaughter-house case:
Commission Decision 2000/42/EC in Case No IV/M.1313 —
Danish Crown/Vestjyske Slagterier, OJ L 20, 25.1.2000, p. 1.
(3) For an example of purchase markets, see Commission Decision
1999/674/EC in Case No IV/M.1221 — Rewe/Meinl, OJ L 274,
23.10.1999, p. 1.

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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 replace-
ment 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 Regulation 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 (1).

(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
Regulation. 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)

(1) See for example Pelikan/Kyocera in XXV Report on Competition
Policy, point 87, and Commission Decision 91/595/EEC in Case
No IV/M.12 — Varta/Bosch, OJ L 320, 22.11.1991, p. 26,
Commission Decision in Case No IV/M.1094 — Caterpillar/Per-
kins Engines, OJ C 94, 28.3.1998, p. 23, and Commission
Decision in Case No IV/M.768 — Lucas/Varity, OJ C 266,
13.9.1996, p. 6. See also Eastman Kodak Co v Image Technical
Services, Inc et al, Supreme Court of the United States, No 90
1029. See also point 56 of the Commission Notice on the
definition of relevant market for the purposes of Community
competition law.

by

the

For individual assessment of vertical agreements not
covered
Block Exemption Regulation,
additional markets may need to be investigated besides
the relevant market defined for the application of the
Block Exemption Regulation. 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
the relevant markets at each
a vertical agreement
level of trade affected by restraints contained in the
agreement will be examined:

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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
in cases of exclusive
downstream. However,
supply the position of the buyer on his down-
stream 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.

(98)

(99)

(i)

(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 obli-
gation 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 Regulation

(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 Regulation).

In-house production, that is production of an inter-
mediate product for own use, may be very important
in a competition analysis as one of the competi-
tive 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.

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 Regulation).
‘Integrated distributors’ are connected undertakings
within the meaning of Article 11 of
the Block
Exemption Regulation.

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 pro-
cesses, 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.

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(102)

In the assessment of individual cases, the Commission
will adopt an economic approach in the application
of Article 81 to vertical restraints. This will limit the
scope of application of Article 81 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 compe-
tition is important to ensure efficiencies and benefits
for consumers.

1.

The framework of analysis

1.1.

Negative effects of vertical restraints

S i n g l e b r a n d i n g g r o u p

(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.

(103)

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

(107)

(i)

(ii)

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

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 col-
lusion 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 Member 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 appro-
priate 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 compe-
tition.

(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 137 to 229, vertical agree-
ments are analysed as they are used in practice because
many vertical agreements make use of more than one
of these components.

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 distri-
bution 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 sup-
pliers 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.

L i m i t e d d i s t r i b u t i o n g r o u p

(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;

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— 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;

horizontal collusion between manufacturers or dis-
tributors 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.

— selective distribution, where

conditions
imposed on or agreed with the selected dealers
usually limit their number;

the

— after-market sales restrictions which limit the

component supplier’s sales possibilities.

M a r k e t p a r t i t i o n i n g g r o u p

(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
In the case
intra-brand competition.
of wide exclusive territories or exclusive customer
allocation the result may be total elimination of intra-
intra-brand
brand competition. This reduction of
competition can in turn lead to a weakening of inter-
brand competition.

R e s a l e p r i c e m a i n t e n a n c e g r o u p

(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 hardco-
re restrictions, may still
lead to a restriction of
competition by effect.

(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

(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

(115)

It is important to recognise that vertical restraints
often have positive effects by, in particular, promoting
non-price competition and improved quality of ser-
vices. 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 quan-
tity of a certain transaction, can lead to a sub-optimal
level of investments and sales.

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(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:

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).

(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 com-
mon 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
time investments’ by the distributor to
‘first
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

(3) The ‘certification free-rider issue’. In some sectors,
certain retailers have a reputation for stocking
only ‘quality’ products. In such a case, selling
for the
through these retailers may be vital
introduction of a new product. If the manufac-
turer cannot initially limit his sales to the pre-
mium 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 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 require-
ment 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 termin-
ation 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 relation-
ship-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 to

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the contract invests more than the other party.
When these conditions are met, there is usually a
good reason to have a vertical restraint for the
duration it takes to depreciate the investment.
The appropriate vertical restraint will be of
the non-compete type or quantity-forcing type
when the investment is made by the supplier and
of the exclusive distribution, exclusive customer -
allocation or exclusive supply type when the
investment is made by the buyer.

(5) The ‘specific hold-up problem that may arise in
the case of transfer of substantial know-how’.
The know-how, once provided, cannot be taken
back and the provider of the know-how may not
want it to be used for or by his competitors. In
as far as the know-how was not readily available
to the buyer, is substantial and indispensable for
the operation of the agreement, such a transfer
may justify a non-compete type of restriction.
This would normally fall outside Article 81(1).

(6)

(7)

‘Economies of scale in distribution’. In order to
have scale economies exploited and thereby see a
lower retail price for his product, the manufac-
turer may want to concentrate the resale of his
products on a limited number of distributors. For
this he could use exclusive distribution, quantity
forcing in the form of a minimum purchasing
requirement,
selective distribution containing
such a requirement or exclusive purchasing.

information on the quality of

‘Capital market imperfections’. The usual pro-
(banks, equity markets) may
viders of capital
provide capital sub-optimally when they have
imperfect
the
borrower or there is an inadequate basis to secure
the loan. The buyer or supplier may have better
information and be able, through an exclusive
relationship,
to obtain extra security for his
investment. Where the supplier provides the loan
to the buyer this may lead to non-compete or
quantity forcing on the buyer. Where the buyer
provides the loan to the supplier this may be the
reason for having exclusive supply or quantity
forcing on the supplier.

(8)

‘Uniformity and quality standardisation’. A verti-
cal restraint may help to increase sales by creating
a brand image and thereby increasing the attract-
iveness of a product to the final consumer by

imposing a certain measure of uniformity and
quality standardisation on the distributors. This
can for instance be found in selective distribution
and franchising.

(117)

The eight situations mentioned in paragraph 116
make clear that under certain conditions vertical
agreements are likely to help realise efficiencies and
the development of new markets and that this may
offset possible negative effects. The case is in general
strongest for vertical restraints of a limited duration
which help the introduction of new complex products
or protect relationship-specific investments. A vertical
restraint is sometimes necessary for as long as the
supplier sells his product to the buyer (see in particular
the situations described in paragraph 116, points (1),
(5), (6) and (8).

(118)

There is a large measure of substitutability between
the different vertical restraints. This means that the
same inefficiency problem can be solved by different
vertical restraints. For instance, economies of scale in
distribution may possibly be achieved by using exclus-
ive distribution, selective distribution, quantity forcing
or exclusive purchasing. This is important as the
negative effects on competition may differ between
the various vertical restraints. This plays a role when
indispensability is discussed under Article 81(3).

1.3.

General rules for the evaluation of vertical restraints

(119)

In evaluating vertical restraints from a competition
policy perspective, some general rules can be formu-
lated:

(1)

For most vertical restraints competition concerns
can only arise if there is insufficient inter-brand
competition, i.e. if there exists a certain degree of
market power at the level of the supplier or the
buyer or both. Conceptually, market power is the
power to raise price above the competitive level
and, at least in the short term, to obtain supra-
normal profits. Companies may have market
power below the level of market dominance,
which is the threshold for the application of
Article 82. Where there are many firms compet-
it can be
ing in an unconcentrated market,
assumed that non-hardcore vertical restraints will
not have appreciable negative effects. A market
is deemed unconcentrated when the HHI index,
i.e. the sum of the squares of the individual
market shares of all companies in the relevant
market, is below 1 000.

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(2) Vertical restraints which reduce inter-brand com-
petition are generally more harmful than vertical
restraints that reduce intra-brand competition.
For instance, non-compete obligations are likely
to have more net negative effects than exclusive
distribution. The former, by possibly foreclosing
the market to other brands, may prevent those
brands from reaching the market. The latter,
while limiting intra-brand competition, does not
prevent goods from reaching the final consumer.

(3) Vertical restraints from the limited distribution
group,
in the absence of sufficient inter-brand
competition, may significantly restrict the choices
available to consumers. They are particularly
harmful when more efficient distributors or dis-
tributors with a different distribution format
are foreclosed. This can reduce innovation in
distribution and denies consumers the particular
service or price-service combination of these dis-
tributors.

for

(4) Exclusive dealing arrangements are generally
worse
competition than non-exclusive
arrangements. Exclusive dealing makes, by the
express language of the contract or its practical
effects, one party fulfil all or practically all its
requirements from another party. For instance,
under a non-compete obligation the buyer pur-
chases only one brand. Quantity forcing, on the
leaves the buyer some scope to
other hand,
purchase competing goods. The degree of fore-
closure may therefore be less with quantity
forcing.

(5) Vertical restraints agreed for non-branded goods
and services are in general
less harmful than
restraints affecting the distribution of branded
goods and services. Branding tends to increase
product differentiation and reduce substituta-
bility of the product, leading to a reduced elas-
ticity of demand and an increased possibility to
raise price. The distinction between branded and
non-branded goods or services will often coincide
with the distinction between intermediate goods
and services and final goods and services.

Intermediate goods and services are sold to
undertakings for use as an input to produce
other goods or services and are generally not
recognisable in the final goods or services. The
buyers of intermediate products are usually well-
informed customers, able to assess quality and
therefore less reliant on brand and image. Final
goods are, directly or indirectly, sold to final
consumers who often rely more on brand and
image. As distributors (retailers, wholesalers)

have to respond to the demand of final con-
sumers, competition may suffer more when
distributors are foreclosed from selling one or a
number of brands than when buyers of inter-
mediate products are prevented from buying
competing products from certain sources of
supply.

The undertakings buying intermediate goods or
services normally have specialist departments or
advisers who monitor developments in the sup-
ply market. Because they effect sizeable trans-
actions, search costs are in general not prohibi-
tive. A loss of intra-brand competition is there-
fore less important at the intermediate level.

(6)

In general, a combination of vertical restraints
aggravates their negative effects. However, certain
combinations of vertical restraints are better for
competition than their use in isolation from each
other. For instance, in an exclusive distribution
the distributor may be tempted to
system,
the products as intra-
increase the price of
brand competition has been reduced. The use of
quantity forcing or the setting of a maximum
resale price may limit such price increases.

(7) Possible negative effects of vertical restraints
are reinforced when several suppliers and their
buyers organise their trade in a similar way.
These so-called cumulative effects may be a
problem in a number of sectors.

(8) The more the vertical restraint is linked to the
transfer of know-how, the more reason there
may be to expect efficiencies to arise and the
more a vertical restraint may be necessary to
protect the know-how transferred or the invest-
ment costs incurred.

(9) The more the vertical restraint

is linked to
investments which are relationship-specific, the
more justification there is for certain vertical
restraints. The justified duration will depend on
the time necessary to depreciate the investment.

(10) In the case of a new product, or where an existing
product is sold for the first time on a different
geographic market, it may be difficult for the
company to define the market or its market share
may be very high. However, this should not be
considered a major problem, as vertical restraints
linked to opening up new product or geographic
markets in general do not restrict competition.

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This rule holds, irrespective of the market share
of the company, for two years after the first
putting on the market of the product. It applies
to all non-hardcore vertical restraints and, in the
case of a new geographic market, to restrictions
on active and passive sales imposed on the direct
buyers of the supplier located in other markets
to intermediaries in the new market. In the case
of genuine testing of a new product in a limited
territory or with a limited customer group, the
distributors appointed to sell the new product on
the test market can be restricted in their active
selling outside the test market for a maximum
period of 1 year without being caught by
Article 81(1).

(a) market position of the supplier;

(b) market position of competitors;

(c) market position of the buyer;

(d)

entry barriers;

(e) maturity of the market;

(f)

level of trade;

(g) nature of the product;

(h) other factors.

1.4. Methodology of analysis

(120)

The assessment of a vertical restraint involves in
general the following four steps:

First, the undertakings involved need to define
the relevant market in order to establish the
the supplier or the buyer,
market share of
depending on the vertical restraint involved (see
paragraphs 88 to 99, in particular 89 to 95).

(122)

The importance of individual factors may vary from
case to case and depends on all other factors. For
instance, a high market share of the supplier is usually
a good indicator of market power, but in the case of
low entry barriers it may not indicate market power.
It is therefore not possible to provide strict rules on
the importance of the individual factors. However the
following can be said:

M a r k e t p o s i t i o n o f t h e s u p p l i e r

If the relevant market share does not exceed the
30 % threshold, the vertical agreement is covered
by the Block Exemption Regulation, subject to
the hardcore restrictions and conditions set out
in that regulation.

(123)

If the relevant market share is above the 30 %
threshold, it is necessary to assess whether the
vertical agreement falls within Article 81(1).

The market position of the supplier is established first
and foremost by his market share on the relevant
product and geographic market. The higher his market
share, the greater his market power is likely to be. The
market position of the supplier is further strengthened
if he has certain cost advantages over his competitors.
These competitive advantages may result from a first
mover advantage (having the best site, etc.), holding
essential patents, having superior technology, being
the brand leader or having a superior portfolio.

If the vertical agreement falls within Article 81(1),
it is necessary to examine whether it fulfils the
conditions for exemption under Article 81(3).

M a r k e t p o s i t i o n o f c o m p e t i t o r s

1.4.1. Relevant factors for the assessment under Article 81(1)

(121)

In assessing cases above the market share threshold of
30 %, the Commission will make a full competition
analysis. The following factors are the most important
to establish whether a vertical agreement brings about
an appreciable restriction of competition under
Article 81(1):

(124)

The same indicators, that is market share and possible
competitive advantages, are used to describe the
market position of competitors. The stronger the
established competitors are and the greater their
number, the less risk there is that the supplier or buyer
in question will be able to foreclose the market
individually and the less there is a risk of a reduction
of inter-brand competition. However, if the number
of competitors becomes rather small and their market
position (size, costs, R&D potential, etc.) is rather
similar, this market structure may increase the risk of
collusion. Fluctuating or rapidly changing market
shares are in general an indication of intense compe-
tition.

(1)

(2)

(3)

(4)

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M a r k e t p o s i t i o n o f t h e b u y e r

(125)

Buying power derives from the market position of the
buyer. The first indicator of buying power is the
market share of the buyer on the purchase market.
This share reflects the importance of his demand for
his possible suppliers. Other indicators focus on the
market position of the buyer on his resale market
including characteristics such as a wide geographic
spread of his outlets, own brands of the buyer/distribu-
tor and his image amongst final consumers. The effect
of buying power on the likelihood of anti-competitive
effects is not
the same for the different vertical
restraints. Buying power may in particular increase the
negative effects in case of restraints from the limited
distribution and market partitioning groups such as
exclusive supply, exclusive distribution and quantitat-
ive selective distribution.

exited. Advertising costs to build consumer loyalty are
normally sunk costs, unless an exiting firm could
either sell its brand name or use it somewhere else
without a loss. The more costs are sunk, the more
potential entrants have to weigh the risks of entering
the market and the more credibly incumbents can
threaten that they will match new competition, as
sunk costs make it costly for incumbents to leave the
market.
If, for instance, distributors are tied to a
manufacturer via a non-compete obligation, the fore-
closing effect will be more significant if setting up its
own distributors will
impose sunk costs on the
potential entrant.

(129)

In general, entry requires sunk costs, sometimes minor
and sometimes major. Therefore, actual competition
is in general more effective and will weigh more in the
assessment of a case than potential competition.

E n t r y b a r r i e r s

M a t u r i t y o f t h e m a r k e t

(126)

(127)

Entry barriers are measured by the extent to which
incumbent companies can increase their price above
the competitive level, usually above minimum average
total cost, and make supra-normal profits without
attracting entry. Without any entry barriers, easy and
quick entry would eliminate such profits. In as far as
effective entry, which would prevent or erode the
supra-normal profits, is likely to occur within one or
two years, entry barriers can be said to be low.

Entry barriers may result from a wide variety of factors
such as economies of scale and scope, government
regulations, especially where they establish exclusive
rights, state aid, import tariffs, intellectual property
rights, ownership of resources where the supply is
limitations (1),
limited due to for instance natural
essential facilities, a first mover advantage and brand
loyalty of consumers created by strong advertising.
Vertical restraints and vertical integration may also
work as an entry barrier by making access more
difficult and foreclosing (potential) competitors. Entry
barriers may be present at only the supplier or buyer
level or at both levels.

(128)

The question whether certain of these factors should
be described as entry barriers depends on whether
they are related to sunk costs. Sunk costs are those
costs that have to be incurred to enter or be active on
is
a market but

that are lost when the market

(1) See Commission Decision 97/26/EC (Case No IV/M.619 —

Gencor/Lonrho), (OJ L 11, 14.1.1997, p. 30).

(130) A mature market is a market that has existed for some
time, where the technology used is well known and
widespread and not changing very much, where there
are no major brand innovations and in which demand
is relatively stable or declining. In such a market
negative effects are more likely than in more dynamic
markets.

L e v e l o f t r a d e

(131)

The level of trade is linked to the distinction between
intermediate and final goods and services. As indicated
earlier, negative effects are in general less likely at the
level of intermediate goods and services.

N a t u r e o f t h e p r o d u c t

(132)

The nature of the product plays a role in particular for
final products in assessing both the likely negative and
the likely positive effects. When assessing the likely
negative effects, it is important whether the products
on the market are more homogeneous or hetero-
geneous, whether the product is expensive, taking up
a large part of the consumer’s budget, or is inexpensive
and whether the product is a one-off purchase or
repeatedly purchased. In general, when the product is
less expensive and resembles
more heterogeneous,
more a one-off purchase, vertical restraints are more
likely to have negative effects.

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O t h e r f a c t o r s

(133)

In the assessment of particular restraints other factors
may have to be taken into account. Among these
factors can be the cumulative effect, i.e. the coverage
of the market by similar agreements, the duration of
the agreements, whether the agreement is ‘imposed’
(mainly one party is subject to the restrictions or
obligations) or ‘agreed’ (both parties accept restrictions
or obligations), the regulatory environment and behav-
iour that may indicate or facilitate collusion like
price leadership, pre-announced price changes and
discussions on the ‘right’ price, price rigidity in
response to excess capacity, price discrimination and
past collusive behaviour.

1.4.2. Relevant factors for the assessment under Article 81(3)

(134)

There are four cumulative conditions for the appli-
cation of Article 81(3):

— the vertical agreement must

to
improving production or distribution or to pro-
moting technical or economic progress;

contribute

— the vertical agreement must allow consumers a

fair share of these benefits;

— the vertical agreement must not impose on the
undertakings concerned vertical restraints which
are not indispensable to the attainment of these
benefits;

— the vertical agreement must not afford such
undertakings the possibility of eliminating com-
petition in respect of a substantial part of the
products in question.

(135)

The last criterion of elimination of competition for a
substantial part of the products in question is related
to the question of dominance. Where an undertaking
is dominant or becoming dominant as a consequence
of the vertical agreement, a vertical restraint that has
appreciable anti-competitive effects can in principle
not be exempted. The vertical agreement may however
fall outside Article 81(1)
there is an objective
justification, for instance if it is necessary for the
protection of relationship-specific investments or for
the transfer of substantial know-how without which
the supply or purchase of certain goods or services
would not take place.

if

be substantiated and must produce a net positive
effect. Speculative claims on avoidance of free-riding
or general statements on cost savings will not be
accepted. Cost savings that arise from the mere
exercise of market power or from anti-competitive
conduct cannot be accepted. Secondly, economic
benefits have to favour not only the parties to the
agreement, but also the consumer. Generally the
transmission of the benefits to consumers will depend
on the intensity of competition on the relevant market.
Competitive pressures will normally ensure that cost-
savings are passed on by way of lower prices or that
companies have an incentive to bring new products to
the market as quickly as possible. Therefore, if suf-
ficient competition which effectively constrains the
parties to the agreement is maintained on the market,
the competitive process will normally ensure that
consumers receive a fair share of
the economic
benefits. The third criterion will play a role in ensuring
that the least anti-competitive restraint is chosen to
obtain certain positive effects.

2.

Analysis of specific vertical restraints

(137) Vertical agreements may contain a combination of
two or more of the components of vertical restraints
described in paragraphs 103 to 114. The most com-
mon vertical restraints and combinations of vertical
restraints are analysed below following the method-
ology of analysis developed in paragraphs 120 to 136.

2.1.

Single branding

(138) A non-compete arrangement is based on an obligation
or incentive scheme which makes the buyer purchase
practically all his requirements on a particular market
from only one supplier. It does not mean that the
buyer can only buy directly from the supplier, but that
the buyer will not buy and resell or incorporate
competing goods or services. The possible competition
risks are foreclosure of the market to competing
suppliers and potential suppliers, facilitation of col-
lusion between suppliers in case of cumulative use
and, where the buyer is a retailer selling to final
consumers, a loss of in-store inter-brand competition.
All three restrictive effects have a direct impact on
inter-brand competition.

(136) Where the supplier and the buyer are not dominant,
the other three criteria become important. The first,
concerning the improvement of production or distri-
bution and the promotion of technical or economic
progress, refers to the type of efficiencies described
inparagraphs 115 to 118. These efficiencies have to

(139)

Single branding is exempted by the Block Exemption
Regulation when the supplier’s market share does not
exceed 30 % and subject to a limitation in time of five
years for the non-compete obligation. Above the
market share threshold or beyond the time limit of
five years, the following guidance is provided for the
assessment of individual cases.

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(140)

the supplier’

The ‘market position of
is of main
importance to assess possible anti-competitive effects
of non-compete obligations. In general, this type of
obligation is imposed by the supplier and the supplier
has similar agreements with other buyers.

(143)

It is not only the market position of the supplier that
is of importance but also the extent to and the duration
for which he applies a non-compete obligation. The
higher his tied market share, i.e. the part of his market
share sold under a single branding obligation, the
more significant foreclosure is likely to be. Similarly,
the longer the duration of the non-compete obli-
gations, the more significant foreclosure is likely to
be. Non-compete obligations shorter than one year
entered into by non-dominant companies are in
general not considered to give rise to appreciable
anti-competitive effects or net negative effects. Non-
compete obligations between one and five years
entered into by non-dominant companies usually
require a proper balancing of pro- and anti-competi-
tive effects, while non-compete obligations exceeding
five years are for most types of
investments not
considered necessary to achieve the claimed ef-
to
ficiencies or the efficiencies are not sufficient
outweigh their foreclosure effect. Dominant compani-
es may not
impose non-compete obligations on
their buyers unless they can objectively justify such
commercial practice within the context of Article 82.

(144)

(145)

(146)

(141)

(142)

In assessing the supplier’s market power, the ‘market
position of his competitors’ is important. As long as
the competitors are sufficiently numerous and strong,
no appreciable anti-competitive effects can be ex-
pected. It is only likely that competing suppliers will
be foreclosed if they are significantly smaller than
the supplier applying the non-compete obligation.
Foreclosure of competitors is not very likely where
they have similar market positions and can offer
similarly attractive products. In such a case foreclosure
may however occur for potential entrants when a
number of major suppliers enter into non-compete
contracts with a significant number of buyers on the
relevant market (cumulative effect situation). This is
also a situation where non-compete agreements may
facilitate collusion between competing suppliers. If
individually these suppliers are covered by the Block
Exemption Regulation, a withdrawal of the block
exemption may be necessary to deal with such a
negative cumulative effect. A tied market share of less
than 5 % is not considered in general to contribute
significantly to a cumulative foreclosure effect.

In cases where the market share of the largest supplier
is below 30 % and the market share of the five largest
suppliers (concentration rate (CR) 5) is below 50 %,
there is unlikely to be a single or a cumulative anti-
competitive effect situation.
If a potential entrant
cannot penetrate the market profitably, this is likely to
be due to factors other than non-compete obligations,
such as consumer preferences. A competition problem
is unlikely to arise when, for instance, 50 companies,
of which none has an important market share, com-
pete fiercely on a particular market.

‘Entry barriers’ are important to establish whether
there is real foreclosure. Wherever it is relatively easy
for competing suppliers to create new buyers or find
alternative buyers for the product,
foreclosure is
unlikely to be a real problem. However, there are often
entry barriers, both at the manufacturing and at the
distribution level.

‘Countervailing power’ is relevant, as powerful buyers
will not easily allow themselves to be cut off from the
supply of competing goods or services. Foreclosure
which is not based on efficiency and which has
harmful effects on ultimate consumers is therefore
mainly a risk in the case of dispersed buyers. However,
where non-compete agreements are concluded with
major buyers this may have a strong foreclosure effect.

Lastly, ‘the level of trade’ is relevant for foreclosure.
Foreclosure is less likely in case of an intermediate
product. When the supplier of an intermediate product
is not dominant, the competing suppliers still have a
substantial part of demand that is ‘free’. Below the
level of dominance a serious foreclosure effect may
however arise for actual or potential competitors
where there is a cumulative effect. A serious cumulat-
ive effect is unlikely to arise as long as less than 50 %
of the market is tied. When the supplier is dominant,
any obligation to buy the products only or mainly
from the dominant supplier may easily lead to signifi-
cant foreclosure effects on the market. The stronger
his dominance, the higher the risk of foreclosure of
other competitors.

(147) Where the agreement concerns supply of a final
product at the wholesale level, the question whether a
competition problem is likely to arise below the level
of dominance depends in large part on the type of
wholesaling and the entry barriers at the wholesale
level. There is no real risk of foreclosure if competing
manufacturers can easily establish their own wholesal-
ing operation. Whether entry barriers are low depends
in part on the type of wholesaling, i.e. whether or not
wholesalers can operate efficiently with only the
product concerned by the agreement (for example ice
cream) or whether it is more efficient to trade in a

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whole range of products (for example frozen food-
it is not efficient for a
stuffs). In the latter case,
to set up
manufacturer selling only one product
his own wholesaling operation.
In that case anti-
competitive effects may arise below the level of
dominance. In addition, cumulative effect problems
may arise if several suppliers tie most of the available
wholesalers.

(148)

For final products, foreclosure is in general more likely
to occur at the retail level, given the significant entry
barriers for most manufacturers to start retail outlets
just for their own products. In addition, it is at the
retail level that non-compete agreements may lead to
reduced in-store inter-brand competition.
It is for
these reasons that for final products at the retail level,
significant anti-competitive effects may start to arise,
taking into account all other relevant factors, if a non-
dominant supplier ties 30 % or more of the relevant
market. For a dominant company, even a modest tied
market share may already lead to significant anti-
competitive effects. The stronger its dominance, the
higher the risk of foreclosure of other competitors.

the total

(149) At the retail level a cumulative foreclosure effect may
also arise. When all companies have market shares
below 30 % a cumulative foreclosure effect is unlikely
tied market share is less than 40 %
if
and withdrawal of the block exemption is therefore
unlikely. This figure may be higher when other factors
like the number of competitors, entry barriers etc. are
taken into account. When not all companies have
market shares below the threshold of
the Block
Exemption Regulation but none is dominant, a cumu-
lative foreclosure effect is unlikely if the total tied
market share is below 30 %.

(152) A so-called ‘English clause’, requiring the buyer to
report any better offer and allowing him only to accept
such an offer when the supplier does not match it, can
be expected to have the same effect as a non-compete
obligation, especially when the buyer has to reveal
who makes the better offer. In addition, by increasing
the transparency of the market it may facilitate col-
lusion between the suppliers. An English clause may
also work as quantity-forcing. Quantity-forcing on the
buyer is a weaker form of non-compete, where
incentives or obligations agreed between the supplier
and the buyer make the latter concentrate his pur-
chases to a large extent with one supplier. Quantity-
forcing may for example take the form of minimum
purchase requirements or non-linear pricing, such as
quantity rebate schemes, loyalty rebate schemes or a
(fixed fee plus a price per unit).
two-part
Quantity-forcing on the buyer will have similar but
weaker foreclosure effects than a non-compete obli-
gation. The assessment of all these different forms will
depend on their effect on the market. In addition,
Article 82 specifically prevents dominant companies
from applying English clauses or
fidelity rebate
schemes.

tariff

(153) Where appreciable anti-competitive effects are estab-
lished, the question of a possible exemption under
Article 81(3) arises as long as the supplier is not
dominant. For non-compete obligations, the efficienci-
es described in paragraph 116, points 1 (free riding
between suppliers), 4, 5 (hold-up problems) and 7
(capital market imperfections) may be particularly
relevant.

(154)

In the case of an efficiency as described in para-
graph 116, points 1, 4 and 7, quantity forcing on the
buyer could possibly be a less restrictive alternative.
A non-compete obligation may be the only viable way
to achieve an efficiency as described in paragraph 116,
point 5 (hold-up problem related to the transfer of
know-how).

(150) Where the buyer operates from premises and land
owned by the supplier or leased by the supplier from
a third party not connected with the buyer,
the
possibility of imposing effective remedies for a poss-
ible foreclosure effect will be limited. In that case
intervention by the Commission below the level of
dominance is unlikely.

(155)

(151)

In certain sectors the selling of more than one brand
from a single site may be difficult, in which case a
foreclosure problem can better be remedied by limiting
the effective duration of contracts.

In the case of a relationship-specific investment made
by the supplier (see efficiency 4 in paragraph 116), a
non-compete or quantity forcing agreement for the
period of depreciation of the investment will in general
fulfil the conditions of Article 81(3). In the case of
high relationship-specific investments, a non-compete
obligation exceeding five years may be justified. A rela-
tionship-specific investment could, for instance, be the
installation or adaptation of equipment by the supplier
when this equipment can be used afterwards only to
produce components for a particular buyer. Gen-
eral or market-specific investments in (extra) capacity

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are normally not relationship-specific investments.
However, where a supplier creates new capacity
specifically linked to the operations of a particular
buyer, for instance a company producing metal cans
which creates new capacity to produce cans on the
premises of or next to the canning facility of a food
producer, this new capacity may only be economically
viable when producing for this particular customer, in
which case the investment would be considered to be
relationship-specific.

(156) Where the supplier provides the buyer with a loan or
provides the buyer with equipment which is not
relationship-specific, this in itself
is normally not
sufficient to justify the exemption of a foreclosure
effect on the market. The instances of capital market
imperfection, whereby it is more efficient for the
supplier of a product than for a bank to provide a
loan, will be limited (see efficiency 7 in para-
graph 116). Even if the supplier of the product were
to be the more efficient provider of capital, a loan
could only justify a non-compete obligation if the
buyer is not prevented from terminating the non-
compete obligation and repaying the outstanding part
of the loan at any point in time and without payment
of any penalty. This means that the repayment of the
loan should be structured in equal or decreasing
instalments and should not increase over time and
that the buyer should have the possibility to take over
the equipment provided by the supplier at its market
asset value.This is without prejudice to the possibility,
in case for example of a new point of distribution, to
delay repayment for the first one or two years until
sales have reached a certain level.

most of its products (90 %) through tied retailers
(tied market share 36 %). The agreements oblige the
retailers to purchase only from the market leader for
at least four years. The market leader is especially
strongly represented in the more densely populated
areas like the capital. Its competitors, 10 in number,
of which some are only locally available, all have
much smaller market shares, the biggest having 12 %.
These 10 competitors together supply another 10 %
of the market via tied outlets. There is strong brand
and product differentiation in the market. The market
leader has the strongest brands. It is the only one with
regular national advertising campaigns. It provides its
tied retailers with special stocking cabinets for its
product.

The result on the market is that in total 46 % (36 % +
10 %) of the market is foreclosed to potential entrants
and to incumbents not having tied outlets. Potential
entrants find entry even more difficult in the densely
populated areas where foreclosure is even higher,
although it is there that they would prefer to enter the
market. In addition, owing to the strong brand and
product differentiation and the high search costs
relative to the price of the product, the absence of in-
store inter-brand competition leads to an extra welfare
loss for consumers. The possible efficiencies of the
outlet exclusivity, which the market leader claims
result from reduced transport costs and a possible
hold-up problem concerning the stocking cabinets,
are limited and do not outweigh the negative effects
on competition. The efficiencies are limited, as the
transport costs are linked to quantity and not exclusi-
vity and the stocking cabinets do not contain special
know-how and are not brand specific. Accordingly, it
is unlikely that the conditions for exemption are
fulfilled.

(157)

The transfer of substantial know-how (efficiency 5
in paragraph 116) usually justifies a non-compete
obligation for the whole duration of
the supply
agreement, as for example in the context of franch-
ising.

(160)

Example of quantity forcing

(158)

Below the level of dominance the combination of non-
compete with exclusive distribution may also justify
the non-compete obligation lasting the full length of
the agreement. In the latter case, the non-compete
obligation is likely to improve the distribution efforts
of the exclusive distributor in his territory (see para-
graphs 161 to 177).

(159)

Example of non-compete

The market leader in a national market for an impulse
consumer product, with a market share of 40 %, sells

A producer X with a 40 % market share sells 80 % of
its products through contracts which specify that the
reseller is required to purchase at least 75 % of its
requirements for that type of product from X. In
return X is offering financing and equipment at
favourable rates. The contracts have a duration of five
years in which repayment of the loan is foreseen in
equal instalments. However, after the first two years
buyers have the possibility to terminate the contract
with a six-month notice period if they repay the
outstanding loan and take over the equipment at its
market asset value. At the end of the five-year period
the equipment becomes the property of the buyer.
Most of the competing producers are small, twelve in
total with the biggest having a market share of 20 %,
and engage in similar contracts with different

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durations. The producers with market shares below
10 % often have contracts with longer durations and
with less generous termination clauses. The contracts
of producer X leave 25 % of requirements free to be
supplied by competitors. In the last three years, two
new producers have entered the market and gained a
combined market share of around 8 %, partly by
taking over the loans of a number of resellers in return
for contracts with these resellers.

other non-hardcore vertical restraints, such as a non-
compete obligation limited to five years, quantity
forcing or exclusive purchasing. A combination of
exclusive distribution and selective distribution is only
exempted by the Block Exemption Regulation if active
selling in other territories is not restricted. Above the
30 % market share threshold, the following guidance
is provided for the assessment of exclusive distribution
in individual cases.

is

X’s

share

tied market

Producer
24 %
(0,75 × 0,80 × 40 %). The other producers’ tied market
share is around 25 %. Therefore, in total around 49 %
of the market is foreclosed to potential entrants and
to incumbents not having tied outlets for at least the
first two years of the supply contracts. The market
the resellers often have difficulty in
shows that
obtaining loans from banks and are too small
in
general to obtain capital through other means like the
issuing of shares. In addition, producer X is able to
demonstrate that concentrating his sales on a limited
number of resellers allows him to plan his sales better
and to save transport costs. In the light of the 25 %
non-tied part in the contracts of producer X, the real
possibility for early termination of the contract, the
recent entry of new producers and the fact that around
half the resellers are not tied, the quantity forcing of
75 % applied by producer X is likely to fulfil the
conditions for exemption.

2.2.

Exclusive distribution

(161)

In an exclusive distribution agreement the supplier
agrees to sell his products only to one distributor for
resale in a particular territory. At the same time the
distributor is usually limited in his active selling into
other exclusively allocated territories. The possible
competition risks are mainly reduced intra-brand
competition and market partitioning, which may in
particular facilitate price discrimination. When most
or all of the suppliers apply exclusive distribution this
may facilitate collusion, both at the suppliers’ and
distributors’ level.

(162)

Exclusive distribution is exempted by the Block
Exemption Regulation when the supplier’s market
share does not exceed 30 %, even if combined with

(163)

(164)

The market position of the supplier and his competi-
tors is of major importance, as the loss of intra-brand
competition can only be problematic if inter-brand
competition is limited. The stronger the ‘position of
the supplier’, the more serious is the loss of intra-
brand competition. Above the 30 % market share
threshold there may be a risk of a significant reduction
of intra-brand competition. In order to be exemptable,
the loss of
intra-brand competition needs to be
balanced with real efficiencies.

The ‘position of the competitors’ can have a dual
significance. Strong competitors will generally mean
that the reduction in intra-brand competition is out-
weighed by sufficient inter-brand competition. How-
ever, if the number of competitors becomes rather
small and their market position is rather similar in
terms of market share, capacity and distribution
network, there is a risk of collusion. The loss of intra-
brand competition can increase this risk, especially
when several suppliers operate similar distribution
systems. Multiple exclusive dealerships,
i.e. when
different suppliers appoint the same exclusive distribu-
tor in a given territory, may further increase the risk
of collusion.
If a dealer is granted the exclusive
right to distribute two or more important competing
products in the same territory, inter-brand compe-
tition is likely to be substantially restricted for those
brands. The higher the cumulative market share of the
brands distributed by the multiple dealer, the higher
the risk of collusion and the more inter-brand compe-
tition will be reduced. Such cumulative effect situations
may be a reason to withdraw the benefit of the Block
Exemption Regulation when the market shares of the
suppliers are below the threshold of the Block Exemp-
tion Regulation.

(165)

‘Entry barriers’ that may hinder suppliers from creating
new distributors or finding alternative distributors
are less important in assessing the possible anti-
competitive effects of exclusive distribution. Foreclos-
ure of other suppliers does not arise as long as
exclusive distribution is not combined with single
branding.

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(166)

Foreclosure of other distributors is not a problem if
the supplier which operates the exclusive distribution
system appoints a high number of exclusive distribu-
tors in the same market and these exclusive distribu-
tors are not restricted in selling to other non-appointed
distributors. Foreclosure of other distributors may
however become a problem where there is ‘buying
power’ and market power downstream, in particular
in the case of very large territories where the exclusive
distributor becomes the exclusive buyer for a whole
market. An example would be a supermarket chain
which becomes the only distributor of a leading brand
on a national food retail market. The foreclosure of
other distributors may be aggravated in the case of
multiple exclusive dealership. Such a case, covered by
the Block Exemption Regulation when the market
share of each supplier is below 30 %, may give reason
for withdrawal of the block exemption.

(167)

‘Buying power’ may also increase the risk of collusion
on the buyers’ side when the exclusive distribution
arrangements are imposed by important buyers, poss-
ibly located in different territories, on one or several
suppliers.

(168)

‘Maturity of the market’ is important, as loss of intra-
brand competition and price discrimination may be a
serious problem in a mature market but may be less
relevant in a market with growing demand, changing
technologies and changing market positions.

(169)

‘The level of trade’ is important as the possible negative
effects may differ between the wholesale and retail
level. Exclusive distribution is mainly applied in the
distribution of final goods and services. A loss of intra-
brand competition is especially likely at the retail level
if coupled with large territories, since final consumers
may be confronted with little possibility of choosing
between a high price/high service and a low price/low
service distributor for an important brand.

(171)

(172)

market share above 30 % usually has enough bar-
gaining power not to choose a less efficient wholesaler.
The possible risks for inter-brand competition of
multiple exclusive dealerships are however higher at
the wholesale than at the retail level.

The combination of exclusive distribution with single
branding may add the problem of foreclosure of the
market to other suppliers, especially in case of a dense
network of exclusive distributors with small territories
or in case of a cumulative effect. This may necessitate
application of the principles set out above on single
branding. However, when the combination does not
lead to significant foreclosure, the combination of
exclusive distribution and single branding may be
pro-competitive by increasing the incentive for the
exclusive distributor to focus his efforts on the particu-
lar brand. Therefore, in the absence of such a foreclos-
ure effect, the combination of exclusive distribution
with non-compete is exemptable for the whole dur-
ation of the agreement, particularly at the wholesale
level.

The combination of exclusive distribution with exclus-
ive purchasing increases the possible competition
risks of reduced intra-brand competition and market
partitioning which may in particular facilitate price
discrimination. Exclusive distribution already limits
arbitrage by customers, as it limits the number of
distributors and usually also restricts the distributors
in their freedom of active selling. Exclusive purchasing,
requiring the exclusive distributors to buy their sup-
plies for the particular brand directly from the manu-
facturer, eliminates in addition possible arbitrage by
the exclusive distributors, who are prevented from
buying from other distributors in the system. This
enhances the possibilities for the supplier to limit
intra-brand competition while applying dissimilar con-
ditions of sale. The combination of exclusive distri-
bution and exclusive purchasing is therefore unlikely
to be exempted for suppliers with a market share
above 30 % unless there are very clear and substantial
efficiencies leading to lower prices to all final con-
sumers. Lack of such efficiencies may also lead to
withdrawal of the block exemption where the market
share of the supplier is below 30 %.

(170) A manufacturer which chooses a wholesaler to be his
exclusive distributor will normally do so for a larger
territory, such as a whole Member State. As long as
the wholesaler can sell the products without limitation
to downstream retailers there are not likely to be
appreciable anti-competitive effects if the manufac-
turer is not dominant. A possible loss of intra-brand
competition at the wholesale level may be easily
outweighed by efficiencies obtained in logistics, pro-
motion etc, especially when the manufacturer is based
in a different country. Foreclosure of other wholesalers
within that territory is not likely as a supplier with a

(173)

the product’

is not very relevant
The ‘nature of
to assessing the possible anti-competitive effects of
exclusive distribution. It is, however, relevant when
the issue of possible efficiencies is discussed, that is
after an appreciable anti-competitive effect is estab-
lished.

(174)

Exclusive distribution may lead to efficiencies,
especially where investments by the distributors are
required to protect or build up the brand image. In

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general, the case for efficiencies is strongest for new
products, for complex products, for products whose
qualities are difficult to judge before consumption (so-
called experience products) or of which the qualities
are difficult to judge even after consumption (so-called
credence products). In addition, exclusive distribution
may lead to savings in logistic costs due to economies
of scale in transport and distribution.

makes it likely, if anti-competitive effects exist, that
the conditions for exemption are fulfilled.

(176)

Example of multiple exclusive dealerships in an oligo-
polistic market

(175)

Example of exclusive distribution at the wholesale
level

In the market for a consumer durable, A is the
market leader. A sells its product through exclusive
wholesalers. Territories for the wholesalers correspond
to the entire Member State for small Member States,
and to a region for larger Member States. These
exclusive distributors take care of sales to all the
retailers in their territories. They do not sell
to
final consumers. The wholesalers are in charge of
promotion in their markets. This includes sponsoring
of local events, but also explaining and promoting the
new products to the retailers in their territories.
Technology and product innovation are evolving fairly
quickly on this market, and pre-sale service to retailers
and to final consumers plays an important role. The
wholesalers are not required to purchase all their
requirements of the brand of supplier A from the
producer himself, and arbitrage by wholesalers or
retailers is practicable because the transport costs are
relatively low compared to the value of the product.
The wholesalers are not under a non-compete obli-
gation. Retailers also sell a number of brands of
competing suppliers, and there are no exclusive or
selective distribution agreements at the retail level. On
the European market of sales to wholesalers A has
around 50 % market share. Its market share on the
various national retail markets varies between 40 %
and 60 %. A has between 6 and 10 competitors on
every national market: B, C and D are its biggest com-
petitors and are also present on each national market,
with market shares varying between 20 % and 5 %.
The remaining producers are national producers, with
smaller market shares. B, C and D have similar
distribution networks, whereas the local producers
tend to sell their products directly to retailers.

On the wholesale market described above, the risk of
reduced intra-brand competition and price discrimi-
nation is low. Arbitrage is not hindered, and the
absence of intra-brand competition is not very relevant
at the wholesale level. At the retail level neither intra-
nor inter-brand competition are hindered. Moreover,
inter-brand competition is largely unaffected by the
exclusive arrangements at the wholesale level. This

the town for large towns.

In a national market for a final product, there are four
market leaders, who each have a market share of
around 20 %. These four market leaders sell their
product through exclusive distributors at the retail
level. Retailers are given an exclusive territory which
corresponds to the town in which they are located or
In most
a district of
territories, the four market leaders happen to appoint
the same exclusive retailer (‘multiple dealership’), often
centrally located and rather specialised in the product.
The remaining 20 % of the national market is compo-
local producers, the largest of these
sed of small
producers having a market share of 5 % on the
national market. These local producers sell
their
products in general through other retailers, in particu-
lar because the exclusive distributors of the four largest
suppliers show in general little interest in selling less
well-known and cheaper brands. There is strong brand
and product differentiation on the market. The four
market leaders have large national advertising cam-
paigns and strong brand images, whereas the fringe
producers do not advertise their products at
the
national level. The market is rather mature, with stable
demand and no major product and technological
innovation. The product is relatively simple.

In such an oligopolistic market, there is a risk of
collusion between the four market leaders. This risk is
increased through multiple dealerships. Intra-brand
competition is limited by the territorial exclusivity.
Competition between the four leading brands is
reduced at the retail level, since one retailer fixes the
price of all four brands in each territory. The multiple
dealership implies that, if one producer cuts the price
for its brand, the retailer will not be eager to transmit
this price cut to the final consumer as it would reduce
its sales and profits made with the other brands.
Hence, producers have a reduced interest in entering
into price competition with one another. Inter-brand
price competition exists mainly with the low brand
image goods of the fringe producers. The possible
efficiency arguments for (joint) exclusive distributors
are limited, as the product is relatively simple, the
resale does not require any specific investments or
training and advertising is mainly carried out at the
level of the producers.

below the

Even though each of the market leaders has a market
exemption under
threshold,
share
Article 81(3) may not be justified and withdrawal of
the block exemption may be necessary.

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(177)

Example of exclusive distribution combined with
exclusive purchasing

Manufacturer A is the European market leader for a
bulky consumer durable, with a market share of
between 40 % and 60 % in most national retail
markets. In every Member State, it has about seven
competitors with much smaller market shares, the
largest of these competitors having a market share of
10 %. These competitors are present on only one or
two national markets. A sells its product through its
national subsidiaries to exclusive distributors at the
retail level, which are not allowed to sell actively into
each other’s territories. In addition, the retailers are
obliged to purchase manufacturer A’s products exclus-
ively from the national subsidiary of manufacturer A
in their own country. The retailers selling the brand of
manufacturer A are the main resellers of that type of
product in their territory. They handle competing
brands, but with varying degrees of success and
enthusiasm. A applies price differences of 10 % to
15 % between markets and smaller differences within
markets. This is translated into smaller price differ-
ences at the retail level. The market is relatively stable
on the demand and the supply side, and there are no
significant technological changes.

In these markets, the loss of intra-brand competition
results not only from the territorial exclusivity at the
retail level but is aggravated by the exclusive purchas-
ing obligation imposed on the retailers. The exclusive
purchase obligation helps to keep markets and territor-
ies separate by making arbitrage between the exclusive
retailers impossible. The exclusive retailers also cannot
sell actively into each other’s territory and in practice
tend to avoid delivering outside their own territory.
This renders price discrimination possible. Arbitrage
by consumers or independent traders is limited due to
the bulkiness of the product.

this system,
The possible efficiency arguments of
linked to economies of scale in transport and pro-
motion efforts at the retailers’ level, are unlikely to
outweigh the negative effect of price discrimination
and reduced intra-brand competition. Consequently,
it is unlikely that the conditions for exemption are
fulfilled.

2.3.

Exclusive customer allocation

(178)

In an exclusive customer allocation agreement, the
supplier agrees to sell his products only to one
distributor for resale to a particular class of customers.
At the same time, the distributor is usually limited in
his active selling to other exclusively allocated classes
of customers. The possible competition risks are

mainly reduced intra-brand competition and market
partitioning, which may in particular facilitate price
discrimination. When most or all of the suppliers
apply exclusive customer allocation, this may facilitate
collusion, both at the suppliers’ and the distributors’
level.

(179)

Exclusive customer allocation is exempted by the
Block Exemption Regulation when the supplier’s mar-
ket share does not exceed the 30 % market share
threshold, even if combined with other non-hardcore
vertical restraints such as non-compete, quantity-
forcing or exclusive purchasing. A combination of
exclusive customer allocation and selective distri-
bution is normally hardcore, as active selling to end-
users by the appointed distributors is usually not left
free. Above the 30 % market share threshold, the
guidance provided in paragraphs 161 to 177 applies
mutatis mutandis to the assessment of exclusive
customer allocation, subject to the following specific
remarks.

(180)

The allocation of customers normally makes arbitrage
by the customers more difficult. In addition, as each
appointed distributor has his own class of customers,
non-appointed distributors not falling within such a
class may find it difficult
to obtain the product.
This will reduce possible arbitrage by non-appointed
distributors. Therefore, above the 30 % market share
threshold of the Block Exemption Regulation exclusive
customer allocation is unlikely to be exemptable
unless there are clear and substantial efficiency effects.

(181)

Exclusive customer allocation is mainly applied to
intermediate products and at the wholesale level when
it concerns final products, where customer groups
with different specific requirements concerning the
product can be distinguished.

(182)

Exclusive customer allocation may lead to efficiencies,
especially when the distributors are required to make
investments in for instance specific equipment, skills
or know-how to adapt to the requirements of their
class of customers. The depreciation period of these
investments indicates the justified duration of an
exclusive customer allocation system. In general the
case is strongest for new or complex products and for
products requiring adaptation to the needs of the
individual customer. Identifiable differentiated needs
are more likely for intermediate products, that is
products sold to different types of professional buyers.
final consumers is unlikely to lead
Allocation of
to any efficiencies and is therefore unlikely to be
exempted.

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(183)

Example of exclusive customer allocation

(185)

A company has developed a sophisticated sprinkler
installation. The company has currently a market share
of 40 % on the market for sprinkler installations.
When it started selling the sophisticated sprinkler it
had a market share of 20 % with an older product.
The installation of the new type of sprinkler depends
on the type of building that it is installed in and on
the use of the building (office, chemical plant, hospital
etc.). The company has appointed a number of
distributors to sell and install the sprinkler installation.
Each distributor needed to train its employees for the
general and specific requirements of installing the
sprinkler installation for a particular class of cus-
tomers. To ensure that distributors would specialise
the company assigned to each distributor an exclusive
class of customers and prohibited active sales to each
others’ exclusive customer classes. After five years, all
the exclusive distributors will be allowed to sell actively
to all classes of customers, thereby ending the system
of exclusive customer allocation. The supplier may
then also start selling to new distributors. The market
is quite dynamic, with two recent entries and a number
of
technological developments. Competitors, with
market shares between 25 % and 5 %, are also upgrad-
ing their products.

As the exclusivity is of limited duration and helps
to ensure that
the distributors may recoup their
investments and concentrate their sales efforts first on
a certain class of customers in order to learn the trade,
and as the possible anti-competitive effects seem
limited in a dynamic market,
the conditions for
exemption are likely to be fulfilled.

2.4.

Selective distribution

(184)

Selective distribution agreements, like exclusive distri-
bution agreements, restrict on the one hand the
number of authorised distributors and on the other
the possibilities of resale. The difference with exclusive
distribution is that the restriction of the number of
dealers does not depend on the number of territories
but on selection criteria linked in the first place to
the nature of the product. Another difference with
exclusive distribution is that the restriction on resale
is not a restriction on active selling to a territory but a
restriction on any sales to non-authorised distributors,
leaving only appointed dealers and final customers as
possible buyers. Selective distribution is almost always
used to distribute branded final products.

The possible competition risks are a reduction in
intra-brand competition and, especially in case of
cumulative effect, foreclosure of certain type(s) of
distributors and facilitation of collusion between sup-
pliers or buyers. To assess the possible anti-competi-
tive effects of selective distribution under Article 81(1),
a distinction needs to be made between purely qualitat-
ive selective distribution and quantitative selective
distribution. Purely qualitative selective distribution
selects dealers only on the basis of objective criteria
required by the nature of the product such as training
of sales personnel, the service provided at the point of
sale, a certain range of the products being sold etc (1).
The application of such criteria does not put a direct
limit on the number of dealers. Purely qualitative
selective distribution is in general considered to fall
for lack of anti-competitive
outside Article 81(1)
effects, provided that three conditions are satisfied.
First, the nature of the product in question must
necessitate a selective distribution system, in the sense
that such a system must constitute a legitimate
the
requirement, having regard to the nature of
product concerned, to preserve its quality and ensure
its proper use. Secondly, resellers must be chosen on
the basis of objective criteria of a qualitative nature
which are laid down uniformly for all potential
resellers and are not applied in a discriminatory
manner. Thirdly, the criteria laid down must not go
beyond what is necessary (2). Quantitative selective
distribution adds further criteria for selection that
more directly limit the potential number of dealers by,
for instance, requiring minimum or maximum sales,
by fixing the number of dealers, etc.

(186) Qualitative and quantitative selective distribution is
exempted by the Block Exemption Regulation up to
30 % market share, even if combined with other non-
hardcore vertical restraints, such as non-compete or
exclusive distribution, provided active selling by the
authorised distributors to each other and to end users
is not restricted. The Block Exemption Regulation
exempts selective distribution regardless of the nature
of the product concerned. However, where the nature
of the product does not require selective distribution,
such a distribution system does not generally bring
to
about
counterbalance a significant reduction in intra-brand
If appreciable anti-competitive effects
competition.

efficiency enhancing

sufficient

effects

(1) See for example judgment of the Court of First Instance in Case
T-88/92 Groupement d’achat E´ douard Leclerc v Commission
[1996] ECR II-1961.

(2) See judgments of the Court of Justice in Case 31/80 L’Oréal v
PVBA [1980] ECR 3775, paragraphs 15 and 16; Case 26/76
Metro I [1977] ECR 1875, paragraphs 20 and 21; Case 107/82
AEG [1983] ECR 3151, paragraph 35; and of the Court of First
Instance in Case T-19/91 Vichy v Commission [1992] ECR II-
415, paragraph 65.

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(187)

(188)

occur, the benefit of the Block Exemption Regulation
is likely to be withdrawn. In addition, the following
guidance is provided for the assessment of selective
distribution in individual cases which are not covered
by the Block Exemption Regulation or in the case of
cumulative effects resulting from parallel networks of
selective distribution.

The market position of the supplier and his competi-
importance in assessing possible
tors is of central
anti-competitive effects, as the loss of intra-brand
competition can only be problematic if inter-brand
competition is limited. The stronger the position of
the supplier, the more problematic is the loss of intra-
brand competition. Another important factor is the
number of selective distribution networks present in
the same market. Where selective distribution is
applied by only one supplier in the market which is
not a dominant undertaking, quantitative selective
distribution does not normally create net negative
effects provided that the contract goods, having regard
to their nature, require the use of a selective distri-
bution system and on condition that the selection
criteria applied are necessary to ensure efficient distri-
bution of the goods in question. The reality, however,
seems to be that selective distribution is often applied
by a number of the suppliers in a given market.

The position of competitors can have a dual signifi-
cance and plays in particular a role in case of a
cumulative effect. Strong competitors will mean in
general that the reduction in intra-brand competition
is easily outweighed by sufficient inter-brand compe-
tition. However, when a majority of the main suppliers
apply selective distribution there will be a significant
loss of intra-brand competition and possible foreclos-
ure of certain types of distributors as well as an
increased risk of collusion between those major sup-
pliers. The risk of foreclosure of more efficient distribu-
tors has always been greater with selective distribution
than with exclusive distribution, given the restriction
on sales to non-authorised dealers in selective distri-
bution. This is designed to give selective distribution
systems a closed character, making it impossible for
non-authorised dealers to obtain supplies. This makes
selective distribution particularly well suited to avoid
pressure by price discounters on the margins of the
the
manufacturer, as well as on the margins of
authorised dealers.

the market covered by selective distribution is below
50 %. Also, no problem is likely to arise where the
market coverage ratio exceeds 50 %, but the aggregate
market share of the five largest suppliers (CR5) is
below 50 %. Where both the CR5 and the share of the
market covered by selective distribution exceed 50 %,
the assessment may vary depending on whether or
not all five largest suppliers apply selective distri-
bution. The stronger the position of the competitors
not applying selective distribution, the less likely the
foreclosure of other distributors. If all five largest
suppliers apply selective distribution, competition
concerns may in particular arise with respect to those
agreements that apply quantitative selection criteria
by directly limiting the number of authorised dealers.
The conditions of Article 81(3) are in general unlikely
to be fulfilled if the selective distribution systems at
issue prevent access to the market by new distributors
capable of adequately selling the products in question,
especially price discounters, thereby limiting distri-
bution to the advantage of certain existing channels
and to the detriment of final consumers. More indirect
forms of quantitative selective distribution, resulting
for instance from the combination of purely qualitative
selection criteria with the requirement imposed on the
dealers to achieve a minimum amount of annual
purchases, are less likely to produce net negative
effects,
if such an amount does not represent a
significant proportion of the dealer’s total turnover
achieved with the type of products in question and it
does not go beyond what is necessary for the supplier
to recoup his relationship-specific investment and/or
realise economies of scale in distribution. As regards
individual contributions, a supplier with a market
share of less than 5 % is in general not considered to
contribute significantly to a cumulative effect.

(190)

‘Entry barriers’ are mainly of interest in the case of
foreclosure of the market to non-authorised dealers.
In general entry barriers will be considerable as
selective distribution is usually applied by manufac-
turers of branded products. It will in general take time
and considerable investment for excluded retailers to
launch their own brands or obtain competitive sup-
plies elsewhere.

(189) Where the Block Exemption Regulation applies to
individual networks of selective distribution, with-
drawal of the block exemption or disapplication of the
Block Exemption Regulation may be considered in
case of cumulative effects. However, a cumulative
effect problem is unlikely to arise when the share of

(191)

‘Buying power’ may increase the risk of collusion
between dealers and thus appreciably change the
analysis of possible anti-competitive effects of selective
distribution. Foreclosure of
to more
efficient retailers may especially result where a strong
dealer organisation imposes selection criteria on the
supplier aimed at limiting distribution to the advantage
of its members.

the market

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(192) Article 5(c) of the Block Exemption Regulation pro-
vides that the supplier may not impose an obligation
causing the authorised dealers, either directly or
indirectly, not to sell the brands of particular compet-
ing suppliers. This condition aims specifically at
avoiding horizontal collusion to exclude particular
brands through the creation of a selective club of
brands by the leading suppliers. This kind of obligation
is unlikely to be exemptable when the CR5 is equal to
or above 50 %, unless none of the suppliers imposing
such an obligation belongs to the five largest suppliers
in the market.

of which the qualities are difficult to judge before
consumption (so-called experience products) or of
which the qualities are difficult to judge even after
consumption (so-called credence products). The com-
bination of selective and exclusive distribution is likely
to infringe Article 81 if it is applied by a supplier
whose market share exceeds 30 % or in case of
cumulative effects, even though active sales between
the territories remain free. Such a combination may
exceptionally fulfil the conditions of Article 81(3) if it
is indispensable to protect substantial and relationship-
specific investments made by the authorised dealers
(efficiency 4 in paragraph 116).

(193)

Foreclosure of other suppliers is normally not a
problem as long as other suppliers can use the same
distributors, i.e. as long as the selective distribution
system is not combined with single branding. In the
case of a dense network of authorised distributors or
in the case of a cumulative effect, the combination of
selective distribution and a non-compete obligation
may pose a risk of foreclosure to other suppliers. In
that case the principles set out above on single
branding apply. Where selective distribution is not
combined with a non-compete obligation, foreclosure
of the market to competing suppliers may still be a
problem when the leading suppliers apply not only
purely qualitative selection criteria, but impose on
their dealers certain additional obligations such as the
obligation to reserve a minimum shelf-space for their
products or to ensure that the sales of their products
by the dealer achieve a minimum percentage of the
dealer’s total turnover. Such a problem is unlikely to
arise if the share of the market covered by selective
distribution is below 50 % or, where this coverage
ratio is exceeded, if the market share of the five largest
suppliers is below 50 %.

(194) Maturity of

the market

is important, as loss of
intra-brand competition and possible foreclosure of
suppliers or dealers may be a serious problem in a
mature market but is less relevant in a market with
growing demand, changing technologies and changing
market positions.

(195)

Selective distribution may be efficient when it leads to
savings in logistical costs due to economies of scale in
transport and this may happen irrespective of the
nature of the product (efficiency 6 in paragraph 116).
However, this is usually only a marginal efficiency in
selective distribution systems. To help solve a free-
rider problem between the distributors (efficiency 1 in
paragraph 116) or to help create a brand image
(efficiency 8 in paragraph 116), the nature of the
product is very relevant. In general the case is strongest
for new products, for complex products, for products

(196)

To ensure that the least anti-competitive restraint is
chosen,
it is relevant to see whether the same ef-
ficiencies can be obtained at a comparable cost by for
instance service requirements alone.

(197)

Example of quantitative selective distribution:

In a market for consumer durables, the market leader
(brand A), with a market share of 35 %, sells its product
to final consumers through a selective distribution
network. There are several criteria for admission to
the network: the shop must employ trained staff and
provide pre-sales services, there must be a specialised
area in the shop devoted to the sales of the product
and similar hi-tech products, and the shop is required
to sell a wide range of models of the supplier and to
display them in an attractive manner. Moreover, the
number of admissible retailers in the network is
directly limited through the establishment of a
maximum number of retailers per number of inhabi-
tants in each province or urban area. Manufacturer A
has 6 competitors in this market. Its largest competi-
tors, B, C and D, have market shares of respectively
25, 15 and 10 %, whilst the other producers have
smaller market shares. A is the only manufacturer to
use selective distribution. The selective distributors of
brand A always handle a few competing brands.
However, competing brands are also widely sold in
shops which are not member of A’s selective distri-
bution network. Channels of distribution are various:
for instance, brands B and C are sold in most of A’s
selected shops, but also in other shops providing a
high quality service and in hypermarkets. Brand D is
mainly sold in high service shops. Technology is
evolving quite rapidly in this market, and the main
suppliers maintain a strong quality image for their
products through advertising.

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In this market, the coverage ratio of selective distri-
bution is 35 %. Inter-brand competition is not directly
affected by the selective distribution system of A.
Intra-brand competition for brand A may be reduced,
but consumers have access to low service/low price
retailers for brands B and C, which have a comparable
quality image to brand A. Moreover, access to high
service retailers for other brands is not foreclosed,
since there is no limitation on the capacity of selected
distributors to sell competing brands, and the quanti-
tative limitation on the number of retailers for brand
A leaves other high service retailers free to distribute
competing brands. In this case, in view of the service
requirements and the efficiencies these are likely
to provide and the limited effect on intra-brand
competition the conditions for exempting A’s selective
distribution network are likely to be fulfilled.

(198)

Example of selective distribution with cumulative
effects:

presentation and pre-sales services rule out most price
discounters from the network of authorised dealers.
As a consequence, consumers have no choice but to
buy the five leading brands in high service/high price
shops. This leads to reduced inter-brand competition
between the five leading brands. The fact that the two
smallest brands can be bought in low service/low price
shops does not compensate for this, because the brand
image of the five market leaders is much better. Inter-
brand competition is also limited through multiple
dealership. Even though there exists some degree of
intra-brand competition and the number of retailers is
not directly limited, the criteria for admission are strict
enough to lead to a small number of retailers for the
five leading brands in each territory.

The efficiencies associated with these quantitative
selective distribution systems are low: the product is
not very complex and does not justify a particularly
high service. Unless the manufacturers can prove that
there are clear efficiencies linked to their network of
selective distribution,
it is probable that the block
exemption will have to be withdrawn because of its
cumulative effects resulting in less choice and higher
prices for consumers.

On a market for a particular sports article, there are
seven manufacturers, whose respective market shares
are: 25 %, 20 %, 15 %, 15 %, 10 %, 8 % and 7 %. The
five largest manufacturers distribute their products
through quantitative selective distribution, whilst the
two smallest use different types of distribution sys-
tems, which results in a coverage ratio of selective
distribution of 85 %. The criteria for access to the
selective distribution networks are remarkably uni-
form amongst manufacturers: shops are required to
have trained personnel and to provide pre-sale ser-
vices, there must be a specialised area in the shop
devoted to the sales of the article and a minimum size
for this area is specified. The shop is required to sell a
wide range of the brand in question and to display the
article in an attractive manner, the shop must be
located in a commercial street, and this type of article
must represent at least 30 % of the total turnover of
the shop. In general, the same dealer is appointed
selective distributor for all five brands. The two brands
which do not use selective distribution usually sell
through less specialised retailers with lower service
levels. The market is stable, both on the supply and on
the demand side, and there is strong brand image and
product differentiation. The five market leaders have
strong brand images, acquired through advertising and
sponsoring, whereas the two smaller manufacturers
have a strategy of cheaper products, with no strong
brand image.

In this market, access by general price discounters
the
to the five leading brands is denied.
requirement that this type of article represents at least
30 % of the activity of the dealers and the criteria on

Indeed,

2.5.

Franchising

(199)

Franchise agreements contain licences of intellectual
property rights relating in particular to trade marks or
signs and know-how for the use and distribution of
goods or services. In addition to the licence of IPRs,
the franchisor usually provides the franchisee during
the life of the agreement with commercial or technical
assistance. The licence and the assistance are integral
components of the business method being franchised.
The franchisor is in general paid a franchise fee by the
the particular business
franchisee for the use of
method. Franchising may enable the franchisor to
establish, with limited investments, a uniform network
for the distribution of his products. In addition to the
provision of the business method, franchise agree-
ments usually contain a combination of different
vertical restraints concerning the products being dis-
tributed,
in particular selective distribution and/or
non-compete and/or exclusive distribution or weaker
forms thereof.

(200)

The coverage by the Block Exemption Regulation of
the licensing of IPRs contained in franchise agreements
is dealt with in paragraphs 23 to 45. As for the vertical
restraints on the purchase, sale and resale of goods
and services within a franchising arrangement, such
as selective distribution, non-compete or exclusive
distribution, the Block Exemption Regulation applies
up to the 30 % market share threshold for the

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franchisor or the supplier designated by the franchi-
sor (1). The guidance provided earlier in respect of
these types of restraints applies also to franchising,
subject to the following specific remarks:

1)

In line with general rule 8 (see paragraph 119),
the more important the transfer of know-how,
the more easily the vertical restraints fulfil the
conditions for exemption.

2) A non-compete obligation on the goods or
services purchased by the franchisee falls outside
Article 81(1) when the obligation is necessary to
maintain the common identity and reputation of
the franchised network. In such cases, the dur-
ation of
the non-compete obligation is also
irrelevant under Article 81(1), as long as it
does not exceed the duration of the franchise
agreement itself.

(201)

Example of franchising:

A manufacturer has developed a new format for selling
sweets in so-called fun shops where the sweets can be
coloured specially on demand from the consumer.
The manufacturer of the sweets has also developed the
machines to colour the sweets. The manufacturer
also produces the colouring liquids. The quality and
freshness of
importance to
the liquid is of vital
producing good sweets. The manufacturer made a
success of its sweets through a number of own retail
outlets all operating under the same trade name and
with the uniform fun image (style of lay-out of the
shops, common advertising etc.). In order to expand
sales the manufacturer started a franchising system.
The franchisees are obliged to buy the sweets, liquid
and colouring machine from the manufacturer, to
have the same image and operate under the trade
name, pay a franchise fee, contribute to common
the
advertising and ensure the confidentiality of
operating manual prepared by the franchisor.
In
addition, the franchisees are only allowed to sell from
the agreed premises, are only allowed to sell to end
users or other franchisees and are not allowed to sell
other sweets. The franchisor is obliged not to appoint
another franchisee nor operate a retail outlet himself
in a given contract territory. The franchisor is also
under the obligation to update and further develop its
products, the business outlook and the operating
manual and make these improvements available to
all retail franchisees. The franchise agreements are
concluded for a duration of 10 years.

(1) See also paragraphs AEG [1983] ECR 3151, paragraph 35; and of
the Court of First Instance in Case T-19/91 Vichy v Commission
[1992] ECR II-415, paragraph 65. See also paragraphs 89 to 95,
in particular paragraph 95.

Sweet retailers buy their sweets on a national market
from either national producers that cater for national
tastes or from wholesalers which import sweets from
foreign producers in addition to selling products from
national producers. On this market the franchisor’s
products compete with other brands of sweets. The
franchisor has a market share of 30 % on the market
for sweets sold to retailers. Competition comes from a
number of national and international brands, some-
times produced by large diversified food companies.
There are many potential points of sale of sweets
in the form of tobacconists, general food retailers,
cafeterias and specialised sweet shops. On the market
for machines for colouring food the franchisor’s
market share is below 10 %.

Most of the obligations contained in the franchise
agreements can be assessed as being necessary to
protect the intellectual property rights or maintain the
common identity and reputation of the franchised
network and fall outside Article 81(1). The restrictions
on selling (contract territory and selective distribution)
provide an incentive to the franchisees to invest in the
colouring machine and the franchise concept and, if
not necessary for, at
least help to maintain the
common identity, thereby offsetting the loss of intra-
brand competition. The non-compete clause excluding
other brands of sweets from the shops for the full
duration of the agreements does allow the franchisor
to keep the outlets uniform and prevent competitors
from benefiting from its trade name. It does not lead
to any serious foreclosure in view of the great number
of potential outlets available to other sweet producers.
The franchise agreements of this franchisor are likely
to fulfil
exemption under
Article 81(3) in as far as the obligations contained
therein fall under Article 81(1).

conditions

the

for

2.6.

Exclusive supply

(202)

Exclusive supply as defined in Article 1(c) of the Block
Exemption Regulation is the extreme form of limited
distribution in as far as the limit on the number of
buyers is concerned: in the agreement it is specified
that there is only one buyer inside the Community to
which the supplier may sell a particular final product.
For intermediate goods or services, exclusive supply
means that there is only one buyer inside the Com-
munity or that there is only one buyer inside the
Community for the purposes of a specific use. For
intermediate goods or services, exclusive supply is
often referred to as industrial supply.

(203)

(204)

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Exclusive supply as defined in Article 1(c) of the Block
Exemption Regulation is exempted by Article 2(1)
read in conjunction with Article 3(2) of the Block
Exemption Regulation up to 30 % market share of the
buyer, even if combined with other non-hardcore
vertical restraints such as non-compete. Above the
market share threshold the following guidance is
provided for the assessment of exclusive supply in
individual cases.

Foreclosure of competing buyers is not very likely
where these competitors have similar buying power
and can offer the suppliers similar sales possibilities.
In such a case,
foreclosure could only occur for
potential entrants, who may not be able to secure
supplies when a number of major buyers all enter
into exclusive supply contracts with the majority of
suppliers on the market. Such a cumulative effect
may lead to withdrawal of the benefit of the Block
Exemption Regulation.

The main competition risk of exclusive supply is
foreclosure of other buyers. The market share of the
buyer on the upstream purchase market is obviously
important for assessing the ability of the buyer to
‘impose’ exclusive supply which forecloses other
buyers from access to supplies. The importance of the
buyer on the downstream market is however the
factor which determines whether a competition prob-
lem may arise. If the buyer has no market power
downstream, then no appreciable negative effects for
consumers can be expected. Negative effects can
however be expected when the market share of the
buyer on the downstream supply market as well as the
upstream purchase market exceeds 30 %. Where the
market share of the buyer on the upstream market
does not exceed 30 %, significant foreclosure effects
may still result, especially when the market share of
the buyer on his downstream market exceeds 30 %. In
such cases withdrawal of the block exemption may be
required. Where a company is dominant on the
downstream market, any obligation to supply the
products only or mainly to the dominant buyer may
easily have significant anti-competitive effects.

(205)

It is not only the market position of the buyer on the
upstream and downstream market that is important
but also the extent to and the duration for which he
applies an exclusive supply obligation. The higher the
tied supply share, and the longer the duration of the
exclusive supply, the more significant the foreclosure
is likely to be. Exclusive supply agreements shorter
than five years entered into by non-dominant com-
panies usually require a balancing of pro- and anti-
competitive effects, while agreements lasting longer
than five years are for most types of investments
not considered necessary to achieve the claimed
efficiencies or the efficiencies are not sufficient to
outweigh the foreclosure effect of such long-term
exclusive supply agreements.

(206)

The market position of the competing buyers on the
upstream market is important as it is only likely
that competing buyers will be foreclosed for anti-
competitive reasons, i.e. to increase their costs, if they
are significantly smaller than the foreclosing buyer.

(207)

Entry barriers at the supplier level are relevant to
establishing whether there is real foreclosure. In as far
as it is efficient for competing buyers to provide the
goods or services themselves via upstream vertical
integration, foreclosure is unlikely to be a real prob-
lem. However, often there are significant entry barriers.

(208) Countervailing power of suppliers is relevant, as
important suppliers will not easily allow themselves
to be cut off from alternative buyers. Foreclosure is
therefore mainly a risk in the case of weak suppliers
and strong buyers. In the case of strong suppliers the
exclusive supply may be found in combination with
non-compete. The combination with non-compete
brings in the rules developed for single branding.
Where there are relationship-specific investments
involved on both sides (hold-up problem) the combi-
nation of exclusive supply and non-compete i.e.
reciprocal exclusivity in industrial supply agreements
is usually justified below the level of dominance.

(209)

Lastly, the level of trade and the nature of the product
are relevant for foreclosure. Foreclosure is less likely
in the case of an intermediate product or where
the product is homogeneous. Firstly, a foreclosed
manufacturer that uses a certain input usually has
more flexibility to respond to the demand of his
customers
in
responding to the demand of the final consumer for
whom brands may play an important role. Secondly,
the loss of a possible source of supply matters less for
the foreclosed buyers in the case of homogeneous
products than in the case of a heterogeneous product
with different grades and qualities.

than the wholesaler/retailer has

(210)

For homogeneous intermediate products, anti-com-
petitive effects are likely to be exemptable below the
level of dominance. For final branded products or
differentiated intermediate products where there are
entry barriers, exclusive supply may have appreciable
anti-competitive effects where the competing buyers
are relatively small compared to the foreclosing buyer,
even if the latter is not dominant on the downstream
market.

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(211) Where appreciable anti-competitive effects are estab-
lished, an exemption under Article 81(3) is possible as
long as the company is not dominant. Efficiencies
can be expected in the case of a hold-up problem
(paragraph 116, points 4 and 5), and this is more
likely for intermediate products than for final products.
Other efficiencies are less likely. Possible economies of
scale in distribution (paragraph 116, point 6) do not
seem likely to justify exclusive supply.

with one buyer. Quantity forcing on the supplier may
have similar but more mitigated effects than exclusive
supply. The assessment of quantity forcing will depend
on the degree of foreclosure of other buyers on the
upstream market.

2.7.

Tying

(212)

In the case of a hold-up problem and even more so in
the case of scale economies in distribution, quantity
forcing on the supplier, such as minimum supply
requirements, could well be a less restrictive alterna-
tive.

(215)

(213)

Example of exclusive supply:

for a certain type of components
On a market
(intermediate product market) supplier A agrees with
buyer B to develop, with his own know-how and
considerable investment in new machines and with
the help of specifications supplied by buyer B, a
different version of the component. B will have to
make considerable investments to incorporate the new
component. It is agreed that A will supply the new
product only to buyer B for a period of five years from
the date of first entry on the market. B is obliged to
buy the new product only from A for the same period
of five years. Both A and B can continue to sell and
buy respectively other versions of the component
elsewhere. The market share of buyer B on the
upstream component market and on the downstream
final goods market is 40 %. The market share of the
component supplier is 35 %. There are two other
component suppliers with around 20-25 % market
share and a number of small suppliers.

Given the considerable investments, the agreement is
likely to fulfil the conditions for exemption in view of
the efficiencies and the limited foreclosure effect.
Other buyers are foreclosed from a particular version
of a product of a supplier with 35 % market share
and there are other component suppliers that could
develop similar new products. The foreclosure of part
of buyer B’s demand to other suppliers is limited to
maximum 40 % of the market.

Tying exists when the supplier makes the sale of one
product conditional upon the purchase of another
distinct product from the supplier or someone desig-
nated by the latter. The first product is referred to as
the tying product and the second is referred to as the
tied product. If the tying is not objectively justified by
the nature of the products or commercial usage, such
practice may constitute an abuse within the meaning
of Article 82 (1). Article 81 may apply to horizontal
agreements or concerted practices between competing
suppliers which make the sale of one product con-
ditional upon the purchase of another distinct product.
Tying may also constitute a vertical restraint falling
under Article 81 where it results in a single branding
type of obligation (see paragraphs 138 to 160) for the
tied product. Only the latter situation is dealt with in
these Guidelines.

(216) What is to be considered as a distinct product is
determined first of all by the demand of the buyers.
Two products are distinct if, in the absence of tying,
from the buyers’ perspective, the products are pur-
chased by them on two different markets. For instance,
since customers want to buy shoes with laces, it has
become commercial usage for shoe manufacturers to
supply shoes with laces. Therefore, the sale of shoes
with laces is not a tying practice. Often combinations
have become accepted practice because the nature of
the product makes it technically difficult to supply
one product without the supply of another product.

(217)

The main negative effect of tying on competition is
possible foreclosure on the market of the tied product.
Tying means that there is at least a form of quantity-
forcing on the buyer in respect of the tied product.
Where in addition a non-compete obligation is agreed
in respect of the tied product,
this increases the
possible foreclosure effect on the market of the tied
product. Tying may also lead to supra-competitive
prices, especially in three situations. Firstly, when the
tying and tied product are partly substitutable for
the buyer. Secondly, when the tying allows price
discrimination according to the use the customer

(214)

Exclusive supply is based on a direct or indirect
obligation causing the supplier only to sell to one
buyer. Quantity forcing on the supplier is based on
incentives agreed between the supplier and the buyer
that make the former concentrate his sales mainly

(1) Judgment of the Court of Justice in Case C-333/94 P Tetrapak v

Commission[1996] ECR I-5951, paragraph 37.

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makes of the tying product, for example the tying of
ink cartridges to the sale of photocopying machines
(metering). Thirdly, when in the case of long-term
contracts or in the case of after-markets with original
equipment with a long replacement time, it becomes
difficult for the customers to calculate the conse-
quences of the tying. Lastly, tying may also lead to
higher entry barriers both on the market of the tying
and on the market of the tied product.

(218)

Tying is exempted by Article 2(1) read in conjunction
with Article 3 of the Block Exemption Regulation
when the market share of the supplier on both the
market of the tied product and the market of the tying
product does not exceed 30 %. It may be combined
with other non-hardcore vertical restraints such as
non-compete or quantity forcing in respect of the
tying product, or exclusive purchasing. Above the
market share threshold the following guidance is
provided for the assessment of tying in individual
cases.

(219)

The market position of the supplier on the market of
the tying product is obviously of main importance to
assess possible anti-competitive effects. In general this
type of agreement is imposed by the supplier. The
importance of the supplier on the market of the tying
product is the main reason why a buyer may find it
difficult to refuse a tying obligation.

Article 81(3) arises as long as the company is not
dominant. Tying obligations may help to produce
efficiencies arising from joint production or joint
distribution. Where the tied product is not produced
by the supplier, an efficiency may also arise from the
supplier buying large quantities of the tied product.
For tying to be exemptable,
it must, however, be
shown that at least part of these cost reductions are
passed on to the consumer. Tying is therefore normally
not exemptable when the retailer is able to obtain, on
a regular basis, supplies of the same or equivalent
products on the same or better conditions than
those offered by the supplier which applies the tying
practice. Another efficiency may exist where tying
helps to ensure a certain uniformity and quality
standardisation (see efficiency 8 in paragraph 116).
However, it needs to be demonstrated that the positive
effects cannot be realised equally efficiently by requir-
ing the buyer to use or resell products satisfying
minimum quality standards, without requiring the
buyer to purchase these from the supplier or someone
designated by the latter. The requirements concerning
minimum quality standards would not normally fall
within Article 81(1). Where the supplier of the tying
product imposes on the buyer the suppliers from
which the buyer must purchase the tied product, for
instance because the formulation of minimum quality
standards is not possible, this may also fall outside
Article 81(1), especially where the supplier of the tying
product does not derive a direct (financial) benefit
from designating the suppliers of the tied product.

(220)

To assess the supplier’s market power, the market
position of his competitors on the market of the tying
product is important. As long as his competitors are
sufficiently numerous and strong, no anti-competitive
effects can be expected, as buyers have sufficient
alternatives to purchase the tying product without the
tied product, unless other suppliers are applying
similar tying. In addition, entry barriers on the market
of the tying product are relevant to establish the
market position of the supplier. When tying is com-
bined with a non-compete obligation in respect of
the tying product, this considerably strengthens the
position of the supplier.

(223)

The effect of supra-competitive prices is considered
anti-competitive in itself. The effect of foreclosure
depends on the tied percentage of total sales on the
market of
the tied product. On the question of
what can be considered appreciable foreclosure under
Article 81(1), the analysis for single branding can be
applied. Above the 30 % market share threshold
exemption of tying is unlikely, unless there are clear
efficiencies that are transmitted, at least in part, to
consumers. Exemption is even less likely when tying
is combined with non-compete, either in respect of
the tied or in respect of the tying product.

(221)

Buying power is relevant, as important buyers will not
easily be forced to accept tying without obtaining at
least part of the possible efficiencies. Tying not based
on efficiency is therefore mainly a risk where buyers
do not have significant buying power.

(222) Where appreciable anti-competitive effects are estab-
lished, the question of a possible exemption under

(224) Withdrawal of the block exemption is likely where no
efficiencies result from tying or where such efficiencies
are not passed on to the consumer
(see para-
graph 222). Withdrawal is also likely in the case of a
cumulative effect where a majority of the suppliers
apply similar tying arrangements without the possible
efficiencies being transmitted at least in part to con-
sumers.

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2.8.

Recommended and maximum resale prices

(225)

(226)

(227)

The practice of recommending a resale price to a
reseller or requiring the reseller to respect a maximum
resale price is — subject to the comments in para-
graphs 46 to 56 concerning RPM — covered by the
Block Exemption Regulation when the market share
of the supplier does not exceed the 30 % threshold.
For cases above the market share threshold and for
cases of withdrawal of
the block exemption the
following guidance is provided.

The possible competition risk of maximum and rec-
ommended prices is firstly that the maximum or
recommended price will work as a focal point for the
resellers and might be followed by most or all of them.
A second competition risk is that maximum or
recommended prices may facilitate collusion between
suppliers.

The most important factor for assessing possible anti-
competitive effects of maximum or recommended
resale prices is the market position of the supplier.
The stronger the market position of the supplier, the
higher the risk that a maximum resale price or a
recommended resale price leads to a more or less
uniform application of that price level by the resellers,
because they may use it as a focal point. They may

(228)

find it difficult to deviate from what they perceive to
be the preferred resale price proposed by such an
important supplier on the market. Under such circum-
stances the practice of imposing a maximum resale
price or recommending a resale price may infringe
Article 81(1) if it leads to a uniform price level.

The second most important factor for assessing poss-
ible anti-competitive effects of
the practice of
maximum and recommended prices is the market
position of competitors. Especially in a narrow oligop-
oly, the practice of using or publishing maximum or
recommended prices may facilitate collusion between
the suppliers by exchanging information on the pre-
ferred price level and by reducing the likelihood
of lower resale prices. The practice of imposing a
maximum resale price or recommending resale prices
leading to such effects may also infringe Article 81(1).

2.9.

Other vertical restraints

(229)

The vertical restraints and combinations described
above are only a selection. There are other restraints
and combinations for which no direct guidance is
provided here. They will however be treated according
to the same principles, with the help of the same
general rules and with the same emphasis on the effect
on the market.