Guidelines on Vertical Restraints
Date: 2002-05-23
Institutions: EFTA Surveillance Authority
Subjects: competition policy, exemption from restrictive-practice authorisation, trade restriction, vertical agreement

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I

(Information)

EUROPEAN ECONOMIC AREA

EFTA SURVEILLANCE AUTHORITY

Guidelines on Vertical Restraints

(2002/C 122/01)

CONTENTS

I.

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

Paragraphs
1–7

Page
3

1.

Purpose of the Guidelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2. Applicability of Article 53 to vertical agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1–4

5–7

II.

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

8–20

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

8–11

2. Agency agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12–20

III. APPLICATION OF THE BLOCK EXEMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

21–70

1.

2.

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

21–22

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

23–45

3. Hardcore restrictions under the Block Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

46–56

4. Conditions under the Block Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

57–61

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

62

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

63–65

7.

8.

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

66–67

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

68–69

9. Transitional period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

70

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

71–87

1. Withdrawal procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

71–79

2. Disapplication of the Block Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

80–87

3

4

4

4

5

7

7

7

12

15

16

16

17

17

17

17

17

19

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

88–99

1.
EFTA Surveillance Authority Notice on definition of the relevant market . . . . . . . . .
2. The relevant market for calculating the 30 % market share threshold under the
Block Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3. The relevant market for individual assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4. Calculation of the market share under the Block Exemption . . . . . . . . . . . . . . . . . . . .

88

89–95
96
97–99

VI.

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

100–229

The framework of analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.
Negative effects of vertical restraints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.1.
Positive effects of vertical restraints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.2.
General rules for the evaluation of vertical restraints . . . . . . . . . . . . . . . . . . . . . . .
1.3.
1.4.
Methodology of analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.4.1. Relevant factors for the assessment under Article 53(1) . . . . . . . . . . . . . . . . . . . . .
1.4.2. Relevant factors for the assessment under Article 53(3) . . . . . . . . . . . . . . . . . . . . .

2.
2.1.
2.2.
2.3.
2.4.
2.5.
2.6.
2.7.
2.8.
2.9.

Analysis of specific vertical restraints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Single branding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exclusive distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exclusive customer allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selective distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Franchising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exclusive supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tying . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recommended and maximum resale price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other vertical restraints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

103–136
103–114
115–118
119
120–136
121–133
134–136

137–229
138–160
161–177
178–183
184–198
199–201
202–214
215–224
225–228
229

20

20

20
21
22

22

23
23
25
27
28
28
30

31
31
35
38
39
42
44
46
47
48

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A.

B.

C.

D.

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

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

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

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

I.

INTRODUCTION

1. Purpose of the Guidelines

(1)

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

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

generally

fall

agreements which
Article 53(1);

— Section III (paragraphs 21 to 70) comments on the

application of the Block Exemption;

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

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

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

(2)

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

(1) OJ C 291, 13.10.2000, p. 1.
(2) OJ L 153, 18.6.1994, p. 13 and EEA Supplement to the OJ
No. 15, 18.6.1994, p 12 as modified OJ L 186, 21.7.1994, p. 69
and EEA Supplement to the OJ No 22, 21.7.1994, p. 17. See in
this context also para. 70 below.

(3) OJ L 336, 29.12.1999, p. 21, as incorporated into the EEA
Agreement by EEA Joint Committee Decision No 18/2000 of
18th December 2000, OJ L 103, 12.4.2001, p. 36.

(4) It should be noted that the EEA Agreement is limited in scope
compared to the EC Treaty, for instance the absence of a customs
union and limited application to certain products by virtue of
Article 8 of the EEA Agreement.

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(3)

(4)

(7)

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

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

adopt

The protection of competition is the primary objective
of EEA competition policy, as this enhances consumer
welfare and creates an efficient allocation of resources.
In applying the EEA competition rules,
the EFTA
Surveillance Authority will
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 restric-
tions by object as listed in Article 4 of the Block
Exemption, the EFTA Surveillance Authority is not
required to assess the actual effects on the market.
Within the scope of
the EEA Agreement, market
integration is an additional goal of EEA competition
policy (8). Companies should not be allowed to recreate
private barriers within the territory covered by the EEA
Agreement where State barriers have been successfully
abolished.

2. Applicability of Article 53 to vertical agreements

II. VERTICAL AGREEMENTS WHICH GENERALLY FALL

OUTSIDE ARTICLE 53(1)

(5)

(6)

‘vertical

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

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

(5) The competence to handle individual cases

falling under
Articles 53 and 54 of the EEA Agreement is divided between the
EFTA Surveillance Authority and the European Commission
according to the rules laid down in Article 56 of the EEA
Agreement. Only one authority is competent to handle any given
case.

(6) Such rulings are relevant to the practice of the Authority by virtue
of the provisions of Article 6 of the EEA Agreement and Article 3
of the Surveillance and Court Agreement.

(7) 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 in Case T-77/92 Parker Pen v Commission [1994] ECR
II-549.

1. Agreements of minor importance and SMEs

(8)

(9)

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

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 53(1). There is no presumption that vertical
agreements concluded by undertakings having more
than 10 % market
share automatically infringe
Article 53(1). Agreements between undertakings whose

(8) The fact that the EEA Agreement is limited in scope compared to
the EC Treaty may affect the assessment of market integration
between the EFTA States and between the EFTA States and the
Community.

(9) Notice on agreements of minor importance which do not fall
under Article 53(1) of the EEA Agreement, OJ L 200, 16.7.1998,
p. 55 and EEA Supplement to the OJ No 28, 16.7.1998, p. 13.

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market share exceeds the 10 % threshold may still not
have an appreciable effect on trade between States
within the territory covered by the EEA Agreement
or may not constitute an appreciable restriction of
competition (10). Such agreements need to be assessed
in their legal and economic context. The criteria for the
assessment of individual agreements are set out in
paragraphs 100 to 229.

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

(11)

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

(10) See judgment of the Court of First Instance in Case T-7/93
Langnese-Iglo v Commission [1995] ECR II-1533, paragraph 98.
(11) See judgment of the Court of Justice of the European Communi-
ties 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.

(12) OJ L 42, 13.2.1997, p. 33. Corresponds to European Commission

Recommendation 96/280/EC OJ L 107, 30.4.1996, p. 4.

2. Agency agreements

(12)

(13)

(14)

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

— purchase of goods or services by the principal, or

— sale of goods or services supplied by the principal.

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

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

(13) OJ L 153, 18.6.1994, p. 23 and EEA Supplement to the OJ

No 15, 18.6.1994, p. 22.

(14) OJ L 382, 31.12.1986.

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(15)

The agency agreement is considered a genuine agency
agreement and consequently falls outside Article 53(1)
if the agent does not bear any, or bears only 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 agreement and may fall under
Article 53(1). In that case the agent does bear such risks
and will be treated as an independent dealer who must
remain free in determining his marketing strategy in
order to be able to recover his contract- or market-
specific investments. Risks that are related to the activity
of providing agency services in general, such as the risk
of the agent’s income being dependent upon his success
as an agent or general
investments in for instance
premises or personnel, are not material to this 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
EFTA Surveillance Authority considers that Article 53(1)
will generally not be applicable to the obligations
imposed on the agent as to the contracts negotiated
and/or concluded on behalf of the principal where
property in the contract goods bought or sold does not
vest in the agent, or the agent does not himself supply
the contract services and where the agent:

example, by failing to comply with reasonable
security measures to avoid loss of stocks);

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

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

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

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

(17)

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

— 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;

(18)

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

— does not maintain at his own cost or risk stocks of
the contract goods, including the costs of financing
the stocks and the costs of loss of stocks and can
return unsold goods to the principal without
charge, unless the agent is liable for fault (for

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

— limitations on the territory in which the agent may

sell these goods or services;

— limitations on the customers to whom the agent

may sell these goods or services;

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— the prices and conditions at which the agent must

sell or purchase these goods or services.

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).

(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
competition and may infringe Article 53(1) if they lead
to foreclosure on the relevant market where the contract
goods or services are sold or purchased (see Sec-
tion VI.2.1).

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

III. APPLICATION OF THE BLOCK EXEMPTION

(22)

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

in general be limited.

2. Scope of the Block Exemption

(i) Definition of vertical agreements

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

1. Safe harbour created by the Block Exemption

(24)

There are three main elements in this definition:

(21)

The Block Exemption creates a presumption of legality
for vertical agreements depending on the market share
of the supplier or the buyer. Pursuant to Article 3 of the
Block Exemption, it is in general the market share of
the supplier on the market where it sells the contract
goods or services which determines the applicability of
the Block Exemption. This market share may not exceed
the threshold of 30 % in order for the Block Exemption
to apply. Only where the agreement contains an exclus-
ive supply obligation, as defined in Article 1(c) of the
Block Exemption, is it the buyer’s market share on the

— the agreement or concerted practice is between
two or more undertakings. Vertical agreements
with final consumers not operating as an undertak-
ing are not covered. More generally, agreements
with final
under
Article 53(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 54 of the EEA Agreement;

consumers

do not

fall

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

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

indirectly exclude certain vertical agreements from the
application of the Block Exemption.

(ii) Vertical agreements between competitors

(26) Article 2(4) of the Block Exemption explicitly excludes
from its application ‘vertical agreements entered into
between competing undertakings’. Vertical agreements
between competitors will be dealt with, as regards
possible collusion effects, in forthcoming Guidelines on
the applicability of Article 53 to horizontal cooper-
ation (16). However, the vertical aspects of such agree-
ments need to be assessed under these Guidelines.
Article 1(a) of the Block Exemption defines competing
undertakings as ‘actual or potential suppliers in the
same product market’, irrespective of whether or not
they are competitors on the same geographic market.
Competing undertakings are undertakings that are actu-
al 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 undertak-
ing would be able and likely to undertake the necessary
additional investments and supply the market within
1 year. This assessment has to be based on realistic
grounds; the mere theoretical possibility of entering a
market is not sufficient (17).

(25)

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

In addition, Articles 2(2)

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

the EEA Agreement,

(16) Article 5(1)(b) of the Surveillance and Court Agreement provides
that the Authority shall, in accordance with EEA legislation and
in order to ensure the proper functioning of the EEA Agreement,
ensure the application of the EEA competition rules. As concerns
non-binding acts adopted by the European Commission after the
signing of
the Authority is to adopt
corresponding acts when EEA relevant. Pending the adoption of
its own notices, the Authority intends to apply the principles
set out
including the
Commission’s Guidelines on the applicability of Article 81 to
horizontal co-operation agreements, OJ C 3, 6.1.2001, p. 2.
(17) EFTA Surveillance Authority Notice on the definition of the
relevant market for the purposes of competition law within the
EEA, OJ L 200, 16.7.1998, p. 48 and EEA Supplement to the OJ
No 28, 16.7.1998, p. 3, at paras. 20-24, and European Com-
mission Decision 90/410/EEC in Case No IV/32.009 — Elopak/
Metal Box-Odin, OJ L 209, 8.8.1990, p. 15.

in the relevant Commission notices,

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(27)

There are three exceptions to the general exclusion of
vertical agreements between competitors, all three being
set out in Article 2(4) and relating to non-reciprocal
agreements. Non-reciprocal means, for instance, that
while one manufacturer becomes the distributor of the
products of another manufacturer, the latter does not
become the distributor of the products of the first
agreements between
manufacturer. Non-reciprocal
competitors are covered by the Block Exemption where
(1)
the buyer has a turnover not exceeding EUR
100 million, or (2) the supplier is a manufacturer and
distributor of goods, while the buyer is only a distributor
and not also a manufacturer of competing goods, or
(3) the supplier is a provider of services operating at
several levels of trade, while the buyer does not provide
competing services at
trade where it
purchases the contract services. The second exception
covers situations of dual distribution, i.e. the manufac-
turer 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.

the level of

(iii) Associations of retailers

follow the rules of

leads to the conclusion that a cooperation between
undertakings in the area of purchasing or selling is
acceptable, a further assessment will be necessary to
examine the vertical agreements concluded by the
association with its suppliers or its individual members.
The latter assessment will
the
Block Exemption and these Guidelines. For instance,
horizontal agreements concluded between the members
of the association or decisions adopted by the associ-
ation, such as the decision to require the members to
purchase from the association or the decision to allocate
exclusive territories to the members have to be assessed
first as a horizontal agreement. Only if this assessment
is positive does it become relevant to assess the vertical
agreements between the association and individual
members or between the association and suppliers.

(iv) Vertical agreements containing provisions on intel-

lectual property rights (IPRs)

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

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

— 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;

(29) An association of undertakings may involve both hori-
zontal and vertical agreements. The horizontal agree-
ments have to be assessed according to the principles set
out in the forthcoming Guidelines on the applicability of
Article 53 to horizontal cooperation. If this assessment

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

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— 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.

Exemption. This means in particular that subcontracting
involving the transfer of know-how to a subcontrac-
tor (18) does not fall within the scope of application of
the Block Exemption. However, vertical agreements
under which the buyer provides only specifications to
the supplier which describe the goods or services to be
supplied are covered by the Block Exemption.

(31)

(32)

These conditions ensure that
the Block Exemption
applies to vertical agreements where the use, sale or
resale of goods or services can be performed more
effectively because IPRs are assigned to or transferred
In other words, restrictions
for use by the buyer.
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.

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

(34)

(35)

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

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

— the pure licence of a trade mark or sign for the

purposes of merchandising;

— sponsorship contracts concerning the right

to
advertise oneself as being an official sponsor of an
event;

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

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

(36)

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

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

(37)

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

(33)

the Block
The second condition makes clear that
Exemption does not apply when the IPRs are provided
by the buyer to the supplier, no matter whether the IPRs
concern the manner of manufacture or of distribution.
An agreement relating to the transfer of IPRs to the
supplier and containing possible restrictions on the
sales made by the supplier is not covered by the Block

(18) See the Authority’s Notice on subcontracting, OJ L 153,
18.6.1994, p. 30 and EEA supplement to the OJ No 15,
18.6.1994, p. 29.

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Trade mark

(43)

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

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

(44)

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

(a)

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

(b)

(c)

(d)

(e)

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 intellectual
property rights,
to take legal action against
infringers or to assist the franchisor in any legal
actions against infringers;

(f)

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

Copyright

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

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

(41)

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

Know-how

(42)

Franchise agreements, with the exception of industrial
franchise agreements, are the most obvious example
where know-how for marketing purposes is 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 distri-
bution 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 procure-
ment services, training, advice on real estate, financial
planning etc. The licence and the assistance are integral
components of the business method being franchised.

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(g)

an obligation on the franchisee not to assign
the rights and obligations under the franchise
agreement without the franchisor’s consent.

(v) Relationship to other block exemptions

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

3. Hardcore restrictions under the Block Exemption

(46)

(47)

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

The hardcore restriction set out in Article 4(a) of the
Block Exemption concerns resale price maintenance
(RPM), that is agreements or concerted practices having
as their direct or indirect object the establishment of a
fixed or minimum resale price or a fixed or minimum
price level to be observed by the buyer. In the case
of contractual provisions or concerted practices that
directly establish the resale price, the restriction is clear
cut. However, RPM can also be achieved through

indirect means. Examples of the latter are an agreement
fixing the distribution margin, fixing the maximum
level of discount the distributor can grant from a
prescribed price level, making the grant of rebates or
reimbursement of promotional costs by the supplier
subject
to the observance of a given price level,
linking the prescribed resale price to the resale
prices of competitors, threats, intimidation, warnings,
penalties, delay or suspension of deliveries or contract
terminations in relation to observance of a given price
level. Direct or indirect means of achieving price
fixing can be made more effective when combined
with measures to identify price-cutting distributors,
such as the implementation of a price monitoring
system, or the obligation on retailers to report other
members of
the distribution network who deviate
from the standard price level. Similarly, direct or
indirect price fixing can be made more effective when
combined with measures which may reduce the
buyer’s incentive to lower the resale price, such as the
supplier printing a recommended resale price on the
product or the supplier obliging the buyer to apply a
most-favoured-customer clause. The same indirect
means and the same ‘supportive’ measures can be
used to make maximum or recommended prices work
list of
as RPM. However,
recommended prices or maximum prices by the
supplier to the buyer is not considered in itself as
leading to RPM.

the provision of

a

(48)

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

(19) OJ L 31, 9.2.1996, p. 2.
(20) OJ L 145, 29.6.1995, p. 25.
(21) OJ L 53, 22.2.1985, p. 1.
(22) OJ L 53, 22.2.1985, p. 5.
(23) See footnote 11, p. 5.

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

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(49)

to sell

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

customer group by the supplier and all the other buyers
of the supplier inside the territory covered by the EEA
Agreement. The supplier is allowed to combine the
allocation of an exclusive territory and an exclusive
customer group by for instance appointing an exclusive
distributor for a particular customer group in a certain
territory. This protection of exclusively allocated terri-
tories or customer groups must, however, permit pass-
ive sales to such territories or customer groups. For the
application of Article 4(b) of the Block Exemption, the
EFTA Surveillance Authority interprets ‘active’ and
‘passive’ sales as follows:

— ‘Active’ sales mean actively approaching individual
customers inside another distributor’s exclusive
territory or exclusive customer group by for
instance direct mail or visits; or actively approach-
ing a specific customer group or customers in a
specific territory allocated exclusively to another
distributor through advertisement
in media or
other promotions specifically targeted at that cus-
tomer group or targeted at customers in that
territory; or establishing a warehouse or distri-
bution outlet in another distributor’s exclusive
territory.

— ‘Passive’ sales mean responding to unsolicited
requests from individual customers including deliv-
ery of goods or services to such customers. General
advertising or promotion in media or on the
Internet that reaches customers in other distribu-
tors’ 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 terri-
tories or in one’s own territory, are passive sales.

(50)

There are four exceptions to the hardcore restriction in
Article 4(b) of the Block Exemption. The first exception
allows a supplier to restrict active sales by his direct
buyers to a territory or a customer group which has
been allocated exclusively to another buyer or which
the supplier has reserved to itself. A territory or
customer group is exclusively allocated when the sup-
plier 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 protect-
ed against active selling into his territory or to his

(51)

Every distributor must be free to use the Internet to
advertise or to sell products. A restriction on the use of
the Internet by distributors could only be compatible
with the Block Exemption to the extent that promotion
on the Internet or sales over the Internet would lead to
active selling into other distributors’ exclusive territories
or customer groups. In general, the use of the Internet
is not considered a form of active sales into such
territories or customer groups, since it is a reasonable

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

(52)

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

(53)

The hardcore restriction set out in Article 4(c) of the
Block Exemption concerns the restriction of active or
passive sales to end users, whether professional end
users or final consumers, by members of a selective

distribution network. This means that dealers in a
selective distribution system, as defined in Article 1(d)
of the Block Exemption, cannot be restricted in the
users or purchasing agents acting on behalf of these
users to whom they may sell. For instance, also in a
selective distribution system the dealer should be free to
advertise and sell with the help of the Internet. Selective
distribution may be combined with exclusive distri-
bution provided that active and passive selling is not
restricted anywhere. The supplier may therefore commit
itself to supplying only one dealer or a limited number
of dealers in a given territory.

(54)

(55)

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

(56)

The hardcore restriction set out in Article 4(e) of the
Block Exemption concerns agreements that prevent or
restrict end-users,
independent repairers and service
providers from obtaining spare parts directly from
the manufacturer of these spare parts. An agreement
between a manufacturer of spare parts and a buyer who
incorporates these parts into his own products [original
(OEM)], may not, either
equipment manufacturer
directly or indirectly, prevent or restrict sales by the
manufacturer of these spare parts to end users, indepen-

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dent repairers or service providers. Indirect restrictions
may arise in particular when the supplier of the spare
parts is restricted in supplying technical information
and special equipment which are necessary for the use
of spare parts by users, independent repairers or service
providers.

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

the end of

the five-year period;

compete obligation and the supplier provides a loan to
the buyer, the repayment of that loan should not hinder
the buyer from effectively terminating the non-compete
obligation at
the
repayment needs to be structured in equal or decreasing
instalments and should not increase over time. This is
without prejudice to the possibility,
in the case for
instance of a new distribution outlet, to delay repayment
for the first one or two years until sales have reached a
certain level. The buyer must have the possibility
to repay the remaining debt where there is still an
outstanding debt at the end of the non-compete obli-
gation. Similarly, when the supplier provides the buyer
with equipment which is not relationship-specific, the
buyer should have the possibility to take over the
equipment at its market asset value at the end of the
non-compete obligation.

(59)

(60)

4. Conditions under the Block Exemption

(57) Article 5 of

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

(58)

The first exclusion is provided in Article 5(a) of the
Block Exemption and concerns non-compete obli-
gations. Non-compete obligations are obligations that
require the buyer to purchase from the supplier or from
another undertaking designated by the supplier more
than 80 % of the buyer’s total purchases during the
previous year of the contract goods and services and
their substitutes (see the definition in Article 1(b) of the
Block Exemption), thereby preventing the buyer from
purchasing competing goods or services or limiting
such purchases to less than 20 % of total purchases.
Where for the year preceding the conclusion of the
contract no relevant purchasing data for the buyer are
available, the buyer’s best estimate of his annual total
requirements may be used. Such non-compete obli-
gations are not covered by the Block Exemption when
their duration is indefinite or exceeds five years. Non-
compete obligations that are tacitly renewable beyond a
period of five years are also not covered by the Block
Exemption. However, non-compete obligations are
covered when their duration is limited to five years or
less, or when renewal beyond five years requires explicit
consent of both parties and no obstacles exist that
hinder the buyer from effectively terminating the non-
compete obligation at the end of the five-year period. If
for instance the agreement provides for a five-year non-

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

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

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(61)

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

if notified, can exempt

cation needs to be made.
If a dispute arises, an
undertaking can still notify the competent authority
under the EEA Agreement (27), in which case the EFTA
Surveillance Authority,
the
vertical agreement with retroactive effect from the date
of entry into force of the agreement if all four conditions
of Article 53(3) are fulfilled. A notifying party does not
have to explain why the agreement was not notified
earlier and will not be denied retroactive exemption
simply because it did not notify earlier. Any notification
will be reviewed on its merits. This amendment to
Article 4(2) of Chapter II of Protocol 4 to the Surveil-
lance and Court Agreement should eliminate artificial
litigation before national courts and thus strengthen the
civil enforceability of contracts. It also takes account of
the situation where undertakings have not notified
because they assumed the agreement was covered by
the Block Exemption.

5. No presumption of illegality outside the Block Exemption

(64)

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

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

6. No need for precautionary notification

(63)

Pursuant to Article 4(2) of Chapter II of Protocol 4 to
the Surveillance and Court Agreement, as last amended
by Agreement between the EFTA States of 11th May
2000 (26), vertical agreements can benefit
from an
exemption under Article 53(3) from their date of entry
into force, even if notification occurs after that date.
This means in practice that no precautionary notifi-

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

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

(26) ‘Agreement between the EFTA States Amending Protocol 4 to
the Agreement between the EFTA States on the Establishment of
a Surveillance Authority and a Court of Justice’, 11th May 2000
(not published).

(27) Sea footnote 5, p. 4.
(28) See judgment of the Court of Justice of the European Communi-
ties in Case C-234/89 Delimitis v Henninger Bräu [1991] ECR
I-935, at paragraph 52.

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7. Severability

(66)

(67)

The Block Exemption exempts vertical agreements on
condition that no hardcore restriction, as set out in
Article 4, is contained in or practised with the vertical
agreement. If there are one or more hardcore restric-
tions, the benefit of the Block Exemption 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.
Therefore, the benefit of the Block Exemption is only
lost in relation to that part of the vertical agreement
which does not comply with the conditions set out in
Article 5.

8. Portfolio of products distributed through the same

distribution system

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

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

IV. WITHDRAWAL OF THE BLOCK EXEMPTION AND DIS-

APPLICATION OF THE BLOCK EXEMPTION

(69)

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

1. Withdrawal procedure

— there is no block exemption but also no presump-

tion of illegality;

(71)

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

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

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

9. Transitional period

(70)

The Block Exemption applies from 1 June 2000.
Article 12 of the Block Exemption provides for a

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

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

EEA competition law or at least to withdraw the benefit
of the Block Exemption, the EFTA State may ask the
EFTA Surveillance Authority to initiate proceedings to
this effect.

(73)

The conditions for an exemption under Article 53(3)
may in particular not be fulfilled when access to the
relevant market or competition therein is significantly
restricted by the cumulative effect of parallel networks
of similar vertical agreements practised by competing
suppliers or buyers. Parallel networks of vertical agree-
ments 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 take
account of
the anti-competitive effects attributable
to each individual network of agreements. Where
appropriate, withdrawal may concern only the quanti-
tative limitations imposed on the number of authorised
distributors. Other cases in which a withdrawal decision
may be taken include situations where the buyer, for
example in the context of exclusive supply or exclusive
distribution, has significant market power in the relevant
downstream market where he resells the goods or
provides the services.

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

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

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

(29) Judgment in the Delimitis case.

(77)

The European Commission and the EFTA Surveillance
Authority share, in accordance with the provisions of
Article 56 of the EEA Agreement regarding the allo-
cation of cases between the two authorities, the exclus-
ive power to withdraw the benefit of the Block Exemp-
tion in respect of vertical agreements restricting compe-
tition on a relevant geographic market which is wider
than the territory of a single EEA State. When the
thereof,
territory of a single EEA State, or a part
constitutes the relevant geographic market, the com-
petent surveillance authority and the EEA State con-
cerned have concurrent competence for withdrawal.
Often, such cases lend themselves to decentralised
enforcement by national competition authorities. How-
ever,
the EFTA Surveillance Authority reserves the
right, within the EFTA pillar, to take on certain cases
displaying a particular interest under the EEA Agree-
ment, such as cases raising a new point of law.

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

(79)

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

(30) Judgment of the Court of Justice of the European Communities
in Case 14/68 Walt Wilhelm and Others v Bundeskartellamt
[1969] ECR 1, paragraph 4, and judgment in the Delimitis case.
(31) OJ C 307, 12.12.2000, p. 6 and EEA Supplement to the OJ No 1,

12.12.2000, p. 5, points 49 to 53.

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2. Disapplication of the Block Exemption

(84)

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

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

in respect of

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

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

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

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

(86)

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

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

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V. MARKET DEFINITION AND MARKET SHARE CALCU-

(91)

LATION ISSUES

1. EFTA Surveillance Authority Notice on definition of the

relevant market

(88)

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

2. The relevant market for calculating the 30 % market

share threshold under the Block Exemption

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

(90)

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

(32) OJ L 200, 16.7.1998, p. 48 and EEA Supplement to the OJ

No 28, 16.7.1998, p. 3.

to the sale of

the application of

to his buyers (33).

the Block Exemption,

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

the preferences of

cannot

ignore

(92)

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

(33) For example, the Dutch market for new replacement truck and
bus tyres in the Michelin case (judgment of the Court of Justice
of the European Communities in Case 322/81 Nederlandsche
Banden-Industrie Michelin v Commission [1983] ECR 3461),
the various meat markets in the Danish slaughterhouse case:
European Commission Decision 2000/42/EC in Case No IV/
M.1313 — Danish Crown/Vestjyske Slagterier, OJ L 20,
25.1.2000, p. 1.

(34) For an example of purchase markets, see European 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 replacement parts.
This may also arise where the supplier (OEM supplier)
subcontracts the manufacturing of the repair or replace-
ment parts. The relevant market for application of the
Block Exemption may be the original equipment market
including the spare parts or a separate original equip-
ment market and after-market depending on the circum-
stances of the case, such as the effects of the restrictions
involved, the lifetime of the equipment and importance
of the repair or replacement costs (35).

(95) Where the vertical agreement, in addition to the supply
of the contract goods, also contains IPR provisions —
such as a provision concerning the use of the supplier’s
trademark — which help the buyer to market the
contract goods, the supplier’s market share on the
market where he sells the contract goods is decisive for
the Block Exemption. Where a
the application of
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.

(35) See for example Pelikan/Kyocera in European Commission
XXV Report on Competition Policy, point 87, and European
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/Perkins 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 EFTA Surveillance Authority’s Notice on the definition of
relevant market for the purpose of EEA competition law.

3. The relevant market for individual assessment

(96)

For individual assessment of vertical agreements not
covered by the Block Exemption, additional markets
may need to be investigated besides the relevant market
defined for the application of the Block Exemption. A

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vertical agreement may not only have effects on the
market between supplier and buyer but may also have
effects on downstream markets. For an individual
assessment of a vertical agreement the relevant markets
at each level of trade affected by restraints contained in
the agreement will be examined:

(i)

(ii)

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

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

(iii)

In cases of individual assessment of an ‘after-
market’, the relevant market may be the original
equipment market or the after-market depending
on the circumstances of the case. In any event,
the situation on a separate after-market will be
evaluated taking account of the situation on the
original equipment market. A less significant pos-
ition on the original equipment market will nor-

mally reduce possible anti-competitive effects on
the after-market.

4. Calculation of the market share under the Block Exemp-

tion

(97)

(98)

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).

In-house production, that is production of an intermedi-
ate product for own use, may be very important in a
competition analysis as one of the competitive con-
straints or to accentuate the market position of a
company. However, for the purpose of market defi-
nition and the calculation of market share for intermedi-
ate goods and services, in-house production will not be
taken into account.

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

VI. ENFORCEMENT POLICY IN INDIVIDUAL CASES

(100) Vertical restraints are generally less harmful than hori-
zontal 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 substitut-
able 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.

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(101) However, this self-restraining character should not be
over-estimated. When a company has no market power
it can only try to increase its profits by optimising
its manufacturing and distribution processes, with or
without the help of vertical restraints. However, when
it does have market power it can also try to increase its
profits at the expense of its direct competitors by raising
its buyers and
their costs and at
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.

the expense of

(102)

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

1. The framework of analysis

1.1. Negative effects of vertical restraints

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

(i)

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

(ii)

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

(iii)

reduction of intra-brand competition between dis-
tributors of the same brand;

(iv)

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

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

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

Single branding group

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

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

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(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.

Limited distribution group

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

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

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

Resale price maintenance group

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

(112) There are two main negative effects of RPM on compe-
tition: (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
leading to a total
compete on price for that brand,
competition. A
intra-brand price
elimination of
maximum or recommended price may work as a focal
point for resellers, leading to a more or less uniform
application of that price level. Increased transparency
on price and responsibility for price changes makes
horizontal collusion between manufacturers or distribu-
tors easier, at
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.

least

— selective distribution, where

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

the

— after-market sales restrictions which limit the com-

ponent supplier’s sales possibilities.

Market partitioning group

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

(113) Under the heading of ‘market partitioning’ come agree-
ments 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.

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

1.2. Positive effects of vertical restraints

(115)

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

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

1)

To ‘solve a “free-rider” problem’. One distributor
may free-ride on the promotion efforts of another
distributor. This type of problem is most common
at the wholesale and retail level. Exclusive distri-
bution 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.

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

The ‘certification free-rider issue’. In some sectors,
certain retailers have a reputation for stocking only
‘quality’ products. In such a case, selling through
these retailers may be vital for the introduction of
a new product. If the manufacturer cannot initially
limit his sales to the premium stores, he runs the
risk of being de-listed and the product introduction
may fail. This means that there may be a reason
for allowing for a limited duration a restriction
such as exclusive distribution or selective distri-
bution. It must be enough to guarantee the intro-
duction 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.

2)

3)

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4)

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

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

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 manufacturer
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 require-
ment or exclusive purchasing.

‘Capital market imperfections’. The usual providers
of capital
(banks, equity markets) may provide
capital sub-optimally when they have imperfect
information on the quality of the borrower or
there is an inadequate basis to secure the loan. The
buyer or supplier may have better information and
be able,
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.

through an exclusive relationship,

8)

‘Uniformity and quality standardisation’. A vertical
restraint may help to increase sales by creating a
brand image and thereby increasing the attractive-
to the final consumer by
ness of a product
imposing a certain measure of uniformity and
quality standardisation on the distributors. This
can for instance be found in selective distribution
and franchising.

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 53(1).

(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).

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(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 distri-
bution may possibly be achieved by using exclusive
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 indispensa-
bility is discussed under Article 53(3).

ful when more efficient distributors or distributors
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 distributors.

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:

4)

Exclusive dealing arrangements are generally worse
for 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 purchases only one brand.
Quantity forcing, on the other hand, leaves the
buyer some scope to purchase competing goods.
The degree of foreclosure may therefore be less
with quantity forcing.

1)

2)

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 pow-
er below the level of market dominance, which is
the threshold for the application of Article 54.
Where there are many firms competing in an
it can be assumed that
unconcentrated market,
restraints will not have
non-hardcore vertical
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.

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
in the absence of sufficient inter-brand
group,
competition, may significantly restrict the choices
available to consumers. They are particularly harm-

less harmful

5) Vertical restraints agreed for non-branded goods
than
and services are in general
restraints affecting the distribution of branded
goods and services. Branding tends to increase
product differentiation and reduce substitutability
of the product, leading to a reduced elasticity 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 ser-
vices 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 consumers,
competition may suffer more when distributors
are foreclosed from selling one or a number of
brands than when buyers of intermediate 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 moni-
tor developments in the supply market. Because
they effect sizeable transactions, search costs are in
intra-brand
general not prohibitive. A loss of

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competition is therefore less important at
intermediate level.

the

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
system, the distributor may be tempted to increase
the price of the products as intra-brand compe-
tition has been reduced. The use of quantity forcing
or the setting of a maximum resale price may limit
such price increases.

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.

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 investment costs
incurred.

The more the vertical restraint is linked to invest-
ments 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.

6)

7)

8)

9)

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.

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 intermedi-
aries 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 53(1).

1.4. Methodology of analysis

(120) The assessment of a vertical restraint involves in general

the following four steps:

1)

2)

3)

4)

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

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

If the relevant market share is above the 30 %
threshold,
it is necessary to assess whether the
vertical agreement falls within Article 53(1).

If the vertical agreement falls within Article 53(1),
it is necessary to examine whether it fulfils the
conditions for exemption under Article 53(3).

1.4.1. R e l e v a n t

f a c t o r s

f o r

t h e a s s e s s m e n t

u n d e r A r t i c l e 5 3 ( 1 )

(121)

In assessing cases above the market share threshold of
30 %, the EFTA Surveillance Authority 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 53(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;

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g)

nature of the product;

h)

other factors.

restraints from the limited distribution and market
partitioning groups such as exclusive supply, exclusive
distribution and quantitative selective distribution.

(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
factors. However the
importance of
following can be said:

the individual

Market position of the supplier

(123) 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.

Market position of competitors

(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 competition.

Market position of the buyer

(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 character-
istics such as a wide geographic spread of his outlets,
own brands of the buyer/distributor 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

Entry barriers

(126) 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.

import tariffs,

(127) 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,
intellectual property
rights, ownership of resources where the supply is
limitations, (36)
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 a market
but that are lost when the market is 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
foreclosing effect will be more significant if setting up

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

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

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its own distributors will
potential entrant.

impose sunk costs on the

(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.

Maturity of the market

(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.

Level of trade

(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.

Nature of the product

(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 heterogeneous,
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 pur-
chased. In general, when the product is more hetero-
geneous, less expensive and resembles more a one-off
purchase, vertical restraints are more likely to have
negative effects.

Other factors

(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 behaviour 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. R e l e v a n t

f a c t o r s

f o r

t h e a s s e s s m e n t

u n d e r A r t i c l e 5 3 ( 3 )

(134) There are four cumulative conditions for the application

of Article 53(3):

— the vertical agreement must contribute to improv-
ing production or distribution or to promoting
technical or economic progress;

— 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 under-
takings the possibility of eliminating competition
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 53(1) if 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.

(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 in
paragraphs 115 to 118. These efficiencies have to 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

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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 sufficient 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
is
chosen to obtain certain positive effects.

the least anti-competitive restraint

(139) Single branding is exempted by the Block Exemption
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.

(140) The ‘market position of the supplier’ is of main import-
ance 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.

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 common
vertical restraints and combinations of vertical restraints
are analysed below following the methodology of
analysis developed in paragraphs 120 to 136.

(141)

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 obligations, 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-
competitive effects, while non-compete obligations
exceeding five years are for most types of investments
not considered necessary to achieve the claimed
to
efficiencies or the efficiencies are not sufficient
outweigh their foreclosure effect. Dominant companies
may not impose non-compete obligations on their
buyers unless they can objectively justify such commer-
cial practice within the context of Article 54.

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 collusion 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.

(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 expected. It
is only likely that competing suppliers will be foreclosed
if they are significantly smaller than the supplier apply-
ing the non-compete obligation. Foreclosure of com-
petitors 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

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covered by the Block Exemption, 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.

on the market. The stronger his dominance, the higher
the risk of foreclosure of other competitors.

(143)

In cases where the market share of the largest supplier
is below 30 % and the market share of the five largest
suppliers (concentration rate CR5)
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, compete
fiercely on a particular market.

(144)

‘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 distri-
bution level.

(145)

‘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.

(147) Where the agreement concerns supply of a final product
at the wholesale level, the question whether a compe-
tition 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 whole range of
products (for example frozen foodstuffs). In the latter
case, it is not efficient for a manufacturer selling only
one product to set up his own wholesaling operation.
In that case anti-competitive effects may arise below the
In addition, cumulative effect
level of dominance.
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
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.

to arise,

(146) 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 cumulative 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 significant foreclosure effects

(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 if
the total tied market share is less than 40 % 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 but

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none is dominant, a cumulative foreclosure effect is
unlikely if the total tied market share is below 30 %.

(capital market imperfections) may be particularly rel-
evant.

(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 possible foreclosure
In that case intervention by
effect will be limited.
the EFTA Surveillance Authority below the level of
dominance is unlikely.

(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.

(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 collusion
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 purchases to a large
extent with one supplier. Quantity-forcing may for
example take the form of minimum purchase require-
ments or non-linear pricing, such as quantity rebate
schemes, loyalty rebate schemes or a two-part tariff
(fixed fee plus a price per unit). Quantity-forcing on the
buyer will have similar but weaker foreclosure effects
than a non-compete obligation. The assessment of all
these different forms will depend on their effect on the
market. In addition, Article 54 specifically prevents
dominant companies from applying English clauses or
fidelity rebate schemes.

(153) Where appreciable anti-competitive effects are estab-
lished, the question of a possible exemption under
Article 53(3) arises as long as the supplier is not
dominant. For non-compete obligations, the efficiencies
described in paragraph 116, points 1 (free riding
between suppliers), 4, 5 (hold-up problems) and 7

(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).

(155)

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 53(3). In the case of
high relationship-specific investments, a non-compete
obligation exceeding five years may be justified. A
relationship-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.
General or market-specific investments
in (extra)
capacity are normally not relationship-specific invest-
ments. 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 suf-
ficient to justify the exemption of a foreclosure effect
on the market. The instances of capital market imperfec-
tion, 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 paragraph 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
in case for example of a new point of
possibility,
distribution, to delay repayment for the first one or two
years until sales have reached a certain level.

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(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 agree-
ment, as for example in the context of franchising.

specific. Accordingly, it is unlikely that the conditions
for exemption are fulfilled.

(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 obli-
gation is likely to improve the distribution efforts of the
exclusive distributor in his territory (see paragraphs 161
to 177).

(160) Example of quantity forcing:

(159) Example of non-compete:

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

from X.

type of product

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
In
return X is offering financing and equipment at favour-
able 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
the
becomes the property of
competing producers are small, twelve in total with the
biggest having a market share of 20 %, and engage in
similar contracts with different durations. The producers
with market shares below 10 % often have contracts
with longer durations and with less generous termin-
ation 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.

the buyer. Most of

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 efficiencies of the outlet exclusivity,
which the market leader claims result from reduced
transport costs and a possible hold-up problem concern-
ing 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 exclusivity and the stocking cabinets
do not contain special know-how and are not brand

Producer X’s tied market share is 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 shows that the resellers
often have difficulty in 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.

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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 com-
petition and market partitioning, which may in particu-
lar facilitate price discrimination. When most or all of
the suppliers apply exclusive distribution this may
facilitate collusion, both at the suppliers’ and distribu-
tors’ level.

(162) Exclusive distribution is exempted by the Block Exemp-
tion when the supplier’s market share does not exceed
30 %, even if combined with 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
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.

(163) The market position of the supplier and his competitors
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.

(164) 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 distributor 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 competition 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 competition will be reduced. Such cumulat-
ive effect situations may be a reason to withdraw the
benefit of the Block Exemption when the market shares
of the suppliers are below the threshold of the Block
Exemption.

(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. Foreclosure of other
suppliers does not arise as long as exclusive distribution
is not combined with single branding.

(166) Foreclosure of other distributors is not a problem if
the supplier which operates the exclusive distribution
system appoints a high number of exclusive distributors
in the same market and these exclusive distributors
are not restricted in selling to other non-appointed
distributors. Foreclosure of other distributors may how-
ever 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
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.

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(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.

(170) A manufacturer which chooses a wholesaler to be his
exclusive distributor will normally do so for a larger
territory, such as a whole EEA State. As long as the
wholesaler can sell the products without limitation to
downstream retailers there are not likely to be appreci-
able anti-competitive effects if the manufacturer is not
dominant. A possible loss of intra-brand competition
at the wholesale level may be easily outweighed by
efficiencies obtained in logistics, promotion 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 market share
above 30 % usually has enough bargaining 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.

(172) The combination of exclusive distribution with exclusive
purchasing increases the possible competition risks of
reduced intra-brand competition and market partition-
ing which may in particular facilitate price discrimi-
nation. 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 supplies for the
particular brand directly from the manufacturer, elimin-
ates 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 conditions of sale. The combination
of exclusive distribution 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
consumers. Lack of such efficiencies may also lead to
withdrawal of the Block Exemption where the market
share of the supplier is below 30 %.

(173) The ‘nature of the product’

is not very relevant to
assessing the possible anti-competitive effects of exclus-
ive distribution. It is, however, relevant when the issue
of possible efficiencies is discussed, that is after an
appreciable anti-competitive effect is established.

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

(171) 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
the combination of
foreclosure,
exclusive distribution and single branding may be pro-
competitive by increasing the incentive for the exclusive
distributor to focus his efforts on the particular brand.
Therefore, in the absence of such a foreclosure effect,
the combination of exclusive distribution with non-
compete is exemptable for the whole duration of the
agreement, particularly at the wholesale level.

(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
EEA State for small EEA States, and to a region for
larger EEA 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

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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 sup-
plier A from the producer himself, and arbitrage by
wholesalers or retailers is practicable because the trans-
port costs are relatively low compared to the value of
the product. The wholesalers are not under a non-
compete obligation. Retailers also sell a number of
brands of competing suppliers, and there are no exclus-
ive or selective distribution agreements at the retail
level. On the EEA 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 competitors
and are also present on each national market, with
market shares varying between 20 % and 5 %. The
remaining producers are national producers, with small-
er 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 makes it likely,
if anti-competitive effects exist, that the conditions for
exemption are fulfilled.

producers sell their products in general through other
retailers, in particular because the exclusive distributors
little
of the four largest suppliers show in general
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 campaigns and strong brand images, where-
as 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 compe-
tition 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
share
under
threshold,
Article 53(3) may not be justified and withdrawal of the
Block Exemption may be necessary.

exemption

(176) Example of multiple exclusive dealerships in an oligopo-

listic market:

(177) Example of exclusive distribution combined with exclus-

ive purchasing:

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 a district of the
town for large towns. In most 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 composed of small local
producers, the largest of
these producers having a
market share of 5 % on the national market. These local

Manufacturer A is the EEA market leader for a bulky
consumer durable, with a market share of between 40 %
and 60 % in most national retail markets. In every EEA
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

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exclusively from the national subsidiary of manufac-
turer 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 differences
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 purchasing
obligation imposed on the retailers. The exclusive
purchase obligation helps to keep markets and territori-
es 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.

The possible efficiency arguments of this system, linked
to economies of scale in transport and promotion
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.

(179) Exclusive customer allocation is exempted by the Block
Exemption when the supplier’s market 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 allo-
cation and selective distribution is normally hardcore,
as active selling to end-users by the appointed distribu-
tors 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 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.

2.3. Exclusive customer allocation

(178)

In an exclusive customer allocation agreement, the
supplier agrees to sell his products only to one distribu-
tor 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 partition-
ing, which may in particular facilitate price discrimi-
nation. When most or all of the suppliers apply exclusive
customer allocation, this may facilitate collusion, both
at the suppliers’ and the distributors’ level.

(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. Allocation of final con-
sumers is unlikely to lead to any efficiencies and is
therefore unlikely to be exempted.

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(183) Example of exclusive customer allocation:

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 customers. To ensure that
distributors would specialise the company assigned to
each distributor an exclusive class of customers and
prohibited active sales to each other’s exclusive cus-
tomer classes. After five years, all the exclusive distribu-
tors 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 upgrading their
products.

As the exclusivity is of limited duration and helps to
ensure that the distributors may recoup their invest-
ments 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.

(185) 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 suppliers or buyers. To
assess the possible anti-competitive effects of selective
distribution under Article 53(1), a distinction needs to
be made between purely qualitative 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 (37). 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 outside Article 53(1) for lack of anti-competitive
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 requirement, having
regard to the nature of the 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 (38). 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.

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 possibilit-
ies 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.

(186) Qualitative and quantitative selective distribution is
exempted by the Block Exemption up to 30 % market
share, even if combined with other non-hardcore verti-
cal restraints, such as non-compete or exclusive distri-
bution, provided active selling by the authorised dis-
tributors to each other and to end users is not restricted.
The Block Exemption 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

(37) 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.

(38) See judgments of the Court of Justice of the European Communi-
ties in Case 31/80 L’Oréal v PVBA [1980] ECR 3775, para-
graphs 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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does not generally bring about sufficient efficiency
to counterbalance a significant
enhancing effects
If appreciable
reduction in intra-brand competition.
anti-competitive effects occur, the benefit of the Block
Exemption 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 or in the case of
cumulative effects resulting from parallel networks of
selective distribution.

(187) The market position of the supplier and his competitors
is of central
importance in assessing possible anti-
competitive effects, as the loss of intra-brand compe-
tition can only be problematic if inter-brand compe-
tition 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 distribution system and on
condition that the selection criteria applied are necessary
to ensure efficient distribution of the goods in question.
The reality, however, seems to be that selective distri-
bution is often applied by a number of the suppliers in
a given market.

(188) The position of competitors can have a dual significance
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 out-
weighed by sufficient inter-brand competition. How-
ever, when a majority of the main suppliers apply
selective distribution there will be a significant loss of
intra-brand competition and possible foreclosure of
certain types of distributors as well as an increased risk
of collusion between those major suppliers. The risk of
foreclosure of more efficient distributors has always
been greater with selective distribution than with exclus-
ive distribution, given the restriction on sales to non-
authorised dealers in selective distribution. This is
designed to give selective distribution systems a closed
character, making it
impossible for non-authorised
dealers to obtain supplies. This makes selective distri-
bution particularly well suited to avoid pressure by price
discounters on the margins of the manufacturer, as well
as on the margins of the authorised dealers.

(189) Where the Block Exemption applies to individual
networks of selective distribution, withdrawal of the
the Block
block exemption or disapplication of
Exemption may be considered in case of cumulative
effects. However, a cumulative effect problem is
unlikely to arise when the share of 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
five largest
vary depending on whether or not all
suppliers apply selective distribution. 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 53(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 distribution 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 econom-
ies 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 manufacturers of
branded products.
in general take time and
considerable investment for excluded retailers to launch
their own brands or obtain competitive supplies else-
where.

It will

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(191)

‘Buying power’ may increase the risk of collusion
between dealers and thus appreciably change the analy-
sis of possible anti-competitive effects of selective
distribution. Foreclosure of the market 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.

(192) Article 5(c) of the Block Exemption provides that the
supplier may not impose an obligation causing the
authorised dealers, either directly or indirectly, not to
sell the brands of particular competing suppliers. This
condition aims specifically at avoiding horizontal col-
lusion 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.

foreclosure to other suppliers.

(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 distri-
bution and a non-compete obligation may pose a risk
of
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.

In general

the case is strongest

(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.
for new
products, for complex products, for products 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 combination of selective and
exclusive distribution is likely to infringe Article 53 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 53(3) if it is indispensable to protect substantial
and relationship-specific investments made by the auth-
orised dealers (efficiency 4 in paragraph 116).

(196) To ensure that the least anti-competitive restraint is
chosen, it is relevant to see whether the same efficiencies
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 inhabitants in each province or
urban area. Manufacturer A has 6 competitors in this
market. Its largest competitors, 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

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sold in shops which are not member of A’s selective
distribution network. Channels of distribution are vari-
ous: 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.

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 quantitative 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
effects:

selective distribution with cumulative

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 prod-
ucts, with no strong brand image.

In this market, access by general price discounters to
the five leading brands is denied. Indeed, the require-
ment that this type of article represents at least 30 % of
the activity of the dealers and the criteria on presentation
and pre-sales services rule out most price discounters
from the network of authorised dealers. As a conse-
quence, 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 selec-
tive 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 systems,
which results in a coverage ratio of selective distribution
of 85 %. The criteria for access to the selective distri-
bution networks are remarkably uniform amongst
manufacturers: shops are required to have trained
personnel and to provide pre-sale services, 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

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
franchisee for the use of the particular business method.
Franchising may enable the franchisor to establish,

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with limited investments, a uniform network for the
distribution of his products. In addition to the provision
of the business method, franchise agreements usually
contain a combination of different vertical restraints
concerning the products being distributed, in particular
selective distribution and/or non-compete
and/or
exclusive distribution or weaker forms thereof.

(200) The coverage by the Block Exemption 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 applies up to the 30 % market share
threshold for the franchisor or the supplier designated
by the franchisor (39). 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 con-
ditions for exemption.

by

the

falls

franchisee

2) A non-compete obligation on the goods or services
purchased
outside
Article 53(1) when the obligation is necessary to
maintain the common identity and reputation of
the franchised network. In such cases, the duration
of the non-compete obligation is also irrelevant
under Article 53(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

(39) See also judgment of the Court of Justice of the European
Communities in Case 107/82 AEG [1983] ECR 3151, para-
graph 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.

lay-out of

also produces the colouring liquids. The quality and
freshness of the liquid is of vital importance to produc-
ing 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
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 advertising and
the operating manual
ensure the confidentiality of
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 agree-
ments are concluded for a duration of 10 years.

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, sometimes
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 53(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

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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 the conditions for
exemption under Article 53(3) in as far as the obli-
gations contained therein fall under Article 53(1).

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.

2.6. Exclusive supply

(202) Exclusive supply as defined in Article 1(c) of the Block
Exemption 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 EEA 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 EEA or that there is only one
buyer inside the EEA for the purposes of a specific use.
For intermediate goods or services, exclusive supply is
often referred to as industrial supply.

(203) Exclusive supply as defined in Article 1(c) of

the
Block Exemption is exempted by Article 2(1) read in
conjunction with Article 3(2) of the Block Exemption
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.

(204) 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 problem 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

(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
the
supply share, and the longer the duration of
exclusive supply, the more significant the foreclosure is
likely to be. Exclusive supply agreements shorter than
five years entered into by non-dominant companies
usually require a balancing of pro- and anti-competitive
effects, while agreements lasting longer than five years
are for most
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.

types of

(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 signifi-
cantly smaller than the foreclosing buyer.

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.

(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 problem.
However, often there are significant entry barriers.

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(208) Countervailing power of

is

suppliers

relevant, as
important suppliers will not easily allow themselves to
from alternative buyers. Foreclosure is
be cut off
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 combination of exclus-
ive 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 manufac-
turer that uses a certain input usually has more flexibility
to respond to the demand of his customers than the
wholesaler/retailer has 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.

(210) For homogeneous intermediate products, anti-competi-
tive 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.

(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 alternative.

(213) Example of exclusive supply:

On a market for a certain type of components (inter-
mediate 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.

(211) Where appreciable anti-competitive effects are estab-
lished, an exemption under Article 53(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.

(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 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.

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2.7. Tying

may also lead to higher entry barriers both on the
market of the tying and on the market of the tied
product.

(215) 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 54 (40). Article 53 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 53 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 purchased
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 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 consequences of the tying. Lastly, tying

(218) Tying is exempted by Article 2(1) read in conjunction
with Article 3 of the Block Exemption 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.

(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 combined with
a non-compete obligation in respect of
the tying
product, this considerably strengthens the position of
the supplier.

(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.

(40) Judgment of the Court of Justice of the European Communities
in Case C-333/94 P Tetrapak v Commission [1996] ECR I-5951,
paragraph 37.

(222) Where appreciable anti-competitive effects are estab-
lished, the question of a possible exemption under
Article 53(3) arises as long as the company is not

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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
therefore
passed on to the consumer. Tying is
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
realised equally efficiently by
effects
requiring 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 53(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 53(1), especially where the supplier of
the
(financial)
tying product does not derive a direct
benefit
the tied
product.

from designating the suppliers of

cannot be

(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 53(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.

(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 paragraph 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 consumers.

2.8. Recommended and maximum resale prices

(225) 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 paragraphs 46 to
56 concerning RPM — covered by the Block Exemption
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.

(226) 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.

(227) 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 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 circumstances the practice of imposing a
maximum resale price or recommending a resale price
may infringe Article 53(1) if it leads to a uniform price
level.

(228) The second most important factor for assessing possible
anti-competitive effects of the practice of maximum and
the market position of
recommended prices

is

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competitors. Especially in a narrow oligopoly,
the
practice of using or publishing maximum or rec-
ommended prices may facilitate collusion between the
suppliers by exchanging information on the preferred
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 53(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.