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WS 8 – DISTRIBUTION AGREEMENTS

Introduction to Question structure EC OR UK

Article 81 State that Art 81 prohibits:

‘all agreements between undertakings, decisions by associations of undertakings and concerted
practices which may affect trade between Member States and which have as their object or effect the
prevention, restriction or distortion of competition within the common market.’

Article 81(2) ‘Any agreement or decisions prohibited pursuant to this article shall be automatically void.’

Chapter I Section 2 Competition Act 1998: ‘agreements between undertakings, decisions by
Prohibition associations of undertakings or concerted practices which:

(a) may affect trade within the UK, and
(b) have as their object or effect the prevention, restriction or distortion of competition within the UK,

are prohibited unless they are exempt.’

2(4) says any agreement prohibited by section 2(1) is void

Article 81 EC - Does agreement infringe article 81 or the chapter I prohibition?

1 What type of agreement is it?

1. Exclusive Distribution Agreement

S agrees not to appoint another distributor in D’s territory and to not supply goods itself in that
territory. Therefore, D is the only outlet for goods in the territory (excluding passive sales from
elsewhere)

S commonly requires D not to sell competing products and meet sales targets.

2. Sole Distribution Agreement

S agrees not to appoint another distributor in D’s territory but retains the right to sell the goods in D’s
territory himself.

3. Selective Distribution Agreement – for luxury products or tech products

S controls who D can sell to.
Helps maintain brand image and luxuriousness of item
Allows customers a specialist and official after-sales or repair service, if goods so require.

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Does
agreement
infringe article
81 or the
chapter I
prohibition?

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Requirements to infringe:

1 Art 81(1) requires either:

• Agreements:
o State whether the agreement is:
 Formal
 Informal
 Non-binding
 Verbal
o Look at terms of the agreement – look out for “D buys from S” and “D can
resale”.

• decisions by associations of undertakings – trade associations
• decisions by concerted practices

2 Between two or more undertakings.

State that the two undertakings (companies) are independent of each other

3 Which may affect trade to an appreciable extent (NAOMI) between member states
(article 81) or UK (Ch.I)

TEST – is the effect felt in the UK OR is it beyond one MS border??

For example:
• only one distributor for an area – therefore only 1 route between UK and an MS

Is the relevant agreement/decision/practice alters or has the potential to alter the natural
flow of trade between member states.

NB – look for hint in the question – normally told to discuss either EC or UK or both?

4 Object or effect is the prevention, restriction or distortion of competition within the
common market (article 81) or within the UK (Chapter I)

Art 81(1) & Chapter I (s.2) wording is the same:

The following list if from Art.81(1).. if within here then term is OBJECT:

(a) directly or indirectly fix purchase or selling prices or any other trading conditions;
(b) limit or control production, markets, technical development, or investment;
(c) share markets or sources of supply;
(d) apply dissimilar conditions to equivalent transactions with other trading parties,
thereby placing them at a competitive disadvantage;
(e) make the conclusion of contracts subject to acceptance by the other parties of
supplementary obligations which, by their nature or according to commercial usage,
have no connection with the subject of such contracts.

object – look at specific terms of agreement
effect – look at impact on common market

NB – do not consider the intentions of the parties

Clause Object Effect
Is it in the Art 81(1) / CH I list?

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2. Breach of article 81: (i.e. affects trade between member states)
consequence
of a. 81(2) says offending term is void. Agreement is void unless term can be severed which is unlikely.
infringement So agreement is unenforceable.

b. EC commission can fine the parties up to 10% of worldwide turnover under article 23 of
regulation 1/2003 for both parties

c. EC shall order the parties to cease infringing activities and investigate parties

d. As article 81 is directly effective, third parties suffering loss from infringement can bring claims for
damages and / or injunctions in national courts.

e. If OFT is investigating – Dir disqualified for max 15 years s9A CDPA86

Breach of Chater I prohibition: (i.e. only affects trade within UK)

a. Agreement void under S.2(4) Comp Act – unenforceable

NB – beware – where S is trying to stop a D selling outside of his exclusive area – can be used as
defence by D because if agreement is VOID then he can continue breaching the ban… should
inform client not to sue D.. advice would be to renegotiate the terms.

b. Office of Fair Trading (NCA) OFT can fine parties up to 10% of worldwide turnover.

c. Third parties suffering loss from infringement can bring claims for damages.

d. Directors of offending companies can be disqualified for up to 15 years under the s.9A
Enterprise Act 2002.- but only if OFT get involved.

3(1). ARTICLE 81 INFRINGEMENT (CH I infringement below)
Can the
parties avoid Argue situation falls outside scope of article 81. Two important examples: parent and subsidiary and
Article 81 ‘genuine agency agreements.’
infringement?

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Avoidance methods:

1 Severance

Check how many terms are anti-comp..

• Only if there is some substance left in the agreement.
• Are the terms central to the agreement
• Use the Blue pencil test..

If there are many terms that need to be severed then this option is not available.

2 Notice on Agreements Of Minor Importance (NAOMI)

Para 1 says agreements do not fall under 81(1) if effect on trade is not appreciable.

Para 4 says that if notice applies, the commission will not initiate proceedings or a fine.
- DISADVANTAGE – this is only a notice – non binding

Third parties may still claim though.

Requirements for protection:

1. Vertical agreement between undertakings

2. if undertakings are competitors then neither has an individual market share exceeding
10% of relevant markets affected by agreement, or

if undertakings are non-competitors, neither has an individual market share exceeding
15% of relevant markets affected by agreement. (para 7)

NB – Making this less advantageous than the BLOCK EXEMPTION because the
% is lower.

3. Para 11 states the agreement must not contain any ‘hardcore’ restrictions which are:

if horizontal:

 price –fixing
 limiting output/sales
 allocation of markets or consumers

if vertical:

 restricting B’s ability to determine price
 restricting territory B may sell to

N.B. Restricting territory does not include:

 restriction of active sales into exclusive territory of someone else
 restriction of sales to end users by a buyer operating at the wholesale level of
trade

3 NAAT

NOT strictly an avoidance technique… simply indicates which jurisdictional law applies.

TEST – MARKET SHARE:

 if share exceeds 5% = presumption is that there is an effect on trade between MS’s
therefore EC law applies.
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3(2). CHAPTER 1 PROHIBITION INFRINGEMENT
Can parties
avoid Chapter
I prohibition?
21.2.6

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Avoidance methods:

1 Severance

Check how many terms are anti-comp.. Blue pencil test..

If there are many terms that need to be severed then this option is not available.

2 Notice on Agreements Of Minor Importance (NAOMI)

The APPRTECIABILITY test is used in the UK. Essentially the same as NAOMI criteria:

Para 1 says agreements do not fall under 81(1) if effect on trade is not appreciable.

Para 4 says that if notice applies, the commission will not initiate proceedings or a fine.
- DISADVANTAGE – this is only a notice – non binding

Third parties may still claim though.

Requirements for protection:

1. Vertical agreement between undertakings

2. if undertakings are competitors then neither has an individual market share exceeding
10% of relevant markets affected by agreement, or

if undertakings are non-competitors, neither has an individual market share exceeding
15% of relevant markets affected by agreement. (para 7)

NB – Making this less advantageous than the BLOCK EXEMPTION because the
% is lower.

3. Para 11 states the agreement must not contain any ‘hardcore’ restrictions which are:

if horizontal:

 price –fixing
 limiting output/sales
 allocation of markets or consumers

if vertical:

 restricting B’s ability to determine price
 restricting territory B may sell to

N.B. Restricting territory does not include:

 restriction of active sales into exclusive territory of someone else
 restriction of sales to end users by a buyer operating at the wholesale level of
trade

3 NAAT

NOT strictly an avoidance technique… simply indicates which jurisdictional law applies.

TEST – MARKET SHARE:

 if share exceeds 5% = presumption is that there is an effect on trade between MS’s
therefore EC law applies.
 If share does not exceed 5% = presumption there is no effect therefore national law
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Advice to Advice depends on:
client
 If agreement still draft then advice to remove or amend terms

 If too late and contentious then advice of consequences and penalties

Article 82 EC – MOST PROBABLY MCQ IN EXAM

Article 82: ‘Any abuse by one or more undertakings of a dominant position within the common
market or in a substantial part of it shall be prohibited as incompatible with the common
market insofar as it may affect trade between Member States.’

Such abuse may, in (a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading
particular, consist in: conditions
(b) limiting production, markets or technical development to the prejudice of consumers
(c) applying dissimilar conditions to equivalent transactions with other trading parties,
thereby placing them at a competitive disadvantage
(d) making the conclusion of contracts subject to acceptance by the other parties of
supplementary obligations which, by their nature or according to commercial usage,
have no connection with the subject of the contracts.

Question Structure 1. one or more undertakings

2. of a dominant position?

(a) Product market – Test – to what extent are products interchangeable??
⇒ If the PM is narrow = high dominance (larger share of smaller market)
⇒ If the PM is wide = low dominance (smaller share of larger market)

(b) Geographic market – Test – to what extent are trading conditions the same?
⇒ Smaller area the more unique the product eg Haggis

(c) Dominance is presumed at 40%, yet the presumption is rebuttable.

3. Abuse of that position?
Essentially behaviour which is not normal commercial behaviour and is detrimental to
consumers or competitors.

Can affect consumers, such as high prices or limiting supply, or competitors such as
predatory pricing.

4. Abuse effects trade between MS / within UK

Effect on trade must be appreciable

5. Consequences:
Same as Art 81.

The Chapter II Section 18 Competition Act 1998:
Prohibition
‘..any conduct on the part of one or more undertakings which amounts to the abuse of a
dominant position in a market is prohibited if it may affect trade within the UK.’

18(2) details examples of conduct which may amount to abuse:

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(a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading
conditions
(b) limiting production, markets or technical development to the prejudice of consumers
(c) applying dissimilar conditions to equivalent transactions with other trading parties,
thereby placing them at a competitive disadvantage

making the conclusion of contracts subject to acceptance by the other parties of
supplementary obligations which, by their nature or according to commercial usage, have no
connection with the subject of the contracts.
Question involving amending terms so that they comply with the Block Exemption:

CLAUSE WHY ANTI-COMP? DOES B/E DEAL WITH THE ISSUE ADVICE TO CLIENT

Exclusivity NOT prohibited N/A

Minimum purchase Non-compete obligation Art 5(a) 1. Remove
order 2. Amend:
 limit it to less than 5 years
(art5(a)
 reduce to less than 80% to
comply with art 1(b)

Price fixing Art 4(a) – Hardcore prohibition 1. Remove
2. Amend so that there is a maximum or
a recommended price (Art 4(a)) (only
minimum is hardcore)

Export Ban Depends on whether active of 1. Amend so that any reference to the
passive: internet/email is removed
- Active = D goes to C
- Passive = C goes to D (internet)

IF passive:
NOT allowed under Art 4(b)

IF active:
Allowed only if territory of another
exclusive disti OR if supplier
reserved for itself

Not to sell competing Non Compete obligation Art 5(a) 1. Limit to less than 5 years
products

Blanket export ban Export ban under Art 4(b) 1. Remove
2. Amend so that it only bans active
sales in territory of another exclusive
disti OR supplier reserved area.

No Challenge of Not prohibited Leave it in
IPRS (trademarks)
Background – Seller could prevent
competitors from selling their products
in the market using IP rights (sue for
breach and get injunction stopping them
selling).
Effect – this stops the D from suing the
S on trademark issues. If D sues S for

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TM then they could potentially lose out
as unable to sell due to injunctions etc.

Restraint of trade Non compete obligation Art 5(b) 1. Amend – reduce the time frame to 1
year to comply with Art 5(b)
minimum. MUST be competing
goods

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