INTERNATIONAL REPORT ON QUESTION B
by Marie Malaurie-Vignal
Associate Professor of the
University of Versailles Law Faculties – Saint-Quentin en Yvelines (France)
To what extent may or must competition law control
a) the freedom of a supplier to choose one or several distribution channels for the same product?
b) the cumulative effect of choice of the same distribution channel by the majority of suppliers operating within the same market?
The rapporteur preferred a pragmatic analysis to an abstract analysis, and drew up a question-by-question synthesis of the works.
Community law as known is not dealt with per se.
The regulation of 22 December 1999 governing vertical restrictions and the guidelines of 13 October 2000 will, nevertheless, be quoted on a regular basis.
The report is based on a comparison of national regulations, as emerges from the national reports.
The reports were drawn up by the following:
-J. Budai, J. Szalatkay, T. Bihary, G. Szathmary, Stadler (Hungary)
-Laurent du Jardin (Belgium)
-Izumi Hayashi (Japan)
-Michel Ponsard (France)
-Adriano A. Levi and L. Biglia (Italy)
-Jean-Marc Reymond (Switzerland)
-Kassie Smith (Great Britain)
-Franziska Wagner (Germany)
The national rapporteurs are well deserving of our thanks for the extent of their work and the quality of their reports.
The international rapporteur begs forgiveness in advance for any failure to comprehend the analyses.
A. . Question 1: Freedom to organise the distribution network?
- Principle
1. 1. Freedom to organise the distribution network is accepted by all legal systems
* Certain legal systems, such as German law, French law or Belgian law, link freedom to organise distribution networks to the contractual freedom set out in common contract law (ex: article 1134 of the Belgian and French civil codes).
Thus, for example, this freedom to organise was established as a « basic principle » by the French Competition Council[1].
* Contractual freedom to organise a network may also be based on economic liberalism.
This is the case in German law, which creates a link between the freedom to organise and a market economy.
In Swiss law, contractual freedom is one of the aspects of the right to economic freedom guaranteed by the federal Constitution[2].
In Japan, contractual freedom is established in the guidelines governing distribution systems and commercial practices in the Antimonopoly Act of 11 July 1991 (known as «GLD»).
- Restrictions
1.2. In all legal systems, contractual freedom is not absolute. There are two types of restrictions.
* In Western countries («old Europe»), contractual freedom is restricted by national competition law, and community law where this is applicable.
National rights are largely inspired by community legislation.
Comparisons with the EU legal system may arise from the law.
For example, in Germany, the 7th amendment to the law governing competition (ARC) contains a general stipulation similar to Article 81 of the Treaty. This is also the case in Great Britain[3], France or Belgium[4].
Comparisons may be enhanced by the competition authorities. For example[5], in France, jurisdictions and competition authorities do not hesitate to use the guidelines of 13 October 2000 on vertical restrictions as a guide to analysis – even when the distribution contract does not affect inter-community trading and is thus not subject to community regulations.Even in Switzerland, which is not an EU member, national law is largely inspired by community law. In Switzerland, all economic operators are bound to draw up «contracts in accordance with the market and the normal conditions of the branch» (Article 13 of LCart).
* In Japan, freedom to organise a distribution network is controlled by the ban on unfair commercial practices.
* Contractual freedom is also controlled by national distribution rights which may impose a compulsory framework. For example, in Belgium and France, distribution contracts such as commercial agent contracts, VRP contracts or integrated distribution contracts (concession, selective distribution, franchises) are subject to more or less restrictive regulations. This poses a problem of compatibility between competition law and the law governing special contracts. The concurrence of two legal systems, competition law and the law governing distribution contracts, may be resolved by the pre-eminence of competition law.
For example, the Belgian law of 14 July 1991 governing commercial practices and consumer information (LPCC), and in particular Article 93 which forbids «any act contrary to honest commercial usage» is interpreted as having the objective of «ensuring effective competition in the market as such»[6].
The principle of predominance of the rules of competition over the rules of fair competition is established. But this is not always the case. The definition of a commercial agent may, in Belgian law, be understood in a different manner, depending on whether this concerns competition law and special laws concerning cancellation of exclusive-concession contracts (Law of 13 April 1995).
Question 2.1: The choice of a single distribution channel: principle and conditions
2.1-1: Western legal systems recognise all three large categories of integrated distribution: selective distribution, exclusive distribution and franchising, which afford the distributor a privileged status in terms of distribution of products and services from the supplier. Distributors may be bound to the obligation of exclusive or quasi-exclusive purchase which enhances their status of dependence.
It may be that traders are not independent and distribute products or services as commercial agents.
We will, however, observe that the Japanese report deals only with exclusive distribution contracts, but not with franchise or selective distribution contracts.
2.1-2. Pro-competition effect of distribution agreements?
Certain legal systems approve distribution networks. In Italy, for example, the regulating authorities (AA) declared that, on principle, exclusive distribution may develop positive cooperation and improve distribution efficiency to the benefit of competition between manufacturers and distributors of different brand names – thus the agreement does not lead to complete market closure. Therefore the AA’s solutions are tinged with casuistry in order to verify whether or not market closure exists.
In Great Britain, the competition authorities (OFT) also accept the beneficial character of distribution agreements. The British authorities place great emphasis on indifference of the mode of distribution. It matters little whether the agreement is exclusive distribution, exclusive purchase, selective distribution or franchise – what is important is to observe the effect of the network on the market.
2.1-3. Western legal systems recognise common prohibitions tempering the abovementioned principle of freedom to organise. These prohibitions may be set out either in a regulation text (community regulations or laws) or by the controlling authorities (as decision-making practices or guidelines).
A. A demand common to all distributionnetworks: the distributor’s tariff freedom
* The distributor’s tariff freedom is emphasised in most legal systems. It is expressed as a legal prohibition of any imposition of a retail price to the distributor forming part of a network. Switzerland[7], Germany[8], France[9] and Great Britain[10] do not allow a minimum retail price to be imposed. This prohibition (or assumption of unlawfulness) holds good for all distribution systems where the retailer is an independent trader (exclusive, selective or franchise distributor).
Germany even imposes a ban on a maximum price and a recommended price (imminent reform has abandoned the latter restriction). On the other hand, Great Britain does not condemn an imposed maximum or recommended price on principle (OFT, Competition Law Guidelines on Vertical Agreements, § 7.7, a, December 2004).
In Japan, the ban on an imposed retail price covers exclusive distribution contracts, and this is sanctioned as an unfair commercial practice (2nd part, Chapters 2 and 3 (3) of the GLD).
In Hungary, the authorities have declared that imposed retail prices constitute unfair competition (report, p. 13 and 14).
Certain States impose a ban per se, regardless of the effect on the market (France, Germany[11]).
It will be observed that Belgium, in its Law of 5 August 1991, transposes Articles 81 and 82 of the Treaty, but there is no specific national stipulation prohibiting price impositions.
Likewise, Italy does not seem to focus on this question. There is a certain amount of pragmatism here (report p. 5: «in a closed distribution system such as a specialist network, the prices applied by members of the network necessarily have a narrow margin of fluctuation»).
- If the distributor is not independent, e.g. a commercial agent, his principal may force a retail price on him.
B. Specific rules on exclusive purchase agreements
- Most States do not have specific competition rules on the matter[12].
From the point of view of competition, such an agreement is generally viewed with suspicion since it hinders inter-brand competition.
In Great Britain, the competition authorities OFT expressly laid down that such a clause is liable to distort competition[13].
However, no State decrees a ban a priori. An exclusivity undertaking may be positive if it is justified by compensation such as territorial exclusivity and/or a loan granted to the distributor.
- In Hungary, for example, exclusive purchase agreements are governed by an exemption decree (Government Decree n° 55/2002 (III. 26) («VCSM»).
- Only Germany has specific competition regulations to control abuse (Article 16 of the ARC Law[14]). The report emphasises that exclusive-purchase undertakings are not necessarily lawful when associated with a loan, but are more likely to be so and even for a longer period in case of beer contracts.
- The term of the exclusive supply clause may be subject to specific regulations, as in France (Commercial Code, Article L. 330-1, restricting such undertakings to 10 years). The term is also limited by the community regulation of 22 December 1999 (Article 1 in combination with Article 5 restricting the undertaking to 5 years, although with certain exceptions), which inspires certain legal systems, such as in Hungary (Article 4 of the 2002 exemption decree («VCSM»)), where the system imitates the community regulation of 1999, restricting the term of the exclusive purchase clause to 5 years).
C. Exclusive distribution
Exclusive distribution agreements are viewed in a different way by the various States.
- They may be viewed with approval by certain States as favouring competition. This is the case in Italy, since there are other networks concerning competing products with the presence of other operators on the internal market. The agreement is subject to a ban if it stems from a business in a strong position of market domination (the case of Costituzione Rete Dealer GSM). Even in this case, an exemption may be made if the agreement is limited in time and economically justified (déc. Ina/Banco di Roma n° 1501, 13 October 1993).
- On the other hand, Great Britain, in accordance with the guidelines laid down by the competition authorities, considers that exclusive distribution contracts are liable to affect competition (see § 7.7, «guidelines on vertical agreements»; December 2004) – with no account taken of the distinction between active and passive competition – except when the regulation of 22 December 1999 is applicable.
In the same way, Switzerland considers the practice is detrimental to competition (Law of 20 June 2003, Article 5, paragraph 4 of LCart (federal law governing cartels and other restrictions on competition)):«(…) distribution contracts attributing territories are assumed to entail suppression of effective competition, when sales by other authorised suppliers are excluded». The rule is thus more rigorous than in community law, since it makes no distinction between active and passive competition.
However, Chapter 5 of the Communication of 18 February 2002 in relation to vertical agreements enacted by the competition authorities, Comco, makes provision, due to reasons of economic efficiency, for territorial exclusivity agreements «insofar as a trader may honour spontaneous orders from individual customers (passive sales) and retail by the trader’s customers are not also restricted». Chapter 5 therefore authorises territorial exclusivity provided this does not prevent passive sales. Moreover, the doctrine interprets the ban set out in Chapter 5, paragraph 4 of the LCart law as covering only passive sales.
- In Hungary, contracts stipulating territorial exclusivity must be subject to individual exemption, and are viewed with suspicion. Exemption is granted if the agreement is drawn up for a limited period of time, but the report does not specify the other lawfulness criteria.
- France is neutral with regard to this type of agreement, and signals its unfairness with regard to competition by making the community distinction between active and passive sales (an exclusive distribution agreement is only lawful when it does not prevent passive sales; on the other hand, the contract may prevent the concessionary from making active sales outside the exclusion zone).
- Italy holds a rather positive view of this type of agreement (supra), but its lawfulness is analysed from another angle; there is no emphasis on the distinction between active and passive competition. The rapporteur feels that the criteria determining the lawfulness of an exclusive distribution agreement «are the existence of competing products (on the market) and the presence of a certain number of Italian and foreign operators within the internal market».
- In Germany, the matter focuses on control of abuse (§ 16 of the ARC Law). There are few examples of litigation. In the future, the rapporteur feels that the matter will be examined from the viewpoint of community law or Article 20 (1) of the ARC Law (discriminatory practices and abuse of a dominant position).
D. Selective distribution
1) All States understand the selective distribution contract with the same distributor selection criteria.
In Germany, suppliers are free to choose selection criteria, provided they observe the principles of proportionality and non-discrimination. The selection criteria are subject to the same conditions as those established by the ECCJ. The intended reform of the ARC Law (7th amendment) will entrance this assimilation (by allowing application of the conditions envisaged by the exemption regulation of 22 December 1999). Thus, the agreement may be subordinated to the obligation to observe a certain shop presentation and to a quality geographic situation, since the product has a certain reputation. The supplier can also prevent on-line distribution if this method of distribution prevents the distributor from meeting his contractual obligations. A supplier may refuse to supply a distributor who would only open one site on-line, even if, on the other hand, he agrees to supply distributors who would have both these distribution methods.
- In Italy, this type of contract is only lawful if it is justified for technically complex products, or products which require specific distribution (newspapers, magazines or luxury products). The selective distribution network will be lawful if the retailers are chosen in accordance with qualitative objective criteria. Quantitative selection of distributors will be considered unlawful.
- In Belgium and France, the law applicable to selective distribution is identical to the community system (objective, proportional and necessary selection criteria, applied in a non-discriminatory fashion). A quantitative limitation of distributors is not lawful on principle; it may be permitted in exceptional circumstances.
- The Hungarian report does not comment on the criteria for selection of distributors.
- Great Britain applies the rules stipulated in Article 4 of the 1999 regulation; if the regulation is not applicable, the competition authorities (OFT) have stated that a quantitative competition restriction may affect the market (OFT, Competition Law Guidelines on Vertical Agreements, § 7.7, b, December 2004).
2) With regard to relations between selective distributors, Switzerland and Hungary have precise rules on the subject: the Communication of 18 April 2002 published by the Swiss competition authorities stipulates that any agreement restricting crossed deliveries between authorised traders is assumed to affect competition considerably (Chapter 3, d). The Communication of 18 April 2002 is inspired by the community regulation of 22 December 1999. In the same way, Chapter 3, c stipulates that agreements which «restrict sales to end consumers, to the extent that this restriction is imposed on an authorised trader within a selective distribution system» do considerably affect competition. As in community law, active or passive sales must be authorised.
- In Hungary, Article 3 of the exception regulation is copied from Article 4 of the community regulation of 22 December 1999.
3) With regard to relations with third parties outside the network, Chapter 5 of the abovementioned communication in Swiss law, for reasons of economic efficiency allowing agreement exemptions, permits a ban on retail sales to an unauthorised trader (point d). However, unlike the community system, it would seem that this stipulation is not specific to the selective distribution contract.
The other States do not make provision for any specific national regulation in relation to crossed sales between distributors or retail to third parties or to consumers. We must suppose that the solutions are as in community law. In any case, this is true in France, since the Competition Council is inspired by the guidelines of 13 October 2000 published by the Commission in relation to vertical restrictions, even though the distribution agreement is not subject to the community regulation of 22 December 1999.
E. Franchising
- Here again, most States have no specific national regulations.
In Germany, for example, litigation essentially concerns Article 16 (control of abuse). Exclusive purchase obligations and/or territorial exclusivity may be stipulated since these obligations are necessary and proportioned.
- Only Italy, through Law 129 of 6 May 2004, stipulates that the contract must «expressly state the potential territorial delimitation of exclusivity with reference to other franchisees and to the sales outlets and networks directly managed by the franchiser». The franchising contract is declared lawful, even if it contains an exclusive purchase clause (13 November 1997, Il Tucano Franchising), except when the franchiser is in a dominant position. Italian jurisprudence would thus seem to be less rigorous than French or German jurisprudence, which subjects an exclusive purchase clause stipulated in a franchising contract to proportionality and necessity controls.
F. Commercial agency contract
- In Germany and France, jurisprudence decides that the agency contract is beyond competition law, since the agent acting on behalf of his principal has no autonomous economic activity. The principal is free to choose his agent, and he may impose a retail price on him. The Supreme Federal Court rules that the contract is beyond Article 14 of the ARC Law if the economic risk of the business activity is borne by the principal and not the agent. However, the non-competition clauses are subject to control of abuse (Article 16 of the ARC Law).
- In Belgium, the rapporteur has pointed out divergence of solutions: according to the Law of 13 April 1995 concerning commercial agent contracts, the qualification criterion depends on the power of representation granted to the agent (contract drawn up in the name and on behalf of the party), whilst community law adopts a more pragmatic and economic understanding to investigate who bears the financial risk.