Competition Authority Category Certificate and Licence in respect of Agreements by guy22

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									                                Competition Authority
    Category Certificate and Licence in respect of Agreements between Suppliers and
                                        Resellers

                                       Background Note.
Introduction.
1.      This note is intended as a brief guide to the Category Certificate and Licence in
respect of Agreements between Suppliers and Resellers which was published by the
Competition Authority in December, 1998 (Decision No. 528). Non-price vertical restraints
are a common feature of many agreements between manufacturers and suppliers of goods and
services and resellers of those products. They include exclusive distribution; exclusive
purchase; franchise and selective distribution arrangements. These are described as non price
vertical restraints while Resale Price Maintenance (RPM) involves vertical restraint in respect
of prices. The objectives of the category certificate and licence are:

∗ To provide simple rules for such agreements;
∗ To ensure greater consistency by focusing on economic effects rather than legal form;
∗ to reduce the need for firms to notify individual agreements to the Authority for approval;
  and
∗ to enable the Authority to focus its attention on those cases where non-price vertical
  restraints are detrimental to economic welfare.

2.      To achieve these objectives the Authority has adapted market share thresholds to
identify those agreements which come within the scope of the Category Certificate and
Licence. This is combined with a ‘black clause’ approach defining what is not exempted
rather than what is exempted. Only two types of clauses do not benefit from the Category
Certificate or Licence viz resale price maintenance clauses and (any) restrictions which
provide for absolute territorial protection. The effect of the Category Certificate and Licence
is that the vast majority of non-price vertical agreements, where no significant net negative
effect can be expected, no longer requires individual scrutiny. This eliminates the need for
individual notification of such agreements and frees up resources at the Authority to
concentrate on more important cases.

3.      The category certificate and licence represent a significant change in the Authority’s
approach toward non-price vertical restraints. The Authority has previously adopted category
licences in respect of exclusive purchasing of motor fuels1, exclusive distribution2, exclusive
purchasing of cylinder liquid petroleum gas (LPG)3 and franchising4. It has dealt with other
exclusive purchasing agreements on an individual basis. The Authority has replaced most of
these licences by a single Category Certificate and Licence applicable to all forms of vertical
restraints, that is, agreements between undertakings which operate at different stages in the
1
  Decision No. 25 of 1 July 1993.
2
  Decision No. 144 of 5 November 1993.
3
  Decision No. 364 of 13 October 1994.
4
  Decision No. 372 of 17 November 1994.


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supply chain, in respect of the same product or service, for example, between a manufacturer
and its suppliers or a manufacturer and its distributors or retailers. This category of agreements
includes non-exclusive and exclusive distribution agreements, exclusive purchasing
agreements, franchising and selective agreements and combinations thereof.5 By including
selective distribution agreements the Authority has brought within the scope of the category
certificate and licence a number of notified agreements on which it had previously not taken
any decision.
Assessment of Vertical Restraints.

4.      For several years the Authority has called for changes in the treatment of non-price
vertical restraints under EU competition law. The fact that the Authority’s existing Category
Licence for Exclusive Distribution Agreements was due to expire at the end of 1998 provided
the Authority with an opportunity to review its treatment of vertical restraints under the
Competition Acts. It is also relevant that the EU Commission has indicated that it intends to
adopt a new approach.

5.      There has been an extensive debate in the economics literature over a number of years
on the issue of the effects of non-price vertical restraints on competition. The extensive
research which has been undertaken on the issue indicates that whether non-price vertical
restraints harm competition or not depends on the specific market circumstances of a case.
Nevertheless where the firms involved have no market power and there is no prospect of
foreclosure through cumulative effects, then it may be safely presumed that such
arrangements are not anti-competitive. This conclusion is reflected in the Category Certificate
which provides that, where neither party to the agreement has more than 20% of the relevant
market, in the Authority’s opinion the agreement does not contravene Section 4(1).

6.      In many instances non-price vertical restraints lead to greater efficiency in
distribution. Such arrangements therefore provide benefits to firms and consumers. For that
reason the Authority has granted a category licence where either firms’ market share is above
20% but below 40%. This is because the Authority recognises that, in such circumstances
non-price vertical restraints might have some anti-competitive impact, these are likely to be
more than offset by efficiency gains. The effect of the category licence is to permit those
agreements which satisfy this criteria and again eliminate the need for them to be notified to
the Authority.

7.      Where firms market shares are above the 40% level or where the cumulative. The
Authority believes that only a relatively small number of agreements incorporating vertical
restraints will fall into this category. At this level the firms concerned may well enjoy a
degree of market power and thus the risk that such arrangements can have serious anti-
competitive effects is real. The Authority’s approach has the advantage of allowing it to give
individual consideration to what it believes is likely to be a small number of agreements
which potentially could have serious anti-competitive effects.

It is also recognised that where many firms in a market employ non price vertical restraints,
that the cumulative effect of such arrangements can leave anti-competitive effects. The

5
  Frequently agreements between manufacturers and distributors may include a combination of different vertical
restraints. For example, a manufacturer may appoint a firm as an exclusive distributor and also seek to set the
prices at


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Authority has decided, however, not to include cumulative market share threshold since this
would cause unnecessary complication for firms seeking to establish whether or not their
agreements were covered by the Category Certificate Licence. Instead the Authority has
decided that in cases where cumulative market shares meant that non price vertical restraints
were anti-competitive and did not satisfy the requirements for a licence, the certificate and
licence would no apply to such arrangement in that sector. For this reason that certificate and
licence do not apply to exclusive purchase agreements in respect of cylinder LPG. Similarly
special provisions apply to exclusive purchase agreements for motor fuels whereby such
agreements are only permitted provided their maximum duration is ten years.

Practices which are not Permitted

8.      The Authority has identified two types of restrictions which may prevent or restrict
competition. The first of these relates to provisions whereby a supplier seeks to prevent the
reseller from setting its own prices. Such arrangements, known as resale price maintenance
(RPM), by setting the price which the reseller may charge eliminate price competition
between resellers and for this reason are considered by the Authority to contravene Section
4(1). Such provisions are therefore not permitted by the Category Certificate or Licence.

9.      It is argued that some distinction should be drawn between such arrangements and
those whereby a supplier sets a maximum price only but where the reseller is left free to
charge a lower price. The Authority recognises that some distinction may be made between
maximum RPM and fixed or minimum price RPM. The Authority considers that the setting
of maximum resale prices is not necessarily anti-competitive, although it may be in certain
circumstances. There is also a danger that arrangements for setting maximum prices may, in
fact, involve an understanding between the parties that the ‘maximum resale price’ is the
price at which the product must be resold and so may amount to fixed price RPM. In such
circumstances it is not possible to conclude that arrangements for setting maximum prices do
not contravene Section 4(1). The Authority is also of the view that such arrangements do not
automatically satisfy the requirements for a licence as set out in Section 4(2). Consequently
the setting of maximum prices is not permitted by the certificate or licence. However, the
Authority will consider such arrangements on a case by case basis.

10.     While setting the prices at which products may be resold is not permitted, suppliers
are entitled to recommend prices to resellers. Here again, however, there is scope for tacit
understandings that such prices will in fact be prices to be applied. For the avoidance of doubt
the category certificate or licence will not apply unless any price recommendation (a) informs
the reseller that he is free to set his own prices; (b) contains no reference to the margins
resulting from applying any recommended price; (c) involves no requirement to display such
a recommended price; and (d) provided no measures are taken to secure adherence to such
price.

11.     The second type of arrangements which are not permitted by the certificate or licence
are provisions which provide absolute territorial protection, i.e. any provisions or
combination of provisions which prevent resellers outside a territory allocated to a particular
reseller from supplying customers in that territory in response to requests from such
customers. In the Authority’s opinion such arrangements absolutely exclude intra brand
competition within the territory and it does not believe that they satisfy the requirements for a
licence. However, arrangements which prevent resellers actively seeking customers outside of


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their allocated territory are permitted in the case of agreements within the market share
thresholds.

Consequences of the Authority’s Category Certificate and Licence.

12.     The category certificate and licence replace the existing exclusive distribution
category licence which expired at the end of 1998. The certificate and licence also apply to
franchise agreements6 , exclusive purchasing agreements of all sorts, and selective
distribution agreements, including motor vehicles.

13. The Authority published the Category Certificate and Licence in respect of Agreements
between Suppliers and Resellers on 11th December, 1998.


                      Main Features of the Category Certificate and Licence.

∗ Non - Price Vertical agreements where the market shares of both the parties involved are
  below certain thresholds are covered by the Certificate or Licence;
∗ Certain arrangements, such as resale price maintenance (RPM) and/or absolute territorial
  protection, are not permitted by the Category Certificate or Licence but otherwise no
  restrictions are imposed on the parties commercial freedom;
∗ The certificate and licence apply a common framework for all non-price vertical restraints,
  e.g. exclusive distribution, exclusive purchasing, selective distribution and franchising, in
  place of the previous system where different rules applied depending on the legal form of
  agreements; and
∗ Agreements which satisfy the requirements of the Category Certificate or Licence do not
  need to be notified to the Authority in order to benefit from the certificate or licence.




6
    The Franchise Category Licence expired on (31/12/99)


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