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Expressions of interest – Vertically challenged?

Tuesday May 18th, 2010

By Rosemary Choueka, Partner and Head of EU, Competition and Regulation and Simon Dodd, EU, Competition and Regulation lawyer, Lawrence Graham LLP

Rosemary Choueka and Simon Dodd discuss the impact the new competition laws on vertical agreements will have on public procurement.

The European Commission has published new rules on the application of competition law to vertical agreements, together with guidance on those rules. The new rules come into force on 1 June 2010, replacing those that have been in place for ten years. The new rules should result in greater competition for business among suppliers to both the public and the private sector, resulting in increased quality and reduced prices.

Vertical agreements are those between companies at different levels in a supply chain, for example a distribution agreement between a manufacturer and a distributor. Such agreements often include some provisions that may restrict competition, usually imposed by the supplier and affecting competition between its distributors. These provisions may include exclusivity, territorial protection and/or price guidance.

Because such provisions reduce competition between the distributors, they may be prohibited by competition law. Companies that breach this prohibition can face large fines (up to ten per cent of worldwide turnover) and may be sued for damages by third parties that have suffered loss as a result of the anti-competitive restrictions. The agreement may be declared void and in the worst cases it is possible that criminal charges may be brought against individuals involved in the anti-competitive behaviour. If the parties to a vertical agreement do not have a strong position in the market, however, and provided that the worst types of anti-competitive restriction are not included in that agreement, the agreement may be exempt from the prohibition and therefore the consequences described above may not follow.

Under the old rules, one of the most significant factors for deciding whether a vertical agreement could be exempt from the prohibition on anti-competitive agreements was the market share of the party imposing the restrictions. In most cases this would have been the supplier. So, for example, if the supplier restricted its distributors from selling outside their territories, or set a maximum retail selling price, a key question was whether the supplier had a market share below 30 per cent.

The main change in the rules takes account of the fact that, in the last decade, many distributors and retailers have grown their businesses significantly and now have the upper hand in negotiations with both their suppliers and their customers. These distributors and retailers are so important to their suppliers that those suppliers may be prepared to include restrictions in their vertical agreements favouring the distributors or retailers that they would not otherwise wish to include. An obvious example is to allocate exclusive territories or customer groups to retailers. This may lead to a very unsatisfactory result for the customers of those retailers, who may end up paying higher prices because they have no other retailers in their area from whom they can buy the products produced by the suppliers.

To take account of this, the new rules provide that an exemption from the prohibition on anti-competitive agreements will only be available if (among other things) both parties to the agreement have a market share below 30 per cent. This should benefit not only customers (including public sector customers) but also smaller businesses, who may find themselves in a more attractive light as potential distributors or who, as suppliers, may no longer be obliged to accept conditions imposed by their much larger distributors.

The new rules will ensure there is greater competition among distributors and retailers selling the same products. This will mean that customers, including public bodies, should benefit from lower prices and improved service. Therefore, when putting contracts out to tender, public bodies should see the benefits afforded by the new rules on vertical agreements, resulting in even better value for taxpayers’ money. As the new rules will also benefit smaller businesses, this should make it easier for small and medium-sized enterprises to be more competitive when bidding for public sector contracts.

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