Regulation of Concerted Practices. Recent Developments

UJBL №5 May 2019

1. Implementation of the EU acquis

The existence and permanent development of economic competition represent the essential condition of any effective national economy. In this regard, serious challenges that are put before national and international antimonopoly agencies to ensure protection of rules of fair competition.

In recent years the activities of the Ukrainian authorities, specifically of the Antimonopoly Committee of Ukraine (AMCU), in the sphere of development, protection and advocacy of economic competition, were acknowledged both in Ukraine and by the international competition institutions as very successful. Here we will discuss modern regulation of vertical concerted practices adopted by the AMCU, which envisage new progressive approaches to the rules of regulation of goods supply arrangements within the chain from manufacturer/importer to retailer and end customer.

To a certain extent progress was achieved due to the major driver of the successful development of Ukrainian legal regulations in competition sphere — the Association Agreement between the European Union and its Member States, on the one side, and Ukraine, on the other side (Association Agreement) and Ukrainian obligations under Article 256 thereof. They assumed approximation of Ukrainian competition laws and enforcement practices to the EU acquis. Among other important documents, whose rules might be implemented into national legislation, was European Regulation (EU) No. 330/2010 of 20 April 2010 On the Application of Article 101(3) of the Treaty on the Functioning of the European Union (EU Treaty) to Categories of Vertical Agreements and Concerted Practices(EU Regulation).

The main idea of the said Regulation is to establish and explain in detail to which vertical concerted practices (agreements) will “block exemptions” from the general prohibitions specified by Article 101(1) of the EU Treaty be applicable.

It’s worth noting that Article 101(1) of the EU Treaty prohibits 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 internal market.

At the same time, Article 101(3) determines what types of agreements, decisions of associations of undertakings, concerted practices may be allowed and which members are exempted from liability due to such arrangements’ advantages outweighing their anticompetitive effect, and specifically those, which contribute to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit, and which does not: (a) impose on the undertakings restrictions which are not indispensable to the attainment of these objectives; and (b) afford such undertakings to eliminate competition in respect of a substantial part of the products in question.

2. Definition of “vertical agreements”

Under EU Regulations “vertical agreements” shall mean agreements or concerted practices concluded between two or more undertakings each of which operates, for the purposes of the agreement or the concerned practice, at a different level of the production or distribution chain, and relating to the condition, under which the parties may purchase, sell or resell certain goods or services.

Substantially the similar definition is provided by the Standard Requirement to Concerted Practices of Business Subjects in respect of Supply and Use of Goods, adopted by the AMCU Resolution No.10-rp as of 12 October 2017 (Standard Requirements).

It should be noted that the Law of Ukraine On Protection of Economic Competition (Competition Law) does not distinguish between vertical and horizontal concerted practices. In general, the Law prohibits anticompetitive concerted practices and establishes liability for violations of prohibitions. It is clear that horizontal concerted practices (when the agreements are concluded by and between the undertakings acting on the same level of the chain “manufacturer — distributor— dealer — retailer”) are more harmful with regard to the prevention, removal or restoration competition than vertical ones, which in certain instances may and must be allowed as having a pro-competitive character.

The Competition Law foresees that concerted practices, which meet the standard requirements to certain types thereof specified by the AMCU, shall be allowed and not require a permit from the AMCU if such is directly determined in the AMCU decision on establishment of standard requirements. In the most part it concerns vertical agreements rather than horizontal ones.

3. What is permitted by the new Standard Requirements

3.1. As an obligation under Article 256 of the Association Agreement, the Standard Requirements were adopted and designed in order to provide clear and, to a certain extent, detailed guidelines what vertical practices (agreements) are allowed and do not require the AMCU preliminary permits. They increased the threshold of the relevant market shares of the participants of the allowed vertical restrains up to 30% in comparison with past thresholds and in many aspects duplicated the rules provided for by the EU Regulation for those undertakings whose market shares do no exceed 30%.

3.2. Under the Standard Requirements the following vertical actions are presumed to be lawful and do not require a permit from the AMCU:

(i) those concerted actions containing vertical restraints where the share of a supplier on a market, on which it sells the contract goods, does not exceed 30%, and the share of a buyer on the market, on which it purchases the contract goods, does not exceed 30% either.

The above exemption shall also apply to vertical concerted practices entered into between an association of undertakings and its members, if all its members are retailers of goods and if no member of association, whose turnover in Ukraine (together with all undertakings connected by control relations) for the past year exceeded the equivalent of EUR 25 million. (NB: the exemptions shall not apply to horizontal concerted practices between association members).

They also apply to vertical concerted practices which contain provisions as assignment to the buyer or use by the buyer of IP rights, provided that provision or use of IP rights are not the primary subject of the agreements and directly relate to use, sell or resell of goods by the buyer or its customer, and provisions of concerted practices on contract goods do not contain restrictions of competition which have the same object as vertical restraints which are not exempted; and

(ii) vertical concerted actions between a contractor and subcontractor in respect of supplying the technologies and equipment to the subcontractor necessary for the subcontractor for fulfillment of obligations under the contract.

4. Still prohibited

According to the Standard Requirements “block exemptions” shall not apply to:

A. Vertical agreements between competitors, unless the supplier is not simultaneously the buyer of its buyer and a buyer is not simultaneously the supplier of its supplier and either the supplier is a manufacturer and a distributor of goods, while the buyer does not manufacture such goods, or the supplier is selling the goods at several levels of trade while the buyer is selling the goods at the level of retail trade does not compete with the supplier at the levels of trade where it purchases the contract goods;

B. Vertical concerted practices that contain so called “hard-core vertical restrictions”, in particular those which, directly or indirectly, in isolation or in combination with other factors under control of the parties, have as their object:

(i) restriction of the buyer’s ability to determine its sale price of the contract goods, except for imposing a maximum or recommended sale price, provided that they do not amount to a fixed or minimum sale prices as a result of pressure from one of the parties or benefits (incentives) offered by such party;

(ii) restrictions on the territory into which, or of the customers to whom, a buyer may sell the contract goods, except for:

— restrictions on active sales by a buyer of the contract goods to an exclusive group of customers or into exclusive territory reserved to the supplier or allocated by the supplier to another buyer, where such restriction does not limit the sales of the related goods by the customers of such buyer;

— restrictions of sales to end users by a buyer operating at the wholesale level of trade;

— restrictions of sales by the members of selective distribution to unauthorized distributors within the territory reserved by the supplier to operate this system;

— restrictions of the buyer’s ability to sell components supplied for the purposes of incorporation, to customers who would use them to manufacture the same type of goods as those produced by the supplier;

(iii) the restrictions of active or passive sales to end users by the members of the selective distribution system operating at the retail level of sales, without prejudice to the possibility of prohibiting a member of the system from operating out of an authorized place of establishment;

(iv) restrictions on cross-supplies between buyers-members of selective distribution system, including between buyers operating at different levels of trade;

(v) in the agreements between a supplier of components and buyer who incorporates them, of the supplier’s ability to sell the components as spare parts to end users or to repairers or other services providers not authorized by the buyer to service its goods.

C.Any direct or indirect obligation not to compete, the duration of which is indefinite or greater than 5 years.

D. Any direct or indirect obligation of the buyer not to manufacture, buy, sell or resell the goods after termination of the agreement.

It should be further noted that the AMCU may decide that the block exemptions shall not apply in respect of the certain market if parallel (unconnected) networks of similar vertical restrains cover more than 50% of the relevant market.

Even if the vertical practices are not permitted business undertakings are entitled to apply to the AMCU to obtain a permit in compliance with Article 10 of the Competition Law.

5. Business gains of the Standard Requirements

Pursuant to Article 6 of the Competition Law the concerted actions that may result in prevention, removal or restriction of competition are prohibited and their participants may be deemed liable. The norms of the Law do not stipulate explanations as to which concerted practices in the system of supplying the goods (vertical arrangements) may be allowed and not require permits issued by the AMCU. By approval of the Standard Requirements the AMCU actually provided for block exemptions which may be generally used in vertical agreements similar to those used in the European Union, considerably increased the threshold of the market share of members of vertical arrangements from 20 to 30% for general application of the block exemption and release from the necessity to obtain permits from the AMCU. Standard Requirements gave clear and understandable guidelines to the business in respect of conformity of certain restrictions in vertical agreements with the requirements of the Competition Law. Exemptions defined and described in the Standard Requirements as lawful are extremely important for business planning and security as they provide real legal certainty. They are in a material respect reducing the risks of violations and apprehensions of the consequent sanctions by the AMCU as soon as they provide for quite predictable rules of safe entry into vertical agreements.

6. Further developments of regulations in field of vertical concerted practices

The AMCU recently publicized for review by the public of the new Standard Requirements to the Concerted Practices of Undertakings in Sphere of Transfer of Technology Observance of which Allows to Perform such Practices without Permits of the AMCU, prepared on the basis of provisions of Article 11 of the Competition Law and reflecting the appropriate provisions of the Commission Regulation (EU) No 316/2014 of 21 March 2014 On the Application of Article 101(3) of the EU Treaty to Categories of Technology Transfer Agreements. It’s interesting that the draft document stipulates that agreements on transfer of technologies between competitors would be allowed and not require an AMCU permit if the combined market share of such participants does not exceed 20%. In terms of non-competing undertakings, they would be allowed should the market share of each of them not exceed 30%. Obviously, those exemptions will not cover significant and exclusive restrictions.

Conclusion

For the past few years the attention of AMCU, as well as of society, has been attracted to the situation on the pharmaceutical market, which is still worrying and requires an appropriate response from the AMCU. Certain decisions taken as a result of the AMCU investigations in respect of the pharma market players sparked serious debates on how to correctly use vertical restrictions in distribution of medicine. Just 2 months ago the AMCU issued Guidelines on Application of the Legislation on Protection of Economic Competition by the Participants of the Markets of Pharmaceutical Products in Vertical Relations regarding Supply and Distribution of the Pharmaceutical Products.

The Guidelines provided detailed explanations as to which vertical actions on pharmaceutical markets may be possible and which (especially in terms of granting of discounts), may have anti-competitive effects and not be allowed. For instance, the Guidelines provided that motivating the sales in the relations with distributors may bear the signs of violation in cases of (i) application of different approaches to different distributors without objectively good causes; (ii) allocation of markets on a territory basis, circles of customers (unless otherwise is permitted under the Standard requirements), assortment of goods; (iii) stimulation of fulfillment of plans of purchase/supply, maintenance of stock resources, which results in making barriers for entering the generics into the market or pushing the medical products — competitors out of the market, when the market share of at least one of the members of the concerted actions is equal to or exceeds 30%.

What may be interesting for other businesses is that the approaches provided by the said Guidelines may be used by the AMCU upon investigating other, not anti-competitive concerted practices, violations of competition law, and thus should be scrutinized by experts in this field of law.

In general, it is clear that the legislation on protection of economic competition is developing dynamically and providing business with ever more and more detailed and transparent rules of the game.

Oleksandr Fefelov is a partner at Ilyashev & Partners