On 1 December 2010, new rules governing the application of the Irish competition rules to vertical agreements came into effect. The new rules consist of a revised Competition Authority Declaration (the “Declaration”) and Notice (the “Notice”) in respect of vertical agreements and concerted practices. The revised rules replace a December 2003 Declaration and Notice.

Vertical agreements, for the purpose of the Declaration and Notice, are agreements between businesses operating at different levels of the production or distribution chain relating to the conditions under which the parties may purchase, sell or resell certain goods or services (e.g., exclusive distribution, exclusive purchasing, selective distribution and franchising).

Declaration

The Declaration provides for an exemption from the prohibition in Irish law on anti-competitive agreements where a vertical agreement satisfies a market share test and does not contain any “hard-core” restrictions. As with the previous Declaration, the Declaration only applies to vertical agreements between competing undertakings in very limited circumstances.  The Declaration reflects changes made in June 2010 to the EU Block Exemption Regulation (the “EU BER”) (which relates to the application of the EU competition rules to vertical agreements).

To avail of the Declaration both the supplier’s and buyer’s market shares must be 30% or below (in contrast to the previous Declaration, which applied if the supplier – or, in the case of certain exclusive supply obligations, the buyer – had a market share below 30%). The relevant market for the supplier is the market where it sells the contract goods or services, while for the buyer the relevant market is the one on which it purchases the contract goods or services.  This amendment puts an additional onus on contracting parties to understand their market position. Vertical agreements containing provisions relating to the assignment or use of intellectual property rights to or by the buyer are exempted on certain conditions.

The inclusion of any of the “hard-core” restrictions will mean that the agreement in question cannot benefit from the Declaration. The “hard-core” restrictions are terms which:

• involve fixed or minimum resale price maintenance;
• restrict the territory into which, or the customers to whom, the buyer (without prejudice to a restriction on its place of establishment) may sell the contract goods or services, except for the following legitimate restrictions:
  – the restriction of active sales into the exclusive territory or to an exclusive customer group reserved to the supplier or allocated by the supplier to another buyer,
  – the restriction of sales to end users by a buyer at the wholesale level of trade,
  – the restriction of sales by the members of a selective distribution system to unauthorised distributors within the territory of the selective distribution system, and
  – the restriction of the buyer’s ability to sell components, supplied for incorporation, to customers who would use them to manufacture the same type of goods as those produced by the supplier;
• restrict active or passive sales to end users by members of a selective distribution system at the retail level;
• restrict cross-supplies between distributors within a selective distribution system, including between distributors at different levels of trade; and
• restrict, in an agreement between a supplier of components and a buyer who incorporates those components, the supplier’s ability to sell the components as spare parts to end-users or to repairers or other service providers not entrusted by the buyer with the repair or servicing of its goods.

The Declaration also specifies a number of obligations to which the exemption does not apply (although the exemption may continue to apply to the remainder of the agreement). Such obligations will not necessarily be prohibited but must be assessed individually. The relevant obligations are:

• direct or indirect non-compete obligations on the buyer which are either indefinite, or more than five years in duration (this limitation does not, however, apply where the contract goods/services are sold from premises owned or leased by the supplier);
• direct or indirect non-compete obligations on the buyer after termination of the agreement (subject to a limited exception permitting a post-termination non-compete obligation where this is indispensible to protect know-how transferred by the supplier to the buyer and provided certain other conditions are met); or
• direct or indirect obligations causing members of a selective distribution system not to sell the brands of particular competing suppliers.

Agreements that are not covered by the Declaration do not automatically infringe the competition rules but must be individually assessed.  New supply and distribution agreements should comply with the new rules as and from 1 December 2010. There is a transitional period until 31 May 2011 for existing agreements.

Notice

The previous Notice had provided that specified categories of agreements (e.g., non-exclusive distribution) fell outside the scope of the Irish competition rules; the new Notice makes no such provision but rather refers, for the first time, to the European Commission Guidelines on Vertical Agreements (the “EU Guidelines”) as providing guidance in an Irish context. The EU Guidelines (which were revised in June 2010 to include, inter alia, a more detailed assessment of permissible restrictions on online sales and a revised assessment of resale price maintenance, selective distribution, agency agreements, access payments and category management agreements) acknowledge that, for most vertical restraints, competition concerns may only arise if there is insufficient competition at the supplier or buyer level. The EU Guidelines also outline how vertical restraints may lead to efficiencies. The EU Guidelines assist parties in assessing the compatibility of their vertical agreements with competition law by:

• describing vertical agreements which generally fall outside the prohibition on anti-competitive agreements, such as genuine agency agreements;
• outlining the scope of application of the various provisions of the EU BER (including the “hard-core” restrictions) in greater detail. Of particular note in the revised EU Guidelines is the more detailed analysis of permissible restrictions on online sales under the EU BER; 
• providing guidance on how to calculate market shares;
• providing a framework for a case-by-case analysis of vertical agreements, setting out general considerations relevant to the assessment of whether an individual agreement (falling outside the scope of the EU BER) may fall within the prohibition on anti-competitive agreements. Relevant factors in this regard include the market position of the parties and competitors, entry barriers and the nature of the agreement. The EU Guidelines also set out factors relevant to ascertaining if the  relevant agreement will satisfy the conditions for exemption (this involves assessing, inter alia, whether the agreement produces efficiencies); and
• outlining the specific relevant considerations for the most common types of vertical agreements including franchising, selective distribution and exclusive distribution. In this regard, the EU Guidelines outline the possible negative effects (e.g., foreclosure of other suppliers/buyers by raising barriers to entry or the reduction of competition between distributors of the same brand) and positive effects (e.g., preventing one distributor from free riding on the promotional efforts of another distributor or enabling relationship specific investments by retailers) of the various categories of agreements. 

The Notice provides that two sections of the EU Guidelines (relating to a buyer pool exemption where no individual member has an annual turnover in excess of €50 million and to the EU de minimis exemption respectively) cannot be relied upon in an Irish context.