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Exclusivity in supply agrrements: approaches in the EU and Ukraine

ЮРИСТ&ЗАКОН, November 2018

Khrystyna Sushkevych, associate

Given dense competition, manufacturers (suppliers) are interested not only in producing goods, but also in their effective distribution. Therefore, pursuing the goal of effective distribution, exclusivity provision, in particular, is included to supply agreements. The provision, per se, prohibits a buyer from purchasing an analogous good from the supplier’s competitors. Interest of a supplier in exclusivity provision is due to a serious advantage he obtains as a result, since it limits cooperation of buyer with other contractors and thereby can push his competitors from the market. Buyer, in its turn, also quite often is interested in such cooperation type as he can obtain encouragement from the supplier, namely bonuses, discounts and more beneficial prices, etc.

Also, it should be noted that the AMCU pays much attention to observance of the legislation on protection of economic competition as concerns contractual relations between manufacturer of products (supplier) with his buyers. Hence, product realization scheme based on exclusivity can fall under the AMCU attention and be in the zone of risk of violation of economic competition protection legislation.

Exclusivity demonstration: where the risk zone starts

It should be noted that agreements with exclusivity condition are considered concerted actions according to the Law of Ukraine “On Protection of Economic Competition” (Competition Act). By the general rule, concerted actions are prohibited if they cause or can cause prevention, removal or limitation of competition.

For the time being, law enforcement practice of the AMCU in the area of vertical concerted actions is being actively developed, and the AMCU itself during law-making quite often employs European rules and approaches.

Therefore, standard requirements of the AMCU to vertical concerted actions (Standard Requirements) implementing to Ukrainian legislation approaches of the European Commission (EC, Commission) to vertical agreement assessment, consider, in particular, vertical concerted actions, in which supplier’s share on market where he sells contractual products does not exceed 30% and buyer’s share on market where he buyer contractual good also does not exceed 30%, within the safe zone.

Regarding “exclusivity” term, the Ukrainian legislation does not put it in a separate category and does not give a specific definition. However, it can exist as a result of including corresponding provisions to the agreement. In this case it is not required that the exclusivity condition be expressed by using an analogous term in an agreement, since exclusivity by its nature should be assessed considering its goal and possible consequences. Thus, exclusivity can be expressed as a result of creating some obligation for the buyer, applying encouragement, granting him special discounts, bonuses, etc. in case he complies with the rules set by supplier.

Single branding. The legislation on protection of economic competition does not define “single brand” concept, however, being guided by the European practice and approaches, it should be mentioned that single branding covers such agreements which oblige a buyer to purchase some goods from only one supplier. In general, single branding is not a prohibited practice under the European and Ukrainian competition legislation.

Single branding as a condition in a supply agreement, in particular, can be expressed as follows:

  • buyer’s obligation to buy more than 80% of goods from only one supplier. The buyer is obliged not to buy and re-sell goods of supplier’s competitors;
  • buyer’s obligation to buy supplier’s goods in the minimum quantity established by him. Now this practice is quite spread among companies on the pharmaceutical market.

It should be noted that antimonopoly risks which can arise upon employment of single branding, in particular, can be the following:

  • hindering access to market to competing and potential suppliers;
  • weakening competition and facilitating conspiration among suppliers.

However, if share of one of the parties to the agreement still exceeds 30%, parties have included provision on single branding to the agreement and have not applied to AMCU for permission for concerted actions, in case of potential attention by the AMCU to the concluded agreement the parties will have to prove absence of its adverse affect on competition condition on the market, including absence of anti-competition effect of single branding.

Non-compete. One of the provisions expressing exclusivity is non-compete provision, whose term is not determined or exceeds 5 years, and per which the buyer obliges:

  • not to produce, purchase, sell or re-sell goods competing with contractual goods, or
  • to purchase from supplier more than 80% of all contractual goods and their corresponding substitutes.

However, it should be remembered that the AMCU, same as the EC, considers non-compete provision a strict limitation prohibited per se, and which should be avoided in vertical concerted actions regardless of market share of both parties.

Discounts and bonuses. As a rule, discounts and bonuses are a spread practice in activities of any market player, as the supplier (producer) can increase volume of sale and its market share, the end consumer consequently obtains from them a benefit by purchasing goods at a reduced price. However, discounts and bonuses may pursue different purposes and be a tool of stimulating exclusivity the possible consequence of which will be creation of barriers for other companies to access the market.

Classic examples of violation in this case can be discounts on loyalty granted by supplier for buyer’s refusal to purchase goods from competitor of this supplier. Since the Committee does not have official explanations regarding assessment of discounts and bonuses, the European rules and practice can serve as a kind of benchmark.

A landmark case on discounts for loyalty is Hoffmann-La Roche v Commission[1]. Hoffmann-La Roche company required that the volume of distributor’s products procurement constitute 80% of Hoffmann-La Roche’s products, for which it promised to grant loyalty rebates. The European Court of Justice declared that such actions are considered abuse of monopoly condition since they block access to market for other producers of medicines.

Furthermore, in 2014 the General Court upheld decision of the Commission by which the latter imposed fine in the amount of EUR 1.06 billion on Intel company, producer of microchips, for granting discounts to clients which purchase from the company more than 80% of the necessary computer chips. The court specified that such discounts are analogous to exclusive agreements, which is unacceptable for dominant companies since they limit competition. However, in 2017 the Court of Justice of the European Union remanded this case back to the General Court. [2]

What are the perspectives?

In case it is established that introduction of exclusivity conditions in a specific case has or may have adverse effects for competition, such actions can be qualified as anticompetitive concerted actions or abuse of monopoly (dominant) status. Competition legislation prescribes effective mechanism to stop violations, including bringing to liability. For each mentioned violation the Law on Competition provides fines in the amount of up to 10% of income (revenues) of a commercial entity for the last financial year. However, it should be noted that the Law established the maximum amount of fine, however it does not regulate the procedure for determining amount of fine. In this matter the AMCU is guided by its Advisory Explanation No. 39-pp as of August 9th, 2016, which reflects approaches to determine amount of fines for violation of legislation on protection of economic competition. As a rule amount of fines for such violations is not maximum, however is quite considerable for offenders.

Therefore, antimonopoly compliance is important. Companies should have internal policies which will regulate, among other things, matters of interaction with contractors (selection procedure, procedure for granting discounts, bonuses, etc.) based on legislative norms, as well as current practice of AMCU and leading competition world departments. Further, it should be noted that every situation is unique and characterized by own nuances, therefore it is impossible to apply one pattern to all cases. Besides, for introduction of effective antimonopoly compliance and minimization of risks in this area it is necessary to hold programs and workshops to employees and management of the company, as well as verify provisions of agreements on matter of compliance with competition legislative provisions.



[1] Case 85-76, Hoffmann-La Roche v Commission

[2] Case C-413/14 P, Intel Corporation Inc. v Commission


Contact the author: Khrystyna Sushkevych, associate at Legal Alliance Company, sushkevych@l-a.com.ua

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