Exclusivity agreements, the ultimate tools of commercial partnership, can quickly become a source of dispute when implemented by a company in a dominant position. Competition law does not prohibit them as a matter of principle, but examines them with particular care to identify practices that distort competition. For a company director, whether in a position of strength or dependent on a major supplier, it is essential to understand the boundary between a legitimate commercial strategy and an abuse of a dominant position. A seemingly innocuous contract may conceal clauses with far-reaching effects that could render the company liable. Analysing these complex situations requires a detailed knowledge of legal mechanisms and case law, an area in which the support of an advisor is often decisive in securing business relationships. If you have any questions about these issues, you can contact our firm's expertise in unfair competition law.
Abuse of a dominant position and exclusive dealing agreements
To analyse the risks associated with exclusivity agreements correctly, it is necessary to master two key concepts of competition law. Firstly, the concept of dominant position, which identifies the economic player concerned. Secondly, the legal framework of exclusivity agreements, which are vertical restraints that can be approached in different ways. You can also consult our complete guide to vertical restraints in competition law for a broader view of the subject.
Definition of a dominant position
A dominant position is a position of economic strength enjoyed by an undertaking which gives it the power to prevent effective competition being maintained on the relevant market. This position enables it to behave to an appreciable extent independently of its competitors, customers and, ultimately, consumers. Article L. 420-2 of the French Commercial Code does not define the concept, but it does prohibit abuse. To assess this position, the competition authorities rely on a range of indicators. Market share is often the first indicator, with a threshold of more than 40-50 % constituting a serious indicator. However, it is not enough. Other factors are analysed, such as the structure of the market, the existence of barriers to entry (technological, regulatory, financial), the financial strength of the company or its technological lead. Holding a dominant position is not a fault in itself; it is the abuse of this position that is punished. For a detailed analysis of prohibited behaviour, please refer to our article on prohibited practices involving abuse of a dominant position.
General framework for exclusivity agreements
An exclusivity agreement is a clause or contract by which a party undertakes to obtain supplies only from a designated supplier (exclusive supply) or to sell only to a single distributor in a given territory (exclusive distribution). These agreements are not illegal by nature. They may even have advantages, such as securing supplies or optimising distribution networks. Their legal analysis depends on the context. They may be examined from the angle of anti-competitive agreements (article L. 420-1 of the French Commercial Code) if they result from an agreement between separate companies with the object or effect of restricting competition. However, when they are imposed by a company in a dominant position, they are scrutinised through the prism of abuse of a dominant position (article L. 420-2). The distinction is important, because the approach is different. The analysis focuses less on the agreement itself and more on the exclusionary or exploitative effect that the dominant undertaking derives from it. This duality of analysis is well illustrated by case law on exclusive distribution agreements from an antitrust perspective.
Abuse of exploitation through exclusivity agreements
Abuse of exploitation is one of the two main categories of abuse of a dominant position. It consists of the dominant company using its market power to impose unfair commercial or contractual conditions on its partners (customers, suppliers). Exclusivity agreements can be the vehicle for such practices, particularly through complex pricing systems. For a better understanding of this mechanism, see our article on criteria for abuse of exploitation provides a comprehensive framework for analysis.
Loyalty and linkage discounts
Loyalty rebates are price reductions granted to customers on condition that they make all or a substantial part of their purchases from the dominant undertaking. While, on paper, the practice appears to be part of healthy price competition, case law sees it as a powerful tool for eviction. The aim of such systems is not to pass on lower costs but to make it more difficult for competitors to enter the market. A new entrant would have to offer an extremely low price to compensate for the loss of the discount that the customer would suffer by diversifying its sources of supply. Bundling discounts, where the purchase of a 'dominant' product is linked to the purchase of another product, have a similar effect by tying the customer and closing the market for the linked product to competitors.
Rebates or progress bonuses
Another monitored pricing practice is that of end-of-year rebates or progress bonuses. These discounts are calculated not on the total quantity purchased, but on the increase in purchase volume from one year to the next. This mechanism gives customers a strong incentive to concentrate their future purchases with the dominant supplier in order to reach the discount levels. It then becomes very difficult for a competitor to capture even a small proportion of orders, as this would jeopardise the customer's overall bonus. The Autorité de la concurrence is examining whether these systems have a foreclosure effect that goes beyond simple competition on the merits.
The impact of English clauses
The "English clause", or alignment clause, is a contractual provision that obliges a buyer to inform its dominant supplier of any more advantageous offer received from a competitor. It gives the dominant supplier the right to match this offer in order to retain the market. Although it may appear pro-competitive by encouraging lower prices, its effect is often perverse. It ensures total market transparency for the sole benefit of the dominant player, which is immediately informed of its rivals' pricing strategies. This clause discourages competitors from making offers, in the knowledge that they will be systematically countered. It reinforces the dominant position and can be considered abusive because it distorts the normal competitive dynamic.
Abuse of exclusion linked to exclusive supply agreements
The other facet of abuse of a dominant position is abuse of exclusion. Here, the dominant undertaking's objective is not so much to exploit its partners as to exclude its competitors, current or potential, or to make it excessively difficult for them to gain access to the market. Exclusive supply agreements are an ideal lever for this type of strategy. They form part of a series of anti-competitive behaviours, as detailed in our analysis of the different forms of exclusion abuse.
Abusive contractual practices
A long-term exclusive supply agreement imposed by a dominant player on a significant proportion of distributors or customers in a market may constitute an abuse. The duration of the contract is an essential criterion: the longer it is, the greater the foreclosure effect. Similarly, quasi-exclusivity clauses, which oblige a customer to make a very large proportion (for example, 80 % or more) of its purchases from the dominant supplier, are analysed as having an effect similar to total exclusivity. The competition authorities assess the cumulative effect of these agreements. A single agreement may be insignificant, but a network of exclusivity contracts can completely barricade a market, depriving competitors of access to the commercial outlets essential to their survival.
Condemnation of de facto exclusivity
Abuse does not always require a formally written exclusivity clause in a contract. Case law recognises the existence of "de facto" exclusivity. These are the result of a set of practices which, when combined, lead to the same result: in practice, the commercial partner has no choice but to obtain supplies exclusively from the dominant undertaking. This may be the result of a system of complex discounts, commercial pressure, the supply of tied equipment or logistical conditions that make any alternative economically unrealistic. Demonstrating de facto exclusivity of this kind is more complex, but the competition authorities are adept at analysing a range of indicators in order to characterise and sanction it.
Proof of abuse and possible justifications
Qualifying a practice as abusive is not automatic. The process implies a specific burden of proof and gives the accused company the opportunity to defend itself by providing objective justifications for its behaviour.
The burden of proof for competition authorities
It is up to the prosecuting authority (the French Competition Authority or the European Commission) or the complainant (a competitor or customer) to prove the existence of the dominant position and the abusive nature of the practice. Proof is generally based on an in-depth economic analysis of the relevant market, market shares, barriers to entry and the actual effects of the practice on competition. The investigators rely on documents seized from the company (e-mails, minutes of meetings, commercial strategies) which may reveal an intention to drive a competitor out of business. Proving the anti-competitive effect, even if potential, is at the heart of the analysis.
Objective justifications and efficiency gains
A company in a dominant position can defend itself by demonstrating that its practice is objectively justified or that it generates efficiency gains that counterbalance its negative effects. An objective justification could be, for example, the need to guarantee the safety or quality of a service. Efficiency gains, on the other hand, must be demonstrated in a tangible way. The company must prove that the practice in question (for example, an exclusivity system) leads to cost reductions, improved quality or innovation. In addition, these gains must benefit consumers, at least in part, and the practice must be indispensable to achieving them, without eliminating all competition.
Penalties and risk prevention
The consequences of a conviction for abuse of a dominant position are severe. Adopting a preventive approach is therefore the only viable strategy for a company occupying a strong position in its market.
Legal consequences for the dominant company
Financial penalties are the most visible consequence. They can amount to up to 10 % of the worldwide turnover of the group to which the company belongs. In addition to the fine, the competition authority may impose injunctions, i.e. an obligation to cease the practice and modify the contracts in question. In addition, the victims of the abuse (ousted competitors, customers who have paid a higher price) may take legal action to obtain damages to compensate for their loss. Finally, image damage and damage to commercial reputation are indirect but equally damaging consequences.
Best practices for a compliant sales strategy
Companies in a dominant position or approaching it must be vigilant. It is advisable to carry out a regular audit of its commercial practices and contracts, particularly discount systems, listing conditions and exclusivity clauses. Sales teams should be trained in the basic rules of competition law to avoid risky behaviour. Before implementing an exclusivity agreement or a new pricing system, it is prudent to document its economic rationale and the expected benefits, not only for the company, but also for its partners and consumers. This documentation will be invaluable in the event of an audit.
There is often a fine line between commercial optimisation and abuse of a dominant position, and crossing it can have severe financial and reputational consequences. If you are confronted with practices of a dominant partner that seem unfair to you, or if you wish to ensure that your own commercial strategy complies with competition law, it is wise not to be alone. Contact our firm for an analysis of your situation and tailored advice.
Sources
- Article L. 420-2 of the French Commercial Code
- Article 102 of the Treaty on the Functioning of the European Union (TFEU)
- European Commission guidelines on priorities in the application of Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings
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