Distribution, franchising and supply agreements are at the heart of many companies' strategies. However, these so-called "vertical" contracts may contain clauses which, without careful analysis, could come into conflict with competition law. Far from being mere contractual documents, they define the balance of power in a market. The aim of this article is to give you an overview of the main principles governing these agreements, so that you have a clear idea of what is at stake and what to watch out for. For an expert opinion on a unfair competitionIn many cases, support is essential. Here we look at definitions, the legal framework and the different types of agreement, bearing in mind that each subject is covered in greater detail in our dedicated articles.
Understanding vertical restraints in competition law
To navigate this field properly, you first need to master the fundamental concepts that structure it. The aim of competition law is to ensure a level playing field in the market, to the benefit of businesses and consumers.
Definition and distinction from horizontal agreements
A vertical restraint is a clause in an agreement between companies operating at different levels of the production or distribution chain. Think of the relationship between a manufacturer and its distributor, or between a franchisor and its franchisee. These agreements organise the way in which a product or service reaches the end customer.
The distinction with a horizontal agreement is fundamental. The latter is concluded between direct competitors, i.e. companies located at the same level of the economic chain (for example, two bicycle manufacturers). Horizontal agreements, such as price cartels, are generally viewed with much greater suspicion by the authorities.
Pro- and anti-competitive aspects of vertical restraints
Contrary to popular belief, a vertical restraint is not inherently illegal. It may even have beneficial effects for competition. For example, territorial exclusivity may encourage a distributor to invest more in promoting a brand, in the certainty that its efforts will not be "cannibalised" by a neighbouring competitor. This can stimulate innovation and improve the quality of distribution.
However, the anti-competitive risk is real. These clauses can lead to market partitioning, reduced competition between distributors of the same brand (intra-brand competition) and, ultimately, higher prices or less choice for the consumer. Analysis of these agreements is therefore a balancing act, aimed at weighing up their potential effects. These practices are sometimes linked to anti-competitive agreements which are strictly monitored.
The European regulatory framework: focus on Regulation (EU) 2022/720
The European Union has established a precise framework for analysing vertical agreements. The centrepiece of this framework is a regulation that establishes a "safe harbour" for many agreements.
Basic principles of the block exemption
The Block Exemption Regulation (often referred to as VBER, for Vertical Block Exemption Regulation) sets out a simple principle: if a vertical agreement meets certain conditions, it is presumed to be legal and exempt from the ban on cartels. The main condition relates to the market power of the companies involved. As a general rule, if the market shares of the supplier and the buyer each do not exceed 30 % on their respective markets, the agreement can benefit from this exemption.
This approach provides considerable legal certainty for businesses, avoiding a case-by-case analysis for the majority of contracts. For a detailed analysis of this text, see our article on Regulation (EU) 2022/720 on vertical restraints.
Hard-core restrictions (blacklist): what is prohibited
The exemption has its limits. The regulation lists so-called "hardcore restrictions" which are so serious that the whole agreement loses the benefit of the exemption, whatever the market share of the companies. The best known is the prohibition on imposing a fixed or minimum resale price on the distributor. A supplier may suggest a recommended resale price, but may under no circumstances prevent the distributor from selling at a lower price. Other restrictions on this "black list" concern limitations on territory or customers, with very limited exceptions.
Conditions for exemption and excluded restrictions
In addition to the black list, the regulation also identifies "excluded restrictions". These are clauses that are not covered by the block exemption, but which do not invalidate the rest of the agreement. These must be assessed individually to determine their legality. This is the case, for example, with certain non-competition obligations whose duration is indefinite or greater than five years.
Exclusivity agreements and competition law
Exclusivity clauses are common in distribution contracts. They can take several forms, with different legal consequences.
Exclusive distribution and cartel rules
In an exclusive distribution system, a supplier undertakes to sell its products only to a single distributor in a given territory or for a given group of customers. In return, the distributor may be prohibited from actively promoting the products outside its exclusive area. This type of agreement is often pro-competitive, but it is monitored to ensure that markets are not completely partitioned.
Non-competition and exclusive purchasing agreements
An exclusive purchasing clause (or "exclusive supply") obliges a distributor to obtain supplies of a certain type of product almost exclusively from a single supplier. These agreements, sometimes referred to as "beer contracts" because of their historical origin in the cafés-hotels-restaurants sector, can have a foreclosing effect on the market. Their validity depends on their duration and the competitive context. The analysis is similar for the non-competition obligationwhich prohibits the distributor from selling competing brands.
Selective distribution agreements and competition law
For luxury products, high-tech products or products requiring specific advice, suppliers often use selective distribution.
Distributor selection criteria and case law
A selective distribution network allows the supplier to sell its products only to approved distributors, selected on the basis of defined criteria. To be valid, the system must be based on objective, qualitative criteria (such as staff training or the quality of facilities), applied in a non-discriminatory way to all applicants. The aim must be to preserve the quality and brand image of the product, not to artificially restrict the number of resellers.
Distributors' commercial freedom and a watertight network
Even in a selective network, authorised distributors must retain their commercial freedom, particularly with regard to setting their resale prices. On the other hand, the supplier can prohibit its approved distributors from reselling products to non-approved resellers, in order to guarantee the "watertightness" of the network.
Franchise agreements and competition law
Franchising is a specific form of vertical agreement that combines the concession of a brand and the transmission of know-how.
Non-restrictive clauses and protection of know-how
Numerous restrictive clauses in a franchise contract are permitted because they are deemed essential to protect the concept. It is legitimate for a franchisor to impose common standards to preserve the network's identity and reputation, or to protect the confidentiality of its know-how. These clauses are not generally considered to be anti-competitive.
Hard-core restrictions in franchising
However, franchise agreements are not a lawless area. They are subject to the same prohibitions as other vertical agreements. It is forbidden for the franchisor to fix the resale prices of products or services. Similarly, post-contractual non-competition clauses must be limited in duration, purpose and geographical scope if they are to be valid, as explained in our guide on the non-competition obligation in commercial law.
The special case of the automotive sector
The car manufacturing and repair sector has long benefited from a specific exemption regime due to the technical complexity of its products.
Automotive after-sales system
Although the sector-specific regulations have evolved, specific rules remain, particularly for the after-sales market. The aim is to ensure effective competition between authorised repairers and independent repairers. This requires manufacturers to provide access to technical information, diagnostic tools and spare parts under reasonable and non-discriminatory conditions.
Penalties and risk prevention
Ignoring the rules of competition law can have serious consequences. Companies that take part in an illegal cartel can face substantial financial penalties from the competition authorities, which can amount to a large percentage of their worldwide turnover. In addition, illegal clauses in a contract are null and void, which can destabilise the entire commercial relationship. In some cases, such practices can even be reclassified as "unfair competition". abuse of a dominant position if one of the companies has very significant market power.
The complexity of the rules and the seriousness of the penalties make a regular audit of your distribution contracts essential. To ensure that your commercial practices are secure and compliant, it is wise to involve a lawyer. Contact our firm for an analysis of your situation and tailor-made advice.
Frequently asked questions
What is a vertical restriction?
This is a contractual clause between companies that are not direct competitors (e.g. a manufacturer and its distributor) that restricts the conditions under which the parties can buy, sell or resell certain goods or services.
Can I impose a selling price on my resellers?
No, imposing a fixed or minimum resale price is a hardcore restriction that is almost always illegal. You may only communicate a non-binding recommended price.
Is an exclusive distribution contract legal?
Yes, in general, provided that the market shares of the supplier and distributor do not exceed 30 %. Beyond that, a case-by-case analysis is required to check that the agreement does not excessively restrict competition.
Can my supplier ban me from selling online?
A total ban on online sales is generally considered to be a hardcore restriction. However, the supplier may impose quality criteria for online sales, similar to those required for physical sales outlets.
What is the maximum duration of a non-competition clause?
Under the exemption regulation, a non-competition clause must not exceed five years. Beyond that, or if it is post-contractual, its validity depends on strict conditions (essential, limited in space and time, etc.).
What is the exemption regulation (EU) 2022/720?
It is a European text that establishes a "safety zone": vertical agreements that meet its conditions (in particular market share thresholds of 30 % and the absence of hard-core restrictions) are presumed to be legal under competition law.
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