The Estonian Competition Act prohibits agreements between entrepreneurs (undertakings) which harm competition. The most serious violations are considered to be cartel agreements: that is when competitors fix purchase and sale prices, limit production or service or share goods markets (in other words, competitors agree not to compete with one another). Most entrepreneurs know that cartel agreements are prohibited, however, it is less known that some agreements between non-competitors, i.e. vertical agreements, are also prohibited, as they can also harm competition.
Vertical agreements are also subject to supervision by the Estonian Competition Authority
Although media’s attention is mostly on cartel cases, several agreements between non-competitors have also caught the attention of the Estonian Competition Authority (the competition supervision authority). One also has to take into account, that in Estonia vertical agreements that restrict or harm competition can be considered as criminal offense and thus a criminal punishment can entail: an individual may be punished with a pecuniary punishment dependant on one’s income or up to one year imprisonment, and a legal person may be punished with a fine of up to 5 per cent of the turnover of the legal person. To minimize the risk of catching the attention of the Competition Authority or finding oneself in supervision or criminal proceedings because of undertaking’s vertical agreements with its business partners, the undertaking must be aware of what is allowed and what is not in vertical agreements under the competition rules.
Vertical agreements and competition restraints
Vertical are relationships between parties at different levels of production or distribution chain, e.g. manufacturer-wholesaler-retailer. Thus, vertical agreements are agreements that are entered into between two or more undertakings each of which operates at a different level of the production or distribution chain. Usually such agreements contain the terms for purchase, sale or resale of the products and services (or goods) that are the object of the contract. Such agreements include, for example, supply agreements between the supplier and the manufacturer, and resale agreements between the importer and the reseller or wholesaler and retailer. Those agreements are common in practice and those agreements as such are not prohibited. However, some vertical agreements may include conditions (competition restraints) that harm competition and that may therefore be prohibited.
When are vertical agreements prohibited?
Above all, competition restraints included in vertical agreements may be prohibited, if the supplier or the buyer or both have certain market power. Both, the supplier’s and buyer’s market share is important when assessing the market power. Competition problems may arise, when the market share of the supplier exceeds 30 per cent of the relevant market, where it sells the goods that are the object of the vertical agreement, or when the market share of the buyer exceeds 30 per cent of the relevant market, where it buys the goods. If the market shares of both the supplier and the buyer remain below this level, then presumably a vertical agreement between them will not raise competition problems. However, the undertakings do not always have precise information about their market share, or they may be mistaken when determining the scope of the product or geographical market. Therefore, assuming that the agreement does not create competition problems only on the basis of the market share is legally risky. If the market share of the supplier or the buyer exceeds 30%, then it does not mean that the vertical agreement is automatically forbidden, but in such case, undertakings should first assess themselves whether their agreement could have a restrictive effect on competition. For this purpose, the market position of oneself and the competitors, market barriers, the exact content of the agreement and the nature of the goods, the manner in which the agreement is implemented, the cumulative effect of similar agreements on the overall situation of the market and competitors, and other things, should be analysed. This is often a very complex analysis, which requires knowledge and experience both in applying competition law and economic analysis.
In addition to the above, certain competition restrictions in vertical agreements are, in any case, prohibited, irrespective of the parties' market shares. These are so-called „hardcore“ restrictions that are intrinsically harmful to competition. Such are, for example, agreements that set a fixed or a minimum resale price for the buyer or a fixed or minimum price level to be met by the buyer, or determine the maximum discount rate or fix the margin for the buyer. Also, an agreement that divides the market between buyers by territory or customer groups is also a „hardcore“ restriction, if certain additional conditions are met.
The form of the agreement is not important
It is important to know, that not only written agreements on competition restraints are prohibited, but also restraints that are imposed, for example, by e-mail or even orally. Undertakings may also be considered as restricting competition in circumstances where the agreement is not directly identifiable, but application of the competition restraint results from the parties' factual, informed cooperation (that is concerted practice).
Legal consequences and recommendations
Agreements that harm competition are, by law, void from inception. In addition, a vertical agreement or concerted practice restricting competition can lead to criminal proceedings against the company and its senior officials (in addition to board members also, for example, sales and purchasing managers). In the light of the above, we strongly recommend the companies to thoroughly review their agreements and related practices and, in cooperation with competent advisers, evaluate their impact on competition in their area of activity. Experienced legal and financial advisers from KPMG can assist you in doing that.
Law Office KPMG Law Ltd.
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