Chapter 13 Guidance on answering assessment questions

Kettles r us Ltd (Kettles), a UK-based kettle manufacturer with a 28 per cent share of the relevant market are in supply negotiations with PotsnPans Ltd, an Irish wholesaler with an 18 per cent share of the relevant market. PotsnPans are very keen to make an agreement with Kettles for the unique products, especially given Kettles’ willingness to grant PotsnPans sole wholesaler status in Ireland. In return, PotsnPans is considering agreeing not to sell any other kettles for an indefinite period and to accept the resale prices stipulated by Kettles.

Advise the parties as to the validity of the proposed agreement under Article 101 TFEU and consider whether Regulation 330/2010 applies as it stands and what amendments could/should be made.

Article 101 TFEU provides that agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade and have as their object or effect, the prevention, restriction or distortion of competition within the internal market are prohibited.  Together with Article 102 TFEU which concerns abuses of a dominant position which are capable of affecting trade, it completes the Treaty provisions designed to ensure that competition can develop naturally and without distortion in securing an internal market whilst protecting small business and consumers.

Article 101 only apples to undertakings.  Undertaking was defined in the case of Hofner and Elser as ‘natural or legal persons engaged in economic activity’.  As such, Kettles and PotsnPans would satisfy this definition as private limited companies.

Article 101 is concerned with agreements between undertakings, decisions by undertakings and concerted practices.  Whilst it is clear that an agreement need not be a formally constituted agreement and indeed, a gentlemen’s agreement will suffice, it is appears from the facts of the instant case that the parties intend to complete a formal, binding agreement.

It must then be established whether or not the agreement may affect trade.  This is interpreted broadly and is satisfied whenever it is ‘possible to foresee with a sufficient degree of probability on the basis of a set of objective factors of law or of fact that the agreement in question may have an influence, direct or indirect, actual or potential on the pattern of trade between Member States’ (STM).  As such, it is clear that by Kettles allowing PotsnPans to be the only wholesaler in Ireland of Kettles’ products that trade may, at the very least, be affected.  It may be asked what if other wholesalers in Ireland wanted to also sell the product?  Furthermore, with PotsnPans agreeing not to sell competing kettles, any other potential manufacturer is limited as to their wholesale outlets which again, may affect trade.

Finally, it needs to be established as to whether the agreement has as its object or effect, the prevention, restriction or distortion of competition.  It is clear from STM that once an anti-competitive object has been established, there is no need to then consider the effect.  Either will suffice – they are alternatives.  The determination of this is important however in relation to whether the agreement has an ‘appreciable’ effect on trade considered below.  In the instant case, it would be very difficult for the parties to sustain an argument that the agreement did not have an anti-competitive objective in view of the price fixing clause (see  Commission guidelines on the application of Article 81(3) of the Treaty, 2004).

As such, it would seem that the agreement is prohibited under Article 101(1) TFEU and is ‘automatically void’ under Article 101(2).  However, it needs to be established whether the proposed agreement falls within any of the exemptions.

First consideration should be as to whether this is an agreement of ‘minor importance’.  According to Volk, an agreement would only fall within the Article 101 prohibition if it had an appreciable effect upon trade.  The Notice on agreements of minor importance, 2014 provides a level at which this can be judged.  Thus, for horizontal agreements (agreements between competitors), so long as the aggregate market share of the parties does not exceed 10%, it is not deemed to have an appreciable affect and therefore (subject to below) would not breach Article 101.  For vertical agreements (agreements between non-competitors), the percentage is set at 15%. However, in application to the instant case, the agreement would automatically be considered to have an appreciable effect on trade due to its anti-competitive object (paragraph 2 of the Notice).

Article 101(3) provides for exemption for both individual agreements, and categories of agreements.  As regards the latter, a number of block exemptions have been introduced and the applicable exemption for vertical agreements such as that in the instant case is the VBE Regulation 330/2010.

Regulation 330/2010 provides that the Article 101(1) does not apply to vertical agreements where the market share of the buyer and supplier does not exceed 30% (each) of the relevant market.  A relevant market is established with consideration of demand and supply substitutability, but the question is not aimed at making such a determination.  Indeed, the question provides detail of the share each undertaking has of the relevant market and being under 30%, it would seem the block exemption applies.  However, it is problematic in two regards.  Firstly, the block exemption excludes direct or indirect non-compete obligations which are either indefinite or exceed five years (Article 5(1)(a)).  A non-compete obligation is defined in Article 1 of the Regulation and includes PotsnPans  agreement not to sell competing kettles.  Such excluded restrictions can, however, be severed from the agreement meaning that the remainder of the agreement can benefit from the block exemption.

However, as noted above, the proposed agreement contains a hard core restriction in the form of a price fixing clause.  Such a clause removes the benefit of the block exemption in its entirety (see Article 4).

As such and in conclusion good advice for the parties would be to amend the agreement before finalising it because as it stands, it would breach Article 101.  In order to enjoy the benefit of the block exemption, the price fixing clause should be removed and the non-complete obligation altered such that it does not exceed five years.