How-to guide: How to assess competition law risks in an agency agreement (EU)

Introduction

This guide will assist in-house counsel, private practitioners and risk and compliance teams with understanding how to deal with competition law risks in agency agreements.

It sets out the implications of using agency as a commercial model and considers the scope of the competition prohibitions contained in Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU) as they apply to agency agreements. This guide also considers how to assess whether an agreement is a genuine agency agreement and the risks if this is not the case.

This guide covers the following:

Overview – legal framework
Key competition law risks for organisations
The distinction between agents and distributors
Advantages of agency
Assessment of whether an agreement is a genuine agency agreement
Potential abuse of dominant position (the Article 102 prohibition)

This guide can be read in conjunction with the How-to guide: Understanding the competition law prohibitions in Article 101 and 102 TFEU, How to identify and prioritise competition law risk in your organisation, How to implement a culture of compliance with competition law in your organisation and How to identify and address competition law infringements and Checklists: Competition law compliance and Conducting a competition compliance audit.

Section 1 – Overview – legal framework

An agent is a legal or natural person with the power to negotiate and/or conclude contracts on behalf of another person (the principal) either in the agent’s own name or in the name of the principal, for the purchase of goods or services by the principal or the sale of goods or services supplied by the principal.

The Article 101(1) TFEU prohibition on anticompetitive agreements applies to agreements between two or more undertakings (economic entities) where that agreement may affect trade between member states and where the object or effect of the agreement is the prevention, restriction or distortion of competition within the EU.

As a general matter, the Article 101(1) prohibition may apply to agreements between entities operating at the same level of the supply chain, such as competitors (these are known as horizontal agreements) and also to agreements between entities operating at different levels of the supply chain, such as a manufacturer and distributor (these are known as vertical agreements).

The extent to which the Article 101(1) prohibition may apply to an agency relationship depends on whether the relationship between the agent and the principal can be categorised as a genuine agency agreement. If this is the case, the agency agreement falls outside the scope of the Article 101(1) prohibition as the selling or purchasing function of the agent forms part of the principal’s activities. If, however, the relationship is not one of genuine agency, then the agreement may fall foul of the Article 101(1) prohibition (although there is still the possibility that restrictions in the agreement may be exempt either because the agreement falls within the scope of a block exemption or is individually exempt due to having certain pro-competitive efficiencies).

The non-application of the Article 101(1) prohibition on anticompetitive agreements to agency agreements is dealt with in the European Commission’s Guidelines on vertical restraints (Vertical Guidelines), which are discussed in more detail below in section 5.

Even if outside of the scope of the Article 101(1) prohibition, Article 102 TFEU, which prohibits abuse of a dominant position could still apply in the context of a genuine agency agreement and this is considered further below in section 6.

Section 2 – Key competition law risks for organisations

It is important to consider the implications for the organisation of getting a competition analysis of an agency agreement wrong. In a genuine agency agreement, one major attraction for a principal is the ability to control the conditions of sale of the products (eg, price) because the agreement falls outside the scope of the Article 101(1) prohibition. If, however, the agreement is not one of genuine agency but is instead properly characterised as an agreement with a distributor, then that same control over the conditions of sale will likely fall foul of the Article 101(1) prohibition which extends, in particular, to those agreements or practices that:

fix pricing or other sales conditions, whether directly or indirectly;
limit or control production, markets, technical development or investment;
share markets or sources of supply;
apply dissimilar conditions to equivalent transactions with other parties, placing them at a competitive disadvantage; and
make the conclusion of contracts subject to supplementary, unconnected obligations.

If an agreement is found by a court or regulator to be in breach of the Article 101(1) prohibition, the implications are potentially very serious. They could include the consequences listed below.

The agreement will be void. Whether or not it is possible to sever the offending provisions from the agreement such that the remainder of it remains in force will be a matter for national member state law. If the offending provision cannot be severed, then the whole agreement will fall.
The parties may be fined up to 10% of annual worldwide turnover.
The parties may then find themselves exposed to damages claims by other organisations that have been suffered loss or damage as a result of the anticompetitive agreement.
The parties may receive onerous directions from the regulatory authority on how to avoid further future infringement.
Legal costs may be high.
There could be potential reputational damage.

There is no procedure for obtaining pre-clearance from the European Commission (Commission) that a particular agency agreement is compliant with competition law. It is therefore incumbent on an organisation entering into an agency agreement, or reviewing an existing one, to assess carefully whether any provision is compliant.

In addition to the Article 101(1) prohibition, companies should also be mindful of the possible application of other competition laws where their activities may affect trade elsewhere.

Section 3 – The distinction between agents and distributors

In the context of competition law, the distinction between agents and distributors is crucial, as it dictates, to a large extent, where risk lies between the parties. In broad terms, an agent is closely connected to their principal, whereas a distributor has more distance, responsibility and freedom.

Article 101 applies to agreements between two or more undertakings. With regard to agency: 'under certain circumstances, the relationship between an agent and its principal may be characterised as one in which the agent no longer acts as an independent economic operator. This applies where the agent bears no significant financial or commercial risks in relation to the contracts concluded or negotiated on behalf of the principal' (paragraph 30, Vertical Guidelines).

If there is a relationship of genuine agency, the agency agreement falls wholly or partially outside the scope of the Article 101(1) prohibition, which results in a lower risk of infringing competition rules for both the principal and the agent. Note below at section 5.3 the circumstances in which an agency agreement might still fall foul of the Article 101(1) prohibition.

A distributor or buyer, on the other hand, is a separate entity from a supplier. An agreement between a distributor and supplier that restricts competition will fall within the scope of the Article 101(1) prohibition and therefore amount to an actionable infringement.

There can be considerable scope for argument in any given case as to whether a party is genuinely an agent or, in reality, a distributor. In the event of a dispute, the court or regulatory body considers which party bears risk on a case-by-case basis, with regard to the economic reality of the situation rather than the legal form of the agreement (paragraph 34, Vertical Guidelines).

Section 4 – Advantages of agency

When considering and weighing up the competition law risks around agency and distribution, it is worth considering some of the broader commercial and legal implications.

For the principal, agency can provide:

a quick route to market because there is no need to set up its own sales and distribution teams;
a higher degree of control when compared with distribution – for example, over pricing, discounts, promotions and other sales strategies;
the ability to establish and grow its own relationships with customers and target customers; and
a lower risk of competition infringement (see section 2, above).

For the agent, agency can provide:

a lower barrier to entry in terms of cost (marketing and real estate costs are likely to be lower than for distributors);
a way to avoid product liability as this risk remains on the shoulders of the principal – for example, if a product is faulty, a customer would potentially have a cause of action against the principal, not the agent; and
a right to compensation for damage suffered as a result of termination of the contract if the products are goods rather than services (under national law implementing Council Directive 86/653/EEC on the coordination of the laws of the member states relating to self-employed commercial agents).

Section 5 – Assessment of whether an agreement is a genuine agency agreement

For the reasons set out above, a key question in all circumstances is whether a commercial relationship is one of agency or, in reality, one of distribution.

5.1 Factors relevant to a genuine agency agreement

If the agent bears no significant financial or commercial risk, the agreement will be construed as a genuine agency (further details on these financial and commercial risks are below). It then follows that the principal will not be at risk of infringing the Article 101(1) prohibition due to restrictions in the agreement relating to the sale of the contract goods or services, as it is one and the same entity with the agent.

To ascertain whether a relationship of genuine agency exists in any given case, identify whether the agent in question is taking on any financial or commercial risk.

When considering the application of the Article 101(1) prohibition, the Vertical Guidelines (paragraph 31) helpfully assist by providing a framework covering three types of financial and commercial risk that are material to the categorisation of an agreement as an agency agreement.

It is not necessary for all three of these types of risk to be present – the presence of one is sufficient. Furthermore, anything greater than a minor, insignificant amount of assumed risk is sufficient for the agency not to be considered genuine.

The three types of risk are listed below.

Contract-specific risks that are directly related to the contracts in question, such as the financing of stock.
Risks related to market-specific investments that are required for the type of activity for which the agent has been appointed by the principal and which are necessary to enable the agent to conclude and/or negotiate the particular type of contract. Such investments are usually sunk, which means that upon leaving that particular field of activity the investment cannot be used for other activities or sold, other than at a significant loss.
Risks related to other activities undertaken in the same product market, to the extent that the principal requires these activities to be undertaken as part of the agency relationship by the agent at its own risk, and not as an agent on behalf of the principal.

According to paragraph 33 of the Vertical Guidelines, in a genuine agency situation it is typically the case that the agent:

does not acquire the property in the goods bought or sold under the agency agreement and does not itself supply the services bought under the agency agreement;
does not contribute to the costs relating to the supply or purchase of the contract products or services, including the costs of transporting the goods;
does not maintain at its own cost or risk stock of the contract goods, including the costs of financing the stock and the costs of loss of stock and can return unsold goods to the principal without charge (unless the agent is at fault);
does not take responsibility for customers’ non-performance of the contract (for instance for non-payments by the customer), with the exception of the loss of the agent’s commission (unless the agent is at fault);
does not assume responsibility towards customers of other third parties for loss or damage resulting from the supply of the contract goods or services (unless the agent is at fault);
is not, directly or indirectly, obliged to invest in sales promotion, including through contributions to the advertising budget of the principal or to advertising or promotional activities specifically relating to the contract goods or services (unless such costs are fully reimbursed by the principal);
does not make market-specific investments in equipment, premises, training of personnel or advertising (unless such costs are fully reimbursed by the principal); and
does not undertake other activities within the same product market required by the principal under the agency relationship, for example, the delivery of goods (unless such costs are fully reimbursed by the principal).

The above list is non-exhaustive but where the agent incurs one or more of the above risks (or another type of risk), the agreement will not be categorised as an agency agreement that falls outside the scope of Article 101(1) TFEU.

In order to be an agent, all relevant risks linked to the sale of the goods or services covered by the agency agreement, including market-specific investments, must be borne by the principal. Paragraph 35 of the Vertical Guidelines makes clear that ‘a principal may use various methods to cover the relevant risks and costs’ and examples are given as to how this might be achieved.

Where the purported agent bears one or more of the relevant risks described above, the agreement between agent and principal will not constitute an agency agreement for the purpose of applying the Article 101(1) prohibition. The agent will be treated as an independent undertaking (a buyer) and the agreement will be subject to the possible application of the Article 101(1) prohibition in the same way as any other vertical agreement (paragraph 42, Vertical Guidelines).

The Vertical Guidelines clarify (at paragraph 36) that it is possible for an independent distributor of some goods or services of a supplier to also act as an agent for other goods or services of the same supplier, provided that:

the activities and risks covered by the agency agreement can be effectively delineated;
the independent distributor is genuinely free to enter into the agency agreement (for example, the agency relationship must not be de facto imposed by the principal through a threat to terminate or worsen the terms of the distribution relationship); and
the principal must not impose on the agent an activity as an independent distributor, unless such activity is fully reimbursed by the principal and all relevant risks linked to the sale of the goods or services covered by the agency agreement, including market-specific investments, must be borne by the principal.

Where such a dual-role is to be undertaken, carefully assess whether the criteria for an agency relationship are met, particularly where the agent undertakes other activities as an independent distributor for the same principal in the same relevant market.

5.2 Effect of an agreement being a genuine agency agreement

The Vertical Guidelines make clear (at paragraph 41) that where a relationship between two undertakings is characterised as an agency agreement, all obligations imposed on the agent in the agency agreement in relation to the contracts concluded or negotiated on behalf of the principal fall outside the scope of the Article 101(1) prohibition. Accordingly, the inclusion within the agency agreement of the following types of restrictions will be acceptable:

limitations on the territory in which the agent may sell the contract goods or services;
limitations on the customers to whom the agent may sell the contract goods or services; and/or
the prices and conditions at which the agent may sell or purchase the contract goods or services.

These types of provisions are acceptable because they form ‘an inherent part of an agency agreement, as those obligations relate to the ability of the principal to determine the scope of the agent’s activity in relation to the contract goods or services’ (paragraph 41, Vertical Guidelines).

5.3 When can a genuine agency still give rise to infringement of the Article 101(1) prohibition?

As a statement of general principle, genuine agency agreements are free from the risk of infringing the Article 101(1) prohibition. However, there are some exceptions. The Vertical Guidelines (paragraph 43) state that, an agent ‘remains a separate undertaking from the principal and therefore provisions governing the relationship between the agent and the principal may fall within Article 101(1) [TFEU]’. In this regard, paragraph 43 refers, by way of example, to the provisions set out below which could give rise to an infringement.

Exclusivity – a clause aimed at preventing the principal from appointing other agents in respect of a given type of transaction, customer or territory. In the Commission’s opinion such exclusive agency provisions will in general not result in anticompetitive effects.
Single branding – a clause aimed at preventing the agent from acting as an agent or distributor for competitors of the principal.
Post-term non-compete – a clause preventing access to the market by the agent for a period of time following termination of the contract.
Any clause or practice that facilitates collusion.

These types of clauses may be exempt from the scope of the Article 101(1) prohibition if they satisfy the conditions for block exemption under the EU Vertical Block Exemption Regulation or the conditions for individual exemption under Article 101(3).

Section 6 – Potential abuse of dominant position (the Article 102 prohibition)

As set out above, the general rule is that genuine agency agreements will fall outside the scope of the Article 101(1) prohibition. However, if either the principal or agent occupy a dominant position in a particular market, an abuse of such dominance might constitute an infringement of Article 102 TFEU, which prohibits such abuse.

In outline, the process for evaluating risk in relation to abuse of dominant position entails assessing:

whether either party to the agency agreement has a dominant position; and
whether the agency agreement or other conduct has the effect of restricting competition through abuse of that dominant position such that it may affect trade within the EU.

6.1 Dominant position

In summary, a supplier could be found to be in a dominant position if it has enough power to act without the normal pressures of a competitive market applying. Market shares are one indicator of market power but are not determinative of market power. The Commission considers it unlikely that an undertaking will be individually dominant if its share of the relevant market is below 40%, although the Commission also takes other factors into account in its assessment of dominance, including barriers to entry, countervailing buyer power, the overall strength of the company and its resources and the extent to which it is vertically integrated.

6.2 Abusive practices

The prohibition on abusive practices applies equally in the context of an agency agreement as in the market generally.

The Article 102 prohibition provides that conduct may, in particular, constitute an abuse if it consists of:

directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions;
limiting production, markets or technical development to the prejudice of consumers;
applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;
making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of the contracts.

This is a non-exhaustive list and shows examples of the types of behaviour that may constitute an abuse.

Abusive conduct may come in two forms:

exclusionary conduct – conduct which removes or weakens competition from existing competitors, or establishes or strengthens entry barriers, thereby removing or weakening potential competition; and
exploitative conduct – conduct which exploits customers or suppliers (eg, excessively high prices).

Competition enforcement tends to prioritise exclusionary conduct, but either form of conduct can be subject to enforcement.

6.3 Exemptions

There are no formal exemptions but if there is an objective justification for the conduct (and the conduct was proportionate), then it may not be regarded as an abuse. The onus is on the company seeking to rely upon such objective justification to show that the measures taken were proportionate and necessary for protecting legitimate objectives, such as protecting a public interest.

How-to guide: How to assess competition law risks in an agency agreement (EU)

Introduction

Section 1 – Overview – legal framework

Section 2 – Key competition law risks for organisations

Section 3 – The distinction between agents and distributors

Section 4 – Advantages of agency

Section 5 – Assessment of whether an agreement is a genuine agency agreement

5.1 Factors relevant to a genuine agency agreement

5.2 Effect of an agreement being a genuine agency agreement

5.3 When can a genuine agency still give rise to infringement of the Article 101(1) prohibition?

Section 6 – Potential abuse of dominant position (the Article 102 prohibition)

6.1 Dominant position

6.2 Abusive practices

6.3 Exemptions

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