IN RE
Exclusivity Arrangements:
Pros and Cons
E
by Igor V. Svechkar
by Tetiana V. Vovk
Igor V. Svechkar
is a partner with Asters
Tetiana V. Vovk
is an associate with Asters
20
xclusivity
arrangements are quite common for a wide range of
products and services
that a consumer comes
across nowadays, especially in
distribution (particularly, in such
industries as pharmaceuticals,
automotive, etc.). Such arrangements are commonly defined as
requiring a buyer/distributor to
purchase all of its requirements
or a large extent thereof from one
(dominant) seller/supplier, or a
supplier to sell all of its products
or services or a large extent thereof to the dominant firm (see Report on Single Branding/Exclusive
Dealing of the Unilateral Conduct
Working Group of the International Competition Network).
There may be various economic reasons for the parties to
engage in exclusivity arrangements. Those would primarily include the supplier’s incentive to
procure for effective distribution
of its products benefiting from
optimization of their import and
sales, as well as making use of
the distributor’s developed marketing structure and reduction
of transport and other related
costs, to implement unified standards with respect to storage,
maintenance and presentation of
products, etc., all of which would
ultimately contribute to safeguarding the supplier’ good reputation on the market and bring
economic efficiencies. Exclusivity
may also serve as a tool to secure
confidentiality of the supplier’s
business secrets and minimize
its expenditures on dealing with
other distributors. From the distributor’s perspective, exclusivity
would secure customers’ demand
for the product and create incentives to offer a better deal to the
customer.
On the other hand, exclusivity arrangements may amount
to an anti-competitive practice
bringing adverse effects for the
market, which may be caused
by market foreclosure and rise
in costs for competitors to enter
or maintain their position on the
market.
Ukrainian legislation does
not contain a precise definition
or expressly regulate the issue
of exclusive dealing, but it does
track down the anti-competitive
effects that such arrangements
may bring for competition on the
market and ultimately, for the
end consumer.
Legislative framework
Thus, Economic Competition Protection Act of Ukraine
prohibits any anti-competitive
concerted practices, i.e. those
which resulted or can result in
the prevention, elimination or
restriction of competition (unless
authorized by the Antimonopoly
Committee of Ukraine (AMCU)
or the Cabinet of Ministers of
Ukraine as the last resort).
Such prohibition is pre-qualified by the primary jurisdictional
test: the law applies only to the
extent an arrangement has or
may have an impact on economic competition on the Ukrainian
market. This created a form of
effects-based defense for the parties to a potentially prohibited
practice. However, as the AMCU
has exclusive competence to as-
July—August 2010 | The Ukrainian Journal of Business Law | www.ujbl.info
sess and decide whether any impact on the market may occur
as a consequence of a particular
arrangement and is vested with
a rather considerable degree of
discretion in qualification of arrangements and determining
their potential anticompetitive
effects, the possibilities to rely on
self-assessment are very limited
and the risks of adverse treatment usually remain.
In the worst case scenarios
exclusivity arrangements may
result in such unlawful practices
as market allocation or significant restriction of competitiveness of other undertakings. Furthermore, such arrangements
may be treated as actions targeting coordination of competitive behavior on the market and
restricting intra-brand competition. They may also contribute
to dominant suppliers maintaining unlawful monopoly market
power or market foreclosure for
competing suppliers, especially if
the distributor is unique or represents an important distribution channel.
However, exclusivity does
not necessarily have adverse effects on competition and result
in consumer harm.
Substantive analysis
Prior to proceeding to the
analysis of an exclusivity arrangement on the substance, it
is worthwhile analyzing whether the arrangement falls into
either of the categories generally
exempted from prohibition as
incapable of causing significant
adverse effects on competition.
IN RE
exclusivity arrangements
The Resolution of the AMCU
On the Standard Requirements
to Concerted Practices of the
Undertakings for the General
Exemption from the Requirement
to Obtain AMCU Approval, offers
the following exemptions:
— de minimis exemption, i.e.
where the aggregate combined
market share of the parties to an
arrangement on any of the product market(s) concerned is less
than 5%;
— market share based exemption, applicable to restraints
between non-monopolists (or
absent exclusive or privileged
rights) if the aggregate combined
market share of the parties to
an arrangement on any of the
product market(s) concerned is
less than 20%, provided certain
(rather low) financial thresholds
are met.
The above exemptions are,
however, not accessible to competitors (at least potential ones)
in the event of hard core restrictions, such as market sharing.
Another possibility to validate an anti-competitive exclusivity arrangement is to obtain
an individual clearance from
the AMCU. As a general rule, the
AMCU would authorize concerted practices if they contribute to
(i) modernization of production,
purchase or sale of products,
(ii) technological or economic development, and/or (iii) development of small or medium-sized
businesses, etc. and do not adversely impact competition on
the relevant market. The AMCU
is usually reluctant to authorize
restrictive arrangements where
the beneficiary of the restriction possesses significant market
power.
Otherwise, the exclusivity arrangements are generally prohibited, as in essence they represent
one of the hard-core restrictions
under Ukrainian competition law
— market allocation — and reduce intra-brand competition.
In this respect European approaches are more flexible. Thus,
exclusive distribution arrange-
ments are generally exempted
from prohibition when both the
supplier’s and the distributor’s/
buyer’s market share do not
exceed 30% (see Vertical Block
Exemption Regulation). In the
view of the European Commission the loss of intra-brand competition (caused by an exclusivity
arrangement) can only be problematic if inter-brand competition is limited (see Commission
Notice, Guidelines on Vertical Restraints). Thus, it may be concluded that an exclusivity arrangement among the undertakings
with a market share of 30% at
most are not perceived as posing
a serious threat to the competitive market environment. Furthermore, those market players
with an even stronger position on
the market may still benefit from
an individual exemption granted
by the European Commission if
they prove that the resulting efficiencies would counter-balance
the adverse effect of the restrictive arrangement.
Importantly, US and European competition authorities have
in recent years tended to employ
a more economic-based approach
when analyzing the effects of
the exclusivity arrangements on
competition and adopting rulings
on the permissibility of exclusivity arrangements in individual
cases. Various factors would be
relevant for such analysis:
— market shares of the participating undertakings;
— entry barriers (markets
with low entry barriers are normally less sensitive to exclusivity arrangements);
— market position of competitors (adverse effects are less
likely when parties to the exclusivity arrangement face strong
competition on the market and
their competitors do not need to
incur significant additional costs
to outbalance the effects of such
an arrangement);
— the duration and obligatory nature of an exclusivity arrangement (arrangements with
shorter duration and/or the pos-
sibility for the parties to exit from
the arrangement upon notice are
generally less harmful as effective competition is preserved);
— price coordination and
output control potential of an
arrangement (if no such coordination or restriction on output
is involved, the arrangement is
unlikely to raise concerns over
competition);
— need to protect the supplier’s good reputation and high
value brand, to ascertain protection of its IP rights (these normally justify exclusivity);
— the products’ specifics (in
certain industries qualified sales
personnel and specific market
knowledge are required, which
normally justifies exclusivity);
— brand preferences of consumers (adverse effects are less
likely if consumers have low
brand sensitivity);
— other efficiencies (e.g.
exclusivity may increase interbrand competition as the exclusive distributor would have more
incentives to invest in promoting
the product and will be more inclined to offer better terms to the
customer to survive in a competitive environment).
Exclusive
dealing
arrangements
are not
always
harmful to
competition
or infringe
upon the
interests
of the end
consumers
Outline
Although prohibited under
the general rules of Ukrainian
competition law as anti-competitive, exclusive dealing arrangements are not always harmful to
competition or infringe upon the
interests of the end consumers.
The practical risks of exposure
and the probability of adverse
treatment of an exclusivity arrangement are usually higher if
other market players do not pose
a serious competitive constraint
on the parties to the exclusivity
arrangement (e.g., due to limited range of offered products) or
if the product is unique and/or
there are no alternative sources
of supply/distribution. Thus, it is
recommended to assess the compliance of a particular arrangement on a case-by-case basis.
www.ujbl.info | The Ukrainian Journal of Business Law | July—August 2010
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