WHAT ARE VERTICAL AGREEMENTS?
In 2002, the Competition Board released “Communiqué No. 2002/2 on Group Exemption for Vertical Agreements,” which encompassed various forms of vertical agreements. Subsequently, in 2003, the Competition Board unveiled the “Implementation Guideline for Communiqué No. 2002/2 on Vertical Agreements,” aiming to provide distinct directives for the Competition Board’s application of the Communiqué. This guideline serves to reduce potential uncertainties that could emerge from undertakings’ interpretations of the Communiqué.
The Communiqué establishes vertical agreements as “contracts involving two or more entities functioning at distinct tiers within the production or distribution hierarchy, relating to the procurement, vending, or re-vending of specific commodities or services.”
As outlined in the Communiqué, the categorization of an agreement as a vertical agreement hinge on three pivotal factors:
- Involvement of Two or More Undertakings: The agreement necessitates the participation of two or more business entities. Consequently, arrangements involving non-undertaking end-users fall outside the purview of Article 4 of the Law and are thereby excluded from group exemption.
- Diverse Levels of Operation: The undertakings engaged in the agreement must function across dissimilar tiers within the spectrum of production or distribution.
- Focus on Goods or Services Transactions: The agreement should primarily pertain to the procurement, sale, or re-sale of particular goods or services.
CASES OF INFRINGEMENT AND GROUP EXEMPTION UNDER THE LAW ON THE PROTECTION OF COMPETITION
Competition Law is regulated in Turkish legislation by Law No. 4054 on the Protection of Competition and the Group Exemption Communiqué No. 2002/2 on Vertical Agreements, but vertical agreements in the motor vehicles sector are separately regulated by the Group Exemption Communiqué No. 2017/3 on Vertical Agreements and Concerted Practices in the Motor Vehicles Sector.
Article 4 of Law No. 4054 stipulates those agreements between undertakings, concerted practices, and such decisions and practices of associations of undertakings which directly or indirectly prevent, distort, or restrict competition in a particular goods or services market, or which have or may have this effect, are against the law.
The article lists certain limitations that are specifically prohibited. These limitations are:
- Determination of the purchase or sale price of goods or services, the elements that determine the price, such as cost, profit, and any conditions of purchase or sale,
- The division of markets for goods or services and the sharing or control of any market resources or elements,
- Control of the quantity of supply or demand of a good or service, or the determination of these outside the market,
- Obstructing or restricting the activities of competing undertakings, excluding undertakings operating in the market through boycotts or other behaviors, or preventing new entrants to the market,
- Except for exclusive franchising, applying different terms and conditions to equally situated persons for equal rights,
- In contravention of the nature of the agreement or commercial practices, imposing the purchase of one good or service and another good or service, or making a good or service demanded by a buyer who is an intermediary undertaking conditional on the display of another good or service by the buyer, or imposing conditions on the re-supply of a supplied good or service.
Article 5 of the Law on the Protection of Competition states that agreements between undertakings will be exempted from the application of Article 4 in the presence of certain conditions. These conditions are;
- New developments and improvements in the production or distribution of goods and the provision of services, or economic, technical progress,
- Consumers benefit from it,
- That competition is not eliminated in a significant part of the relevant market,
- Restrict competition no more than is necessary to achieve the objectives in points (a) and (b).
Therefore, if the conditions in Article 5 are met, restrictions between undertakings will not be illegal and will be subject to group exemption.
COMMUNIQUÉ NUMBERED 2017/3 ON GROUP EXEMPTION FOR VERTICAL AGREEMENTS AND CONCERTED PRACTICES IN THE MOTOR VEHICLES SECTOR
The Communiqué No. 2005/4 on Group Exemption for Vertical Agreements in the Motor Vehicles Sector (Repealed Communiqué), which was previously published by the Competition Authority, was repealed after an effective period of 12 years, replaced by the Communiqué No. 2017/3 on Group Exemption for Vertical Agreements in the Motor Vehicles Sector (Communiqué).
The scope article of the Communiqué states that the provisions of the new Communiqué No. 2017/3 will now apply to vertical agreements on the purchase, sale, or resale of new motor vehicles; purchase, sale, or resale of spare parts of motor vehicles; and provision of maintenance and repair services for motor vehicles. However, for such vertical agreements to be subject to the group exemption, they must first contain vertical restrictions and meet the exemption conditions.
In other words, the Communiqué will apply to vertical agreements in the motor vehicles sector at all levels, from the initial supply of a new motor vehicle by its supplier to its resale to the end-user and from the initial supply of spare parts by its suppliers to the provision of maintenance and repair services to the end-user.
In the following part of the scope article of the Communiqué, it is regulated that vertical agreements between competing undertakings operating in the motor vehicles sector cannot benefit from the exemption, and it is stated that agreements that do not have reciprocity conditions and where the supplier is both the manufacturer and distributor of the goods or services subject to the agreement; on the other hand, agreements where the buyer is not the manufacturer but only the distributor of goods or services that compete with the goods or services subject to the agreement will benefit from the exemption.
CONDITIONS OF EXEMPTIONS IN THE COMMUNIQUÉ
To benefit from the exemption according to the Communiqué, first, for agreements on quantitative selective distribution and exclusive distribution, the relevant market share of the vehicle or spare parts supplier for motor vehicles or spare parts should not exceed 30%.
The Quantitative distribution system is defined in the first paragraph of Article 4 of the Communiqué. Accordingly, a quantitative distribution system is a selective distribution system in which the supplier uses criteria that directly or indirectly limit the number of distributors.
In Article 4 of the Communiqué, an exclusive distribution system is defined as a distribution system in which the supplier undertakes to sell its products to a single distributor for resale in a certain region, while at the same time limiting the active sales of the distributor to other regions established as exclusive.
In addition to quantitative and exclusive selective distribution systems, there is also a qualitative selective distribution system. A qualitative selective distribution system is a selective distribution system in which the supplier uses only qualitative criteria for distributors, which are required by the nature of the goods or services subject to the agreement, determined in such a way that they are the same for all undertakings applying to participate in the distribution system which are not applied in a discriminatory manner, and which do not directly or indirectly limit the number of distributors.
Accordingly, if an exclusive distribution system, a quantitative distribution system or a qualitative distribution system is applied in vertical agreements where the market shares of the parties are below the 30% threshold, it can be said that such agreements meet the first of the general conditions to benefit from the exemption provided by the Communiqué. However, vertical agreements where the parties’ market share is above 30% may benefit from the group exemption provided by the Communiqué only if a qualitative distribution system is adopted. Because the Communiqué does not regulate any market share threshold for the qualitative selective distribution system.
The other requirement for a vertical agreement between a supplier and a distributor to benefit from the group exemption is that the agreement must be for a period of at least 5 years and both parties must agree to give notice of non-renewal 6 months before the expiry of the agreement, or if the agreement is for an indefinite period, the notice period for termination must be at least two years for both parties. The purpose of this condition is to protect intra-brand competition and to prevent distributors from immediately terminating the agreement due to unrestricted behavior.
LIMITATIONS PREVENTING AGREEMENTS FROM BENEFITING FROM THE GROUP EXEMPTION
Article 6 of the Communiqué No. 2017/3 regulates that certain vertical agreements include restrictions that are intended to prevent competition directly or indirectly and cannot benefit from the exemption provided by the Communiqué.
Restrictions on the Distributor’s Determination of the Resale Price
Restricting or preventing the freedom of the distributor to set its own selling price is one of the limitations that exclude a vertical agreement from the group exemption. This restriction may be made directly by an explicit provision of the resale price in the contract, or indirectly by setting the upper level of the distributor’s discount rate and profit margin, applying special discounts to the distributor to the extent that it complies with the recommended prices, and delaying deliveries or terminating the agreement if the recommended prices are not complied with.
It should also be noted that the supplier is allowed to determine or recommend the maximum selling price of the distributor if it does not turn into a fixed or minimum selling price. Therefore, vertical agreements where the maximum price or recommended price is determined will benefit from the group exemption.
Restrictions on the Distributor’s Sales Territory or Customers
One of the restrictions that exclude vertical agreements between undertakings from the group exemption is the restriction on the region or customers to which the distributor will sell. However, in some cases, these restrictions are subject to exceptions.
In the case of an exclusive distribution system, active sales to an exclusive region or customer group allocated by the suppliers to themselves or another distributor may be restricted. However, restricting passive sales to this exclusive territory or customer group would be illegal and would exclude the vertical agreement from the group exemption.
The second exception introduced in the Communiqué is that the buyer operating at the wholesale level may be restricted from selling to end-users. Such restriction is introduced to preserve the efficiency of the distribution network and to ensure that goods and services are offered to consumers on equal terms at the endpoints.
Another exception in the Communiqué is related to the sale of parts supplied for assembly purposes. The restriction or limitation by the supplier of the buyer supplying such parts to the competitors of the supplier, who is the manufacturer, is not considered as a restriction that excludes the vertical agreement from the group exemption.
Restrictions on the Implementation of the Selective Distribution System
For a vertical agreement to benefit from the exemption provided by the Communiqué, members of the selective distribution system cannot be prohibited from active or passive sales in terms of sales to end-users. However, except for the sale of new motor vehicles, the distributor may be prevented by the supplier from changing the sales point or opening another sales point, but this prevention does not exclude the vertical agreement from the scope of group exemption. This is because the physical characteristics of the sales point are an important factor affecting the success of the distribution system in the selective distribution system.
Restrictions on the Distribution of Motor Vehicles, Distribution of Spare Parts, and Provision of Maintenance and Repair Services in Combination
The obligation of the supplier to provide motor vehicle distribution, spare parts distribution, and maintenance and repair services together are among the restrictions that exclude the vertical agreement from the scope of the group exemption. With this regulation, it is not possible to benefit from the group exemption if vehicle suppliers impose an obligation to provide after-sales services together with sales to authorized distributors, or an obligation to distribute new motor vehicles together with after-sales services to authorized services.
However, it should be noted that Communiqué No. 2017/3 accepts the obligation of the supplier to provide sales and after-sales activities together as one of the restrictions that exclude the agreement from the scope of the group exemption, but vertical agreements that require the provision of maintenance and repair services and the distribution of spare parts together will benefit from the group exemption.
Restrictions Preventing Specialized Services from Accessing Spare Parts
The restriction by the motor vehicle supplier on authorized distributors, authorized services, and authorized spare parts distributors to sell the spare parts of motor vehicles provided by the supplier to private services is considered as an illegal restriction that prevents the vertical agreement from benefiting from the exemption provided by the Communiqué. The purpose of this Article is to prevent the supplier from restricting authorized distributors or authorized services if they wish to make such sales.
Restrictions on Spare Parts Distribution
Restrictions that prevent the sale of these goods to itself, authorized spare parts distributors, authorized services, independent spare parts distributors, special services, or end-users in the agreements made by the motor vehicle supplier with spare parts suppliers or equipment suppliers such as repair equipment, diagnostic devices, etc., are accepted as one of the restrictions affecting the benefit of the vertical agreement from the group exemption. The main purpose of this regulation is to reduce the dependency of authorized distributors, authorized spare parts distributors, authorized services, independent spare parts distributors, private services, or end-users on the motor vehicle supplier for the supply of these goods and to enable the suppliers to operate effectively in the market.
Except for the services provided free of charge within the scope of the warranty, the supplier’s restriction on the use of original spare parts or spare parts of equivalent quality obtained from other sources by authorized distributors and authorized services, and preventing the authorized distributor and authorized service from purchasing original spare parts directly from the manufacturer of the parts, are among the restrictions that prevent the vertical agreement from benefiting from the exemption provided by the Communiqué. The supplier may only compel authorized distributors and authorized services to use spare parts obtained from itself or an undertaking nominated by it for warranty repairs, free maintenance, and vehicle recall services.
Paragraph (h) of Article 6 of the Communiqué regulates the placement of the trademark or logo of the spare parts manufacturer on these parts in an effective and easily visible manner as one of the restrictions preventing the vertical agreement from benefiting from the group exemption. This regulation includes the prohibition of placing a trademark or logo on the package. However, it does not prevent the motor vehicle supplier from placing its trademark or logo on the parts provided to the supplier by the spare parts manufacturer.
In Article 7 of the Communiqué, the provisions that do not prevent the whole agreement from benefiting from the group exemption, but which themselves cannot benefit from the group exemption, are regulated under the title of ” Non-Compete Obligation and Restriction of the Opening of Additional Facility Locations”.
The Regulation makes it possible to separate the provisions that cannot benefit from the group exemption from the whole agreement and to ensure that the remaining provisions are included in the scope of the group exemption.
According to the Communiqué, the non-competition obligations that cannot benefit from group exemption are separately regulated as distribution of motor vehicles, distribution of spare parts, and maintenance and repair services.
Non-Competition Obligation for the Distribution of Motor Vehicles
Similar to Communiqué No. 2002/2, the non-competition obligation for the distribution of motor vehicles is defined as “any obligation imposed directly or indirectly on the buyer to purchase, based on the buyer’s purchases in the previous calendar year, more than 80% of the goods or services subject to the agreement, or their substitutes in the relevant market for the sale of new motor vehicles from the supplier or another undertaking indicated by the supplier”.
In practice, the duration of the non-compete obligation imposed on the buyer is of great importance. Non-competition obligations with an indefinite duration or a duration longer than five years cannot benefit from the group exemption. In this case, a non-compete obligation will benefit from group exemption if its duration does not exceed five years or if the extension beyond five years is possible with the consent of both parties and no situation prevents the buyer from terminating the non-compete obligation at the end of the five years.
Non-Competition Obligation for the Distribution of Spare Parts
The provisions regarding the non-competition obligation for the distribution of spare parts are regulated differently from those for the distribution of motor vehicles, and accordingly, the non-competition obligation is considered to be “any obligation imposed directly or indirectly on the buyer to purchase, based on the buyer’s purchases in the previous calendar year, more than 30% of the goods or services subject to the agreement or their substitutes in the after-sales market in the relevant market from the supplier or another undertaking to be indicated by the supplier”. This definition is intended to allow network members to buy and sell goods from at least three different competing suppliers, with a limit of 30%.
It is regulated that any non-competition obligation imposed on the buyer for the distribution of spare parts during the term of the agreement cannot benefit from the exemption provided by the Communiqué. In other words, direct or indirect obligations that force the buyer to purchase more than 30% of its purchases of a certain type of product from a single supplier will not be able to benefit from the group exemption. According to this regulation, a vehicle supplier wishing to benefit from the group exemption cannot impose an obligation on the buyer to use only spare parts of its own brand. However, if the buyer voluntarily chooses a single brand, the group exemption will continue to apply.
It should also be noted that if the supplier forces the buyer to keep the spare parts of vehicles of different brands in different parts of the service facility, this provision will not benefit from the group exemption. This is because such an imposition would mean restricting the authorized service center’s right to repair vehicles of other brands.
Non-Competition Obligation for Provision of Maintenance and Repair Services
In terms of the provision of maintenance and repair services, the buyer should not be subject to any non-competition obligation during the term of the agreement and for the period after the termination of the agreement. Therefore, restrictions that directly or indirectly prevent a vehicle supplier, an authorized distributor, or an authorized service in its distribution network from providing maintenance and repair services to vehicles distributed by another vehicle supplier will not benefit from the group exemption. This regulation aims to enable authorized distributors and authorized services to provide authorized services or special services for more than one brand.
RESTRICTION ON OPENING ADDITIONAL FACILITIES
In the second paragraph of Article 7 of the Communiqué, it is regulated that the exemption provided by the Communiqué shall not apply to the direct or indirect obligations imposed about the distribution of spare parts, or the opening of additional facility locations in terms of maintenance and repair services in vertical agreements where the selective distribution system is applied.
In this context, while the supplier is allowed to restrict additional sales points to be opened by authorized distributors and authorized dealers, the prohibition of opening additional facility locations for the distribution of spare parts or maintenance and repair services cannot benefit from the exemption provided by Communiqué No. 2017/3.
Author: Talha Fahri İzgeren