New Anti-Monopoly Regulation With Respect to Distribution Agreements
- By Patrick J. Brooks
- Oct. 13 2009 00:00
On August 23, 2009, a series of amendments to Federal Law No. 135-FZ “On Protection of Competition” (the Competition Law) came into effect, which, among other things, substantially broaden the permissible rights manufacturers may exercise with respect to their distributors in Russia. In conjunction with the adoption of the amendments, the Russian government issued Resolution No. 583 “On Cases of Permissible Agreements between Economic Entities” (the Resolution), which came into effect on July 31, 2009 and shall remain in effect for five years.
Exemptions to per seviolations
Prior to these latest amendments to the Competition Law, certain provisions regarded as common distribution chain management tools could not be included in agreements between manufacturers and their distributors because they constituted per se violations of the Competition Law (i.e. no anti-competition effect needs to be proven to constitute a violation of law). Commission of per se violations exposes market participants to administrative fines and other penalties. Among the long list of per se violations is (i) the fixing or maintaining of prices, discounts, bonuses or markups; (ii) the division of markets (on the basis of the geography, volumes or range of products, composition of sellers or purchasers (customers); and (iii) the refusal to make agreements with certain sellers or purchasers or causing a reduction or termination of a product’s production without economic or technological justification.
The amendments exempt vertical agreements, that is, agreements between commercial entities not competing with each other, one of which acquires a product or is its potential acquirer, while another one supplies the product or is its potential seller from most of the per se violations. Franchise agreements may also qualify as vertical agreements.
Vertical Agreements and the 20% Rule
Under the amended Competition Law, none of the enumerated per se violations apply to vertical agreements if each of the parties (excluding financial organizations which are subject to different regulations) to such agreement holds less than 20 percent of their respective market. If a party holds more than 20 percent of its respective market and is party to a vertical agreement, the Competition Law imposes only two prohibitions:
• including provisions that lead or could lead to setting resale prices of a product (which includes fixing of markups); and
• precluding a distributor’s sale of a competitor’s product (unless the purchaser sells under a registered trademark or logo of the seller or producer).
The Resolution, however, establishes additional limitations discussed below.
Permissible Agreements and the 35% Rule
In addition to the per se violations (if applicable), the Competition Law continues to bar agreements, joint actions or coordinated economic activities that have an anti-competitive effect on the market, unless such agreements are identified as permissible agreements or joint actions. Before the Regulation entered into force, only franchise agreements (without reference to a party’s market share) and vertical agreements among parties that do not hold more than 20 percent of their given market were deemed permissible agreements. However, by adopting the Regulation, the government of Russia has exercised its power established by the Competition Law to define permissible agreements.
The Resolution provides that a product sale agreement may be permissible if each of the following conditions are met:
a. the seller sells a product to two or more purchasers and its share of the market for that product is less than 35 percent or sells the product to a single purchaser whose share of the market for that product is less than 35 percent;
b. the seller and the purchaser do not compete with each other either in the resale or acquisition of the product; and
c. the purchaser does not also produce products interchangeable with those that it acquires under the agreement.
At the same time, the Resolution expands the list of prohibited contractual provisions in such agreements.
Additional Limitations on Product Sale Agreements
The Resolution further enumerates the following provisions that may not be included in product sale agreements, including vertical agreements, if one of the parties to the agreement holds more than 20 percent of the relevant market:
a. restrictions on a purchaser’s right to conduct sales in certain territories and/or to certain customers unless such territories are serviced by another purchaser, or the seller itself. The Resolution also provides that if a product sales agreement includes an exclusive territory provision, then such agreement must also include a provision obligating the purchaser to refrain from entering into other agreements to purchase interchangeable products within the same territory. This provision presumably is required to minimize the opportunity for a distributor or retailer to obtain exclusive rights to sell a certain class or type of product produced by different manufacturers within a territory with the resultant ability to control pricing;
b. restrictions on the seller’s right to sell spare parts on a retail basis or to special repair and service organizations unaffiliated with the purchaser;
c. restrictions on a purchaser’s right to produce, buy and/or sell interchangeable products or establishing requirements that the purchaser acquires products from the seller, which constitute more than 50 percent of the purchaser’s annual turnover (unless such prohibition was contained in an agreement concluded before the entry into force of the Resolution, does not exceed 3 years — unless the purchaser is a retail sales organization — and complies with some other conditions); and
d. terms requiring that the purchaser includes prohibitions on resale of the product in its own sale agreements (with subdistributors).
Grace Period Upon Exceeding 35 Percent Threshold
In the event that a market participant’s market share grows over time to exceed the 35 percent threshold, the restrictions provided for by the Resolution shall become applicable to such market participant’s operation on July 1 of the year after the market participant’s share of the market exceeded the 35 percent threshold.
The interpretation and application of the Competition Law remains a complex and fact-intensive process, and the case law is very limited making ultimate conclusions of the Federal Anti-Monopoly Service difficult to predict. Moreover, defining the applicable market remains ambiguous under the Competition Law and difficult, thus making determinative market share calculations challenging and without clear safe harbors.
Nonetheless, the amendments discussed above are welcome improvements and provide manufacturers and distributors with more flexibility in managing their distribution chains by providing significantly reduced limitations, which should be particularly helpful to small and medium-size businesses operating in highly competitive markets. If a manufacturer or distributor has any concerns about their proposed distribution arrangements they should consult qualified counsel and may seek the direct input of the Federal Anti-Monopoly Service, which welcomes inquiries of the business community.
The contents of this article are not intended to serve as legal advice related to individual situations or as legal opinions concerning such situations.