1AGENT OR DISTRIBUTOR? A COMPETITION LAW PERSPECTIVE

ANDRZEJ KMIECIK

Partner, Van Bael & Bellis, BrusselsAdvanced Agency & Distribution 2008

2OUTLINE OF PRESENTATION

The advantages of selling through a genuine agent.

The conditions to qualify as a genuine agent: are the conditions clear?

The consequences of not qualifying as a genuine agent: are therealternative means of controlling prices/customers (unilateral action?)

3THE ADVANTAGES OF SELLING THROUGH A GENUINE AGENT

Genuine agency provides a partial escape from Article 81 EC for suppliers.

The Reason : Article 81(1) EC prohibits agreements between independent undertakings, whereas a genuine agent is considered to be part of the same undertaking as its principal (see Suiker Unie, 480 and 539; DaimlerChrysler, 86; CEEES/CEPSA, 43).

Therefore, the obligations imposed on a genuine agent in relation to the sale of the principals goods or services fall outside Article 81(1) EC (see Vertical Guidelines, 13).

4THE ADVANTAGES OF SELLING THROUGH A GENUINE AGENT (2)

This leads to two main advantages for suppliers: (1) Price control: imposition of minimum/fixed prices (hard-core restriction under VABER) is allowed.(2) Customer control: prohibition of passive sales into other territories/customers groups (hard-core restriction under VABER) is allowed.

Caveat: Even in the case of genuine agents, Article 81(1) EC mayapply to any restrictions concerning the relationship between the agent and the principal (e.g. exclusive agency, non-compete obligations)(see CEEES/CEPSA, 62; Vertical Guidelines, 19).

However, even exclusivity and non competes may be exempted by the VABER.

5THE CONDITIONS TO QUALIFY AS A GENUINE AGENT

Test: Genuine agents must not bear the financial andcommercial risks linked to the sale of goods (or the provision of services) on behalf of the principal to third parties (CEEES/CEPSA, 43-44; also DaimlerChrysler, 87).

Two types of risks : (i) linked to sale of product and (ii) market-specific investments.

Is this always the only condition to be met for an agent to qualifyas a genuine agent? The recent case law suggests so, althoughsome exceptions may remain.

6THE CONDITIONS TO QUALIFY AS A GENUINE AGENT:Risks linked to the sale of the goods

(i) Does the agent assume risks linked to the sale of goods? Based on the case law and the Vertical Guidelines, the agent is liable to be considered to assume risk if, in particular:

The agent has ownership of the goods prior to their sale to customers (i.e., the agent is the seller).

The agent has to pay the principal before, or regardless of whether, he receives payment from a customer (i.e. payment risk or other risk of non-performance by the customer).

7THE CONDITIONS TO QUALIFY AS A GENUINE AGENT : Risks linked to the sale of the goods (2)

The agent has to hold stocks and/or demonstration goods at his expense.

The agent has to bear transport or other costs of supply.

The agent has to assume liability for damage caused to the goods (loss or deterioration) and for damage caused by the goods to third parties, regardless of whether the agent is at fault.

The agent has to carry out repair services for products under guarantee for which he is not adequately remunerated by the principal.

8THE CONDITIONS TO QUALIFY AS A GENUINE AGENT : Risks in the form of market-specific investments

(ii) Does the agent assume risks by making market-specific investments, i.e., investments required to enable the agent to carry out the type of activity for which he is appointed by the principal?

General investments (e.g. in premises, personnel) are not considered relevant risks (Vertical Guidelines, 15) as any business needs to make these to operate. How to distinguish general from specific investments?

9THE CONDITIONS TO QUALIFY AS A GENUINE AGENT : Risks in the form of market-specific investments (2)

The agent will assume risk if he has to invest in premises or equipment specific to the market (e.g. fuel tank for a service station).

The agent will assume risk if he has to invest in advertisingspecific to the market (e.g. the principal does not carry out advertising for its products and leaves it to the agent).

Arguably, an agent using investments (e.g. in infrastructure) previously made for selling competing goods could be deemed to assume market-specific risks in relation to the goods of a subsequent principal.

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THE CONDITIONS TO QUALIFY AS A GENUINE AGENT : Non-risks

Caveat: the qualification of an agency relationship as genuine will not be prejudiced by either:

(a) Permitting the agent to grant rebates to customers at the expense of the agents commission; or

(b) (Arguably) the obligation imposed by the principal on the agent to assume risks on another market, such as the obligation to provide after-sales services (DaimlerChrysler, 113; contrary to this, Vertical Guidelines, 16).

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HOW CLEAR ARE THE CONDITIONS OF GENUINE AGENCY? Extent of the Risk

An overall economic assessment of whether the agent bears risk should be made no exhaustive list of factors.

It appears that the test should be applied rather strictly.

Negligible financial and commercial risks will not be a bar to genuine ageny (CEEES/CEPSA, 61; AG Kokott in Spanish petrol stations, 63 and 64; DaimlerChrysler, 112).

But one non-negligible risk may be enough to prevent a genuine agency relationship (CEPSA/LV Tobar e Hijos).

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HOW CLEAR ARE THE CONDITIONS OF GENUINE AGENCY?Daimler Chrysler Example

The more the principal protects its agents from the specific risks linked to the market, the more likely its agents will be regarded as genuine agents.

However, in DaimlerChrysler the CFI concluded that there was a genuine agency relationship despite the appearance that agents partly assumed certain risks (transport costs, demonstration vehicles, repairs under guarantee, after-sales services, stock of spare parts).

DaimlerChrysler at least indicates that the burden of proof is on the competition authority/court to prove that the agent does actually bear appreciable risk. (The Vertical Guidelines can be read too narrowly.)

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HOW CLEAR ARE THE CONDITIONS OF GENUINE AGENCY?Is Risk the Only Relevant Factor?

Apparently contrary to previous case-law (Vlaamse Reisbureaus), a genuine agent can act for several principals (see, CEEES/CEPSA 62 (a contrario) and Vertical Guidelines, 13).

If the only test for determining whether an agent is a genuine agent is whether the agent bears risks in relation to the sale of goods on behalf of the principal, a genuine agent would be able to act as an independent dealer on other markets.

In favour : AG Kokott in her opinion in CEEES/CEPSA, 44; the CFI in DaimlerChrysler, 113

Against ? : the ECJ judgments in Suiker Unie and VAG Leasing (concern over ambivalent relationships).

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HOW CLEAR ARE THE CONDITIONS OF GENUINE AGENCY?Practical Concerns for Principals

As the principal must assume the risks in order to create a genuine agency relationship, the principal must either (i) bear directly the costs itself (e.g. investments in infrastructure and advertising, stocking, transport, etc), or (ii) reimburse the agent for such costs.

Question: if the principal chooses (ii), can it cap the agents expenditure that will be reimbursed? Answer: presumably yes, provided that this amount is reasonably sufficient to carry out the business (analogy to employee).

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HOW CLEAR ARE THE CONDITIONS OF GENUINE AGENCY?Practical Concerns for Principals (2)

Related question: Can/should the principal prohibit the agentfrom unilaterally deciding to take (further) risks in relation to the sale of goods on behalf of the principal (e.g. additional investments in infrastructure and/or advertising) in order to ensure the agent remains genuine?

Answer unclear. Arguably:- the principal is not required to do so (see DaimlerChrysler in relation to the granting of rebates out of the agents commission).- the principal is allowed to do so in relation to the sale of goods on his behalf (although it could amount to an indirect non-compete?).

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EXAMPLE: a genuine agent

A manufacturer of video game products (principal) uses wholesalers (agents) to supply retailers accross Europe.

The principal appoints one agent per country.

The principal (1) prohibits agents to sell outside the country where they are established and (2) fixes minimum prices.

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EXAMPLE: a genuine agent

Principal Agent

Ownership until sale to retailers X

Conclusion of contracts with retailers X

Financing of stocks X

Payment risk (agent does not pay until retailer pays) X

Rebates (out of agents commission) X

Repair services under guarantee (labour at agreed rate) X

Several principals X

After-sales services X

Premises and employment X

Technical training & equipment X

Advertising at national level (further advertising allowed) X

Conclusion: wholesalers are arguably genuine agents for the sale of video games for the principal

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ALTERNATIVE MEANS OF CONTROLLING PRICES/CUSTOMERS

In the case of a non-genuine agency relationship:(1) the principal loses control over the effective price charged to customers by the agent; and(2) any customer/territorial restrictions must comply with the VABER.

Truly unilateral action is not caught by Article 81(1) EC (see Bayer Adalat).

Can a principal - as seller - rely on the theory of unilateral action and limit supplies in order to control the prices/customers of anon-genuine agent?

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ALTERNATIVE MEANS OF CONTROLLING PRICES/CUSTOMERS

Scenario: the principal refuses orders for anti-competitive reasons (e.g. prices too low, orders from territories/customers not assigned to the agent), without communicating his (anti-competitive) reasons to the agent. Afterwards, the agent understands the reasons behind the principals refusals and stops submitting such orders.

Risk: anti-competitive tacit agreement or concerted practice.

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CONCLUSION

There are significant advantages in terms of price/customer control for a principal having a genuine agent, which cannot be achieved otherwise.

It appears that (normally at least) the only relevant criterion for the assessment is whether the agent assumes appreciable risks linked to the sale of goods on behalf of the principal.

It appears that an agent may be genuine even if it acts for several principals and/or also acts as an independent dealer (but bewareof ambivalent relationships).

However, there is not yet a consistent body of judgments and decisions applying these criteria in practice.

Therefore, a number of practical questions remain unclear (e.g. what is negligible risk?).

AGENT OR DISTRIBUTOR? A COMPETITION LAW PERSPECTIVEOUTLINE OF PRESENTATIONTHE ADVANTAGES OF SELLING THROUGH A GENUINE AGENTTHE ADVANTAGES OF SELLING THROUGH A GENUINE AGENT (2)THE CONDITIONS TO QUALIFY AS A GENUINE AGENTTHE CONDITIONS TO QUALIFY AS A GENUINE AGENT:Risks linked to the sale of the goodsTHE CONDITIONS TO QUALIFY AS A GENUINE AGENT : Risks linked to the sale of the goods (2)THE CONDITIONS TO QUALIFY AS A GENUINE AGENT : Risks in the form of market-specific investmentsTHE CONDITIONS TO QUALIFY AS A GENUINE AGENT : Risks in the form of market-specific investments (2)THE CONDITIONS TO QUALIFY AS A GENUINE AGENT : Non-risksHOW CLEAR ARE THE CONDITIONS OF GENUINE AGENCY? Extent of the RiskHOW CLEAR ARE THE CONDITIONS OF GENUINE AGENCY?Daimler Chrysler ExampleHOW CLEAR ARE THE CONDITIONS OF GENUINE AGENCY?Is Risk the Only Relevant Factor?HOW CLEAR ARE THE CONDITIONS OF GENUINE AGENCY?Practical Concerns for PrincipalsHOW CLEAR ARE THE CONDITIONS OF GENUINE AGENCY? Practical Concerns for Principals (2)EXAMPLE: a genuine agentEXAMPLE: a genuine agentALTERNATIVE MEANS OF CONTROLLING PRICES/CUSTOMERSALTERNATIVE MEANS OF CONTROLLING PRICES/CUSTOMERSCONCLUSION