New Rules of Play in Vertical Agreements: Safe Harbor or a Trap?

 Nadia Goreslavskaya
Baker & McKenzie

Until recently, sale and purchase agreements or distributions agreements, i.e. agreements between noncompeting parties (also known as “vertical agreements”), had been subject to a wide list of prohibitions. They were deemed per ser prohibitions, as no anticompetitive effect had to be proven to constitute a violation of the law. As such, the per se prohibitions, including price fixing, division of territory among distributors, refusal to contract with certain sellers or buyers, tying arrangement and few others, substantially complicated life for many market players operating in a vertical chain of relations (particularly those with insignificant market share, but not only them). The complications were strengthened with increased administrative fines reaching the turnover percentage of the infringing entity and enforcement activity of the Russian competition authority.

Prohibitions for Verticals

The recent amendments to the Russian Competition Law significantly reduced limitations on small and medium-sized businesses in Russia. The amendments no longer view minor noncompeting players on the market with a share of 20 percent or less on any market as being able to threaten competition, irrespective of how they act. It is noteworthy that the 20 percent threshold continues to apply to any market where the party to the agreement operates, and not just the market in relation to which the agreement is concluded. This fact is often ignored by businesses when determining supply tactics.

The enactment of the amendments resulted in a substantial reduction of the number of the per se prohibitions applicable to vertical agreements. The only two per se bans that now apply to vertical agreements include a resale price fixing and an undertaking not to sell competing products.

The Competition Law continues to forbid any other agreements and concerted actions which may impact on the competition. Following the adoption of the amendments, the Russian government issued Resolution No. 583 “On Cases of Permissible Agreements between Economic Entities” (the Resolution). The Resolution introduces the so-called “general exceptions” from such “other” agreements impacting on the competition (similar to “block exemptions” known in the West). In particular, for those with a market share above 20 percent, the Resolution sets a number of new prohibitions and restrictions, which, in the event of their violation, would imply a limitation of competition. Failure to follow the restrictions of the resolution or its improper interpretation may play hard against the businesses.

General Exceptions

One of the general exceptions for vertical agreements concerns territorial restrictions. The resolution prohibits conditions in an agreement envisaging a buyer’s waiver to sell in particular territory, unless this territory is reserved for another buyer or the seller himself.

At first sight such territorial restrictions are rather straightforward: one cannot sell in region “A”, if another distributor or the seller himself supplies to region “A”. A more careful reading of the resolution, however, leads to the conclusion that with all that, the resolution does not permit limiting any other territory. That is, a provision in the agreement under which a distributor undertakes to sell only in region “A”, most likely would not fall under the general exception of the resolution. Moreover, in the instance where a manufacturer has several distribution agreements each of which states that a distributor obliges to sell in particular region, the manufacturer may be caught for coordination of economic activities of its distributors leading to division of territories among the distributors. Under the Competition Law, coordination of economic activities indicates a restriction of competition. It may be charged irrespective of the type of the agreement concluded and irrespective of the market shares of the parties concerned, which means that the law does not set any exceptions for coordination of economic activities.

The amendments to the Competition Law and the resolution, providing for considerably broadened scope of rights of manufacturers and sellers in relation to their distributors and buyers, are aimed at ensuring more normalized and flexible purchase and supply chain management in vertical arrangements in Russia. At the same time, the interpretation and application of legislative rules for vertical agreements remains in many cases ambiguous and complex. Certain provisions of the Competition Law and resolution that appear to serve as a safe harbor at a first glance may turn to be a pitfall if improperly examined and inaccurately applied. Thorough analysis of a vertical arrangement and careful drafting of an agreement should allow admonishing the businesses from possible errors.