EU Competition Rules for Distribution Agreements #2: Agency Agreements

Why is competition law important in the distribution context?

Article 101(1) of the Treaty on the Functioning of the European Union (‘TFEU’) prohibits anticompetitive agreements or concerted practices. Agreements infringing Article 101(1) are void and may expose your company to fines and/or damages before national courts and/or competition authorities. This is particularly important in the context of distribution agreements where private parties (i.e. your companies’ customers and competitors) are often the most likely to go to court or file complaints with competition authorities.

This note is part of a blog series in which we seek to provide guidance on the most relevant topics of EU competition law for distribution agreements. In this second blog we discuss the competition law regime for Agency Agreements.

What is it?

An agent is a legal or natural person entrusted with the power to negotiate and/or conclude contracts on behalf of another person (‘the principal’), either in the agent’s own name or in the name of the principal, for the purchase of goods or services by the principal, or the sale of goods or services supplied by the principal.

Exception to the cartel ban for “genuine” agency agreements

An exception to the general cartel prohibition is made with respect to agency agreements. However, only “genuine” agency agreements can benefit from this exception, i.e. agency agreements where the agent bears no or only insignificant financial or commercial risks in relation to the contracts concluded or negotiated on behalf of the principal. If the principal carries these risks, the principal and the agent will for competition law purposes be considered a single undertaking and the cartel prohibition will not apply.

If the genuine agency test is not met, the normal competition rules governing independent distributors are applicable. This implies, for instance, that the agent cannot be obliged to apply a particular fixed price level, or that he cannot be forbidden to deal with certain customers or in certain territories.

As it constitutes an exception to the general cartel prohibition, the conditions for categorising an agreement as a genuine agency agreement should be interpreted narrowly.

Key rules

The Vertical Guidelines clarify that there are three types of financial or commercial risks that are material to the categorisation of an agreement as a genuine agency agreement:

(a)   contract-specific risks: these are risks that are directly related to the contracts concluded and/or negotiated by the agent on behalf of the principal, such as the financing of stocks, cost of transport, responsibility towards third parties for damage cause by the products sold etc.;

(b)   risks related to market-specific investments: these are investments specifically required for the type of activity for which the agent has been appointed by the principal (i.e. investments which are required to enable the agent to conclude and/or negotiate a specific type of contract). Such investments are typically sunk, which means that upon termination that activity the investment cannot be used for other activities or sold other than at a significant loss;

(c)   risks related to other activities undertaken on the same product market that an agent is required to undertake by the principal on his own risk, unless they are fully reimbursed by the principal.

The question of risk must be assessed on a case-by-case basis and with regard to the economic reality of the situation, rather than the legal form of the agreement.

FAQ’s

Is it possible to rely upon the genuine agency exception if the agent acquires ownership of the contract goods?
A typical feature of the genuine agency exception is that the agent does not acquire the ownership of the goods sold under the agency agreement. However, if the agent temporarily, for a very brief period of time, acquires the property in the contract goods while selling them on behalf of the principal, it does not preclude the existence of an agency agreement that falls outside the scope of Article 101(1) TFEU, provided that the agent does not incur any costs or risks in relation to the transfer of property.

Is it possible for a “genuine agent” to negotiate and or conclude contracts for more than one principal?
Yes, this is possible. However, it is less likely that an agency agreement will be categorised as falling outside the scope of Article 101 (1) TFEU where the agent negotiates and/or concludes contracts on behalf of a large number of principals.

Can ‘dual role agents’ (i.e. undertakings that act both as agent and reseller for the same principal in relation to products belonging to the same product market) qualify as a genuine agent?
Yes, provided that:

• the activities and risks covered by the agency relationship can be effectively delineated;
• the agency relationship is not forced upon the agent (for example, the agency relationship must not de facto be imposed by the principal through a threat to terminate or worsen the terms of the distribution relationship); and
• all risks & investments related to the agency relationship are compensated.

If you have any questions about the contents of this note, please contact Minos van Joolingen, Martijn Jongmans or Sophia Wittkämper of Banning’s Competition & Regulatory Team, telephone number +31 73 692 77 52.