Vertical agreements

Published: 17.10.2023.

Pursuant to Section 11 of the Latvian Competition Law (CL), agreements between undertakings that have as their object or effect the prevention, restriction or distortion of competition in the territory of Latvia are prohibited and null and void from the moment of being entered into, including agreements concerning, for example, the determination or fixing of resale prices or the allocation of markets or customers. The most common restrictions of competition are set out in the law, but in the context of vertical agreements, the assessment of whether a particular vertical agreement restricts competition will need to be assessed by reference to the specific circumstances, such as the relevant market and the nature of the restriction in question.

Vertical agreements often provide benefits to undertakings and consumers as well as competition, but they can also be used to restrict competition, which is prohibited under competition law.

What is a vertical agreement?

A vertical agreement is a contract or concerted practice between two or more undertakings, each of whom performs its economic activities at a different level of production or distribution, and which is related to purchasing or selling provisions of the contract goods. Contract goods are products or services which are the subject of the vertical agreement. Vertical agreements are most often supply and distribution contracts used by the undertakings to agree on specific terms and conditions with respect to the purchase, sale or resale of goods or services. Vertical agreements are therefore different from agreements between direct competitors operating in the same market or at the same level of the market, i.e. horizontal agreements.

The purpose of the competition rules is to prevent undertakings from using their vertical agreements to restrict competition in a way that is detrimental to consumers. A prerequisite to be observed by each and every undertaking is that the decisions of the undertaking must be taken independently, for example, regarding the price at which the buyer sells the product or service to the end consumer.

Terms and conditions that restrict competition may not be applied or enforced. Each undertaking is responsible for ensuring that its vertical agreements do not restrict competition. Therefore, undertakings must be able to determine when their vertical agreements are permitted and when they fall within the scope of the prohibitions laid down in the competition rules (Section 11 of the CL).

Latvian Competition Law (Section 11 of the CL) is interpreted in accordance with Article 101 of the Treaty on the Functioning of the European Union (TFEU). The operation of the TFEU in relation to vertical agreements is further clarified in Commission Regulation (EU) 2022/720 of 10 May 2022 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices categories and the European Commission (EC) Guidelines on vertical restraints. Vertical agreements that restrict competition only within the territory of Latvia and do not restrict trade between Member States are subject to Cabinet Regulation No. 797 Regulations Regarding Non-subjection of Certain Vertical Agreements to the Prohibition of the Agreement Specified in Section 11, paragraph one of the Competition Law.

The applicable Cabinet Regulation No. 797 is being revised in line with the requirements laid down in EC Regulation 2022/720. The information below is in accordance with the currently applicable Cabinet Regulation No. 797.

When is a vertical agreement permitted?

The competition rules (i.e. Section 11 of the CL) apply in any case to vertical agreements between undertakings if such agreements contain hardcore restrictions or otherwise significantly restrict competition. Competition rules do not apply to vertical agreements that do not restrict competition, if the vertical agreement:

Falls within the scope of the block exemption

Vertical agreements harm competition only if there is insufficient competition at one of the levels of the supply chain. Vertical agreements are subject to the so-called block exemption set out in Cabinet Regulation No. 797 if the conditions set out therein are met. If a vertical agreement provides benefit to consumers and does not significantly distort competition, an exemption from the prohibition applies, in accordance with Cabinet Regulation No. 797.

A vertical agreement between two or more undertakings is normally covered by the block exemption and therefore permitted in the following situations:

Terms and conditions other than those regarding the purchase, sale or resale fall outside the block exemption.

PLEASE KEEP IN MIND!

Terms and conditions relating to, for example, the transfer or use of intellectual property rights are not covered by the block exemption, unless such terms are directly related to the use, sale or resale of the products or services covered by the vertical agreement.

The block exemption does not apply to vertical elements of agreements between competitors.

PLEASE KEEP IN MIND!

However, vertical elements of agreements between competitors are covered by the block exemption if the agreement involves a dual distribution scenario. Dual distribution refers to the scenario where a supplier sells products or services not only at the upstream level but also at the downstream level, thereby competing with its independent distributors.

A vertical agreement is not caught by the prohibition if the market share of each of the parties to the agreement in the relevant market does not exceed 10 per cent.

PLEASE KEEP IN MIND!

Agreements containing hardcore restrictions cannot be considered as agreements of minor importance regardless of the market share of the parties.

A vertical agreement is not caught by the prohibition if the supplier’s market share in the relevant market in which it sells the agreed goods does not exceed 30 per cent.

PLEASE KEEP IN MIND!

This condition does not apply to exclusive supply (distribution) agreements. If one undertaking both purchases the products and sells them within the framework of a single agreement, the undertaking’s market share on both the purchase and the sales market must be below 30 per cent. Otherwise, the market share threshold of 30 per cent is exceeded, and the agreement is not covered by the block exemption.

If a vertical agreement provides for exclusive supply (distribution), it is not subject to the prohibition on the condition that the market share of a buyer in the relevant market, in which it purchases contract goods, does not exceed 30 per cent.

Hardcore restrictions of competition are restrictions that are presumed to cause harm to consumers. If a vertical agreement contains any of them, it is not covered by the block exemption.

Creates benefit to consumers

Vertical agreements excluded from the block exemption may generate efficiency gains that benefit consumers and therefore fulfil the conditions for an individual exemption. If a vertical agreement that restricts competition meets the requirements for an individual exemption, the agreement is permitted, notwithstanding the restriction of competition.

In order to qualify for an individual exemption, the vertical agreement must satisfy the following conditions. It:

contributes to the improvement or economic development of the production or marketing of the goods;
creates a benefit to consumers;
does not impose restrictions on the relevant undertakings that are not necessary to achieve those objectives;
does not have the potential to eliminate competition in a substantial part of the relevant market.

It is for undertakings to independently assess whether their vertical agreements fulfil the above mentioned conditions.

When is a vertical agreement prohibited?

A vertical agreement is prohibited if it contains one or more hardcore restrictions

Hardcore restrictions of competition restrict competition and cause harm to consumers. They are generally not necessary, therefore a vertical agreement containing hardcore restrictions is completely excluded from the application of the block exemption, regardless of the market shares of the parties. An agreement containing hardcore restrictions is likely to restrict competition and will be prohibited under Section 11, paragraph one of the CL.

Hardcore restrictions include all contractual terms and conditions of a vertical agreement or actual measures having as their subject:

The distributor must have the right to determine the resale price of the products or services it sells.

The use of maximum resale prices or recommended prices is not prohibited as long as they do not amount to a minimum resale price or price fixing.

Distributors must have the right to determine independently where and to whom they sell the supplier’s products.

However, such restrictions are permitted in the following cases:

A restriction of active sales imposed on a seller in the exclusive region or to a customer group reserved for another seller.

PLEASE KEEP IN MIND!

In active sales, the seller approaches the customer, for example through targeted advertising or other forms of direct communication. Passive sales are driven by individual customer self-initiated enquiries, where the seller responds to customer contacts. For example, online sales via a private website are generally considered passive sales. Submitting a bid in response to public procurements also considered a form of passive sales.

Passive sales may not be restricted even where there is an exclusive distribution system.

A wholesaler is restricted to sell goods to end consumer;
A restriction imposed on a member of a selective distribution system to sell the contract goods to unauthorised distributors within the territory of the distribution system.

PLEASE KEEP IN MIND!

In a selective distribution system, the supplier undertakes to supply products only to distributors meeting certain criteria. Accordingly, authorised distributors undertake not to sell the contract goods to unauthorised distributors in the territory of the selective distribution system.

Authorised distributors must be allowed to sell the supplier’s products to all end consumers, irrespective of whether they are consumers or other undertakings, as long as such activities are carried out from an authorised sales outlet.

Authorised distributors must be allowed to purchase products from other authorised distributors. Authorised distributors cannot be obligated to purchase products sold in a distribution system only from a single supplier.

Component manufactures must be able to also sell components directly to, for example, end consumers or repair and maintenance undertakings.

A vertical agreement that includes hardcore restrictions falls in its entirety outside the scope of the block exemption under Cabinet Regulation No. 797. However, undertakings may demonstrate that even a vertical agreement including hardcore restrictions qualifies for an individual exemption. In such case, the undertaking must prove that the vertical agreement has efficiency-enhancing effects that provide benefit to consumers.

Vertical agreements that contain other vertical restrictions

Vertical agreements that fall outside of the block exemption must be assessed on a case-by-case basis, i.e., by assessing whether an individual exemption applies. Vertical agreements falling outside the scope of the block exemption are only prohibited if they restrict competition. A vertical restraint can be implemented either through specific contractual provisions or through various incentives and sanctions that lead to the same outcome. Vertical restraints include, for example, the following:

The buyer is obligated to purchase goods only or primarily from a single supplier.

The supplier supplies its products only or primarily to one buyer or for a specific purpose.

The supplier sells its products in a specific territory to only one distributor or to one distributor for resale to specified groups of customers.

PLEASE KEEP IN MIND!

Restricting passive sales in an exclusive distribution system is prohibited. Other aspects of an exclusive distribution system must be assessed on a case-by-case basis.

Authorised retailers are restricted from selling products to customers who are not other authorised retailers or end customers.

PLEASE KEEP IN MIND!

Regarding the selective distribution system, please see hardcore restrictions. Other aspects of a selective distribution system must be assessed on a case-by-case basis.