The Competition Council of Latvia (the CC) develops a self-assessment tool for entrepreneurs so that they could be able to assess independently whether they have not engaged in a prohibited vertical agreement because of their negligence or lack of knowledge, for example, by agreeing to sell products at a price fixed by the supplier. Involvement in an agreement on the application of the minimum or fixed resale price for a product or service is considered a severe infringement of the competition law, subject to a fine of up to 5 % of the company turnover.
Vertical agreements concluded by two or more independent market participants, each of which implements its economic activity at a different manufacturing or distribution level, are not prohibited, but market participants have to assess themselves, whether the agreement does not restrict competition and, therefore, is allowed.
Fixed resale price
One of the most widespread competition restrictions included in vertical agreements is setting a fixed resale price for a product or service. Such a competition restriction can be directly specified in the agreement as a fixed resale price or can be implemented indirectly, for example, providing for a specific profit margin for a member of the distribution chain, specific or maximum discounts, sanctions for non-compliance with the recommended price level, for example, refusal to deliver the product, etc.
It is prohibited for a supplier to set a fixed or minimum resale price because by doing so, competition among retailers of the particular brand products is restricted, depriving them of the possibility to freely set the product price and compete for the customer with the lowest price, and, at the same time, the end consumers are deprived of the possibility to obtain the specific product at a lower price.
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Example. Sales of “Lielvārds” books at a fixed price [1] SIA “Lielvārds” offered to its cooperation partners to conclude agreements on sales of “Lielvārds” books and other publications, including in the agreement a condition that bookstores and other retail companies must observe the prices indicated in the catalogue of the publisher SIA “Lielvārds”. In addition, the following condition was included in 40 agreements with cooperation partners: “The Seller shall sell books and publications to third parties at the retail price set by the Publisher.” A fine of more than 10,000 lats was imposed on SIA “Lielvārds”. |
Sanctions imposed for non-compliance with the recommended price
The distributor has no restrictions for informing the retailer about the maximum or advisable/recommended prices of its products unless these prices are indeed advisable, not obligatory.
Temporary recommending of the price may be necessary for the manufacturer to acquire a new market; however, continuous and regular recommending of resale prices without any justification can facilitate retaining of a single price at the retail level, as a result of which the minimum threshold of the price is set or the price on the market is fixed, thus having a negative impact on competition.
A prohibition applies to situations when the recommended prices are controlled, and failure to observe recommendations result in imposed sanctions. Moreover, by the manufacturer or distributor maintaining such a system among several independent sellers of its product – wholesalers or retailers–a cartel agreement is implemented.
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Example. The sales price set for Samsung products, incl. in online stores in online stores in Latvia [2] In 2009, a prohibited vertical agreement was detected between SIA “Samsung Electronics Baltics” and wholesalers, which was based on setting a resale price for Samsung products at points of sale. The points of sale that did not observe the specified prices were included in the “blacklist”, refusing to supply Samsung products to these points of sale. The CC imposed a fine of 5.8 million euros on SIA “Samsung Electronics Baltics” for this infringement, also penalising the four largest distributors of Samsung products in Latvia – SIA “RD Elektronik”, SIA “PROKS”, SIA “ELKOR TRADE” and SIA “ROTA un K”. |
Expressly stay away from an agreement on the price
Juris Gaiķis, the Chairman of the CC: “If a market participant has noticed features of a prohibited vertical agreement, it is important to clearly and expressly stay away from such offered agreement, for example, notifying the cooperation partner in writing. In case of submitting to conditions that affect competition and not showing clear signals that this agreement is unacceptable for the entrepreneur, it can be held liable for involvement in a prohibited agreement. Sales of products at a fixed price is particularly unfavourable for retailers, as well as consumers, who are deprived of the possibility to select the most favourable offer; therefore, when facing such a competition restriction as setting a fixed resale price for sales of products of the particular brand, it shall be reported to the Competition Council immediately. It can also be done anonymously on the authority's website.”
To facilitate carrying out of the assessment of vertical agreements for market participants, the CC has developed guidelines aimed at explaining how to recognise vertical agreements on resale prices of products and services and explaining permissible and prohibited conditions of agreements. The draft guidelines also include a self-assessment tool, which can be used to assess whether there are risks that the agreement may negatively impact competition and, consequently, shall be considered prohibited.
GUIDELINES for identification and assessment of vertical agreements
[1] CC 28.05.2008. decision no. E02-60 for KL 11.p. violation of Paragraph one, Clause 1 in the activities of SIA «Lielvārds».
[2] CC 30.10.2009 decision no. E02-40 for KL 11.p. violation of Paragraphs 1 and 3 of the first part in the activities of SIA “Samsung Electronics Baltics”, SIA “RD Elektroniks”, SIA “PROKS”, SIA “ELKOR TRADE”, SIA “ROTA un K”.