Analysis of Competition Law Cases - Essay Example

Competition Law Question 15 marks) Explain with relevant cases and other ities the nature of an exclusive distribution system. You would explain why such agreements are potentially contrary to article 101 TFEU and why the distributor might insist on having such protection. Distribution agreement is a contract between a manufacturer and a supplier, with terms of the distribution and sale of the products manufactured. The agreement also includes the terms concerning advertisement of the product. The Treaty on the Functioning of European Union 101 (TFEU) was proposed to ensure more efficient enforcement of the (EU) European Union competition systems in the importance of the customers and businesses. An exclusive distribution system is whereby a company, (manufacturer) grants exclusive rights of its products and/or services, to another company1. The most common form is when a single distributor acquires exclusive rights to market a product in a specific territory. Exclusive distribution limits sales to one dealer or to one distributor in a given market. Take the example of Sealy, a company that manufactures high quality mattresses and beddings products. In 1967 entered into an agreement to have its products distributed under the Sealy name and trademark, however the condition was that the companies to take up the distribution of the products were not to; 1. Be engaged, in contract, to any other company and not to distribute any other products whether beddings or not. 2. Sticking to a precise territory of sale and not to out of their allocated and agreed upon jurisdiction. The courts in the USA agreed to the terms that were being offered to the distributing companies by the manufacturing company Sealy and termed then ‘horizontally correct’. This is because they looked at the substance rather than the form. This is the same as that of the Lolo Cars PLC and a hypothetical car distribution company called Zeek in Germany’s capital city Berlin2. The two decide to come to an exclusive distribution agreement of the sports cars. Zeek is located in Berlin, and it is limited to the boundaries of the city. The following will be the nature of the agreement; Lolo Cars PLC shall not be involved directly or indirectly in the sale, or even offer to sell its sports cars in Berlin. This is because it is an area exclusively under the authority of Zeek. This is evident in the American-Japan agreement on the sale of laser printers manufactured in Japan and sold in the USA. The Canon LPC laser printer is manufactured by a Japanese company but is distributed by Eastman Kodak Company in USA and is even rebranded as Hewlett-Packard and Corona data Systems. Zeek is not allowed to sell the sports cars from Lolo Cars to any other part outside Berlin, and this is because it is aregion that has been demarcated for it. Advertisement of the sports cars outside Berlin is also not allowed. Zeek is also not to supply other products within Berlin that are assumed to be competing with the products of Lolo Cars. That means that Zeek cannot sign another agreement contract with another sports cars manufacturing company, especially if it should supply those cars within Berlin.Zeek should place a written order of the number of the cars that they would like (Roger & Culloch 314). This not only brings about transparency in the activities between the two firms but also gets rid of any form of fraud, and hence brings about responsibility. Lolo CarsCompany can change the price list of its sports cars only once in a year, and should give a written notice of sixty days to Zeek. This is because Zeek needs time to be able to inform their already established clientele about the changes in the prices. Zeek shall use commercially reasonable efforts to promote the sale. Lolo Cars Company should first pass these efforts. If Lolo Cars does not agree with the methods of marketing and advertisement, then Zeek will not use it. These efforts also mean that they will train their own personnel that will be used tomarket and advertise the cars3.Lolo Cars Company should approve any methods used for advertisement by Zeek. This is to ensure that Zeek promotes the exact image that Lolo Cars Company portrays and likes the distributors to portray. Zeek is also mandated to pay Lolo Cars on time for the products that they order, however, in case they are late on their payments for more than 30 days then they are subjected to a 1.5% per annum late fee on the past invoices within the same year. The distributor, who in our case is Zeek, may seek protection from the 101 TFEU because; Incase the supplier,Lolo Cars,opens a branch of its company in Berlin, this would be a problematic condition, since it is liable to competing with the supplier, Lolo Cars Company, in selling and marketing the same products in the same market. This is why it is important to get protection to ensure that Zeek has its market demarcated and that there will be a no healthy competition. This means that Lolo Cars Company should have demarcated and restricted areas of their sales and marketing. Lolo Cars Company is liable for the quality of its sports cars. This is because Zeek will be importing the sports cars from England to Germany, and in product liability, the importer is liable for any damage caused by the use of an imported product. In order to protect their best interest, Zeek should ensure that Lolo Cars Companyincludes an unequivocal undertaking to bear exclusive liability of the quality of its products.Returning of defective products is usually a measure of the level of consumers’ satisfaction. However, Zeek must ensure that, Lolo Cars Company has a return of defective cars mechanism that does not cut down on its profits. Question 2 (15 marks) Explain with relevant cases and other authorities the nature of a selective distribution system. You should explain when such agreements are considered to be permitted by article 101 TFEU, why the parties might insist on having such a system and whether selective distribution would be justified in this case. Selective Distribution Systemis whereby; a supplier agrees to a contract with several but limited distributors within the same geographical area. The number of distributors is restricted and , sale to unauthorized dealers is prohibited, the only ones who purchase the products are authorized distributors and the final consumer of the product. There is a specific criterion for the selection of these distributors by the supplier.The Treaty on the Functioning of European Union (TFEU) allows there to be a selective distribution system under three distinct conditions. The first condition was based on the nature of the product. It must rightly deserve a selective distribution network. The court of justice of the European Union suggests that,the characteristics of a product must necessitate selective distribution system these characteristics include high quality and technically advanced consumer durables. This is to ensure that quality and usage of the product is preserved. The second condition is that the resellers must be chosen because of an objective qualitative criterion that is laid down uniformly, and not in any discriminatory manner. The selection should be based on technical qualifications and the suitability of the resellers trading premises (materials and equipment), and location(availability of a ready market). The criterion also gives an allocation that the chosen distributor should have the necessary personnel that are qualified to market and distribute the products in the best way possible. Once a distributor has the required materials and premises, is in a good location and has the qualified personnel then it has passed the criteria, and therefore, can qualify for the contract of distribution. The third condition is that the criteria of selection of resellers should not go beyond what is necessary. The suppliers should be enthusiastic to obligate themselves to the utmost necessary conditions, and not block out any distributor firm due to unnecessary reasons. Take the example of Sealy, a company that manufactures high quality mattresses and beddings A selective distribution would be most suitable for the distribution and sale of the sports cars, this is because; the sports cars are technically advanced consumer durables that are allowed by the TFEU to take on a selective distribution network of the product. It is also preferred because all the distributors are located in areas where there is a ready market for the sports cars. This means that it will be a profitable endeavor for Lola Cars Company, and also that the resellers who in this case are the distributors have passed the criteria, that means they have qualified. Selective distribution also reduces intra-brand competition, which most of the time, proves to be unhealthy. Given the fact that the criteria is required by the EU not to include unnecessary conditions then the three distributors would be chosen. The block exemption regulation 330/2010 (BER), provides a safe harbor for most vertical agreements that are selective. The block exemption in the motor industry is a safe harbor that exempts anentireclass of motor vehicle allocation and repair conformities from the ruling out of TFEU 101. Agreements can benefit from the block exemption only if they do not have strict restrictions. In the block exemption regulation, there are no hardcore restrictions. This means that in the clauses for exclusive distribution system, the hard-core restrictions under the article 4 of the block exemption regulation state that, sales are exclusive to a specific territory, whereby it is not allowed for a specific distributor to go beyond the demarcated area or jurisdiction. This means that it would be termed illegal to sell the sports cars beyond Berlin for the Zeek Company4. It also states that, the dealer should sell the product to the end user of that same product. This means that the distributors, Zeek and Ezta should not sell the sports cars to other distributors to resell them again, however, they should sell to the final consumer, which is the user of the cars. This means that the distributor cannot have a contract to other distributors to assist in the distribution, marketing and sale of the sports cars manufactured by the Lolo Cars Company The hard-core restrictions also prohibit the sale to customers who have the purpose of manufacturing a similar product. This simply implies that the distributors in their sale should ensure that they are well acquainted with their customers. This will enable them to know whether if these customers are manufacturers of a similar type of car. This ensures that unhealthy competition does not exist within their territory of sale5. Both the distributor and the supplier gain from this clause, which means their sales and consequently profits, are not reduced. This goes concurrently with the section that seeks to maintain due care and diligence in the sale and promotion of the sports cars within the allocated territory of sale. There is a restriction of the cross supplies between and among the different distributors in a selective distribution agreement. For instance, Zeek cannot order for one hundred sports cars from Lolo Cars Company and then decide to send twenty of them to Ezta in France instead of it ordering from the cars company. This ensures that each distributor will always deal directly with the manufacturer of the sports cars. Transparency with their dealings is enhanced through this clause, and this makes it easy to follow up incase issues of supply and payment arise. The supplier is to fix a standard price of its products and is allowed to dictate to the distributors the price range within which its products’ price should range. This goes in unison with the clause that states that the distributor is entitled not to sell the product at a lower cost than that suggested by the manufacturer6. If the distributor sells the price at a lower price than that of the manufacturer, it will ruin the clientele base of the manufacturer, and this is not good public relation for the manufacturer. Question 3 (45 marks) Analyze the clause above and identify with reasons and appropriate authorities: 1) Those which might be restrictive of competition but could be covered with the Block Exemption Regulation 330/2010; Those not in the exemption regulation include; advertisement materials and ideas should strictly come from the manufacturer or should be passed by the manufacturer for approval or disapproval. This clause is not covered in the exemption regulation. The distributor should operate on premises only approved by the manufacturer. This means that the criteria used to hire and fire employees is also set by the manufactuirer and not by the distributor. 2) Those which might be hard core restrictions under Article 4 of Block Exemption Regulation 330/2010; The hard-core restrictions in the block exemption regulation talk of price, territory, distribution and supply of spare parts. In the Lolo cars company the following clauses are under the hard-core restrictions; There is restrictions in terms of territories, as a distributor is not allowed to sell the products out of its demarcated territory. In terms of price, the manufacturer is the ultimate price setter and the distributor is under no circumstances allowed to sell products at any price lower than that of the manufacturer. The manufacturer should equally supply the spare parts and not by any other company, that sells similar commodities. The distributor is allowed to sell to any other re- appointed distributor under prior notice and submission of full information to the manufacturer. The distributor is also given the allowance of not dictating whom the end user of the product is. 3) Those which might be outside the block exemption under Article 5, but which might be severable 4) The clause that restricts the distributor from using the websites to find buyers. Even though not included in the exemption regulation it goes hand in hand with the clause that states that one should sell within a stipulated territory. This is because the internet has turned the world into a global village and so it is easy to access buyer outside your territory as a distributor on the internet. Having analyzed the agreement in this way, please indicate what amends or deletion of clauses would have made the agreement to bring all potential restrictions of competition within the Block Exemption 330/ 2010 Would it be possible to combine selective distribution with an exclusive territory and still get the benefit of the block exemption? If not explain why not. It is not probable to combine equally the selective and exclusive territory distribution agreements and still benefit from the block exemption, since they both have different application policies. A good example is on the restriction of the number of authorized distributors. In an exclusive agreement, the restriction on the number of authorized distributors is based on the number of territories in the region. If the territories are just three, then the number of distributors will be just three, each distributor with his own territory7. In the selective agreement, the restrictions on the number of authorized distributors are based on a selection criterion that is linked to the nature of the product8. A distributor must pass these criteria in order to market and sell the product. The criterion includes an analysis of the distributor’s premises, which includes both the materials and equipment available for marketing and sale. The personnel available for sale are also analyzed on their qualifications and capabilities to deliver. The other reason as to why a combination of the two agreements would not benefit from the block exemption is based on the restriction on reselling. In the exclusive agreement, the restriction is on the resale of the product to non-authorized dealers within the territory, however, in the selective agreement the restriction is in the active territory, this occurs when selective distribution is always used to distribute branded final products. The restriction ensures that there is minimum intra brand competition. The office of fair trading mission is to make markets perform well for consumers. This is attained byprotecting consumer interest while ensuring fairness and competition in the businesses. It can go around solving this issue first by looking into the following; The contract between the two individual companies and if it is legal under the article (101)1 of the treaty of the functioning of the European Union. As well as the Article (101)3 of the TFEU. There should be an overall view of the competition rules relating to agreement between the manufacturing company, Lolo Cars Company, and the repair company that distributes thespares. Question 4 (25 marks) An independent repairer of sports cars complains to the Office of Fair Trading that it is unable to carry out repairs of Lolo sport cars because the manufacturer and distributors in its network refuse to supply it with spare parts. The OFT is considering an investigation and possible fines. What provision (or provisions) would it rely on to justify the investigation? What remedies may be open to the repairer if it wishes to obtain compensation? The repair company has the following options open to it; the repair company can seek financial compensation from Lolo Cars Company that is equal to or more than the revenue that the company would have earned during the period that it was not supplied with the spares that it required9. This could give the repair company enough money to pay off all its outstanding unpaid salaries and wages of the workers together with paying of bills. The repair company can also seek the termination of its contract with Lolo Cars Company. This is because, Lolo Cars Company did not keep its end of the deal and has proved not to be able to fulfill the terms of the contract. The repair company can then take up another company’s deal in distributing its spare parts to ensure that business goes on as usual. The repairing dealer should be allowed to operate multiple outlets and multiple contracts at a go. The repair company can deal in different brands of repairs, whereby, the manufacturer of the sports cars cannot restrict the number of other sports cars manufacturing company that can be contracted by the repairs company to sell their spare parts10. This means that Lolo Cars Company does not exercise monopoly control over the functions of the repair company. With the multiple outlets, it can ensure that each manufacturing company gets an individual outlet where the market is more promising for the products shelved. There should also be no restriction of sale to customers based on the location, this will open a greater and bigger market for the repairers, and thus it will report increasing profits. It will then become an asset to the manufacturing company that cannot be allowed to be lost at any cost. This would mean that the manufacturing company would readily supply these repair parts immediately and maintains the terms of that contract. The repairer should seek changes in the contract agreement that allows for the termination. This is because some manufacturers allow for specific causes, which may lead to the oppression of the repairers, to ensure that they will be allowed to walk out in case the manufacturer does not meet their end of the deal. Works Cited Rodger J. Barry, CullochMacAngus.Competition Law: An Introduction to Practice and Policy. London: Routledge, 2004. Print Van Bael, I.and Bellis, J.F.Competition Law of the European Community- 4th Edition. Alphen aan den Rijn: Kluwer Law International, 2005. Print. Buttigieg, Eugene.Competition Law: Safeguarding the Consumer Interest. a Comparative Analysis of Us Antitrust Law and EC Competition Law. New York: Kluwer Law International, 2009.Print. Campbell, Dennis.International Agency and Distribution Law [2007] - II. Raleigh: Lulu.com, 2007.Print. Cseres, Katalin Judit.Competion Law and Consumer Protection (Series: European Monographs Volume 49). Alphen aan den Rijn: Kluwer Law International, 2005. Print. Maher, Imelda. Competition law: alignment and reform. London: Round Hall Sweet & Maxwell, 1999.Print. Monti, Giorgio. EC Competition Law. Cambridge: Cambridge University Press, 2007. Print. Schaffer, Richard, Agusti,Filiberto&Earle,Beverley. International Business Law and Its Environment. Connecticut: Cengage Learning, 2008. Print. Whish,Richard&Bailey,David. Competition Law. Oxford: Oxford University Press, 2012. Print. Read More