In more detail
Previously, there were minimal enforcement efforts by the ECA in respect of vertical agreements. As a result, vertical agreements and restraints were generally seen as low risk. From 2005 until 2022, the ECA very rarely took enforcement action against vertical restraints. In 2023, the ECA made a marked departure from its previous policy and more than 10 vertical restraints violation decisions were issued.
The ECA issued its first minimum and fixed retail price maintenance (RPM) and most favoured nation (MFN) decisions in the household electrical appliances sector under Article 7 of the ECL, which pertains to vertical restraints. Please refer to our recent article. The ECA issued other prohibition decisions in relation to vertical restraints in other sectors as well.
As a result, the ECA has now issued these new Guidelines to provide clarification on various vertical restrictions that are commonly found in the Egyptian market. These clarifications include the following:
- Definition and types of vertical agreements
The Guidelines cover a wide range of vertical relationships. The ECA has also clarified that vertical agreements do not need to take a specific form. Hence, oral agreements are captured by the regulations.
- Exclusion of agency agreement
In a very welcome approach, the ECA has finally clarified its criteria for excluding certain agreements from the scope of vertical agreements. Most importantly, the ECA has excluded genuine agency agreements from the scope of application of competition law to vertical agreements. The benchmark adopted by the ECA is whether the agent bears any significant commercial and/or financial risks. If any risk is borne, this agreement should be considered a vertical relationship, not an agency agreement, as the agent is dependent on the principal. The ECA has also provided a very helpful checklist for market players to help them determine whether their "agency agreement" actually qualifies for such exclusion.
- "Effects-based" approach?
The ECA highlights that vertical agreements may be pro-competitive by producing economic efficiencies in the market. However, in some circumstances a vertical agreement can have a negative effect on competition.
In the Guidelines, the ECA clarifies that assessing whether conduct is anti-competitive or not requires the ECA to consider the effect on competition of the said practice, rather than the harm sustained.
Despite the effects-based approach, the ECA clearly states that agreements such as RPM, MFN clauses and restrictions on passive sales are likely to violate the ECL.
The ECA notes that it assesses the effect on competition through the following:
- Effect of the agreement on the freedom of competition in the market.
- Consumer benefits resulting from the agreement.
- Considerations related to the quality, reputation, safety and security.
Other elements are taken into consideration as market power, buyer power, barriers to entry and exit, and market concentration.
- Main prohibited conduct
- RPM
The Guidelines explicitly state that setting a minimum and fixed resale price for products are among the most "dangerous" restraints to vertical agreements. However, maximum or recommended retail price are generally seen as compatible with the ECL, unless the party imposes any sanctions or incentives that in reality amount to RPM.
- Restriction on passive sales
Restrictions on passive sales are also seen as one of the most concerning agreements that are likely to violate the ECL.
- MFN Clauses
Interestingly, the ECA has clarified that both wide and narrow MFN clauses are likely to be found problematic and in violation of the ECL.
- Other types of conduct
The ECA highlights other types of conduct in vertical agreements that could raise competition concerns. However, the ECA states that these types of restrictions can be less concerning than the restrictions described above. In such cases, the ECA will conduct a study to determine the effect of these restrictions on competition in the market. The restrictions are as follows:
- Exclusive distribution: Selling to one distributor exclusively for the purpose of reselling in a specific geographic area, to distribution centers, to specific customers, in a specific season, etc.
- Exclusive supply: Supplier undertakes to supply the products for resale to one buyer or to several buyers in a specific market or industry.
- Single branding: An agreement that the distributor will not resell products that compete with the supplier's products.
- Non-compete clause: An agreement between the supplier and distributor not to compete in production, selling, etc. After terminating the contract, the clause should be to protect the know-how within the same geographic area of the business for a maximum of one year. During the contract, it should be based on objective criteria, limited by a timeframe, and applies to the same geographic area.
Conclusion
The Guidelines are a very welcome approach by the ECA, as they clarify numerous points and identify the main areas of concern. The ECA has also explained its enforcement policy when it comes to a wider range of vertical agreements. It remains to be seen how the ECA will implement the Guidelines in practice.
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