Don’t Overlook EU, UK Antitrust Issues With Vertical Arrangements During the COVID-19 Pandemic

March 25, 2020

During the current COVID-19 pandemic, antitrust/competition law in the EU and UK has focused primarily on competitor cooperation and price increases of certain products, such as face masks, hand sanitizer, paracetamol, bottled oxygen and ventilators. However, there are also issues to consider concerning “vertical arrangements,” such as supply and distribution arrangements.

Particularly where non-competitors are involved, the risk arising out of a “vertical” arrangement is generally lower than with “horizontal” cooperation arrangements between competitors. Nevertheless, there are provisions which are usually treated as serious infringements of the law, regardless of the size of the company, if included in vertical arrangements.

These provisions include restrictions on cross-border (“parallel”) sales between EU countries (plus the UK) and resale price maintenance (setting a minimum or fixed resale price) (RPM) in distribution/resale agreements. This remains the case during the ongoing COVID-19 pandemic.

Maximum resale price clauses are also receiving particular attention. A manufacturer may wish to impose a maximum resale price on its distributors or resellers in order to protect the end-user and the manufacturer’s reputation. In addition, recommended resale prices (RRPs) may be used more frequently in order to guide distributors.

On 23 March 2020, the European Competition Network of national regulators in the EU (ECN) issued a joint statement on the application of competition law in the EU during the COVID-19 crisis. This expressly dealt with maximum resale prices:

“… it is of utmost importance to ensure that products considered essential to protect the health of consumers in the current situation (e.g. face masks and sanitising gel) remain available at competitive prices … In this context, the ECN would like to point out that the existing rules allow manufacturers to set maximum prices for their products. The latter could prove useful to limit unjustified price increases at the distribution level.”

These “existing rules” need to be applied carefully. Generally, so long as the manufacturer/supplier (in its selling market) and the buyer (in its purchasing market) have market shares below 30 percent, maximum resale prices are legal and raise no concerns under EU and UK antitrust/competition law, provided that the figure which is set does not become a de facto fixed price as a result of pressure from, or incentives offered by, the supplier.

Maximum resale prices may legally be used above those market share levels, but there would then need to be an individual analysis of the arrangement. A key issue here will be the market position of the supplier. The stronger its market position, the higher the risk that a maximum resale price will lead to a uniform application of that price and give rise to concerns.

Even where the supplier does have a strong position, it is likely that there will be more flexibility in the current situation than is normally the case. Often a detailed analysis, coupled with robust legal advice and a reasonable attitude to risk, will allow a company to decide that an arrangement can go ahead.

Similarly with RRPs, if the 30 percent maximum market share thresholds are not exceeded, they can usually freely be used, so long as the figure does not become a fixed or minimum sale price as a result of pressure from, or incentives offered by, the supplier. Above that threshold, there is more risk, particularly if the supplier has a strong market position, but there may be more flexibility than before the pandemic.

The Greek Competition Authority has published some examples where a maximum retail price or recommended price would be acceptable

The overall message is that suppliers and their buyers who may be looking to make immediate changes to vertical arrangements in response to the COVID-19 pandemic should consider the possible antitrust/competition law issues that may ariseand seek out antitrust law advice in advance of taking action.

For more information, please see McGuireWoods’ related alerts:

  • EU, UK Antitrust Regulators Monitor Price Increases Resulting From COVID-19 Demand
  • EU, UK Governments and Antitrust Regulators Permit Limited Competitor Cooperation Due to COVID-19
  • Government Funding or State Aid in the EU, UK During the COVID-19 Pandemic
  • UK Guidance on Application of Competition Law to Business Cooperation in Response to COVID-19
  • New EU Guidance: Applying Competition Law to Business Cooperation During COVID-19
  • EU, UK Guidance on Public Procurement Rules During COVID-19

We will provide more detail on these topics in future alerts.

McGuireWoods has published additional thought leadership related to how companies across various industries can address crucial COVID-19-related business and legal issues.