THE INTRODUCTION OF A VERTICAL BLOCK EXEMPTION IN JERSEY
DRAFTING INSTRUCTIONS
MAY 2020
- INTRODUCTION
These drafting instructions relate to a Ministerial Order (“Order”) required to exempt certain types of vertical arrangements from the prohibition on anti-competitive arrangements laid down in Article 8(1) of the Competition (Jersey) Law 2005 (“Competition Law”). Article 8(1) is about identifying arrangements that will harm consumer welfare and market integration in Jersey and prohibits arrangements between undertakings that have “the object or effect of hindering to an appreciable extent competition in the supply of goods or services within Jersey or any part of Jersey”.
Under Article 8(1) of the Competition Law, anti-competitive arrangements between businesses are prohibited. Amongst other things, this prohibition can apply to arrangements entered into between two or more businesses operating at different levels of the production or distribution chain and relating to the conditions under which the parties may purchase, sell or resell certain goods or services. These are so-called vertical arrangements. The negative effects that may result from restrictions contained in vertical arrangements may concern market foreclosure, a reduction of rivalry and the facilitation of collusion between undertakings operating on the market.
It can however be presumed that certain types of vertical arrangements are likely to help realise efficiencies and the development of new markets which may offset any possible negative effects resulting from the restrictions contained in the arrangement. In particular, certain types of vertical arrangements can lead to a reduction in the transaction and distribution costs of the parties and to an optimisation of their sales and investment levels. To enable such “good arrangements” to be concluded, the Chief Minister (“Minister”) may under Article 10 of the Competition Law, by Order, exempt a specific class of arrangements from the prohibition in Article 8(1) for which it can be assumed with sufficient certainty that they:
(a) are likely to improve the production or distribution of goods or services, or to promote technical or economic progress in the production or distribution of goods or services;
(b) will allow consumers of those goods or services a fair share of any resulting benefit;
(c) do not impose on the undertakings concerned terms that are not indispensable to the attainment of the objectives mentioned in sub-paragraphs (a) and (b); and
(d) do not afford the undertakings concerned the ability to eliminate competition in respect of a substantial part of the goods or services in question.
The exemption of a class of arrangements from the prohibition on anti-competitive arrangements is commonly known as a block exemption. Parties to an arrangement, satisfying all the conditions of a block exemption, are no longer required make an application to the Jersey Competition Regulatory Authority (“JCRA”) for an individual exemption under Article 9 of the Competition Law.
The introduction of a sufficiently clear block exemption in Jersey creates legal certainty for undertakings operating in the Island, as this allows them to determine whether their arrangements are exempted from the prohibition in Article 8(1) of the Competition Law. This simplifies procedures and reduces costs for undertakings. The Order will thus have a safe harbour function, as arrangements that meet the conditions set out therein will, in principle, be unlikely to affect actual or potential competition to such an extent that a negative effect on prices, output or the variety or quality of goods and services can be expected on the market in Jersey. The proposed block exemption will furthermore allow the JCRA to focus its resources on those areas where it can deliver the most benefit.
Important to note is that arrangements that do not satisfy the conditions set out in the block exemption are not necessarily illegal. With regard to such arrangements, parties are required to make an application for an individual exemption to the JCRA under Article 9(2) of the Competition Law.
- BACKGROUND TO PROPOSAL FOR A BLOCK EXEMPTION
In 2015, the JCRA issued a consultation paper in which the Authority identified a number of areas where the EU has (in the past) introduced block exemptions and considered the areas where in Jersey the introduction of block exemptions would be appropriate.[1] Following the consultation, the JCRA concluded that there were four areas where the introduction of a block exemption would be appropriate:
a) fuel forecourt arrangements;
b) motor vehicle sales arrangements;
c) insurance industry arrangements;
d) franchise arrangements.
However, following discussions with the Office of the Chief Executive (“Department”), the JCRA indicated that it no longer supports the introduction of the above four block exemptions. Instead, the JCRA advised that for Jersey a covering general vertical block exemption is developed, in line with the legislation in force in the EU. According to the JCRA, this would offer significant flexibility to undertakings in Jersey, as the Order will not be limited to specific sectors. Instead, it can, in principle, be applied across multiple sectors, as long as the arrangements covered are of a vertical nature. An arrangement is of a vertical nature if it is concluded between undertakings active on different levels of the chain of production or distribution (e.g. supplier, wholesaler, and retailer or a supplier of raw material which the other undertaking uses as an input).[2] Furthermore, in EU competition law, there appears to be a move away from sector specific block exemptions towards more general block exemptions.[3]
The Department has been advised that building on EU precedent is sensible as the EU regulations are based on years of legal and economic assessment and jurisprudence. The Department therefore supports the JCRA’s recommendation for a single Order introducing a general vertical block exemption in Jersey, which, in the Department’s view, will provide greater legal certainty for businesses and their advisors in the Island and allow the JCRA to make better use of its limited resources.
- DETAILED DRAFTING INSTRUCTIONS
The Draftsman is requested to draft a single Order for a block exemption covering vertical arrangements in general.
The Department takes the view that the Order should apply to all vertical arrangements which meet its requirements, whether for goods or services and whatever their main objective is (exclusive distribution, exclusive purchasing, franchising, selective distribution etc.). The focus of the Order should therefore be more on the restrictive nature of the clause than on the type or form of the arrangement in involved.
The structure of the Order to introduce the requested block exemption is for the Draftsman to determine. For the reasons set out above, the Department can see the benefit of drawing on relevant EU precedent, in particular the EU Vertical Agreements Block Exemption Regulation (“VABER”).[4] Drawing on the VABER, would also be in line with the practice of several EU Member States, which have introduced in their domestic legislation vertical block exemptions based on this Regulation.[5]
Should the Draftsman wish to follow the outline of the VABER, the Department advises to include the below provisions in the Order.
- DEFINITIONS
The Draftsman is requested to include a provision in the Order defining the relevant concepts used in the block exemption. In the view of the Department, definitions of the below general concepts should be included in the Order for a vertical block exemption.
a) Vertical arrangement;
b) Fuel forecourt arrangement
c) Vertical restraint;
d) Competing undertaking;
- Actual competitor;
- Potential competitor;
e) Non-compete obligation;
f) Selective distribution system;
g) Connected undertakings;
h) Intellectual property rights;
i) Know-how;
j) Buyer;
k) Customer of the buyer.
For the purposes of the Order, the terms ‘undertaking’, ‘supplier’ and ‘buyer’ should include their respective connected undertakings. Other words and expressions used in the Order should have the same meaning as in the Competition Law.
All of the above terms are defined in Article 1 of the VABER. To ensure uniformity with this Regulation, the Draftsman could take note of the VABER definitions when drafting the Order.
- THE EXEMPTION
In the opinion of the Department, vertical arrangements of the kind to which the Order applies, comply with the conditions referred to in Article 10(2) of the Competition Law[6] to the extent that such arrangements contain restrictions of competition which would otherwise be prohibited by Article 8(1) of the Competition Law.
By introducing a block exemption, such arrangements no longer need to be notified for an individual exemption under Article 9(2) of the Competition Law.
The Draftsman is requested to include in the Order the key provision that, subject to the provisions of the Order, Article 8(1) of the Competition Law shall not apply to vertical arrangements to the extent that such arrangements contain vertical restraints.
The scope of the Order should therefore be limited to vertical arrangements. I.e. arrangements entered into between two or more undertakings each of which operates, for the purposes of the arrangement, at a different level of the production or distribution chain, and relating to the conditions under which the parties may purchase, sell or resell certain goods or services.
The exemption provided by the Order should not apply to vertical arrangements concluded between competing undertakings. The Order should however apply where competing undertakings enter into a non-reciprocal vertical arrangement and:
a) the supplier is a manufacturer and a distributor of goods, while the buyer is a distributor and not a competing undertaking at the manufacturing level; or
b) the supplier is a provider of services at several levels of trade, while the buyer provides its goods or services at the retail level and is not a competing undertaking at the level of trade where it purchases the contract services.
Moreover, the vertical block exemption should only cover arrangements in relation to the conditions under which the parties may purchase, sell or resell certain goods or services.[7] The Order should not exempt arrangements, restrictions or obligations that do not relate to the purchase, sale or resale of goods or services, such as rent or leasing arrangements or clauses preventing parties from carrying out independent research and development.
The assignment of intellectual property rights (“IPRs”) (e.g. trade marks, copyright or know-how) may be beneficial for the effective performance of a vertical arrangement (for example in relation to franchise arrangements). The Order should therefore contain a provision stating that the exemption applies to vertical arrangements containing provisions relating to the assignment to the buyer or use by the buyer of IPRs but only if they are ancillary and are directly related to the use, sale, or resale of goods or services by the buyer or its customers. It is also essential that the clauses relating to IPRs must not have the same object or effect as vertical restraints which are not exempted by this Order. The provision relating to IPRs is of importance to all vertical arrangements but is particularly relevant to franchise arrangements that ordinarily involve the assignment or licensing of IPRs.
Please note furthermore that the Order may not apply to any unilateral conduct of the undertakings concerned. Such unilateral conduct, if anti-competitive, can fall within the scope of Article 16 the Competition Law, which prohibits abuse of dominance.
- MARKET SHARE THRESHOLD
The Draftsman is requested to include in the Order a provision containing a market share threshold, above which the Order does not apply.
The Department takes the view that the Order exempting vertical arrangements should only apply where the market share of the supplier (on the market on which it sells the contract goods or services) and the market share of the buyer (on the market on which it purchases them) does not exceed 30 per cent.[8]
Where a vertical arrangement involves three parties, each operating at a different level of trade, each party's market share must be 30 % or less in order for the block exemption to apply. The Order should make clear that if in a multiparty arrangement an undertaking buys the contract goods or services from one party to the arrangement and sells the contract goods or services to another party to the arrangement, the block exemption should only apply if its market share does not exceed the 30% threshold both as a buyer and a supplier.
If for instance, in an arrangement between a manufacturer, a wholesaler and a retailer, a non-compete obligation is agreed, then the market shares of the manufacturer and the wholesaler on their respective downstream markets must not exceed 30% and the market share of the wholesaler and the retailer must not exceed 30% on their respective purchase markets in order to benefit from the block exemption.
For the purposes of applying the market share thresholds, the Draftsman is requested to include the following rules in the Order:
a) the market share of the supplier shall be calculated on the basis of market sales value data and the market share of the buyer shall be calculated on the basis of market purchase value data. If market sales value or market purchase value data are not available, estimates based on other reliable market information, including market sales and purchase volumes, may be used to establish the market share of the undertaking concerned;
b) the market shares shall be calculated on the basis of data relating to the preceding calendar year;
c) the market share of the supplier shall include any goods or services supplied to vertically integrated distributors for the purposes of sale;
d) if a market share is initially not more than 30 % but subsequently rises above that level without exceeding 35 %, the exemption provided by the Order shall continue to apply for a period of two consecutive calendar years following the year in which the 30 % market share threshold was first exceeded;
e) if a market share is initially not more than 30 % but subsequently rises above 35 %, the exemption provided by the Order shall continue to apply for one calendar year following the year in which the level of 35 % was first exceeded;
f) the benefit the above points d) and e) above may not be combined so as to exceed a period of two calendar years;
g) the market share held by the undertakings referred to in point (e) of the second subparagraph of Article 1(2) of the VABER (definition of ‘connected undertakings’) shall be apportioned equally to each undertaking having the rights or the powers listed in point (a) of the second subparagraph of Article 1(2) of the VABER.[9]
- HARD CORE RESTRAINTS
The purpose of the Order is to exempt from the scope of Article 8(1) of the Competition Law, certain vertical arrangements to the extent that such arrangements contain vertical restraints.
In principle, the Order should exempt vertical arrangements irrespective of the restrictions or obligations they contain. However, the Order should not exempt so-called hard-core restrictions from the scope of Article 8(1) of the Competition Law. In fact, the insertion of a single hard-core restriction in a vertical arrangement, whether directly or indirectly, should preclude the entire arrangement from benefitting from the block exemption.
Where a hard-core restriction is included in an arrangement, that arrangement is presumed to fall within Article 8(1) of the scope of the Competition Law. It is also presumed that the arrangement is unlikely to fulfil the conditions of Article 9(3), for which reason the block exemption does not apply.
The Draftsman is requested to include a provision in the Order containing the below hard-core restrictions which lead to the exclusion of the entire vertical arrangement from the scope of application of the Order.
4.1. FIXED OR MINIMUM SALES PRICES
The first hard core restriction the Draftsman is requested to include in the Order concerns so-called resale price maintenance (RPM). RPM is the practice involving arrangements having as their direct or indirect object the establishment of a fixed or minimum resale price or a fixed or minimum price level to be observed by the buyer.[10] In the case of contractual provisions or concerted practices that directly establish the resale price, the restriction is clear cut.
RPM can also be achieved through indirect means. Examples of this are (e.g.) arrangements fixing the distribution margin, fixing the maximum level of discount the distributor can grant from a prescribed price level, making the grant of rebates or reimbursement of promotional costs by the supplier subject to the observance of a given price level.[11]
However, setting maximum resale prices or recommended resale prices from which the distributor is permitted to deviate without penalty may be permissible and is not considered in itself as leading to RPM (provided these do not amount to fixed or minimum selling prices as a result of pressures from, or the offer of incentives by, the seller).
4.2. MARKET PARTITIONING BY TERRITORY OR BY CUSTOMER GROUP
The Draftsman is furthermore requested to insert a provision in the Order prohibiting clauses that restrict the territory into which, or the customers to whom, the buyer party to the arrangement, without prejudice to a supplier’s ability to place restrictions on the buyer’s place of establishment, may sell the contract goods or services. The provision should prohibit both direct restrictions and indirect provisions that, in practice, prevent or deter a buyer or its customers from making sales outside of specific territories or customer groups.[12]
However, by way of exception, the Order should permit the below four restrictions of the territory into which, or of the customers to whom, the buyer may sell:
a) the restriction of active sales into the exclusive territory or to an exclusive customer group reserved to the supplier or allocated by the supplier to another buyer, where such a restriction does not limit passive sales by the customers of the buyer;
b) the restriction of (both active and passive) sales to end users by a buyer operating at the wholesale level of trade;
c) the restriction of (both active and passive) sales by the members of a selective distribution system to unauthorised distributors within the territory reserved by the supplier to operate that system; and
d) the restriction of the buyer's ability to (both actively and passively) sell components, supplied for the purposes of incorporation, to customers who would use them to manufacture the same type of goods as those produced by the supplier. [13]
4.3. RESTRICTIONS IN SELECTIVE DISTRIBUTIONS SYSTEMS
In respect of selective distribution systems, two more hard core prohibitions should be included in the Order, providing further limits on sales restraints that may be imposed on authorised members of a selective distribution network. The exemption shall not apply to vertical arrangements which have as their object:
- Firstly, the restriction of active or passive sales to end users by members of a selective distribution system operating at the retail level of trade, without prejudice to the possibility of prohibiting a member of the system from operating out of an unauthorised place of establishment;
- Secondly, the restriction of cross-supplies between distributors within a selective distribution system, including between distributors operating at different level of trade.[14]
4.4. RESTRICTION ON SUPPLIERS OF COMPONENTS
The last hard-core restriction the Draftsman is requested to include in the Order concerns the restriction, agreed between a supplier of components and a buyer who incorporates those components, of the supplier’s ability to sell the components as spare parts to end-users or to repairers or other service providers not entrusted by the buyer with the repair or servicing of its goods.
- SEVERABLE, EXCLUDED RESTRICTIONS
In addition to the hard-core restrictions described above, the Order should also provide that certain so-called excluded restrictions are precluded from benefiting from the block exemption.
Important to note is that the insertion of an excluded restriction should not necessarily prevent the possibility of the remaining provisions of the arrangement to benefit from the Order. It should only do so where the offensive clauses are not severable from the remaining provisions of the arrangement. In other words, the Order may continue to apply to the remaining part of a vertical arrangement if that part is severable from the non-exempted obligations.
5.1. NON-COMPETE OBLIGATIONS
Non-compete obligations are capable of foreclosing the market and restricting inter-brand competition.[15] The Draftsman is therefore requested to include in the Order the provision that the block exemption does not apply to any direct or indirect non-compete obligations where the duration is indefinite or exceeds five years. This includes non-compete obligations that are tacitly renewable beyond a period of five years. Such non-compete obligations shall be deemed to have been concluded for an indefinite duration.
The time limitation of five years does, however, not apply where the contract goods or services are sold by the buyer from premises and land owned by the supplier (or leased by the supplier from third parties not connected with the buyer). In such cases the non-compete obligation may be of the same duration as the period of occupancy of the point of sale by the buyer.
For the purposes of the Order ‘non-compete obligation’ should mean:
a) any direct or indirect obligation causing the buyer not to manufacture, purchase, sell or resell goods or services which compete with the contract goods or services; or
b) any direct or indirect obligation on the buyer to purchase from the supplier or from another undertaking designated by the supplier more than 80 % of the buyer's total purchases of the contract goods or services and their substitutes on the relevant market, calculated on the basis of the value or, where such is standard industry practice, the volume of its purchases in the preceding calendar year. [16]
5.2. NON-COMPETE OBLIGATIONS AFTER THE TERMINATION OF AN ARRANGEMENT
The Draftsman is furthermore requested to include in the Order a provision relating to obligations imposed on a buyer which prevent it from manufacturing, purchasing, selling or reselling goods or services after the termination of an arrangement.
In this respect, the Order should provide that the exemption shall not apply to any direct or indirect obligation causing the buyer, after termination of the arrangement, not to manufacture, purchase, sell or resell goods or services, unless:
a) the obligation relates to goods or services which compete with the contract goods or services; and
b) the obligation is limited to the premises and land from which the buyer has operated during the contract period; and
c) the obligation is indispensable to protect know-how transferred by the supplier to the buyer; and
d) the duration of the obligation is limited to a period of one year after termination of the arrangement.
A restriction which is unlimited in time may be possible, however, where this is essential to prevent the use or disclosure of know-how which has not entered the public domain.
5.3. NON-COMPETE OBLIGATIONS AND SELECTIVE DISTRIBUTION SYSTEMS
The third excluded restriction concerns the sale of competing goods in a selective distribution system. Whilst the Order should cover the combination of selective distribution with a non-compete obligation, obliging the dealers not to resell competing brands in general, a supplier may not prevent its appointed dealers, either directly or indirectly, from buying products for resale from specific competing suppliers. The objective of the exclusion of this obligation is to avoid a situation whereby a number of suppliers using the same selective distribution outlets prevent one specific competitor or certain specific competitors from using these outlets to distribute their products (foreclosure of a competing supplier which would be a form of collective boycott).
5.4. EXCLUDED RESTRICTIONS IN FUEL FORECOURT ARRANGEMENTS
Specifically in relation to fuel forecourt arrangements, the Draftsman is requested to provide that the exemption provided by the Order shall not apply to any direct or indirect non-compete obligation, the duration of which is indefinite or exceeds three years. The limitation to three years is meant to create greater levels of competition between oil companies for retail market share (see the Government’s response to the public consultation for more information regarding this limitation).
Furthermore, in order to preserve a buyer’s commercial freedom, the Draftsman is also requested to provide in the Order that, where a fuel forecourt arrangement is operated from premises owned by the buyer, any obligation which purports to restrict the ability of the buyer to dispose of those premises shall not be covered by the exemption.
- WITHDRAWAL OF THE ORDER
The Draftsman is requested to insert a provision enabling the JCRA to withdraw the benefit of the Order if it finds in a particular case that the vertical arrangement, whether in isolation or in conjunction with other similar arrangements, nevertheless has certain effects which are incompatible with the Article 9(3) of the Competition Law.
Where the JCRA wishes to withdraw the benefit of the Order, it will have to prove that the arrangement infringes Article 8(1) of the Competition Law and does not fulfil one or several of the of the four conditions set out in Article 9(3) of the Competition Law. A withdrawal does not apply retrospectively, which means that the exempted status of the arrangement should not be affected until the date at which the withdrawal becomes effective.
- COMMENCEMENT AND EXPIRY
The Draftsman is requested to include a provision in the Order stipulating the date of entry into force of the Order.
- AMENDMENT OF THE ORDER
The Draftsman is requested to include a provision in the Order enabling the Minister to amend the Order, in particular to exclude a particular category of goods or services, where in the Minister’s opinion access to the relevant market or competition therein is significantly restricted by the cumulative effect of parallel networks of similar vertical restraints implemented by competing suppliers or buyers covering more than 50% of a relevant market.
- RELATIONSHIP WITH GUERNSEY
The Draftsman is asked to, as far as possible, align Jersey law with similar provisions that Guernsey is developing. This benefits our regulators which deal with similar issues and businesses that operate in both islands. The Department is happy to facilitate discussion with the relevant parties in Guernsey if that is helpful.
- FURTHER INFORMATION
The Draftsman may find the following websites useful in terms of obtaining access to legislation and information on block exemptions:
- VABER:
https://eur-lex.europa.eu/legalcontent/EN/TXT/PDF/?uri=CELEX:32010R0330&from=EN
- European Commission Guidelines on Vertical Restraints
https://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2010:130:0001:0046:EN:PDF
- Irish Declaration in Respect of Vertical Agreements and Concerted Practices
https://www.ccpc.ie/business/wp-content/uploads/sites/3/2017/02/Verticals-Declaration-2010.pdf
Furthermore, for the information of the Draftsman, the JCRA’s previous draft outlines for block exemptions are attached below. Please note that these draft documents are now outdated as they are based on the Authority’s initial recommendation for 4 separate block exemptions.
gov.je