Absolute territorial protection

 

Author Definition

 

Definition

Mostly used under European Union Competition Law, the term “Absolute Territorial Protection” designates a practice by manufacturers or suppliers, according to which a single distributor obtains the rights from a manufacturer to market a product or service in a certain territory and other distributors are prohibited to sell actively or passively into this territory. In that vein, distributors cannot offer the product or service outside its designated territory and cannot respond to solicitations from consumers in other territories. Absolute Territorial Protection is equivalent to a “reinforced exclusive dealing”, whereas, in addition to the exclusivity, there is a prohibition on so called “parallel imports”.

 

Commentary

European Union

Understandably, given its goal of creating a single market, EU Competition Law is skeptical of practices that appear to undermine that goal, independently if they increase output. Accordingly, agreements aiming to restrict trade between Member States are in principle restrictive of competition “by object” (or “by their very nature”) under Article 101(1) of the Treaty on the Functioning of the European Union (TFUE).

This apparently absolute prohibition applies not only to horizontal agreements (as would be the rule on most jurisdictions with a Competition or Antitrust Law), but to some vertical restraints that could enhance inter-brand competition and benefit consumers in the process (IBAÑEZ COLOMO, 2016). In Consten and Grundig v. Commission, the Court of Justice reached the conclusion that if an agreement goes beyond granting exclusive rights to a territory, imposing importing bans and preventing “parallel trade”, it is considered to have “as its object” the restriction of competition.

In that vein, Article 4 of the Vertical Restraints Regulation No. 330/2010 qualifies as “hardcore restrictions” stipulations limiting “the territory into which, or the customers to whom, a buyer party to the agreement may sell the contract goods or services”. It is important to bear in mind, however, that the heading of article 4 uses the phrase “have as their object”; which means that a broader agreement that contains other provisions, with other plausible goals, and with a plausible competitive justification (i.e. agreements that include investments in advertising or protection of intellectual property), could fall outside the scope of Article 4.

Moreover, Article 4 includes four exceptions to the rule:

  • (i) 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, that do not limit sales by the customers of the buyer;
  • (ii) the restriction of sales to end users by a buyer operating at the wholesale level of trade;
  • (iii) the restriction of sales by the members of a selective distribution system to unauthorized distributors within the territory reserved by the supplier to operate that system; and,
  • (iv) the restriction of the buyer’s ability to 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.

United States

Under US Antitrust Law, the analysis is more straightforward, especially after Continental T.V., Inc. v GTE Sylvania. An absolute territorial protection is analyzed as a vertical restraint and, as such, would be analyzed under the rule-of-reason standard. In Sylvania, the Supreme Court acknowledges that “vertical restrictions reduce intrabrand competition by limiting the number of sellers of a particular product”, but “promote interbrand competition by allowing the manufacturer to achieve certain efficiencies in the distribution of his products”. Therefore, vertical territorial restrictions merit further analysis.

Under the rule-of-reason, plaintiffs must demonstrate that the defendant has a high degree of market power, and that the restriction has negative effect on competition. Defendants can demonstrate that the restraint has procompetitive interbrand effects that mitigate the anticompetitive effects on intrabrand competition.

Competition law of other nations

The competition laws of other nations give a similar treatment to territorial restrictions, the main difference being the burden of proof. Peruvian Antitrust Law (Legislative Decree 1034) has a clear classification between unilateral practices and agreements, which can be vertical and horizontal agreements. Only horizontal agreements related exclusively to price, output, and client allocation, and bid-rigging, are under an “absolute prohibition” rule (akin to the per se rule). Vertical territorial restrictions (even “absolute”, therefore, would be analyzed as a vertical agreement; and are hence subject to a “relative prohibition” rule (akin to the rule of reason). Plaintiffs, therefore, must demonstrate that the defendant has dominance in the relevant market, that the practice is unjustified, and that it has or may have negative effects on competition.

 

Bibliography

Whish, Richard and David Bailey. Competition Law, Seventh Edition. Oxford University Press, 2012.

Gavil, Andrew, Kovacic, William, Baker, Jonathan and Joshua Wright. Antitrust Law in Perspective. Cases, concepts and problems in Competition Policy. Third Edition. West Academic, 2017.

Heimler, Alberto and Mehta, Kirti. Absolute Territorial Protection and Competition in the EU: An Economic Approach (April 15, 2014).

Mastromanolis, Emmanuel. Insights from US Antitrust Law on exclusive and restricted territorial distribution: the creation of a new legal standard for European Union Competition Law. U. Pa. J. Int’l Bus. Vol. 15, No. 4 (1994).

Ibanez Colomo, Pablo. Article 101 TFEU and Market Integration. LSE Law, Society and Economy Working Papers 07/2016.

Author

Quotation

Mario Zúñiga, Absolute Territorial Protection, Global Dictionary of Competition Law, Concurrences, Art. N° 12348

Visites 11859

Publisher Concurrences

Date 1 January 1900

Number of pages 500

 

Institution Definition

Practice by manufacturers or suppliers relating to the resale of their products and leading to a separation of markets or territories. Under absolute territorial protection, a single distributor obtains the rights from a manufacturer to market a product in a certain territory and other distributors are prohibited to sell actively or passively into this territory. © European Commission

See also Hard core restriction(s) and Block exemption (regulation)

 
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