Ercüment Erdem Att. Ecem Susoy Uygun

Draft Guideline on Vertical Agreements and the Related Workshop of the Competition Authority

December 2017

Introduction

A number of studies have been undertaken in order to revise the Guideline on Vertical Agreements ("Vertical Guideline")[1] in line with the developments in the European Union legislation, as well as the needs in the relevant sectors. In accordance with the announcement made on 20.07.2017 on the website of the Turkish Competition Authority (“Competition Authority”), the Draft Guideline on Vertical Agreements ("Draft Guideline") was presented for public opinion. In accordance with the suggestions and opinions collected from the public, a workshop ("Workshop") was held on 12.12.2017 by the Competition Authority to discuss and evaluate these suggestions and opinions. The Workshop was a wide-ranging meeting where all parties expressed their views on the changes in the Vertical Guideline. This article addresses the Draft Guideline and the Workshop on vertical agreements.

Draft Guideline on Vertical Agreements

Regulations on Agency Agreements

The Draft Guideline proposes a new regulation to paragraph 14 of the Vertical Guideline on Agency Agreements. When designing a proposal for the new Regulation, the Competition Authority first examined whether there is a difference between the Vertical Guideline and the relevant provisions of the European Union legislation. It was then examined whether paragraph 14 of the Vertical Guideline complies with the relevant provisions of the Turkish competition law legislation.

Paragraph 14 of the Vertical Guideline under the heading of Agency Agreements states the following: “...However non-competition obligations, including those related to the period following the termination of the agreement, concern inter-brand competition, and may lead to anticompetitive effects if they create a foreclosure effect in the relevant market where the contracted goods and services are being sold; as a result, this provision may fall under Article 4 of the Act.”

Paragraph 14 also differs from that in the 19th paragraph of the European Commission's Guidelines on Vertical Restraints (“Commission’s Guideline”)[2]. In the paragraph referred to in the Commission’s Guidelines, the non-competition obligations in the agency agreements might violate Article 101(1) of the Treaty on the Functioning of the European Union if they have foreclosure effects on the relevant market. However, as stated in the Informatory Memorandum on the Draft Guideline published by the Competition Authority ("Memorandum"), contrary to the EU legislation, in the 14th paragraph of the Vertical Guideline, the foreclosure effect in the market is considered as a criterion as to whether or not the non-compete obligations included in the agency contracts fall within the scope of Article 4 of Law No. 4054 on the Protection of Competition (“Law No. 4054”).

Moreover, the Competition Authority reached the conclusion that the understanding adopted within the framework of the non-competition obligation contained in the agency agreements in paragraph 14 of the Vertical Guideline is contrary to the general understanding adopted in Law No. 4054 and in Block Exemption Communiqué on Vertical Agreements No. 2002/2 and in the Vertical Guideline, and requires to be harmonized, accordingly. Also, a new regulation should be introduced in order to eliminate the discrepancies regarding non-competition obligations in vertical agreements, and to remove inconsistencies in the application of the non-compete obligations contained in the agency contracts.

As a consequence, the Competition Authority proposes to reorganize the phrase in paragraph 14 of the Vertical Guideline, as follows: "...However non-competition obligations, including those related to the period following the termination of the agreement relates to inter-brand competition, and this provision falls under Article 4 of the Act.

At the Workshop, while some of the sector representatives arguing that the new Regulation envisaged in the Draft Guideline is in accordance with the Regulation of the European Commission (“Commission”), and that it should come into force in this manner, however, based on a different interpretation, some of them proposed that this Regulation needs to be reviewed before entry into force. Those who are of the opinion to re-evaluate the regulation have stated that it is aimed to accept that the relevant contract is within the scope of Article 4 of Law No. 4054, regardless of whether it has an effect of market closing, the manner of how to deal with the non-competition obligation in the agency contracts should be revealed in light of the decisions of the Competition Board, that any agency contract containing the non-competition obligations with the proposed regulation will cause serious concerns for enterprises and, in this respect, there will be many exemption applications to the Competition Authority, thereby increasing the workload and, due to all of these facts, the existing Regulation in the Vertical Guideline must remain.

Regulations Regarding Online Sales

There is no doubt that the widespread use of the internet in Turkey, and the increase of online sales raises the debate of introducing the new regulations into Turkish competition legislation. As is stated in the Memorandum, the Regulation in the Turkish competition legislation is limited to indicating that online sales are considered to be a passive selling method, and there are significant shortcomings as compared to the approach of the Commission.

As is set forth in the Draft Guideline, the Competition Authority envisages a broad regulation based on the Commission’s Guidelines on prohibitions of online sales. As per the Draft Guidelines, limitations imposed on online sales will exclude vertical agreements in question from the scope of a block exemption. These limitations, in particular, are the restrictions imposed on buyers with regard to territory, and on customers to which the contractual goods and services will be sold, the restrictions on the proportion of sales made via the internet, and limitations on determining higher prices to be paid by buyers for the products to be sold on the internet, than for products to be offered at physical sale points.

Furthermore, the Draft Guideline regulates that the provider may set forth certain conditions with respect to the use of the internet as a sales channel. These conditions are exemplified as follows: The quality conditions of the website in which the products are offered for sale, the requirement of providing certain services to online consumers, and the obligation to have a physical point of sale. Also, in accordance with the Draft Guideline, provided that online sales will not be prevented, directly or indirectly, the provider may request from the buyer to sell on "sales platforms" that meet certain standards and conditions.

Finally, for the purpose of harmonizing Article 31 of the Vertical Guideline with the selective distribution system in terms of online sales, it is envisaged to make additions to the said paragraph referred to in the Draft Guideline.

The regulations proposed in the Draft Guideline on online sales have been discussed, in detail, by various sector representatives at the Workshop. Although a consensus has been reached on the development of e-commerce and the growth of e-commerce volume, differing opinions have been put forward on introducing some limitations to online platforms, provided that they do not hinder competition. Within the context of the limitations imposed on online sales, the Coty Decision (C-230/16) of the European Court of Justice dated 06.12.2017 has been referred to. This decision is a precedent that affirms that luxury brands can block online sales in order to avoid damaging the images of their products. While some sector representatives have argued that the Draft Guideline must be drafted in accordance with the last provision of paragraph 54 of the Commission’s Guidelines and the Coty Decision, on the other hand, some have argued that no restrictions should be imposed on online platforms.

Regulations Regarding the Most Favored Nation / Customer Condition

As is stated in the Memorandum of the Competition Authority, it is not easy to decide whether or not a competition law violation has occurred with regard to the most favored nation / customer ("MFN"). Moreover, pursuant to the Competition Authority, the fact that there is no explanatory provision on the conditions of MFN in the Turkish competition law legislation causes uncertainties, in practice. For this reason, the Competition Authority has considered that it would be appropriate to include the regulations on the MFN conditions in the Draft Guideline. In accordance with the new regulation proposed in the Draft Guideline, in the competition law examinations with regard to the MFN condition, it is necessary to examine, in detail, the competitive position of the beneficiary and competitors in the relevant market, the purpose for which the contract is placed, the characteristics of the market, and the condition.

In the Workshop, the concerns regarding introducing regulations regarding the application of the MFN have been expressed due to the fact that there has been no established case-law on the MFN practice. It has been proposed by some sector representatives to introduce a market share threshold in the competition law examinations for the MFN condition, pointing out that it is unclear how to conduct market power examinations on the market position of the beneficiary and competitors. Additionally, with the proposed amendment to Article 19 of the Vertical Guideline, it states that the MFN condition might be another example of enhancing the effectiveness of maintaining the resale price. However, as such additional proposal of regulation is mentioned together with the resale price regulation, under the same paragraph, it has been criticized that the MFN condition might be recognized as the resale price maintenance.

Conclusion

In order to meet the needs arising from the competition law applications, and to comply with the EU legislation, it has been concluded that the "Agency Contracts," "Internet Sales," and "Most Favored Nation / Customer Conditions" should be reviewed and introduced into the Vertical Guideline. In the Workshop of the Competition Authority, the Draft Guideline was evaluated with the participation of various sector representatives. Changes to be introduced into the Guidelines are expected to take effect soon.

[1] Please see. http://rekabet.gov.tr/Dosya/guidelines/13-pdf (Last Access date: 20.12.2017).

[2] Please see. http://ec.europa.eu/competition/antitrust/legislation/guidelines_vertical_en.pdf (Last Access date: 20.12.2017).