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VERTICAL AGREEMENTS AND GROUP EXEMPTIONS IN TURKISH COMPETITION LAW
Competition Law in Turkish legislation is regulated by the Law on the Protection of Competition No. 4054 (“Law No. 4054”), which bears the traces of the European Union Competition Law, and the Block Exemption Communiqué on Vertical Agreements No. 2002/2 (“Communiqué”) regarding vertical agreements. In addition, the Block Exemption Communiqué on Vertical Agreements and Concerted Actions in the Motor Vehicles Sector No. 2005/4 specifically regulates vertical agreements in the motor vehicles sector. Moreover, there are other communiqués within the framework of the implementation of the Competition Authority Law.
TRANSACTIONS REGULATED UNDER THE LAW NO. 4054
Violation Article and Exception of the Law No. 4054
The purpose of the Law No. 4054 is to prevent agreements, decisions, and practices that prevent, distort, or restrict competition in the goods and service markets, to prevent the abuse of this dominance by the enterprises that dominate the market, and to ensure the protection of competition by making the necessary regulations and inspections. In order to achieve this purpose, it is possible to assemble the transactions under the Law under three main titles. First, agreements, practices, and decisions that prevent distort, and restrict competition between all enterprises operating in or affecting the goods and service markets within the borders of Turkey; secondly, the abuse of this dominance by enterprises that dominate the market; the third is all kinds of legal transactions in the nature of mergers and acquisitions, that aim to create a dominant position or to strengthen an existing dominant position, and as a result, which will significantly reduce competition. Article 4 of the Law No. 4054 could be considered as a fundamental violation. Pursuant to the relevant Article of the Law, “Agreements, concerted practices and such decisions, and actions of associations of enterprises that aim to directly or indirectly prevent, distort or restrict competition in a certain good or service market, or that have or may cause such an effect, are unlawful and prohibited.” Set out of Article 5 of the Law, the exemption institution is regulated as an exception to the prohibition in the Article 4. Pursuant to the relevant article, the Competition Authority may decide to exempt the agreements between enterprises from the application of Article 4 in the presence of the following conditions:- To ensure new developments and improvements or economic or technical development in the production or distribution of goods and the provision of services,
- Consumers benefit from it,
- Competition does not disappear in a significant part of the relevant market,
- The competition should not be limited more than is necessary to achieve the objectives in (a) and (b).
VERTICAL AGREEMENTS
Definition and Elements of Vertical Agreement
Vertical agreements are defined as “agreements made between two or more enterprises operating at different levels of the production or distribution chain for the purpose of buying, selling, or reselling certain goods or services”. There are three main elements of the vertical agreement, which are:- Two or more enterprises must be parties to the agreement. Therefore, since the agreements with non-enterprise end users are not covered by Article 4 of the Law, they are not subject to block exemption.
- The enterprises that are party to the agreement shall be operating at different levels of production or distribution. The distribution agreement concluded between a manufacturer enterprise as a supplier and a wholesaler is an example of a simple vertical agreement in this context. A supply agreement concluded between an enterprise that is a raw material producer and another enterprise that uses this raw material in production is also included in the definition of the vertical agreement stipulated by the Communiqué. An agreement concluded between three enterprises, the parties of which are the manufacturer company, the wholesale distributor, and finally, the retailer selling the products to the consumer is also considered as a vertical agreement and could benefit from the block exemption provided that it fulfills the conditions stipulated in the Communiqué. The emphasis here is that the enterprises that are party to the agreement operate at different levels of distribution. In the contrary case, for instance., if an enterprise in the position of wholesaler concludes the same distribution agreement at once with more than one supplier operating at the next level of the distribution process, the said agreement does not comply with the definition of the vertical agreement stipulated in the Communiqué. Rather than concluding the same agreement at once with competing suppliers, the wholesaler enterprise shall conclude the agreement separately with each of the suppliers.
- The agreement shall be made for the purpose of buying, selling, or reselling certain goods or services. Accordingly, the Communiqué covers both purchase (supply) and distribution agreements. In other words, it is not substantial for what purpose the buyer buys the goods or services that are the subject of the agreement from the supplier. The buyer may have purchased the goods or services that are the subject of the agreement for resale or use in his own production. Even if the buyer has purchased the contractual goods from the supplier for the purpose of leasing them to third parties, the agreement concluded with the supplier will fall within the definition of the vertical agreement stipulated in the Communiqué. However, the lease agreement concluded between the buyer and the third party (e.g., financial leasing-leasing agreements) cannot be considered as a vertical agreement since there is no purchase, sale, or resale of any goods or services. Furthermore, if the agreement is signed with the end-user, it is not considered a vertical agreement.
Types of Vertical Agreements
Vertical agreements involving the use of intellectual property In the case of a vertical agreement that includes arrangements for the purchase, sale, or resale of goods or services, the vertical agreement may benefit from the block exemption, provided that certain conditions are met, if there are also provisions regarding the transfer of intellectual rights to the buyer or their use by the buyer. In the 4th paragraph of Article 2 of the Communiqué, titled “Scope”, the conditions that vertical agreements involving the transfer of intellectual rights to the buyer or their use by the buyer shall meet in order to benefit from the block exemption are specified. The aforementioned vertical agreement could be evaluated within the scope of block exemption, provided that all of the elements described below are met:- Provisions on intellectual property should be directly related to the use, sale, or resale of the goods or services subject to the agreement.
- The purchase, sale, or resale of the goods or services subject to the agreement should be the main purpose of the agreement. In other words, the transfer of intellectual rights to the buyer or making them available to the buyer should serve the purchase, sale, or resale of the goods or services subject to the agreement and should not constitute the main purpose of the agreement. This condition is generally provided in franchise agreements. Intellectual rights transferred to the franchisee in order to maintain the uniformity of the franchise system are generally necessary ancillary for the purchase, sale, or resale of the goods or services that are the subject of the agreement.
Vertical agreements between rival enterprises
Regardless of whether they operate in the same geographical market or not, suppliers operating in the same product market or having the potential to operate in the same product market in Turkey are considered as “competing enterprises”. As vertical agreements between rival enterprises are of the nature of “horizontal agreements”, they cannot benefit from the exemption granted by the Communiqué as a rule. However, in the exception to the said provision, enterprises could only compete with each other at the distribution level. In other words, vertical agreements where the supplier is both the producer and the distributor of the goods subject to the agreement and the buyer is the distributor, not the producer, of the goods competing with these goods, can benefit from the block exemption. Thus, enterprises in the position of producers will be able to distribute their products through independent buyers on the one hand and distribute themselves on the other hand.SCOPE OF GROUP EXEMPTION COMMUNIQUE REGARDING VERTICAL AGREEMENTS NO. 2002/2
In 2002, the Competition Board issued the Block Exemption Communiqué on Vertical Agreements No. 2002/2, which covers many types of vertical agreements. In 2003, the “Block Exemption Communiqué on Vertical Agreements No. 2002/2” was published in order to clearly state the issues to be considered by the Competition Board in the implementation of the said Communiqué and thus to minimize the uncertainties that may arise in the interpretation of the Communiqué by enterprises. In accordance with Communiqué No. 2002/2, “vertical agreements” between two or more enterprises operating at different levels of the production and distribution chain are exempted as a group from the prohibition in Article 4 of the Law. Pursuant to the provision of Article 2/2 of the Communiqué; “The exemption provided by this Communiqué is applied if the market share of the supplier in the relevant market in which the supplier provides the goods or services subject to the vertical agreement does not exceed 40%.” Because in this case, the possibility of abuse of the dominant position is high. Unless the enterprises in this situation take an individual exemption decision regarding their agreements before making a vertical agreement, it will be possible to invalidate the agreements they have made pursuant to Article 4 of the Law. Similarly, Article 2/3 indicates that, “In vertical agreements that include the obligation to supply to a single buyer, the exemption is applied provided that the buyer's share in the relevant market from which the goods and services subject to the vertical agreement does not exceed 40%.”. Here, on the other hand, the opposite of the aforementioned situation is arranged. In accordance with Article 2/4 of the Communiqué, if there are provisions regarding the transfer of intellectual rights to the buyer and their use by the buyer in the agreements regulating the purchase, sale, or resale of goods or services, such vertical agreements also benefit from the exemption. So far; the transfer of intellectual rights must not constitute the main purpose of the contract and this transfer must be related to the use, sale, or resale of the said goods and services. In addition, if the provisions on intellectual property have the same purpose as the agreements not exempted by this Communiqué, they cannot benefit from the exemption this time. Article 2/5 of the Communiqué states that vertical agreements between contender enterprises cannot benefit from the exemption. At this point, it should be noted that since the agreement between the two contender enterprises will already be of the nature of a “horizontal agreement”, it will not be included in the scope of the Communiqué. However, in the subsequent of the provision, the supplier is both the manufacturer and the distributor of the goods in question; however, it has been stated that the agreement between such two enterprises will benefit from the exemption even though the buyer is only the distributor.Limitations that Exclude Agreements from Block Exemptions
Pursuant to Article 4 of the Communiqué, if the limitations mentioned in this article are included in the agreement, the agreement will not benefit from the exemption. Determination of the resale price Sub-paragraph (a) of the first paragraph of Article 4 of the Communiqué is about preventing the freedom of the buyer enterprise to determining its own selling price. Accordingly, it is strictly forbidden to set a fixed or minimum selling price for the buyer. However, it is possible for the supplier to determine the buyer's maximum selling price or to recommend the buyer's selling price, provided that it does not translate into a fixed or minimum selling price. In order for the maximum or advisory sales, prices notified to the buyer not to turn into a minimum or fixed price, it must be clearly stated in the published price lists or on the product that the said prices are maximum or advisory. Limitation of Region and Customer Region or customer sharing types listed under four headings in subparagraph (b) of the first paragraph of Article 4 of the Communiqué are not considered as restrictions that exclude agreements from block exemption:- Restriction of active sales to be made by the supplier to an exclusive territory or exclusive customer group allocated to supplier or a buyer, provided that sales to be made by the buyer's customers are not covered,
- Restricting the sales of the buyer operating at the wholesale level to end-users,
- Restricting members of a selective distribution system from selling to unauthorized distributors,
- In the case of parts supplied for assembly purposes, restricting the buyer from selling them to the competitor of the manufacturer supplier.
Obligation of Non-Compete
In Article 3 of the Communiqué, a non-compete obligation is defined as a direct or indirect obligation that prevents the buyer from producing, purchasing, selling, or reselling goods or services that compete with the goods or services that are the subject of the agreement. Accordingly:- “The non-compete obligation imposed on the buyer for an indefinite period or for a period exceeding five years cannot benefit from the exemption in the Communiqué. If it is decided that the non-compete obligation can be renewed implicitly beyond the period specified above, the non-compete obligation is deemed to be for an indefinite period.
- “Any direct or indirect obligation imposed on the buyer, relating to the period after the termination of the agreement, that prohibits the buyer’s from producing, buying, selling, or reselling goods or services. However, if there is a condition that the prohibition relates to goods and services in competition with the goods or services that are the subject of the agreement, provided that the buyer is limited to the facility or land in which the buyer operates during the agreement and it is mandatory to protect the know-how transferred to the buyer by the supplier, a non-compete obligation may be imposed on the buyer for a period not exceeding one year from the termination of the agreement. The right to indefinitely prohibit the use and disclosure of non-public know-how is reserved.
- “Obligation imposed on members of a selective distribution system not to sell branded products of designated competing suppliers”