This article aims to assist businesses in assessing, on a case-by-case basis, the compatibility of their vertical agreements with national and European Union competition rules.

The purpose of competition law is to protect, maintain, and encourage competition and a fair competitive environment, ultimately promoting consumer interests. The provisions of competition law apply to actions and practices that have or may have the effect of restricting, preventing, or distorting competition.

For most vertical restrictions, competition concerns arise only if competition is insufficient at one or more commercial levels—meaning that there is a certain degree of market power at the supplier and/or buyer level. Vertical restrictions are generally less harmful compared to horizontal restrictions (between direct competitors).

What is a Vertical Agreement?

A vertical agreement refers to an agreement or concerted practice between two or more businesses operating at different levels of the production and distribution process, which governs the conditions under which the parties may purchase, sell, or resell certain goods or services. A vertical restriction refers to the restriction of competition through a vertical agreement that falls under Article 5(1) of Competition Law No. 21/1996.

According to Article 5(1) of the Competition Law:
“Any agreements between undertakings, decisions by associations of undertakings, and concerted practices that have as their object or effect the prevention, restriction, or distortion of competition in the Romanian market or in a part of it are prohibited, particularly those which:
a) directly or indirectly fix purchase or selling prices or any other trading conditions;
b) limit or control production, commercialization, technical development, or investments;
c) divide markets or sources of supply;
d) apply dissimilar conditions to equivalent transactions with trading partners, placing them at a competitive disadvantage;
e) make contract conclusion conditional on the acceptance of additional obligations which, by their nature or according to commercial usage, have no connection with the subject of the contracts.”

Exemptions for Minor Agreements

Competition law provides that agreements, decisions, or concerted practices with a minor market impact are not subject to Article 5(1). According to Article 7(1), if the market share of each party to an agreement does not exceed 15% in any relevant market affected by the agreement, and the parties are not competitors (actual or potential), then Article 5(1) does not apply.

Serious Vertical Restrictions

However, five serious restrictions lead to the exclusion of the entire agreement from the exemptions provided by the Competition Law, regardless of market share. These are considered severe anti-competitive restrictions due to their harmful impact on competition. The following are strictly prohibited:

a) Resale Price Maintenance (RPM) – restricting the buyer’s ability to set resale prices, except for setting a maximum resale price or recommending a resale price, provided these do not become fixed or minimum prices due to pressure or incentives from any party.

b) Customer and Territorial Restrictions – limiting the territories or customers to whom a buyer can sell contractual goods or services, except in cases such as:

• Restricting active sales into an exclusive territory or customer group reserved for the supplier or another buyer, as long as it does not limit buyer-to-buyer sales.
• Restricting sales to end-users by a wholesaler.
• Restricting sales by selective distribution system members to unauthorized distributors.
• Restricting the buyer from selling components intended for assembly to customers producing competing goods.

c) Active or Passive Sales Restrictions in Selective Distribution Systems – prohibiting selective distribution system members acting as retailers from selling to end-users, except for restrictions on unauthorized locations.

d) Cross-Supply Restrictions – limiting cross-supplies between distributors in a selective distribution system, including between distributors at different levels.

e) Component Supply Restrictions – prohibiting a component supplier from selling parts as replacements to end-users, repair service providers, or independent service providers not authorized by the buyer.

Resale Price Maintenance (RPM)

RPM is a specific type of vertical agreement in which an upstream firm controls or restricts the price (or, in some cases, the terms and conditions) that a downstream firm applies when selling the product or service to end consumers. RPM, including recommended prices that turn into fixed prices, may have negative effects such as:

• Facilitating collusion among suppliers, especially in oligopolies, by increasing price transparency.
• Enabling collusion among buyers by reducing intra-brand price competition, where some distributors may pressure suppliers to maintain resale prices, leading to market stabilization.
• Reducing competition between manufacturers and/or retailers.
• Causing overall price increases.
• Decreasing pressure on supplier profit margins.
• Slowing down innovation and reducing dynamism at the distributor level due to the lack of price competition.

There are different forms of RPM:

• Maximum RPM – sets an upper limit on the resale price.
• Minimum RPM – sets a lower limit below which the retailer cannot sell the product.
• Fixed RPM – establishes an exact price, with both minimum and fixed RPMs being serious anti-competitive restrictions.

Under the Block Exemption Regulation, maximum RPM and recommended resale prices are generally allowed, provided that the market share of each party does not exceed 30%, and they do not result in a de facto minimum or fixed price due to pressure or incentives.

Sanctions for Anti-Competitive Vertical Agreements

A vertical agreement violating Article 5 of the Competition Law can result in a fine of up to 10% of the total turnover of the infringing company in the financial year preceding the sanction.

In general, vertical agreements are considered to have moderate severity, meaning fines typically range between 2% and 4% of total turnover, with potential adjustments based on aggravating or mitigating circumstances and the duration of the infringement.

Additionally, the final amount of the fine may be reduced if the infringing company:

1. Applies for leniency, or
2. Acknowledges the infringement, which can lead to a fine reduction of up to 30%.

Leniency and Acknowledgment Policies

Through the leniency policy, the Competition Council encourages businesses that discover anti-competitive behavior or restrictive clauses in contracts to report them and provide evidence in exchange for immunity or fine reductions.

During investigations, companies can also choose to acknowledge their participation in the infringement, which results in a reduced fine. Unlike leniency statements, acknowledgments do not require additional proof of the violation.

Legal Compliance in Vertical Agreements

Competition law and its principles must be considered when negotiating and concluding vertical agreements. Therefore, a company’s legal department should always be consulted before entering into a contract that may contain vertical restrictions.

Author: Atty. Lavinia Rusu