Group Exemptions of Vertical Agreements in Turkish Law

By Derya Cindioğlu
ADMD Law Office, www.admdlaw.com  Istanbul TURKEY

Competition (anti-trust) law was first established with Law No. 4054 titled ‘The Law on the Protection of Competition’ in Turkey. The fourth article of such law titled “Agreements, Concerted Practices and Decisions Limiting Competition” sets different types of principles for purpose.

Perhaps the most commonly referred part of such article is the following statement: “Agreements and concerted practices between undertakings, and decisions and practices of associations of undertakings which have as their object or effect or likely effect the prevention, distortion or restriction of competition directly or indirectly in a particular market for goods or services are illegal and prohibited.” Although the article simply suggests for agreements we need to dig deeper in order to understand what types of agreements are subject to what types of limitations.

The first classification used for such ‘agreements’ referral above mentioned is horizontal and vertical agreements. Horizontal agreements are simply designations of specifications at similar levels of product or service chains that are constructed by enterprises. If such agreements are for different levels then they are called vertical agreements.

The conditions in the event of vertical agreements are different since in this case agreements in question are unlikely to create distortion of competition by their nature. A number of reasons resulted from their characteristics can be enumerated as follows:  First of all, they are not usually entered into between competitors and thus less likely to result in collusion, especially concerning price competition. Secondly, vertical agreements have a self-restraining character as one party is the customer of another, in other words vertical agreements take place between producers of complementary goods or services who have, in general, no interest in raising the price of such products (the product of the one is the input for the other) that will cause a decrease in the demand for their product. For instance let us assume a Supplier A and a Supplier B; the mentioned vertical agreements will be among: 1) Distributor C (Distributor of Supplier A and B) and B and 2) Distributor A1 (Allied Company of Supplier) and A and 3) Distributor C and A. Here Supplier A and Supplier B are two rival ventures displaying activity along the same market. Supplier A distributes its own products both by distributor C (by a vertical contract) and Distributor A1, which is the subsidiary company of Supplier A. Distributor C also distributes the products of Supplier B. In this context Supplier A and Distributor C are rivals to each other on the distribution position. Therefore Supplier A displays activity among the distribution position by Distributor A1 accordingly. These two ventures are not rivals to each other on the production level but still this agreement is eligible for an exemption.

Exclusive distribution rights, geographical market restrictions and limitations on sharing customers or fixing resale prices are sample limitations imposed on these different levels by vertical agreements. Although sounds anti-competitive such limitations may have positive features such as rationalization of services after distribution and sales, providing instruments for the consumers to find the concerned product easily etc. Therefore some types of vertical agreements bearing limitations could be subject to exemptions provided by the Competition Authority (Authority) if concurrent with their regulations.

Vertical Agreements are defined as “provided that they bear the conditions mentioned in this communiqué, agreements concluded between two or more undertakings operating at different levels of the production or distribution chain, with the aim of purchase, sale or resale of particular goods or services are vertical agreements” within the “Block Exemption communiqué on Vertical Agreements” (Block Exemption Communiqué - BEC) enacted by Competition Board (Board).

Article 2 BEC provides the exemption “The Board, in case all the terms listed below exist, may decide to exempt agreements, concerted practices between undertakings, and decisions of associations of undertakings from the application of the provisions of Article 4:

• a) Ensuring new developments and improvements, or economic or technical development in the production or distribution of goods and in the provision of services,
• b) Benefiting the consumer from the above-mentioned,
• c) Not eliminating competition in a significant part of the relevant market,
• d) Not limiting competition more than what is compulsory for achieving the goals set out in sub-paragraphs (a) and (b).

Namely if the conditions in the Article 5 of the Competition Law are fulfilled, vertical agreements are exempted from the limitations stated in the Article 4 of the same law.
Such conditions are determined in existence subject to BEC. BEC was amended various times in 2003 and recently in 2007 and subject to the new version of BEC “Exemption provided with this communiqué, is to be applied unless provider does not get over %40 market share that provided by vertical agreement. Exemption in vertical agreements that have a liability, provide to one receiver, is applied unless receiver does not get over %40 of market share of vertical agreement's subject goods and services.”
Since we refer to the issue herein we should not avoid the legislative background for the determination of such 40% market share as an evidence of market dominance. Basically this calculation is subject to the determination of market share, with goods or services that are subjected to the vertical agreement including all goods or services that are provided by same provider. According to BEC if market sales info does not exist, Board makes approximations with the following principles: 

• a) Market share is calculated by previous year's data.
• b) Market share includes all goods and services were provided for selling, affiliated to distributors. 
• c) If at first market share was not more than 40% then passed over threshold but not 45%, exemption  shall be affective in two years after passing threshold.
• d) If at first market share was not more than 40% then passed over 45%, exemptions continues in one year after passing market share threshold.
• e) Privileges provided by (c) and (d) clauses can not be combined in order to go beyond 2 calendar years. 

With the above amendments a new condition is added into BEC’s exemptions simply the dominance in the market thus making it more in conformity with the general principles of the Competition Law. Indeed by this exemption limitation imposed, execution of vertical agreements reduced dramatically in practice.
Third article of BEC titled “definitions” was also amended to state that “To selling agreement subjected goods only one receiver for use only or reselling in Turkey is direct liability or indirect liability of provider” thus clarifying another troubling issue as well.  
Another amendment made in BEC at 2007 is the addition of a new sentence on to the 6th Article designating that the Board could ask for the opinions of the concerned third parties regarding the execution of the vertical agreements. Thus the Board is now aiming to provide an option for the concerned parties including both sides of the agreement to raise their voices before deciding on an exemption. 
The Board regularly uses European Union (EU) legislation as a source and by means of communiqués ensures a considerable alignment with EU policies.

The source of the Article 5 above and BEC is the Article 81(3) of European Economic Community (EEC) Treaty. There are differences in BEC. For instance; exemption provided with BEC is to be applied unless provider does not get over 40% market share that provided by vertical agreements. This threshold is 30% in EU.

As explained above the amendments at BEC, that depend on EC's regulations, brought the amendments at BEC brought more scrutiny to block exemptions compared with previous applications in order to prevent competitive damages caused by vertical agreements.