The AMCU’s representatives voiced that, indeed, currently there is no official practice and interpretation of the non-compete covenants of the vertical agreements. At the same time, the AMCU stressed its watchful attitude to such frequently used in the vertical relations ‘tools’ as bonuses, discounts, other privileges applied differently to distinct distributors.
In order to avoid penalties the AMCU advised the companies to verify their effective vertical agreements on compliance with Ukrainian competition protection legislation by their own. If there are any doubts as to their compliance with Ukrainian law requirements, the companies shall notify thereon the AMCU on the free-will basis. In that case they may be released of liability under the leniency provisions of Ukrainian law.
As far as the companies, just entering the Ukrainian market, are concerned, they may approach the AMCU for receipt of its official decision recommendations and explanations as to the compliance of such limitations/restrictions with the requirements of Ukrainian law prior to entering into the agreement. Please find below a short overview of applicable completion requirements.
Non-compete covenants in distribution agreements under Ukrainian competition law Article 6 of the Law of Ukraine ‘On Protection of Economic Competition’ (‘Competition Law’) most of the non-compete covenants widespread in the vertical agreements may be regarded as prohibited anti-competitive concerted actions, namely:
- Setting prices or other conditions of acquisition or sale of products;
- Restricting manufacture and markets of products, technical and technological development, investments or placing them under control;
- Dividing markets or sources of supply on the basis of territory, assortment, volumes of sales or acquisition, range of sellers, purchasers or consumers, or on the basis of other features;
- Removing other legal entities, purchasers or sellers from the market or restricting their access to the market (exit from the market);
- Applying different conditions to equivalent agreements with different legal entities, thus, placing them into an unfavorable competitive position;
- Concluding agreements with other legal entities based on their acceptance of additional conditions, which do not concern the subject-matter of certain agreements in terms of their contents or under trade and other fair practices in business activities;
- Restricting considerably competitiveness of other legal entities on the market without any objective reasons.
The said concerted actions may be permitted by the AMCU subject to observance of the set procedure and conditions.
At the same time, Article 8 of the Competition Law defines the so-called ‘vertical agreement exemptions’. Particularly, if one participant of concerted actions in respect of supply or use of products establishes the below-listed limitations/restrictions for another participant thereof, such limitations/restrictions shall not be regarded as anti-competitive concerted actions and thus, shall not be prohibited.
The following limitations/restrictions are not prohibited:
- Use of products supplied by a participant, imposing limitations, or other suppliers;
- Acquisition of other products from other legal entities or sale of other products to other legal entities and consumers;
- Acquisition of products, which, by their nature or in accordance with trade and other fair practices of business activities, do not belong to the subject-matter of the agreement;
- Specification of prices or other conditions of an agreement for the sales of the supplied products to other legal entities or consumers.
However, the said limits/restrictions shall be permitted only if they do not:
(a) lead to material limitation of competition on the whole market or on the substantial part thereof, including monopolization of the respective markets; (b) restrict access of the other legal entities onto the market; and (c) lead to economically groundless increase of prices or shortage of products.
Notably, as of today there is no well-established practice of application and/or comprehensive official interpretation of the said articles. Hence, the AMCU defines whether non-compete covenants of agreements are in line with Ukrainian law on case-by-case basis and its decisions strongly depends on market conditions in the relevant sphere, i.e. a total number of the companies/competitors selling similar goods, their share on a market, type of products (i.e. whether the products are products of first priority) etc.
Non-compete covenants in franchise agreements under Ukrainian law It is worth emphasizing that Article 1122 of the Civil Code of Ukraine and Article 372 of the Commercial Code of Ukraine directly allow introducing into the franchise agreements the following restrictions:
- The franchisor’s obligation not to grant to other persons the similar set of rights for using thereof on the territory allocated to the franchisee or to refrain from its own similar activity on this territory;
- The franchisee’s obligation not to compete with the franchisor on the territory covered by the franchise agreement within the business activity carried out by the franchisee with use of the rights transferred by the franchisor;
- The franchisee’s obligation not to obtain similar rights from the franchisor’s (potential) competitors;
- The franchisee’s obligation to approve with the franchisor location of premises to be used for sale of products, works, services as well as their internal and external design.
At the same time, the Civil Code directly prohibits to stipulate in the franchise agreement terms and conditions:
- Entitling the franchisor to establish prices for products, works, services and/or maximum or minimum price rates; and/or
- Setting out that the franchisee shall sell products, services only to certain kinds of consumers or exclusively to consumers located on the territory defined in the franchise agreement.
The said provisions shall be regarded as null and void.
Besides, the Commercial Code stipulates that any restrictive terms and conditions of the franchise agreement, contradicting Ukrainian law, may be invalidated e.g. if the said restrictions violate provisions of the respective competition regulations – the above provisions of the Competition Law.
As of today the AMCU’s approach as to correlation between the said provisions of the Civil Code, the Commercial Code and the Competition Law is not voiced. Hence, it is unclear whether the above non-compete covenants allowed directly by the Civil Code and the Commercial Code may be applied without any limitations or on the contrary, the franchisors and the franchisees should always look back the Competition Law requirements.
Nataliya Mykolska , IDI franchising Country Expert for Ukraine.