On November 18, 2021, the Court of Justice clarified the framework for assessing anticompetitive agreements between a software developer and its distributors, and ordered a Latvian court to revisit its analysis before adjudicating on the case.[1]
Background
On December 9, 2013, the Latvian competition authority found that contracts which Visma, an accounting software developer, had concluded with its distributors violated Latvian competition law. These contracts provided that the distributor, which first recorded a potential customer in Visma’s database, had a “priority” for completing the transaction with that customer over other distributors, unless the customer disagreed. This priority had a duration of six months.
The Latvian authority considered that the objective of the agreement was the allocation of customers among distributors, thereby limiting competition between them. The authority thus concluded that the agreement was anticompetitive “by object,” meaning that it was by its very nature harmful to the proper functioning of competition, meaning that there was no need to prove that the agreement had any actual effects on the market before fining Visma.
Following Visma’s appeal, and a review of the case by multiple Latvian courts, the regional administrative court in Latvia decided to stay the proceedings and request a ruling from the Court of Justice regarding the application of the EU competition rules to the case.
The Judgment Of The Court Of Justice
The core question of the Latvian Court was whether the priority provision contained in Visma’s contracts with its distributors constituted an agreement restricting competition by object or by effect.
The Court of Justice recalled that the existence of a restriction by object must be assessed in the light of the provisions of the agreement, the objectives pursued, and the economic context in which it took place. When applying this test, the Court of Justice found that the content of the disputed provision was unclear. In particular, it was not apparent whether the “priority” given to distributors by the contract meant that only the first distributor registering a potential customer could conclude the contract.
Indeed, Visma disputed this interpretation of the provision. The European Commission also pointed out that the contract did not preclude discussions between a customer and competing distributors, as the customer could opt out of the priority arrangement.
The Court of Justice also found that the objective of Visma’s contracts was unclear. Visma argued that their objective was actually procompetitive, in that the contracts aimed to improve the cooperation with its distributors and to ensure the quality of the products delivered to the customers. According to the Court of Justice, these considerations should be taken into account by the Latvian court before adjudicating on the case.
The Latvian court is now expected to issue a final judgment on the case based on the guidance received from the Court of Justice. If no restrictions “by object” were found, the Latvian court would have to carry out a full assessment the contracts’ actual effects on the market. This assessment would have to take into account that Visma’s market shares are fairly limited (below 30%), that the distributors were unaware of priorities of other distributors and, that customers had the possibility of opting-out of the priority.
“By object” decisions must be supported by rigorous reasoning
The distinction between “by object” and “by effect” restrictions of competition is important in EU antitrust law, and it has been extensively expanded upon by the Court of Justice in several landmark judgments.[2]
If an agreement between undertakings is anticompetitive “by object,” antitrust authorities can declare it void and impose fines without further assessment. Otherwise, authorities will often need to collect extensive market data and produce sophisticated economic analysis in an attempt to demonstrate the agreement’s actual effects on the market. In other words, a “by effect” case requires more investigative efforts and is more difficult to defend in court.
The ruling in the Visma case is a reminder that antitrust authorities should not apply the “by object” standard lightheartedly. The conditions for a “by object” case—as established in the Court of Justice’s case law—are typically met by price- fixing cartels and other egregious infringements of competitions rules. The analysis of commercial clauses in vertical distribution agreements however is less straightforward, and requires close and careful scrutiny.
[1] Visma Enterprise v. Konkurences padome (Case C-306/20) EU:C:2021:935. The decision is not yet available in English.
[2] See for example, LTM (Case 56/65) EU:C:1966:38; CB v. Commission, (Case C-67/13 P) EU:C:2014:2204; and Maxima Latvija (Case C-345/14), EU:C:2015:784.