Clear guideline for assessing non-compete obligations for market shares above 30 % under competition law

Exclusive sourcing agreements and non-compete obligations continue to play an important role in sales practice.

Under such agreements, a buyer, such as an authorised dealer, works exclusively for one supplier. Exclusivity has advantages for both the buyer and the supplier. On the one hand, the supplier benefits from a certain sales guarantee as it concentrates the buyer’s sales promotion efforts on the sale of the contract goods purchased from the supplier. Moreover, the supplier will typically be able to arrange and manage its production and sales planning more efficiently. On the other hand, the non-competition clause provides the buyer with a supply guarantee and market access based on conditions that are often better than without the exclusive sourcing agreement. Another advantage for the buyer, but also for the end-customer, is that the supplier will regularly be more committed to the quality of the contract products and customer service due to its close relationship with the buyer.

At the same time, exclusive sourcing agreements and non-compete obligations (hereinafter referred to as “non-compete obligations”) can also have a negative impact on competition as they may foreclose supplier’s competitors. In the presence of other significant market entry barriers – and possibly in conjunction with other similar contracts of the same supplier or other suppliers – they may prevent new domestic and foreign competitors from entering the market or utilising the opportunity to increase their market share.

Particularly outside the scope of application of the Vertical Block Exemption Regulation (“VBER”), which generally exempts certain non-compete obligations from the cartel prohibition (see Article 5 VBER), it is therefore often necessary to examine on a case-by-case basis whether and to what extent the non-compete obligation has market foreclosure effects and is therefore permissible under antitrust law or not.

In a recent decision, Düsseldorf Higher Regional Court has now provided further guidance on the antitrust assessment of non-compete obligations in distribution agreements (judgment of 28 August 2024 - VI-Kart 4/22).

Overview of the proceedings

The case involved the company STIHL, a manufacturer of equipment for agriculture, forestry, landscape and garden maintenance and the construction industry. Previously, STIHL had prohibited its buyers from promoting the manufacture and sale of competing products in its distribution agreements. After the German Federal Cartel Office (“FCO”) initiated proceedings in 2019, STIHL waived the application and enforcement of the non-compete obligation in these distribution agreements. The sales concept in question was also discontinued. In May 2022, the FCO nevertheless determined that the non-compete obligations were unlawful. STIHL successfully challenged this decision before Düsseldorf Higher Regional Court, which overturned the FCO’s decision in August 2024.

Criteria for assessing non-compete obligations under antitrust law

In line with the case law of the German Federal Court of Justice, Düsseldorf Higher Regional Court emphasised that non-competition obligations cannot automatically be classified as restrictions of competition by object solely due to their excessive duration (see German Federal Court of Justice, judgment of 12 June 2018 - KZR 4/16).

Düsseldorf Higher Regional Court then added that even a market share of over 30 %, which means that the VBER is not applicable, or a dominant market position of a participating company does not generally lead to categorisation as a restriction of competition by object. In the Court’s view, it must instead be examined on a case-by-case basis whether the non-compete obligation – possibly in conjunction with other similar contracts of the same supplier or other suppliers – may prevent new domestic and foreign competitors from accessing the market or utilising the opportunity to increase their market share.

In its judgment, Düsseldorf Higher Regional Court outlines several criteria that must be considered when assessing non-compete obligations as part of an overall assessment. These include:

• The supplier’s market share
• The number of point of sales bound to the supplier by the non-compete obligation relative to the number of point of sales not bound
• Duration of the non-compete obligation
• Quantity of products covered by the non-compete obligation
• The ratio of market-relevant contract volume to open market opportunities
• Any other factors affecting market access, such as:
• Does a new competitor of the supplier even have the actual possibility of establishing its own contract network with the buyers already operating in the market or would it rather open its own points of sales?
• What is the market environment and the nature of competition in the market, i.e. which competitors of the supplier exist and how big are they? Is the product market already saturated? Is there any relevant brand loyalty on the part of the customers?

Düsseldorf Higher Regional Court thus assumed that a non-compete obligation exceeding a duration of two years could in principle only significantly influence market access if the supplier

(i) has a market share above 40 %, corresponding to the threshold for presumed market dominance under the German Act against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen – GWB) and

(ii) the degree of exclusivity is above 30 % in terms of both market share and points of sales. In addition, however, further significant barriers to market entry must be identified to affirm an infringement of Article 101(1) of the Treaty on the Functioning of the European Union (TFEU) and section 1 of the German Act against Restraints of Competition.

Significance for practice

It is positive to emphasise that Düsseldorf Higher Regional Court does not consider a non-compete obligation of a certain duration to be critical under antitrust law simply because certain market share thresholds are exceeded. Instead, the Court requires a case-by-case examination of whether and to what extent the non-compete obligation in question is actually associated with negative foreclosure effects. This examination considers existing market conditions, which lead to new domestic and foreign competitors being prevented from accessing the market or utilising the opportunity to increase their market share.

Not only are the assessment criteria developed by Düsseldorf Higher Regional Court useful for practical guidance, but so too is the Court's statement that a non-compete obligation that exceeds a duration of two years is in principle only suitable for significantly influencing market access if (i) the supplier has a market share of more than 40% and (ii) the degree of loyalty is more than 30% both in terms of market share and in terms of points of sales.