Antitrust pitfalls for distribution agreements with effects in Switzerland

The Swiss Federal Act on Cartels (ACart) provides that agreements that affect competition in Switzerland are unlawful if: (a) their effect on competition is significant; and (b) they cannot be justified on grounds of economic efficiency. For certain horizontal hard-core restraints (price/volume fixing, customer allocation; so–called “5/3 restrictions”) and certain vertical restrictions (resale price maintenance, absolute territorial protection; so–called “5/4 restrictions”) the ACart contains a presumption that they eliminate competition and that the parties involved in such conduct can be directly sanctioned if the finding of its illegality cannot be rebutted. The lawmaker has, therefore, taken a differentiated approach – not to establish straightforward per se illegality, but rather that a modified rule of reason analysis should take place.

Effects-based analysis?

Under well established earlier case law, the analysis of potential 5/3 and 4 restrictions included as a first step whether such restraints do indeed eliminate competition.

If the Swiss antitrust authority – the Competition Commission (ComCo) – must acknowledge that competition, even if only residual competition, prevails due to third parties not participating in the conduct (“external competition”) or that the parties participating in the conduct still compete with each other irrespective of their mutual agreement (“internal competition”) the legal presumption that competition is eliminated would have to be considered as rebutted.

Nonetheless, under such circumstances the ComCo can still conclude the potentially critical conduct to be unlawful if it: (a) significantly affects competition; and b) cannot be justified on grounds of economic efficiency; and impose direct fines against the parties involved in such conduct.

The per se rule

The legal requirement of a significant anti-competitive effect for a finding of illegality as set forth in the ACart (“effects-based” approach) would, in principle, constitute a considerable difference from EU competition law, which allows qualifying conduct as illegal if its purpose was to restrict competition, even if it had little or no effect on competition.

Relatively soon after the right to impose direct fines had been introduced to the ACart (in 2003) the ComCo, however, indicated that it would be willing to bring Swiss antitrust law in line with EU antitrust law.

Interestingly, it did not choose hard-core horizontal cases for this purpose where no one really questions their harmful effect. Rather, it indicated that it would effectively consider 5/4 restrictions as per se unlawful since they must be considered as “qualitatively” significant restraints to competition. The very nature, or purpose, of such restraints was according to the ComCo so harmful that it would not be necessary to assess their “quantitative” effect on competition. For such restraints the ComCo, therefore, considers itself dispensed from carrying out an effects-based analysis.

Landmark case

In a landmark case decided in 2009 on the basis of the above referenced reasoning, the ComCo imposed a fine of 4.8 million Swiss francs (US$5.5 million) against the Swiss producer – a Colgate-Palmolive group company – of the toothpaste Elmex, a brand well known in Switzerland, and of 10,000 francs against the latter’s independent licensed manufacturer in Austria for prohibiting all and any sales by the licensee to Switzerland.

According to the ComCo, the agreement to absolutely protect the Swiss market from imports of such toothpaste had such a fundamentally harmful effect on competition, among the same products of the same brand, that it did not really matter whether such arrangements did effectively harm competition.

Since the market share held by Elmex in Switzerland was between 15% and 20%, the quantitative effect of such restraint on competition with other brands was, however, also considered significant, and therefore supported the ComCo’s finding of unlawfulness.

In a long-awaited decision rendered early in 2014, the Federal Administrative Court (FCA) held that the considerations of the ComCo in this case were fully justified, and that the latter’s decision had, therefore, to be upheld. In particular, the FCA rebuffed the parties’ argument that their market shares should be of relevance when assessing territorial restraints. Simply put, the effects-based approach enshrined in the ACart was fully set aside by the FCA.

Far reach of Swiss law

Even though the FCA decision has been challenged by both the Swiss manufacturer and the Austrian licensee, and therefore is not yet legally binding, manufacturers that rely on independent distributors to market their products should pay attention that the terms and conditions of their agreements comply with the Swiss ACart as per the above understanding.

It is also noteworthy in this regard that in most recent cases the ComCo has gone as far as investigating whether agreements entered into by a US manufacturer and a US distributor restricted sales to Switzerland.

In order to be compliant with Swiss (but also EU) antitrust law, and to avoid the risk of fines, Chinese manufacturers and wholesalers, and Chinese companies holding manufacturers and wholesalers, should therefore consider the following principles when negotiating distribution or wholesale agreements with counterparties in Switzerland or elsewhere (particularly in Europe):

Klaus Neff is a partner and head of Vischer’s antitrust and merger control team; Wu Fan is a counsel on Vischer’s China Desk