Vertical Distribution Agreements in the Competition Law of Bosnia and Herzegovina and European Union Practice
Vertical agreements represent one of the most significant categories of contracts from a competition law perspective, especially considering that almost every distribution system is based on certain restrictions on the freedom of contracting parties. A manufacturer or supplier may wish to determine the territory in which the distributor operates, sales space standards, product presentation methods, online sales conditions, or a certain level of exclusivity. On the other hand, precisely such provisions may, depending on their content and market context, constitute an unlawful restriction of market competition.
In Bosnia and Herzegovina, the fundamental rule is specified in Article 4 of the Competition Law of BiH (Official Gazette of BiH, No. 48/05, 76/07, and 80/09). Agreements between undertakings that have as their object or effect the prevention, restriction, or distortion of market competition are prohibited, particularly if they directly or indirectly fix prices or other trading conditions, limit the market, divide markets or sources of supply, or apply dissimilar conditions to equivalent transactions. Agreements falling under this prohibition are void. At the same time, Article 4, Paragraph 3 provides for an exemption when an agreement contributes to improving production or distribution or promoting technical and economic progress, allows consumers a fair share of the resulting benefit, imposes only necessary restrictions, and does not eliminate competition in respect of a substantial part of the market.
Of particular importance for distribution contracts is Article 7 of the Law, which explicitly provides for block exemptions for vertical agreements, including agreements on exclusive distribution, selective distribution, exclusive purchasing, and franchising. More detailed rules are governed by the Decision on Block Exemption of Agreements between Undertakings Operating at Different Levels of Production or Distribution (Official Gazette of BiH, No. 18/06). A vertical agreement is defined as an agreement between undertakings operating at different levels of the production or distribution chain and relating to the conditions under which the parties may purchase, sell, or resell certain goods or services.
The key distinction, however, lies between restrictions that form a legitimate part of organizing a distribution network and so-called “hardcore restrictions,” i.e., severe restrictions of competition.
Resale Price Maintenance – The Distributor’s Freedom to Set Prices
One of the most problematic restrictions is Resale Price Maintenance (RPM), which refers to setting the price at which a distributor must resell a product. Article 7 of the Block Exemption Decision explicitly excludes from the block exemption any agreements that restrict the buyer’s right to independently determine its selling prices.
A supplier may recommend a selling price or set a maximum selling price, but only on the condition that such a price does not effectively turn into a fixed or minimum price as a result of pressure or economic incentives.
Therefore, a contractual formulation stating that the “recommended retail price is 100 BAM” is not problematic in itself. The situation is fundamentally different if the supplier requires the distributor not to sell the product below 100 BAM, threatens to withhold rebates or deliveries if the distributor lowers the price, or systematically monitors their prices and penalizes deviations.
The practice of the European Commission illustrates this well. In 2018, the Commission fined four consumer electronics manufacturers—Asus, Denon & Marantz, Philips, and Pioneer—for restricting the ability of online retailers to independently set their retail prices. These cases are particularly significant because they demonstrate that traditional RPM is often implemented more sophisticatedly today: by monitoring distributors’ prices on the internet, contacting retailers offering lower prices, and pressuring them to raise them again. For these violations, the Commission imposed total fines exceeding 111 million EUR.
Territorial Restrictions: Active and Passive Sales
A supplier may organize an exclusive distribution system and allocate specific territory to a single distributor. However, this does not mean that the distributor can be completely shielded from sales made by other distributors.
The Competition Council of BiH draws an important distinction between active and passive sales.
- Active sales are considered to be targeted approaches to customers in a territory reserved for another distributor.
- Passive sales represent responding to unsolicited requests from individual customers. General internet advertising that may also be accessible to customers in other territories is generally considered passive sales.
Restricting active sales in a territory exclusively assigned to another distributor may be permitted under certain conditions; however, a total ban on passive sales presents a significantly more serious issue.
This is precisely one of the reasons why contractual provisions such as “the distributor shall not sell products to customers outside the territory of Bosnia and Herzegovina” require special attention. If a customer from Croatia, Germany, or another country independently contacts the distributor and requests delivery, an absolute ban on such a sale may constitute an unlawful territorial restriction.
Internet Sales and the Pierre Fabre and Coty Cases
The development of e-commerce has significantly transformed practices in the field of vertical agreements. One of the most prominent cases is Pierre Fabre Dermo-Cosmétique (C-439/09). A cosmetics supplier required its products to be sold exclusively in a physical space with a qualified pharmacist present, which effectively prevented authorized distributors from engaging in online sales altogether.
The Court of Justice of the European Union (CJEU) concluded that a general and absolute ban on online sales within a selective distribution system constitutes a restriction of competition “by object,” unless objectively justified. Such a restriction cannot automatically benefit from a block exemption, although it could theoretically be the subject of an individual exemption if the strict conditions of Article 101(3) TFEU are met.
A few years later, in the Coty Germany (C-230/16) case, the Court of Justice adopted a more nuanced approach. Coty, a luxury cosmetics manufacturer, allowed its authorized distributors to sell online via their own web-shops, but prohibited them from selling the products in a manner visible to consumers through unauthorized third-party platforms, such as Amazon.
The Court concluded that such a restriction may be permissible when it is part of a selective distribution system aimed at preserving the luxury image of the products, provided the criteria are determined objectively, applied uniformly and without discrimination, and do not go beyond what is necessary to achieve that legitimate objective.
The practical difference between Pierre Fabre and Coty is highly significant: a total ban on the internet is problematic, whereas restricting a specific online sales channel may be permissible if the distributor still retains a realistic possibility of online selling and if there is a legitimate and proportionate justification for the restriction.
Guess – An Attempt to Control the Entire Online Distribution System
An even better illustration is provided by the European Commission’s 2018 decision in the Guess (AT.40428) case. The Commission identified multiple parallel restrictions imposed on authorized distributors: restricting the use of the Guess brand for online search advertising, requiring special approval for internet sales, restricting sales to customers outside the assigned territory, prohibiting cross-sales within the authorized network, and restricting the freedom of distributors to determine their own resale prices.
This case is particularly interesting because it demonstrates that a competition analysis does not end with reading a single contractual provision. The Commission examined the overall commercial policy and the manner in which various provisions are used together to reduce intra-brand competition and protect the manufacturer’s own online channel.
The Significance of EU Law for Bosnia and Herzegovina
Although Bosnia and Herzegovina is not a member of the European Union, European practice holds particular significance for the application of domestic competition law. Article 4 of the BiH Competition Law mirrors Article 101 of the TFEU, and the Competition Council itself relies on CJEU judgments, European Commission practice, and European guidelines when interpreting domestic rules in its practice. The Competition Council has also invoked Article 43, Paragraph 7 of the Competition Law and obligations arising from the Stabilization and Association Agreement as the basis for applying European practice.
At the same time, it must be borne in mind that the EU regulatory framework has been significantly modernized in the meantime. Since June 1, 2022, the new Vertical Block Exemption Regulation – VBER, Regulation (EU) 2022/720, has been in application, alongside the European Commission’s new Guidelines on Vertical Restraints. Among other things, the VBER regulates online sales, dual distribution, exclusive and selective distribution, and certain restrictions on online advertising in greater detail.
From the perspective of drafting distribution agreements in practice within BiH, it is therefore advisable to perform at least four checks:
- First, the distributor must be granted genuine freedom to determine its resale price.
- Second, territorial clauses should be drafted so as to clearly distinguish permitted active sales restrictions from problematic passive sales restrictions.
- Third, online sales rules should not effectively prevent the distributor from making efficient use of the internet.
- Finally, in selective distribution, the criteria for selecting distributors must be objective, transparent, proportionate, and applied uniformly.
Vertical agreements are therefore not anti-competitive in themselves. On the contrary, exclusive, or selective distribution can increase distribution efficiency, protect distributor investments, improve service quality, and strengthen competition between different brands. However, the boundary is crossed when a manufacturer uses the distribution network to eliminate price competition among its own distributors, partition territories, prevent cross-border or online sales, or protect its own sales channel from legitimate distributor competition. Practice from the European Commission and the CJEU clearly demonstrates that the text of an agreement is merely a starting point—for assessment of competition, how the agreement is applied in practice and what its actual effect on the market is equally important.
Autor: Aleksandar Sajic
