New Guidelines Issued by the Egyptian Competition Authority on Vertical Agreements

In August 2024, the Egyptian Competition Authority (ECA) released its Guidelines on Vertical Constraints of Competition (Guidelines) clarifying the regulation of vertical agreements under the Egyptian Competition Law No. 3 of 2005 (ECL) and its Executive Regulations (ER).

The ECL addresses vertical agreements and grants ECA a wide discretion in assessing whether a vertical agreement is distortive to competition. The Guidelines elaborate further on the criteria that ECA would consider for that purpose, especially in the common forms of vertical agreements. In this respect, the Guidelines seem to adopt international best practices tailored to the context of the Egyptian market.

Understanding Vertical Agreements

Vertical agreements are arrangements between parties operating at different stages of the supply chain (e.g., manufacturers, wholesalers, and distributors). These agreements, whether written or verbal, explicit or implicit, are prohibited under Article 7 of the ECL, to the extent they restrict competition in the market.

The assessment of whether a vertical agreement would be harmful to competition is subject to the ECA assessment on a case-by-case basis, taking into consideration the following factors:

• • • The agreement’s effect on market competition.
    • Benefits to consumers from the agreement.
    • Whether the agreement preserves product quality, reputation, and safety without harming competition.

Main Highlights

The Guidelines elaborate on the vertical relationship between independent persons in the different stages of the supply chain. In this context, the Guidelines explain that commercial agency contracts normally fall out of the scope of Article 7 of the ECL given that parties thereto are not considered fully independent from each other, and the commercial agent does not incur the financial and commercial risks of the contract. On the other hand, the Guidelines highlight specific types of vertical agreements that might be found particularly harmful to competition, including the following:

1. 1. 1. Resale Price Maintenance (RPM): RPM agreements where manufacturers or suppliers in the upstream market agree with distributors or retailers in the downstream market to maintain a resale price of products. RPM can take the forms of setting a fixed or a minimum resale price, both of which might constitute a violation of Article 7. In this context, a clause that provides for a maximum resale price or a recommended resale price would be less likely to constitute a violation to Article 7 unless the actual implementation turns out to be a binding determination of the price.
         
      2. Restrictions on Passive Sales: Passive sales are achieved when distributors sell to customers outside their designated territories or customer groups without distributors playing an active role to solicit such sales. Restricting passive sales may create unfair advantages for certain distributors, hinder market access for others, and sometimes allow for intra-brand competition through parallel imports.
         
      3. Most Favored Nation Clauses: These clauses ensure that one party receives the best price or terms compared to other market participants, which may impact price competition among distributors. These clauses are particularly problematic in the growing realm of e-commerce and can lead to uniform pricing across platforms, thus negatively affecting consumers.
      4. Exclusive Distribution and Supply Agreements: While exclusive distribution agreements are common and generally permissible, the ECA warns that these may have anti-competitive effects, such as creating barriers to entry or growth of other players in the market. In assessing whether an exclusive distributorship would be violating Article 7 of the ECL, the ECA would consider several elements including (i) the market share of the person compared to others in the upstream market; (ii) the market share of the retailer or distributor in the downstream market; (iii) whether the exclusivity is at the level of wholesale or retail, with the latter being more harmful; and (iv) restraints on the exclusive distributor especially in relation to RPM or impermissibility to distribute competitive products. The Guidelines also highlight selective distribution agreements which allow suppliers to restrict sales to certain approved distributors. Selective distribution on objective and transparent basis or that aims at maintaining product quality or technical integrity, rather than to unduly limit competition, should generally not invoke Article 7 of the ECL.
      5. Non-Compete Clauses in Supply Agreements: These restrict the buyer from manufacturing, purchasing, or selling goods, or services that compete with the contracted products. The permissibility of these clauses is assessed on a case-by-case basis and differ between a non-compete obligation that applies during the contract term and the one that extends beyond the contractual term. The assessment of non-compete obligation would also consider its justification such as the protection of know-how, its time limit and geographical scope.

The Role of Vertical Restraints in E-Commerce

The rise of e-commerce brings vertical agreements into new focus, particularly concerning the interplay of RPM, selective distribution, and MFN clauses in online platforms. The ECA notes that e-commerce can facilitate cross-border passive sales, and any attempt to limit these, especially through exclusive arrangements or restrictive pricing clauses, could be seen as anti-competitive. In digital marketplaces, MFN clauses that mandate preferential treatment or pricing can prevent competition by standardizing prices across platforms, thus harming both consumers and smaller competitors. Businesses should be especially cautious in applying these clauses in the context of online sales.

Legal Consequences of Violating Clauses

A violation of Article 7 of the ECL is punishable with a criminal fine ranging between 1% and 10% of the total revenues of the product in question during the period of violation. If calculating total revenues is not possible, fines ranging between EGP 100,000 and EGP 300 million (approx. EUR 2k to 6 million) would be imposed. The fine would be doubled in case of recurrence. Criminal proceedings to impose the foregoing fines shall be initiated by the ECA.

In an established violation, the ECA must instruct the perpetrator to rectify the violation or take immediate corrective measures within a specific period of time. Otherwise, the violating clause or agreement shall be considered void.

Further, if the violating practices have resulted in grievous irreparable damage to competition or consumer, the ECA may also issue a decision to put the practices suspected to violate Article 7 on hold for a specific period of time. This is without prejudice to liability arising therefrom.

What Should Businesses Do?

The ECA’s new Guidelines provide essential clarity for businesses operating in Egypt, emphasizing the need for careful consideration when entering into vertical agreements. By outlining key areas of concern and potential anti-competitive effects, the ECA aims to safeguard market competition and consumer welfare. Nevertheless, the implementation of the assessment criteria explained in the Guidelines, remain subject to ECA’s discretion.

With that said, and in order to mitigate risks of non-compliance, it is essential for businesses involved in vertical agreements, particularly suppliers and distributors, to review their contractual arrangements in light of the Guidelines. Agreements that restrict resale prices, limit passive sales, or create exclusivity without sufficient justification may be at risk of violating Article 7.

For distribution agreements, businesses are advised to ensure that any exclusive or selective distribution systems do not impose unjustified restrictions on competition. Selective distribution systems should have clear and objective criteria that justify restrictions without unnecessarily limiting competition. Additionally, RPM clauses in distribution RPM clauses in distribution contracts should be closely examined to ensure that any price recommendations remain advisory.

If you would like more information about this topic then please contact us.

• DR. KILIAN BÄLZ PARTNER kb@amereller.com

• NISREEN AL KARYOUTI PARTNER karyouti@amereller.com

• MAZIN EZZELDIN ASSOCIATE ezzeldin@amereller.com

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In August 2024, the Egyptian Competition Authority (ECA) released its Guidelines on Vertical Constraints of Competition (Guidelines) clarifying the regulation of vertical agreements under the Egyptian Competition Law No. 3 of 2005 (“ECL”) and its Executive Regulations (“ER”).