Vertical Agreement Guidelines: Understanding them for Your Business
Vertical agreements are contractual agreements between companies that operate at different levels of the supply chain. These agreements often include distribution agreements, supply agreements, and franchise agreements. Vertical agreements are becoming a common practice among companies in different industries. However, these agreements are highly regulated by the competition law authorities.
Vertical agreements are essential for businesses as they provide a structured relationship between the parties involved. For example, a franchise agreement between a franchisor and a franchisee helps the franchisee to operate under the franchisor`s brand name and gain access to their expertise, while the franchisor benefits from the franchisee`s local knowledge and market presence.
To ensure that vertical agreements follow legal and ethical guidelines, regulatory agencies have created vertical agreement guidelines. These guidelines provide clarity on what businesses can and cannot do within vertical agreements. Some of the most significant guidelines include:
1. Resale Price Maintenance (RPM): This is when a supplier requires a reseller to sell their product at a particular price. RPM can be illegal under competition law, as it may be seen as a form of price-fixing.
2. Exclusive or Selective Distribution: Exclusive or selective distribution agreements restrict the number of distributors that can sell a particular product. This can be legal under competition law, but businesses must ensure that they do not use this agreement to exclude competitors or harm competition.
3. Tying and Bundling: This is when a supplier requires a reseller to purchase one product or service to get access to another product or service. This can be legal under competition law if it promotes competition and innovation.
4. Information Exchange: Vertical agreements may include provisions for information exchange between parties. However, businesses must ensure that they only exchange information that is necessary for the agreement to work and that they do not share sensitive information that could harm competition.
Compliance with vertical agreement guidelines is critical for businesses to avoid legal repercussions. If a business violates these guidelines, they may face hefty fines, reputational damage, or even legal action. Therefore, it is essential for businesses to work with legal experts to ensure that their agreements align with the guidelines.
In conclusion, vertical agreements are useful for businesses as they provide a structured relationship between parties. However, these agreements must follow legal and ethical guidelines to promote competition and innovation. Understanding the vertical agreement guidelines is critical for businesses to ensure that they comply with the law and avoid legal repercussions.