An insight on the key takeaways from Egyptian Competition Authority's latest Guidelines on Vertical Agreements
Competition Focus
Khaled AttiaPartner,Head of Dispute Resolution - Egypt
Chahira BachaSenior Associate ,Dispute Resolution
Yasmine Salama Associate,Dispute Resolution
Anticompetitive practices are regulated in Egypt under law No. 3 for 2005 promulgating the Egyptian Competition Law (the “ECL”) and its Executive Regulations
Vertical agreements are contractual arrangements between two or more entities operating at different levels of the supply chain (i.e. the agreement or contract between a person and any of its suppliers or clients). While, vertical agreements may create economic efficiency, they can also have anti-competitive effects.
In line with anti-trust regulations across the globe and to balance the aforementioned concerns, the ECL has included a provision prohibiting vertical agreements if the intent thereof is to restrict competition in the relevant market. In this regard, Article 7 of the ECL provides that “Agreements or Contracts between a Person and any of its suppliers or clients are prohibited if they are intended to restrict competition”.
It stems from the above that the conclusion of a vertical agreement is not per se unlawful under the ECL. However, the assessment of whether or not the agreement or contract between a person and any of its suppliers or clients would restrict competition is left to the discretion of the Egyptian Competition Authority (“ECA”) to assess on a case-by-case basis (a rule of reason approach) following the criteria set forth under article 12 of ECL Executive Regulations. These criteria include the following:
The effect of the agreement or contract on the freedom of competition in the market;
The existence of benefits accrued to the consumer from the agreement or contract; and
The considerations of preserving the quality of the product, its reputation, safety and security requirement in a manner that does not harm competition.
Since the promulgation of the ECL and up until the second half of 2024, the criteria mentioned above, which included broad terms, were the only tools made available to parties in assessing whether or not a vertical agreement restricts the competition in the relevant market and leaving room for a wide scope of uncertainty in the market regarding the ECA approach vis-à-vis the stipulation of certain terms in a vertical agreement.
Consequently, the ECA issued guidelines on vertical agreements (“Vertical Guidelines”), marking a significant step in enhancing competition enforcement in the Egyptian market. This was a result of the issuance of more than 10 violation decisions related to vertical restraints in 2023, a sharp contrast to its previous minimal enforcement. The Vertical Guidelines provide much-needed clarity on the ECA's approach in assessing potential violations of vertical agreements, most importantly its approach in relation to Resale Price Maintenance (RPM), exclusive distribution, and/or restrictions on passive sales in vertical agreement.
The Vertical Guidelines further confirm that from a competition standpoint, a written agreement /contract is not required to prove the existence of a vertical agreement or to conclude that the parties are conducting an anti-competitive practice in their dealings. The key factor is the demonstrated intent among market players to implement a specific policy, pursue a particular objective, or adopt certain market behaviours.
Also, ECA explicitly noted in the Vertical Guidelines that certain vertical agreements are excluded from the scope of Article 7 of the ECL, such as, without limitation, commercial agency agreements. The reason for such exclusion is that commercial agents do not bear under their name or for their account the financial and commercial risks arising out of the commercial agency agreements as the beneficiary is the principal and the commercial agent is not regarded as an independent contractor from said principal.
It is worth noting in this regard that ECA assesses the provisions of the agreement to determine whether or not it is a commercial agency agreement. Accordingly, if an agreement is titled "Agency Agreement," but the terms thereof align more with those of a distribution agreement, the ECA will consider it a vertical agreement subject to Article 7 of the ECL.
The ECA issued guidelines on vertical agreements (“Vertical Guidelines”), marking a significant step in enhancing competition enforcement in the Egyptian market.
The Vertical Guidelines emphasize that ECA will conduct a case-by-case examination, focusing primarily on the agreement's impact on the competition in the market using the Rule of Reason approach as discussed above. This approach ensures a balanced evaluation, recognizing the importance of both competition and legitimate business interests.
Furthermore, the Vertical Guidelines explicitly set the elements that would be taken into consideration while assessing the implications of a vertical agreement on the competition in the market. Such elements include (i) the nature of the agreement, (ii) the market position of the concerned parties and their competitors, (iii) negotiating buyer power, (vi) barriers to market entry or expansion, and (v) other relevant factors.
The ECA classified vertical agreements that may impact competition in the Vertical Guidelines into two categories those “Harmful” and those “Less Restrictive” depending on the provisions contained therein.
Vertical agreements can have detrimental consequences on competition, especially for consumers. By limiting market entry, expansion and facilitating collusion among competitors. These effects can negatively impact both upstream and downstream markets.
In upstream markets, these consequences may manifest as higher product prices, reduced product variety, diminished quality, and stifled innovation.
Conversely, in downstream markets, consumers may experience higher prices for the final products, limited access to crucial financial services like instalment plans or insurance, restricted distribution options, reduced availability and quality of after-sales services, and stifled innovation in distribution methods.
ECA highlighted in the Vertical Guidelines that vertical agreements that include any of the following provisions are likely to be deemed harmful vertical agreements in violation of Article 7 of the ECL: (i) Resale Price Maintenance (RPM); (ii) Restriction on Passive Sales; and (iii) Most Favoured Nation Clauses.
Resale Price Maintenance (RPM) RPM constitutes a form of vertical agreement whereby a manufacturer or supplier exerts control over the resale price of its products by distributors or retailers to end customers.
These types of agreements include ‘Minimum RPM’ and ‘Fixed RPM’. ‘Minimum RPM’ is setting a minimum price at which distributors/retailers cannot sell the product below. ‘Fixed RPM’ is dictating a specific resale price that distributors/retailers must adhere to. In both cases, such Minimum and Fixed RPM are treated by ECA as strictly prohibited.
As for setting a ‘Maximum RPM’, it may seem less restrictive than Minimum/Fixed RPM. However, its impact on competition depends heavily on its implementation and whether it effectively restricts price flexibility for distributors/retailers or not. Thus, it may be tolerated by ECA depending on its application on ground.
Restriction on Passive Sales Passive sales refer to instances whereby a distributor, designated for a specific geographic area or customer group, inadvertently fulfils orders from customers outside their assigned territory, for example e-commerce. There should be no restrictions on passive sales as it encourages competition. On contrary to active sales which is done explicitly and directly through seeking customers in a different geographic area.
In practice, the ECA prohibits the above-mentioned practice of active sales unless the following conditions are met: the supplier must clearly define such exclusive territories or customer groups for each distributor (Exclusive Territories); the supplier must apply the restriction on active sales equally on all distributors of the same supplier (Equal Treatment); and the supplier cannot require distributors to impose the same restriction on their own customers (No "Rolling Over").
The Most Favoured Nation Clauses (MFN) MFN results in price uniformity among many players in the downstream market, resulting in restricting their freedom as a result to their higher prices for consumers. They are divided into ‘wide’ and ‘narrow’. The wide MFN clauses aim to guarantee that a company's branded products are sold at the most competitive price throughout the supply chain, while the narrow MFN clause aims that the company's branded products are sold at a price in the downstream market that is more favourable than the price offered by the company itself in the upstream market.
The ECA confirmed in the Vertical Guidelines that the inclusion of such clause in a vertical agreement is likely to be deemed a violation of Article 7 of the ECL.
ECA further highlights in the Vertical Guidelines certain provision that are likely to be deemed as restrictive to the competition in the market when their stipulation is coupled with an anti-competitive behaviour.
Exclusive Distribution Agreements: agreements wherein a single distributor is granted exclusive rights within a specific territory, potentially limiting consumer choice and hindering market entry for other distributors.
Exclusive Supply Agreements: agreements that require distributors to primarily source from a single supplier, restricting access to alternative sources and potentially stifling innovation.
Territorial Restrictions: agreements that allocate specific geographic areas or customer groups to individual distributors, limiting competition within those designated areas.
Single Branding Agreements: agreements that require distributors to exclusively sell the products of a single manufacturer, restricting consumer choice and hindering the entry of competing products.
Non-Compete Clauses: clauses that may restrict a distributor's ability to engage in competing businesses after the termination of the agreement, potentially stifling competition and innovation.
It is worth noting that a vertical agreement including any of the provisions addressed above is likely to be deemed restricting competition in the market in violation of Article 7 of the ECL.
In the event ECA concludes that a breach of Article 7 of the ECL occurred, ECA will order the perpetrator to rectify their position and redress the violation within a period of time. Failure to do so, will result in the agreement or contract being considered void.
Moreover, the breach of the aforementioned Article is sanctioned by a fine not less than 1% of the product total revenue during the period of violation and not exceeding 10% of such revenue or between EGP 300,000 to EGP 300 million. In all cases, the person in violation can submit a request to the ECA for conciliation to avoid proceeding with criminal trial.
By providing clear and concise guidance on the application of article 7 of the ECL as well as its approach regarding certain commonly used provisions in vertical agreements, ECA aims to create a more predictable and supportive environment for businesses while ensuring a fair and competitive marketplace for all.
For further information,please contact Khaled Attia, Chahira Bacha, and Yasmine Salama.
Published in February 2025
