Legal Briefing

Thou shalt not foreclose the Swiss market

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Competition | 08 May 2018

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Although being a landlocked country in the heart of Europe, Switzerland has kept a certain insularity: while Swiss companies have access to the European markets (and vice versa) based on bilateral agreements with the European Union, it is a member neither of the EU nor the EEA. Further, Switzerland is often characterised as a ‘high price island’ within Europe. The latter has caused heated debates in domestic politics relating to price differences between Switzerland and neighbouring European countries for comparable products and services, and to the reasons for these differences. Several amendments to the Swiss Constitution and|or Cartel Act have been proposed in the past years to ‘flood’ this island and do away with these price differences.

While none of these measures passed the legislative process so far, the Federal Supreme Court (FSC) recently decided two landmark competition cases addressing an important alleged reason for the higher prices: contractual restrictions of parallel or direct imports into Switzerland. These judgments tighten the regulatory grip on hardcore restrictions (price-fixing, quantity-limiting and market-allocating agreements), and render judicial blessing to the practice of increasing deterrence in vertical scenarios by imposing significant fines. Compliance with the tenets of these judgments is of utmost importance for all companies establishing or entertaining international distribution systems – even in cases without obvious connection to Switzerland.

The first case related to a license to produce and distribute Elmex toothpaste in Austria granted by the Swiss company Gaba to the Austrian company Gebro in 1982. The Swiss Competition Commission (ComCo) had concluded that this agreement included a market-allocating agreement that prohibited Gebro from exporting Elmex directly and indirectly from Austria to other countries, and issued fines of CHF 4.8m (approximately €4m) upon the parties for a ban on passive sales into Switzerland. The FSC confirmed the decision in 2016, arguing that price-fixing, quantity-limiting and market-allocating agreements generally constitute significant restraints of competition, without the need to carry out an evaluation of their actual effects. According to the FSC, such agreements are unlawful and directly sanctionable, unless they can be justified on grounds of economic efficiency (while the conditions of such justification were not given in the case at hand).

The second case related to the distribution system of the German car manufacturer BMW. BMW had concluded agreements with its distributors in the EEA that prohibited sales outside of the EEA. According to the ComCo, this prohibition banned sales, including passive sales, into Switzerland. The ComCo was not convinced by the fact that BMW had subsequently sent a ‘clarification’ to its distributors that, for the purposes of the distribution agreements, Switzerland should be considered as forming part of the EEA and passive sales to Switzerland thus permitted. The ComCo issued a record fine of CHF 156m (approximately €130m) upon BMW. The FSC confirmed the decision in late 2017, referring in its reasoning to the Gaba case according to which market-allocating agreements generally constitute significant restraints of competition, and upheld the fine. This fine is not only the highest fine ever imposed for vertical agreements in Switzerland, it is overall ComCo’s highest fine to ever become effective.

The two cases have a number of important implications for companies that entertain or establish international distribution systems: First, distribution agreements in Europe regularly limit sales of the distributor to a certain territory, but – as an exception – allow for passive sales throughout the EEA. Such permission of passive sales within the EEA is necessary for the agreement to comply with EU competition law – but in the form described the provision is toxic from the perspective of Swiss competition law. In ComCo’s reading, it includes a ban on passive sales into Switzerland, which constitutes a sanctionable infringement of Swiss competition law. To prevent a fine, such agreements must in all cases allow for passive sales into the EEA and Switzerland.

Switzerland is often characterised as a “high price island” within Europe. The latter has caused heated debates in domestic politics relating to price differences between Switzerland and neighbouring European countries.

Second, the cases may affect distribution agreements even outside of Europe. In both the US and the EU, the application of competition law is limited to behaviour that has certain qualified effects in the respective jurisdiction. Under US law, those effects need to be direct, substantial and reasonably foreseeable. Similarly, the European Court of Justice recently held in its Intel judgment that EU competition law applies if it is foreseeable that the conduct in question will have an immediate and substantial effect in the EU. In stark contrast to such nuanced requirements, the FSC let it suffice in the Gaba/Gebro case for Swiss competition law to apply that the relevant conduct ‘has or potentially has effects in Switzerland’. According to the wording of the FSC’s reasoning, it is not necessary that these effects have a certain intensity, and it is not even required that they are foreseeable for the parties. This sufficiency of potential local effects, in conjunction with the FSC’s ruling in the same case that market-allocation agreements may be fined without analysis of their actual effects, makes a multitude of non-Swiss distribution agreements potentially subject to fines in Switzerland. Unless and until a ‘qualified effects’ doctrine shall be instated in Swiss practice, companies should ensure that distribution agreements do not ban passive sales outside of the contract territory even if these agreements have no obvious, but only a possible link to Switzerland.

Third, market-allocation agreements are subject to a fine, according to the wording of the relevant provision in the Swiss Cartel Act, if they are contained in ‘distribution agreements’. According to the FSC’s ruling in the Gaba case, this provision applies not only to classic distribution agreements, but to distribution clauses in any type of contract, including license agreements. The FSC further held that Swiss competition law on vertical agreements principally closely follows EU law, as contained in the block exemption regulation for vertical agreements and the accompanying guidelines. However, potentially more permissive rules that EU law provides for distribution clauses outside of classic distribution agreements – in particular the block exemption for technology transfer agreements and the accompanying guidelines – do not apply in Switzerland, according to the FSC. Companies should thus be aware that clauses prohibiting passive sales into Switzerland even outside of classic distribution agreements may be fined in Switzerland, and that compliance of these clauses with EU competition law does not necessarily entail compliance also with Swiss competition law, as the latter may be more restrictive. Therefore, an individual analysis of the permissibility of such clauses under Swiss law is recommended.