THE EXEMPTION OF AN EXCLUSIVE DISTRIBUTION AGREEMENT MADE BETWEEN PHILIP MORRIS MAGYARORSZÁG KFT. AND SEVEN TOBACCO WHOLESALERS(Exemption of a Vertical Agreement) Summary
The Competition Council has exempted until 9 April 2003 the exclusive distribution agreements made between Philip Morris Magyarország Kft. (hereinafter: PMHU) and seven tobacco wholesalers (hereinafter: the Agreements).
PMHU, the second biggest tobacco manufacturer in Hungary and seven tobacco wholesalers operating in Hungary have requested on 29 January 2002 the exemption of an exclusive distribution agreement made between themselves, having regard to the provisions of the Hungarian Competition Act and the Block Exemption Decree No 53/1997 of the Government on the exemption from the prohibition on restriction of competition of certain groups of exclusive distribution agreements (hereinafter: the Decree) .
With seven similar Agreements, PMHU has divided the whole territory of Hungary between the seven wholesalers without overlap. The wholesalers were granted exclusive right to distribute PMHU`s products in their respective territories.
As regards the Hungarian tobacco market, four tobacco manufacturers are present on the Hungarian market, imports are not significant. Manufacturers are required to pay excise duties directly to the State, they have to put a tax seal on every tobacco product marketed in Hungary, with the resale price indicated as it is prescribed by law.
The Competition Council has considered that the relevant market is the market of the distribution of cigarettes in Hungary. The Competition Council stated that assessing the competitive effects of the agreements, manufacturing, wholesale and retail of tobacco products should be examined parallel to each other from the consumers` perspective. Although the wholesale of cigarettes constitutes a vertical market segment that can be examined separately, the Agreements may have the effect of distorting competition in the whole market.
The Decree enables companies to operate an exclusive distribution system, but passive sales outside the exclusive territories, i.e. sales in response to unsolicited orders must always remain free. This provision corresponds to the one set forth by the relevant EC regulation and its aim is to prevent differences in purchase conditions from arising between the different territories. The initial Agreements did not meet this requirement, as their Clause 1 Section (d) prohibited for the wholesalers to sell the products outside their territory, and stated that the wholesaler shall not satisfy the orders and other requests of clients who intend to sell the products outside its territory. This way, not just active sales, but also passive sales were impeded.
First, on April 2002 the Agreements were modified so as to allow passive sales, except as regards passive exports Such a provision could not be exempted either, as from this point of view the Decree does not make any difference between territories outside Hungary and inside Hungary. Nevertheless, as PMHU argued, the export of tobacco products - which, as mentioned earlier, obligatorily have tax seal on them - is prohibited by relevant Hungarian laws. That is the reason why finally the Competition Council exempted the Agreements, and although they still contained the prohibition of passive exports, but after the second modification of the Agreements with a wording that explicitly referred to these relevant Hungarian regulations.
On 9 April 2002, a new Decree  concerning the block exemption of vertical agreements in full conformity with the new EC regulation  entered into force. Above the market share threshold of 30%, the new Decree does not apply. Therefore, as PMHU`s market share is 32%, no exemption can be granted to the Agreements under the new Decree. Nevertheless, the new Decree exempts for a period of one year from its entry into force the agreements exempted by the previous agreement but to which the new Decree does not apply. This was the case for the Agreements in question.
June 18, 2002. Budapest
Regulation of the Governement no 55/2002. (III. 26.)
Commission Regulation (EC) No 2790/1999 on the application of Article 81(3) of the Treaty to certain categories of vertical agreements and concerted practices, OJ L336, 29.12.1999.