Saudi Arabia: Vertical Restraints In The Saudi Competition Law In Light Of The New Rulings Of The CCP And The Administrative Court

Last Updated: 7 January 2016
Article by Sahin Ardiyok and Barış Yüksel

In the Kingdom of Saudi Arabia competition law is now a critical issue for many undertakings as the competition watchdog CCP is becoming more and more active. The increase in the number of competition investigations conducted by CCP is a clear indication in that respect.

Along with the adoption of a stricter approach towards competition law violations in the country, all undertakings operating in the Kingdom now need to review their unilateral conducts as well as their multilateral relations with other undertakings.

The Competition Law and the relevant legislation in the Kingdom resemble the EU approach to a certain extent, and this might come as an advantage to multinationals. However, there are some nuances in the legislation that make immense differences in practice and failing to grasp them might lead to serious problems. The most significant issue is the evaluation of vertical agreements or restraints. Rules regarding vertical agreements are crucial for any undertaking that desires to establish a distribution network in the Kingdom.

The tricky issue with the vertical agreements is that the scope of Article 4 of the KSA Competition Law, which corresponds to Article 101 of the TFEU, is narrower than usual as it only prohibits "agreements between actual and potential competitors." The wording of the provision suggests that only horizontal agreements fall within the scope of the Law and that vertical agreements are not covered. Therefore, it might be claimed that the undertakings are completely free to impose any kind of restrictions under vertical agreements. However, the recent rulings of CCP and the administrative court have clearly showed that this is not the case. On the contrary, the approach towards vertical restraints seems to be much more restrictive when compared to the EU.

The most significant decision of CCP considering vertical agreements is related to the market for soft drinks. This decision is of special importance since it was also upheld by the court of first instance (it should be noted that the decision is not yet final).

In its investigation, CCP examined claims regarding the vertical agreements made between the exclusive supplier of a certain brand with a market share well below 20 percent and certain resellers. The investigation focused on the non-compete obligations and retail price maintenance.

The main argument raised by the defendant was that the KSA Competition Law did not prohibit any vertical restraints. CCP has adopted an extremely wide interpretation of the term "potential competition" in order to be able to examine distribution agreements. CCP has assumed that the resellers may be regarded as the potential competitors of a supplier for two reasons: (i) resellers are active in the market for the sales of the product, and they may decide to import these products in the future and become actual competitors; (ii) resellers may sell the competing products and become actual competitors.

After deciding that the agreements between suppliers and resellers fall within the scope of the Law, CCP examined whether non-compete obligations and retail price maintenance might be regarded as violations. While conducting its analysis, CCP refrained from conducting an affect-based analysis and held that these restrictions "aim" to restrict competition. Although there is no express reference in the decision, CCP's interpretation suggests that it adopted a per se approach.

The decision of CCP was appealed before the administrative court. Defendant once again claimed that vertical restraints were out of the scope of the Law and claimed that non-compete obligations may be regarded as a violation only if the undertaking is in a dominant position. In response to that argument, the administrative court held that the supplier offered its commodity on an exclusive basis and that it has "dominance over its own commodity" and can also affect the price prevailing in the Saudi market for carbonated drinks in general. The administrative court upheld the decision accordingly.

This precedent of the administrative court is quite significant (and perilous) as it implies that the exclusive supplier of any commodity might be regarded as a dominant undertaking no matter how small the market share of that commodity in the general market may be.

The decision of the administrative court was appealed before the Upper Court, and the final decision has not yet been rendered. However, the current case law in the KSA regarding vertical agreements is blurry and the undertakings are operating under significant uncertainty. The final decision of the Appeal Court might provide a temporary solution to that problem. Yet in order for there to be legal certainty, the wording of the Law and the practices of CCP should be aligned with international best practices.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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