Having an exclusive dealing is quite common in today’s commercial transactions. This may be done by incorporating an exclusivity clause in commercial agreements. An exclusive dealing occurs when an enterprise enters into an agreement with another to limit the latter from dealing with the first enterprise’s competitors. Whilst having an exclusive dealing may, to an extent benefit competition in the market, it could if exercised by companies which have market power, raise competition concerns.
An exclusive dealing in its nature is a form of vertical restraint. Fundamentally, an exclusive dealing would create foreclosure effects on the market as it would prevent other competitors from competing. This is more so, when the company imposing such an exclusivity is a dominant company. A dominant company may be said to have the incentive to impose an exclusivity on a party that it is trading with to keep its actual and/or potential competitors out of the market.
In ascertaining whether an exclusivity clause is anti-competitive, the clause will be examined under section 4(1) or section 10 of the Competition Act 2010 (“CA 2010”), depending on the market power of the parties involved.
Section 4(1) of the CA 2010 prohibits agreements between enterprises that have the object or effect of significantly preventing, restricting or distorting competition in any market. Meanwhile, section 10 of the CA 2010 prohibits an enterprise from engaging, whether independently or collectively, in any conduct which amounts to an abuse of dominant position in any market for goods or services.
In general, an assessment will be made under section 4(1) when the market power of the party imposing such a restraint falls short of the dominance threshold.
Exclusivity clauses are also normally assessed together with the duration element of the agreements since they may relate to one another. Generally, the longer the duration of the exclusivity, the greater the likely foreclosure effect.
A competition law assessment as to whether an enterprise has infringed section 10 however requires a careful analysis and consideration to determine whether (i) an enterprise is dominant in the market and (ii) if so, whether that enterprise has engaged in any conduct that may amount to an abuse of such position. Such analyses can be complex as they typically involve a combination of legal and economic considerations.
However, even if there is a potential infringement, an agreement which is prohibited under section 4(1) may be relieved of liability if the parties to the agreement can show that there are pro-competitive benefits arising from the said agreement that outweigh the detriments. If it relates to a dominant company, the company can still invoke reasonable commercial justifications or responses as its defence as provided for in section 10.
In a recent final decision issued by the Malaysia Competition Commission (“MyCC”), the MyCC has imposed a financial penalty of RM10,302,475.98 against a company for abusing its dominant position by engaging in exclusive dealing through the imposition of exclusivity clauses, thereby resulting in an infringement under section 10(1) of the CA 2010.
This decision merits close consideration by any party which have exclusivity agreements in place, which can potentially amount to an infringement under the CA 2010.
This article is intended for general information of the clients of our Firm. It should not be regarded as legal professional advice. If you need advice based on specific facts, please feel free to contact us.
Managing Partner and Head, IP