Term and Legal Relevance of “Vertical”
The term “Vertical” is predominantly used in the legal context in connection with competition and antitrust law. It refers to vertical agreements, relationships, or structures between companies operating at different levels of the production or distribution chain, for example, between a manufacturer and its dealers. In contrast to horizontal agreements, which concern companies at the same market level, “Vertical” focuses on interactions along different value creation stages. The following outlines the legal significance of verticals in various areas of law and the statutory regulations that must be observed.
Vertikale Vereinbarungen im Kartellrecht
Definition and Distinction
Vertical agreements are arrangements, agreements, or concerted practices between two or more companies, each belonging to different stages of the production or distribution chain. Typical examples: contracts between manufacturers and wholesalers, or between wholesalers and retailers.
Legal Framework under European and National Law
Both European and German antitrust law dedicate extensive regulatory areas to verticals. According to Art. 101(1) of the Treaty on the Functioning of the European Union (TFEU) as well as § 1 of the Act against Restraints of Competition (GWB), agreements that restrict competition are, in principle, prohibited and void.
However, numerous exceptions apply to vertical agreements, in particular through the so-called Vertical Block Exemption Regulation (VBER, EU Regulation 330/2010). This regulation specifies the conditions under which vertical agreements are permissible even though they contain certain competition restrictions.
Hardcore Restrictions in Verticals
Not covered by the exemption under the VBER, and therefore prohibited, are especially certain “hardcore restrictions” (Art. 4 VBER):
- Resale price maintenance (e.g., fixed or minimum sale prices)
- Restrictions on the territory or customer group in which a dealer may actively sell goods or services
- Restrictions concerning passive sales to end customers in exclusive distribution
- Restrictions on the purchase of spare parts by end customers
- Cross supplies in selective distribution systems
Permissible Vertical Agreements
Many vertical arrangements, such as the agreement of maximum sales prices, qualitative requirements for distribution partners, brand image requirements, or exclusivity agreements, can—subject to the exemption provisions—be permissible. This particularly requires that the market share of the participating companies does not exceed certain thresholds (generally 30% each).
Selective and Exclusive Distribution Systems
Vertical agreements often concern the establishment of selective and exclusive distribution systems, which are subject to specific antitrust requirements. In selective distribution, a circle of dealers is permitted to distribute goods or services according to certain qualitative and/or quantitative criteria. Exclusive distribution may involve the granting of exclusive distribution rights to one or more dealers and is subject to strict limitations with regard to competition.
Vertical Structures in Distribution Law
Types of Contracts in Distribution
Vertical structures are regularly formed by various contract types under distribution law:
- Commercial agency contracts
- Authorized dealer agreements
- Franchise agreements
- Commission contracts
All of these contracts govern business collaboration along the value chain and are subject to their own statutory provisions, such as the German Commercial Code (e.g., §§ 84 et seq. HGB for commercial agents) or specific guidelines under European law.
Duties and Rights of the Parties
The legal structuring of vertical cooperation not only establishes the economic framework but also determines the parties’ rights and obligations, such as exclusivity, non-compete clauses, delivery obligations, or aspects of customer protection.
Vertical Structures in Corporate Law and Merger Control
Corporate Groups, Group Structures, and Vertical Mergers
In corporate law, ‘vertical’ also refers to relationships within corporate groups, especially between parent and subsidiary companies operating at different value creation levels. In corporate combinations (mergers, acquisitions), vertical mergers are distinguished from horizontal ones. Merger control also examines whether the market position of the merging entities at several levels of the value chain could lead to a restriction of competition (§§ 35 et seq. GWB, European Merger Regulation).
Vertical Price Maintenance and its Legal Limits
A central point of contention in the context of vertical relationships is vertical price maintenance, particularly the determination of minimum or fixed prices by the supplier. The legal situation is clear: vertical resale price maintenance is generally inadmissible, as authorities and courts consider it an immediate threat to competition.
Vertical Agreements in Labor Law
Vertical structures are also found in labor law, for example in group liability or in employee leasing along complex supply chains. Vertical segmentation can impact liability, co-determination, as well as employment contracts and collective arrangements.
Vertical Integration and Digitalization
With ongoing digitalization and the development of new business models, new vertical structures have emerged, such as in online platforms, e-commerce, or cloud services. The aforementioned antitrust and competition law requirements also apply here, with additional relevance of data protection and copyright law aspects.
Case Law and Enforcement
Both national and European case law are continually concerned with the assessment of vertical agreements, especially concerning price maintenance, distribution systems, and exclusivity arrangements. Regulatory authorities like the Federal Cartel Office (Bundeskartellamt) or the European Commission enforce requirements and impose significant fines for violations.
Summary
The term Vertical describes comprehensive, multi-layered legal relationships and arrangements along the value chain. While antitrust and competition law are predominantly in focus, corporate combinations, distribution agreements, and labor law issues may also be affected. The permissibility of vertical structures and agreements depends on numerous requirements and exceptions that necessitate a precise legal analysis in each individual case. The relevant regulations are aimed at protecting competition, ensuring the effective functioning of the market, and preventing market foreclosure or distortion of competition.
Frequently Asked Questions
What legal framework applies to vertical business models in Germany?
Vertical business models operate within a complex legal framework as they often encompass various levels of actors and industries within a supply chain. Key legal requirements arise from commercial law (in particular the German Commercial Code – HGB), antitrust law, the Act against Restraints of Competition (GWB), and European regulations such as the Vertical Block Exemption Regulation (VBER). In contractual relationships between manufacturers and distributors, additional competition law restrictions apply, for example regarding territorial protection, selective distribution systems, or pricing restrictions (impermissible resale price maintenance). Sector-specific regulations also apply, for instance concerning product safety law, liability for defective products, or compliance with sustainability requirements. For digital verticals, data protection requirements under the GDPR and consumer protection regulations are also decisive. The complex interconnection of various legal domains usually requires interdisciplinary advice.
What antitrust risks exist in vertical agreements?
Vertical agreements—such as those between manufacturers and dealers—are subject to strict antitrust scrutiny. Under German and EU antitrust law, especially agreements that significantly restrict competition are prohibited (§ 1 GWB, Art. 101 TFEU). Typical risks arise in resale price maintenance, exclusivity arrangements, market division or territorial protection clauses, and selective distribution systems. Such provisions must not unduly restrict market access for other competitors. The VBER (Regulation (EU) 2022/720) defines the conditions under which certain restrictions are permissible (exemption criteria), e.g., if specific market share thresholds are not exceeded. Infringement of these rules can result in heavy fines, the invalidity of the relevant clauses, and claims for damages by affected market participants.
How is liability regulated in vertical value chains?
Vertical constellations often give rise to complex liability issues, e.g., in the case of defective products or services that have passed through several parties. In principle, each participant in the supply chain is liable under both contractual (e.g., warranty, liability for defects in B2B transactions under HGB and BGB) and statutory (Product Liability Act – ProdHaftG) regulations. In cases of personal injury caused by defective products, strict product liability applies. Liability may also be supplemented by contractual agreements within the vertical model but, in certain cases (e.g., intent or gross negligence), cannot be excluded. Special significance is attached to recourse rights within the chain, for example under § 478 BGB (supplier recourse). In addition, specific information and recall obligations apply throughout the vertical value chain.
What requirements apply to contract design in vertical distribution systems?
Contracts in vertical systems require precise definition of the rights and obligations of all parties involved. Contractual provisions must be consistent with mandatory competition, commercial, and contract law requirements. Typical contract contents concern delivery conditions, acceptance obligations, regulations on quality and safety standards, exclusivity rights, territorial protection, confidentiality, data protection, and allocation of liability. Contractual freedom is limited where antitrust boundaries or mandatory consumer protection rules apply. Particular care is required for provisions on pricing, selective distribution, and territorial splitting. For legal certainty, individual adjustments and regular reviews of the contracts are essential.
What data protection requirements must be observed for vertical business models?
Vertical business models regularly involve the processing of personal data, e.g., when customer data is passed along the distribution chain or digital platforms are involved. The GDPR requirements are particularly decisive. These include, among others, legally compliant collection, processing, and storage of personal data, compliance with data subject rights (e.g., information, deletion), the conclusion of data processing agreements when sharing data, the existence of a legal basis (e.g., contract fulfillment, legitimate interest), and the implementation of appropriate technical and organizational security measures. Violations of data protection requirements can lead to heavy fines and reputational damage. Compliance with information obligations towards end customers and business partners is also mandatory.
What industry-specific features must be considered for vertical models?
Vertical business models must always be assessed in the context of the respective industry, as there may be special legal requirements. In trade, for example, regulations on product safety, labeling, and traceability are relevant. The food sector is also subject to food law provisions, while the medical device or pharmaceutical sectors require compliance with separate pharmaceutical and medical device laws. In IT and digital industries, copyright, data protection, and telemedia laws are particularly relevant. In addition, industry-specific professional or regulatory provisions may impose additional restrictions, e.g., in the insurance or financial services sector (regulatory licensing, licensing requirements).
How are conflicts and disputes in vertical business relationships resolved?
Conflicts in vertical business relationships are primarily resolved on the basis of contractual agreements, where arbitration and forum selection clauses and rules on applicable law play a central role. Especially in cross-border verticals, international jurisdiction and applicable law must be clearly stipulated (e.g., under the Rome I Regulation, Brussels Ia Regulation). Out-of-court dispute resolution mechanisms such as mediation or arbitration are also often used to avoid lengthy and costly court proceedings. In case of dispute, national civil courts have jurisdiction, whereby special statutory competences (e.g., cartel divisions for competition law disputes) must also be observed. For consumer disputes, alternative dispute resolution procedures are available under the Consumer Dispute Resolution Act (VSBG).
