Egypt: The Future Of Selective Distribution Systems In Egypt Following The Egyptian Competition Authority's Apple Decision

Last Updated: 28 June 2019
Article by Kilian Bälz and Hussam Mujally

The recent decision by the Egyptian Competition Authority (ECA) concerning the permissibility of restrictive distribution contracts may have far-reaching consequences for the distribution of branded products in Egypt. At the same time, it testifies to the ECA's increasingly active role in addressing anti-competitive practices.

The Decree is the result of a two-year investigation into Apple's sale and supply practices. According to the ECA, Apple appointed its UAE-based Middle East regional distributor to supply Apple products to three Egyptian distributors, and obliged Apple retailers to source products from one of these local authorized distributors.

It was found that the prices of Apple products in the Egyptian market, including the iPhone, iWatch and MacBook, are in many cases up to 50 percent higher than the prices for the same products in other Middle East countries. The ECA confirmed that the prices of Apple products are "unjustifiably" higher in Egypt, even after accounting for the variable import restrictions and customs tariffs among other countries in the Middle East (including the United Arab Emirates, Kuwait and Saudi Arabia). Allegedly, this pricing disparity is the result of anti-competitive practices engaged in by Apple and its Middle East distributor.

The ECA's Decree No. 27/2018 ("Decree"), published on 9 December 2018, contains six Articles and effectively outlawed Apple's use of restrictive clauses to regulate its authorised distributors (Article 2). Furthermore, the ECA gave Apple 60 days to eliminate its supply chain agreements' vertical constraints, which restrict the passive sales of its products to authorized sellers, retailers, and end-customers in Egypt (Articles 3 and 4). The ECA also threatened criminal proceedings if Apple did not comply with the Decree (Article 6).

The ECA concluded that Apple's sourcing through a single distributor, to prevent parallel imports, isolated the Egyptian market geographically from intra-brand competition, and to ban any parallel imports to the Egyptian market. It also concluded that Apple's exclusive distribution agreements violate Article 7 of Law no. 3/2015 on Protecting Competition and Combating Monopolistic Practices ("Competition Law").

Restrictive Clauses under the Egyptian Competition Law (2005)

The Competition Law, and its Executive Regulations (Ministerial Decree no. 1316/2005), represent a developing discipline in Egypt that is intended to address anti-competitive practices. Over the last 13 years, the law has been amended three times, with the latest in 2014, and the Executive Regulations amended twice, with the latest changes in 2016.

The Competition Law includes restrictions applicable to market participants in general and stronger restrictions that are applicable to market participants who hold a dominant position. In recent years, the ECA has increasingly followed a sector-specific and determined enforcement policy; however, the focus remained on tackling anti-trust infringements (horizontal agreements) and the abuse of a dominant position in the market. The lawfulness of vertical constraints under the Competition Law was considered controversial as the matter has not been a subject of the ECA's decisions in the past.

Vertical Constraints in Distribution Agreements

Regarding vertical constraints, Article 7 of the Competition Law provides, in general terms: "Any understanding or contract between a person and one of its suppliers or customers with the object to restrict competition is prohibited." Notwithstanding the broadly formulated prohibition, vertical constraints in distribution agreements are not per se prohibited. The ECA determines whether a vertical constraint that aims to restrict competition violates Article 7 of the Competition Law on a case-by-case basis.

Prior to the latest amendment of September 2016, Article 12 of the Executive Regulations stated that the ECA would consider the following factors when analysing vertical constraints:

  1. The agreement's implication on the freedom to compete in a relevant market,
  2. The agreement's benefits for the consumer,
  3. Considerations regarding safeguarding the quality and reputation of products, as well as their safety, as long as these do not damage competition, and
  4. How closely the agreement aligns with established commercial practices in a certain sector.

These factors have been understood as exceptions from the general prohibition on vertical constraints that may restrict competition.

Because the majority of brand product and automobile manufacturers use selective distribution systems, vertical constraints in distribution and franchise agreements had been legally justified as an established commercial practice in accordance with Article 12 (4) of the Executive Regulations. However, in the latest amendment of September 2016, Article 12 (4) of the Executive Regulations was eliminated. Vertical constraints in distribution and franchise agreements after September 2016 could only be justified by considerations regarding safeguarding the quality and reputation of products, as well as their safety, in accordance with Article 12 (3) of the Executive Regulations. Therefore, the Decree could arguably manifest a new twist in commercial practice regarding vertical constraints that prohibit members of a distribution network from passively selling products to retailers outside the geographic area of their sale activities.

Administrative and Criminal Sanctions

Violations of the Competition Law incur administrative and criminal sanctions. For violations of Articles 7, the ECA is empowered under Article 20 to order the vertical constraint be eliminated immediately or within a certain period of time. Failure to comply can render any agreement in breach of Article 7 as void. It was this procedure that the ECA followed when issuing the Decree.

The ECA's board of directors also have the option to vote in favour of referring Apple and its UAE-based distributor to the Prosecutor's Office for Financial and Administrative Affairs. The competent Economic Court could order Apple to pay a fine. Without prejudice to any more stringent penalty stipulated in any other law, the breach of the Competition Law's Article 7 incurs a fine of between one percent and ten percent of revenues for the time period in which the violation took place (Article 22[2] Competition Law).

Whether criminal proceedings will be initiated in this case is at the discretion of the ECA. In any case, the Competition Law grants the ECA authority to settle the dispute extra-judicially at any stage of the proceedings (Article 22[b] Competition Law).

Implication for Distribution Systems in Egypt

The ECA's findings regarding Apple's distribution agreement network is restricted to the investigated practices. The decision of whether a vertical constraint violates the Competition Law is still determined on a case-by-case basis. However, this decision could establish a precedent regarding the ECA's position on vertical constraints in distribution and franchise agreements. In its press announcement dated 9th December 2018, the ECA stated that businesses that do not hold a dominant position are entitled to determine a geographic scope for their distributor's sale activities. Furthermore, such businesses can restrict their distributors from actively selling outside the said geographic scope. Nevertheless, preventing passive sales and parallel imports, such as by restricting distributors along the supply chain from passively selling products to buyers outside their sales activity area is prohibited.

This position could lead to the voidability of any vertical constraints in distribution agreements that restrict distributors based in Egypt and distributors based outside Egypt from passively selling products into the Egyptian market. It is still debateable whether the ECA will follow this position in general, regardless of the particulars of each distribution network or of each commercial sector, and to what extent a vertical constraint that aims to restrict passive sales and parallel imports can still be justified on the grounds of safeguarding the quality and reputation of products.

In any case, companies selling into Egypt through exclusive distribution channels should review their distribution agreements for potential infringements of the Competition Law.

Originally published 15 January 2019

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions