Vertical agreements — between businesses at different levels of the supply chain, such as a manufacturer and its distributors — are caught by section 4 of the Competition Act 2010 just as horizontal agreements are. Most are lawful and even pro-competitive, but one restraint stands out as high-risk: resale price maintenance (RPM), where a supplier dictates the price at which its product is resold.

This article explains what vertical agreements and RPM are, how Malaysian competition law assesses them, the spectrum of risk across common distribution and franchise terms, and how to draft those terms to stay compliant.

Key takeaways •Vertical agreements are covered too. Section 4 applies to agreements between suppliers, distributors and franchisees, not only between competitors. •Most are fine. Vertical restraints are generally assessed by their effect, and many improve distribution and benefit consumers. •RPM is the danger. Imposing a fixed or minimum resale price is high-risk and likely caught by the prohibition. •Recommended and maximum prices are lower risk. Provided they are genuinely non-binding and not enforced. •Exemptions can apply. A restrictive vertical agreement may still be permitted under sections 5, 6 or 8 if it delivers net economic benefits.

What is a vertical agreement?

A vertical agreement is one between enterprises at different levels of the production or distribution chain — for example a manufacturer and a wholesaler, a supplier and a retailer, or a franchisor and a franchisee. This is distinct from a horizontal agreement between competitors at the same level. Vertical agreements are everywhere in normal commerce: distribution agreements, supply contracts, agency arrangements and franchise systems are all vertical.

Because the parties are not competitors, vertical agreements usually do not raise the same concerns as cartels. The competition question is whether a particular restraint forecloses the market or softens competition — which is generally assessed by looking at its effect and the market power of the parties.

What is resale price maintenance (RPM)?

Resale price maintenance is where a supplier controls the price at which a reseller sells the product on. The clearest — and riskiest — form is a fixed or minimum resale price: the supplier tells the distributor or retailer that it must not sell below a set price. This removes price competition between resellers of the same brand and tends to keep prices up, which is why competition law treats it as having the object of restricting competition.

RPM has featured in Malaysian competition practice from the outset — in an early matter, a multinational explored applying for an exemption to continue a resale price maintenance practice before stepping back after engaging with MyCC, illustrating how seriously the conduct is viewed.

Is RPM always illegal in Malaysia?

Not every form of price guidance is prohibited. The risk depends on the type of restraint:

• Fixed or minimum resale prices — high risk. These directly remove price competition and are likely to be caught by section 4.
• Maximum resale prices — lower risk. Capping the resale price can protect consumers and is generally less problematic, provided it does not operate as a fixed or minimum price in practice.
• Recommended retail prices — lower risk, with care. Genuinely non-binding recommendations are usually acceptable, but they become high-risk if the supplier monitors and pressures resellers into following them, turning a recommendation into de facto RPM.

Other vertical restraints and their risk

Beyond pricing, distribution and franchise agreements commonly contain other restraints, which sit on a spectrum:

• Exclusive distribution. Appointing one distributor for a territory is often legitimate, but absolute territorial protection that blocks all cross-territory sales is riskier.
• Customer and territory restrictions. Limiting who a distributor may sell to can be acceptable in moderation, but bans on responding to unsolicited (passive) sales are problematic.
• Exclusive purchasing and non-compete. Requiring a buyer to source only from one supplier can foreclose rivals if the supplier has market power or the obligation is long.
• Selective distribution. Choosing resellers by objective quality criteria is generally acceptable; using it to exclude discounters is riskier.

How are vertical agreements assessed?

Outside the clear case of fixed or minimum RPM, vertical restraints are assessed by their effect on competition. Market power is central: a restraint imposed by a supplier with little market share rarely harms competition, while the same restraint imposed by a powerful supplier may foreclose rivals. The de minimis safe harbour for parties with small market shares can apply to vertical agreements (it does not apply to the hardcore horizontal restrictions). The practical question is always whether the restraint forecloses the market or dampens competition more than it improves distribution.

Can vertical agreements be exempted?

Yes. A vertical agreement that does restrict competition may still be permitted if it produces genuine benefits. The relief under section 5 applies where the four cumulative conditions are met (net benefits; indispensability; proportionality; no elimination of competition in a substantial part of the market). Businesses can also seek an individual exemption (section 6), and a category of agreements can be covered by a block exemption (section 8). See block and individual exemptions under Malaysian competition law.

Practical drafting tips for distribution and franchise agreements

• Avoid fixed or minimum resale prices. If you want to influence price, use clearly labelled, non-binding recommended prices or a maximum price — and do not police them.
• Allow passive sales. Do not prohibit distributors from fulfilling unsolicited orders from outside their territory.
• Keep exclusivity proportionate. Match the duration and scope of non-compete or exclusive-purchase obligations to a genuine commercial need.
• Document the rationale. Record the pro-competitive reasons for any restraint, which helps if relief or an exemption is ever in issue.

See building a competition law compliance programme.

Frequently asked questions

What is resale price maintenance?

Resale price maintenance (RPM) is where a supplier dictates the price at which a reseller may sell the product on — typically a fixed or minimum price. Imposing a fixed or minimum resale price is treated as high-risk under the Competition Act 2010 because it removes price competition between resellers.

Is resale price maintenance illegal in Malaysia?

Fixed and minimum RPM is high-risk and likely to be caught by section 4, because it has the object of restricting competition. Maximum prices or genuinely non-binding recommended prices carry far less risk, provided they are not used to pressure resellers into following them.

Are vertical agreements treated the same as cartels?

No. Vertical agreements (between different levels of the supply chain) are generally assessed by their effect and many are pro-competitive. The hardcore by-object restrictions in section 4(2) target horizontal conduct between competitors. RPM is the main vertical restraint that attracts serious concern.

Can I give my distributors an exclusive territory?

Often yes. Exclusive distribution can be legitimate, but absolute territorial protection that bans all passive sales or prevents customers buying across territories is riskier. The assessment depends on market power and effect; take advice for significant arrangements.

Can a vertical agreement be exempted?

Yes. A vertical agreement that restricts competition may still be permitted under the relief in section 5 if it produces net economic benefits, or via an individual exemption (section 6) or a block exemption (section 8).

Speak to NZSK’s competition law team If you have received a notice from MyCC, are reviewing an agreement or a contemplated deal, or want to put a compliance programme in place, our competition law team can help. Ng, Zainurul, Seke & Khoo (NZSK) Offices: Mont Kiara and Puchong Phone / WhatsApp: 016-557 4789 Email: [email protected] Web: nzsklegal.com