Competition law in software channel deals

Resale price maintenance means a supplier fixing the minimum price at which its reseller sells on. Section 5(2) of the Competition Act 89 of 1998 prohibits it in every case: unlike most competition rules, it has no defence that the arrangement brings benefits.

Every one of our agreements for partners that resell lets the partner set its own prices. When we draft for the vendor or for the partner, the agreement says the same thing: the vendor may not set a price floor, ask the partner to keep to one, limit the discount the partner may give, or hold the partner’s prices against it. That last point covers orders, the price the partner pays, support, sales targets and whether the agreement continues.

Indirect pressure counts. In Competition Commission v Federal Mogul [2003] ZACT 43, a supplier of Ferodo brake pads cut a reseller’s discount to make it go back to the fixed resale price. The Competition Tribunal, which hears competition cases, held that the contravention was the fixing of the resale price; the discount cut was only the means of enforcing it. It imposed an administrative penalty of R3 million.

Maximum prices. Section 5(2) prohibits minimum resale prices. It does not mention a maximum price. But any term about your partner’s prices is still an agreement between a supplier and its customer, so section 5(1) applies to it: it is prohibited if it substantially prevents or lessens competition, unless the gains it brings outweigh that effect. Our agreements do not set a maximum price either: the partner sets its own prices.

If you are the vendor, protect your margin through the price your partner pays you, stated per product, not through what it charges its customers. If you are the partner and a vendor’s terms already control your prices, take advice before you sign or carry on: a live minimum-price arrangement is one of the points on which we stop and advise before anything else.

Our agreements spell out how a recommendation is made. The vendor must state in writing that it is not binding on the partner. Where the vendor shows the price on the product, its packaging or a web page where the product is offered, the words “recommended price” must appear next to it. Our plain reseller agreement’s price list heads the column “Recommended resale price (not binding)”.

The label is not enough on its own. A recommendation becomes risky if, in practice, it is made binding by incentives, threats, decisions about supply, protection for registered deals that depends on the partner’s prices, or monitoring of what the partner charges. A recommended price that you police risks being treated as a fixed price.

A Johannesburg vendor of payroll software may tell its Durban reseller that it recommends R450 a user a month, in a price list marked “not binding”. It may not cut the reseller’s discount, delay its orders or withdraw support because the reseller sells at R380.

If you are the vendor, keep recommendations in writing and keep sales staff from treating them as rules. If you are the partner, you may price as you choose; keep any message that pressures you about your prices.

The Act calls the relationship between a business and its suppliers or customers a vertical relationship. A relationship between competitors is a horizontal relationship, and stricter rules apply to it (see the next question). A vendor and the partner that resells its software are, in the ordinary case, in a vertical relationship. So exclusivity, territories and a promise not to sell rival products during the deal are judged on their effect on competition under section 5(1).

Our agreements build in these safeguards:

• Exclusivity is paid for. The agreement records what the partner gives in return, usually a minimum commitment, sales target or minimum royalty.
• No territory is sealed. We never draft absolute territorial protection: other partners may answer orders from inside an exclusive territory that they did not seek, and partners may always market and take orders online. The one exception is our SaaS distribution agreement: it can stop a distributor accepting such orders from outside its own territory, but only where the agreement records a business reason for the limit.
• Your own customers are named. Existing direct customers you keep are listed by name when the agreement is signed, never as a category or a list you can add to later.
• Extra limits need a reason. Any restraint beyond the exclusivity itself has its business reason recorded in the agreement.

Exclusivity can also cover a group of customers rather than an area. Our white-label agreement grants it for a territory and a field of use, for example accounting and legal practices in South Africa with fewer than 100 staff. Our SaaS distribution agreement, for distributors of hosted software (software as a service, or SaaS), works by territory only; limiting a distributor to a customer group is custom drafting.

Which agreements offer exclusivity at all is our drafting choice, not a rule of law: our plain reseller agreement is always non-exclusive, and we put an exclusive reseller on our value-added reseller (VAR) agreement. See exclusive, sole and non-exclusive appointments. The table shows how each of our agreements handles the competition points on this page.

If you are the vendor, record what the partner gives for its exclusivity and name your direct customers before you sign. If you are the partner, check that the territory or customer group is described precisely, and expect other partners’ unsolicited sales into it.

Many software vendors sell through partners and also sell direct to customers in the same area. This is called dual distribution. We are not aware of a South African ruling on whether such a vendor and its partner are judged as competitors under section 4, or as supplier and customer under section 5(1). We treat them as competitors, to be safe.

So on every sole or non-exclusive appointment we record whether you sell, or will sell, direct in the partner’s territory beyond the customers named at signing. If you do, each of our agreements cuts back as follows:

• Plain reseller and referral partner: no promise not to poach each other’s staff (a staff non-solicitation). These agreements carry no exclusivity or ban on rival products in any case.
• Value-added reseller (VAR): rules on what business information you may share are added, and the staff non-solicitation and the restraint after the deal ends are left out. Our VAR agreement’s exclusivity already lets you keep your direct sales, so it stays. The VAR’s ban on selling competing products also stays while the VAR is exclusive.
• SaaS distributor: no exclusivity, no limits on where the distributor sells, no ban on competing services, no staff non-solicitation, no restraint after the end, and no promise by you not to approach the distributor’s customers.
• White-label partner: no exclusivity and no staff non-solicitation.
• Original equipment manufacturer (OEM): no ban on competing products and no staff non-solicitation, with limits on the information shared.

So cutting back means different things in different agreements. Our SaaS distribution and white-label agreements drop exclusivity. Our VAR agreement keeps its sole form of exclusivity (no other reseller, but you keep your direct sales), and drops only the staff non-solicitation and the restraint after the deal ends.

If you start selling direct after signing, have the agreement redone. Terms agreed on the footing that you did not compete may then fall foul of section 4(1)(b). Whether an exclusive VAR can keep you out of its territory altogether is a contract question, covered on our VAR page.

If you are the vendor, tell us about every direct sale you make or plan in the territory: that fact decides which terms we can include. If you are the partner, ask whether the vendor sells direct where you will sell, and expect the agreement to say so.

A partner that may sell only your brand in a product category is under what competition lawyers call single branding. Each of our agreements treats it differently:

• Plain reseller: not available. A vendor that wants it needs our VAR agreement.
• Value-added reseller (VAR): only while the appointment is exclusive, and only in the version we draft for the vendor. It ends when exclusivity ends and does not cover the VAR’s own products and services. Unlike our other agreements, it is not removed if you also sell direct and so compete with the VAR.
• SaaS distributor: only on an exclusive or sole appointment, in the version we draft for the vendor.
• White-label partner: only while exclusive. The partner may still sell its own existing products listed in the agreement, and answer approaches or tenders it did not start.
• OEM: only during the agreement, for categories of functionality listed in it, with the interest it protects and the reason recorded. On a non-exclusive appointment we first check the vendor’s market position.
• Referral partner: not offered. A referral buys no exclusivity that could justify it.

The described competing products must be specific: for example, fleet-planning and route-optimisation software for commercial vehicle fleets, not “any software”.

If you are the vendor, expect to give exclusivity in return, and expect the ban to fall away if exclusivity ends. If you are the partner, ask for carve-outs for products you already sell, and resist a ban on a non-exclusive appointment: when we draft for a VAR or a distributor, the agreement contains none.

Whether a restraint holds depends on the interest it protects, the harm it prevents, whether it goes further than needed and the public interest. The leading cases are Magna Alloys and Research v Ellis [1984] ZASCA 116 and Basson v Chilwan [1993] ZASCA 61. The general rules are on our restraint of trade page. A restraint is also tested separately under the Competition Act.

How our agreements use restraints:

• Plain reseller, referral partner and OEM: no restraint after the deal ends.
• Value-added reseller (VAR): only if the VAR is still exclusive when the agreement ends, and only in the version we draft for the vendor. It protects your confidential information and, where the facts support it, the customer relationships the VAR built in your name. Its area is the territory, or the area where the VAR actually traded.
• SaaS distributor: in the version we draft for the vendor, a ban on distributing competing services and on approaching your customers. If the distributor ends the agreement because you broke it, it may still serve its customers elsewhere.
• White-label partner: the restraint runs the other way. At the partner’s request, you promise not to approach its customers for 12 months after the deal.

Twelve months is our default. Anything longer needs a recorded business reason. We do not rely on a court cutting an overbroad restraint down to size: we draft it no wider than the interest it protects. Who may approach the customers when a deal ends is covered on our who keeps the customers page.

If you are the vendor, record what the restraint protects and why 12 months is needed. If you are the partner, check the area and the period, and ask whether the restraint falls away if the vendor is the one in breach.

Market power means the power to control prices, to exclude competition, or to act largely without regard to competitors, customers or suppliers. Section 8 of the Competition Act lists conduct that a dominant business may not engage in. Two items matter most in channel deals:

• Exclusive dealing. Requiring or inducing a supplier or customer not to deal with a competitor. A ban on your partners selling rival products is the obvious example.
• Tying. Selling on condition that the buyer also buys separate goods or services unrelated to the contract, or accepts an unrelated condition.

Each is prohibited unless the dominant business shows technological, efficiency or other gains that outweigh the harm to competition.

Our agreements ask for your market position whenever they contain a ban on competing products. If you may be dominant, the agreement records the business reason for the ban. If you are dominant, we refer the deal to a competition specialist before it is signed. On a non-exclusive OEM appointment, we check your market position before agreeing to a ban at all, because single branding without exclusivity in return can harm competition when a dominant business imposes it.

If you are the vendor and hold a large share of your niche, tell us early. If you are the partner and a market leader asks you to drop rival products or take products you did not ask for, take advice before you agree.

Section 65(1) of the Competition Act keeps a prohibited clause in force until the Tribunal or the Competition Appeal Court declares it void. If the point comes up in an ordinary court case, that court does not decide it. It applies an existing Tribunal ruling or refers the issue to the Tribunal. We advise on the risk of a clause before it is signed. We never plan on a clause being invalid as a way out of a deal.

Our channel agreements reflect this. Each says that nothing in it requires either side to do what the Act prohibits. Each provision binds the parties unless the Tribunal or the Competition Appeal Court declares it void. Where disputes go to arbitration, an arbitrator’s award does not decide whether a provision is void under the Act.

Penalties. Under section 59 the Tribunal may impose an administrative penalty for a prohibited practice, including the agreements on this page that sections 4(1), 5(1) and 5(2) prohibit. The penalty may not exceed 10% of the business’s annual turnover in South Africa and its exports from South Africa in its previous financial year. The ceiling is 25% for conduct that substantially repeats a practice the Tribunal has already found prohibited. Within those ceilings, the Tribunal weighs factors such as how serious and how long the contravention was, the loss it caused, the profit made and how far the business co-operated. In Federal Mogul, the penalty for fixing a resale price was R3 million.

A business that suffered loss from a prohibited practice may also claim damages in a civil court, once the Tribunal or the Competition Appeal Court has found the practice prohibited (section 65(6)).

Take advice at once if a channel deal already fixes resale prices, if either side may be dominant, or if a competition authority contacts you. General competition law, including merger approval, is covered in our guide to competition law when buying or selling a business.