Splitting hairs? Profit-sharing mechanisms in contracts under EC Competition Law

The focus in this article is on the potential competition law risks posed by various types of profit splitting mechanism clauses and the potential competition law risks associated with the drafting and enforcement of such clauses, and in particular the possible risks attached to any sharing of sensitive commercial information. These types of clauses are not uncommon in long-term LNG contracts. LNG is of course transported over long distances by ships, from a liquefaction plant to a re-gasification terminal. Profit-splitting mechanisms could however also be - and indeed have been - applied to pipeline sales. LNG transport permits greater flexibility as regards delivery a cargo can easily be diverted to a more attractive market before it reaches its destination. Furthermore, it is easier to monitor the destination of the cargo whereas pipeline gas is often impossible to track to a final destination once the gas has been delivered. Hence, sellers may attempt to maximise their returns on sales of LNG to different markets by incorporating some form of profit sharing mechanisms into their contracts in order to benefit from the proceeds of any diversion of the cargo to a higher priced market elsewhere in the European Union. Although this type of arrangement may make commercial sense for the seller, and indeed the seller's financial backers, seeking to maximise the returns on their investments, profit-splitting and price-sharing clauses can raise concerns under European competition law. In particular both the Commission and the European Courts have been concerned that any types of contracts may amount to a restriction on resale could either divide or partition the various national markets, thus frustrating the objective of ensuring undistorted competition throughout the internal market. Furthermore, European competition law has traditionally taken a tough line on resale price maintenance restrictions - contractual clauses that require a buyer to impose a certain price in its own contracts with customers further down the contractual chain. In both cases, clauses which partition markets or impose different prices for different territories, are usually deemed to be hard-core restrictions. However not every measure impeding sales outside one market infringes competition rules. The Commission has also recognised that it may be justified to grant special rebates to distributors when they sell into another market if the rebate is granted in return for additional efforts to sell the product into a new territory, which is less developed, for example. It is recognised that this type of rebate does have as its object the restriction of trade but rather its promotion. In accordance with the more economics-based analysis of European competition law it is always necessary to analyse the alleged restrictive clauses in the light of the underlying facts and circumstances in order to determine their objective purpose