New Rules for Distribution Agreements
On 20 April 2010, the European Commission published its revised Vertical Restraints Block Exemption Regulation and accompanying Guidelines, which will come into force on 1 June 2010 and will expire on 31 May 2022. A one year grace period (ending 31 May 2011) will apply for agreements that were in force prior to 1 June 2010 and meet the block exemption criteria under the current regime.
By exempting certain agreements between a supplier and its distributors from the prohibition on restrictive agreements under Article 101 (ex Article 81) of the EU Treaty, the block exemption effectively sets the parameters for the relationship between supplier and distributor, for example as regards exclusivity, online sales and resale prices.
The spirit of the new regulation remains close to that of its predecessors. However, the Commission’s concern regarding buyer power in some industries has led to the adoption of a two-limbed market share threshold which requires an evaluation of both the supplier’s market share and the purchasing market share of the distributor. In addition, the Guidelines refer to online sales in more detail than before. Further, the Commission continues to treat retail price maintenance (“RPM”) as in principle a hard-core restriction. We outline the key points in more detail below.
The Guidelines which accompany the Regulation are not binding on the Courts, but are likely to be influential on questions of interpretation.
To qualify for the safe harbour provided by the block exemption, both the supplier’s market share and the distributor’s purchasing market share must not exceed 30%, and the agreement must not contain any “hardcore” restrictions, such as bans on cross border selling or RPM. The most significant change in the block exemption is that the 30% threshold now applies not only to the supplier’s market share, as in the previous Regulation, but also to the buyer’s share of the market in which it purchases the contract goods or services. According to the Commission, this more limited safe harbour is necessary in order to rein in the power of large purchasers. It remains to be seen what effect this change will have.
Online sales in some sectors have grown since the previous rules were adopted in 1999. Broadly speaking the European Commission sees this as a welcome trend which supports European market integration. As a result, online sales are discussed more fully in the new Guidelines. The new text is the culmination of intensive exchanges concerning, notably, the respective roles of online sales and internet platforms, on the one hand, and distribution systems based on brick and mortar outlets on the other hand, particularly those based on selective distribution.
The new text continues to recognise that selective distribution systems may be justified by the nature and characteristics (including “the image”) of the products in line with existing case law. For online sales, in particular in selective distribution systems, the Guidelines:
- allow a supplier to “require its distributors to have one or more brick and mortar shops or showrooms as a condition for becoming a member of its distribution system”;
- allow a supplier to impose restrictions on online sales that are “overall equivalent to the criteria imposed for the sales from the brick and mortar shop”, highlighting that online specific restrictions “should pursue the same objectives and achieve comparable results and that the difference between the criteria must be justified by the different nature of these two distribution modes”; and
- allow a supplier to require its authorised distributors to use third party platforms only if these meet the criteria agreed between the supplier and authorised distributor. The supplier may require that the customer does not visit the distributor’s website via a third party platform.
The Commission has also provided clarification on the scope of protection that can be afforded to exclusive distributors. As under the previous regulation, exclusively allocated territories or customer groups can still be protected from active sales (i.e. customers being approached actively by another distributor), whilst any restriction on passive (i.e. unsolicited) sales remains hardcore.
The Commission remains of the view that online sales are “passive sales”, with the result that most restrictions on online sales in exclusive distribution systems are classified as “hardcore”. However, certain methods of targeting customers (e.g. online advertisements specifically addressed to a certain customer group) can be prohibited. Websites are considered to remain a form of passive selling even where they employ multiple languages, and so this is not a basis for restricting their use. The result will generally be that an exclusive distributor will continue to be exposed to competition from online sales from outside its assigned territory or customer group. More specifically, the new rules make it clear that practices such as the compulsory re-routing of ‘foreign’ customers to their national websites, or the terminating of online transactions if ‘foreign’ credit cards are used, are “hardcore” restrictions.
The Commission further considers it a “hardcore” restriction for the supplier to limit the proportion of overall online sales, but is prepared to accept a requirement that the buyer has to sell at least a “certain absolute amount” of product offline, whether in volume or value, in order to “ensure an efficient operation of its brick and mortar shop”. Similarly, according to the Commission any requirement that a distributor pay a higher price for products intended to be resold online is considered to be “hardcore” though this does not exclude “the supplier agreeing with the buyer a fixed fee” to support its online or offline sales efforts.
The Commission’s view on the above points is however untested, and aspects of the Commission’s position may be questionable.
The place of RPM in competition law has been much debated since the U.S. Supreme Court decision in Leegin, which held that RPM in the US was no longer a per se restriction of competition, but one governed by the rule of reason, which requires the balancing of pro- and anti-competitive effects. Despite lengthy discussions, the Commission has remained firm in its policy of considering RPM as a “hardcore” restriction under Article 101(1) of the Treaty. However, Commission officials have repeatedly pointed out that there are no per se restrictions in the EU, and that, therefore, RPM may be legal if it meets the conditions of Article 101(3).
The new rules retain RPM as a hardcore restriction but set out limited circumstances in which RPM may have pro-competitive effects, for example:
- when introducing a new product; and
- in order to organise and maintain a short term (2 to 6 week) low price campaign in a franchise or similar distribution system.
It remains to be seen whether these modifications will lead to a more flexible approach towards RPM in practice. Since hardcore restrictions have traditionally been seen, in effect, as absolute prohibitions, any pro-competitive arguments in favour of RPM are likely to be difficult to sustain.
Other changes of interest
In addition to updating the Guidelines to reflect recent practice, the Commission has included an extensive section on its likely enforcement policy in individual cases. The Commission has also introduced new sections relevant to mass retailing:
- ‘Category management’: agreements where the distributor takes advice from a supplier on the marketing of a category of products, including the products of other suppliers; and
- ‘Upfront access payments’: fixed fees paid by suppliers to distributors for access to their distribution network.
These new sections provide helpful clarity as to the Commission’s current approach.
The Guidelines also indicate the circumstances in which the Commission might withdraw the benefit of the block exemption in individual cases under Article 29(1) of Regulation 1/2003. Under Article 29(2), national authorities also have certain powers to withdraw the benefit of the block exemption in a particular Member State.
An agreement not falling within the block exemption may still fall outside Article 101 of the Treaty if the requirements of Article 101(3) are shown to be satisfied in the individual case.
If you have any further questions or would like to discuss how the changes will affect your current distribution contracts, please contact: