New block exemption for Vertical Agreements, such as distribution agreements

23 April 2010

Janneke Kohlen

On 20 April 2010, the European Commission published its new block exemption regulation and guidelines for vertical agreements which will replace the existing regulation and the guidelines on 1 June 2010. The new rules will remain in force for 12 years, expiring on 31 May 2022.  The proposed changes will have an effect on the legal treatment of vertical agreements in the EU.

The distribution rules in context

Article 101(1) of the Treaty on the Functioning of the European Union (“TFEU”) prohibits agreements, decisions of associations of undertakings and concerted practices that have as their object or effect the prevention, restriction or distortion of competition. Under Article 101(2) TFEU all such agreements are void. Article 101(3) TFEU provides that agreements, which meet specified criteria, may be exempt from the prohibition. A block exemption regulation defines a category of agreements that will normally meet these criteria for exemption. The current block exemption that covers vertical agreements (such as distribution agreements) is Regulation 2790/1999, which expires on 31 May 2010. (Existing agreements covered by the current block exemption will in any event continue such benefit under a transitional provision, until 31 May 2011).

How will the new rules affect distribution agreements?

It is expected that more distribution agreements will need individual examination but the changes mean more flexibility for designing the distribution system you want. However more in-depth analysis is needed to take advantage of the changes.

One of the Commission's themes in modernising these rules has been the greater importance of e-commerce/online sales as compared to the situation ten years ago. This is particularly important for products such as luxury goods. Another theme is to allow for potentially more lenient treatment of certain practices categorised as "hardcore" restraints of competition, for example, resale price maintenance. The table summarises the main changes and their effects.

 


























ChangesSummary
Market sharesThe 30% market share threshold will in future apply to all parties to the agreement, i.e. typically both the supplier and the buyer. By including this additional market share threshold for the buyer, the Commission has taken into account that some buyers on their own may have market power which potentially has a negative effect on competition.

Effect: fewer agreements will benefit directly from the block exemption leaving greater legal uncertainty for those that are subject to an individual analysis.
Resale price maintenance (RPM)RPM will continue to be treated as a "hardcore" (i.e. serious) restriction, but the Commission accepts in its guidelines that in some cases RPM may lead to efficiencies (for example, when the manufacturer introduces a new product and where the RPM is supplier driven). Possible examples given are the following: use of RPM during the introductory period to induce distributors to take the manufacturer’s interest in promoting the product into account; and a coordinated short term low price campaign in a franchise network; and use of RPM in a retail network to fund additional pre-sale services. Subject to demonstrating consumer benefits, such arguments may justify application of the exception under article 101(3) TFEU.

Effect: this is a very important change of approach that may allow suppliers greater flexibility in operating a distribution system.  However, it is necessary to tread carefully before (implicitly or explicitly) imposing RPM.

Selective distribution systems - IThe guidelines make clear that, under the block exemption the supplier may require quality standards for the use of the internet site to resell its goods, just as the supplier may require quality standards for a shop; for selling by catalogue or for advertising and promotion in general. The supplier may for instance require its distributors to have one or more bricks-and-mortar shops or showrooms as a condition for becoming a member of its distribution system.

Effect: manufacturers may choose distributors on the basis of quality standards for presenting their products, whether online or otherwise. Hence, brand owners of luxury goods may refuse a distributor if it has no brick-and-mortar shop or showroom.

Selective distribution systems - IIAs regards restrictions of sales by members of a selective distribution system to unauthorised distributors, on territories reserved by the supplier to operate the system whereas in Regulation 2790/1999 such focus was not included.

Effect: no unlimited restriction on active or passive sales by the members of a selective distribution system to unauthorised distributors. It is only allowed if it relates to the territory where such selective distribution system is operated or to a territory which has been reserved by the supplier to operate that system.

Please note that the guidelines explain “the territory reserved by the supplier to operate that system” as any territory where the system is operated or where the supplier does not yet sell the contract products. Therefore, the addition of the territories reserved by the supplier to operate the selective distribution system, will most likely not lead to any significant changes although the wording may indicate otherwise.

Online salesSales over the internet are in most instances categorised as permissible passive sales, which cannot be restricted, irrespective of the language used on the website. The guidelines have become much more explicit about online sales, making it clear that it would, for example, be an illegal restriction of passive sales to introduce automatic re-routing of customers to the manufacturer’s or another distributor’s website or to provide for termination of purchases if credit card data reveal that the customer is based outside the distributor's territory.

Effect: the new block exemption and guidelines codify the Commission's strict approach, which is intended to safeguard online (passive) sales, particularly cross-border sales. Parties will therefore need to be careful in developing their policies as regards sales over the internet.

Upfront access paymentsFees paid by distributors to obtain access to a supplier's distribution network may, in many cases, as explained in the guidelines, be covered by the block exemption, subject to the market share thresholds. 

Effect: this is a new category of agreements that are explicitly described as within the scope of the block exemption.
Category  managementAgreements where a supplier takes responsibility for marketing a particular category of products sold by the distributor (including products of competing suppliers) will be covered by the block exemption, subject to the market share thresholds. 

Effect: this is a new category of agreements that are explicitly described as within the scope of the block exemption and is particularly important in the food and beverage sector. The rules may bring substantial opportunities for businesses who are contemplating moving into new markets, introducing new products, or otherwise reshaping their reseller arrangements. 

Authors

Image of Janneke Kohlen

Janneke Kohlen

Counsel
Netherlands

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