The new EU Vertical Agreements Block Exemption – impact on internet sales

02 November 2010

Chelsea Roche

The new EU Vertical Agreements Block Exemption Regulation and accompanying guidelines entered into force on 1 June 2010 and provide much needed clarity on the issue of internet sales.

Online sales have grown considerably since the previous rules were adopted in 1999, and this trend is reflected in the European Commission’s treatment of internet distribution and sales in the new Block Exemption Regulation (EU) No. 330/2010) (BER). Broadly speaking, the guidelines provide that every distributor must be free to use the internet to sell its products. Any obligations that dissuade online dealers from using the internet to sell to consumers and which are not equivalent to obligations imposed on sales from “brick and mortar” shops will be seen as “hardcore restrictions”, and will fall outside the safe harbour of the BER.

The BER will apply for 12 years and replaces the 1999 block exemption on vertical restraints (Regulation (EC) No. 2790/1999) which expired on 31 May 2010. The BER is supported by non-binding but influential guidelines which provide information on how Article 101 of the Treaty of the Functioning of the European Union (TFEU) and the BER apply to distribution agreements. In this article we focus on the following main changes that have been introduced by the BER

  • Buyer’s market share threshold;

  • Online sales – hardcore restrictions;

  • Online sales – selective distribution agreements; and

  • Resale Price Maintenance (RPM).

Buyer’s market share threshold

Vertical agreements are those entered into by parties acting at different levels of the supply chain, for example distribution agreements. Where a vertical agreement is concluded between parties that have limited market power (that is, each party’s market share does not exceed 30%) the BER exempts the agreement from the Article 101(1) TFEU prohibition on restrictive agreements, provided that it contains no hardcore restrictions (e.g. price fixing).

Under the new BER, the 30% threshold now applies not only to the supplier’s market share, as under the previous regulation, but also to the buyer’s share of the market in which it purchases the relevant goods or services. This means that suppliers who are below the 30% threshold will still need to ascertain the market share held by their buyer because, if it exceeds 30%, the agreement will not benefit from the safe harbour of the BER.

This change has narrowed the scope of application of the BER and in general fewer agreements are now likely to receive the benefit of the block exemption. In addition, compliance with the new rules may prove to be difficult and costly, as businesses now have to assess both their own and their buyer’s market share, and information on the buyer’s market share may not be readily available.

Online sales – hardcore restrictions

Online trading has increased considerably since the previous rules were adopted in 1999, and in line with the Commission’s policy of supporting European market integration and cross-border commerce, online sales are discussed in more detail in the new guidelines.

“Hard core” restrictions, such as export bans and price fixing, are presumed to have a negative effect on competition and their presence in a vertical agreement will prevent the entire agreement from benefitting under the BER (even where the market share thresholds are met). The new guidelines maintain the rule that a supplier may restrict its distributor from making active sales (where the supplier actively approaches customers) into a territory or customer group reserved to another distributor, but cannot restrict its distributors from making passive sales (where the distributor responds to unsolicited requests from a customer). A restriction on passive sales will be treated as hard core and will therefore fall outside the safe harbour of the BER.

Given that the Commission starts from the principle that every distributor must be allowed to use the internet to sell products, and that having a website is considered a form of passive selling (even where different language options are offered on the website) it is important to be able to determine what amounts to a restriction on passive sales.  The guidelines provide significant new guidance in this area, and set out the following examples:

  • preventing customers located in a separate (exclusive) territory to the distributor from viewing the website, or automatically re-routing them to the supplier’s or other exclusive distributors’ websites;

  • requiring the distributor to terminate a customer’s transaction if their credit card data reveals an address outside the territory to which the distributor has been assigned;

  • requiring the distributor to limit the proportion of overall sales made over the internet (although the supplier can require the distributor to sell a minimum value or volume through offline sales); and

  • requiring a distributor to pay a higher price for products intended to be resold online (however a fixed fee can be agreed to support the offline sales).

In relation to online sales that are targeted at the exclusive territory of another distributor, the guidelines state that these will be treated as “active sales”. Restrictions on active sales in exclusive distribution agreements are permitted under the BER. For example:

  • the sending of unsolicited emails to customers located within another distributor’s exclusive territory; and

  • targeting online advertisements to customers exclusively assigned to another distributor e.g. by using territory-based banners on third party websites, or paying a search engine to display an advertisement to users in other distributors’ territory.

The new guidelines provide businesses with much needed clarity on what constitutes a restriction on passive sales, which will enable them to manage the scope of their distribution agreements with greater legal certainty.

Online sales – selective distribution agreements

Selective distribution refers to a strategy whereby a supplier restricts the number of authorised dealers they will distribute through. The restriction on resale is not on active selling to a territory but a restriction on any sales to non-authorised dealers, leaving only appointed dealers and final customers as possible buyers. The selection criteria are linked to the nature of the product and selective distribution systems are almost always used in connection with the distribution of luxury or branded products.

The guidelines make it clear that certain types of selective distribution arrangements will fall within the safe harbour of the BER. However, the presence of hardcore restrictions will deprive the agreements of this comfort. For example, any obligations which dissuade appointed dealers from using the internet by imposing criteria for online sales that are not equivalent to the criteria imposed for sales from a brick and mortar shop will be treated as hardcore restrictions. A supplier may set different criteria for online and offline sales provided that both sets of criteria pursue the same objectives and achieve comparable results and that any difference between the criteria is justified by the different nature of these two distribution modes.

The guidelines also clarify the extent to which suppliers can impose restrictions in selective distribution arrangements:

  • a distributor may be required “to have one or more brick and mortar shops or showrooms as a condition for becoming a member of a supplier’s distribution system”;

  • quality standards may be imposed on the use of a website to resell goods, just as equivalent standards may be imposed on the appearance of a physical shop; and

  • a distributor may be required to use third party platforms only if these meet the standards and conditions agreed between the supplier and the authorised distributor. For instance, the supplier may require that customers do not visit the distributor's website through a site carrying the name or logo of the third party platform.

Distributors may argue that by permitting suppliers to require that they have one (or more) physical stores risks foreclosing online-only retailers. Some manufacturers on the other hand will welcome the new rules, as many believe this will prevent so-called “free-riding” by online-only companies, a commonly expressed concern amongst manufacturers of luxury goods. The Commission states that it will be monitoring the situation, and where the requirements of a selective distribution system are not justified, and appreciable anti-competitive effects occur, the BER will be withdrawn.

Resale Price Maintenance

An agreement to fix resale prices continues to be treated as a hardcore restriction under the new BER. However, it is now accepted in the guidelines that in some cases RPM may lead to efficiencies, for example:

  • where a manufacturer introduces a new product;

  • in order to coordinate a short term low price campaign in a franchise network; or

  • to avoid free riding of pre-sale services, e.g. in the case of experience or complex products.

This represents a subtle but significant shift in the Commission’s views on RPM which may allow suppliers greater flexibility in operating a distribution system. However any arguments in favour of RPM will be difficult to maintain, and suppliers would be wise to adopt a cautious approach before imposing RPM.

Implications for business

The new BER applies from 1 June 2010 until 31 May 2022. However a one year grace period (ending 31 May 2011) will apply for agreements which at 31 May 2010 qualified for exemption under the previous regulation.

It is important to bear in mind that agreements which do not fall within the ‘safe harbour’ of the BER are not automatically illegal but must be self assessed to determine whether they contain restrictive clauses and whether they can be justified.

Companies involved in the distribution of goods or services in the EU will want to consider the effect of the new BER on their existing agreements, for example the effect of the new threshold applicable to the buyer’s share of the market. The BER will only apply so long as the market share threshold is met. Businesses will need to monitor their supply chains on an ongoing basis to ensure that the threshold is not exceeded.

The enhanced level of detail in relation to online sales will prove helpful to those in the process of setting up distribution strategies. It will be important for these businesses to review their current selection criteria and restructure selective distribution systems where appropriate to ensure that they take full advantage of the new rules.