The European Commission's Final Report indicates that enforcement action is likely against common restrictions in distribution agreements such as active sales restrictions and the requirement for a distributor to have at least one brick and mortar store.
On 10 May 2017, the European Commission published the Final Report in its e-commerce sector inquiry as part of its Digital Single Market Strategy. This concludes an extensive two year inquiry, the findings of which are likely to have significant consequences in terms of enforcement in the next few years and legal developments further down the line. The Final Report rules out an early review of the current Vertical Agreement Block Exemption Regulation (VABER) which expires in May 2022. Instead it intends to step up the enforcement of the existing rules, so high profile enforcement action is very likely in the coming months. In this report we look at the key conclusions drawn by the Commission and how these will affect suppliers and distributors.
At a glance: the impact on distribution agreements
Your distribution agreement will need to be reviewed in particular if it contains the following restrictions:
- Active Sales Restrictions: the Commission considers active sales restrictions into non-exclusive territories a hardcore restriction, meaning that it will presume an adverse effect on competition and not need to prove one. The Commission's position is clear: active sales restrictions are not permitted except when used to protect an exclusive territory or customer group.
- Brick & Mortar shop requirement: although seemingly permitted by the Commission's 2010 Vertical Restrains' Guidelines (the Guidelines), the Commission has concluded that the benefit of the block exemption may be withdrawn if there is no good justification for requiring a brick and mortar store. Such a requirement is now less likely to be acceptable than previously thought under the Guidelines.
- Territorial restrictions in a selective distribution agreement: the Commission has reiterated that selective distribution systems cannot be used in conjunction with territorial restrictions, but has highlighted that such restrictions are commonly being used.
- Price comparison tool bans: provisions which prevent a distributor selling on a price comparison website are in principle likely to amount to hardcore restraints and be considered anti-competitive. The exception is if they cannot meet justified qualitative criteria in relation to the way products are promoted on the internet.
- Online advertising restrictions – Google Adwords: our reading of the report is that the Commission would probably be satisfied with restrictions that only prevent bidding for first place, but wider restrictions that prevent the distributor being properly able to be found by searching customers are unlikely to be enforceable.
- Information obligations: the Commission highlights competition concerns relating to information flows between a supplier and its retailers/third-party platforms where the supplier competes with the retailer/platform.
1. Selective distribution
The Commission highlights the following potentially problematic provisions that should now be considered:
a. Brick and Mortar Stores
The Commission found that the permitted obligation (under the Guidelines) to have a brick and mortar shop is used frequently and in some cases arbitrarily on the basis of excluding pure online players. The Commission concludes that it may withdraw the benefit of the block exemption where the use of such a requirement is only aimed at protecting products from price competition by pure online players, without enhancing competition on other parameters such as brand image or quality of distribution.
The requirement is therefore now less likely to be acceptable than previously thought. This is a significant revision and suppliers should therefore review their current arrangements.
b. Territorial restrictions
The Commission has highlighted two common territorial restrictions that are being used, but which should not be combined with a selective distribution system that is operated across a number of Member States:
- Restrictions which limit the ability of authorised retailers to actively and passively sell to all customers within those Member States (e.g. restrictions which are intended to appoint authorised retailers along national lines for example);
- The appointment of an exclusive distributor for a sub-section of the territory across which the selective distribution system operates and therefore limiting the ability of the appointed wholesalers in other jurisdictions to actively sell to all authorised distributors within the selective distribution network.
c. Publication of selection criteria
The Commission makes it clear that manufacturers are not under a legal obligation to publish their selection criteria. Nonetheless, it implies that it is best practice to provide a minimum level of information to retailers who request it, allowing them to identify the reason for the exclusion.
2. Active sales restrictions
It is clear from the VABER that active sales restrictions are only permitted if they are used to protect a territory (or customer group) that has been exclusively reserved for the supplier or another distributor. The Commission had also made it clear that it considers such restrictions to be hardcore restrictions. Many observers will consider this a controversial or in any event overly strict position.
However, the Commission has concluded that they are still included in a large number of distribution agreements, and that certainly corresponds with our experience. This is an area where suppliers have typically been prepared to take a risk and commonly continue to include such an active sales restriction. The Commission's Final Report suggests that enforcement action is now more likely; they are restrictions which go to the heart of keeping distribution down national lines, and they therefore seem a prime target for investigation by the Commission. We would expect a fairly high profile enforcement action in this area for the Commission to drive home its analysis.
3. Price comparison tools bans
The Final report analyses price comparison tools restrictions in great detail. It concludes that such tools directly increase transparency for customers and are therefore an important mechanism to facilitate price competition on the internet. The Commission states that whilst manufacturers are allowed under the VABER to require quality standards when it comes to advertising their product on the internet, absolute price comparison tool bans which are not linked to quality criteria, can amount to a hardcore passive sales restriction because they prevent effective internet selling without bringing competitive advantages.
4. Pricing restrictions
The Commission concludes that pricing restrictions generally, are the most widespread contractual restrictions. In the Final Report, it reiterates the existing position that charging different wholesale prices to different retailers is a normal part of the competitive process. However, dual pricing, (charging different prices for products which are sold offline to products which are sold online) for one retailer remains a hardcore restriction under the VABER.
In relation to most favoured nation/price parity clauses, the Commission states that provided there are no blacklisted restrictions, parity clauses in vertical agreements are covered by the VABER if the parties' market share is below 30%. Parity clauses are not commonly included in supplier – distributor agreements (as opposed to retailer - platform agreements), but this position of the Commission is surprising because such clauses affect the suppliers' prices to third parties.
5. Marketplace bans
The Commission in its Final report confirms its conclusion from the preliminary report that absolute marketplace bans generally should not be considered as hardcore restrictions. However, the Commission is careful to make this statement without prejudice to an impending European Court of Justice decision in Coty.
That said, the Commission insists that its conclusion does not mean that it considers marketplace bans to be in all cases compatible with EU competition law. Such bans may be scrutinised if they do not fall under the safe harbour of the VABER. The Commission therefore leaves the door open for national competition authorities to investigate marketplace bans which fall outside the VABER. That is not only where they exceed the market share threshold but also if the agreement contains blacklisted restrictions, even perhaps an active sales restriction into a non-exclusive territory, and so may be more commonplace than one might expect. It also remains to be seen whether the Court of Justice will agree with the Commission's conclusions. The debate on market places restrictions has therefore not been settled with the Final Report.
6. Google AdWords restrictions
Given the growing importance of search engines for attracting customers to retailers' websites, the Commission is of the view that restrictions on the use of trademarks for online search advertising could raise concerns if they "restrict the effective use of the internet as a sales channel by limiting the ability of retailers to direct customers to their website." The key is determining what the Commission means by that because, unhelpfully, it has not given any examples. Our initial view is that it may be permissible, for example, for manufacturers to reserve their right to use the trademark for the first Google AdWords position, whilst allowing distributors to bid for the second and third place. However, a blanket prohibition on using a trademark to bid for Google AdWords positions is more likely to be interpreted as hardcore.
7. Data collection
The Commission notes that whilst data collection and processing can bring substantial benefits in the form of better products and services and allowing companies to become more efficient, the use of large data sets may affect competition. The exchange of competitively sensitive data between marketplaces and third party sellers or manufacturers and retailers for example could lead to competition concerns, particularly where the manufacturer and retailer compete in the retail market. It is widely expected that data collection will be an area under increased scrutiny from the European Commission in the coming years.
Although the Commission has said that it will not now amend the VABER, its Final report clarifies and therefore supplements some aspects of its Guidelines as to when the Commission is likely to take enforcement action. Previously it had been reticent to interfere in vertical arrangements, but it has now highlighted that it will take enforcement action to "target the most widespread, problematic business practices that have emerged or evolved as a result of the growth of e-commerce and that may negatively impact competition and cross-border trade and hence the functioning of the EU's Digital Single Market." It has already commenced three investigations, which we reported on here.
It also seems likely that certain of the more active national authorities will look to rely on elements of the report to take infringement action, with possible targets being marketplace bans and price comparison tool bans. As regards marketplace bans, the position is subject to the Coty case currently pending in the European Court of Justice.
Please note that we have not covered the second part of the Final Report which sets out the Commission's conclusions in relation to digital content.
For further information, please contact anyone below or your usual contact in Bird & Bird's Competition & EU Group.