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New competition law rules for vertical agreements
29 April 2010
The European Commission has adopted new rules and accompanying
guidelines for supply and distribution agreements.
- As with the current system, the new Block Exemption will
provide a ‘safe harbour’ from the application of competition law
for vertical agreements that meet the conditions set out in the
Block Exemption.
- The new Vertical Agreements Block Exemption will come into
force on 1 June 2010 and replaces the current Block Exemption that
has been in force since January 2000. Existing agreements that
benefit from the current Block Exemption will have a one year
transitional period.
- The new rules represent a modification of the existing system
rather than a wholesale change and the new Block Exemption still
exempts most types of distribution and supply agreements (e.g.
exclusive and selective distribution systems) from the prohibition
on restrictive agreements set out in article 101(1) of the Treaty
on the Functioning of the European Union (Previously article 81(1)
of the EC Treaty).
However, there are a number of important points to note and
these are discussed in more detail below. In terms of substantive
changes to the Block Exemption, the market share condition has
changed. There is also new guidance on a number of issues
including, in particular, the ability of a supplier to impose
restrictions on online selling.
Set out below are some immediate steps for businesses to
consider in the light of the changes to the system.
Steps for businesses to consider
- Check that existing supply and distribution arrangements will
benefit from the new Block Exemption. The new market share
thresholds are particularly relevant to this assessment. Where the
new Block Exemption is not available, it will be necessary to carry
out an individual assessment. The transition period provides
businesses with a year to carry out this exercise.
- Ensure that new vertical agreements entered into from 1 June
2010 are assessed for compliance with the new Block Exemption.
- Consider whether the new guidelines provide scope to amend
existing agreements and proforma documents. This is particularly
relevant in the case of internet sales controls.
Review of key points
1. New market share threshold
Currently, it is only the market share of the supplier on its
selling market that must not exceed 30% (except in the case of an
exclusive supply agreement with a single buyer in the whole of the
community where it is the share of the buyer on its purchase market
that must not exceed 30%).
From 1 June 2010, the new Block Exemption will only be available
where the market share of both the supplier and the buyer does not
exceed 30%.
In the case of the supplier, the threshold applies to the
relevant market on which the supplier sells the goods/services. In
the case of the buyer, the threshold applies to the relevant market
on which the buyer purchases the goods/services. This is a change
to the European Commission’s original proposal to apply the buyer’s
market share threshold to its downstream selling market.
From a practical point of view, this change means that the Block
Exemption will be available to fewer agreements than was previously
the case and there is an increased prospect that both suppliers and
purchasers will need to carry out an individual self-assessment
instead of being able to rely upon the safe harbour provided by the
Block Exemption.
For suppliers, in particular, the assessment as to whether the
Block Exemption is available to their distribution systems will be
more complex. Instead of just assessing their own market share,
they will now need to understand the market shares of their buyers.
By implication, this also means that there is the possibility that
identical agreements with different distributors will be covered by
the Block Exemption in some cases but not in others.
2. Online sales
The ability of suppliers to limit internet sales by their
distributors has been both contentious and ambiguous since the
existing system came into force over 10 years ago.
The new guidelines provide considerably more guidance on the
potential application of the competition rules to internet sales
restrictions and, in particular, provide more comfort in terms of
permissible controls. No doubt this will be welcomed by many
suppliers (especially suppliers of branded goods). The reaction is
likely to be more mixed from distributors.
However, before considering the new guidelines, it is important
to sound a note of caution as the ability to control the use of the
internet remains a complicated area. Restrictions and controls will
need to be considered carefully against the new guidelines before
they are implemented. It is still the case that internet sales are
generally considered to be a form of passive selling and, as such,
any restrictions on such sales by a distributor are likely to be
hardcore restrictions.
Subject to this general point, the guidelines provide that in
principle the following can be agreed:
Active sales / exclusive distribution – the
guidelines clarify that some internet sales activities are
considered to be active selling and, accordingly, a distributor can
be prevented from using these techniques to sell into an exclusive
territory allocated to another distributor. The guidelines
highlight the following as forms of active selling:
- Territory based banners on third party websites
- Paying a search engine or online advertiser to have an
advertisement displayed specifically to customers in a particular
territory.
Website links - a distributor can be required
to provide links to websites of other distributors and/or the
supplier
Quality standards – particularly in the case of
selective distribution systems, quality standards can be imposed on
the use of websites by distributors
Bricks & mortar outlets – particularly in
the case of selective distribution systems, a supplier may require
a distributor to have one or more physical shops as a condition to
becoming a distributor.
A supplier can require a distributor to sell an absolute amount
of goods (by volume or value) through a physical shop. However,
care is necessary as any such requirement must not be calculated on
the basis of online/offline sales being a certain proportion of
overall sales (e.g. a requirement that a distributor sells 75% of
the goods through a physical shop).
A supplier can offer fixed fee support for offline sales. Again
care is necessary as such support must not vary according to the
level of sales made through the physical shop. The guidelines are
clear that dual pricing (e.g. where a distributor pays a higher
price for goods that it sells via the internet) is generally
considered to be a hardcore restriction.
3. Other key points to note
It remains the case that the presence of a hardcore restriction
in an agreement will prevent it from benefiting from the Block
Exemption. It also remains the case that the presence of a hardcore
restriction will give rise to a presumption that the agreement
infringes the law and is unlikely to benefit from an individual
exemption.
However, the new guidelines recognise that in some cases (albeit
limited), it may be possible to demonstrate that an agreement
containing a hardcore restriction meets the criteria for an
individual exemption. In particular, the guidelines open up a
limited possibility of exemption in respect of:
- Absolute territorial protection for distributors (e.g. to allow
a distributor to open up a new market)
- Resale price maintenance (e.g. in order to launch a new product
or to run short term low price promotional campaigns).
In practice, it is likely that the competition authorities and
courts will remain cautious in respect of hardcore restrictions and
a careful analysis will always be required before entering into any
hardcore restrictive activity.
The new Block Exemption provides that a restriction on the place
of establishment of a distributor does not constitute a hardcore
territorial or customer restriction. As such, it is permissible to
agree that a distributor will restrict its outlets to a particular
address, place or territory.
To discuss the implications of the new Block Exemption and
guidelines further, please contact our competition law team.
talk to us
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