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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 Commissions original proposal to apply the buyers 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.

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