Article 101 of the Treaty on the Functioning of the European Union (“TFEU”) prohibits agreements between competitors the object or effect of which is to exclude, restrict or distort competition in the internal market of the European Union as a whole – in simple terms, companies must not enter into cartels with each other. Therefore, companies may not, subject to a number of exceptions, enter into agreements, for example, on joint pricing of products, allocation of markets or customers, etc.
Vertical agreements = distribution contracts
While “classic”, horizontal cartels between companies at the same level of the market are considered significantly more harmful, the above general prohibition also applies to so-called vertical agreements, i.e. agreements between operators at different levels of the market. These are therefore any distribution agreements between unrelated parties. These generally have less potential to adversely affect competition in a given market.
The European Commission (“EC”) has therefore set out rules further defining the framework of what manufacturers and distributors can safely agree in distribution agreements in the Block Exemption Regulation for Vertical Agreements (“the Regulation”): the Regulation thus defines agreements that generally don’t infringe the prohibition of anti-competitive agreements under Article 101 of the TFEU. It expires on 31 May 2022 and the EC has now published a proposal for a revised text of the Regulation in a public consultation and related soft-law guidelines on vertical restraints (“Guidelines”) for the following period. In addition to this general Regulation, the EC is also working on a revision of the specific block exemption for the automotive sector, where the legislative work is not yet at such an advanced stage.
Below we recall the main rules resulting from the current version of the Regulation and some proposed changes. These unifying rules apply throughout the territory of the European Union, which contributes to the legal certainty of the contracting parties, also in view of the fact that distribution contracts are often concluded between companies from different Member States and manufacturers often insist in practice on the exclusive use of their contractual templates. The Regulation and the Guidelines allow parties to assess for themselves whether the content of their contractual relationship contravenes the prohibition of anti-competitive agreements.
Market share threshold of 30%
A vertical agreement is and will remain subject to the Regulation after the amendment if neither the supplier nor the purchaser of the goods or services has a market share exceeding 30%. In the case of a supplier, its market share on the relevant supply market, i.e. the market on which it sells goods or services, is decisive for the application of the block exemption. In the case of a purchaser, its market share on the relevant purchasing market, i.e. the market on which it purchases goods or services, is decisive for the application of the Regulation.
There are five restrictions which result in an entire agreement not benefiting from the Regulation, even if the market shares of the supplier and the buyer do not exceed 30%. Such contractual arrangements are considered to be serious restrictions of competition due to the likely harm to consumers and will in most cases be prohibited:
- suppliers may not set a (minimum) price at which distributors may resell products (resale price maintenance);
- restrictions on the territory or range of customers to whom the seller may sell the contract goods or services (a number of types of restrictions is permissible here);
- restrictions on active or passive sales to end users by members of a selective distribution system operating at the retail level (in a selective distribution system, retailers have to comply with strict rules on sales space and sales method – typically e.g. sellers of luxury goods, premium electronics or cars);
- restrictions on cross-supply between distributors within the selective distribution system, including distributors operating at different levels of sales (example – a manufacturer of goods prohibits its distributors within the selective distribution system from reselling stock to each other);
- restrictions on the supplier’s ability, agreed between the supplier of the components and the buyer who uses the components, to sell the components as spare parts directly to end-users or other persons to whom the buyer has not entrusted the repair or servicing of its goods (e.g. the manufacturer of the goods prohibits the supplier of a part used in the goods from selling that part to an independent repairer).
As of June 2022, the main principles of the current regulation can be expected to be maintained, taking into account the economic developments of the last ten years in supplier-customer relations, inter alia with regard to the development of e-commerce. We summarise below the main proposed changes to the Regulation and Guidelines.
The draft revised Regulation foresees changes in the area of dual distribution, i.e. in situations where a manufacturer also sells its goods or services directly to end customers and thereby compete with its own distributors at the retail level.
Dual distribution is covered by a special rule (safe harbour) in the Regulation as an exception to the general rule that competitors cannot benefit from the Regulation. The draft revised rules change this exception for dual distribution and introduce more restrictions in this respect.
Safe harbour for dual distribution will now be limited to cases where the parties’ total retail market share does not exceed 10%. For distribution agreements where the aggregate retail share of the parties is greater than 10% and less than 30%, there will be an additional but more limited safe harbour covering all aspects of the agreement except for the exchange of information between the parties.
According to the Commission, the reason for the tightening of the current rules is the increase in dual distribution and related competition concerns in the market as a result of the growth of e-commerce, which makes it easier for suppliers to sell directly, either through their own e-shops or online marketplaces.
- Dual pricing and criteria for online shops
Dual pricing is the practice of charging a higher wholesale price to the same distributor for products to be sold online than for products to be sold offline.
The current Guidelines provide that an agreement for a distributor to pay a higher price for products to be sold online than for products to be sold physically constitutes a “hardcore” restriction on competition and is prohibited. The only way a supplier can now support a buyer’s sales efforts offline or online is by paying a lump sum regardless of sales volume.
The draft revised Guidelines now soften the position and clarify that the Regulation allows suppliers to set different wholesale prices for online and offline sales from the same distributor, as long as this is to incentivise or reward an appropriate level of investment and as long as it relates to the costs incurred for each sales channel.
In relation to the selective distribution system, the draft revised Guidelines state that the criteria imposed on suppliers in relation to online sales may not be generally equivalent to those imposed on bricks-and-mortar shops due to the fact that online and offline channels have different characteristics. For example, the draft revised Guidelines state that a supplier may impose specific requirements to ensure certain service quality standards for users shopping online, such as the establishment and operation of an online after-sales service, the requirement to reimburse customers for product returns or the use of secure payment systems.
- Most-favoured-nation/parity obligation
A parity obligation (also known as a most-favoured-nation clause) is a contractual provision that requires a business to offer its counterparty the same or better terms and conditions as other points of sale (whether on other platforms or other sales channels). Most Favoured Nation clauses are generally allowed under the current Regulation.
The EC is proposing to remove the benefit of the block exemption for retail parity obligations imposed by online intermediary service providers (online marketplaces such as MALL Partner or price comparison tools such as Heureka.cz). Under this type of “broad” parity obligation, suppliers are not allowed to offer better terms on other platforms. This type of parity obligation will not benefit from the block exemption and is thus likely to be prohibited. The EC is concerned that “broad” parity obligations may make it more difficult for entrants to establish a market presence, limit price competition and restrict access to different sales channels.
- Internet sales restrictions
Restrictions aimed at preventing buyers or their customers from selling goods or services online or from effectively using one or more online advertising channels are defined as restrictions on active or passive sales and therefore as “hardcore” restrictions under the Regulation, i.e. in principle prohibited irrespective of the size of the parties’ share of the relevant market.
The draft revised Guidelines include additional examples of prohibited direct and indirect obligations aimed at preventing distributors from selling online and, conversely, restrictions that could be permitted:
- Restrictions on the use of price comparison websites or paid search engine links constitute a “hardcore” restriction under the Regulation, as the ability to use comparison websites enables a distributor to attract potential customers to its website, which is a prerequisite for being able to sell online.
- Restrictions on internet advertising that do not exclude specific online advertising channels are allowed, for example, if these restrictions are linked to the content of internet advertising or set certain quality standards.
- While operating a website is a form of passive selling, translating that website into a language not commonly used in the distributor’s territory is a form of active selling.
- Restrictions on active sales
Active selling restrictions are limitations on a buyer's ability to actively reach customers in a particular territory or customer group defined by other criteria.
The current Regulation does not foresee the use of shared exclusive rights between two or more distributors in a territory, i.e. there can only be one exclusive distributor per territory/group of customers. This makes it difficult for some suppliers to set up distribution networks that are tailored to their specific needs.
The draft amended Regulation introduces the possibility of shared exclusivity, which allows a supplier to appoint more than one exclusive distributor in a certain territory or for a certain group of customers. The draft revised Guidelines specify that the number of appointed distributors should be set in proportion to the assigned territory or customer group to ensure a certain volume of business to sustain their investment efforts. The Guidelines warn that exclusive distribution “must not be used to protect a large number of distributors from competitors located outside the exclusive territory, as this would lead to the fragmentation of the internal market”. In practice, it may prove difficult to assess how many distributors are permissible given the volume of business in a given territory, and there is a risk of different interpretations across Member States.
If you have any further questions, please contact the author or other members of EY Law or your usual EY team.