Some recent developments in the European antitrust legal arena demonstrate that the enforcement of antitrust rules in the distribution sector is clearly one of the main priorities on the agenda of the European antitrust authorities. As such, compliance with antitrust legislation is also a priority for alcohol beverage companies reliant on distribution systems.
New Rules Article 101, paragraph one, of the Treaty on the Functioning of the European Union (TFEU) prohibits agreements that have as their object or effect the prevention, restriction or distortion of competition. Under Article 101, paragraph three, of the TFEU, potent ial ly rest r ict ive agreements may, however, be exempt if they benefit customers.
The European Commission has adopted a number of block exemption regulations for agreements that meet a set of specific requirements. The main one applies to vertical distribution agreements (the Vertical Block Exemption, or VBE). A new VBE, along with a new version of the relevant vertical guidelines entered into force on 1 June 2010. Companies involved in the supply and distribution of their products in Europe were given until 31 May 2011 to review their existing vertical agreements and adjust them to comply with the new VBE and guidelines. If a business is not sure if it is currently compliant, it should seek legal advice immediately.
Recent Antitrust Cases Related to Distribution in Europe
Meanwhi le, a number of ant it rust proceeding s and sector speci f ic investigations have been started by the Commission and national competition authorities, in order to better understand potential competition concerns related to distribution of goods and services.
In November 2010, the Italian competition authority launched an invest igat ion into the role of large-scale distribution in Italy, which included, inter alia, the main alcohol beverage groups that are active in Italy. The investigation aims at assessing potential antitrust issues, focusing on the agreements and strategic negotiations between suppliers and largescale distributors, the role of centralised purchasing, the use of private-label brands and their likely effects on the final prices. The investigation is still ongoing and may be the prelude to specific investigations against individual companies.
In February 2011, the German competition authority also launched a sector inquiry into the market for the purchase of food, drinks and tobacco for retailers, focusing on the purchasing power at retail level and the relationship between retailers and their suppliers.
Very recently, in April 2011, the Austrian competition authority launched a national antitrust enquiry over allegedly unlawful pricing practices for beer in barrels as compared to beer in bottles, and other alleged anticompetitive restrictions at wholesale level.
Multinational companies distributing their products in European Economic Area (EEA) countries (the European Union, plus Iceland, Liechtenstein and Norway), or wishing to enter such markets, are well advised to review their current distribution agreements in order to ensure overall compliance with EU competition law.
Minimising Exposure to Antitrust Risks
EU competition rules differ substantially from those applicable outside Europe, par t icularly in the United States. Therefore, foreign companies cannot merely import their existing standard distribution agreements into Europe, but must adapt their strategies to comply with EU and national rules.
Even the most basic restrictions contained in vertical distribution agreements, such as restrictions on the buyer’s ability to determine the sale price or the territory where (or the customers to whom) it may sell the goods, or when the buyer is required to purchase all or most of its stock from a supplier, may potentially give rise to competition issues.
In the EEA, fixed or minimum resale price maintenance (RPM) is very likely to be considered illegal. Recommended resale prices are generally allowed, however they are also likely to be considered illegal if they operate as RPM in practice. For example, rewarding distributors that follow the prices recommended by the suppliers could be seen as establishing an illegal agreement to adhere to minimum resale prices.
Under the new VBE, fixed or minimum RPM continues to fall outside the scope of the block exemption. However, the Commission has inserted into the vertical guidelines a description of certain cases where RPM may increase efficiency and might, therefore, be exempt from the prohibition contained in Article 101 TFEU. In particular, RPM may have beneficial effects in the introduction of a new brand or entry into a new market; in relation to organising a coordinated short-term, lowprice campaign (in a franchise system or similar distribution systems); in preventing large distributors from using a particular brand as a loss leader and the avoidance of sales below cost leading to the delisting of the product by other retailers, to the detriment of consumers.
EU competition does not allow the use of airtight, exclusive arrangements to completely seal off markets.
In principle, a supplier may prohibit a distributor from “actively” seeking sales in territories reserved exclusively for other distributors, but it may not prevent a distributor from filling unsolicited (passive) orders from customers outside its territory. Similarly, a supplier is permitted to reserve a customer group for itself (or for another distributor), but it cannot prohibit a distributor from filling unsolicited orders sought by customers in that group.
Channel Restrictions: Online Sales
In principle, the internet must be available to all retailers. Suppliers may, however, impose reasonable conditions on how retailers can use the internet (e.g., brand image guidelines) or require a minimum brick and mortar presence.
Acts currently prohibited under EU law include restricting access to websites for customers outside the territory, re-routing based on the IP address of the customer, refusing payment if made from outside the territory and placing limitations on the proportion of sales made through the internet.
Conversely, the use of “banner” advertising outside the territory or national extensions of other reserved territories (e.g. .de, .fr) is considered restrictive of active selling and, therefore, is allowed in certain circumstances.
Non-compete clauses (i.e., an obligation on the distributors to buy more than 80 per cent of its total product requirements from a supplier) are not covered by the VBE if their duration exceeds five years. If they do exceed this time limit, they need to be assessed in light of the criteria set out in the vertical guidelines. Post-contract non-compete clauses, which prevent the buyer from distributing competing products when the distribution contract period is completed, are unlikely to give rise to competition issues if their duration does not exceed one year.
These rules have serious implications for companies engaged in distribution agreements. Agreements found to be restrictive are automatically void and unenforceable and the parties may be subject to substantial fines (up to 10 per cent of group worldwide sales), as well as claims for damages.
In order to minimise potential antitrust risks, MNCs active in Europe must review their distribution strategies to ensure they are compliant, if they haven’t already done so. Given that the deadline is only recently expired, the effects of any violations would not be major at this stage. Any potential fines would be at a low level, given that they are proportional to the duration of the alleged infringement. However, any further delay would result in increased fines and penalties.