- The EU Commission has updated the vertical block exemption regulation and guidelines. The new rules will come into force on June 1, 2010 and will be valid until 2022 with a one year transitional phase.
- Two main market developments have prompted improvements to the legal regime: (i) the increased market power of large distributors and retailers; and (ii) the growing significance of online sales.
- The 30% market share threshold used to determine the safe harbor now takes into account both the supplier’s market share as well as the purchaser’s market share on the purchasing market.
- Where both the supplier’s and the purchaser’s market share does not exceed 30% and providing the vertical agreement does not contain any hardcore restrictions, there is a positive presumption that the agreement should be automatically exempted.
- In contrast, where the parties’ market share exceeds 30%, there is no automatic exemption, but there is no presumption that the agreement is illegal. It is necessary to assess the agreement’s negative and positive effects on the market.
- The new regime introduces “Internet friendly” rules by limiting the supplier’s ability to restrict Internet sales, such as imposing a higher price for products sold online as opposed to offline or automatically re-routing online customers to distributors in other territories. However, brand owners may impose certain minimum quality requirements on their online resellers such as setting quality standards for the website or requiring that a distributor has a “brick and mortar” shop presence in addition to a website.
The EU Commission adopted on 20 April 2010 its revised vertical block exemption regulation (Regulation 330/2010) accompanied by the publication of the vertical restraints guidelines (the “Guidelines”), which explain in detail the Commission’s approach to vertical agreements. The new regime will come into force on 1 June 2010 and will be valid until 31 May 2022.
The new regime is not a major overhaul, but rather an update of the old rules (Regulation 2790/1999). The new rules were subject to a public consultation process, which lasted between July and September 2009. More than 150 submissions were received during the two-month consultation process. The overwhelming reaction was positive: the EU’s vertical regime has been successful in reducing companies’ compliance costs, while ensuring that consumers benefit from choice and price competition. This positive feedback reinforced the Commission’s position that the old regime required only some face-lifting.
To the extent that there are changes, these are designed to take account of market developments over the recent years. In particular, the Commission identified two main developments which prompted improvements to the legal regime: (i) increased market power of large distributors and retailers; and (ii) the growing significance of online sales.
Buyer Power Reflected in the New Safe Harbor Rules
The market power of large retailers has grown significantly during the past 10 years. In response to this development, the new block exemption regulation takes into account not only the supplier’s market share, but also that of the buyer. Whereas the safe harbor was available under the old rule so long as the supplier’s market share did not exceed 30%, under the new rules the supplier’s market share on the relevant supply market and the buyer’s market share on the relevant purchasing market must each be below 30%.
Growing Importance of the “Effects-Based” Approach
The new safe harbor rules will automatically exempt fewer agreements because now both parties’ market shares are relevant. In practice, this means that more companies will have to defend the economic merits of their agreements based on efficiencies and pro-competitive virtues. This is in line with the Commission’s trend to endorse a more “economic” and “effects-based” approach rather than the traditional “straightjacket” approach (based on predetermined blacklisted clauses) in its competition policy enforcement. The Commission’s Guidelines which accompany the block exemption continue to be a useful tool in making this “rule of reason” assessment.
The Online Sales Debate
Another major market development in recent years has been the surge of online sales. This has led to a debate between online retailers and luxury goods producers as to whether brand owners should be entitled to restrict online sales. Online retailers have strongly resisted any restrictions on online distribution, while brand owners insist that online sales should meet certain minimum standards.
The new regime attempts to strike a compromise between these two sides by limiting restrictions on Internet sales, but allowing brand owners to impose certain minimum requirements to guarantee the quality of online distribution. Examples of minimum requirements which suppliers can impose include the following:
- Prescribing quality standards for a distributor’s Internet sites, similar to the ones that the supplier might require for a shop, for selling by catalogue or for advertising and promotion in general;
- Requiring a distributor to have one or more “brick and mortar” shops or showrooms as a condition for inclusion in the supplier’s distribution system;
- Preventing customers from visiting the distributor’s website through a site hosted by a third party.
“Active” and “Passive” Sales in the Online Context
The new vertical regime maintains the Commission’s longstanding distinction between active and passive sales. In the Commission’s parlance, “active” sales are those made by actively approaching individual customers, while “passive” sales are made in response to unsolicited requests from individual customers. The Commission has traditionally allowed suppliers to prohibit active sales by distributors to exclusive territories or customers of another distributor, whereas any prohibition of a distributor’s passive sales has been viewed as a hardcore restriction.
The Commission recognizes that online sales do not fit easily into either of these categories and has therefore provided some guidance on how to categorize online sales along the active/passive divide.
- Passive sales: As a general matter, the Commission has chosen to treat distributor websites as a form of passive sale which, if restricted, can constitute a hardcore restriction. This is understandable given the Commission’s mission to promote the free movement of goods across national boundaries and the demonstrated power of internet sales to do just that. Accordingly, the following are example of clauses that will be viewed by the Commission as hardcore restrictions of “passive” sales:
- Preventing customers located in another territory from viewing a distributor’s website;
- Any automatic re-routing of online customers from outside the territory back to distributors in the territory in which the customer is located; and
- Forcing the termination of Internet sales if the credit card address is located outside a distributor’s territory.
- Active sales: The Commission also gives examples of what are viewed as “active” sales in the online context. Sending unsolicited e-mails (or other type of direct mail) to customers, or creating online advertisements targeted at a specific group of customers are both viewed as forms of active sales, which can be legitimately prohibited.
The Commission’s firm opposition to restrictions on Internet sales finds no analogue in either the enforcement policies or the court decisions under US antitrust law, which has always shown greater tolerance for vertical territorial and customer restrictions. There is accordingly more leeway for suppliers to restrict Internet sales in a variety of ways in the US than in the EU.
Despite the increased emphasis on the “effects-based” approach, the Guidelines still identify certain clauses (i.e., hardcore restrictions) that will automatically deprive agreements of the benefit of the block exemption. The most significant hardcore restrictions are resale price maintenance and absolute territorial and customer restrictions. Agreements that contain a hardcore restriction cannot benefit from the block exemption irrespective of whether they meet the market share safe harbor thresholds. Such agreements must be individually assessed for their pro-competitive effects, but there is a strong presumption that their overall effects are anti-competitive. Companies will face a heavy burden in reversing the presumption of anti-competitive effects and, in practice, agreements containing a hardcore restriction run a significant risk of unenforceability.
Limited exceptions to the hardcore restrictions have been listed in the Guidelines. For instance, active and passive sale restrictions necessary to protect the distributor’s entry in the relevant market are allowed only for the first two years. This gives distributors entering new markets an incentive to recoup their sunk costs associated with starting up and/or developing a new market.
Many features of the old rules have remained unchanged. In particular, non-compete clauses lasting for a period of up to five years are still within the scope of the block exemption and will automatically benefit from the safe harbor if the market share thresholds are not exceeded. Non-compete obligations are arrangements that require the buyer to purchase from the supplier more than 80% of the buyer’s total purchases of the contract goods and services and their substitutes. Such non-compete obligations are not covered by the block exemption where their duration is indefinite or exceeds 5 years. Unlike hardcore restrictions, the rule of severability does apply to non-compete obligations. As such, the benefit of the block exemption is only lost in relation to the offending non-compete clause and not for the whole agreement.
The new block exemption regulation does not apply, during its first year (i.e., from 1 June 2010 to 31 May 2011) to agreements already in force on 31 May 2010 and which satisfy the conditions for exemption under the previous rules.
The purpose of this transitional period is to allow the parties to digest these changes, perform the necessary due diligence of their agreements concluded under the old regime and to bring them in line, where needed, with the new regime.