On 28 July 2009, the European Commission invited any interested parties to comment its proposal for a revised regulation and guidelines on vertical restraints. The revised regulation and guidelines will replace regulation No 2790/1999, due to expire in May 2010, and the current guidelines on vertical restraints. The revision makes noteworthy changes to the safe harbor protections for larger firms, to rules on some exclusive territories, and to internet selling restrictions. The proposed changes, if finally adopted, might require larger firms to introduce important adjustments to their distribution networks to ensure they do not infringe EU competition law.

Article 81(1) of the European Community Treaty prohibits agreements between companies restricting competition and affecting trade within the EU unless they satisfy the conditions laid down in Article 81(3).

Regulation 2790/1999 establishes a safe harbor from the application of Article 81(1) for all types of vertical agreements (agreements between parties active at different levels in the economic supply chain, including selective distribution and agency arrangements), provided the supplier does not hold more 30% of the relevant product market and that the agreement does not contain certain hardcore restraints listed in Article 4 of the Regulation. When the vertical agreement contains an exclusive supply obligation (an obligation causing the supplier to sell its goods only to one buyer inside the EU), the Regulation applies provided the buyer does not hold more than 30% on the market on which it purchases the contract goods.

Vertical agreements falling within the scope of the Regulation are deemed to satisfy the conditions of Article 81(3). Agreements falling outside its scope are not automatically contrary to Article 81: their compatibility with that Article must be assessed on a case by case basis, with the aid of the Commission guidelines on vertical restraints.

The proposed revised Regulation is basically identical to Regulation 2790/1999, except for the introduction of two amendments. First, a vertical agreement would benefit from the safe harbor of the revised Regulation only if the market shares of both the supplier and the buyer do not exceed 30% in any of the relevant markets affected by the agreement, regardless of whether the agreement contains an exclusive supply obligation. Second, any restriction imposed on a member of a selective distribution network to sell to unauthorized distributors in markets where such system is not operated would constitute a new hardcore restriction that would render the revised Regulation automatically inapplicable to the entire agreement.

Many more novelties are contained in the proposed draft guidelines on vertical restraint. The most notable ones are those concerning internet sales. In particular, the Commission provides new examples of internet selling restrictions that, if imposed on the distributors, would render the regulation inapplicable and would very likely not satisfy the conditions of Article 81(3). These examples are: (i) requiring a (exclusive) distributor to prevent customers located in another (exclusive) territory from viewing its website or requiring the distributor to put on its website automatic re-routing of customers to the manufacturer's or other (exclusive) distributors' websites; (ii) requiring a (exclusive) distributor to terminate consumers' transactions over the internet once their credit card data reveal an address that is not within the distributor's (exclusive) territory; (iii) requiring a distributor to limit the proportion of overall sales made over the internet; and (iv) requiring a distributor to pay a higher price for products intended to be resold by the distributor online than for products intended to be resold off-line.

The draft guidelines also provide further guidance as to the permissibility of the imposition of quality standards for the use of an internet site. For instance, they note that an outright ban on Internet or catalogue selling may be objectively necessary and fall outside Article 81(1) EC and will thus not be considered to be a hardcore restriction if it does not restrict competition that would take place in its absence given specific circumstances in which the agreement operates, such as when its purpose is to align on a public ban on selling dangerous substances over the internet or by mail order for reasons of safety or health (paragraph 54).

It should be noted that, although the guidelines bind only the Commission, they can have an influential effect on the way in which national enforcement agencies and national courts will apply Article 81 to vertical agreements.

The Commission explains that its proposed reforms are triggered by two major developments of the last years: a further increase in large distributors’ market power and sales on the Internet. It is however debatable that the proposed introduction of a 30% market share threshold to both the supplier and the buyer constitutes the appropriate solution to deal with distributors’ market power. Most importantly, this new threshold will limit the legal certainty offered by the Regulation, because the suppliers often will be unable to determine the market share held by their (potentially several) buyers.

Given the impact that the revised guidelines and regulation will have on the distribution sector and on the business in general, all interested parties are invited to provide their comments to the Commission by 28 September 2009.

Read more on the draft revised Regulation and Guidelines at the Commission's website.

Unofficial texts highlighting the amendments proposed by the Commission to Regulation 2790/1999 and the amendments proposed by the Commission to the current guidelines on vertical restraints can be found here: