Commission adopts new vertical agreements block exemption and vertical restraints guidelines

On 20 April 2010, the European Commission ("Commission") adopted a new vertical agreements block exemption regulation ("Regulation") and revised vertical restraints guidelines. This regulation will replace the old regime from 1 June 2010.

The Regulation applies to any distribution, supply or purchasing arrangement with effect in Europe and is one of the cornerstones of the EU competition framework.

Vertical agreements block exemption

The Regulation exempts from the application of Article 101 TFEU - which prohibits agreements that restrict or distort competition within Europe - agreements between parties operating at different levels of the supply chain and which contain "vertical restraints" on competition. The Regulation only applies if the supplier and the buyer each has a market share not exceeding 30 per cent and the agreements do not contain specified "hardcore" restrictions.

Any vertical agreement containing restrictions of competition between parties where this 30 per cent market share is exceeded will not benefit from the safe harbour of the Regulation and will fall to be individually assessed under the conditions set out in Article 101(3).

Whilst the main features of the existing rules remain, the new regime varies and refines the pre-existing block exemption to address the Commission's experience over the past 10 years and the changing market conditions within which the rules are applied.

(a) Market share of buyer

One of the major changes from the previous regime is that the Regulation applies only where buyers hold a share not exceeding 30 per cent of the relevant market. This is in addition to the current 30 per cent threshold applicable to the supplier. The Commission has made this change primarily to benefit small and medium-sized companies as they are more likely to be harmed by buyer-led constraints.

(b) Online sales

The increased role of online sales over the past 10 years has led to considerable changes to the guidelines, which now state that "every distributor should be able to use the internet to sell products". The distinction between "active" and "passive" sales for the purposes of distribution agreements has been refined. A supplier may require its distributors to have one or more brick and mortar shops or showrooms as a condition of becoming a member of its distribution system and may also restrict active selling into another distributor's exclusive territory or customer group over the Internet. In addition, the guidelines include examples of "hardcore" restrictions on passive sales via the Internet. For example, it is not permissible to automatically redirect customers to distributors in the online customer's home country or to terminate an online sale if the credit card of a customer is registered outside the distributor's home country.

(c) Resale price maintenance

Whilst resale price maintenance ("RPM") remains classified as a "hardcore" restriction, the Commission's new guidelines state that RPM may be exempted from Article 101(1), for example where a supplier introduces a new product or where the parties can demonstrate that the RPM can be expected not only to provide the means but also the incentive to overcome possible free-riding between retailers on pre-sales services and that these services will benefit consumers.

(d) Category management

Guidance on category management agreements is included for the first time and provides an explanation of potential competition issues that such agreements could raise. The guidelines state that in most cases category management agreements will not be problematic.