The European Commission has launched a formal consultation on the EU rules applicable to distribution agreements. Its proposals contain mixed messages, in particular for consumer product producers and retailers. Although the block exemption will no longer be available for distributors with a large market share, there is welcome new guidance on common commercial practices such as up-front access payments, category management and resale price maintenance. There is also further clarification on online distribution. The deadline for comments is 28 September
The European Commission has launched a formal consultation on the EU rules applicable to distribution agreements. The key legislation expires on 31 May 2010 and the intention appears to be to adopt the new rules before the end of this year. A review of these rules has been under way informally for some time now, both within the Commission and in consultation with member state competition authorities, and has now been formally opened to all interested parties. The proposals apply to all business sectors except for motor vehicles, the rules for which are the subject of a separate review.
These proposals are of importance to both suppliers and retailers and affect both physical and online distribution. Although the block exemption will no longer be available for distributors with a large market share, there is welcome new guidance on common commercial practices such as up-front access payments, category management and resale price maintenance. There is also further clarification on online distribution.
The current legal framework consists of the vertical restraints block exemption regulation (VRBE) and related guidelines. The VRBE exempts a wide range of distribution agreements from the prohibition on restrictive agreements set out in article 81(1) of the EC Treaty, provided that certain conditions are satisfied. In particular, the relevant market share must not exceed 30 per cent and the agreement cannot include certain ‘hard core’ restrictions. The guidelines set out the Commission’s interpretation of the VRBE and provide its views on how to assess whether distribution agreements that fall outside the VRBE’s scope infringe article 81(1) and, if so, whether they should benefit from exemption under article 81(3).
The Commission considers that the current economic effects-based rules, introduced in 1999, work well and sees no need for major change. It has therefore put out for consultation a revised VRBE and guidelines that would not bring radical change to the existing regime. It proposes very limited changes to the VRBE and focuses more attention on clarifying and developing certain aspects of the guidelines. The most important proposed changes and additions are considered below.
Buyer power and the 30 per cent market share threshold
The most important substantive change proposed to the VRBE reflects the Commission’s concern at the increased buyer power of large retailers such as supermarkets and other big distribution chains. It concerns the 30 per cent market share threshold, which at present normally applies only to the supplier’s market share on the market on which it sells. If there is an exclusive buyer for the whole of the Community, this threshold is instead applied to the buyer’s share of its purchase market.
In future the market shares of both supplier and buyer would be required not to exceed 30 per cent ‘on any of the relevant markets affected by the agreement’ for the block exemption to apply. The proposed new guidelines interpret this as referring to the supplier’s share on the market where it supplies the buyer, and the buyer’s share on the market where it resells. In other words, it appears to be the share of the downstream market that will be relevant in each case. This is the first of the two main topics on which the Commission seeks views.
‘Hard core’ restrictions and efficiencies
‘Hard core’ restrictions are those considered so serious that their presence in an agreement prevents the agreement from benefiting from exemption under the VRBE. In addition, if an agreement is assessed individually, outside the scope of the block exemption, the current guidelines state presumptions that such restrictions infringe article 81(1) and cannot benefit from exemption under article 81(3). These presumptions remain in the revised guidelines, but there is noticeably more emphasis on the possibility of arguing that article 81(3) may apply even to hard core restrictions if it can be shown that they generate efficiencies.
The most striking example of this is the new text setting out the circumstances in which fixed or minimum resale price maintenance may be exempted, a possibility currently not even considered in the guidelines. Clearly inspired by the debate that followed the US Supreme Court’s softening of its approach to such restrictions in 2007, the guidelines, while still listing the possible negative effects, also mention a number of possible efficiencies that can be brought about by such policies. These include inducing distributors to invest effort in introducing a new product or brand, enabling a coordinated short-term low price campaign (though if it lasts only a few weeks this may not raise competition issues at all) and preventing damaging use of a particular brand as a loss leader.
Some of the most controversial issues that have arisen under the current regime concern the extent to which suppliers may limit the internet sales activities of their distributors. This is the second main topic on which the Commission seeks interested parties’ views and it overlaps with the broader ongoing debate on online commerce in the EU. Announcing this competitionfocused consultation, the Commission states that it seeks to strike a balance between allowing consumers to take advantage of cross-border purchasing and protecting distributors who invest in marketing and promotion activities from other distributors who may ‘free-ride’ on those efforts.
The guidelines include significant new guidance in this area, mainly in the form of interpretation of some of the hard core restrictions listed in the VRBE. For example, if territories or customer groups are exclusively allocated to different distributors, restrictions on ‘active’ sales (in which the distributor actively approaches individual customers) are permitted but restrictions on ‘passive’ sales (in which the distributor responds to unsolicited requests from individual customers) are treated as hard core. It is important, particularly for suppliers of branded goods, to know what restrictions, which they may want to place on online selling by their distributors, will be regarded as restrictions on passive sales. The proposed guidelines include as examples of such restrictions those requiring distributors:
- to prevent customers in another territory from viewing their website or automatically to reroute such customers;
- to terminate internet transactions if credit card details reveal an address outside the distributor’s territory;
- to limit the proportion of overall sales made over the internet (though a minimum value or volume of noninternet sales may be imposed); or
- to pay a higher price for products intended to be sold online.
However, suppliers may impose quality standards for internet selling and those using selective distribution may require distributors to have a physical shop or showroom before engaging in online distribution.
Other proposed changes
Other proposed changes to the VRBE include deletion of the existing exemption where a buyer with a turnover of no more than €100m makes a non-reciprocal agreement with a competitor. There is also clarification that, in a selective distribution system, restrictions on sales to non-authorised distributors will not be treated as hard core only if they apply to a territory where that system operates.
The guidelines have been substantially revised, though many of the changes consist either of updates to reflect more recent European court case law, as is the case of the section on agency, or clarification of existing enforcement policy.
There are also some completely new sections, including those setting out how the Commission will assess agreements for ‘up-front access payments’ and ‘category management’ agreements. Up-front access payments are fixed fees that suppliers pay to distributors for services such as provision of shelf space for the supplier’s product or access to the distributor’s promotion campaigns and in principle these are exempted by the VRBE. Even when this is not the case, the Commission recognises that such arrangements can contribute to more efficient allocation of shelf space for new products and to preventing suppliers from free-riding on distributors’ promotional efforts. However, the Commission refers on the other hand to the risks of anti-competitive foreclosure of other distributors or suppliers or collusion between distributors. Similarly, category management agreements, under which a distributor puts a leading supplier in charge of its marketing of a particular product category, are in principle exempted by the VRBE. When this does not apply, the possible benefits, in particular in terms of economies of scale, and the risks of anti-competitive foreclosure of other suppliers and possible collusion between suppliers or distributors need to be considered.
The Commission has requested comments on its proposals by 28 September. Once it has reviewed the submissions that it receives following this consultation, and taken into account the views of the member states and their competition authorities, it will adopt final versions of the revised VRBE and guidelines. The existing VRBE expires on 31 May 2010 and its replacement needs to be in place within a few months if business is to be in a position to plan a transition strategy to adapt to any changes.
In addition, imminent institutional changes bring some urgency to the process. The officials responsible for the texts presumably hope to be able to finalise them soon enough for them to be adopted by the current Commission before it leaves office. The date when the new Commission will take over remains unclear because of the continuing uncertainty over the fate of the Lisbon Treaty, but to be safe the texts would need to be adopted before the end of October.
This creates a very tight timetable. There has clearly already been significant consultation with member state competition agencies and it is probably hoped that this, combined with the fact that the changes proposed to the regime are relatively minor, will allow such rapid adoption.
This process will determine EU distribution rules until June 2020, so it is very much in the interests of business to contribute to this debate, to ensure that the outcome matches their needs as closely as possible.