New European Competition Rules on Vertical Agreements
The Block Exemption Regulation stipulates under which conditions
vertical agreements are exempted from the cartel ban in any case.
If a vertical agreement, like an agreement between a supplier and a
distributor, meets the conditions of the Regulation, it is exempted
from the cartel ban by operation of law. If this is the case, the
arrangements no longer require an individual assessment. Vice
versa, if the arrangements are not included in the block exemption,
they will have to be tested against the individual exemption
criteria. In that case the parties themselves will have to assess
whether the agreements are eligible for the individual
exemption.
The new Regulation introduces some changes with regard to the
conditions of the Block Exemption Regulation. Below, I shall
discuss a selection of important changes.
Market Shares
The greatest change concerns the market shares of the parties.
In order to be eligible for the exemption, the market shares of all
parties involved - both suppliers and buyers - must remain below
30%. However, under the current Regulation the threshold applies
only to the supplier or, in the case of exclusive supply
obligations, only to the buyer.
Interim conclusion:
The tightened market thresholds entail that many agreements will
no longer be exempted by operation of law. For these agreements
parties will from now on have to assess by themselves whether these
are included in the individual exemption and comply with the cartel
ban.
Agreements between Competing Undertakings
Both under the current and under the new Regulation, the
exemption in principle does not apply to vertical agreements
between competing undertakings. The current Regulation contains
three exceptions to this rule. One of these is that the exemption
still applies in the case of a non-reciprocal agreement in which
the buyer has a total annual turnover not exceeding EUR one hundred
million. In the new Regulation this specific exception has been
cancelled, and the application of the exemption to agreements
between competitors is thus restricted.
Interim conclusion:
This change means that a non-reciprocal vertical agreement
between competitors, in which the buyer has a total annual turnover
not exceeding EUR one hundred million, is no longer automatically
eligible for exemption. Such an agreement may still comply with
either of the two other exceptions, or it may be eligible for
individual exemption.
Hardcore Restrictions & Resale
Price Maintenance
In order to be eligible for the exemption, agreements may not
contain so-called 'hardcore restrictions', such as
arrangements about vertical price control ('resale price
maintenance'). The hardcore restrictions remain unchanged in
the new Regulation. However, the Commission discusses vertical
price control extensively in the new Guidelines.
In the new Guidelines the Commission describes how vertical
price control may, under specific circumstances, meet the
conditions of the individual exemption of Article 101(3) of the
TFEU. It may be allowed to use vertical price control in agreements
with distributors as part of the introduction of a new product. The
coordination of prices may guarantee that distributors will make
promotional efforts and vertical price control may also have a
positive effect during short-term price decreases, for example in
franchise systems.
Interim conclusion:
It is doubtful whether the elaborations of the Commission must
be regarded as a relaxation of its policy. After all, also the
current Regulation may include vertical price control in the
individual exemption. Moreover, the Commission has made the
explicit choice to maintain vertical price control as a hardcore
restriction, whereas during the creation of the new Regulation and
Guidelines there has been extensive lobbying in favor of deleting
this hardcore restriction. The policy of the Commission with regard
to vertical price control therefore seems to be
unchanged.
Internet Sales
The new Guidelines specifically deal with sales through the
Internet. Distributors must be free to advertise and sell their
products through the Internet. Just as under the current
Guidelines, online sales are usually regarded as passive. This
means that the allocation of online consumers to certain
distributors is regarded as a hardcore restriction. This
prohibition of customer allocation means that it is not allowed
that distributors are forced to prevent consumers from another
region from being able to visit their website, or that consumers
from another region are automatically being redirected to another
website. Distributors cannot be forced to end transactions if it
appears from the credit card information that consumers are from
another region, and a distributor cannot be compelled to limit the
percentage of internet sales. It is also not allowed to use a price
system in which the prices paid by the distributor for online sales
are higher than those for offline sales, unless the online sales
lead to considerably higher costs for the supplier.
However, restrictions of active online sales may be
exempted under the Bock Exemption Regulation. For example, it is
allowed that distributors are compelled to refrain from online
advertising targeting specific territories of other distributors.
Posting region-bound banners on websites of third parties, for
example, is a form of active sale and may be restricted within a
distribution system. These forms of advertising are specifically
directed to consumers and are a form of active sale, therefore they
may be limited.
In addition, it is important, particularly in the context of a
selective distribution system, that a supplier may impose criteria
of quality on websites. Just like a supplier may set demands for a
physical shop, it may also set demands for the appearance and
presentation of a website. Moreover, a supplier can demand that the
distributor will have at least one physical shop where consumers
can see the products.
Interim conclusion:
Especially when compared to the current Guidelines, the new
Guidelines pay a great deal of attention to online sales. Internet
sales seem to be an important point of attention and the purpose of
the Commission is to stimulate distributors to develop online
activities. As a result, consumers may be reached by distributors
from all over the EU, and they can fully use the internal
market.
Selective Distribution and Resale
Under the current Block Exemption Regulation, restrictions may
be imposed on resale to unauthorized distributors wihtin a
selective distribution system. Under the new Block Exemption
Regulation, these options are limited and a supplier may only
prohibit such resale for territories where the distribution system
is used. So resale is still allowed to the territories where the
supplier does not use a selective distribution
system.
Interim conclusion:
Suppliers got fewer options to prohibit resale. In order to
prevent resale to unauthorized distributors, it may be
recommendable to make the distribution system as much EU-covering
as possible.
Upfront Access Payments & Category
Management Agreements
The new Guidelines also contain an analysis of two specific
vertical restraints that were not discussed separately in the
current Regulation and Guidelines. First, the Commission discusses
upfront access payments. This form of vertical agreements
relates to various variants of payments to distributors by
suppliers in order to get access to the distribution network, or
for example to make use of the means of promotion of the
distributor. In addition, the Commission discusses so-called
category management agreements in which the supplier
becomes responsible for promoting an entire category of products,
rather than his own individual products alone. This may have the
advantage that promotion stimulates the sale of the full category,
as opposed to the promotion of individual products, in which the
increased sale of product A is detrimental to the sale of product B
and the overall sales within the category do not increase. Such a
form of category management may lead to scale advantages,
especially if the supplier has more specific knowledge of the
products than the buyer, and is therefore more able to respond to
the needs of consumers.
Interim conclusion:
It follows from the analysis of the Commission of upfront
access payments and category management that these
two specific vertical restraints are allowed in many cases and can
qualify for exemption.
Final Conclusion
The new Block Exemption Regulation and the new Guidelines entail
a number of changes relevant to practice with regard to the
relationship between suppliers and distributors. The main change is
the tightening of the market share thresholds, which will apply to
both parties. The new regulations will enter into force on 1 June
2010.