Antitrust Alert: European Commission Adopts New Regulation and Guidance for Distribution Agreements
On 20 April 2010, the European Commission ("Commission") adopted a new Regulation and Guidelines on vertical restraints. "Vertical restraints" are restraints of trade in agreements between producers and distributors and similar situations where the parties to the agreement are active on different levels of the value chain. In 1999, the Commission passed a Regulation that listed the conditions under which vertical restrains of trade are exempt from the EU prohibition on anticompetitive agreements (Article 101(1) of the Treaty on the Functioning of the European Union, "TFEU", formerly known as Article 81(1) of the EC Treaty). The 1999 Regulation will expire on May 31, 2010. The new Regulation and Guidelines will replace the 1999 Regulation and the current Guidelines on 1 June.
Among the many changes the new Regulation and Guidelines will bring about for EU supply and distribution agreements, key novelties relate to:
- market share thresholds necessary to obtain a "safe harbor" exemption
- selective distribution networks
- Internet sales, and
- the efficiency defense.
Additional Market Share Threshold
As did the 1999 Regulation, the new Regulation provides a "safe harbor" for vertical restraints, if the market share of the supplier does not exceed 30% in the market in which it sells the contract goods or services. For this "safe harbor" to apply, the new Regulation also requires that the market share of the buyer not exceed 30% in the "relevant" market.
Following the Commission’s publication of a draft version of the new Regulation in 1999, the definition of "relevant" buyer market was fiercely debated. Based on the 2009 draft, the market share of the buyer would have had to be calculated in relation to "any of the relevant markets affected by the agreement." Business and the legal community raised the concern that this provision would have resulted in a significant loss of legal certainty and would have been inconsistent with other EU instruments. The final Regulation relates the relevant market share of the buyer to the market "on which it purchases the contract goods or services" (Article 3(1)).
This market share test will suffice to ensure that the Commission achieves its objective of not applying the "safe harbor" to restrictions of competition resulting from buyer power, while maintaining an adequate level of legal certainty for the businesses involved.
A distribution system is "selective" if (i) the supplier selects its distributors on the basis of specified criteria and (ii) the distributors undertake not to re-sell to unauthorized distributors. The 1999 Regulation allowed suppliers that established a selective distribution system to prevent the members of this network from selling to any "unauthorized distributor" across the EU. Under the new Regulation, suppliers will be able to prevent the members of a selective distribution network from selling to unauthorized distributors only "within the territory reserved by the supplier to operate that system" (Article 4(b)), i.e. the territory "where the system is currently operated or where the supplier does not yet sell the contract products" (Guidelines, paragraph 55).
This new rule may have the effect of chilling the suppliers’ ability to establish a selective distribution system in certain EU countries while using other forms of distribution (for instance exclusive distribution) in other EU countries.
Apart from the introduction of the additional market share threshold and the revised provision on selective distribution, the new Regulation does not contain other significant changes compared to the 1999 Regulation. By contrast, the new Guidelines contain a great number of adjustments and changes to the rules for how vertical restraints need to be assessed, from the Commission’s perspective, in light of Article 101 TFEU. These changes relate to Internet sales, agency agreements, resale price maintenance, category management, and many other issues that distribution agreements frequently raise. The Guidelines are legally binding only on the Commission but heavily influence how national courts and antitrust agencies apply Article 101 TFEU in the 27 EU member states.
With regard to Internet sales, the new Guidelines strike a compromise between the opposing interests of on-line commercial platforms and luxury goods producers. On the one hand, they confirm that an outright prohibition to sell or advertise a product over the Internet is a hardcore restraint that would deprive the agreement of the safe harbor granted by the Regulation (Guidelines, paragraph 52). Similarly, they clarify that restrictions on how a distributor can sell through the Internet are hardcore restraints if they limit the distributor’s ability to make "passive sales" (i.e. unsolicited sales). The following examples are provided of Internet sales restrictions that are considered hardcore: (i) requiring the distributor to make its website inaccessible, or transactions through its website impossible, to customers depending on their place of residence; (ii) requiring a distributor to limit the proportion of overall sales made over the internet (without excluding, however, the possibility for the supplier to require the buyer to sell at least a certain absolute amount, in value or volume, of the products off-line to ensure an efficient operation of its brick and mortar shop); (iii) 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 (Guidelines, paragraph 50).
On the other hand, the Guidelines state that an outright ban on Internet sales may be objectively justified in exceptional circumstances (such as when necessary to align on a public ban on selling dangerous substances to certain customers for reasons of safety or health), and that undertakings have always the possibility to plead an "efficiency defence" of Internet sales hardcore restrictions (Guidelines, paragraph 60). For instance, requiring a distributor to pay a higher price for products intended to be resold by the distributor on-line than for products intended to be resold off-line may be justified if the sales on-line lead to substantially higher costs for the manufacturer than sales made off-line (Guidelines, paragraph 64).
Finally and most importantly, the Guidelines clarify that a supplier may impose quality standards for the use of an Internet site and, in particular, "require its distributors to have one or more brick and mortar shops or showrooms as a condition for becoming a member of its distribution system" (Guidelines, paragraph 54). The quality standards, however, must be proportionate, that is, they should be "overall equivalent to the criteria imposed for the sales from the brick and mortar shop" and should not consist of obligations that "dissuade appointed dealers from using the internet to reach more and different customers" (Guidelines, paragraph 56).
The revised Regulation and Guidelines will have a significant impact on the distribution sector and business in general in the EU. Suppliers and distributors, therefore, need to comply with the new Regulation only by 31 May 2011 but need to review and assess their distribution arrangements affecting the EU promptly to ensure timely legal compliance with the new and relatively detailed provisions of this new antitrust system for the supply of products in and to the EU.
For more information, please contact your principal Jones Day representative or either of the lawyers listed below.
Stefano Macchi di Cellere
Milan / London
+39.02.7645.4001 / +44.20.7039.5959
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