Since December 2021, the Distribution Law Center has been publishing a weekly countdown newsletter on the expected changes of the Vertical Block Exemption Regulation (the “VBER”) and the Vertical Guidelines (the “VGL”). Now that the new VBER and VGL have been adopted and enter into force on 1 June 2022, it is time for us to wrap up our DLC countdown. This last countdown provides an overview of the main topics that we discussed during the past weeks and indicates for each of these topics how they found their way in the new VBER and VGL. At the same time, we would like to bring a number of additional changes to your attention. Be sure however to read through to the end of this countdown to find out what new series the Distribution Law Center has in store for you.

PERIOD OF VALIDITY

Before moving on to the different topics, we would like to draw your attention to the period of validity of the new texts. The VBER and VGL will apply for a period of 12 years (i.e., until 31 May 2034). The Commission has chosen a period of validity of 12 years, rather than 10, because in 2034 a new Commission will take office. Please also note that vertical agreements that comply with the previous VBER benefit from a transitional period of 1 year (i.e., until 31 May 2034) to satisfy the conditions of the new VBER.

AGENCY

Our DLC countdown started with the draft new rules on agency, which showed that a stricter regime would apply to agency agreements. The most important developments were (i) the legal test to measure the significance of the risks undertaken by the agent (see, DLC countdown no. 3), (ii) the temporary transfer of ownership (see, no. 4), and (iii) the combination of agency and distribution for so-called dual role agents (see, no. 5).

The new VGL confirm the stricter regime. Going forward, suppliers appointing agents should be aware of the following:

• The new VGL confirm the case law stating that the exception for agency agreements to fall outside the scope of Article 101(1) TFEU must be interpreted narrowly. For example, where the agent negotiates and/or concludes contracts on behalf of a large number of principals, it is less likely that he will qualify as a “genuine agent”.;

• The test to qualify as a genuine agent in a dual role scenario of agent and distributor has become rather burdensome and costly. First, burdensome, because the independent distributor must be genuinely free to enter into the agency agreement and it must be possible to effectively delineate the commercial and financial risks related to the agency. Second, costly, because of a quite expansive reading of the commercial and financial risks linked to the sale of the goods or services covered by the agency agreement, including market-specific investments, must be borne by the principal. With respect to market-specific investments, the principal must reimburse all investments that are required to operate in the relevant market. In other words, only investments exclusively related to the distribution of differentiated products outside the scope of the agency agreement are not covered by this obligation.

To end this section on a positive note, the new VGL do confirm that an agreement will not necessarily be excluded from the exception if the agent acquires the ownership of the goods for a very short period of time while selling them on behalf of the principal.

NON-COMPETE OBLIGATIONS

Moving on from agency, the following DLC countdowns focused on non-compete obligations, either imposed during the term of the distribution agreement (see, no. 6) or post-term (see, no. 7). Based on the draft VGL, the expectation was that the regime would remain largely unchanged. This is now confirmed:

• The definition of non-compete obligations continues to cover two types of obligations: single branding and the 80%-rule.

• Non-compete restrictions must in principle still be limited to five years to benefit from the exemption of the new VBER. However, non-compete obligations that are tacitly renewable beyond a period of five years can as well be exempted, provided that the distributor can effectively switch to a competing supplier. This means that the distributor must be given the opportunity to terminate the agreement within a reasonable time and at a reasonable cost.

• The new VBER exempts post-term non-compete obligations under the same strict and cumulative conditions that applied previously.

HARDCORE RESTRICTIONS (1): RPM

The DLC countdowns continued with the centrepiece of the VBER, namely the hardcore restrictions. After a general introduction (see, no. 8), we addressed resale price maintenance (see, no. 9), dual pricing (see, no. 10), and equivalence (see, no. 11).

New compared to the previous VBER is Article 4(e): the prevention of the effective use of the internet by the distributor or its customers to sell the contract goods or services is now explicitly blacklisted as an illegal territorial or customer restriction.

Otherwise, the list of hardcore restrictions in Article 4 remains largely the same, even if it is now split between exclusive, selective and open distribution. The attentive reader will however note that the actual split is between selective and non-selective distribution, as the lists of hardcore restrictions for exclusive and open distribution are identical.

As regards resale price maintenance (“RPM”), the following additions are worth mentioning:

• A provider of online intermediation services qualifies as a supplier, so that it is prohibited from imposing fixed or minimum sales prices for the transactions it intermediates.

• Imposing minimum advertised prices (“MAP”) is RPM.

• Under a fulfilment contract, where the customer selects the company providing the fulfilment services, the imposition of a resale price by the supplier may restrict the competition for the provision of the fulfilment services and amounts to RPM.

• Price monitoring is not in itself RPM, but increases price transparency and may therefore facilitate it.

• The new VGL provide an additional example of RPM that may lead to efficiencies: a minimum resale price or MAP can be used to prevent a particular distributor from regularly using a product as a loss leader, because this may damage the brand image and lead to a reduction of demand.

As regards online sales, the new regime is more flexible in relation to dual pricing and the previously existing equivalence requirement:

• Dual pricing of products sold online or offline – i.e., charging a different wholesale price for products sold online than for products sold offline – is a hardcore restriction only if it aims to prevent the effective use of the internet by the buyer, not if it is meant to incentivize or reward a difference in investments in online or offline sales channels made by a buyer.

• The same goes for the equivalence requirement. A supplier is henceforth entitled to impose online selective criteria that differ from the offline selective criteria, provided that the distinct online criteria do not aim to prevent the authorized distributors from effectively selling the contract product online.

HARDCORE RESTRICTIONS (2): ACTIVE SALES RESTRICTIONS

Next, the DLC countdowns addressed the conditions to legally impose active sales restrictions toward exclusive territories or customers: no. 12 dealt with the exclusivity condition, no. 13 with the parallel imposition requirement, and no. 14 with the roll-over prohibition.

Before addressing these conditions, it is worth highlighting that the concepts of active and passive sales are now defined in the VBER, and that the definition of active sales confirms that specific forms of online promotion (use of language and top-level domain names) can lead to active sales, because the promotion is specifically targeting certain territories or customers.

The new VBER finetunes the conditions for imposing active sales restrictions to better protect exclusive distributors and their investments, while at the same time allowing more intra-brand competition through shared exclusivity:

• The definition of exclusivity confirms that the exclusivity condition encompasses the possibility of shared exclusivity, now that a supplier may allocate a territory or customers to a maximum of five distributors.

• The requirement of parallel imposition, which is often a challenge in daily practice, is here to stay: the VBER unequivocally stipulates that the supplier must impose the active sales restriction on all its other buyers.

• The new VBER softens the roll-over prohibition. Under the new regime, suppliers are allowed to impose an active sales restriction not only on their buyers, but also on direct customers of the buyers.

DUAL DISTRIBUTION

The DLC countdowns dealing with dual distribution discussed the envisaged extension of the exception to wholesalers and importers (see. no. 15), the introduction of a market share threshold (see, no. 16) and how to deal with information exchanges in a dual distribution set-up (see, no. 17 and no. 18).

The main features of the new regime on dual distribution are as follows:

• Article 2(4)(a) of the new VBER extends the safe harbour for (non-reciprocal) vertical agreements concluded between competitors, as long as the buyer does not compete with the supplier at the upstream level where the buyer buys the contract goods. The upstream level may be the level where the supplier is active as manufacturer, importer or wholesaler.

• Information exchanges in the context of dual distribution are excluded from the safe harbour only if they (i) are not directly related to the implementation of the vertical agreement, or (ii) are not necessary to improve the production or distribution of the contract products, or (iii) fulfill neither of these two conditions. The new VGL (see, paragraphs 99-100) clarify what type of information exchanges are likely or unlikely to fulfil these conditions, and what precautions parties can take if their information exchange does not benefit from the exemption of the new VBER (firewalls).

Vertical agreements relating to the provision of online intermediation services do not benefit from the safe harbour if the provider of the online intermediation services competes on the relevant market for the sale of the intermediated goods or services. Briefly said, hybrid platforms require an individual exemption. Interestingly, the Commission will not prioritize enforcement action in respect of hybrid platforms if a supplier allows its buyers to use its web shop, but does not allow that web shop to be used to offer competing brands of products and the supplier is not otherwise active on the relevant market for the provision of online intermediation services (see, paragraph 109 of the new VGL). This benefits SMEs that have an online presence mainly or exclusively via the website of their supplier and was a suggestion of the Distribution Law Center in its comments on the draft new section on dual distribution.

BETTER PROTECTION FOR SELECTIVE DISTRIBUTION

The DLC countdowns also examined a number of envisaged changes to selective distribution (see, no. 19) and to hybrid distribution systems – i.e., when exclusive and selective distribution systems are combined (see, no. 20).

The Distribution Law Center is pleased to see that the new VBER allows a better protection of authorized distributors when a supplier operates selective distribution in certain territories and exclusive or open distribution in other, for instance because it is gradually rolling out selective distribution in the EU.

In order to protect the authorized distributors against sales to unauthorized distributors in the territory where the supplier operates selective distribution, it may from now onwards restrict active and passive sales by all other distributors and their customers (so not only their direct customers, but all customers) to unauthorized distributors located in that territory. This is a major improvement to enforce the closed nature of a selective distribution system.

E-COMMERCE

As the DLC countdowns on e-commerce were mostly published after the adoption of the new VBER and VGL, they already contain a handy overview of the rules applicable henceforth to restrictions or a ban of sales on online marketplaces (see, no. 22) and bans on price comparison services (see, no. 23).

In summary, suppliers whose products are sold online should bear in mind the following principles:

• The new VGL (see, paragraph 208) provide that restrictions relating to the use of particular online sales channels, such as online marketplaces, may generally benefit from the VBER, provided that they do not constitute a hardcore restriction and prevent the effective use of the internet by the distributors and their customers. This will generally not be the case where the distributors remain free to operate their own online store and may advertise online.

• The Commission is less tolerant when it comes to ban the use of price comparison services as an entire advertising channel. Such ban constitutes a hardcore restriction. By contrast, a ban on the use of particular price comparison services or restrictions on the use of price comparison services based on quality requirements does not amount to an absolute ban and can therefore benefit from the new VBER (again, provided that it does not have as its object the prevention of the effective use of the internet by distributors and their customers).

The above rules apply to vertical agreements that fall within the VBER. When this is not the case (e.g., because the 30% market share threshold is exceeded) it is recommended to carefully consider imposing any of the above restrictions above. The new VGL (see, paragraphs 340-342 and 353-355) can help assessing whether a restriction imposed can benefit from an individual exemption in accordance with Article 101(3) TFEU.

WITHDRAWAL IN INDIVIDUAL CASES

Finally, the power of the Commission or a national competition authority to withdraw the benefit of a block exemption in individual cases – respectively for the EU and the Member State concerned – can be found in the basic regulation for the implementation of Articles 101 and 102 TFEU – i.e., in Article 29 Regulation 1/2003. In the new block exemption regulations (see e.g., the draft horizontal block exemption regulations) the possibility to withdraw the benefit of the block exemption is now incorporated in the block exemption itself. Article 6 of the new VBER foresees the possibility of withdrawal of the block exemption for a highly concentrated market for online intermediation services, where buyers use multiple providers of online intermediation services that apply narrow parity obligations, which would lead to a situation where those buyers are restricted from offering, selling or reselling products to end users under more favorable conditions on their direct sales channels.

WHAT’S NEXT?

This last DLC countdown completes the examination of the differences between the previous and the new VBER regime. The countdown to the new VBER and VGL ends here.

We hope that you enjoyed it as much as we did.

Whilst the countdown ends here, our actual journey for the next 12 years has only just started. Together with you, we look forward to seeing what impact the new rules will have on the daily business of millions of European companies, and what issues or questions will arise going forward.

This impact will be the subject of a new series which the Distribution Law Center will launch in September. Every month, we will address a concrete question originating from the business and explain the applicable rules in a practical way. Therefore, stay tuned more than ever!

THE FINAL REVISED VBER IS PLANNED TO ENTER INTO FORCE ON 1 JUNE 2022.

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WANT TO KNOW MORE? STAY TUNED…
Counting down towards 1 June 2022, we aim to provide you with regular updates and the necessary legal knowhow in order to fully prepare your business for the future. Please also check out the Distribution Law Center platform (www.distributionlawcenter.com) and our LinkedIn page for much more information on the laws governing vertical agreements, covering both competition and commercial law. 27 specialized teams from all over the EEA are working hard to turn the platform into your favourite source of guidance and information.

The post DLC – Vertical in the spotlight: Wrap-up – The new VBER regime in a nutshell (EN) appeared first on Delchev & Partners.

GETTING READY FOR 1 JUNE 2022 AND EUROPEAN COMPETITION RULES CHANGE

WHAT?

Price comparison services, such as price comparison websites or apps, are used as catalogues in which consumers can search for various goods, find out information about them and, in particular, find the cheapest online store. However, price comparison services do not only benefit consumers. Retailers can use them to increase their visibility and secure better sales.

Price comparison services (as opposed to online marketplaces) usually do not offer sale and purchase functionality. Their role is to re-direct customers to the online stores of specific retailers, where consumers can subsequently order goods. Therefore, price comparison services are more of an advertising tool than an online sales channel.
Since price comparison services contain publicly available offers from many online retailers, their existence leads to increased market transparency and has the potential to intensify both intra-brand and inter-brand price competition.

However, suppliers may wish to restrict or prohibit the use of price comparison services by distributors in distribution agreements. For example, the reason may be to protect the brand image, as price comparison services are most focused on the lowest price rather than on the quality of the goods or services. Another reason may be that suppliers seek to protect specific business models based on specialisation or high quality of the goods or services offered rather than on price. Restricting or banning the use of price comparison services may also make selling counterfeit goods more difficult, as it is the price comparison services that make it easier to get such goods to market.

RULES UNTIL 31 MAY 2022

Neither the Vertical Block Exemption Regulation (the “VBER”) nor the Guidelines on Vertical Restraints (the “Vertical Guidelines”) address the issue of price comparison service restrictions.

Therefore, it have been the competition authorities and courts that ruled on the matter.

The German ASICS case concerning branded sports footwear is key in this respect. In its judgment upholding the fine imposed by the competition authority’s decision, the Federal Supreme Court stated that price comparison services (tools) were an important means for consumers to facilitate their online shopping. They made it easy for consumers to choose the cheapest retailer offering the goods. It might be a small independent online store that would not be able to establish itself on the market and whose offer might not even be noticed by consumers without the existence of price comparison services. Thus, the Federal Supreme Court concluded that the ban on the use of price comparison services excluded a number of retailers from competition and, thus, restricted passive sales. Therefore, it was deemed a hardcore restriction, which was prohibited regardless of the market shares of the parties.

THE FUTURE AS OF 1 JUNE 2022?

The European Commission addresses price comparison services extensively in the new Vertical Guidelines. It deals with three basic situations, namely a restriction on the use of price comparison services, a complete ban on the use of price comparison services as an entire online advertising channel and a ban on the use of particular price comparison services.

First, mere restrictions on the use of price comparison services based on the quality requirements imposed on the advertising placed there do not as such constitute a ban on the use of price comparison services. The imposition of such conditions does not have as its object the prevention of the effective use of the internet by the distributor or its customers to sell the contract goods or services to particular territories or customers. It can therefore benefit from the new VBER.

Second, the ban on the use of price comparison services as an entire online advertising channel hinders the distributor from selling to customers who are located outside its area of activity and who wish to make online purchases. It can be imposed both directly and indirectly (e.g., restricting the possibility to provide price information to price comparison services, requiring the supplier’s prior approval to use price comparison services or prohibiting the use of the supplier’s brand on price comparison services). Such a prohibition has the object of preventing the effective use of the internet by the distributor to sell the contract goods or services. This is now a hardcore restriction within the meaning of Article 4(e) of the VBER and therefore is not within the safe harbour of the new VBER.

Third, the European Commission considers that the ban on the use of particular price comparison services does not generally have the object to prevent retailers from making effective use of the internet to sell the contract goods or services to particular territories or customers. Indeed, a retailer may continue to use other price comparison services to increase customer awareness of its online sales activities. If this is the case, the new VBER will apply to such a prohibition. However, if the ban were directed at the most widely used price comparison services and the other price comparison services were de facto not sufficiently effective to attract customers to the retailer’s online store, such a restriction could constitute an anticompetitive agreement. Therefore, it will always be necessary to assess whether a ban on selected price comparison services has as its object the prevention of the effective use of the internet by the distributor or its customers to sell the contract goods or services to particular territories or customers.

Under the VBER, targeting customers through price comparison services will be – under certain conditions – considered a form of active sales (see, DLC countdown no. 21). Therefore, restricting the use of price comparison services targeting customers located in an exclusive territory within an exclusive distribution system is permissible and even necessary to satisfy the condition of parallel imposition (see, DLC countdown no. 13).

In the new Vertical Guidelines, the European Commission also addresses the issue of price comparison services in the context of a purely qualitative selective distribution system to which the prohibition of anticompetitive agreements does not apply (see, DLC countdown no. 19). The European Commission points out that where restrictions on the use of price comparison services are used in a selective distribution agreement, it is first necessary to assess whether the restrictions are an appropriate and proportionate means to preserve quality or to ensure the proper use of the contract goods or services. In this respect, the European Commission notes that via price comparison services, customers merely access the distributor’s online store in relation to which the supplier can already set quality requirements. A prohibition to use price comparison services is therefore unlikely to qualify as a purely qualitative selection criterion.

IN PRACTICE?

As of 1 June 2022, there will be more legal certainty as to the European Commission’s approach to the issue of restrictions of price comparison services. Suppliers will be entitled to set the quality standards that price comparison services must meet. Conversely, they will not be allowed to impose a total ban on the use of price comparison services as an entire online advertising channel. Under certain conditions, it will be possible for them to impose a ban on the use of particular price comparison services, provided that this does not prevent the effective use of the internet by the distributor or its customers to sell the contract goods or services to particular territories or customers.

ASSESSMENT?

Given the increasing importance of online sales, the European Commission’s detailed treatment of price comparison services in the Vertical Guidelines is to be welcomed. This will lead to increased legal certainty for suppliers, who until now have only been able to assume what they can and cannot do.

The classification of the absolute ban on price comparison services as a hardcore restriction is not surprising in view of the judgment of the Federal Supreme Court in ASICS. However, the European Commission’s explicit recognition of the possibility to restrict the use of price comparison services in some ways is appreciated. This is a desirable element of flexibility, as many suppliers have so far taken a more cautious approach and have preferred to avoid restricting price comparison services.

THE FINAL REVISED VBER IS PLANNED TO ENTER INTO FORCE ON 1 JUNE 2022.

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WANT TO KNOW MORE? STAY TUNED…
Counting down towards 1 June 2022, we aim to provide you with regular updates and the necessary legal knowhow in order to fully prepare your business for the future. Please also check out the Distribution Law Center platform (www.distributionlawcenter.com) and our LinkedIn page for much more information on the laws governing vertical agreements, covering both competition and commercial law. 27 specialized teams from all over the EEA are working hard to turn the platform into your favourite source of guidance and information.

The post DLC – Countdown 23 – Vertical in the spotlight: Bans on use of price comparison services (EN) appeared first on Delchev & Partners.

GETTING READY FOR 1 JUNE 2022 AND EUROPEAN COMPETITION RULES CHANGE

WHAT?

An “online marketplace” is an e-commerce site that offers multiple products from many different sellers which connects merchants and potential customers with a view to enabling direct purchases. Over the last decade online marketplaces (such as Amazon and eBay) have become an important sales channel for both suppliers and retailers selling their products online.

Despite the significant benefits that result from online marketplaces in facilitating the ability of retailers to sell their products online and the associated consumer benefits, suppliers of specific products may choose to restrict the freedom of a retailer to use this particular online sales channel – through a marketplace ban – for various reasons. Examples include the protection of brand image, positioning of a brand, the aim of ensuring sufficient support services to the customer or in order to allow the retailer to maintain a direct relationship with customers.

An online marketplace ban should be distinguished from an absolute prohibition on a distributor to sell the contract goods online. The latter is considered to be a restriction by object within the meaning of Article 101(1) of the TFEU if it is not objectively justified.

RULES UNTIL 31 MAY 2022

Article 4(b) of the current VBER, which will expire on the 31 May 2022, prohibits agreements or concerted practices that have as their object the restriction of brick-and-mortar or online sales by a buyer party to the agreement or its customers, in as far as those restrictions relate to the territory into which or the customers to whom the buyer or its customers may sell the contract goods or services.

As regards online sales, paragraph 54 of the current Vertical Guidelines provides that a supplier “may require that its distributors use third party platforms to distribute the contract products only in accordance with the standards and conditions agreed between the supplier and its distributors for the distributors’ use of the internet. For instance, where the distributor’s website is hosted by a third party platform, the supplier may require that customers do not visit the distributor’s website through a site carrying the name or logo of the third party platform ”. With this somewhat opaque language, the Commission indicated that it would block exempt a requirement by the supplier on its buyers to use their own electronic shopwindow rather than to sell the supplier’s products via online marketplaces.

This was confirmed by the European Court of Justice in the Coty case (Case C-230/16). In that case, the Court first confirmed that the qualification of a selective distribution system as purely qualitative – making that it escapes the prohibition of Article 101(1) TFEU – is not lost when a supplier imposes a marketplace ban on its authorised distributors, at least not to the extent that the products concerned are luxury goods and the ban meets with the Metro criteria, meaning a.o. that it must be proportionate to preserve the luxury image of those goods. In addition, irrespective of the nature of the selective distribution system (purely qualitative or quantitative – see, on this distinction, DLC Countdown no. 19), the Court confirmed that a marketplace ban does not amount to a customer or territorial restriction in the sense of Article 4(b) of the current VBER.

THE FUTURE AS OF 1 JUNE 2022?

The new VBER and Vertical Guidelines, entering into force on 1 June 2022, clarify and consolidate the existing practice and case law. First, it is useful to flag that the list of hardcore restrictions (Article 4 (e) new VBER) now includes the “prevention of the effective use of the internet” as a separate hardcore restriction that may be relevant to any distribution system (selective, exclusive or open distribution).

With respect to luxury goods forming part of a purely qualitative selective distribution system, paragraph 150 of the new Vertical Guidelines incorporates Coty and states that a ban on the use of online marketplaces may be proportionate and comply with the Metro criteria so long as it does not indirectly prevent the effective use of the internet for sales to particular territories or customers. It does not do so where the authorised distributors remain free to operate their own online store and to advertise online in order to raise awareness for their online activities. In such circumstances, an online marketplace ban will be proportionate and fall outside of the scope of Article 101(1) TFEU, so that no further analysis under the new VBER is required.

Under the regime of the VBER, paragraph 208 of the new Vertical Guidelines does away with the previously somewhat opaque language and provides that “a direct or indirect ban on the use of online marketplaces” can benefit from the block exemption, provided again it does not run counter to the requirement of Article 4(e) new VBER regarding the effective use of the internet by buyers for the purposes of selling goods or services online. Also here, the Guidelines state that this will generally not be the case where the buyer remains free to operate its own online store and to advertise online.

The application of the new VBER continues to be subject to a double market share limit of 30%. Between paragraphs 338-342, the new Vertical Guidelines provide guidance for the assessment of restrictions on the use of online marketplaces in individual cases, where either or both parties exceed that market share limit.

IN PRACTICE?

The consolidation and clarification of the existing practice and case law in the new Vertical Guidelines bring clarity with regard to the permissibility of online marketplace bans and will surely lead to a more uniform assessment of such restrictions throughout the EU.

ASSESSMENT?

The clarifications in the new Vertical Guidelines on the appropriate assessment that should be undertaken for online marketplace bans, both in- and outside the VBER, are to be welcomed. Outside the VBER, the new Vertical Guidelines now contain guidance in respect of online marketplace bans in the context of purely qualitative selective distribution (so outside Article 101(1) TFEU) and also in situations where the supplier or buyer or both exceed the market share limit of 30%.

THE FINAL REVISED VBER IS PLANNED TO ENTER INTO FORCE ON 1 JUNE 2022.

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WANT TO KNOW MORE? STAY TUNED…
Counting down towards 1 June 2022, we aim to provide you with regular updates and the necessary legal knowhow in order to fully prepare your business for the future. Please also check out the Distribution Law Center platform (www.distributionlawcenter.com) and our LinkedIn page for much more information on the laws governing vertical agreements, covering both competition and commercial law. 27 specialized teams from all over the EEA are working hard to turn the platform into your favourite source of guidance and information.

The post DLC – Countdown 22 – Vertical in the spotlight: E-Commerce online marketplace bans (EN) appeared first on Delchev & Partners.

GETTING READY FOR 1 JUNE 2022 AND EUROPEAN COMPETITION RULES CHANGE

WHAT?

Digitalization and innovation of technology have been a focal point over the last decade in the development of the modern world. Online marketing and sales have become an ever more powerful tool to reach a variety of customers. Accordingly, online promotions have gained more attention compared to 2010, when the current Vertical Block Exemption Regulation (the “VBER”) was introduced. In the draft VBER and Vertical Guidelines, the European Commission has revisited the rules concerning online promotions and added a number of useful clarifications.

NOW?

Classic notions in the world of distribution agreements are those of “active sales” and “passive sales”.

Under Article 4 of the current VBER, the imposition of restrictions on passive sales constitutes a hardcore restriction. As such, restrictions on passive sales may not benefit from the safe harbour of the VBER and are also presumed not to qualify for an individual exemption. The same applies to restrictions of active sales, with limited exemptions. The block exemption regime notably accepts that distributors must refrain from active sales into the territory or to a customer group that is allocated to an exclusive distributor or reserved exclusively for the supplier (see, DLC countdowns no. 12, 13 and 14).

The definition of active sales and passive sales can be found in the current Vertical Guidelines. The definition of active sales refers to a targeted approach towards a particular customer group or territory, whereas passive sales refer to sales in response to unsolicited requests from individual customers without having initiated the sales by means of active targeting of such customers.

According to the current VBER and Vertical Guidelines, where a distributor uses online promotions to sell products, that is considered a type of passive sales. However, the European Commission accepts that sales following online promotions specifically targeted at another distributor’s exclusive territory or customer group are active sales and therefore may be prohibited.

THE FUTURE AS OF 1 JUNE 2022?

The key principles regarding active or passive sales are expected to remain unchanged under the draft VBER and Vertical Guidelines. However, the proposals contain amendments to the definition of active sales and passive sales, including with respect to online promotions.

Importantly, the notions of active and passive sales are likely to be defined in the VBER itself, rather than in the Vertical Guidelines. The new definition of active sales can be found in Article 1(1)(l) of the draft VBER. Active sales mean actively targeting customers by direct communication or through offline or online targeted advertisement and promotions. This includes communication via online media, price comparison tools, as well as any advertisement on search engines targeting customers in specific territories or specific customer groups. Offering language options on a website different than the ones commonly used in the territory by the distributor or offering a website with a domain name corresponding to a territory other than the one in which the distributor is established, also constitute active sales.

This amendment to the definition of active sales clarifies the range of restrictions on online promotions that may benefit from the VBER and be imposed on an exclusive distributor.

Restrictions on passive sales, including online passive sales, will still be blacklisted. The new definition of passive sales can be found in Article 1(1)(m) of the draft VBER. Passive sales mean responding to unsolicited requests from individual customers, including delivery of goods or services to such customers. The new definition of passive sales clarifies that it concerns responding to unsolicited requests without having initiated the sale through advertising actively targeting the customer group or territory. It follows from the definition of active sales that an example of such active targeting would be when a distributor offers language options on its website that are not commonly used in the specific territory or uses a domain name corresponding to the target territory rather than his own territory.

IN PRACTICE?

The rules on restrictions of active and passive sales remain largely unchanged. However, the definitions of active and passive sales have now been inserted in the draft VBER and have been clarified, including when it comes to online promotions. Particularly the definition of active sales has been updated, making it clear that active sales are the catch-all category (all forms of selling that are not passive sales are active sales) and that this category includes certain online sales which previously were not mentioned but have become more important in the last decade.

In order to protect efforts and investments made by an exclusive distributor, the draft VBER will continue to accept a prohibition of active sales into the territory or customer group allocated to an exclusive distributor, or the supplier itself. Compared to the current VBER, this will also entail the online promotions categorized as active sales in the future, i.e., targeting customers in specific territories through price comparison tools or search engines.

Further, the draft VBER is supplemented by more detailed guidelines and examples of active and passive sales in the proposal for the draft Vertical Guidelines.

ASSESSMENT?

In the EU, customer and territorial restrictions are presumed to be hardcore restrictions of competition infringing Article 101(1) TFEU. Given the internal market objective, this approach will stay unchanged under the new VBER, which will elevate the definition of active and passive sales from soft law to hard law and update them to include present day examples of online promotions. This will be useful to avoid discussions on whether certain online promotions are active or passive sales.

THE FINAL REVISED VBER IS PLANNED TO ENTER INTO FORCE ON 1 JUNE 2022.

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WANT TO KNOW MORE? STAY TUNED…
Counting down towards 1 June 2022, we aim to provide you with regular updates and the necessary legal knowhow in order to fully prepare your business for the future. Please also check out the Distribution Law Center platform (www.distributionlawcenter.com) and our LinkedIn page for much more information on the laws governing vertical agreements, covering both competition and commercial law. 27 specialized teams from all over the EEA are working hard to turn the platform into your favourite source of guidance and information.

The post DLC – Countdown 21 – Vertical in the spotlight: E-Commerce online promotions and active sales (EN) appeared first on Delchev & Partners.

GETTING READY FOR 1 JUNE 2022 AND EUROPEAN COMPETITION RULES CHANGE

WHAT?

As explained in prior countdowns (see DLC countdown 12, DLC countdown 13 and DLC countdown 14) the notions of “active sales” (to actively target individual customers) and “passive sales” (to respond to unsolicited requests from individual customers) are pivotal to the world of vertical agreements.

In principle, buyers should be allowed to actively and passively sale as they see fit. This is why under the Vertical Block Exemption Regulation (the “VBER”), restrictions of the territory into which, or the customers groups to whom, the buyer can sell are generally deemed as hardcore restrictions and are prohibited. However, there are limited exceptions to these hardcore restrictions linked to the protection of exclusive and, to a lesser extent, selective distribution systems.

In an exclusive distribution system, the supplier allocates a territory or customer group exclusively to an exclusive distributor who is then protected from competing active sales into the exclusive territory or to the exclusive customer group by the supplier or by other distributors. In a selective distribution system the supplier undertakes to sell the contract products, either directly or indirectly, only to distributors who satisfy certain objective criteria and who cannot resell to third party resellers who are not part of the selective distribution system. Selective distributors are free however to sell to all end-users without limitation.

A supplier can choose the preferred way to distribute its products and this might be via an exclusive distribution system, a selective distribution system, an open distribution system that is non-exclusive/non-selective or any combination of the above (when distributing its products in different territories).

But what happens when the supplier has opted to apply a ‘hybrid’ distribution system, namely one which includes both exclusive as well as selective distributors, depending on the territory or customer group? This countdown addresses the amendments introduced by the new VBER regarding the instances where an active and/or passive sales prohibition may be imposed within ‘hybrid’ distribution systems, as a means to practically facilitate and better protect their co-existence.

NOW?

Under the current VBER regime, an exclusive distributor is protected against active sales, meaning that distributors outside the exclusive territory/customer group to actively pursue sales in the exclusive territory/customer group assigned to the exclusive distributor.

This applies to hybrid distribution systems as well. Whilst selective distributors cannot be restricted as to the customers to whom they sell (Article 4(c) of the VBER), the Vertical Guidelines (Guidelines) confirm in paragraph 56 that a supplier is allowed to prohibit its selective distributors to pursue active sales in territories where the supplier has appointed an exclusive distributor.

The opposite does not apply. Under the VBER and Guidelines, a selective distributor does not enjoy protection against active or passive sales from distributors outside the selective territory, irrespective of whether they are exclusive or unauthorised distributors.

THE FUTURE AS OF 1 JUNE 2022?

When exclusive or non-exclusive and selective distribution systems exist in parallel, the new VBER establishes a framework that protects selective distribution systems from exclusive or non-exclusive distributors, and exclusive distribution systems from selective distributors (reverse protection system).

In particular, draft articles 4(b)(ii) and 4(d)(ii) VBER allows a supplier to protect its selective distribution system in one territory by preventing active and passive sales to unauthorised distributors in that territory by exclusive or non-exclusive distributors located outside that territory. Like before, draft article 4(c)(i) VBER allows the supplier to protect its exclusive distribution system in a given territory against active sales by members of a selective distribution system operating in another territory.

In both cases, there is a pass on possibility meaning that the supplier may require that the exclusive and non-exclusive distributor passes its obligation under 4(b)(ii) and 4(d)(ii) VBER to its customers and that the selective distributor passes on its obligation under 4(c)(i) VBER to its customers that have entered into a distribution agreement with the supplier or with a party that was given distribution rights by the supplier.

IN PRACTICE?

By way of example, a supplier of watches may have established an exclusive distribution system in member state A (appointing exclusive distributor A), whereas in all other member states he operates a selective distribution system. The supplier can oblige exclusive distributor A (as well as all customers of A) not to actively sell to or respond to unsolicited requests by unauthorised distributors in the other member states (new article 4(b)(ii)). That way, selective distributors are protected from sales to unauthorised distributors active in their territories. At the same time, the supplier can impose on all members of its selective distribution systems to not actively sell watches in member state A, thereby protecting A’s exclusive territory (new article 4(c)(i) first hyphen).

Under the current VBER, exclusive distributor A could actively and passively sell to unauthorised distributors located in the selective territory, or to unauthorised distributors in its own territory, for subsequent sales to unauthorised distributors in the selective territory, without the possibility for the supplier to protect selective distributors against such sales.

ASSESSMENT?

The draft article 4(c)(1) mirrors draft Articles 4(b)(ii) and 4(d)(ii), which allows businesses to adopt hybrid systems of distribution across the EU that will respond better to the genuine needs of their businesses.

As exclusive distribution systems were already shielded from active sales, the new articles constitute a major novelty in relation to the protection of selective distribution systems from both active and passive sales coming from exclusive or non-exclusive territories.

All in all, the established reverse protection system reveals the more flexible approach adopted by the Commission that intends to practically facilitate and protect the co-existence of these two distribution systems and their protection from one another, ensuring that choices lawfully made under the block exemption are not undermined as a consequence of the fact that a single distribution system is not implemented across the whole of the EEA.

It remains to see how these provisions will be applied and interact with the remaining amendments regarding active/passive sales. Perhaps the new Guidelines could provide a few examples of the practical implementation of the new framework.

THE FINAL REVISED VBER IS PLANNED TO ENTER INTO FORCE ON 1 JUNE 2022.

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WANT TO KNOW MORE? STAY TUNED…
Counting down towards 1 June 2022, we aim to provide you with regular updates and the necessary legal knowhow in order to fully prepare your business for the future. Please also check out the Distribution Law Center platform (www.distributionlawcenter.com) and our LinkedIn page for much more information on the laws governing vertical agreements, covering both competition and commercial law. 27 specialized teams from all over the EEA are working hard to turn the platform into your favourite source of guidance and information.

The post DLC – Countdown 20 – Vertical in the spotlight: Selective distribution (reverse protection) (EN) appeared first on Delchev & Partners.

GETTING READY FOR 1 JUNE 2022 AND EUROPEAN COMPETITION RULES CHANGE

WHAT?

One of the common types of distribution agreements are selective distribution agreements. In a system of selective distribution, the supplier undertakes to sell the contract goods or services, either directly or indirectly, only to distributors selected on the basis of specified criteria and these distributors undertake not to sell such goods or services to unauthorised distributors within the territory reserved by the supplier to operate that system.

By way of selective distribution, a supplier thus creates a network of authorised distributors. The admission to the network can be subject to purely qualitative criteria only, or additionally to quantitative criteria, which limit the potential number of distributors more directly by, for instance, requiring minimum or maximum sales or fixing the number of distributors.

NOW?

Both purely qualitative selective distribution and quantitative selective distribution are covered by the Vertical Block Exemption Regulation (“VBER”), regardless of the nature of the products and the nature of the selection criteria.

For purely qualitative selective distribution, relying on the VBER may not even be required: if the selective distribution system complies with the so-called Metro criteria laid down by the European Court of Justice, it is generally considered to fall outside Article 101(1) TFEU. For this to be the case, the distributors must be selected only on the basis of objective criteria, required by the nature of the product, which do not put a direct limit on the number of distributors. Only then will the selective distribution system be considered to be purely qualitative of nature.

Under the VBER, the supplier must, in the territory where it operates selective distribution, prohibit its authorised distributors from selling to unauthorised dealers. This belongs to the essence of selective distribution and is not considered to be a hardcore restriction. Besides this, however, the authorised distributors operating at the retail level must be entitled to sell, actively and passively, to all end users in the “selective territory” and also to other members of the network. The latter cross-supplies between the members of the network must be allowed at all times, even between members operating at different levels of trade. Like in other distribution systems, the supplier is entitled to prohibit authorised wholesalers from selling, actively or passively, to end users, and the supplier can impose a location clause on the members of its network, thus making sure that they operate from a given place of establishment. Finally, the Commission imposes an overall equivalence requirement on the criteria that apply to online and offline sales: compared to the latter criteria, the former may not dissuade distributors from using the internet.

The supplier is allowed to impose an active sales restriction on the members of its network outside the selective territory, to territories in which the supplier has appointed an exclusive distributor (Vertical Guidelines, no. 56). Inversely, selective distributors are not protected against active or passive sales by (exclusive) distributors located outside the selective territory into the selective territory.

THE FUTURE AS OF 1 JUNE 2022?

The draft VBER and draft Vertical Guidelines contain some important developments in respect of selective distribution.

The draft VBER expressly distinguishes between hardcore restrictions in three types of distribution systems: exclusive distribution (Article 4(b)), selective distribution (Article (4(c)) and distribution which is neither exclusive or selective (Article 4(d)).

In order to analyse the impact of the list of hardcore restrictions on selective distribution, account must be also be taken of the list of hardcore restrictions for the non-selective distribution. This shows that the draft VBER grants the authorised distributors, which often invest in the supplier’s brand, enhanced protection against sales by unauthorised distributors.

The draft VBER does so in two ways. Firstly, the supplier will be allowed to prohibit sales to unauthorised distributors in the selective territory not only by the authorised distributors themselves, but also by their customers (Article 4(c)(i), second indent). Secondly, the supplier will be allowed to impose a restriction on (exclusive) distributors and/or their customers outside the selective territory to sell actively or passively to unauthorized distributors located inside the selective territory (Article 4(b)(ii) and 4(d)(ii)). This “reverse protection” is separately dealt with in the next DLC countdown 20.

The draft Vertical Guidelines, in their turn, provide more flexibility in defining the online criteria. The Commission indeed no longer imposes an overall equivalence requirement on the criteria that apply to online and offline sales. A supplier will be allowed to have different online criteria, provided that these do not have as their object to prevent the authorised distributors or their customers from effectively having online sales.

IN PRACTICE?

Practitioners have long struggled with the creation of or the transition to a system of selective distribution in the EU, particularly because they have to apply an all or nothing approach. If selective distribution is not immediately applied throughout the EU, which frequently is the case for SMEs, the supplier is currently not allowed to protect its authorised distributors against sales by distributors located outside the selective territory to unauthorised distributors in the selective territory. Imposing a prohibition on such sales currently amount to imposing an illegal customer/territorial restriction on the latter distributors. The draft VBER remedies this and allows the gradual rollout of selective distribution in the EU.

ASSESSMENT?

The upcoming changes of the draft VBER and the Vertical Guidelines are to be welcomed. They incorporate the developments of the case-law since the entry into force of the VBER and, in so doing, they bring selective distribution into the new millennium, where online sales have come to occupy a much more important role. Suppliers will have more flexibility to draft the selective criteria applicable to online sales by authorised distributors, without having to worry about the currently applicable equivalence requirement between online and offline selective criteria.

In addition, the increased protection of authorised distributors against sales of the contract products by unauthorized distributors is to be welcomed. Authorised distributors often invest in a supplier’s brand and are discouraged by sales by unauthorised distributors, leading to a potential unwillingness to keep up such investments. Moreover, the gradual rollout of selective distribution in the EU benefits SMEs.

To end on a note of caution, what is worrying is that the draft Vertical Guidelines, like they do in respect of non-selective distribution, foreshadow that the Commission intends to have more recourse to its possibility to withdraw the benefit of the VBER. For selective distribution, for example, the Commission mentions that the VBER is likely to be withdrawn where the products do not require selective distribution or the applied criteria, such as the requirement to have one or more brick-and-mortar shops. This is a worrying development in view of the safe harbour (and legal certainty) which a block exemption is supposed to offer the market participants.

THE FINAL REVISED VBER IS PLANNED TO ENTER INTO FORCE ON 1 JUNE 2022.

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WANT TO KNOW MORE? STAY TUNED…
Counting down towards 1 June 2022, we aim to provide you with regular updates and the necessary legal knowhow in order to fully prepare your business for the future. Please also check out the Distribution Law Center platform (www.distributionlawcenter.com) and our LinkedIn page for much more information on the laws governing vertical agreements, covering both competition and commercial law. 27 specialized teams from all over the EEA are working hard to turn the platform into your favourite source of guidance and information.

The post DLC – Countdown 19 – Vertical in the spotlight: Selective distribution (General) (EN) appeared first on Delchev & Partners.

GETTING READY FOR 1 JUNE 2022 AND EUROPEAN COMPETITION RULES CHANGE

WHAT?

Dual distribution occurs where a supplier sells goods or services both directly and through independent distributors, thereby competing with these independent distributors on the downstream market. A classic example would be that of a manufacturer of a clothing brand who sells these clothes in his own stores but also relies upon independent retailers to sell the clothes in their stores.

Dual distribution is hardly a new phenomenon. Already in 2010, it was applied by manufacturers for various reasons. To set an example for their independent distributors in so-called “flagship stores”, to offer more choice to the end-customers, etc. Over the past decade, however, dual distribution has become increasingly important due to the significant increase in online sales.

The increased use of dual distribution has led the European Commission to examine whether the existing legal framework is still adapted to the changed market conditions, but it has also prompted stakeholders to point out certain shortcomings of the legal framework. This countdown discusses information exchanges in the context of dual distribution, in particular in view of providers of online intermediation services or third-party platforms.

A provider of online intermediation services runs a hybrid platform when on the one hand it provides online intermediation services, namely the platform, and on the other hand additionally sells goods or services on its own platform in competition with the companies using the platform.

This special competitive relationship between two users of the platform when one user owns the platform may raise horizontal concerns. For example, the European Commission decided in 2019 to initiate (still ongoing) antitrust proceedings against Amazon. The European Commission is concerned with the standard agreements between Amazon and its marketplace sellers, which allow Amazon to use competitively sensitive information about the activities of its competing sellers on its platform.

NOW?

Currently neither the VBER nor the Vertical Guidelines specify if the block exemption covers vertical agreements between a supplier of online intermediation services who also sells goods or services in competition with companies to which it provides such services (hybrid platform) and those companies. Article 2(4), first sentence, VBER states that the exemption does not apply to agreements between competitors.

In the case of a hybrid platform, the supplier of the online intermediation services and the marketplace sellers are competing sellers on the platform.

Therefore, the question is whether the exception of Article 2(4), second sentence, VBER for dual distribution applies as well to the case of hybrid platforms. One difference between a dual distribution scenario and the hybrid platform scenario is that in dual distribution the competing parties use different distribution channels. In contrast, in the case of a hybrid platform, the platform is the only distribution channel used by both the supplier of the platform and its competing sellers on the platform.

THE FUTURE AS OF 1 JUNE 2022?

Article 2(7) of the draft VBER clarifies that the exception of Article 2(4), second sentence, VBER for dual distribution will not apply in a hybrid platform scenario. Therefore, vertical agreements between a supplier of online intermediation services with a hybrid function and companies to which it provides the intermediation services will not benefit from the VBER exemption. The definition of suppliers of online intermediation services (Article 1(1)(d) of the draft VBER) is wide and seems to include for instance manufacturers and dealers that open their own trade platform to other dealers that offer competing goods or services.

IN PRACTICE?

Vertical agreements between a hybrid platform and its users must be assessed on a case-by-case basis, notably by reference to the Vertical Guidelines and the Horizontal Guidelines. This assessment must cover all aspects of the relationship between the providers of online intermediation services that have a hybrid function and the companies to which they provide online intermediation services, including for instance any exchange of information between them.

ASSESSMENT?

Article 2(7) of the draft VBER brings some clarity into the assessment of vertical agreements concluded by a supplier of online intermediation services with companies that sell goods or services on the platform in competition with the supplier of the services.

However, some questions remain. Article 2(7) of the draft VBER provides for the inapplicability of Article 2(4) draft VBER (dual distribution exemption) but does not include Article 2(5) draft VBER (on the exchange of information). This would seem to suggest that providers of online intermediation services can still benefit from the block exemption if they comply with the information exchange rules referred to in Article 2(5) draft VBER. Paragraph 92 of the draft Vertical Guidelines points however in a different direction and suggests that in any event a case-by-case assessment is needed. This possible inconsistency should be ironed out in the final texts.

Paragraph 92 of the draft Vertical Guidelines state that vertical agreements between a hybrid platform and its users must be assessed on a case-by-case basis and refers to Section 8 of the Vertical Guidelines. However, Section 8 of the Vertical Guidelines contains just general guidance for the examination of vertical agreements regarding Article 101 TFEU. The section does not provide any guidance for the special case of vertical agreements between a supplier of online intermediation services with a hybrid function and the companies to which it provides such services. Therefore, it remains unclear how to examine this main area of vertical agreements, in particular for example what kind of information can be exchanged by a hybrid platform and its users.

THE FINAL REVISED VBER IS PLANNED TO ENTER INTO FORCE ON 1 JUNE 2022.

==================================================================================================

WANT TO KNOW MORE? STAY TUNED…
Counting down towards 1 June 2022, we aim to provide you with regular updates and the necessary legal knowhow in order to fully prepare your business for the future. Please also check out the Distribution Law Center platform (www.distributionlawcenter.com) and our LinkedIn page for much more information on the laws governing vertical agreements, covering both competition and commercial law. 27 specialized teams from all over the EEA are working hard to turn the platform into your favourite source of guidance and information.

The post DLC – Countdown 18 – Vertical in the spotlight: Dual distribution information exchange article 2.7.(EN) appeared first on Delchev & Partners.

GETTING READY FOR 1 JUNE 2022 AND EUROPEAN COMPETITION RULES CHANGE

WHAT?

Dual distribution occurs where a supplier sells goods or services both directly and through independent distributors, thereby competing with these independent distributors on the downstream market. A classic example would be that of a manufacturer of a clothing brand who sells these clothes in his own stores but also relies upon independent retailers to sell the clothes in their stores.

Dual distribution is hardly a new phenomenon. Already in 2010, it was applied by manufacturers for various reasons. To set an example for their independent distributors in so-called “flagship stores”, to offer more choice to the end-customers, etc. Over the past decade, however, dual distribution has become increasingly important due to the significant increase in online sales.

The increased use of dual distribution has led the European Commission to examine whether the existing legal framework is still adapted to the changed market conditions, but it has also prompted stakeholders to point out certain shortcomings of the legal framework. This countdown discusses information exchanges in the context of dual distribution.

NOW?

The exchange of information between supplier and buyer is indispensable for the proper implementation of a vertical agreement and such exchange is covered by the VBER if the vertical agreement itself benefits from the safe harbour of the VBER.

Pursuant to Article 2(4), first sentence, VBER, vertical agreements between competitors do not benefit from the safe harbour. Only certain cases of dual distribution do. That is to say, pursuant to Article 2(4), second sentence, non-reciprocal vertical agreements benefit from the block exemption if the supplier is a manufacturer and a distributor of goods, or a provider of services at several levels of trade, whereas the buyer is a distributor, not a manufacturer, or provides its goods and services at the retail level and is not a competitor at the trade level where it purchases the contract services.

Currently the exchange of information in the context of the cases of dual distribution that benefit from the block exemption brings with it quite some legal uncertainty as it is not addressed in the VBER and the Vertical Guidelines. To the extent that it is part of the vertical agreement, it can be within the safe harbour. To the extent that it pertains to the downstream (competitive) level, the VBER does not apply but instead the stricter guidelines on the exchange of information between competitors, which can be found in the Horizontal Guidelines.

THE FUTURE AS OF 1 JUNE 2022?

The draft new VBER states that the exchange of information in dual distribution shall not be exempt if the parties have an aggregate market share that exceeds 10 % in the relevant market at retail level. In this case, the exchange of information is assessed under the Horizontal Guidelines (Article 2(5) draft VBER).

This proposal was not supported by stakeholders. Subsequently the European Commission published a draft new section for the Vertical Guidelines (also available on the DLC website) dealing with information exchange in dual distribution. This draft section is no longer market share based but states that the block exemption applying to dual distribution shall apply to all aspects of the vertical agreement, including any exchange of information between the parties that is necessary to improve the production or distribution of the contract goods or services by the parties.

Concretely the draft section lists several examples of such exchanges, including the following:

• Technical information relating to the contract goods or services;

• Information relating to the supply of the contract goods or services, including information relating to production, inventory, stocks, sales volumes and returns;

• Aggregated information relating to customer purchases of the contract goods or services, customer preferences and customer feedback;

• Information relating to the prices at which the contract goods or services are sold by the supplier to the buyer;

• Information relating to the supplier’s recommended resale prices or maximum resale prices for the contract goods or services and, conditionally, information relating to the prices at which the buyer resells the goods or services;

• Information relating to the marketing of the contract goods or services, including information on new goods or services to be purchased and sold under the vertical agreement, as well as, conditionally, to information on promotional campaigns for the contract goods or services;

• Performance-related information, including aggregated information communicated by the supplier to the buyer relating to the marketing and sales activities of other buyers, as well as information relating to the volume or value of the buyer’s sales relative to the buyer’s sales of competing goods or services.

Conversely, the following information generally shall not fall under the exemption:

• Information relating to the actual future prices at which the supplier or buyer will sell the contract goods or services downstream, unless the exchange is necessary, e.g. to organize a coordinated short-term low price campaign;

• Customer-specific sales data, including non-aggregated information on the value and volume of sales per customer, or information that identifies particular customers, unless the exchange is necessary, e.g. to provide guarantee or after-sales services;

• The exchange of information relating to goods sold by a buyer under its own brand name with a manufacturer of competing branded goods, unless the manufacturer is also the producer of the own-brand goods.

IN PRACTICE?

If the draft VBER applies to the dual distribution scenario and the type of information is listed in the Vertical Guidelines or otherwise necessary to improve the production or distribution of the contract goods or services, the exchange of the information falls under the VBER.

Information exchanges in the context of dual distribution that do not benefit from the exemption must be assessed individually under Article 101 TFEU, taking into account the Horizontal Guidelines. The other provisions of the vertical agreement may nonetheless benefit from the exemption.

The parties to an exchange of information that does not benefit from the exemption may take precautions to minimize the risk that their information exchange will raise horizontal concerns. For example, they may exchange only aggregated sales information or ensure an appropriate delay between the generation of the information and the exchange. Another possible precaution is to use technical or administrative measures, such as information barrier protocols or firewalls, to ensure that buyer information is accessible only to the personnel responsible for the supplier’s upstream activities and not to the personnel responsible for the supplier’s downstream direct sales activity, where the supplier competes with the buyer.

ASSESSMENT?

The adjustment of the topic of exchanges of information in dual distribution is to be welcomed. Although the Distribution Law Center understands that the European Commission has a concern that a dual distribution scenario may lead to “false positives” (i.e. information exchanges that raise significant horizontal concerns, but are nevertheless block exempted), the introduction of an additional market share limit is not an appropriate way to address such concern.

The new test, where the draft VBER would cover exchanges of information necessary to dual distribution, is an improvement, also because examples are given in the draft revised Vertical Guidelines.

Unfortunate is that the European Commission did not publish its proposed wording for the new Article 2(5) draft VBER. It is also to be noted that the draft Vertical Guidelines only contain examples of exchanges of information that may or may not be necessary to dual distribution, but that they do not otherwise contain additional guidance on this condition.

Finally, the broad definition of ‘suppliers of online intermediation services’ may have the unwanted consequence that the distribution agreements between a supplier that opens up its platform to its buyers at the request of the latter (for example because some of them do not have the resources to start their own web shop) will no longer be covered by the block exemption.

THE FINAL REVISED VBER IS PLANNED TO ENTER INTO FORCE ON 1 JUNE 2022.

==================================================================================================

WANT TO KNOW MORE? STAY TUNED…
Counting down towards 1 June 2022, we aim to provide you with regular updates and the necessary legal knowhow in order to fully prepare your business for the future. Please also check out the Distribution Law Center platform (www.distributionlawcenter.com) and our LinkedIn page for much more information on the laws governing vertical agreements, covering both competition and commercial law. 27 specialized teams from all over the EEA are working hard to turn the platform into your favourite source of guidance and information.

The post DLC – Countdown 17 – Vertical in the spotlight: Dual distribution information exchange (EN) appeared first on Delchev & Partners.

GETTING READY FOR 1 JUNE 2022 AND EUROPEAN COMPETITION RULES CHANGE

WHAT?

Dual distribution occurs where a supplier sells goods or services both directly and through independent distributors, thereby competing with these independent distributors on the downstream market. A classic example would be that of a manufacturer of a clothing brand who sells these clothes in his own stores but also relies upon independent retailers to sell the clothes in their stores.

Dual distribution is hardly a new phenomenon. Already in 2010, it was applied by manufacturers for various reasons. To set an example for their independent distributors in so-called “flagship stores”, to offer more choice to the end-customers, etc. Over the past decade, however, dual distribution has become increasingly important due to the significant increase in online sales.

The increased use of dual distribution has led the European Commission to examine whether the existing legal framework is still adapted to the changed market conditions, but it has also prompted stakeholders to point out certain shortcomings of the legal framework. This countdown discusses the specific market share limit for dual distribution as introduced by the draft revised VBER published in July 2021.

NOW?

The current Vertical Block Exemption Regulation (the “VBER”) excludes vertical agreements entered into between competitors from the block exemption, but specifically provides in Article 2(4) that dual distribution agreements are covered by the safe harbour for vertical agreements.

The general market share limit of 30% stipulated in Article 3(1) of the VBER also applies to dual distribution agreements.

THE FUTURE AS OF 1 JUNE 2022?

With the aim of narrowing down the safe harbour for dual distribution arrangements, the European Commission proposed in July 2021 to exclude all information exchanges from the benefit of the block exemption for dual distribution, unless the parties’ aggregate retail market share is below 10%. When this market share limit is exceeded, any exchange of information between the parties to a dual distribution arrangement would have to be assessed under the rules applicable to horizontal agreements (Articles 2(4) and 2(5) of the draft revised VBER). In other words, in addition to the general market share limit of 30% a new 10% retail market share limit would be introduced for information exchanges.

The European Commission’s proposal to introduce this additional 10% limit was heavily criticized.

In the Distribution Law Center’s observations on the draft revised VBER and Vertical Guidelines in the context of the European Commission’s public consultation it is pointed out that the choice of a limit of 10% with reference to the De Minimis Notice is remarkable in a block exemption context. Furthermore, one would have expected to find here at least the 15% safe harbour limit applicable to joint commercialization agreements pursuant to the Horizontal Guidelines (see paragraphs 240-241).

The Distribution Law Center further observed that the introduction of a market share limit on the downstream retail market is at odds with the regime currently in place, where the buyer’s market share in relation to the 30% market share limit is measured on the purchasing market and not on the downstream market. The arguments for this approach are equally applicable in the context of dual distribution. Defining the relevant retail market and measuring retail market shares correctly is notoriously complicated in practice. It requires considerable fact finding and on retail markets with a
narrow geographic scope (local or regional) market shares might be subject to considerable fluctuations that are outside the control of the parties (the opening or closure of one additional competing retail store may bring the parties above or below the threshold overnight).

Additionally, the Distribution Law Center observed that, in order to measure the retail market share correctly, it is necessary to include not only the supplier’s products, but also all competing products. In order to assess its legal position under the block exemption, the supplier would therefore need access to up-to-date and detailed information on the performance of its buyers in terms of competing products. It is the Distribution Law Center’s view that this could trigger a requirement for information exchanges which the current drafts may consider anti-competitive.

For the above reasons, the Distribution Law Center recommended that the dual distribution regime should not be dependent on any market share limit and in any event not on one that is so difficult to define as that pertaining to the retail market. In addition, many stakeholders requested the European Commission to provide more detailed guidance on the types of information that can be exchanged in a dual distribution relationship.

In response to this feedback, on 4 February 2022, the European Commission published a draft new section (also available on the DLC website) to be included in the revised Vertical Guidelines dealing with information exchange in dual distribution. Paragraph 9 of the draft new section states that “if the conditions of Article 2(4), points (a) and (b) of the Regulation are fulfilled, the exemption provided for in Article 2(1) of the Regulation applies to all aspects of the vertical agreement, including any exchange of information between the parties that is necessary to improve the production or distribution of the contract goods or services”.

It is the understanding of the Distribution Law Center that this new language implicitly eliminates the market share limit of 10% from the draft VBER. The new section indeed also states that the revised VBER would include a provision stating that the block exemption generally does not apply “to the exchange of information between the supplier and the buyer that is not necessary to improve the production or distribution of the contract goods or services by the parties”, thus apparently doing away with the 10% market limit as originally foreseen.

IN PRACTICE?

The European Commission’s initial proposal to block exempt information exchanges between a supplier and a distributor in a dual distribution arrangement on condition that the parties’ market share is less than 10% seems to have been abandoned. It has been replaced by a carve out from the draft revised VBER of exchanges of information that are not necessary to improve the production or distribution of the contract goods or services.

ASSESSMENT?

The adjustment of the draft VBER on the topic of exchanges of information in dual distribution is to be welcomed. Although the Distribution Law Center understands that the European Commission has a concern that a dual distribution scenario may lead to “false positives” (i.e. information exchanges that raise significant horizontal concerns, but are nevertheless block exempted), the introduction of an additional market share limit is not an appropriate way to address such concern. The new test, where the draft VBER would cover exchanges of information necessary to dual distribution, is an improvement, also because examples are given in the draft revised Vertical Guidelines.

THE FINAL REVISED VBER IS PLANNED TO ENTER INTO FORCE ON 1 JUNE 2022.

==================================================================================================

WANT TO KNOW MORE? STAY TUNED…
Counting down towards 1 June 2022, we aim to provide you with regular updates and the necessary legal knowhow in order to fully prepare your business for the future. Please also check out the Distribution Law Center platform (www.distributionlawcenter.com) and our LinkedIn page for much more information on the laws governing vertical agreements, covering both competition and commercial law. 27 specialized teams from all over the EEA are working hard to turn the platform into your favourite source of guidance and information.

The post DLC – Countdown 16 – Vertical in the spotlight: Dual distribution (market share threshold) (EN) appeared first on Delchev & Partners.

GETTING READY FOR 1 JUNE 2022 AND EUROPEAN COMPETITION RULES CHANGE

WHAT?

Dual distribution occurs where a supplier sells goods or services both directly and through independent distributors, thereby competing with these independent distributors on the downstream market. A classic example would be that of a manufacturer of a clothing brand who sells these clothes in his own stores but also relies upon independent retailers to sell the clothes in their stores.

Dual distribution is hardly a new phenomenon. Already in 2010, it was applied by manufacturers for various reasons. To set an example for their independent distributors in so-called “flagship stores”, to offer more choice to the end-customers, etc. Over the past decade, however, dual distribution has become increasingly important due to the significant increase in online sales.

The increased use of dual distribution has led the European Commission to examine whether the existing legal framework is still adapted to the changed market conditions, but it has also prompted stakeholders to point out certain shortcomings of the legal framework. This countdown discusses the extension of the dual distribution exception to wholesalers and importers. Countdown no. 16 will focus on the specific market share threshold for dual distribution that was introduced in the draft texts published in July 2021. Finally, countdowns no. 17 and 18 will elaborate on information exchange in the context of dual distribution.

NOW?

The current Vertical Block Exemption Regulation (the “VBER”) applies to vertical agreements, which are agreements or concerted practices entered into between two or more undertakings which operate, for the purposes of the agreement or concerted practice, at a different level of the production or distribution chain (Article 1(a) VBER).

Consequently, Article 2(4) VBER stipulates that the block exemption does not apply to vertical agreements entered into between competing undertakings. However, an exception is made for dual distribution “where competing undertakings enter into a non-reciprocal vertical agreement and

a) the supplier is a manufacturer and a distributor of goods, while the buyer is a distributor and not a competing undertaking at the manufacturing level; or
b) the supplier is a provider of services at several levels of trade, while the buyer provides its goods or services at the retail level of trade where it purchases the contract services.”

Thus, under the current regime, the exception does not apply to all forms of dual distribution. The exception of Article 2(4)(a) VBER only applies to situations where the supplier is both a manufacturer and a distributor of goods. Consequently, importers and wholesalers who are not manufacturers cannot benefit from the block exemption when they compete with their independent distributors on the downstream market.

Smaller market players in particular are disadvantaged by this rule. Vertical integration is easier to achieve for market players with greater financial resources. Smaller manufacturers, on the other hand, will be more inclined to use independent importers and wholesalers in order to spread their financial risk. This leads in practice to the unequal treatment of similar vertical agreements. Within the same distribution network, the VBER will apply to some vertical agreements and not to others, even if these agreements contain the same contractual conditions.

Let’s make this practical with an example. Suppose a Finnish car manufacturer wants to distribute its models in the Netherlands and Spain. In Spain, the manufacturer has a subsidiary (importer A) which will import the cars. In the Netherlands, on the other hand, the manufacturer will use an independent importer (importer B). Importers A and B have each set up a selective distribution network. If both importers A and B are also active at the retail level (for instance because they sell directly to larger end-customers or have some dealerships of their own), only the selective distribution network of importer A (because it is an economic unit with the manufacturer) will benefit from the block exemption. The same distribution agreements of importer B, on the other hand, are not covered. On the other hand, if importer B would refrain from direct selling (which paradoxically restricts supply and competition), its selective distribution agreements would be covered by the block exemption.

THE FUTURE AS OF 1 JUNE 2022?

Because of the above-mentioned problems, the draft VBER now stipulates in Article 2(4)(a) that the exemption applies to non-reciprocal vertical agreements between competing undertakings where the supplier is a manufacturer, wholesaler, or importer and a distributor of goods, while the buyer is a distributor and not a competing undertaking at the manufacturing, wholesale or import level. Thus, the exception that the VBER does not apply to vertical agreements entered into by competing undertakings is extended to wholesalers and importers.

IN PRACTICE?

Since the buyer must not be a competing undertaking at the production, wholesale or import level, the parties are only allowed to compete at the retail level. As a consequence, a manufacturer which is also an integrated importer/wholesaler and which, for example, appoints an independent importer/wholesaler in another country, cannot benefit from the exemption for that appointment. On the other hand, the distribution agreements between the independent importer/wholesaler and the independent dealers with whom the wholesaler competes would be covered.

ASSESSMENT?

The European Commission has addressed the request of stakeholders to extend the scope of the exception Article 2(4)(a) VBER to importers and wholesalers (for their downstream agreements). This extension is definitely an applaudable change which, to a certain extent, reduces the unequal treatment of similar vertical agreements, but it becomes clear in the above example that the European Commission has not provided a conclusive solution. Still not all vertical agreements within the same distribution network will be able to benefit from the legal certainty of the block exemption.

THE FINAL REVISED VBER IS PLANNED TO ENTER INTO FORCE ON 1 JUNE 2022.

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WANT TO KNOW MORE? STAY TUNED…
Counting down towards 1 June 2022, we aim to provide you with regular updates and the necessary legal knowhow in order to fully prepare your business for the future. Please also check out the Distribution Law Center platform (www.distributionlawcenter.com) and our LinkedIn page for much more information on the laws governing vertical agreements, covering both competition and commercial law. 27 specialized teams from all over the EEA are working hard to turn the platform into your favourite source of guidance and information.

The post DLC – Countdown 15 – Vertical in the spotlight: Dual distribution (Extension of exception to wholesalers and importers) (EN) appeared first on Delchev & Partners.