European Union: New Block Exemptions For Vertical Agreements Bring Stricter Rules For Distributors With Market Power

This article was originally published in the schoenherr roadmap`10 - if you would like to receive a complimentary copy of this publication, please visit: http://www.schoenherr.eu/roadmap.

Several block exemption regulations (BER) issued by the European Commission (the Commission) under Art 81(3) EC will expire in 2010. This applies in particular to the BER on vertical agreements and the BER on agreements in the motor vehicle sector. The Commission recently presented draft revised rules. In principle, the Commission intends to prolong the established principles. However, the draft also provides for a few significant changes, in particular for distributors with market power.

The prohibition on restraints of competition, as set forth in Art 81(1) EC, applies not only to agreements concluded between competitors but also to agreements between undertakings operating on different levels of production or distribution. Pursuant to Art 81(3) EC, anti-competitive agreements are exempted from the prohibition if, in short, they produce efficiencies that countervail the negative effects on consumers. Basically, it is up to undertakings to self-assess whether their agreements meet the requirements for an exemption. However, to increase legal certainty, the Commission is empowered to adopt regulations which declare certain categories of agreements block exempted from the prohibition. In practice, the most important of these BER is the one on vertical agreements1 (BER Vertical), which covers, for instance, the widely used exclusive distribution, as well as industrial supply agreements. For the motor vehicle sector, a specific vertical BER exists (BER Motor Vehicles). These important BERs will expire on 31 May 2010.

New Block Exemption Regulation For Vertical Agreements

The current BER Vertical exempts more or less all types of vertical agreements from the prohibition under Art 81(1) EC, provided that: (i) the market share of the supplier does not exceed 30%, (ii) the agreement does not contain any hard-core restrictions (i.e. resale price maintenance, market or customer sharing) and (iii) no other BER (such as the BER Motor Vehicles) is applicable. Detailed explanations on the BER Vertical and guidelines concerning situations where the BER is not applicable may be taken from the Commission's Guidelines on Vertical Restraints (OJ 2000 C 291/1).

With a view to the upcoming expiry of the BER, the Commission issued both a renewed draft BER for vertical agreements and revised draft Guidelines for consultation. While the Commission does not propose to fundamentally change the current rules, the revision aims to provide answers to market developments over the last 10 years. The Commission has identified the increased market power of big retailers and the evolution of online sales as the most crucial developments2.

No Safe Harbour For Distributors With Market Power

The Commission plans to limit the scope of the BER Vertical by introducing a second market share threshold. As of 1 July 2010, the safe harbour shall not apply to distributors that enjoy a certain degree of market power. In the future, all agreements where either the seller or the buyer have a market share of 30% or more will fall outside the BER and will have to be assessed individually for their permissibility under competition rules. According to the Draft BER Vertical, the relevant market share of the buyer is its share of any downstream market in which it (re)sells the contract goods or services3.

The restricted scope of the new BER is likely to have significant effects in smaller EU member states, such as Austria or most CEE countries. As retail markets are usually defined to be national in geographic scope, it is quite common that retailers are found to have a market share in excess of 30% there (a threshold which is much more difficult to pass e.g. in France or Germany). For example, under the new regime, exclusivity clauses which protect the distributor are more likely to fall outside the BER. As the new BER does not provide for any interim period, large retailers are well advised to verify in due course whether this might have a negative impact on their existing supply contracts.

Online Sales

As to online sales, the underlying principle remains unchanged, i.e. "every distributor must be free to use the internet to advertise or to sell products"4. At the same time, certain restrictions on online sales may enable consumers to benefit from better services. This is particularly true if such restrictions aim at preventing distributors from taking unfair advantage of marketing or brand promotion undertaken by others (free riding).

The BER Vertical has always allowed certain restrictions of sales made as a result of active marketing (active sales), whereas sales made as a result of unsolicited requests from consumers (passive sales) must not be restricted under any circumstances. The Commission's draft refines the distinction between active and passive sales. It is proposed that sales resulting from purchase orders over the internet be deemed as "passive" and thus not allowed to be restricted. Hence, restrictions requiring, for instance, a distributor to reroute online customers located in certain territories to another distributor's website will (continue to) constitute an illicit hard-core restriction.

Resale Price Maintenance

Under the Draft Guidelines, the Commission intends to provide (for the first time) guidance on resale price maintenance (RPM), which is widely considered to be per se prohibited. While RPM is still considered to be presumptively in breach of the cartel prohibition, examples are given when an RPM obligation might meet the criteria for an individual exemption from Art 81(1) EC, e.g. in the context of promotional activities or low price campaigns.

Vertical Agreements Among Competitors

Under the current regime, the BER Vertical also applies to agreements between vertically integrated companies (e.g. a pulp manufacturer who also produces paper supplies a competing paper manufacturer with pulp), provided the agreement is non-reciprocal and the buyer's turnover in the last financial year was less than EUR 100 mln. The Draft BER Vertical envisages removing this exception, which would decrease legal certainty for smaller groups.

New Block Exemption Regulation For The Motor Vehicles Sector

The BER Motor Vehicles5 applies to all supply agreements for passenger cars and commercial vehicles. In a July 2009 publication, the Commission set out its basic policy orientations for the future legal framework that should apply to motor vehicle distribution and after-sales services agreements after the expiry of the current BER Motor Vehicles.

A More Lenient Regime For The Highly Competitive Primary Market

As regards sales of new motor vehicles (primary market), a Commission market investigation has not unveiled signs of significant competition shortcomings in the EU. The Commission therefore considers that distribution contracts concerning the sale of new motor vehicles no longer require a sector specific BER. Rather, it is deemed sufficient if such contracts fall within the ambit of the general BER Vertical. As the current BER Motor Vehicle imposes considerable restrictions on the contractual freedom of the supplier (e.g. distribution agreements may not be terminated with less than two years notice), this move should provide opportunities for a much more flexible design of car distribution systems. To give car dealers time to adapt to the new legal regime, it is currently envisaged that the BER Motor Vehicles will remain in force until 31 May 2013 and will only then be replaced by the BER Vertical.

A Strict Regime For Repair And Maintenance Services

As to the markets for repair and maintenance services and/or for spare parts distribution in the motor vehicle sector, the Commission believes that competition is still not sufficiently intense. In this context, the Commission intends to complement the revised general BER Vertical with sector specific guidelines, a more focused BER or a combination of both. One may expect a draft of this legal regime very soon.

Undertakings should verify in due time whether their distribution agreements covered by the Commission's current block exemption regulations will also benefit from an exemption under the successor rules that enters into force on 1 June 2010.

This article was originally published in the schoenherr roadmap`10 - if you would like to receive a complimentary copy of this publication, please visit: http://www.schoenherr.eu/roadmap.

Footnotes

1. Reg (EC) No 2790/1999, OJ 1999 L 336/21.

2. Cf Press release of the EC dated 28 July 2009 available under: http://europa.eu/rapid/pressReleasesAction.do?reference=IP/09/1197&format=HTML&aged=0&language=EN&guiLanguage=en.

3. Cf Draft Guidelines, Recital 83.

4. Cf Draft Guidelines, Recital 52.

5. Reg (EC) No 1400/2002, OJ 2002 L 203/30).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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