UK: New Vertical Agreements Block Exemption

Last Updated: 28 July 2010
Article by Anthony Woolich and Cécile Schlub

The new vertical agreements block exemption regulation for distribution of goods and services (the "New Block Exemption") and vertical restraint guidelines (the "New Guidelines") were adopted by the European Commission on 20 April 2010. The New Block Exemption entered into force on 1st June 2010 with a transitional period of one year ending 31 May 2011 for pre-existing agreements that meet the conditions of the previous block exemption. The New Block Exemption will expire on 31 May 2022.

What is a vertical agreement?

Vertical agreements are entered into between parties acting at different levels of the supply chain, such as supply and distribution agreements between manufacturers and wholesalers or retailers. A vertical agreement falling under the New Block Exemption will be deemed to have no anti-competitive effects, or the positive effects that it contains will be deemed to compensate for the anti-competitive effects. Therefore, EU competition rules will not prohibit agreements which are covered by the New Block Exemption.

The main changes

The New Block Exemption is a result of major developments in the last ten years that have impacted on vertical agreements, namely (i) the increase of the market power of large distributors and retailers, and (ii) the increased significance of the internet for online sales and for cross-border commerce which the European Commission wants to promote, because it increases consumer choice and price competition.

The New Block Exemption has a similar structure to the current block exemption. To benefit from the block exemption, each party cannot have a market share in excess of 30% and the agreement must not contain any hardcore restrictions.

Buyer's market share

Under the previous block exemption, the 30% market share threshold generally only applied to the supplier's market share. Under the New Block Exemption, the 30% market share threshold applies to both the share of the buyer on the market on which the buyer purchases the goods and services and the share of the supplier of the market on which the supplier supplies the goods and services. This is to take account of the fact that some buyers may also have market power with potentially negative effects on competition. This does not mean that agreements between companies with higher market shares are illegal, but they will need to be analysed under the New Guidelines.

Hardcore restrictions are restrictions which may create barriers to the internal market, such as maintaining resale price and territorial/customer resale restrictions (subject to some exceptions). There is a presumption that the New Block Exemption will not protect vertical agreements containing hardcore restrictions. The New Block Exemption does not fundamentally change the list of hardcore restrictions and the presumption can be rebutted in individual cases, where the efficiency arguments can be used successfully.

Online sales

The New Block Exemption specifically addresses the question of online sales. The European Commission supports the principle that once authorised, distributors must be free to sell on their website as they do in traditional shops, without limitation on quantities, customers' location and restrictions on prices, save that, for example, exclusive distributors may be required not actively to target online customer groups or customers in areas exclusively reserved for another distributor of the supplier.

The New Guidelines clarify the concept of active and passive sales for exclusive distribution. In general, selling online through a website is considered a form of passive selling and the receipt and processing of an order by a customer following a visit to a website is also considered to be passive selling.

Restrictions on passive selling are hardcore restrictions and are therefore prohibited. An obligation in an agreement to terminate transactions or to re-route consumers after they have entered their credit card details showing a foreign address will not be accepted. Other hardcore restrictions on passive selling include agreements where a(n exclusive) distributor prevents customers located in another territory viewing its website or automatically re-routes customers to the manufacturer's or other (exclusive) distributor's website, or an agreement which provides that a distributor will pay a higher price for products intended to be resold by the distributor online than for products intended to be resold offline. Dual pricing can potentially be justified if online sales lead to substantially higher costs for the supplier.

Manufacturers cannot limit the quantities sold over the internet or charge higher prices for products to be sold online. This does not, for example, preclude the supplier requiring, without limiting the online sales of the distributor, that the buyer sells at least a certain amount of the products off-line. The supplier may decide to sell only to dealers that have one or more 'brick and mortar' shops, so that consumers can physically see and try or test their products. In this regard, the Commission will be particularly attentive to concentrated markets to which price-discounters either online only or traditional may not have access.

Similarly, to preserve the quality of distribution and prevent free riding, the New Guidelines clarify that the New Block Exemption covers obligations to require quality and service conditions to be fulfilled for online sales and use third party platforms only in accordance with standards and conditions agreed between the parties. Quality requirements can, however, be imposed on internet selling if they are "overall equivalent" to the offline sales criteria. Therefore the New Guidelines allow consumers to benefit from the internet while allowing manufacturers to prevent possible free-riding between distributors.

Other changes

New specific restraints which are identified are upfront access payments (slotting allowances) and category management. They are covered by the New Block Exemption Regulation up to a 30% market share.

The New Guidelines clarify that if an agent for one product acts as independent distributor for another product of the principal which is in the same market, the agency agreement is not automatically outside the competition rules.

Possible positive effects of resale price maintenance are identified: launching a new product, supporting short term low price advertisement campaigns, and preventing free riding between distributors.

It is also recognised that it is not only possible to prevent wholesalers selling to end users, but also to allow wholesalers to sell to some larger end users but not to others.

HFW tips

As the scope of the New Block Exemption is narrower than that of the previous vertical block exemption, parties to vertical agreements should:

  1. Review any existing agreements benefiting from the previous vertical block exemption as these may now fall outside the scope of the New Block Exemption.
  2. Assess whether hardcore restrictions contained in new vertical agreements can be justified by efficiency gains and where internet sales are involved, consider whether any restrictions on the use of the internet can qualify as a restriction on passive selling.
  3. Carry out a proper assessment of whether new agreements contain restrictive clauses, and whether they would be justified under EU competition law.

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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