UK: European Commission Consults On Review Of Competition Rules For Supply Agreements

Last Updated: 6 August 2009
Article by Susan Hankey, John Markham and Fran Matthews

The European Commission has published its long-awaited proposal for a revised block exemption for "vertical agreements", i.e. distribution and other supply agreements. The current block exemption expires on 31 May 2010. The proposed text retains the basic elements of the outgoing regime, but suggests significant amendments to reflect both the Commission's enforcement experience over the last decade and market developments. The main changes have particular regard to the increased buyer power of big retailers and the evolution of online trade.

The Commission has requested comments (please click here for the press release) by 28 September 2009 on drafts of a revised block exemption regulation (please click here for draft BER) and of accompanying guidelines (please click here for draft guidelines). Suppliers in all industries, including online businesses, are affected by the verticals block exemption regime. Many companies may wish to express concerns to the Commission, which has in the past shown a willingness to take account of stakeholder comments in revising other block exemptions.

European Commission believes verticals regime is working well

The Commission is keen to stress that its experience of the verticals regime has been positive over the last ten years. The current block exemption, implemented in 2000, was introduced to reduce the regulatory burden of an onerous (and now defunct) notification system. It also ushered in an effects-based analysis which assessed potential restrictions of competition according to their market circumstances and not according to rigid rules. It did this by implementing a regime based upon automatic exemption for agreements where (i) market share thresholds were not exceeded and (ii) a limited black list of restrictions were not infringed. It also set out, in detailed guidelines, a flexible approach to assess restrictions for companies which fell outside the market share thresholds, but did not infringe the black list.

The structure of this regime will be retained. The Commission has however suggested a small number of key changes and refinements.

Growing importance of purchaser's market share

The main change is to the market share threshold. For an agreement to benefit from automatic exemption, not only the supplier's but also the purchaser's market share must not exceed 30%.

  • The Commission has stated that this change is motivated by the market power of larger retailers and distributors.
  • This contrasts with the current regime, where the relevant market share threshold (also 30%) is usually the supplier's, the purchaser's share being relevant only to provisions restricting the supplier from selling to other EU-located purchasers. Reference to this type of restriction has now been removed from the block exemption.

Permissive approach to restrictions of passive sales?

The majority of the more significant changes do not relate to the rules in the block exemption itself, but represent a fine-tuning of the Commission's analytical approach and are found in the guidelines.

The point likely to be of most interest to businesses generally is the proposed change to the Commission's general assessment of the restriction of so-called passive selling:

  • A longstanding principle of EU competition law is that a supplier cannot prevent a distributor from responding to unsolicited business opportunities outside its designated territory or customer group – i.e. "passive" selling. The current verticals regime prohibits all restrictions of passive selling.
  • The new draft guidelines suggest one exception to this rule. A supplier should be allowed to restrict passive sales for two years to a territory or customer group reserved for a new distributor where that new distributor has significant start-up costs.
  • It is interesting that this carve-out is not in the text of the block exemption and only in the guidelines, since an equivalent provision for technology licences is found in the text of the technology transfer block exemption itself.
  • Even though this point is not found in the block exemption text, it is likely to be of considerable practical importance to suppliers with a cross-border network of distributors.

Updated explanation of points relating to online sales

The proposed guidelines update and amplify the guidance on a supplier's ability to restrict on-sales by their purchasers. In particular, the guidance looks in more detail at the question of Internet selling, and in general the aim appears to be maximising use of the Internet as a distribution channel. The Commission indicates, for example, that suppliers should not:

  • require an exclusive distributor to stop customers from another exclusively allocated territory from viewing its website, or to re-route customers automatically to a website in another territory;
  • require an exclusive distributor to terminate consumers' transactions over the Internet if their credit card data reveal that they are outside that distributor's territory;
  • require a distributor to limit the proportion of overall sales made over the Internet;
  • require a distributor to pay more for products intended to be sold online rather than off-line.

The supplier is, however, able to require quality standards for the use of an Internet site (as it could for a shop). An outright ban on Internet selling will not be permitted unless clearly justified, which will only be possible in limited circumstances. In a selective distribution system, a supplier may require that a dealer has a bricks-and-mortar shop before they can sell online, although suppliers must not discourage dealers from selling online by imposing more onerous criteria than those for off-line sales. Issues around Internet selling and selective distribution arrangements are likely to be particularly contentious during the Commission's consultation process.

New analysis of upfront access payments and category management

New sections in the proposed guidelines indicate how the Commission will apply the law to two specific types of vertical restraint that are not expressly analysed in the existing guidelines. These are upfront access payments (i.e. various fees that suppliers pay in order to get access to a distribution network and remunerate services provided to the suppliers by the retailers) and category management agreements (where a supplier is entrusted with marketing a whole category of products, rather than just its own products in that category). Although there is nothing novel in the law set out in those sections, the clarification of the Commission's thinking in these areas is helpful. Their inclusion also emphasises that the Commission is concerned about such practices, whilst recognising their potential positive effects.

Resale price restrictions – hint at a more flexible approach?

There is a revised section in the guidelines analysing how the law should be applied to resale price restrictions, i.e. the supplier in some way imposing a resale price on a distributor. The hardcore nature of resale price maintenance is reiterated, and its anti-competitive effects clearly enumerated. However, the proposed guidelines also set out various economic benefits (efficiencies) that could potentially apply to the use of resale price maintenance practices in certain circumstances. It seems that these kinds of efficiencies will not be easy to demonstrate, but this change in the guidelines indicates that such arguments can be made. This is again a clarification of the current situation, but it is significant that the guidelines even hint at more flexibility.

Conclusion

These are the first formal drafts of the block exemption regulation and guidelines, although the Commission's approach seems to have already evolved from the first informal indications of its thinking. This reinforces the Commission's likely willingness to take account of interested parties' comments. The Commission would aim to finalise the draft documents by early 2010, therefore this consultation period is the key time for any substantial amendments.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 30/07/2009.

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