European Union: Commission Consults On Information Exchange Guidance For Dual Distribution

The European Commission ("Commission") is currently reviewing its Guidelines on Vertical Restraints ("Vertical Guidelines") within the broader context of the review of the Vertical Block Exemption Regulation ("VBER") and consulted on its proposals last year. It has now launched a further consultation on guidance on information exchange in dual distribution relationships. The deadline is short – interested parties are  invited to submit comments by 18 February 2022.

Background

Our update on the draft VBER and draft Vertical Guidelines published last July is available  here.

The Commission's July drafts included limiting the safe harbour for dual distribution by specifying in Article 2(5) of the VBER that a dual distribution agreement would be block-exempt, provided the parties' aggregate market share at retail level in the relevant market does not exceed 10%. Above that market share, but where the agreement remains within the VBER's general 30% market share threshold, the exemption would still apply except for information exchanges between the supplier and the buyer which would need to be assessed separately under the rules on information exchange set out in the guidelines on horizontal cooperation agreements (the  Horizontal Guidelines).

In  response to the subsequent consultation, all categories of stakeholders requested more guidance on the types of information that can be exchanged between the parties in a dual distribution relationship, and many considered that the reference in the drafts to an assessment under the Horizontal Guidelines was not appropriate or at least not sufficient.

The Commission therefore gathered additional evidence on this topic and commissioned an  expert report. This has led to it publishing additional specific  guidance on such information exchanges, which will be incorporated into the new Vertical Guidelines which should be published in final form in May 2022 at the latest.

The  current consultation – with a deadline of 18 February – is limited to the additional guidance on information exchange in the context of dual distribution.

What is dual distribution?

Dual distribution is the scenario where a supplier sells goods or services not only at the upstream level, but also at the downstream level. In other words, the supplier competes with its independent distributors.

What is the competitive concern?

In a dual distribution agreement the Commission considers that, in the absence of 'hardcore restrictions', and provided that the buyer does not compete with the supplier at the upstream level, the potential negative impact of the agreement on the competitive relationship between the supplier and buyer at the downstream level is less important than the potential positive impact of the agreement on competition in general at the upstream or downstream level.

It also notes that the exchange of information between a supplier and buyer can contribute to the procompetitive effects of vertical agreements, in particular the optimisation of production and distribution processes. This also applies in the scenario of dual distribution. However, not all exchanges of information between a supplier and buyer in a dual distribution scenario are efficiency enhancing and some may raise horizontal concerns.

Assumption as to the new VBER

The Commission is consulting on the additional guidance on the basis that the VBER would include a provision stating that the safe harbour 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.

Put another way, if the exchange is necessary for the agreement to achieve these benefits, it will be covered by the 'safe harbour' of the VBER (assuming the other conditions for the VBER to apply are met).

We note that it is unclear from the draft additional guidance whether the 10% market share threshold for information being within the safe harbour in any event remains.

New guidance on when an information exchange will be necessary

Information exchange includes any communication of information by one party to the other, irrespective of the characteristics of the exchange (e.g. whether the information is communicated by only one party or by both parties, whether it is exchanged in writing or orally, and whether it was requested or not).

Whether an information exchange is necessary to improve the production or distribution of the contract goods or services by the parties may depend on the particular distribution model.

In addition, the Commission provides a non-exhaustive list of examples of information that, when exchanged by the parties in a dual distribution context, can generally be considered necessary:

• Technical information relating to the goods/services
• Information relating to the supply of the contract goods/services
• Aggregated information relating to customer purchases of the goods/services, customer preferences, and feedback
• Information relating to the prices at which the goods/services are sold by the supplier to the buyer
• Information relating to the supplier's recommended resale prices or maximum resale prices for the goods/services and information relating to the prices at which the buyer resells the goods/services (provided that such information is not used to restrict the buyer's ability to determine its sale price or to enforce a fixed or minimum sale price), and is not information relating to actual future downstream sale prices
• Information relating to the marketing of the contract goods/services
• Performance-related information, including aggregated information communicated by the supplier to the buyer relating to the marketing and sales activities of other buyers of the goods/services (provided that this does not enable the buyer to identify the activities of particular competing buyers), as well as information relating to the volume or value of the buyer's sales of the goods/services relative to the buyer's sales of competing goods/services.

The Commission also indicates the types of information that are generally not necessary.

• Information relating to the actual future prices at which the supplier or buyer will sell the goods/services downstream, unless the exchange of such information is necessary to organise a coordinated short-term low price campaign, and without prejudice to the possibility to exchange information on the supplier's recommended resale prices or maximum resale prices for the goods/services, provided that such information exchange is not used to restrict the buyer's ability to determine its sale price or to enforce a fixed or minimum sale price
• Customer-specific sales data, including non-aggregated information on the value and volume of sales per customer, or information that identifies particular customers, unless in each case such information is necessary to enable the supplier or buyer to adapt the contract goods/services to the requirements of the customer or to provide guarantee or after-sales services or to allocate customers under an exclusive distribution agreement
• 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.

Outside the VBER – individual assessment required

The Commission notes that exchanges of information between a supplier and buyer in a dual distribution scenario that do not benefit from the safe harbour of the VBER must be assessed individually under Article 101 TFEU, taking the Horizontal Guidelines into account. It emphasises that they do not necessarily infringe Article 101. However, referring to CJEU case law (ICAP, T-Mobile Netherlands, Dole Food, and Eturas)  it cautions that "such exchanges are subject to the presumptions established by the case law ... relating to exchanges of information between competitors. In particular, undertakings that participate in a concerted practice and that remain active on the market are presumed to take into account information exchanged with their competitors in determining their conduct on the market."

Safeguarding information

The Commission also notes that where the exchange falls outside the safe harbour of the VBER companies may take precautions to minimise the risk that the 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 firewalls, to ensure, for example, that information communicated by the buyer 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.