The European Commission's New Block Exemption On Vertical Restraints

The European Commission’s new Block Exemption on vertical restraints has attracted widespread publicity. Effective from 1 June 2000, it heralds a new approach towards distribution and supply agreements, based on self-assessment rather than notification. Its principal objective is to introduce a more "economic" approach, whereby agreements are analysed in terms of their effect on the market, regardless of their form.

In the future, the European Commission intends to control vertical relationships between undertakings at different levels of the production and distribution chain only in circumstances where the supplier, or in some cases the buyer, exercises a degree of market power, i.e. its market share exceeds 30% of the relevant market. The presumption is that where the supplier’s share of the relevant market does not exceed 30% vertical agreements (which do not contain "hardcore" restrictions) generally lead to an improvement in production and distribution and allow consumers a fair share of the resulting benefits. Where the vertical agreement contains exclusive supply obligations, this presumption applies on the condition that the buyer’s market share does not exceed 30% of the relevant market on which it purchases the contract goods or services. Accordingly, this new approach provides a "safe harbour" below which certain categories of vertical agreement will be exempt from the application of EC competition law. If the 30% market threshold is exceeded, the agreement will not be automatically illegal, but will have to be examined on the basis of guidelines that the Commission is due to adopt in Spring 2000.

The vast majority of companies will benefit from greater flexibility under the new regime. Not only are all goods and services covered by the new Block Exemption, but certain practices which were previously prohibited without the express consent of the European Commission will, in the future, be permitted. For example, it will be possible to appoint an exclusive distributor for a particular category of customers, as well as for a defined geographical territory. In selective distribution systems, suppliers will be able to limit the number of authorised distributors in a defined area.

Practices that previously would have been caught by the competition rules can now be exempted retroactively through the new Block Exemption. This should all be good news for business.

The new Block Exemption will, however, contain a number of "hardcore" restraints. The inclusion of a "hardcore" restraint in an agreement will always exclude the application of the Block Exemption, regardless of market shares. In such cases, individual exemption will be very unlikely. Some of the hardcore restrictions, such as resale price maintenance and export bans will come as no surprise, having always been illegal under EC competition law. There are, however, other important changes that reflect the Commission’s desire to protect the possibility of parallel trade to an even greater extent than is currently the case:

• agreements which include non-compete obligations on a buyer (i.e. restrictions on manufacturing, purchasing, selling or reselling goods or services that compete with contract goods or services) will in future have to be limited in time, to not more than 5 years, in order to fall within the Block Exemption. Previously suppliers could impose a non-compete obligation on their exclusive distributors for the entire duration of the contract.
• exclusive purchasing obligations are now more broadly defined as any direct or indirect obligation on the buyer to purchase from the supplier more than 80% of his total purchases of the contract goods or services and their substitutes on the relevant market. Any such obligation is now defined as a "non-compete obligation" and subject to the 5-year limit.

Clearly, therefore, whilst there are many advantages to the proposed new regime, there are also considerable changes which need careful evaluation.

Although the new Block Exemption is designed to facilitate vertical agreements, there is a fear that, despite the presumption of legality, the loosening of the Commission’s grip on the application of the EC competition rules may lead to legal uncertainty. Potential areas of concern include the following:

• unless clear guidelines are available, the new emphasis on auto-compliance, without prior notification of agreements, may result in companies making potentially very expensive errors; and
• national competition authorities have the power to withdraw the benefit of the Block Exemption in the territory of a Member State where access to the market or competition is significantly restricted by the cumulative effect of parallel networks of similar vertical restraints practised by competing suppliers or buyers.