NEW FRAMEWORK ON RESTRICTIVE COMPETITION CLAUSES IN DISTRIBUTION CONTRACTS

I. Introduction

Article 101(1) of the Treaty on the Functioning of the European Union (“TFEU”) prohibits those agreements or concerted parties in undertakings that may be incompatible with the EU single market and aim to impede, restrict, or falsify the mechanisms of free competition within the EU single market.

Nevertheless, Article 101(3) of the TFEU provides an exception to said prohibitions, as long as the agreements contribute to the improvement of the production or distribution of the products, or to the encouragement of technological and economic progress, and at the same time reserve for the users an equal share in the resulting benefit thereof.

Regulation (EC) no. 330/2010 of the Commission (3) defined a category of vertical agreements which, in the eyes of the Commission, generally meet the conditions foreseen in Article 101, paragraph 3, of the TFEU. The experience acquired with the application of the Regulation (EU) no. 330/2010, which expired on the 31^st of May 2022, in particular with regards to e-commerce, was in favour of introducing certain modifications, with regards to the interpretation of vertical agreements and their possible exemption with regards to Article 101 of the TFEU.

The Regulation (EU) 2022/720 of the 10^th of May 2022 of the European Commission on categories of vertical agreements and exempted concerted practices (VBER) substitutes the prior Regulation (EC) 330/2010, with a validity of 12 years that shall terminate on the 31^st of May 2034.

Likewise, the Commission published some guidelines regarding vertical restrictions via Communication 2022/C248/01, published on the 30^th of June 2022 (the “Guidelines”). There have also been Guidelines published on vertical restrictions.

II. Analysis and New Additions:

Whilst the VBER has kept the same legal framework and its principles, it provides extensive guidance on the scope of Article 101 of the TFUE, and offers greater flexibility so that suppliers may

(i) combine different types of distribution models;

(ii) oblige their distributors to pass on sales restrictions to their clients;

(iii) appoint numerous exclusive distributors.

It also introduces a new “hardcore” restriction against the preventing of the effective use of the internet, and modifies the prior Regulation to adopt to the growth of e-commerce.

1. Which aspects remain the same?

The same structure of the Regulation 330/2010 has been kept: Article 2 states that a vertical agreement may be exempted from the prohibitions foreseen in Article 101(1) of the TFEU, as long as:

(i) the market share of the supplier does not exceed 30% of the market in which they are selling the contractual goods or services, and that the market share of the buyer does not exceed 30% of the market in which those same contractual goods are being bought or provided by them.

(ii) the vertical agreement does not include a restriction that eliminates the benefit for which the exemption is being conceded, and does not include pacts or restrictive clauses that are expressly declared as ´hardcore´ by the Regulation.

2. What are the major changes with regards to distribution contracts?

(A) Exclusive Distribution

With regards to Exclusive Distribution, the VBER maintains the same definition, that is, a distribution system in which the supplier exclusively assigns a territory or group of clients to one or more buyers, whilst at the same time restricting their other buyers the possibility of actively selling in the exclusive territory or to that same group of clients.

• • The VBER allows the supplier to restrict the active sales of the exclusive distributor in an exclusive territory or to a group of clients assigned exclusively to a maximum of 5 buyers, or for them to be reserved by the supplier. Article 4(b)(i) of the VBER and Paragraph 219 of the Guidelines.
• • The VBER allows the supplier to demand his buyers to restrict their direct clients from selling actively in territories or to groups of clients that the supplier has assigned exclusively to other distributors. Article 4(b)(i) of the VBER.
• • The definition of an active sale has also been updated and developed to include a number of examples associated with marketing and promotional activities. For example, sales shall be considered “active” if they are realised:

   (i) Marketing through price comparison services;

   (ii) Search engine advertising directed to clients from specific territories.

(B) Selective Distribution

The VBER defines selective distribution as a system in which the supplier undertakes to sell the contractual goods or services, directly or indirectly, exclusively to distributors selected on the basis of specified criteria; and the latter distributors undertake not to sell said goods or services to unauthorised distributors in the territory reserved for the application of this distribution system.

• • The VBER allows businesses to combine or mix selective and exclusive distribution in different territories within the European Union, and provides additional protection for such distribution models. As a consequence, the members of a selective distribution system established in a territory may be prohibited to carry out active sales in the chosen territory or to a group of clients exclusively assigned or reserved by the supplier. Article 4(b)(ii) of the VBER.
• • The combination of exclusive and selective distribution in the same territory shall not benefit from the exemption. Paragraph 236 of the Guidelines. Nonetheless, the supplier may undertake to provide selective distribution exclusively to certain distributors in the territory in which they operate, or to undertake to not carry out direct sales in said territory.

(C) Dual Distribution

Dual distribution is a business practice in which the supplier distributes their products through two different methods at the same time, thereby creating competition between the distributor´s own suppliers. Under a system of dual distribution, the supplier will usually sell their products not only directly to their final clients (at the bottom of the supply chain, or “downstream”), but also through independent distributors (at the top of the supply chain, or “upstream”).

Dual distribution remains permissible under Regulation 2022/720. Indeed, this exemption has been extended to wholesalers and importers.

However, the interchange of information between a supplier and his distributor shall only be exempt if:

• • They are directly related to the implementation of the vertical agreement, or
• • Are necessary to generate an improvement in the production or distribution of the goods or services covered by the agreement.

INTERCHANGE OF INFORMATION BETWEEN THE PARTIES OF A VERTICAL AGREEMENT

(D) Online Sales

The VBER has updated the exemptions in light of the evolution of the markets, and, more specifically, the growth in e-commerce and the evermore pertinent role that online platforms are playing for the distribution of goods and services. The VBER has departed from the equivalence principle between offline and online sales of selective distribution systems, since all evidence now demonstrates that online sales no longer need special protection.

• • The VBER expressly permits the supplier to establish certain requirements for the online sale or marketing of its products. The supplier may establish requirements both for the quality or appearance of products on the webpage of the distributor, as well as the way in which goods or services, or the supplier’s brand, must be shown on the distributor´s webpage. Article 2(1) of the VBER and Paragraph 208 of the Guidelines.

• • In certain cases, the supplier may prohibit the use of platforms or markets for the distribution of their goods, (so long as they do not indirectly aim to prevent the effective use of the internet by the buyer), or require that the distributor keep open a physical store as well as an online sales channel, or even that there be a minimum volume of sales in physical store. Paragraphs 207 and 208 of the Guidelines.

• • The VBER adds a complete list of the hardcore restriction practices that prohibit the effective use of the internet as a sales channel. Paragraph 206 of the Guidelines.

• • • The requirement of sales made exclusively in physical stores (offline) or in the physical presence of a specialist.

• • • The prohibiting of the distributor to use one or more websites.

• • • The prohibiting of the distributor to use the supplier´s brand in their online store.

• • • The obligating of the distributor to block or redirect access to the webpage of the distributor for those clients who access it from a foreign territory, within the European Union.

• • • The contracting of an online intermediary service provider who competes with the supplier´s distributors in the sale of the goods or services.

(E) Pricing

• • The Guidelines establish that a supplier may impose criteria on online/offline sales in a selective distribution system, that are not equivalent, as long as those criteria do not aim to prevent the effective use of the internet.

• • Likewise, they consider acceptable, under certain conditions, that the supplier set a different wholesale price for the same product, depending on if it is distributed online or in a physical marketplace, thereby effectively permitting the setting of a dual price. Article 2(1) of the VBER and Paragraph 209 of the Guidelines. Such conditions are:

• • • The setting of a price must incentivise or recompense an adequate level of investments in each channel.
    • The price difference must not aim, directly or indirectly, to restrict sales in one territory or to a real client, within the European Union.
    • The setting of a dual price must not prohibit distributors or clients to use the internet for the sales of their goods or services online (the effective use of the internet).

(F) Parity Obligations, a.k.a. Most Favoured Nation Clauses (MFN).

In the context of distribution contracts, a parity obligation (also called a “most favoured nation”) assures that the supplier offers to all his distributors the same sales conditions.

Indeed, one can distinguish between two types of parity obligation:

(i) Wide Parity/MFN requires that the supplier offers the same or better conditions to a distributor as those offered by any competitor´s online platform. These clauses do not benefit from the exemption, except for wholesale business.

(ii) Narrow Parity/MFN requires that the supplier offer the same or better conditions to a distributor as those offered in a specific sales channel (for example, their own website). These clauses do benefit from the exemption, for both retail and wholesale businesses.

(G) Sustainability

The VBER considers sustainability as a relevant criterium with regards to the exemption provided by Article 101(3) of the TFEU. Therefore, a vertical agreement that is not exempt under the VBER may nonetheless qualify for an exemption under the aforementioned provision, due to the sustainability advantages of an agreement, including the protection of the environment or the limitation of the use of natural resources.

III. Conclusion

The new Regulation, which has a validity of 12 years, shall shape the contractual clauses of many “vertical” agreements between suppliers and distributors, a category that includes: distribution (both selective and exclusive), franchising, concession, resale, marketing, commercialisation, provision and agency, amongst other examples.

The VBER introduces some relevant changes that a supplier will have to bear in mind moving forwards in their distribution contracts. Whilst the VBER creates opportunities to reform the distribution network, with the aim of improving its efficiency and profitability, it also carries with it new risks of non-compliance that one must not lose track of.

From the 1^st of June 2022, distribution contracts that will seek to comply with the new VBER Regulation, shall have to adapt to the rules established in Regulation 2022/720.

With regards to distribution contracts and the commercial practices already in force as of the 1^st of June 2022, the VBER shall plan a transition period of 1 year (until the 31^st of May 2023) for its adaptation.

 

 

Eduardo Vilá

Vilá Abogados

 

For more information, please contact:

va@vila.es

 

26^th of August 2022