What’s New? - June 2010
New EU rules and Guidance on Distribution and Supply Arrangements Restrictions on Online Sales and more…
New regulations governing vertical distribution and supply agreements came in on 1 June 2010 and suppliers and distributors have until 1 June 2011 to bring their existing agreements into line.
The new regulations and Guidelines will be of particular interest to retailers interested in clarification concerning online sales, and to luxury brand owners who may refuse distributors if they do not have a bricks-and-mortar shop.
The new guidelines will also be of interest to supermarket retailers concerned with the legality of Upfront Access Payments, such as slotting allowances and “pay-to-stay” fees.
Background
Market Shares
Hardcore Restrictions
Selective Distribution Systems
Online Sales
Upfront Access Payments (”UAPs”)
Category Management Agreements
Article 101(1) of the Treaty on the Functioning of the EU prohibits agreements and concerted practices which have as their objective or effect the prevention, restriction or distortion of competition with the EU unless they meet the criteria under Article 101(3).
The consequences of failing to comply with Article 101(1) may result in fines and/or agreements that are void. However agreements and arrangements which come within and comply with the new block exemption regulations are automatically exempted from the application of Article 101(1).
One significant change is that now both the seller and the buyer’s market share will be relevant. The block exemption will apply on condition that the market share held by the supplier does not exceed 30% of the relevant market on which it sells the contract goods or services and that the market share held by the buyer does not exceed 30% of the relevant market on which it purchases the contract goods or services. This means that fewer agreements will benefit directly from the block exemption (i.e. where the buyer’s market share exceeds the threshold) and more agreements will be subject to individual assessment.
In order to benefit from the block exemption agreements must not contain certain hardcore restrictions, which if they do will give rise to a presumption that the agreement is anticompetitive under Article 101(1). Hardcore restrictions include price fixing and export bans. However, restrictions on active sales into a territory, or to a customer group exclusively allocated to another distributor, or reserved to the seller are permitted, while restrictions on “passive” (i.e. unsolicited) sales are viewed as hardcore restrictions..
Selective Distribution Systems
Suppliers operating selective distribution systems undertake to sell goods or services only to distributors selected on the basis of specified criteria and in these systems the buyers undertake not to make sales (active or passive) to unauthorised distributors. This restriction on buyers is now limited to unauthorised distributors within the territory reserved by the supplier to operate that system. Therefore, if a supplier operates a system in only part of the EU it may find sales being made to unauthorised distributors outside that territory, which may undermine its selective system.
Internet sales remain viewed as “passive” sales. The new Guidelines state that even if the website carries a language option outside of the territory then that is still part of passive selling. Hardcore restrictions would include:
- a ban on internet sales;
- agreeing that a distributor will prevent customers in a different territory from viewing its website or installing an automatic re-direct to the manufacturer or another exclusive distributor’s website;
- agreeing to terminate a consumer’s transaction once their credit card data reveals an address not within the distributor’s exclusive territory;
- agreeing to limit the proportion of overall sales made over the internet (although the supplier may be able to ensure a minimum of off-line sales to ensure the efficient operation of its bricks-and-mortar shop);
- agreeing that the distributor shall pay higher prices for products intended to be resold online than for products to be sold off-line (although the supplier might agree a fixed fee to support the buyer’s off-line or online sales efforts).
Upfront Access Payments (”UAPs”)
UAP’s are fixed fees that suppliers pay to distributors in a vertical relationship at the beginning of a relevant period in order to get access to their distribution network and to pay for services provided by the distributors. This is a new category of agreement mentioned in the guidelines and in many cases these will be covered by the new block exemption, subject to the market share thresholds. Examples of cases that may give rise to concern include cases where UAPs result in foreclosure of other distributors or result in barriers to entry for small suppliers where, for example, they amount to “single branding” payments that induce distributors not to purchase from other suppliers.
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Category Management Agreements
The new Guidelines offer assistance with category management, whereby a retailer appoints a supplier as “category captain” to take responsibility for marketing a particular category of products. Again this is a new category of agreement which are block exempted when both the supplier’s and the buyer’s market share does not exceed 30%. In most cases it is recognised that the distributor may not have an interest in limiting its choice of roducts. However, the European Commission highlights that concerns may arise where a retailer sells its own competing products (e.g. private labels) and therefore has incentives to exclude certain suppliers or where category management agreements may facilitate collusion when the supplier serves as a category captain for all or most of the competing distributors in a market and provides a common point of reference for their marketing decisions.
Whilst every effort has been made to ensure the accuracy of this bulletin, it does not provide complete coverage of the subjects referred to, and it is not a substitute for professional legal advice and should not be relied upon as such.
Simon Barker
0845 634 2583
Email: simon.barker@freethcartwright.co.uk
Philip Raven
0845 634 9781
Email: philip.raven@freethcartwright.co.uk
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