EU rules regulating the legality or otherwise of distribution agreements are due for an overhaul, the European Commission has recently decided. The current rules which are bound to expire in May 2010 will be revised in order to cater for some major developments which have taken place over the past 10 years since the current block exemption was adopted.
As a general rule, any agreement which affects trade between member states and which prevents, restricts or distorts competition breaches the EU's competition rules. This holds true even for distribution agreements concluded between a manufacturer and a distributor. However, those vertical agreements which are carefully drafted to reflect the rules laid down in the current block exemption and associated guidelines benefit from an exemption.
The objective behind the current block exemption and associated guidelines is precisely that of offering a safe haven to those vertical agreements which, under certain conditions, may improve economic efficiency within a production or distribution chain.
This means that those supply and distribution agreements which fulfil certain criteria and which do not contain serious restrictions on competition such as price fixing and limits on production are exempt from the application of the EU's competition rules. This is subject to the caveat that the supplier's market share does not exceed 30 per cent of the relevant market.
The Commission is now proposing that these rules are modified in order to reflect two major developments, namely, an increase in large distributors' market power and sales over the internet. To this end, it is proposing that for a vertical agreement to benefit from the block exemption, not only the supplier's market share but also the buyer's market share should not exceed 30 per cent.
The new rules will also facilitate the sale of goods and services over the internet. The Commission has sought to strike a balance between the right of consumers to purchase goods and services across borders particularly over the internet and the need to prevent distributors from taking unfair advantage of marketing and brand promotion undertaken by others. The new rules maintain that any internet sale is to be considered as a passive sale, that is, as an unsolicited request from a purchaser.
Any attempt to prevent passive sales would be a violation of competition rules. Indeed, certain commercial practices, such as requiring an exclusive distributor to prevent customers located in another territory from viewing its website or requiring the distributor to put on its website automatic re-routing of customers to the manufacturer's or other distributors' websites will be considered as hardcore restrictions of passive selling.
Similarly, the practice of requiring an exclusive distributor to terminate consumers' transactions over the internet once their credit card data reveal an address that is not within the distributor's territory will not be tolerated. The main thrust of the Commission's line of reasoning is that a website ought not to be considered as a form of active selling to certain customers unless it is specifically targeted at these customers. In practice, such an approach could essentially signify a way by which distributors could circumvent territorial restrictions imposed upon them by the manufacturer and sell goods outside their allocated territories by using the web to target countries outside their territories.
Interested parties now have until September 28 to comment on these proposals.
The fact that vertical agreements play an extremely important role in today's economy and in the enhancement of consumer welfare cannot be negated. Nonetheless, benefits will only be garnered from distribution networks if such networks do not seek to restrict competition unnecessarily to the prejudice of both competitors and consumers alike.
Dr Vella Cardona is a practising lawyer and a freelance consultant in EU, intellectual property, consumer protection and competition law. She is also a visiting lecturer at the University of Malta.
mariosa@vellacardona.com