New rules regulating distribution agreements
The distribution of goods and services will shortly be regulated by new rules which have been recently adopted by the European Commission. Any restrictions imposed by manufacturers or suppliers in distribution agreements which do not satisfy the conditions of these new regulations could be found to be in breach of EU competition rules and deemed to be illegal.
This new block exemption replaces a previous one which is bound to expire shortly. It exempts vertical agreements, that is, agreements entered into between manufacturers and distributors or retailers, from the application of the stringent competition rules provided that certain criteria found therein are satisfied. Companies remain, as a rule, free to decide how their products are distributed.
However, similarly to its predecessor, the new block exemption prohibits hardcore restrictions such as price-fixing clauses in distribution agreements. The new rules now emphasise that a general restriction by suppliers on the use of the internet by distributors for the sale of their products is considered as a hardcore restriction.
Suppliers are still free to decide to sell only to distributors that have one or more physical points of presence where the suppliers' goods can be touched, smelled or tried. However, once a supplier has accepted a distributor into its distribution network, it cannot prevent that distributor from having a website and selling products online. In practice, this means that, for example, any obligations on distributors to automatically reroute customers located outside their territory, or to terminate consumers' transactions over the internet if their credit card data reveal an address that is not within the distributor's territory are condemned in terms of the new law. Similarly, any obligation that dissuades distributors from using the internet, such as a limit on the proportion of overall sales which a distributor can make over the internet, or the requirement that a distributor pays a higher purchase price for units sold on-line is also considered as a hardcore restriction.
However, certain restraints imposed by manufacturers or supplier on online sales by distributors can still be justified. For instance, a supplier operating a selective distribution network may impose a requirement that a distributor must not sell online through a website that does not meet the agreed quality standards or to unauthorised distributors. However, distributors operating within such a network must remain free to actively sell to other authorised distributors as well as to any end consumer.
In the case of exclusive distribution networks, the law still allows manufacturers to protect an exclusive distributor from active sales by other distributors into its territory. A manufacturer or supplier may therefore require a distributor not to actively target online customer groups or customers in areas exclusively reserved for another distributor of the supplier. The exclusive distributor must, however, remain free to sell to customers that contact him on their own initiative.
The new rules establish a 30 per cent market share threshold which cannot be exceeded by either the manufacturer or distributor in order for the agreement to be able to benefit from the certainty offered by the block exemption. The introduction of a buyer's market share threshold is particularly beneficial to small and medium sized enterprises, because they are the most to be harmed by buyer-led vertical restraints.
Vertical agreements concluded by companies whose market share exceeds 30 per cent do not benefit from the safe haven offered by the block exemption. This does not mean, however, that the agreement is necessarily illegal. In such cases, it would be necessary to assess the agreement's negative and positive effects on competition in order to ensure that the agreement being entered into is permissible in terms of antitrust law.
The new block exemption has gone a step forward in ascertaining that the EU's objective of ensuring that consumers can buy goods and services at the best available prices wherever they are located in the EU is reached.
At the same time, small and medium sized companies are free to organise their sales network as they deem best with the legal certainty that they would not be found to be in breach of EU antitrust rules if they fulfill the criteria laid down by the block exemption.
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.