On April 20, the European Commission adopted a new regulation exempting certain supply and distribution agreements from the European Union's prohibition against anti-competitive arrangements.
The adoption of the new regulation is an important development for all companies that are involved in the distribution of goods or services in the European Union. It applies to agreements entered into between companies operating at different levels of the production or distribution chain, such as agreements between manufacturers and wholesalers or retailers.
Generally speaking, this type of so-called "vertical" agreements do not raise issues of antitrust except where there is insufficient competition at one or more levels of trade, which occurs when there is some degree of market power at the level of the supplier or the buyer or at both levels. A restriction of competition may also occur if an agreement between a supplier and a buyer contains restraints, such as exclusive distribution.
The new regulation has reinforced the scope of the "safe harbour" by exempting from competition rules those vertical agreements in which both the seller and the buyer have up to a 30 per cent share on the market where they respectively sell and purchase the goods or services. This means that both the supplier's share of the purchaser base and the buyer's share of the customer base must not exceed 30 per cent.
The exemption relies heavily on the definition of the dimension of the market in which the parties to the agreement are active; the more restrictively construed, the greater the possibility of finding a trader's share on the market to be high. Notwithstanding this safe harbour, any hardcore restraints present in an agreement will carry a presumption that that agreement is against EU rules on competition.
New guidelines accompanying the regulation seek to lay down general principles relating to online distribution in view of the consistent use of the internet for advertising and selling products. Suppliers should normally be free to decide on the number and type of distributors they want to have in their distribution systems. But once a supplier has allowed a distributor into its distribution system, it cannot prevent that distributor from having a website and selling products online. The guidelines indicate that use of the internet cannot be restricted, as it is considered a reasonable way to allow customers to reach the distributor. Uncompetitive in the online world will be restraints requiring a distributor to terminate transactions when the client's credit card data reveal an address outside the distributor's territory; or dissuading distributors from using the internet, by limiting the proportion of overall sales which a distributor can make over the internet.
Yet, a supplier may legally require quality standards from its distributor for the use of an internet site to resell its goods, just as the supplier may require quality standards for a shop, for selling by catalogue or for advertising and promotion in general.
The supplier may, for instance, require its distributors to have one or more bricks-and-mortar shops as a condition for becoming a member of its distribution system. Hence, brand owners of luxury goods may refuse a distributor if it has no brick-and-mortar shop or showroom.
The regulation comes into force on June 1 and will be valid until 2022. The new regime effectively varies and refines the pre-existing block exemption to address the changing market conditions within which the rules are applied.
Dr Grech is an associate with Guido de Marco & Associates and heads its European law division.