What analysis does the Commission’s new and important consultation with a view to reforming the competition law applicable to distribution agreements call for?

On Friday 18 December 2020, the Commission launched a consultation on the issues under discussion that it considers particularly important in the context of the review of the Vertical Restraints Regulation and its guidelines.

The objective of the consultation, open from 18 December 2020 to 26 March 2021, is to make advances in the preparation of the new legislation expected in the second quarter of 2022 in order to succeed the current Regulation and its guidelines.

It is of paramount importance for the future of all distribution contracts and more broadly vertical agreements in Europe since undertakings tend to shape their agreements according to the regulation in order to qualify for the block exemption and the guidelines provide them with additional elements enabling them to carry out a self-assessment of their agreements with regard to Competition law.

This consultation is particularly important because it addresses the most sensitive issues and focuses on the controversial matters that may or may not evolve under the new rules.

It is also of utmost importance to respond to it and our firm will participate in this consultation as it has done previously in order to defend the interests of businesses and the efficient functioning of distribution law.

How to respond to the fifty plus or so questions asked?

You will find our initial analysis below.

The consultation is focused on the 4 main themes identified during the evaluation phase by the stakeholders as not working well or not as well as they should :

  • dual distribution by distributors and suppliers,
  • active sales restrictions,
  • indirect measures restricting online sales,
  • parity obligations.

In addition to these four central themes, the Commission has included four other important issues :

  • resale price maintenance (RPM),
  • non-compete obligations,
  • sustainability agreements, and
  • impact of the COVID crisis.

We first note that the fundamental issue of agency contracts and the conditions under which they fall outside the scope of antitrust law is not directly addressed and that this point will have to be brought to the Commission’s attention.

Table of contents

I. Key issues

II. Other key issues

I.Key issues

1. Dual distribution

The term is open to various interpretations and should not cause confusion. It refers to the distribution of products or services by both network distributors and the headend supplier. Contrary to what is sometimes asserted in legal literature, this situation is neither new nor exceptional, even if it is perhaps taking on new forms today. This is the first falsehood to be challenged.

In many networks, there may be independent distributors and distributors that are subsidiaries or branches of the supplier, direct sales by the supplier to certain customers or competing sales by distributors and the supplier’s website to end customers. All of these channels are complementary and if they exist, it is in order to best meet customer demand.

The block exemption in principle does not cover agreements between competitors but applies, by way of exception, to dual distribution as it is fundamentally a vertical relationship.

Some of the options considered by the Commission are quite alarming e.g. Option 2, which envisages limiting the exemption of dual distribution to cases that are unlikely to present horizontal problems, for example by introducing a market share threshold on the downstream market for distribution to final customers of less than 20%, or Option 4, which envisages nothing less than no longer block exempting dual distribution and subjecting it to an individual exemption.

To be very clear: making the block exemption for dual distribution subject to a market share threshold on the local resale market would lead to the block exemption being denied to almost all current distribution networks. Indeed, there are forms of dual distribution in almost all networks and the market share of distributors in their local catchment areas alone is often greater than 20% or is very difficult to estimate. This is what led the drafters of the vertical block exemption regulations to calculate the exemption thresholds for distributors in the upstream market in which they purchase the product. Option 2 is therefore impractical because it would require the calculation of thousands of market shares within a single network with enormous transaction costs, with the data often not even being available, and in any case would deprive almost all networks of the exemption, which is not the aim of a block exemption regulation.

Options 1 (make no changes) or 3 (extension of the dual manufacturer – distributor exemption to the situation of importers or wholesalers with their own network of distributors and selling parallel to their network) are more reasonable. Option 3 corresponds to a request from private importers handling distribution in a European country and who have a dealer network while making direct sales to final customers. Insofar as their situation is similar to that of manufacturers or manufacturers, confirmation of the benefit of the block exemption appears to be a legitimate claim.

2. Active sales restrictions

Restrictions on sales are prohibited in principle with certain exceptions; for example, active sales are prohibited in exclusive distribution to the territory of another distributor to whom exclusivity has been granted; similarly, active and passive sales are prohibited to non-members of the network in selective distribution. However, where there is a combination of exclusive and selective distribution, active and passive sales must in principle be permitted and cross-selling is possible at all levels in selective distribution. Moreover, in the event of a combination in the EU of exclusive distribution in some countries and selective distribution in others, selective distributors are not protected against sales from outside to off-network resellers in selective countries.
The present situation is unsatisfactory: it does not sufficiently protect selective distributors and does not allow the organization of exclusive distribution by country at the wholesale stage for importers responsible for running a selective downstream network. These problems need to be resolved in the future through recourse to Options 2 and 3 which can be combined, as Option 1 (no change) does not address the current problems.

3. Indirect restriction of online sales

Online sales are regarded as passive sales. Therefore, restrictions preventing distributors from selling through the internet are considered hardcore restrictions not exempted by the VBER. This also applies to indirect restrictions on online sales. Stakeholders have rightly criticized this rigid repression of all indirect restrictions on online sales. Two criticisms that the Commission takes note of and submits for assessment: the prohibition of dual pricing (selling at a different price to the same distributor depending on whether the product is to be resold online or in a physical store) and the equivalence principle (i.e. the criteria for online sales should be equivalent to the offline criteria).

Option 1 (make no changes) is certainly not the right one. Options 2 and 3 are worthy of approval provided that the limits envisaged by the Commission do not deprive the exemption of any useful effect.

Option 2 here consists in no longer defining dual pricing as a hardcore restriction and allowing it, although with limits and precautions so that it does not lead to restrictions on online sales. We have been campaigning for years to put an end to the absurdity of an absolute ban on dual pricing. Indeed, the distribution costs of the different sales channels are not the same and the services offered by the different channels differ and have different costs. It is completely reasonable to be able to pay for the costly services offered in-stores if an undertaking wishes to preserve some physical outlets.

The internet has long since won the battle, so it is no longer necessary to overprotect it with rules that disadvantage physical stores, which are undergoing an unprecedented crisis and have to face important charges that do not usually affect websites or not to the same degree. The preferential treatment granted to online sales by the rigid ban on dual remuneration as advocated by the German competition authority, the BKA, must be stopped as soon as possible. On the other hand, the safeguards envisioned by the Commission must not be such that they indirectly prevent dual remuneration. As long as it is justified and proportionate, there is no reason it should not be permitted.

Option 3 consists of no longer making non-compliance with the principle of equivalence a hardcore restriction. The initiative is welcome given the significant differences between channels. Here again, the safeguards devised by the Commission should not be such that they indirectly preclude the exemption.

4. Parity obligations

Parity obligations which oblige a company to provide the same or better terms to the other party (e.g. an internet-based booking platform) than it otherwise provides (e.g. on its own website or through other sales channels) are currently block exempted below the 30% threshold of the Regulation. Such obligations have been the subject of numerous rulings in the various Member States, with decision-making practices that are not necessarily uniform. The competition authorities of the Member States have analyzed the anticompetitive effects of these platforms demanding parity provisions, and also the pro-competitive effects, in particular to avoid free riding, with platforms having made investments not wishing them to benefit co-contractors or competitors offering better prices than those on the platform.

Responses from the competition authorities of Member States have suggested that a distinction may need to be made between general parity obligations (applicable to all channels, to the contracting firm’s own sales and to other platforms or channels) and limited parity obligations applicable only in respect of the contracting undertakings own sales to avoid free riding but not preventing better terms by competing sites.

Option 2 reflects that analysis, while Option 1 defines the status quo (exemption when below the thresholds) and Option 3 no exemption for parity obligations.

II. Other key issues

1. Resale price maintenance

This is effectively a crucial issue which has been raised by many stakeholders in the responses to the consultations and at the workshop in Brussels in which we participated. The Commission acknowledges in its consultation that the conditions for the efficiencies of RPM and a possible individual exemption are not clear and that the directives are insufficient. The evaluation report went further and suggested that the conditions regarding RPM themselves were not at all clear. In addition, the rules regarding resale price maintenance as a restriction by object and hardcore restriction that may be subject to an individual exemption – that is never granted – do not correspond to the economic analysis or, moreover, to the recent requirements of case law regarding restrictions by object. As a result, the consultation is still very tentative on the efficiency gains of RPM, the conditions and how to improve the clarity of the rules. A total paradigm shift should be made in this area, following the example of the Leegin case law in the United States. It would be appropriate, when inter-brand competition is high, to exempt RPM below a market share threshold of, for example, 20 or 25%. This situation needs to get past the purely wishful thinking stage.

2. Non-compete obligations

Many stakeholders have pointed out that the absolute and rigid 5-year limit for benefiting from the block exemption for contractual non-compete clauses is too strict and that it should be possible to provide for renewable 5-year clauses where the contracting party has an option not to renew or to terminate the contract, also in order to avoid the transaction costs associated with renegotiation. The consultation has taken this into account and presented this recommendation to respondents.

3. Sustainability agreements

Here, the Commission asks respondents whether, in the light of the objectives of the European Green Deal, the current rules may have created obstacles to the implementation of the sustainability objectives pursued by European law.

4. Impact of Covid-19

The Covid-19 crisis has had important economic implications that have not spared the distribution sector. In particular, it has led to an increase in online sales. The Commission is therefore asking respondents whether the crisis has led to changes that should be taken into account in the revision of the regulation. It should be noted that the expansion of the Internet makes it all the more necessary to ensure absolute neutrality in competition regulation in relation to the various sales channels and to eliminate the current system of absolute preference for online sales, which ultimately has detrimental effects on physical commerce.

It is of course possible to alert the Commission by means of an attached document of any problems that have not been taken into account. This should be the case in particular for the arrangements for agents within the meaning of competition law or for shared exclusive distribution (several distributors for an exclusive territory shared between them).