Exclusive distribution agreements and new EU rules on vertical restraints - News Distribution / Competition / Contracts - May 20222022

Relationships between suppliers and their distributors are regulated by an increasingly precise framework, considering the evolution of distribution and consumption patterns, among which the development of e-commerce figures, both at French and European level. In view of the need to adapt its flagship text in force since 2010, the European Commission published on May 10, 2022 its new exemption regulation for vertical agreements, accompanied by its new guidelines.

The new EU vertical agreements exemption framework

One of the central mechanisms aiming to protect and regulate the EU market is the prohibition of all kinds of agreements between independent economic operators. In this respect, Article 101§1 of the Treaty on the Functioning of the European Union ("TFEU") prohibits any express or implicit agreement which has, according to the established phrasing, "as its object or effect the prevention, restriction or distortion of competition within the internal market". This prohibition covers practices occurring both horizontally (between competitors operating on the same market) and vertically (between operators operating at different levels of the design/production/distribution chain), more commonly known as horizontal or vertical "agreements".

Any agreements or decisions prohibited pursuant to the said Article shall be automatically void. In addition, offenders are liable to an administrative fine of up to 10% of the annual worldwide turnover of the offending group or company.

However, the rigor of such a prohibition system is tempered by several exemptions, based on a cost-benefit analysis of the practice for both the market and consumers. To that extent, Article 101§3 TFEU allows for the exemption of agreements prohibited by Article 101§1, subject to the demonstration that (i) they have a positive impact on the market and (ii) a fair share of the resulting benefit is allowed to consumers.

This exemption can be applied to individual practices as well as to categories of agreements ; thus, the European Commission has adopted several block exemptions, including one specifically applicable to vertical agreements (distribution, franchise, etc.).

For the last twelve years, the block exemption for such vertical agreements was Regulation (EU) No 330/2010 of April 20, 2010, which expires on May 31, 2022. Therefore, on May 10, 2022, the Commission adopted a new framework: Regulation (EU) No 2022/720 on the application of Article 101(3) TFEU to categories of vertical agreements, which will enter into force on June 1st, 2022 (the "VBER"). The Guidelines setting out the conditions for the application of the said VBR were published on the same day.

While many of the key provisions of Regulation No 330/2010 have been retained, such as the 30% market share sensitivity threshold below which a vertical agreement is likely to be exempted, a few innovations clarify and update the elements that qualify for the block exemption.

The new competition law rules applicable to exclusive distribution agreements

Exclusive distribution systems benefit in several respects from the innovations brought about by this new VBER, which incorporates new tolerances for the set-up of exclusive networks.

Network structuring

• The supplier is allowed to establish shared exclusivity between several distributors (up to 5), on the same given territory or for a defined group of customers.
• In case of cumulation of exclusive and selective distribution in the network(s) of the supplier, he may now restrict active or passive sales of an exclusive distributor to non-approved distributors in the territory of a selective distributor.
• The supplier is allowed to restrict active sales by the exclusive distributor and its direct customers into a territory or to a group of customers which the supplier has reserved for itself, or which it has allocated on an exclusive basis to a maximum of five other exclusive distributors.
• Any clause prohibiting passive (i.e. unsolicited) sales by the distributor outside the allocated territory or customer group remains prohibited by the VBER.
• The supplier is allowed to restrict active or passive sales to end-users by an exclusive distributor acting as a wholesaler in the market.
• He is also allowed to restrict the ability of the exclusive distributor to sell components actively or passively for incorporation to customers who could use them for the manufacture of goods similar to those produced by the supplier.
• The supplier is also allowed to set up a dual distribution system (i.e. a network where he is selling both to its distributors and to final customers). The VBER provides that exchanges of information in a dual distribution situation may now be exempted if the resulting exchange of information is (i) directly related to its implementation, and (ii) necessary to improve the production or distribution of the goods or services (some examples of exempted and non-exempted exchanges of information in this situation are listed in §99 and §100 of the Guidelines).

Non-competition undertakings

• The Commission has also chosen to ease the terms of renewal of non-compete commitments (during the contract): from now on, these obligations may be tacitly renewed beyond the traditional 5-year period, provided that the distributor's right to renegotiate or terminate the distribution contract is preserved; the aim is to facilitate the continuation of the contractual relationship, and not to force the distributor to remain in it.
• The VBER also exempts post-contractual non-competition commitments if the obligation:

• Relates to goods or services in competition with the contractual goods or services,
• Is limited to the premises and land from which the distributor has carried on business during the term of the contract,
• Is essential for the protection of any know-how transferred by the supplier to the distributor, and
• Is limited to a one-year duration from the expiry of the contract.

Pricing policy

• The supplier will remain vigilant to ensure that its pricing policies do not reflect an attempt to impose minimum sale prices, either directly or indirectly (notably through minimum advertised prices - MAP), as this is still firmly qualified as a hardcore restriction.
• The supplier may now choose to apply a differentiated dual wholesale pricing system, depending on whether the resale of its products is carried out online or offline by the distributor, with the VBER now exempting dual pricing systems, provided that (i) the dual pricing is intended to encourage or reward an adequate level of investment, commensurate with the costs associated with each channel; and (ii) the dual pricing is not intended to restrict the distributor's ability to sell the products online, which would constitute a hardcore restriction. The VBER therefore supports physical shops while encouraging online sales.

What Altaïr Avocats can do for you :

• Audit of contract - compliance with competition rules.
• Assistance in setting up, developing and/or restructuring distribution networks.
• Assistance in the context of investigations by competition authorities.
• Representation in litigation before the competition authorities (proceedings on the merits and applications for interim measures to prevent irreversible damage from anti-competitive behavior) and in court.