EC’s public consultation on the new Block Exemption Regulation and Guidelines on Vertical Restraints

On 28 July 2008, the European Commission launched a public consultation to review the Block Exemption Regulation (“BER”) and the Guidelines on vertical restraints, which are set to expire in May 2010.

As the Commission puts it, two major developments have marked the ten-year period following the adoption of the current rules: an increase in large distributors’ market power and the evolution of sales on the Internet. Accordingly, the draft revised rules on which stakeholders are consulted have been adapted to take account of these two developments. The majority of the changes are included in the revised draft Guidelines.

The dual market shares threshold. The Commission proposes that for a vertical agreement to benefit from the block exemption, not only the supplier’s market share (as is the case under the current rules) but also the buyer’s market share should not exceed 30%, a change which the Commission deems necessary to take account of the further increase in large distributors’ market power.

Internet sales. The draft Guidelines include new provisions on Internet sales in relation to restrictions of passive/active sales within exclusive and selective distribution systems. Manufacturers of expensive goods, notably luxury/branded goods or electronics are lobbying fiercely the Commission to allow for tighter rules on Internet selling.

As a preliminary issue, the draft Guidelines address the distinction between active and passive sales. They reiterate the principle that every distributor must be free to use the Internet to advertise or to sell products and that, in general, the use of the Internet/the setting up of a website is not considered a form of active sales, since it is a reasonable way to reach every customer, unless it is specifically targeted at these customers. However, online advertisement specifically addressed to certain customers is now expressly considered a form of active selling to these customers, while, conversely, general advertising or promotion on the Internet that reaches customers in other distributors’ (exclusive) territories or customer groups but which is a reasonable way to reach customers outside those territories or customer groups, for instance to reach customers in one’s own territory, are considered passive sales.

In addition, the following are now explicitly considered as hardcore restrictions of passive internet selling:

–             Requiring a (exclusive) distributor to prevent customers located in another (exclusive) territory from viewing its website or requiring the distributor to re-route automatically customers to the manufacturer’s or other (exclusive) distributors’ websites;

–             Requiring a (exclusive) distributor to terminate transactions if the credit card data reveal an address that is not within the distributor’s (exclusive) territory;

–             Requiring a distributor to limit the proportion of overall sales made over the internet;

–             Requiring a distributor to pay a higher price for products to be resold online than for products intended to be resold off-line.

Conversely, under the draft Guidelines a supplier may legitimately “restrict” Internet sales by requiring his distributors to have a brick and mortar shop or showroom before engaging in online distribution as well as requiring quality standards for the use of the Internet site to resell his goods, just as the supplier may require quality standards for a shop or for advertising and promotion in general. However, any obligation which dissuades appointed dealers (i.e. within a selective distribution system) from using the Internet by imposing criteria for online sales which are not equivalent (albeit they do not have to be necessarily identical to those imposed for off-line sales) to the criteria imposed for the off-line sales will be regarded by the Commission as a hardcore restriction (of passive selling).

Moreover, the restriction of passive sales during the first two years that a distributor is selling the contract goods or services fall outside Article 81(1) when such distributor is the first to sell a new brand or the first to sell an existing brand in a new (geographic) market. Allowing such an absolute restriction of passive sales appears particularly relevant for branded (e.g. luxury) products which are the most affected by Internet sales, notably due to counterfeits and free-riding issues.

Other changes in brief.  The revised Guidelines contain the majority of the “new” provisions. These are aimed chiefly to either clarify general issues, or to address issues not covered in the current Guidelines, among which the following:

–     Resale Price Maintenance. RPM is still regarded as a hardcore restriction. Notwithstanding, the draft Guidelines underline the possibility for an undertaking to substantiate, in individual cases, the likely efficiencies that RPM restrictions may bring about. Fixed or minimum retail prices may be justified/necessary to align the interests of the distributors with the interest of the supplier (typically where a manufacturer introduces a new brand or enters a new market), or to organize coordinated short term low price campaigns which may benefit consumers; or also to limit the potential negative effects of loss-leading activities by distributors.

–     Agency agreements. The draft Guidelines introduce a further category of risk (related to other activities, in other product markets) to determine whether an agent is a true agent or a distributor.  The draft Guidelines suggest to assess whether the principal requires the agent to undertake such activities and these activities are indispensable to engage in selling or purchasing the contract goods or services on behalf of the principal.

–     Upfront access payments and category management agreements. The draft Guidelines now address two types of agreements not discussed in the current Guidelines: upfront access payments (practices whereby suppliers pay fixed fees to distributors in order to have access to their distribution network) and category management agreements (where the distributor entrusts the supplier, i.e. the category captain, with the marketing of a category of products including in general not only the supplier’s products, but also the products of its competitors).

The draft Guidelines make also clear that while the BER does not apply to unilateral conduct, as long as the unilateral policy of one party receives the (explicit and/or tacit) acquiescence of the other party, then such acquiescence constitute a vertical agreement for the purpose of the application of Article 81 EC.  Moreover, while in general the Commission bears the burden of proof that an agreement falling outside the scope of the BER actually infringes Article 81(1), the new draft Guidelines now clarify that including hardcore restrictions in an agreement gives rise to the a rebuttable presumption that the agreement falls within Article 81(1), and that the Commission may simply rely on such a presumption to base a finding that the agreement in question infringes Article 81(1). [Gabriele Accardo]