EU Block Regulation
The 2010 EU Regulation on Vertical Agreements significantly changed the approach of previous block exemptions. It provides exemptions on more general terms, which in effect, allows more restraints to be permissible in principle unless prohibited.
It adopts a so-called black list of prohibited terms and a white list of permissible terms. It gives greater flexibility in vertical agreements.
A safe haven is created where the relevant entities do not have significant market power. This is generally measured at 30% of the relevant market. The Commission recognises certain types of vertical agreements may improve economic efficiency within a chain of production or distribution by facilitating better coordination between participating undertakings. This may lead to a reduction in transaction and distribution costs to the parties and an optimisation of their sales and investment levels.
Vertical agreements are agreements, or concerted practices entered between two or more undertakings, each of which operates, for the purpose of the agreement or the concerted practice, at a different level of production or place in the distribution chain which relates to the conditions under which the parties may purchase, sell or resell certain goods or services.
Many vertical agreements will not fall within the scope of this definition at all, under general principles. Agreements that fall within the definition may be exempted under other provisions, such as the Technology Transfer Regulation. An assignment of intellectual property rights may be exempt where it is ancillary to the main objective of the agreement, for example, in the case of the establishment of an efficient system of distribution.
The Regulations apply a market share threshold. Where the market share held by the supplier does not exceed 30% of the relevant market in which it sells the relevant goods or services, and the market share of the buyer does not exceed 30% of the relevant market in which it purchases the relevant goods or services, the Regulation does not apply. The European Commission has published notes on the definition of the market for the purpose of market share.
The blacklisted or so-called hard-core restraints, which are prohibited, are set out in the Regulation. They are not capable of being exempted. The most significant types are resale price maintenance and territorial restrictions.
Resale price maintenance may arise directly by fixing a minimum resale price. It may arise indirectly by fixing discount levels or indirect action which imposes penalties or practical obstacles in order to ensure the maintenance of a recommended minimum price.
Maximum prices are not restricted in themselves. Although resale price maintenance is almost invariably regarded as objectionable, there may be highly exceptional circumstances in which it can be justified.
Clauses which restrict passive sales into excluded EU territories or customer groups are excluded from the exemption. This is based on the EU requirements for an integrated market and the long-standing objection to the compartmentalisation of the single market.
The Commission has published guidelines on the distinction between active and passive sales. The use of the internet in itself does not comprise an active sale if it is a reasonable means of marketing. Provided the website is not aimed at specific customers, primarily located in another state, it does not comprise an active sale. The language on the website is not determinative. Apart from e-commerce marketing, passive selling would include catalogue selling and responding to unsolicited orders.
The guidelines allow for a restriction of passive sales in limited cases. Where the distributor is first in the market selling a new brand or first to bring an established brand into a new market, the significant investment may justify a restriction on passive sales for up to two years.
There are restrictions on the use of non-compete obligations arising after the term of the agreement and obligations regarding competing products in selective distribution networks. They are restricted, irrespective of market share. They may be severed from an agreement so that the remainder may be capable of benefiting from the exemption.
The Commission has published guidelines on vertical restraints. This assists in the interpretation of the Regulations and sets out the Commission\’s policy in order to assist businesses in undertaking a self-assessment of the agreements.
There is a four-stage test for analysis. The party should first analyse the relevant market and ascertain the relevant market share. If the shares are each below 30%, then the agreement may be within the exemption.
If the market share is less than 30%, hard-core prohibitions must be considered. If the parties have a share of more than 30%, the agreement must be considered from the perspective of whether it falls within the prohibition and, if it does so, whether it falls within the exemption.
A key issue is whether the agreement is such that it leads to insufficient competition between brands. A reduction between brands is generally more harmful than a reduction of competition within the brand. A combination of restraints may increase the harmful effect on competition and be less easily justified.
Restraints that are required in order to justify a bilateral investment in the context of a specific type of relationship are more easily justified. Restraints imposed in the context of seeking to open up new products or geographic markets are similarly more easily justified.
The Commission emphasises the market position of competitors, the existence and extent of barriers to entry and the maturity of the product markets. The Commission is of the view that negative effects are more likely to follow in a mature market than in an emerging or dynamic market.
There may be justification for exclusive distribution agreements in terms of economic efficiency. The Commission has sought to balance the restrictions on competition arising from exclusive distribution agreements with features that enhance competition between brands.
Distribution agreements typically provide for exclusive distribution in a particular territory. This will often be recognised as necessary for start-up goods entering a new market.
The Vertical Agreements Regulation restricts the types of territorial exclusivity which are permissible. Territorial exclusivity may be permissible, but not all territorial restrictions are allowed.
Complete obstruction of parallel imports is not usually permitted, even where agreements grant absolute territorial protection, which could be justified on the basis of an increase in inter-brand competition.
There is a strong presumption that parallel trading should be permitted from outside the relevant territory, subject perhaps to restrictions for a short period, such as the first year, where significant investment is necessary.
The EU Guidelines on Vertical Restraints take into account the effect of e-commerce. It restricts practices such as dual pricing by which online products are sold at a higher rate.
While an exclusive distribution agreement breaches the substantive prohibition in Article 101(1), it may still be upheld under Article 101(3). Article 101(3) defences are unlikely to justify absolute territorial exclusivity or resale price maintenance.
The Vertical Agreement Guidelines refer to single branding agreements as non-compete obligations, the main element of which is that the buyers are obliged to concentrate their orders for a particular type of product with one supplier. This runs the risk of closing the market to actual or potential competitors.
If the participants have less than 30% market share, and the agreement is for less than five years, then the block exemption applies. The exemption applies to direct and indirect non-compete obligations. This includes exclusive purchasing obligations.
The Commission may withdraw the benefit of the exemption where the agreement does not fulfil the criteria in Article 101(3). The guidelines indicate that the exemption may be withdrawn where a number of major suppliers enter into single branding agreements with a significant number of buyers in the market, causing a cumulative effect. The Commission may exclude from the exemption parallel networks of similar vertical agreements where the networks cover more than 50% of the relevant market.
Where the block exemption is not applicable, the guidelines set out considerations for the analysis of whether the single branding agreement is caught by the substantive prohibition. They include the supplier’s market position, the length of non-compete obligations and the likelihood of significant foreclosure of the market.
The guidelines emphasise the possibility of a reduction in inter-brand competition for final products at the retail level. Significant anticompetitive effects may start to arise if 30% or more of the relevant market is tied. Guidance is given in relation to cumulative foreclosure effects.
Selective distribution agreements typically involve the restriction of branded products based on criteria related to the products. In order to be eligible to join the network of distributors, resellers must meet certain standards provided by the manufacturer. In contrast to exclusive distribution agreements, the number of distributors is not necessarily limited.
Qualitative criteria, such as staff training or service quality requirements based on the nature of the product, without restriction on the number of dealers, is regarded as low risk in respect of anticompetitive effect. The Commission recognises that in some product cases, non-price factors are a significant competitive force. The enhancement of quality through selective networks with provisions which seek to eliminate free riders who damage the brand by lower standards is generally permissible.
The 2010 Regulation allows both qualitative and quantitative restrictions. Restrictions on the number of outlets in an area are usually allowed, provided that the market share is below 30% and there are no hard-core restrictions, including, in particular, restrictions on active selling by distributors to each other and to end-users.
Where there is no significant market power, inter-brand restrictions in selective distribution agreements are generally acceptable on the basis that there is competition from other brands. The Commission may withdraw the exemption if over half the market is subject to similar restrictions.
The internet raises difficult questions for selective distribution. There is a risk of free riders who compete unfairly with high-quality retailers who have invested in physical infrastructure. Selective distribution agreements may be justified in imposing proportionate restrictions, requiring minimal infrastructural investment.
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