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New Rules for Distribution Agreements in the EU

View profile for Jonathan Rathbone
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I manufacture and sell children’s potties in the UK, Europe and China. This is a sideline to my main occupation as a solicitor and Head of our Corporate and Commercial Team. As a result, I have always taken a keen interest in the competition restrictions that apply on selling products in Europe.

Competition is a good thing as it helps drive innovation and keep prices down for the consumer. However, a manufacturer will often want to put in place restrictions on their distributors to give each distributor a reasonable opportunity to promote and sell their products without facing competition from each other and their customers. It is also in the manufacturer’s interests that a distributor can make enough margin from selling their products so that they want to invest in promoting and growing sales.

The rules relating to what restrictions would be permitted changed on 1 June 2022.

Vertical and horizontal agreements

There are two main types of agreement:

  1. A vertical agreement: is between parties at different levels of a supply chain, such as a manufacturer and distributor.
  2. A horizontal agreement: is between parties at the same level of a supply chain, such as two distributors.

The basic anti-competition prohibition

Competition law makes it illegal for businesses to abuse a dominant market position and bans anti-competitive agreements between parties such as agreements to fix prices. 

The vertical agreement block exemption

Certain vertical agreements are exempt from the basic anti-competition prohibition, provided they do not contain a hardcore restriction. If the agreement can benefit from the exemption, there is no need to carry out a full analysis to decide if it breaches competition law. The most significant hardcore restriction is any agreement or restrictive practice whose direct or indirect object is establishing a fixed or minimum resale price.

This exemption expired on the 31 May 2022. Fortunately, the European Commission decided it was still relevant but in need of updating. As such Vertical Agreement Block Exemption Order (SI 2022/516) was adopted and came into force on the 1 June 2022.

Has anything changed?

  1. Dual distribution occurs when a supplier sells directly to their customers and to a distributor. The supplier has a vertical agreement with the distributor, but they are also acting horizontally by competing to sell the product. For example, a manufacturer may appoint a distributor in a country, but still wish to sell to consumers via their own website or via an online marketplace.

Under the old exemption, dual distribution would normally benefit from the vertical agreement exemption. This enabled the manufacturer to require information to be shared by the distributor which would ultimately help the manufacturer compete and sell its products to the consumer.

The new exemption is now more limited so that:

  • Exchanging any information which is not directly related to the vertical agreement and is not necessary to improve the production/distribution of the product, is no longer automatically exempt;
  • Online intermediation services which sell goods/services in competition with those who they provide their services to cannot use the exemption.

The UK and European competition authorities are currently investigating how Amazon is using data it gathers from independent retailers selling on Amazon marketplace in order to improve Amazon’s own direct sales to customers. This is an example of how information exchange can be used in an anti-competitive way.

  1. Parity obligations refer to a requirement that all goods are offered on the same terms (including price) across different platforms. Parity clauses are sometimes referred to as most favoured nation clauses. Under the old exemption all such clauses were a hardcore restriction.

Under the new rules, it is no longer a hardcore restriction to include a clause which only restricts better offers being made on the supplier's own sales channels, such as its website.

  1. Active sale restrictions limit a buyer’s ability to approach customers. They are usually hardcore restrictions, and the old exemption only had a few narrow and ambiguous exemptions.

The new exemption provides:

  • a definition of active sales;
  • the concept of shared exclusivity for up to 5 distributors per exclusive territory;
  • the possibility that a supplier can force the distributor to pass on any active sale restrictions; and
  • greater protection for selective distribution systems by allowing suppliers to prohibit buyers from selling to unauthorised distributors who are located in the same territory as the selective distribution system.
  1. Online sales were a particular focus of the European Commission’s review as e-commerce has changed the way in which manufacturers approach distribution. The new exemption has recognised this and provides for:
  • Dual pricing: a supplier can charge different wholesale prices for online vs offline sales. However, the difference must relate to the difference in costs for online/offline sale platforms. This mechanism cannot impose restrictions as to the number of products sold online.
  • Equivalence principle: has been updated for selective distribution systems. The criteria imposed for online platforms need not be the same as those imposed for traditional shops.
  • Online sale restrictions: will be hardcore if they have the object of preventing the effective use of the internet.

 

If you are looking to establish, review or negotiate your distribution or agency agreement, then please contact out Corporate and Commercial Team on 01242 574244 or e-mail Head of Department, Jon Rathbone.  

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