EU | Review of vertical restraints regarding dual distribution systems

The Commission is evaluating minimum pricing rules 
EU | Review of vertical restraints regarding dual distribution systems
May 6, 2022

As discussed in previous posts, the European Commission (the “Commission”) is currently reviewing the Vertical Block Exemption Regulation (“VBER”) and its accompanying guidelines that will expire on May 31, 2022. In particular, the Commission is evaluating the rules on minimum resale prices and non-compete clauses, other possible active sales restrictions, indirect measures restricting online sales, parity clauses and dual distribution systems.

Current dual distribution regime

Dual distribution is a system in which a supplier not only sells its goods or services through independent distributors but also directly to end customers (in direct competition with its independent distributors).

Under the VBER, if the market share of the parties to the agreement does not exceed 30%, the dual distribution system is exempt from the prohibition of article 101(1) of the Treaty on the Functioning of the European Union (“TFEU”), even if the supplier and the buyer compete at retail level.

However, since dual distribution systems are becoming increasingly important over the last few years, this exemption is raising more and more concerns, because of the risk of anticompetitive information being exchanged between suppliers and distributors.

Draft revised VBER and Vertical Guidelines published on July 9, 2021

On July 9, 2021, the Commission published a Draft revised VBER and Vertical Guidelines (“Draft VBER”) limiting the scope of the dual distribution exemption to situations raising no horizontal concerns.

Specifically, article 2(4) of the Draft VBER limited the exemption to dual distribution cases in which the aggregate market share of the manufacturer or importer (note that it extends the parties covered by the exemption) and the distributor does not exceed 10% at retail level.

The Draft VBER added that, if the supplier and the distributor had an aggregate retail market share of at least 10% but not exceeding 30%, the exemption remained applicable, although any exchange of information between them  would have to be assessed separately under the horizontal cooperation guidelines.

Public consultation: Stakeholder comments

After the Draft VBER was published, a public consultation was opened between July and September 2021, where the stakeholders submitted their comments to the new dual distribution regime provided in the Draft VBER.

Stakeholders claimed that the 10% market share threshold was unreasonable, impractical and disproportionately low. They also asked for further clarification on the type of information that could be exchanged between the parties in a dual distribution relationship.

Consultation: Draft new section dealing with information exchange in dual distribution

In response to stakeholders’ criticism, on February 4, 2022, the Commission launched a public consultation on the draft new section dealing with information exchange in dual distribution.

This draft does not mention the 10% market share threshold. Therefore, it looks like the Commission will not introduce this amendment in the final version of the VBER.

Additionally, the draft clearly states that any exchange of information "necessary to improve the production or distribution of the contract goods or services” will be covered by the exemption included in the Draft VBER.

The Commission lists some examples of information that could generally be considered necessary to improve the production or distribution of the contract goods or services, therefore benefitting from the exemption provided in the Draft VBER, including (i) technical information on the contract goods or services; (ii) information on production, inventory, stocks, sales volume and returns; (iii) aggregated information regarding customer purchases, preferences and feedback; and (iv) performance-related information, including information on the marketing and sales activities of other buyers.

The Commission also lists the types of information exchange that could be considered “not necessary” and therefore not covered by the exemption: (i) information on the actual future prices of the contract goods or services; (ii) customer-specific sales data; and (iii) information on goods sold by a distributor under its own brand name, if the supplier sells competing branded goods.

Information exchanges that do not qualify as “necessary” will be assessed under the prohibition of article 101(1) TFEU, also considering the horizontal cooperation guidelines.

Conclusion

Dual distribution has gained importance over the last few years, mostly due to the development of ecommerce, which has facilitated direct sales by suppliers and manufacturers. This trend has consolidated during the COVID-19 pandemic, and it has led the Commission to consider applying the VBER benefit to this type of distribution may exempt vertical agreements where horizontal concerns are no longer negligible and therefore should not be exempt.

Regardless of the final approach to dual distribution systems in the final version of the new VBER and its accompanying guidelines that will enter into force on June 1, 2022, there is no doubt that information exchange in dual distribution will be closely examined by the Commission and EU Member State authorities. Therefore, it is advisable to review the adjustments and preventive measures to ensure that dual distribution systems are in line with the new legal framework.

May 6, 2022