Exclusive distribution in the new Vertical Block Exemption Regulation

Spain European Union
New Vertical Block Exemption Regulation (“New Regulation”), which came into force on June 1
Exclusive distribution in the new Vertical Block Exemption Regulation
June 9, 2022

On May 10, the European Commission (EC) adopted the new Vertical Block Exemption Regulation (“New Regulation”), which came into force on June 1. The revised Guidelines have not been formally adopted yet, but they are already available in English on the Directorate-General for Competition’s website.

This post discusses the main developments regarding exclusive distribution. According to the Guidelines, exclusive distribution is one of the distribution systems available to suppliers that want to sell their goods or services through an intermediary. Suppliers may decide to use:

> An exclusive or a selective distribution system (both already provided in the Vertical Block Exemption Regulation that expired on May 31, 2021).

> Neither, using the so-called “free distribution systems”.

The New Regulation keeps the previous definition of “exclusive distribution systems,” i.e., distribution systems in which the supplier reserves a territory or a customer group exclusively for itself or for another distributor. Exclusive distribution entails the possibility of restricting other distributors from actively selling (i.e., it covers only active sales) into the exclusive territory or to the exclusive customer group reserved by the supplier or allocated exclusively to a distributor. Therefore, exclusive distribution is relevant not due to possible market or customer partitioning, but due to the protection of investments made by the exclusive distributor (or the supplier) to promote the supplier’s brand in the exclusive territory or to promote the product with certain buyers. 

Although the basic principles of exclusive distribution have not changed, the New Regulation has modified the following aspects:

> The New Regulation allows up to a maximum of five exclusive distributors to be appointed per territory or customer group (only one used to be allowed).

Therefore, a territory or customer group reserved for itself by the supplier or allocated exclusively to one or more distributors may be protected from other distributors’ active sales. However, active and passive sales by appointed distributors within the exclusive territory or customer group cannot be restricted.

> Suppliers may also restrict active sales into the exclusive territory or customer group by any other distributor’s direct buyers, which was expressly prohibited under Regulation 330/2010.

> The definition of active sales has broadened: in addition to the means provided in the 2010 Guidelines (letters, visits, emails and calls), the New Regulation lists various examples of active selling related to targeted advertising and promotion online. In particular, active sales include:

  • Advertising the goods or services on search engines targeting customers in particular territories.
  • Promoting the goods or services through price comparison services.
  • Operating a website with a top-level domain corresponding to particular territories (e.g., “.es,” “.cat,” or “.gal”).
  • Offering on a website languages that are commonly used in particular territories, where such languages are different from the ones commonly used in the territory in which the buyer is established.

> The definition of passive sales under the New Regulation expressly excludes any sale started by actively targeting the particular customer, customer group or territory. The definition includes sales resulting from participating in public procurement or responding to private invitations to tender.

If the restrictions on competition implemented in an exclusive distribution system do not meet the conditions of the New Regulation, the following aspects must be assessed: (i) the impact of these restrictions on customers; and (ii) potential efficiencies, e.g., investments for brand promotion, the launching of new products or the distribution of complex goods, and the reduction of logistic or transportation costs. Arguably, hardcore restrictions could lead to pro-competitive effects, but it is unlikely that they meet the above conditions. 

June 9, 2022