Selective distribution in the new Vertical Block Exemption Regulation

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On May 10, the European Commission (EC) adopted the new Vertical Block Exemption Regulation 2022/720 
Selective distribution in the new Vertical Block Exemption Regulation
September 28, 2022

On May 10, the European Commission (EC) adopted the new Vertical Block Exemption Regulation 2022/720 (“VBER”), which came into force on June 1. After the publication of the English version of Guidelines together with the new VBER, the Guidelines were formally adopted in all official languages on June 28, 2022.

This post explains the main developments regarding selective distribution, which is one of the distribution models available to suppliers that want to sell their goods or services through an intermediary.

Under this system, suppliers undertake to sell the contract goods or services, either directly or indirectly, only to distributors selected on the basis of specified criteria, who in turn undertake not to sell these goods or services to unauthorized distributors within the territory reserved for selective distribution.

The selection criteria can be:

  • Quantitative: directly limiting the number of authorized distributors; or
  • Qualitative: selecting authorized distributors based on objective qualitative criteria.

Purely qualitative selective distribution systems are not considered to restrict competition as long as they meet the criteria set by the Court of Justice of the European Union (“CJEU”) in the Metro judgment. As such, this type of selective distribution systems does not require any individual exemption and it is not required to benefit from the exemption provided by the new VBER. In essence, this depends on the fulfillment of three conditions:

  • the nature of the goods or services must necessitate a selective distribution system (this is the case, for instance, of high-quality, high-technology or luxury products);
  • distributors must be chosen on the basis of objective qualitative criteria applied uniformly and not in a discriminatory manner; and
  • these criteria must not go beyond what is necessary. 

On the other hand, even if these conditions are not met, selective distribution agreements can benefit from the exemption under the new VBER if the market shares of the supplier and the buyer do not exceed 30% and the agreement does not contain any hardcore restriction.

In addition to the usual examples of qualitative selective distribution criteria that relates to the product range, the training of the staff or the point-of-sale services, the new Guidelines recognize the possibility of making access to the distribution network conditional to achieving sustainability objectives (such as  climate change, environmental protection or the use of natural resources).

It is important to note that the new VBER has not significantly modified the rules applicable to selective distribution. The main restrictions already provided for in Regulation 330/2010 will continue to benefit from the block exemption regulation. In this regard, suppliers are entitled to:

  • restrict active or passive sales by authorized to unauthorized distributors;
  • restrict the place of establishment of the members of the selective distribution system;
  • restrict active or passive sales to end users by members of the selective distribution system operating at the wholesale level of trade; and
  • restrict distributors’ ability to sell components, supplied for the purposes of incorporation to a product, to customers who would use them to manufacture the same type of goods as those produced by the supplier.

The Guidelines also allow suppliers to require distributors to have one or more physical stores or showrooms as a condition for becoming members of their selective distribution system.

While the basic principles of selective distribution have not changed, the new VBER has introduced the following new features:

  • As in the case of  exclusive distribution systems, the new VBER allows suppliers to restrict active or passive sales made by the direct buyers of authorized distributors to unauthorized distributors, which was expressly prohibited under Regulation 330/2010.
  • The combination of several distribution systems: if suppliers combine several distribution systems (selective/exclusive) in different territories, they may (i) restrict active and passive sales to unauthorized distributors in the territories covered by the selective distribution system, and (ii) restrict active sales by authorized distributors into a territory or to a customer group reserved to the supplier or allocated by the supplier exclusively to a maximum of five exclusive distributors (for more information, see our post on the main developments on exclusive distribution).
  • Requirements that restrict online sales: suppliers may impose quality requirements for online sales that are different to those imposed on physical stores. Suppliers may also require distributors to make an (absolute) minimum of sales in physical stores. This obligation may apply equally to all distributors, or differently, based on objective criteria (such as the distributor’s size in the network). In any event, the minimum sales obligation can never be a percentage of the distributor’s total sales.
  • Restrictions on marketplace sales: in line with the case law of the CJEU (Coty case), the new Guidelines expressly provide for the possibility of prohibiting distributors from selling products on marketplaces, as long as that they are allowed to use other online channels and even search engine advertising channels.
  • Price monitoring: the new Guidelines allow price monitoring – a practice increasingly used in e-commerce, while excluding measures aimed at fixing resale prices.
  • Broadening of the concept of active sales: 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 (for more information, see our post on the main developments on exclusive distribution).
  • Dual pricing: it is now possible to set a price for sales of the products or services online different than the prices for sales offline, provided that the difference is not intended to effectively prevent online sales. As the new Guidelines clarify, dual pricing will be acceptable when it is reasonably related to the differences in investments and costs incurred by the buyer to make sales in each channel. The burden of proof lies with the company that intends to charge different prices.
  • Exchange of information in the context of dual distribution: the exchange of information between suppliers and distributors within selective distribution systems, provided that the suppliers are also active in the same relevant market (and therefore compete with its distribution network) benefit from the exemption in the new VBER provided that the information is directly related to the implementation of the vertical agreement or necessary to improve the production or distribution of the contract goods or services. The Guidelines provide examples of information that comply with this criteria.

If the conditions of the new VBER are not met, an assessment should be made of (i) the impact that the restrictions have on consumers and (ii) the possible efficiencies generated by the restrictions. Arguably, hardcore restrictions could lead to pro-competitive effects, but it is unlikely that they meet the above conditions, in particular if the selective distribution systems contribute to a cumulative effect or exclude from the market new distributors that are capable of adequately selling the products.

September 28, 2022