Competition rules apply to distribution arrangements both on an EU and national level and can be enforced by both the European Commission and national competition authorities. In recent years we have seen some national authorities adopting a more stringent enforcement approach. A refresh of the EU rules is an opportunity to reduce the room for divergence and ensure that the rules are sufficiently flexible to adjust to the pace of change that markets are experiencing. We have been discussing the most important trends and anticipated changes in the rules with Fiona Carlin, Brussels-based Partner and former Chair of the Firm’s Global and Antitrust Law Practice.
The competition rules governing vertical restraints in distribution agreements are being revisited. The European Commission is currently consulting on draft legal texts that will be finalised and adopted in the first half of 2022. What are the headline changes?
We are in the process of a significant change in the rules that will govern distribution agreements for the next decade. Although the European Commission published the draft texts of the new rules for public consultation last year, it is still a work in progress and here might be still significant changes. Nonetheless, based on what we know today, there are three big headlines: First, the good news.
The Commission recognises the need to clarify and simply the rules and to allow for more flexibility to ensure that supply chains can quickly adapt to future changes and evolving customer demands. So they are proposing a number of changes that provide for more flexibility. One example is its willingness to be more permissive when it comes to resale price maintenance – by allowing, for the first time, the use of “Minimum Advertised Prices” or MAPs. This has always been lawful in the US for as long as retailers remain free to sell below the MAP. The EU is now proposing to align with that approach. If adopted, this might limit the detrimental impact of algorithmic price adjustments and help cushion against aggressive loss leader conduct.
Does this mean that the supplier can specify the minimum advertised price but the product can in fact be sold at a lower price?
Yes, the supplier can only set a minimum advertised price, insofar as the actual resale price is concerned, the distributor should always remain free to offer a discount based on its own discretion. Resale price fixing remains strictly prohibited.
„This time around, the rules will be rebalanced to counter the power of the platforms.”
What are the other main headlines?
The Commission recognises the impact of e-commerce. The current rules are a decade old and they were designed to promote e-commerce at the time nascent online sales. This time around, the rules will be rebalanced to counter the power of the platforms. Finally, there is one area where the Commission was planning to toughen the rules in a way that we think was completely uncalled for and that’s in relation to the ability to exchange information between a supplier and its resellers where the supplier competes with its resellers at their level – this is referred to as “dual distribution”. In a dual distribution context, the draft rules initially proposed by the Commission reflect a stricter approach, treating any information exchange between the supplier and its reseller as suspicious. This is unnecessary and potentially highly disruptive.We are hopeful that the final texts will be more practicable.
Interesting topics. Let’s take them one at a time. How is the Commission proposing to make the rules more flexible? You mentioned the example of MAPs – are there any other novelties when it comes to pricing?
Under today’s rules, a supplier can recommend a retail price or set a maximum price for as long as the maximum price doesn’t operate as a floor price or a fixed price in practice. Otherwise RPM is prohibited subject to two limited exceptions:
(1) short-term fixed price promotions of up to 6 weeks in a franchise context, and
(2) the ability of the supplier to fix a price on the introduction of a new product for a short period if that is needed to encourage resellers to invest in creating demand for the new product.
The Commission is going to maintain these exceptions but we think that they could be made more generous in scope. It will be interesting to watch whether the final texts will make any further concessions. The Commission is also proposing a sensible clarification to recognise the legitimacy of price-setting in relation to so-called “fulfilment contracts”. This notion refers to a situation where, usually, a large customer negotiates a favourable price directly with the supplier but where the products are delivered via an independent reseller that takes title in the normal course of business.
The Commission is proposing that fulfilment contracts and the related price fixing by the supplier are covered by the block exemption safe habour but that is conditional on the end customer waiving its right to choose the intermediary that should execute the agreement. Without such a waiver, then the supplier can only set a maximum resale price and allow the intermediary to further discount. This is welcome but we are arguing that this exception should be available to any buyer, not just “end users”. Also, the Commission should drop the customer “waiver” requirement. The new rules should avoid needless bureaucracy.
You mentioned that the “dual distribution” rules may get tougher which I’m guessing also touches on the sorts of pricing information that can be exchanged between a supplier and its resellers. What does that mean in practice?
For the last 20 years, the competition rules have recognised that even if the supplier is present at the retail level itself, its relations with independent resellers of its products remain primarily vertical in nature. The Commission was proposing to examine any information exchange between the supplier and resellers under the stricter competition rules governing horizontal agreements between competitors whenever the supplier and reseller have a combined market share of 10% or more. The 10% threshold included in the published draft new rules raises lots of questions.
What if some resellers are large and others small so some relationships fall in or out of this rule? What is the relevant geographic market to assess market share? This only adds significant complexity without the Commission having identified any particular harm from purely vertical information exchange in a dual distribution context. What this would mean in practice is that the supplier would have to potentially install internal firewalls to separate the data from its own retail outlets from the data pertaining to its independent retail operations. Commercial teams deciding the supplier’s own resale prices would need to be separate from the teams recommending retail prices to independent resellers. This doesn’t make a lot of sense. We are hopeful we can get the Commission to change its mind on this. So watch this space!
„By this, the Commission is finally recognising that both channels are inherently different in nature.”
You also mentioned the topic of online sales. The competition authorities seem to be realising that the huge success of e-commerce is having some unintended consequences that require intervention. What’s going on in your opinion?
As you rightly say, there is a much broader debate on the power of big tech, including the online platforms. There is also a lot of discussion about regulating data ownership and use. But in the distribution context, the Commission is proposing a number of changes that will impact e-commerce and the use of various online tools such as platforms and online search engines or advertising channels.
First,
it wants to regulate so-called “parity clauses” between competing platforms, so any obligation not to sell goods or services on more favourable terms using competing platforms will be excluded from the safe habour.
Second,
the Commission plans to clarify that a restriction on the use of a specific online sales channel, such as an online marketplace, is block exempted regardless of the distribution system used by the supplier – so this is not just limited to selective distribution.
Third,
a requirement that the buyer operates one or more brick and mortar shops or showrooms and sells a specific amount of goods offline will likely be exempted regardless of the distribution system used but provided such terms do not aim to prevent the buyer or its customers from “effectively using the internet to sell online or from effectively using one or more online advertising channels”.
Fourth,
the draft guidelines also spell out that dual pricing – this is charging a hybrid buyer a different price depending on whether the products are intended to be sold online or offline – will be covered by the block exemption for as long as it is intended to incentivise or reward the appropriate level of investments in the respective channel. So the price differential should be related to the differences in the costs incurred by retailers in each channel and should not make the effective use of the internet/online sales unprofitable or financially not sustainable.
We are asking the Commission to clarify that charging a different price to pure online retailers vs hybrid or brick and mortar resellers is also lawful as there is divergence amongst national competition authorities on this point.
Fifth,
the draft guidelines spell out a list of restrictions on online advertising that are likely to be viewed as preventing the effective use of the internet and as such are considered problematic. While the Commission accepts that prohibiting the use of one specific online advertising channel such as a price comparison tool or a specific search engine won’t meet the threshold test of “preventing the effective use of the internet”, it signals that prohibiting the use of all most widely used advertising services will not be looked upon kindly.
Finally, the Commission is proposing to remove the requirement that quality criteria imposed in relation to online sales have to be “equivalent” to the criteria imposed on brick and mortar shops. By this, the Commission is finally recognising that both channels are inherently different in nature.
Are there other ways the Commission is proposing to make the rules more flexible?
Yes, there are many technical but important changes. I will just name a few that are among the most important. A quick word on agency agreements. Today, so-called “genuine agents” that take no title and bear little commercial risk fall outside the competition rules. They are viewed as an extension of the supplier’s own organisation. The Commission is now proposing to extend the agency exception to situations where the agent temporarily takes title of the contract goods for a “very brief period of time” without incurring any costs or risks related to the transfer of title. This is a welcome development and we are urging the Commission to clarify what a “very brief period of time” is and to drop the “very” from that formulation.
Interestingly, the Commission is also proposing to open up the possibility for a supplier to appoint more than one exclusive distributor in a particular territory or for a particular customer group provided there is sufficient volume to protect their respective investment efforts. And it is proposing that the active sales restriction into exclusive territories can also be passed on to the distributors’ customers. Further, the prohibition of active and passive sales by exclusive distributors into other territories where the supplier operates a selective distribution system will be allowed for the first time. And conversely, authorised members of a selective system can be prevented from actively selling into a territory or customer group that has been exclusively appointed. If adopted in the final texts, these are all welcome changes that make the rules more practicable.
The draft legislation is expected to be finalized and adopted in the first half of 2022, could the new regulation enter into force already this year?
The new rules are expected to enter into force on 1 June 2022, however, the new regulation provides for a one-year grace period for market players to bring their existing distribution agreements into line with the new rules.
