Competition: Focus on the new Vertical Restraints Exemption Regulation and “dual distribution”.
When a supplier develops a direct sales channel to consumers, for example via an e-commerce site, in addition to its distribution network, this is known as “dual distribution”. This dual distribution puts the supplier in a position of competition with its distributors, creating areas of risk under competition law, particularly as to the information exchanged with distributors.
The Exemption Regulation provides that vertical agreements, i.e. in practice all distribution agreements (selective, exclusive, franchising, etc.), are exempted and escape the prohibition on cartels, provided they meet the market share threshold and do not contain any hard-core or excluded restrictions. The new Exemption Regulation and Guidelines specify the conditions under which this exemption applies to ” dual distribution “.
“Dual distribution” and exchanges of information between a supplier and its distributors
What are we talking about?
In principle, vertical agreements between competitors do not qualify for exemption under the Vertical Agreements Exemption Regulation (Article 2(4)).
However, Article 2(4) of the new Block Exemption Regulation contains two exceptions applicable to “non-reciprocal” agreements between competing parties.
For the record, an agreement is “non-reciprocal” when the purchaser of the contractual goods and services does not also supply goods or services competing with the supplier. In the case of such agreements, the potential negative impact of the agreement on downstream competition is considered less important than the potential positive impact upstream or downstream.
As these are exceptions, they must be interpreted strictly.
Who is covered by these exceptions?
In practice, these exceptions correspond to the following two dual distribution scenarios, in which a supplier of goods or services is also active downstream:
- when the supplier is both a producer, importer or wholesaler of goods and a distributor of goods, and the buyer is solely a distributor (Article 2, paragraph 4, a) ;
- when the supplier is both a service provider at several levels of commercial activity and the purchaser is only active at the retail stage (Article 2, paragraph 4, b) ).
In practice, this refers to situations where a supplier markets its products or services both via distributors and directly to consumers, notably via an e-commerce site.
At one stage, the Commission considered limiting these exceptions to cases where the market share of the buyer and supplier is less than 10%, but this new threshold was ultimately rejected in view of criticism that it was too restrictive.
What is the practical impact of these exceptions?
The aim of applying these exceptions is to create a safe harbor for exchanges of information between suppliers and distributors, whereas exchanges of commercially sensitive information between competitors are liable to constitute prohibited anti-competitive agreements.
Under Article 2(5) of the new Exemption Regulation, the exemption applies to all aspects of the non-reciprocal vertical agreement, including exchanges of information between supplier and distributor if such exchanges are directly linked to the implementation of the agreement or are necessary to improve the production or distribution of the contract goods or services.
Exchanges meeting these conditions may concern, for example:
- Technical information on the contractual goods or services (e.g. certification) or their supply (e.g. inventory, sales and returns volumes);
- Aggregate information on consumer purchases, preferences or customer returns;
- Information on the supplier’s selling prices to the buyer, or the supplier’s recommended or maximum selling prices;
- Information on promotional or performance-related campaigns by other distributors (aggregated information).
On the other hand, exchanges of the following information may not be covered by the exemption, and therefore potentially prohibited as a horizontal agreement:
- Information on the supplier’s or distributor’s future sales prices;
- Customer-specific data, unless the information is needed to adapt products to customer specifications, to implement a loyalty program, for warranty or after-sales services, or to respect customer allocation under selective or exclusive distribution agreements;
- Information on goods sold by a distributor under its own private label exchanged with a manufacturer of competing goods, unless it manufactures the private label products in question.
In conclusion, if a supplier develops a direct-to-consumer distribution channel, and in particular an e-commerce site, in parallel with its distribution network, this supplier must be cautious and adopt measures to ensure that exchanges of information with its distributors are properly justified. This justification must be linked to the implementation of the contract or the improvement of production or distribution. The supplier must also avoid prohibited exchanges of information, for example by putting in place “Chinese wall” type measures between its direct distribution activities and distribution via distributors.
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