I SSUE 3-4, 2011
Vertical Restraints Policy in the EU: Open Questions in the Face of Policy Compromises
By Peter Alexiadis (Partner, Gibson, Dunn & Crutcher LLP/Brussels) & Alison Kop (Associate, Gibson, Dunn & Crutcher LLP/San Francisco)*
I. Introduction practices, the Commission ran a Public Consulta- Although the view is commonly expressed tion process in the year 2009 with all relevant around the world that vertical agreements stakeholders. This consultation process culmi- (between economic operators at different parts nated in a significant recalibration of policy of the supply chain) are less harmful to competi- objectives in the arena of vertical restraints tion than agreements between competitors (at under EU competition rules which now reflect, the same level of the supply chain), one of the inter alia: enforcement priorities of the European Commis- sion (‘‘the Commission’’) for well over fifty years changes in the way in which economists has been to prevent manufacturers from dividing consider ‘‘efficiencies’’ to arise from vertical up the European Union (‘‘EU’’) by entering into commercial relationships, the need to take a agreements with their distributors not to export more ‘‘effects-based’’ approach towards goods to another Member State (i.e., geographic restrictions of competition in general, and a segmentation). The emphasis on the enduring more realistic approach as to the types of need of European competition policymakers to conduct which infringe Article 101TFEU by support the realization of the Common Market – reference to their object (assessed in a manner and thereby to support intra-brand competition more akin to a per se violation) or by their as much as inter-brand competition - has been so effect (assessed in their particular factual strong that their approach to vertical restraints setting); arguably presents the most stark example of the a shift the institutional dynamic between the differences in antitrust enforcement between the enforcement practices of the Commission world’s two leading antitrust legal models which and the National Competition Authorities dominate global commerce. of the EU Member States adopted since 2004 through the provisions of Regulation Impetus for change 1/2003; In response to a series of emerging shifts in the raising by the European Courts of the economic thinking, the institutional administra- standard of proof required to be satisfied tion of competition rules, and commercial by the Commission in those cases where it
*The views of the authors are personal, and do not necessarily reflect the views of the Firm’s clients. Many thanks to A´ lvaro Garci´a-Delgado and Elissavet Kazili of the Brussels office of Gibson Dunn for their invaluable research skills in assisting the authors in the production of this paper. Thanks also to Rachel Brass of the San Francisco office for her helpful comments on the an earlier draft of this paper. Any errors of judgment or interpretation remain exclusively those of the authors.
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This article originally appeared in The Antitrust Report, a twice-yearly newsletter published by LexisNexis. It is available both in print and online. ANTITRUST REPORT
seeks to establish the existence of tacit anti- between suppliers and distributors.7 As such, competitive agreements between firms at they are supposed to guide firms in their ‘‘self- different levels of the production/distribu- assessment’’ of whether their vertical practices tion/maintenance value chain;1 are enforceable in EU Member State courts.8 significant shifts in value brought to the That guidance is all the more important given global marketplace through the rise of the the fact that the decentralized model of antitrust Internet as a means of distributing goods enforcement set forth in Regulation 1/2003 means and services, on the one hand, and the recog- that the old system of pre-notification of agree- nition that market power is increasingly ments exclusively to the Commission has been resting in the hands of large European retai- completely overhauled. Under the new regime, lers, on the other; and not only are parties involved in distribution rela- the migration over time of certain markets tionships expected to have a greater level of from a national level to a pan-European understanding of the antitrust principles to be level. applied in any self-assessment exercise in which they engage, but national courts and regu- Adoption of a new vertical restraints regime latory bodies are also required to be more familiar with the application of those principles TheendresultofthePublicConsultation in the event of the inevitable wave of national process was the adoption by the Commission of litigation that will occur under the new regime.9 a new vertical restraints regime which came into The recalibration of Commission policies is effect on 1 June 2010, made up of an updated set reflected in the fact that the new Guidelines of interpretative Guidelines on Vertical Restraints 2 adopt an explicitly more lenient view on vertical (released on 19 May 2010), having previously restraints than had ever occurred in the past fifty approved the revised Block Exception Regulation 3 years, explaining that ‘vertical restraints are gener- 330/2010. As a result of the changes effected, ally less harmful than horizontal restraints...,’ (at vertical distribution agreements are now sub- para. 6), and requiring that the assessment of ject to a single overarching block exemption— vertical restraints be undertaken in the context Regulation 330/2010,whichreplacedRegulation 4 of the wider objective of achieving an integrated 2790/1999, although agreements entered into internal market. The new Guidelines also repre- under the auspices of the vertical restraints sent a shift in competition objectives, based on regime before the adoption of Block Exemption the application of a sounder economic analysis. Regulation 330/2010 will continue to benefit Thus, whereas the previous version of the Guide- fromthesafeharbororiginallyavailableto lines stated that the main objective of the EC them. This Block Exemption Regulation brings competition policy is to protect competition (at together a number of more narrowly defined para. 7), the new Guidelines shift the ‘primary’ block exemptions for particular types of distribu- 5 objectives, by stating that the objective of tion, and applies to all agreements which meet Article 101 TFEU is to ‘ensure that undertakings the conditions contained in that Regulation. It is 6 do not use agreements ... to restrict competition on due to expire on 31 May 2022. the market...’. The operation in tandem of the new Guidelines The new approach reflects the Commission’s and Block Exemption Regulation does not obviate recognition that certain agreements might be the need for an analysis of the competitive effects pro-competitive under various factual scenarios, of vertical agreements on their own terms, but with the agreements themselves not needing to these instruments do map out the presumptions be prohibited ab initio in order to protect compe- and analytical framework which the Commis- tition on the market; instead, the effects of the sion would apply in assessing the compatibility agreements need to be assessed in their own of certain types of agreements entered into
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particular circumstances. This is also consistent to customers. However, the Court did not with the balancing exercise expected from express its own views on whether the restriction National Competition Authorities when acting by object could be justified on the basis of the under the auspices of Regulation 1/2003 in their criteria set forth in Article 101(3) TFEU, prefer- application of Articles101(1)and(3)TFEU. ring to leave that decision in the hands of Taking these principles into account, the Guide- the relevant national court involved in the lines go on provide guidance on a number of proceedings. advances in distribution techniques, particularly Given that the genesis of the dispute in this with respect to the emergence of Internet sales. case stems from the time when the Public The changes effected in June 2010 (discussed in Consultation on the vertical restraints regime Section III below) have gone a long way towards was already underway, and given the fact that bridging the significant gap that had existed national courts continue to have very little between vertical restraints policy applied across guidance on how to apply the criteria listed in both sides of the Atlantic (recent US policy devel- Article 101(3) TFEU to a particular factual situa- opmentsarediscussedinSectionIIbelow). tion under the new regime, the final resolution of However, while it is clear that progress has this case before the French courts will hopefully been made in bringing together the different provide practitioners with greater legal certainty streams of economic theory, institutional compe- as to how to advise suppliers and distributors in tence and commercial developments, achieving anything other than the most straightforward of the confluence of these streams reflects a series of distribution scenarios. policy compromises which are just as easily capable of producing strained legal interpreta- II. Developments Across the Atlantic tions and distorted commercial decision- making. As such, they are most prone to different The process of re-evaluating the economic and legal standards by which to assess vertical rela- interpretations in practice, and hence likely to generate a wave of litigation across the EU, tionships in the EU that occurred in 2009 took with manufacturers and distributors likely to be place in the aftermath of the 2007 Judgment of the U.S. Supreme Court in Leegin Creative Leather relying on the Guidelines both as an antitrust Products, Inc. v. PSKS, Inc shield and a sword in the face of actions to , where the Court over- per se enforce distribution arrangements. ruled the longstanding rule against minimum resale price maintenance (‘‘RPM’’) agreements. Guidance from recent case-law Barely one year after the adoption of the EU’s The rationale of the Leegin precedent new vertical restraints regime, the European Leegin Court of Justice ruled on 31 October 2011, In , the Supreme Court established that 10 per se in the Pierre Fabre Dermo-Cosme´tique Case, that the rule against vertical price fixing estab- Dr. Miles Medical Company v. a ban on online sales of skin cream products lished in 1911 in John D. Park & Sons 11 constituted a restriction of competition ‘‘by , was no longer appropriate. Dr Miles object’’ and that, as such, would only be enforce- The precedent had been taken a step United States v. Colgate 12 able if that restriction could be objectively further in , where the justified. According to the Court, online sales Court clarified that the rule did not apply to a could not be prohibited outright simply because seller’s unilateral refusal to deal with a buyer that the supplier was seeking to preserve its brand had failed to charge the resale prices suggested per se image, nor was such a restriction justified by the seller. In addition, while the rule all because the supplier considered that its creams originally applied to price and non-price required on-the-spot advice to be made available vertical resale restraints between buyers and
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sellers—such as location clauses, territorial Consumer Protection Act, were held in 2009.20 In restraints, and customer restraints—over the connection with the hearings, thirty-eight state years the Court adopted the rule of reason as Attorneys General submitted a letter to Congress the relevant standard of legal review for all in support of the Bill.21 By contrast, the American vertical restraints, other than for minimum Bar Association opposed the Bill in its own letter RPM.13 Unlike the EU, given that the United to Congress.22 Neither the 2007 or the 2009 Bills States was considered to be an integrated have ultimately become law, but debate national market with little need for the creation regarding Leegin has continued and the Bill was of a ‘‘common market’’, the rationale for the treat- re-introduced to the Senate on 25 January 2011.23 ment of vertical restraints other than RPM However, with the resurgence of Republicans to according to a rule of reason lay in the under- the House of Representatives in the last election, standing that it was primarily inter-brand a number of commentators have speculated that competition that should be promoted in order the Bill has little chance of being passed before to maximize consumer welfare, rather than the next Presidential election. intra-brand competition.14 While many commentators anticipated that By 2007, therefore, it was time for the US Leegin would significantly change the landscape Supreme Court to consider whether it was for claims alleging illegal minimum RPM, in appropriate to extend the rule of reason even to many ways the effect in practice of the Judgment cases of to minimum RPM.15 After analyzing the has not been as dramatic as originally antici- developing economic literature, the Court identi- pated. Since Leegin, only a few minimum RPM fied several potential pro-competitive benefits of cases have been litigated in Federal Court, none minimum RPM, including the encouragement of of which have raised any significant new issues. retailers to invest in customer service and promo- The most notable case has been the remanding of tional efforts and the facilitation of market entry Leegin to the District Court in the Eastern District for new firms and brands.16 Rejecting the argu- of Texas.24 On remand, the plaintiffs have ment that the per se rule should be preserved alleged a hub-and-spoke conspiracy among for its administrative convenience, the Court Leegin and over 100 of its dealers.25 The plaintiffs adopted the rule of reason, holding that, over also alleged that Leegin had engaged in a hori- time courts could ‘‘establish the litigation struc- zontal price-fixing conspiracy at the retail level.26 ture to ensure the rule operates to eliminate anti- The District Court dismissed the plaintiffs’ competitive restraints from the market and to Complaint, holding that: it had failed to plead provide more guidance to businesses.’’17 the existence of a plausible relevant market, as required under the rule of reason; its new hori- Developments post-Leegin zontal restraint allegations were barred by the mandate rule; and, even if not barred, the hori- Since the Judgment in Leegin was delivered, it 27 has generated much controversy in the antitrust zontal claims failed as a matter of law. The Fifth and business communities as to its practical Circuit affirmed these findings, adding that the effect, whether among commentators, jurists or plaintiffs had also failed to prove the existence of any anti-competitive effect caused by Leegin’s legislators. The National Association of Attor- 28 neys Generals has been especially vocal in its conduct. 18 Leegin comments. In response to criticism, U.S. Though changed the analytical frame- Congress members introduced Bills in the work of analysis in federal RPM cases, its Senate and House of Representatives in 2007 broader impact has been limited by the various Leegin and 2009 proposing to return minimum RPM to State antitrust laws currently in force. is per se illegal status.19 Hearings on the final expected to have the greatest impact on antitrust version of the Bill, entitled The Discount Pricing enforcement in those States which explicitly look
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to federal precedent for guidance in interpreting the Leegin Judgment. In New York v. Herman their antitrust laws. At present, sixteen States Miller, New York, along with Michigan and Illi- statutorily require these State courts to follow nois, sued furniture manufacturer Herman federal precedent in analyzing state antitrust Miller in Federal Court, alleging that it ob- statutes.29 Laws in another six states, plus the tained agreements from its resellers to comply District of Columbia, suggest that courts simply with its minimum advertised price policy.37 use federal precedent as a guide in construing The case was settled by Consent Decree under antitrust claims.30 which Herman Miller agreed to pay $750,000 as Because the statutes in many States encourage a civil penalty.38 The case was especially notable courts to look to federal law in assessing antitrust because the plaintiffs appeared to proceed under claims, many commentators anticipated that a per se approach, as the complaint did not allege States would amend their antitrust statutes that Herman Miller had market power nor that with ‘‘Leegin Repealers’’ explicitly disavowing anti-competitive effects outweighed whatever federal law and prohibiting minimum RPM as pro-competitive benefits the minimum RPM per se illegal. To date, however, only one State— agreement may have had.39 Maryland—haspassedsuchastatute.31 The In 2010, the New York Attorney General filed Maryland law, enacted on 14 April 2009, suit in People v. Tempur-Pedic International, Inc., forbids any ‘‘contract, combination, or conspiracy alleging that Tempur-Pedic established a retail that establishes a minimum price below which a pricing policy in which it refused to do business retailer, wholesaler, or distributer may not sell a with any retailer who did not adhere to its commodity or service’’ regardless of its effect on suggested retail price ranges.40 While Tempur- competition.32 Pedic admitted to giving effect to such policies, Although Maryland is currently the only State the Court held that such agreements were merely to explicitly codify its disapproval of Leegin, the unenforceable, but not illegal under the New lack of other ‘‘Leegin Repealers’’ is partially York statute, and granted the motion to explained by the fact that pre-existing antitrust dismiss.41 laws in several other States can be interpreted as The California Attorney General has also prohibiting minimum resale price agreements. aggressively litigated minimum RPM in the For example, California law provides that it is wake of Leegin.InPeople v. DermaQuest, Inc., the illegal to ‘‘fix at any standard or figure’’ for any defendant agreed to pay $70,000 and $50,000 in article or commodity ‘‘whereby its price to the attorneys’ fees after the Attorney General alleged public or consumer shall be in any manner controlled that it prohibited distributors from selling its or established.’’ 33 The law also prohibits agree- products below its suggested retail price in viola- ments to ‘‘not sell, dispose of or transport’’ any tion of California law.42 Most recently, California article or commodity ‘‘below a common standard settled its suit against Bioelements, Inc. for figure, or fixed value.’’34 The States of Kansas, $15,000 and $36,000 in attorneys’ fees after alle- Montana, New Jersey, New York, and Ohio ging that Bioelements’ dealers contracted not to each have similar laws.35 In addition, laws in at sell products for less than the manufacturer’s least fourteen other States prohibit price fixing, suggested retail price.43 though they do not make a specific reference To date, the campaign by State Attorneys minimum RPM.36 General in the wake of the Leegin precedent has Armed with favorable State laws, certain State been very effective in discouraging minimum Attorneys General have continued to aggres- RPM agreements. Most firms continue to avoid sively litigate minimum RPM cases. The most such arrangements because of the risk of enforce- aggressive State has been New York, which ability at the State level and also because they are filed at least two high profile RPM cases since able to achieve their marketing goals by other
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means, including policies based on the Colgate (b) the specific treatment afforded to the precedent and minimum advertised pricing ‘‘hardcore’’ restrictions under the Block programmes. Thus, even though the Department Exemption Regulation; of Justice and most States now accord the rule of (iii) the treatment of agency relationships in the reason treatment to minimum RPM, the handful context of vertical relationships; of States (including, California and New York) (iv) the specific rules developed with respect to which continue to zealously prosecute RPM, Internet sales; coupled with the need of many firms to imple- (v) the new approach developed in relation to ment nation-wide promotional policies, has Resale Price Maintenance (‘‘RPM’’); and discouraged most firms from executing mini- (vi) reflections on the compatibility of emerging mum RPM policies. vertical commercial practices in light of the Commission’s new priorities in the field of Impact of the Leegin rationale in the EU vertical restraints. As controversial as the precedent in Leegin may Guidelines be, it has found itself a very close counterpart in The new reflect not only changes in the manner in which the EU now treats RPM case-law and legislative developments of the situations under the new vertical restraints past decade, but also seeks to reflect the regime which applies in the EU.44 Moreover, changes that have occurred in business practices when one considers that the logic of Leegin reso- over the past ten years. In examining the new nates with the protection of prestige brand features of the vertical restraints regime, the products, the logic underpinning the distribution most significant changes between the new 2010 of goods in the EU via a system of ‘‘selective regime and the regime which prevailed in the Guidelines Block distribution’’ (see discussion in Section IV) has year 2000 in the and under the Exemption Regulation led openly to a system of price rigidity which 330/210 are reflected in the would in practice result in similar outcomes to Annex to this paper. that proposed under the Leegin precedent. 2. Clarifying the Scope of the Block Exemption The precise parameters of the ‘‘safe harbor’’ III. Principle Changes to the EU Vertical provided under the Block Exemption Regulation Restraints Regime have been clarified in a number of important respects, namely, by: 1. Introduction Given the policy drivers which dominated the explaining that commercial conduct that is 2009 Public Consultation process, the chief non-consensual between a supplier and a features of the new vertical restraints regime distributor is not caught by Block Exemption introduced by the Block Exemption Regulation Regulation 330/2010; and its accompanying Guidelines are: clarifying which agreements are likely to have such a small impact on competition on (i) clarifications as to which types of agree- the market, by virtue of the limited turnovers ments fall outside the scope of the safe affected by the transaction in question, as to harbour provided under the Block exemp- not require the safe harbor protection tion regime; afforded by the Block Exemption; (ii) fundamental modifications to the scope the specification of which types of ver- ofthe‘‘safeharbour’’regime,including: tical distribution arrangements between (a) extending the 30 percent threshold competitors are capable of benefiting from fromthesuppliertothebuyeralso;and the terms of the Block Exemption;
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the exclusion from the scope of the Block necessary to achieve the objects of the policy in Exemption of those vertical relationships question. which involve predominantly the licensing of intellectual property rights; and Limited market impacts theroleofBlock Exemption Regulation 330/2010 where other block exemption In 2001, the Commission adopted the so- called De Minimis Notice48 which classifies parti- instruments might cover the same subject- matter in question. cular agreements as ‘agreements of minor importance.’ In the Notice, an agreement in which each individual party which is involved The exclusion of unilateral conduct in a vertical agreement holds a market share of Paragraph 25 of the new Guidelines establishes less than 15 percent on any of the relevant that there are three elements which define the affected markets is classified as an agreement of sort of ‘‘vertical agreement’’ which is covered minor importance. These ‘agreements of minor by the EU regime. The previous Guidelines importance’ are presumed not to be capable of listed three elements, namely: (1) an agreement restricting competition within the meaning of between two or more parties;45 (2) where that Article 101(1) TFEU. The De minimis Notice also agreement is between parties operating at draws a distinction between horizontal and different level of the production/distribution vertical agreements, by setting the exception at chain; and (3) the agreement relates to the condi- a level of 10 percent individual market share for tions of the purchase, sale or resale of certain those parties involved in horizontal agreements. goods or services.46 In response to developments This distinction reflects the more liberal review in European case-law, the new version of the taken by the Commission as regards the compe- Guidelines has amended the definition of ‘‘vertical titive impact of vertical agreements when agreements’’ to include an additional element, compared to horizontal agreements. namely, that the Block Exemption Regulation Under the previous version of the Guidelines 330/2010 applies to agreements and concerted (at para. 9), parties entering into vertical agree- practices, but does not extend to unilateral ments with individual market shares less than conduct of the concerned party.47 10 percent of the relevant market were presumed Unilateral anti-competitive conduct of a firm to fall outside of the scope of Article 101(1) TFEU. might fall within the scope of an Article 102 The new Guidelines have now been amended to TFEU action for the abuse of dominance. reflect the adoption of the De Minimis Notice, However, in order for an agreement to fall increasing the market share threshold from within the scope of Article 101 TFEU, and 10 percent to 15 percent, therefore categorizing hence be considered in light of Regulation vertical agreements between parties with indivi- 30/2010, the agreement must reflect the mutual dual market shares of between 10-15 percent as intention of all the parties to carry out the ‘agreements of minor importance’. This has the conduct in question. The Commission bears the potential to lower the number of agreements burden of proof, where there is no explicit agree- which, prior to the amendments, would have ment to engage in the joint conduct in question, otherwise been assessed on a case-by-case to establish that the unilateral policy of one party basis, and is particularly important in relation has been accepted (from the responsibilities to those agreements which are not covered by allocated between the parties in the general Block Exemption Regulation 330/2010. agreements) or acquiesced in by the other The de minimis thresholdisbasedonthe party, where that acceptance or acquiescence is market share enjoyed by the party in question,
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and is not related to its individual level of turn- Intellectual property licensing over. Therefore, a large firm with a high turnover but low market share – particularly in a highly Regulation 330/2010 will not apply to vertical agreements which include the assignment or saturated market – may fall under the 15 percent market share threshold and take advantage of licensing of intellectual property rights other the terms of the Notice. The provision, in both than those situations where the intellectual prop- erty licensing or assignment does not constitute the previous version and new Guidelines, makes primary object it clear that having an individual market share the ‘‘ ’’ of the agreement and where over the relevant share threshold on the relevant the it is directly related to the use, sale or resale of goods or services by the buyer or its customers market will not lead to a presumption of illeg- ality under Article 101(1) TFEU. An individual (and does not include any hard-core restrictions assessment into possible appreciable effects and of competition) (Article 2(3)). The meaning of the expression ‘‘primary object’’ is not clarified in restrictions on competition will therefore need to be carried out by the Commission before an any meaningful way by the idea that ‘‘ancillary antitrust infringement can be established. In provisions on the assignment of use of intellec- tual property rights’’ will be considered to fall addition, any agreements which fall within the Block Exemption ‘hardcore’ restrictions category, regardless of within the terms of the (see the relevant party’s market share, will not Recital 3). While the policy direction behind such an be excluded from an individual competitive Block Exemption assessment. exclusion from the scope of the may be clear, its application in complicated distribution relationships where intellectual Vertical agreements between competitors property rights lie at the heart of the commercial Article 2(4) of Block Exemption Regulation relationship is anything but clear-cut. In order to 330/2010 provides that the safe harbor exemption address any possible interpretative difficulties does not apply to vertical agreements between that might arise, the Commission sets forth a competing parties other than those entered into number of observations in its Guidelines designed on a non-reciprocal basis. In these more limited to clarify particular applications of the general circumstances, the vertical relationship can principle.50 For example: benefit from the terms of the Block Exemption (i) Whereas the Guidelines specify that Block where the supplier is a manufacturer of compe- Exemption Regulation 330/2010 will not apply to ting goods, or where the supplier is the provider those agreements ‘‘where a party provides another of services operating at various functional levels party with a recipe and licenses the other party to of the market and the buyer operates at the retail produce a drink with this recipe’’, they neverthe- level.49 less conclude that a license to dilute and bottle On the understanding that a relatively limited a concentrated extract for a drink prior to its turnover might not necessarily equate to a lack of sale as a drink is covered by the Block Exemp- market power where the relevant market is rela- tion.51 Despite the existence of a range (and tively narrowly defined, the new Guidelines fairly dated) set of Commission precedents eliminate the previous requirement that the which shed some light on the issue of whether buyer be limited to have a turnover which does a particular commercial relationship should be not exceed €100 million. considered to be ‘‘ancillary’’ to another,52 it is The concept of ‘‘competing’’ parties is under- odd that the treatment of the perennial ‘‘bottling stood to include both actual and potential problem’’ should ultimately turn on whether or competitors on the same relevant market (see not a ‘‘recipe’’ has been provided by the licensor Article 1(1) (c)). to the licensee.
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(ii) The Guidelines also indicate that, in the 3. Extending the Depth of the ‘‘Safe Harbour’’ context of franchising relationships, ‘‘industrial (applying the 30 percent threshold to franchising’’ (at para. 34) should in principle fall buyers also) outside the scope of Block Exemption Regulation The amendment which arguably has the 330/2010, whereas the logical inference from the greatest impact on vertical business arrange- structure of the Guidelines is that distribution and ments involves the extension of the market service franchising relationships should fall share threshold for the application of Block within the terms of the Block Exemption. The ratio- Exemption Regulation 330/2010 (Article 3(1)). nale for this exception is anything but clear and, Under the previous version of the Guidelines in order to provide some comfort that different and the Block Exemption Regulation, it was only standards of antitrust review should not apply to the market share of the supplier which triggered different categories of franchising agreement, the the application of the Block Exemption Regula- Commission states that the Commission will tion. The buyer’s market share was not seen as apply the principles set forth in the Block Exemp- being relevant when determining the application tion and the Guidelines ‘‘as a general rule’’ to of the Block Exemption Regulation. However, this industrial franchise relationships (at para. 44). view has changed, given the supposed applica- (iii) The Guidelines (at para. 34) specify that the tion of a more economically oriented approach Block Exemption does not apply where the transfer which takes into account the increase in the of intellectual property rights is made by a buyer power of large distributors and retailers. supplier to a subcontractor, based on the ratio- In response to these types of concerns, the new nale that such an assignment of rights is not Guidelines (at para. 83) require the Commission to compatible with the vertical relationship being assess both the market shares of the supplier and one where the transfer of intellectual property is the buyer when determining whether the ‘safe merely ancillary to the principal distribution harbor’ threshold has been fulfilled. Thus; function (Article 2(3) of Block Exemption Regula- ‘‘Both the market share of the supplier, on the tion 330/2010). marketwhereitsellsthecontractproductsto the buyer, and the market share of the buyer, on The impact of other ‘‘safe harbor’’ instruments the market(s) where it (re)sells the contract Where the subject matter of vertical agree- products, may not exceed 30 percent in order to ments ‘‘falls within the scope of application of be covered by the Block Exemption Regulation.’’ anyotherblockexemptionregulation’’,Block If the market share of the buyer and the Exemption Regulation 330/2010 provides that the supplier exceed 30 percent,53 the agreement is safe harbour under Article 2(1) does not apply not automatically deemed illegal, but the Block (Article 2(5)). In practice, given that Block Exemp- Exemption Regulation does not apply and the tion Regulation 330/2010 incorporates so many agreement will need to be assessed on its own specific forms of distribution arrangements individual merits. At the same time, while an within its scope, this means in practice that individual assessment on the likely effects of Block Exemption Regulation 772/2004 might apply the agreement will be required, a Competition to intellectual property licensing relationships, Authority such as the Commission or a National while Block Exemption Regulation 461/2010 Competition Authority would bear the burden of would apply to motor vehicle distribution proving that the agreement infringes Article issues not covered by the provisions of Block 101(1) TFEU. Exemption Regulation 330/2010 (especially as Commentators such as De Stefano have regards aftermarket sales restrictions). cautioned against this narrowing of the Block Exception Regulation,whichisanextensionof
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the approach which was previously taken in rela- as sales volumes. Similarly, market share calcu- tion to exclusive supply arrangements but which lations should include sales made through now extends to all vertical agreements falling independent distributors and through distribu- within the safe harbor. In particular, she warns tors which are vertically integrated with the that the utility of the safe harbor will be reduced supplier (Article 7(c)). The new Guidelines have by virtue of the difficulties faced by parties also deleted the provisions regarding the differ- attempting to measure shares in a purchasing ences that might exist as between the assessment market.54 By contrast, a commentator such as of intermediate products, final products, and Lianos takes the view that the new threshold after-market products and services. regime should be welcomed because it places greater emphasis on retailer market power, 4. Falling Outside the ‘‘Safe Harbour’’ 55 which had been neglected in the past. In this Regime – Agency Agreements regard, Lianos describes retail market power as Section II (2) of the Guidelines addresses ‘‘a filter to the application of the new block explains the situations where agency arrange- exemption’’, which is complemented by the ments57 should be treated under the new Guidelines’ new focus commercial practices such vertical restraints regime. Article 101(1) TFEU as up-front access payments and category only applies to agreements entered into between management (discussed below). two or more independent parties,58 and there- The 30 percent threshold applies to the buyer’s fore does not apply to an agency agreement market share only in relation to the relevant situation where the businesses of the principal market affected by the agreement, or on the and the agent are closely integrated. Competition market upon which it purchases the relevant regulators will therefore need to assess the inde- goods and services where the vertical agreement pendence of the agent when considering the in question contains exclusive supply obliga- compatibility of vertical agreements under EU tions. The wording reflects a change after the antitrust rules, and this needs to occur on a Consultation phase from the original proposal case-by-case basis. of the Commission, which had proposed origin- The treatment of agency relationships reflects ally that the buyer’s market share be calculated the more restrictive case-law developed over the on the downstream market. That downstream past decade which considered the applicability market shares approach was departed from of Article 101(1)TFEU to agency agreements.59 essentially because of the inherent difficulties in Under the previous version of the Guidelines, a supplier being able to calculate such shares on there were only two types of risk considered in the part of buyer, especially since downstream the assessment of whether an agency relation- markets are capable of being drawn quite ship could be established. For example, the narrowly and because a supplier might have Commission will assess the contracts negotiated little direct knowledge of such markets.56 by the agent on behalf of the principal, and According to the new Guidelines, market share also any investments that are considered to will be calculated on the basis of market sales be market-specific. The new Guidelines have value data (Article 7(b)). In this regard, the expanded the level of assessment required, in Commission has deleted the previous provision alignment with developments that have taken calling for market share to be based on the place in the case-law, to include a third type of contract goods or services, or other goods and financial or commercial risk relevant to the inde- services sold by the supplier which are compar- pendence of the agent, namely: the financial or able or substitutable. Where the market sales commercial risks associated with the resale or value is not available, the estimates must be repair services provided in relation to the based on other reliable market information such
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product, insofar as those activities are indispen- 5. The Treatment of ‘‘Hardcore’’ Restrictions sible and the agent undertakes such activities under the Block Exemption Regulation independent of the principal. In Mercedes- The traditional approach of EU antitrust rules 60 Benz, for example, the Commission considered to ‘‘hardcore’’ competitive restrictions (i.e., tanta- the commercial risks associated with the mount to a per se offenceinUSterms)ina Mercedes-Benz agent in Germany which distribution agreement that cannot otherwise offered a workshop, emergency services, and a benefit from the terms of a Block Exemption stock of spare parts for repairs. The commercial renders that agreement or specific restrictions risks associated with the repair services classified in it both unlawful under Article 101(1) TFEU the agent, Mercedes-Benz, as having undertaken and unenforceable under Article 101(2) TFEU, activities that may have been essential for the at least to the extent that it affects trade product but which had not been effected on between Member States. However, if the effects behalf of its principal, DaimlerChrysler. In the of the ‘‘hardcore’’ restriction are clearly confined circumstances, it was therefore not considered to the territory of a single EU Member State, the to be an ‘‘agent’’ for antitrust purposes. agreement might escape the reach of EU antitrust The new Guidelines (at para. 17) now provide rules, but will still need to be assessed under further guidance on the appropriate approach to national competition rules. be taken when assessing risks in connection with Block Exemption Regulation 330/2010 and the agency arrangements. First, if contract-specific Guidelines provide a list of hardcore restrictions risks are incurred by the agent, the agent is of competition, which will prevent the entire considered to be an independent distributor. If agreement from obtaining the benefit of the there are no contract-specific risks borne by the Block Exemption due to the high probability of agent, the analysis will continue with the assess- negative effects on competition flowing from ment of the risks related to the market-specific the particular restriction in question. The new investments. If the agent does not incur any Guidelines have provided a number of changes risks related to market-specific investments, the to the previous list of hardcore restrictions, risks related to other required activities are then largely in response to recent case-law and to taken into consideration, to the extent that they significant changes within the market that have are indispensable for them to act as an agent on taken place over the past decade, particularly the 61 behalf of the principal. increase in business conducted over the Internet The logic of the Commission’s shift in app- and how it affects competition within the rele- roach to assess market-specific risks is further vant market. The revised list of hardcore elaborated upon by a number of Commission restrictions in Article 4 of Block Exemption Regu- 62 officials, who submit that a party wishing to lation 330/2010 refers to: be characterized as an agent should not be present on the same market as both an agent Restrictions on the sales of goods or services and an independent distributor, since this at minimum prices, namely, Resale Price would allow the agent to leverage its relationship Maintenance (RPM) obligations. with the principal to acquire greater market Restrictions on sales to certain territories and power as an independent distributor. These to certain customers. ‘‘spill-over effects’’ of intra-brand restrictions Restrictions on cross-sales between members could, in addition, allow price-fixing to occur as of a selective distribution system. between the agency activities and independent Restrictions on retailers’ sales to end-users distributor activities. under selective distribution systems.
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Restrictions imposed on suppliers of com- notes that the Commission’s acknowledgement ponents in selling their components to of the possibility that hardcore restrictions independent repairers or service providers. might fall outside the scope of Article 101(1) TFEU is a significant policy advance, particularly The Commission has therefore re-caste the as regards restrictions on so-called ‘‘passive’’ (i.e., provision regarding the treatment of hardcore unsolicited) sales outside an allocated distribu- restrictions under the Block Exemption Regulation, tor’s territory. so as to clearly explain the nature of the legal presumption that applies when a hardcore a. Resale Price Maintenance restriction is included in an agreement (at para. Guide- 47). Where a hardcore restriction is included in The Commission includes in the new lines an agreement, a presumption arises that the (at para. 219) a section on the analysis of resale price restrictions, which replace the agreement will fall within the scope of the prohi- bition contained in Article 101(1) TFEU and that original section on ‘recommended and resale it is unlikely to fulfill the requirements for an prices.’ Resale The Commission treats as hard- core restrictions those RPM agreements that exemption under Article 101(3) TFEU. This will, in turn, result in a finding of anti-competitive restrict a buyer’s ability to determine its sales conduct which infringes Article 101 TFEU. The price, whether directly or indirectly, either by obliging them to sell at a fixed price or not to new Guidelines explain that such a presumption 64 is rebuttable, and does not amount to per se illeg- sell below a minimum price (Article 4(a)). It is ality. The parties in question bear the burden of presumed that such agreements will result in a restriction of competition within the meaning of rebutting the presumption and are afforded the opportunity to plead their individual case. At Article 101(1) TFEU, and will not usually be able that point, the Commission or a National Compe- to fulfill the criteria set forth in Article 101(3) TFEU (as discussed in para. 47). Where such an tition Authority will need to assess the likely negative effects of the agreements, as opposed anti-competitive presumption flows from a hard- to presuming their negative effects on competi- core restriction, the affected parties will have the opportunity to rebut the presumption by demon- tion. This opportunity for the parties to plead an efficiency defense under Article 101(3) TFEU strating to a National Competition Authority (or furthers the recent policy endorsed by the theCommission,asthecasemaybe)thatthe resale price maintenance agreement fulfills all Commission that economic assessments are necessary before concluding whether the condi- therequiredconditionsoutlinedinArticle tions of Article 101(3) TFEU have been fulfilled. 101(3) TFEU. The effects of the agreement on 63 competition, both positive and negative, will As De Stefano has noted, the language of ‘‘presumptions’’ is new to the Commission’s then need to be weighed and balanced against treatment of hardcore restrictions. In the past, it one another. The new Guidelines provide clear examples as was assumed that hardcore restrictions were restrictive of competition by object, which were to how resale price restrictions might restrict largely synonymous with per se antitrust restric- competition, by facilitating collusion between suppliers and leading to the elimination of tions identified in the United States. De Stefano suggests that the use of the term ‘‘presumption’’ intra-brand price competition. In addition, as creates a particular clash with the burden of with the other references to specific vertical restraints, the new Guidelines explain how those proof incumbent upon the Commission or upon National Competition Authorities to demon- same agreements may lead to efficiencies and strate that infringements of Article 101(1) TFEU how they can assist distributors in their promo- tional efforts.65 These sorts of pro-competitive have occurred. On the other hand, De Stefano
[42] I SSUE 3-4, 2011
benefits are usually realizable in the short-term, 1. Active sales into the exclusive territory or to although the Commission has expressed the an exclusive customer group reserved to the view that it will also be willing to look at the supplier or allocated by the supplier to another possible long-term negative effects of such a buyer, where such restriction does not limit commercial practice. The Guidelines also instruct sales by the customers of the buyer. the Commission to assess if any monitoring This exception relating to territorial restric- mechanism is in place and if there is any possi- tions bility of retaliation against a deviating distributor reflects the longstanding EU policy that, from the practice. This provides another example although territorial exclusivity conferred upon a distributor should allow some degree of protec- of where the new Guidelines require the Commis- sion to conduct a thorough assessment of the tion for the investment expended to penetrate a impact of the vertical agreements in their market in exchange for the grant of that exclu- sivity, the territorial protection afforded to the broader context so as to be able to weigh up both the likely negative and positive conse- distributor could not be absolute, insofar as quences of RPM. they could not be prevented from making so- called ‘‘passive’’ sales (but could be prevented In the adoption of this approach by the Commission, commentators such as Lugard and from making ‘‘active’’ sales into another territory Van Dijk66 have pointed to the difference of meth- or directed to a particular category of customers allocated to other distributors or the supplier odology adopted by the US Supreme Court, in Guidelines contrast to the approach adopted by the Com- itself). The previous version of the responding mission. They characterize the Commission’s defined ‘‘passive sales’’ as those sales ‘‘ to unsolicited requests from individual customers, approach to RPM as ‘‘empiricist’’, while they including the delivery of goods or services to such consider the approach of the US Supreme Court customer in Leegin to be more ‘‘theoretical’’ in its analysis. .’’ This is in contrast to ‘active’ selling, which includes sending unsolicited e-mails to Lugard and Van Dijk also question the persua- Guidelines siveness of the economic literature endorsed by individual customers. While the new the Commission, which emphasizes that a fall in do not amend the definition of passive selling, they do include examples of hardcore restrictions prices for consumers justifies the prohibition of RPM. They attribute falls in prices to an outward with respect to passive selling in the context of shift in the demand curve, which does not neces- sales made over the Internet. Over the past decade, the Internet has devel- sarily result in long term consumer welfare gains. oped into a significant distribution mechanism b. Territorial/Customer Sales Restrictions: for many firms. A large number of suppliers The Special Case of Internet Sales and and distributors fulfill their orders through the Common Market Policy Internet and utilize the Internet to reach potential clients all around the world. This was not the Any direct or indirect restrictions imposed on situation when the previous version of the Guide- a buyer to either sell into a territory not allocated lines was drafted, with the new Guidelines having to them or to certain customers are treated as amended the provisions to adapt them to current hardcore restrictions under Article 4(b) of Block business trends and needs. Thus, the new Guide- Exemption Regulation 330/2010, unless one of lines now provide guidance on the use of the four exceptions can be established: Internet in relation to the application of the hard- core restrictions found in Article 4(b) of Block Exemption Regulation 330/2010 with respect to the protection of exclusive territories.
[43] ANTITRUST REPORT
Given that the sales made online are generally Internet or catalogue sales will not be considered considered to fall into the ‘‘passive sales’’ cate- to constitute a hardcore restriction as long as the gory,67 the new Guidelines (at para. 52) treat the restriction does not restrict competition that following practices as amounting to hardcore would otherwise not have taken place in its restrictions on passive selling, namely, where absence. This is reserved primarily, for they require: example, for restrictions on the sale over the Internet or by mail order of goods such as (i) an exclusive distributor to prevent custo- dangerous substances, given the safety or mers located in another (exclusive) health concerns attached to such sales. In any territory from viewing its website or event, any such restrictions must be based on requiring the distributor to put on its the adoption of proportionate quality standards, website automatic re-routing of customers given the nature of the concern being addressed to the manufacturer’s or other (exclusive) and the policy priority of not dissuading custo- distributors’ websites; mers from sourcing products over the Internet (ii) an exclusive distributor to terminate consu- (at para. 56). mers’ transactions over the Internet once In order to assist those new distributors which their credit card data reveal an address have made substantial investments to start up that is not within the distributor’s (exclu- and/or develop a new market, and where those sive) territory; investments are considered to be necessary; the (iii) a distributor to limit the proportion of new Guidelines consider that restrictions on overall sales made over the Internet; and passive selling by other distributors into the (iv) a distributor to pay a higher price for exclusive geographic territory or to particular products intended to be resold by the customer groups to fall outside the scope of distributor online than for products Article 101(1) TFEU for a period of up to two intended to be resold offline. years in which the distributor is selling in this territory or to a particular customer group (at The characterization in the Guidelines of all of para. 61). This exception is designed to prevent these restrictions on passive sales as being ‘‘hard- large distributors or retailers, which might other- core’’ restrictions of competition is a direct wise be able to easily transition into the new response by the Commission to concerns market, from foreclosing a new entrant or expressed over the increased significance of erecting entry barriers to thwart that new sales over the Internet and the lack of regulation entrant. of these agreements in the previous versions of The exception relating to the prevention of the Guidelines and the Block Exemption Regulation. active sales to the designated customers of the The changes will affect many online firms which supplier or other distributors, where those supply or distributor only through the Internet. customer s have been exclusively allocated to They will result in more restrictions on the types another distributor or exclusively reserved to of provisions that are permissible in distribution the supplier (Article 4(b), para. 51 of the Guide- agreements, and should help to maintain a lines), reflects the position taken in the Block competitive market. Exemption in force for intellectual property However, acknowledging that there may be licensing. The exception applies regardless of legitimate instances where a supplier may need whether or not the protected customers are actu- to subject the resale of its products to some legit- ally being served at the time of the contract, it imate form of quality/health/safety standard, beingsufficientthatthecustomergrouphas the Commission expresses the view (at para. 54 been identified clearly in advance. Clearly, this of the new Guidelines)thatanoutrightbanon requires a degree of forward planning by the
[44] I SSUE 3-4, 2011
supplier so that the designated customers can be supplier is acting appropriately in setting readily identified in advance of any parallel sales minimum requirements for bricks-and-mortar taking place. In any event, the designated custo- sales (para. 52 of the Guidelines), in engaging in mers of the supplier must not be prevented from any dual pricing policies which discriminates in engaging in further resale.68 terms of the prices at which goods are available in their respective online and offline environ- The impact on selective distribution ments (para. 62 of the Guidelines), and even in the exclusion of those resellers who might be Marsden and Whelan have identified a distributing goods exclusively over the Internet number of inconsistencies in the Commission’s (see paras 176-179). It is inevitable that the approach to online retail sales, as elaborated in promotion of the Internet as an important Guidelines the new , and the Commission’s medium for sales, while at the same time preser- broader rules on selective distribution.69 In parti- ving the sanctity of selective distribution cular, they consider that suppliers should be systems, is fraught with difficult questions of allowed to impose qualitative conditions on interpretation which national judges will no distributors’ use of online selling provided that doubt be called upon to resolve. such conditions are similar in nature to those imposed in relation to bricks-and-mortar shops, 2. Restrictions on wholesalers from selling to since the interests to be protected are the same. end-users Marsden and Whelan further suggest that the prominence and utility of online retail raise It has been longstanding practice that restric- doubts as to the legality of selective distribution tions on a wholesaler from selling directly to end per se, in its ability to act as a pro-competitive customers are a legitimate restriction of trade, market mechanism.70 Indeed, they suggest that insofar as this has been interpreted as a practice selective distribution means that ‘‘consumers are which does not infringe Article 101(1) TFEU.74 forced to pay a premium in order to prevent free-riding Consequently, its express exclusion from the and to maintain the integrity of the system: the list of hardcore restrictions in Article 4(b) is balance is struck in favour of customers who value consistent with that practice. the mandated service.’’71 Dethmers and Posthuma de Boer have also drawn attention to possible 3. Restrictions of sales to unauthorized tensions in the Commission’s approach to distributors within a selective distribution Internet selling in the new vertical restraints system regime, especially insofar as the classification of Block the Internet’s commercial use for passive sales It is also legitimate under Article 4(b) of Exemption Regulation 330/2010 conflicts with the Commission’s broader policy for a supplier to restrict a distributor which is a member of its objective of promoting the Internet as a business tool.72 selective distribution system from selling to any The limits on restrictions of online sales for other reseller other than those distributors forming part of its selective distribution luxury brand or technologically advanced 75 products becomes particularly problematic in network. The legitimate restriction on cross- an online environment, where both types of supply to members of the selective distribution network is said to apply to those territories goods would otherwise attract a premium price in a ‘‘bricks-and-mortar’’ store environment run where the supplier currently operates through a selective distribution network or where it has not under the auspices of a selective distribution 76 73 as yet sold its contract products. Unless a fran- system. In this context, it is inevitable that inter- Block Exemption pretative questions will arise as to whether a chise falls outside the regime altogether because the licensing of intellectual
[45] ANTITRUST REPORT
property is characterized as the primary driver of within the network, operating either at the same or at that relationship (see discussion earlier), the a different level of trade.’’ rationale regarding restrictions on cross-supplies should apply with equal effect in the franchising Retailers’ sales to end-users under selective context.77 distribution systems Article 4(c) has also been preserved from the 4. Sales of components supplied for the purposes 1999 Block Exemption Regulation. This Article, of incorporation into another product which could be regarded as one of the corner- Article 4(b) of Block Exemption Regulation stones of the Commission’s approach as 330/2010 provides a limited exception to the prin- regards selective distribution, forbids the restric- ciple that a distributor should not be restricted to tion of active or passive sales to end users, whom it sells, by providing that a supplier is able whether professional end users or final consu- to restrict a distributor from reselling goods to mers, by members of a selective distribution parties who would incorporate those products system operating at the retail level of trade. By as components in a product in relation to which doing so, the Commission aims at clearly differ- there is competition with goods manufactured by entiating selective distribution from exclusive the supplier. The restriction must not go beyond distribution, both of which are individually this limited exception. allowed, but whose combination would lead to a hardcore restriction as expressly stated in para- c. Other Hardcore Restrictions of graph 57 of the Guidelines. Competition In this respect, it must be noted that, while making it clear that the end-users to whom the Aside from key hardcore restrictions relating authorized distributors — within the selective to RPM and territorial restraints, Article 4 of — Block Exemption Regulation 330/2010 also distribution network sellcaninnowaybe prescribes three other practices in relation to restricted, the Commission also underlines the which a rebuttable presumption will exist that need for protection of the selective distribution they are likely to produce anti-competitive networks, by clarifying that the removal of the effects that are unlikely to satisfy the terms of limitations on existing active or passive sales is exemption set forth in Article 101(3)TFEU. ‘‘without prejudice to the possibility of prohibiting a These presumptively anti-competitive relate to: member of the system from operating out of an unauthorized place of establishment.’’ Cross-sales between members of a selective This provision is of key importance to Internet distribution system sales, given that, by including passive sales into the hardcore restrictions, the Commission is flag- Article 4(d) of the Block Exemption Regulation ging as ‘‘hardcore’’ any restrictions imposed on explicitly classifies the restriction of cross- authorized distributors which are not ‘‘over- supplies between authorized distributors within all equivalent to the criteria imposed for the sales a selective distribution system as a hardcore from the brick and mortar shop’’, in particular, as restriction. This provision, which has been regards the objectives pursued and the results carried over from the 1999 Block Exemption achieved.78 Regulation, bans not only cross-supplies between distributors at the same level of the value chain, Suppliers of components in their dealings with but also includes ‘‘distributors operating at independent repairers or service providers different level of trade.’’ As the Guidelines clarify, ‘‘selected distributors must remain free to purchase the Similar to the approach taken in relation to contract products from other appointed distributors the two hardcore restrictions mentioned above,
[46] I SSUE 3-4, 2011
the hardcore restriction regarding sales of proving that all the required conditions set components, contained in Article 4(e), was also forthinthatprovision79 have been fulfilled. included in the 1999 Block Exemption Regula- If the likelihood of anti-competitive effects tion — albeit with a slight modification in its resulting from the agreement can be demon- wording. Even if, according to Article 4(b) strated, the parties may justify the restrictions buyers may be prohibited from selling compo- contained in the agreement by reference to its nents to competitors of the supplier, according ability to benefit consumers without eliminating to Article 4(e) suppliers cannot be banned from effective competition. selling components as spare parts to end-users or The Commission, in para. 93 of the new Guide- to repairers or other service providers simply lines,observesthatitshouldassessavertical because they have not been entrusted by the agreement by comparing the actual or likely buyer with the repair or servicing of its goods. future effects that will occur due to the agree- In this respect, it is worth noting that, while ment within the relevant market as against the restrictions of sales by the buyer or its customers situation that would prevail in the absence of fall, in principle, under the hardcore restriction the vertical restraints in the agreement (the category, restrictions on the supplier’s sales are ‘‘counterfactual’’). not considered to fall in and of themselves within The new Guidelines clarify which types of the exception provided by Article 4(e). effects constitute negative and positive effects for the assessment of a vertical agreement. 6. Enforcement Policy in Individual Cases These types of clarifications will hopefully In Section VI of the new Guidelines,the assist individual parties when self-assessing the Commission lays out the framework of analysis compatibility of their agreements with EU anti- for whether an agreement that might not be trust rules and will possibly lead to greater legal otherwise qualified to benefit from the safe certainty for those parties when entering into harbor provided by the Block Exemption Regula- such agreements. It also provides clear guidance tion, is caught by Article 101(1) TFEU, and if the from the Commission to Member State Competi- cumulative conditions for Article 101(3) TFEU tion Authorities in order to ensure consistency in can be satisfied. This Section of the Guidelines approach in the assessment of vertical agree- has been updated to reflect legislative changes, ments throughout the EU. Block Exemption Regulation 330/2010 in particular the adoption of Regulation 1/2003 also lists in 2002. two types of clauses which, while falling As laid out in para. 92 of the new Guidelines, outside the terms of the safe harbor exemptions, – the individual parties must assess the likely require a separate assessment because unlike effects of their own agreements with respect to the hardcore restrictions whose lack of enforce- whether competition will be capable of being ability might jeopardize the enforceability of the restricted and will thus fall within the prohibi- whole agreement in which they included - their tion on anti-competitive agreements or practices enforceability is a matter which does not taint the contained in Article 101(1) TFEU. As noted enforceability of the remainder of the agreement non-compete obliga- above, the adoption of Regulation 1/2003 has in question. In the case of tions80 eliminated the necessity of a notification of the , the rule established is that such clauses are enforceable if they do not exceed five relevant agreement to the Commission by parties 81 who wish to benefit from the exemption afforded (5) years, except where they prevent members of a selective distribution system from selling the by Article 101(3) TFEU. However, while no 82 longer being obliged to notify their agreements, products of competing manufacturers. The post-term any party claiming to be able to benefit from approach of the Commission to competition bans Article 101(3) TFEU will bear the burden of is that they are enforceable
[47] ANTITRUST REPORT
if they are of only one year’s duration post These up-front access payments might also be termination of the contract, they are also a means of blocking smaller new entrants onto limited in terms of relating to the contract the market by increasing the barriers of entry or goods and the premises from which the distri- even to facilitate collusion between distributors butor operated during the contractual term, and (at para. 206). This level of collusion normally are indispensible to protect to technology trans- requires that the distribution market is already ferred by the supplier.83 Beyond this period, it fairly concentrated. remains open to the parties to argue that a The making of up-front access payment are longer period of protection might be justified in blockexemptedwhenboththesupplier’sand light of the know-how that has been transferred the buyer’s market share is less than 30 percent, to the distributor during the life of the contract it being understood that, below such market and continues to remain secret and proprietary.84 share figures, they are unlikely to result in the foreclosure of other distributors (even though it a. Analysis of Other Specific Vertical is arguable that, even below this market share Practices figure, these types of payments are not necessa- rily efficient). The earlier version of the Guidelines provided an analysis and example of the most common c. Category Management Agreements competitive restraints and combinations of vertical restraints which arise within vertical The new Guidelines also include a new section agreements. The new Guidelines have expanded regarding the analysis of so-called ‘‘category this analysis (starting at para. 124), by including management’’ agreements. Category manage- an analysis of the possible effects of up-front ment agreements are those agreements in which access payments and category management the distributor entrusts the supplier with the agreements, with both practices reflecting a marketing of a category of products, the suppli- concern about market power in the hands of a er’s products and those in the general category buyer. of products, including those of its competitors. At paras 205 – 208, the new Guidelines discuss b. Up-front Access Payments the various possibilities of category management agreements resulting in anti-competitive foreclo- Guidelines The new include a new section on sure due to their tendency to facilitate collusion – up-frontaccesspayment(atparas203 208), between suppliers, to distort competition between which are fixed fees that suppliers pay to distri- suppliers, and to facilitate collusion amongst butors at the beginning of the relevant contract distributors.86 period in order to gain access to their distribution However, the new Guidelines also acknowl- network and to remunerate them for services edge the possible efficiencies which might flow provided to the suppliers by the retailers. While from the operation of category management recognizing that these types of arrangement agreements. According to para. 209 of the Guide- might also lead to the efficient allocation of lines, such agreements have the ability to allow shelf-space at supermarkets (see paras 207-208), both distributors and suppliers to achieve econo- it is also understood that these types of payments miesofscale.Thedistributorsareableto might contribute in certain circumstances to the guarantee that the quality products are presented anti-competitive foreclosure of other distribu- in a timely manner and directly to the retailers, tors, at least where the payments have the while the suppliers can tailor the marketing to effect of encouraging a supplier to distribute its specific customers, thereby increasing customer products through only one or a limited number satisfaction. of distributors.85
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To date, the French Competition Authority has of the new EU vertical restraints regime is begin- conducted a Public Consultation on the effects on ning to generate a number of important competition of Category Management Agree- enforcement issues across a broad range of the ments. The results of its conclusions on 7 changes introduced in 2010. Many of these issues December 201087 amplified the more general stemfromthefactthattheCommission,in concerns voiced by the Commission in the imbuing the application of vertical restraints context of its Public Consultation procedure policy with a greater economic rationale (a laud- and in its Guidelines. Among the risks identified able goal), is contemporaneously introducing a by the competition authority in relation to such greater degree of legal uncertainty because of practices, those especially highlighted were: the departure from the ‘‘black letter law’’ approach initially pursued by earlier versions theshelfspaceforeclosurerisksforthe of the Block Exemption Regulation. This is espe- competitors, due to the ‘‘category captain’s’’ ciallythecasegiventhefactthatthemajor participation in the introduction, placement instrument of policy change is found in the and positioning of products in stores; Commission’s Guidelines, which have nothing the provision to suppliers of exclusive in- more than a persuasive force before national formation on sensitive qualitative and judges, as opposed to a Block Exemption Regula- quantitative data, which would enable the tion, whose terms are directly applicable under category manager to anticipate the retailer’s the national legal systems of the EU Member commercial strategy; and States. the risks of collusion between retailers, due Given that the vast majority of the open issues to the possible horizontal arrangements that under vertical restraints regime will need to be might arise between them. addressed at Member State level before national court judges (or, to a lesser extent, National In its assessment, the Authority underlined CompetitionAuthorities),itcanbeexpected four points of recommendation, namely: that the resolution of those issues will assume an increasingly important role antitrust practice The appointment of a category captain across the EU. Some of those issues relate to the should, in principle, be made public (i.e. following: through a call for tender). The role of intellectual property: As noted Contracts/agreements should specify which in the discussion in Section III above, in its tasks may be performed by the category desire to differentiate between traditional manager and those which remain under vertical distribution relationships, on the the exclusive competence of the retail one hand, and intellectual property licen- distributor. sing relationships, on the other, the The category manager should only be Commission has made a number of strained provided with information that is indispen- distinctions in seeking to establish a ‘‘bright sable to perform its tasks. line’’ between the two regimes based solely The category manager should be precluded on whether or not the intellectual property from making recommendations as regards being licensed is deemed to be ‘‘ancillary’’ to the distributor’s own brand. the distribution agreement between the rele- vant parties. Consequently, the Commission IV. Unresolved Issues has taken a somewhat artificial view of While still in its relatively early stages of which franchising relationships fall within implementation across the EU Member States, or outside the terms of Block Exemption Regu- the policy compromises reached in the forging lation 330/2010, given that intellectual
[49] ANTITRUST REPORT
property licensing and know-how transfer from a consumer’s point of view). Similarly, lie at the heart of all franchise relation- if one takes the view that subcontractors do ships.88 Similarly, the rationale behind the not form part of the same economic entity as Commission’s conclusion that subcon- the supplier, the scope for finding potential tracting agreements fall outside the Block competition among an unrealistically broad Exemption because they involve the transfer set of market actors becomes self-evident. of intellectual property rights (and hence go Market shares: The introduction of a beyond those rights being merely ancillary 30 percent market share threshold for distri- to the distribution function) seems artificial. butors and retailers alike, in order to take Consistent with the terms of its original into account that some large buyers might Notice on Subcontracting Agreements and the also enjoy market power, raises practical treatment of the ‘‘single economic entity issues of self-assessment and compliance 89 concept’’ as the basis for why agency with Block Exemption Regulation 330/2010. agreements fall outside the Block Exemption National commercial judges in many (see below), subcontracting agreements Member States have a habit of interpreting should fall outside the terms of Block Exemp- such market thresholds rather inflexibly. In tion Regulation 330/2010 – and thereby also the recent past, the task of monitoring outside the scope of the prohibition in whether a supplier continued fall under a Article 101(1) TFEU – because a supplier market share threshold was a complicated and its subcontractor act as an integrated exercise in its own right. The need under entity for the purposes of EU antitrust the new regime to perform a parallel exer- rules. An exclusion based on the ancillary cise to monitor whether the buyer also nature of intellectual property licensing continues to fall under the threshold will fails to draw the necessary link with the not be a straightforward one. implications of the practice for the purposes Moreover, the sorts of information asymme- of liability under Article 101(1) TFEU. tries which characterize many markets The scope of ‘‘potential’’ competition: The would suggest that a supplier would need particular rules established to govern distri- to rely on some form of information bution relationships between competitors exchange in order to be able to predict are open to significant debate, given that with any degree of certainty whether a the concept of a competitor embraces both buyer exceeded the 30 percent market actual and potential competitors. Unlike the share threshold. In an antitrust climate short timeframe (usually one year) attribu- where enforcement actions against ‘‘hub table to the application of a Hypothetical and spoke’’ cartels are becoming more Monopolist Test, the usual timeframe for prevalent, and information sharing in the determining the existence of a potential context of distribution relationships is the competitor is up to three (3) years. In a focal point of this new generation of cartel world where large supermarkets produce investigations, such a course of action seems as many ‘‘home brands/own label’’ goods prone to some residual risk.90 In addition, as they stock the branded goods of indepen- given that market share calculations for dent suppliers, it is difficult to make hard- large retailers may be based on a completely and-fast decisions as to whether those different geographic market scope (usually supermarkets are not potential competitors national, and often sub-national) than that (yet alone actual competitors if branded and which exists for suppliers, the process of own brand goods are considered to fall market share calculation will be further within the same relevant product market
[50] I SSUE 3-4, 2011
complicated as it will need to relate often to but be ‘‘general’’ advertising in others. There different ‘‘markets’’. can be no blanket rule that can cover all The net result might be that suppliers permutations of ‘‘intent’’ in such an online with strong brand names find it difficult to context. establish uniform distribution networks Given the pan-European territorial scope of throughout the territory of the EU, as each the Internet, despite the fact that the vast relationship will need to be assessed under bulk of disputes will be resolved at national its national competitive conditions in which level, one can expect that the Commission both the supplier and the distributor find will take a particular interest in this area of themselves.91 the law in order to develop some workable Restrictions on online sales restrictions: precedents in the near future. In this respect, It is inevitable the enforcement of the one can anticipate that the Commission will new rules on Internet sales will create inter- be particularly vigilant in relation to concen- pretative problems, as they epitomize the trated markets with respect to which price spirit of ‘‘compromise’’ among the various discounters (whether online or offline) stakeholders taking part in the Public might not have adequate access. As indi- Consultation on what is arguably the most cated earlier, two particular areas which divisive of issues (namely, the extent to are likely to remain problematic are restric- which a supplier can insulate its ‘‘bricks- tions imposed on distributors to retain at and-mortar’’ distributor against online least part of their sales in the bricks-and sales). This can also be witnessed in the mortar form – which has already been the fact that the Commission has almost exclu- subject of a very recent Judgment of the 92 sively dedicated its attention to sales Court of Justice in the Pierre Fabre Case – practices on the Internet to its ‘‘soft law’’ and their ability to charge different prices for Guidelines rather than to its legally binding the contract goods depending on whether Block Exemption Regulation 33/2010. sales are to occur online or through physical outlets.93 The enforceability of both types of As the rules currently stand, they prescribe differentiated conduct turns on whether the narrow and fragmented guidance on what contract products are capable of benefitting constitutes ‘‘active’’ or ‘‘passive’’ sales in an from the logic which underlies a selective Internet context, which of itself will provide distribution system, namely, that the main- fertile ground for disputes. For example, one tenance of quality at the point of sale and cannot escape the feeling that a number of with respect to after-sales service and the examples cited in the Guidelines to iden- advice is such as to justify such differentia- tify the dividing line between such types of tion by reference to the level of investment sales are arbitrary (see, e.g., para. 52 of the required to maintain the quality levels in Guidelines), insofar as they proceed on the question. basis of a number of presumptions about the impact of linguistic and currency divi- Upon the referral to it of a series of questions sions which might not always hold true in by the Cour d’Appel de Paris,theCourtof practice. The specification in Internet adver- Justice in the Pierre Fabre case found that ‘‘a tising of different languages other than contractual clause requiring sales of cosmetics English and different currencies other than and personal care products to be made in a aEuromightverymuchbespecifically physical space where a qualified pharmacist targeted at customers outside a designated must be present, resulting in a ban on the use exclusive territory in certain circumstances, of the Internet for those sales, amounts to a
[51] ANTITRUST REPORT
restriction [of competition] by object’’. Of leave this matter to the national court to course, even a restriction of competition by decide in its overall assessment of whether object (clearly a hardcore restriction) could an individual exemption was justified. not benefit from the terms of a Block Exemp- Given that Article 4(c) of Block Exemption tion, it might in principle be capable of Regulation 330/2010 expressly excludes benefitting in its own individual circum- from the list of hardcore restraints any stances from the exemption afforded by prohibition on a distributor to operate out Article 101 TFEU where all the conditions of an unauthorized place of business,94 it of that provision could be satisfied. In would have been extremely helpful for the providing guidance on how this process Court to address this question, especially of evaluation can be applied, the Court sinceitlayattheheartofPierre Fabre’s proceeded to make a number of statements defense. Even more disappointingly, the which will appear to be very difficult to Court has made no effort to reconcile its reconcile in practice, if not necessarily in approach with its own case-law dating theory. First,theCourtexplainedthata back to 1996, where it was willing to restriction of competition by object is some- permit a selective distributor to forbid sales thing which needs to be considered in light by mail order on the basis that such sales of the specific content of the problematic would harm the ‘‘luxury’’ nature of the clause, the objects it seeks to attain and its brand. That precedent had confirmed the overall legal and economic context. Second, Commission’s own position to similar the Court repeated its traditional view that effect dating from 1992.95 While the selective distribution systems ‘‘necessarily approach of the Commission in its Guidelines affect competition’’ in the market but that on the importance of preserving Internet they are compatible with EU antitrust rules sales is consistent with its more recent to the extent that the members of the selec- administrative practice,96 it cannot be tive network are chosen on the basis of correct for the Court to avoid its own prece- objective criteria of a qualitative nature, dent without at least seeking to explain why and that the characteristics of the product and how the distance selling techniques of necessitate the use of such a system in mail order and online sales are any different, order to preserve its quality and to ensure or if the Court’s view has had to change over its proper use. Third, the Court emphasized time because of the characteristics of the that it was for the national court to deter- Internet. No doubt, the French court has its mine whether a contractual clause which de work cut out to steer the proper course facto prohibits all forms of Internet selling between two such polarized positions can be justified by a ‘‘legitimate aim’’, but when it determines what constitutes a ‘‘legit- that the mere aim to preserve the prestigious imate aim’’ to prohibit Internet sales by image of a product is not a legitimate aim reference to the quality of the product, which could justify such a restriction of given the much broader implications of its competition. Judgment on the future shape of selective Rather disappointingly, the Court declined distribution systems across the EU. to take a view on the very thorny question of Absolute territorial protection: In what whether or not Pierre Fabre was able to ban constitutes a major exception to the rule Internet sales because such a ban would be that absolute territorial protection is no more restrictive than a prohibition on a forbidden under EU competition rules, espe- selective distributor operating out of an cially given the historical importance authorized establishment, preferring to attached to the freedom of a distributor to
[52] I SSUE 3-4, 2011
make ‘‘passive’’ sales, the provision of a two- advertising expenditures, and other criteria, year exception to allow for absolute terri- none of which sit comfortably with the tradi- torial exclusivity in those situations where tional model of a distributor free to price the prohibition is necessary to justify the independently and to assume all the rele- investment of a distributor to sell a new vant risks associated with the distribution brand or sell an existing brand into a new of a particular product. 97 market (the Guidelines, at para. 61) consti- On the contrary, these relationships are tutes a major step forward for vertical much more accurately portrayed as either restraints policy in the EU. agency relationships taking place in a two- Having said that, it would be an extreme sided market context or as a joint venture optimist who would assume that concepts relationships where risks are shared among such as a ‘‘new market’’ and the ‘‘necessity’’ the members of the joint venture. As such, of the investments to penetrate such markets from an antitrust point of view they should will not result in legal disputes before not be treated in the same manner as tradi- national courts. In the case of many types tional vertical relationships, especially when of consumer products, new generations of considering pricing issues, particularly alle- technology or fashion are being introduced, gations of RPM. In the author’s view, the but it is doubtful if such products constitute usual RPM analysis has no role to play in ‘‘new’’ markets98 in the antitrust sense, while such relationships but, at the very least, at the same time many national judges will these are the sorts of situations which differ in their approach as to whether should benefit from a liberal view of what upgrades of traditional products character- constitutes ‘‘efficiencies’’ in an online envir- ized by stable distribution networks and onment so as to justify what might otherwise loyal customer bases justify a ‘‘necessity’’ appear to be restrictions on a distributor’s for absolute territorial protection. Indeed, if freedom to set price. anything, many national judges seem to be Resale Price Maintenance (RPM): Despite reluctant to accept the necessity of exclusive the pronouncements of the Commission distribution arrangements altogether where regarding the ability of parties to introduce large market shares of the contract product arguments on ‘‘efficiencies’’ to justify their 99 are involved. RPM practices under Article 101(3) TFEU, Agency and the Internet: The extension a review of the terms of legislation which some years ago of the Block Exemption Regu- exists at Member State level100 and the lation to the distribution of ‘‘services’’ as well existing case-law before National Competi- as the traditional distribution of ‘‘goods’’ tion Authorities and the courts101 suggests has, to all intents and purposes, not been that Member States are likely to adopt the problematic in practice. However, the traditional conservative approach to RPM growth of Internet commerce has generated that characterized the era where such a number of new business models recently clauses were ‘‘blacklisted’’ under the older in relation to which various members of an Block Exemption regimes (i.e., tantamount online value chain find themselves in to a per se violation). As noted above, vertical relationships vis a vis one another. however, the advent of the Internet and the It is commonplace in such Internet-based more complex value chains that are being environments that parties in different parts driven by technological change raise some of the value chain fix remuneration and difficult issues of practical application in margins by reference to numbers of ‘‘hits’’, relation to RPM offences.
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For example, on 10 May 2004, the Czech affected, the Guidelines provide an inter- Competition Commission imposed a fine of esting additional insight into the fact that CZK 6.5 million (US$264,850) on a mobile such practices might be capable of providing phone operator, Cesky´ Mobil a.s. for a focal point for a ‘‘hub and spoke’’ cartel having fixed the prices which distributors (see discussion above). It would appear could charge for ‘‘pre-paid coupons’’ for that such a scenario becomes increasingly mobile-phones. In a case which involved problematic as industries tend towards an almost identical fact pattern, the UK’s greater concentration on both the supply Office of Fair Trading had, on 5 April 2002, side, but especially on the retail side of the adopted a consumer protection oriented market. The fact that the UK’s existing approach and characterized ‘‘pre-paid precedents for hub-and-spoke cartels focus mobile vouchers’’ as being compatible with on the retail sector heightens the importance competition rules, since they were in accor- that should be attached to the horizontal dance with Condition 58.3 of Vodafone’s antitrust risks raised by what ostensibly Telecommunications Act licence (which appears to be a uniquely vertical relation- guaranteed end users that they would ship between supply and distributor. receive mobile airtime for the exact amount The antitrust risks inherent in managing of the published price which they had paid). Category Management relationships, for As can be seen from a comparison of the example, without falling foul of a hub-and- Czech and UK cases, the Czech Competition spoke style of allegation are illustrated by Authority took a less nuanced view than its the approach taken recently by the French UK counterpart in its assessment of RPM in Competition Authority in its recent investi- a particular sectoral context, and found that gation into such practices (see above – obliging independent retailers to sell pre- Section III). In seeking to create a more paid cards at the advertised tariff consti- ‘‘level playing field’’ among suppliers so as tuted the illegal practice of RPM. In this to minimize the foreclosure effects of Cate- regard, it is hoped that the UK precedent gory Management agreements, measures 102 in the Vodafone Decision in 2002 might have been proposed which add greater prove to be more instructive, insofar as the transparency to the relationships between allegation that Vodafone had sought to suppliers and the Category Manager. impose RPM conditions on independent However, in doing so, it is inevitable that retailers in relation to its pre-paid cards competitors have greater transparency into was dismissed, given that the price of the one another’s commercial practices, thereby pre-paid card represented Vodafone’s publi- arguably facilitating the tendency of compe- cized tariff rate which it provided pursuant tition regulators to see such ground as being to the terms of its mobile network operator fertile for a hub-and-spoke cartel scenario. It license. In the relevant circumstances, it is a situation which therefore needs to be could not be said that an interference with monitored closely by suppliers. the retail price amounted to RPM in a The use of the ‘‘counter-factual’’: Subjec- manner which would bring about consumer ting vertical restraints to a counterfactual harm in the manner understood by antitrust analysis (see above; para 93 of the Guidelines) rules. is a very important analytical step in devel- Up-front Payments and Category Manage- oping a true European ‘‘rule of reason’’ ment Arrangements: Aside from the general which can somehow sit comfortably with foreclosure concerns raised by such prac- the structure of Article 101 TFEU and tices where significant market shares are
[54] I SSUE 3-4, 2011
be sensitive to a more economics-based many respects a logical continuum of its prede- approach. One can only hope that it cessor 1999 version, it is also the case that a becomes an important tool for judges adju- number of threshold definitional issues add dicating competition cases. There is a very anything but legal certainty to the process of recent precedent at Member State level negotiating enforceable distribution arrange- which applies the logic of the counterfactual ments across the EU. to a situation involving RPM. On 24 February Moreover, much of what has been introduced 2011, the Athens Appeals Court, in the case of in the realm of Internet sales is largely untested Fiat Hellas, overturned the fine of 9.7 Million in practice. It has also arguably opened up fresh Euros imposed by the Greek Competition areas of ambiguity and raised a number of Authority103 on the various members of the contradictions in approach. This is probably the Fiat group operating in Greece for their invol- inevitable byproduct of the Commission moder- vement in an alleged RPM scheme with Fiat nizing its approach to vertical restraints (and dealers over a number of years; in doing so, especially RPM), while also seeking to promote the Authority had rejected Fiat’s defense that distribution via the Internet while at the same its dealers had simply been operating under time being mindful of the importance of Europe’s the auspices of a ‘‘recommended price’’ prestige brands whose traditional distribution scheme (which was perfectly compatible model is far removed from the world of online with EU antitrust rules). A highly material sales. Such policy compromises are difficult to consideration in the Court’s Judgment forge, and the ‘‘collateral damage’’ is usually was the fact that the Greek Competition found in the area of legal certainty. Authority, in concluding that the Fiat group The very recent ruling of the European Court had engaged in the practice of RPM with its of Justice in the Pierre Fabre case has done little to dealers, had failed to subject the pricing data inspire confidence that many of our open ques- to an assessment under any other competi- tions will be answered in the short term. If tive scenario other than one consistent with anything, it has posed a new layer of questions the existence of RPM. However, given that for practitioners. The logic of the EU system of Fiat operated a selective distribution system decentralized enforcement by the Member States in Greece – which the European Courts have will probably mean that precedents will develop acknowledged has a tendency to generate bit by bit, and we are by no means certain of a price stability – the Competition Authority consistent and coherent approach being adopted had erred in concluding that the stable across the range of vertical restraints that are prices witnessed on the market were the likely to give rise to litigation. This is especially direct result of an RPM agreement in the the case where the legal traditions of the Member absenceofhavingsubjectedthefactstoa States as regards matters such as parallel trade through counterfactual analysis. It is to be and the promotion of Internet commerce are not hoped that the doctrine will be embraced necessarily ad idem with the prevailing single more widely over time. market policy dynamic of the Commission. In the circumstances, and particularly given the additional economic pressures wracking the V. Conclusions EU, the Commission may be sorely tempted to One year on from the adoption of the new bringaninfringementactionagainstcertain vertical restraints regime, much remains unan- problematic practices in order to inject greater swered as to the practical application of that legal certainty into the new verticals regime. new regime. Although it is true to say that the Theridepromisestobeabumpyone,but new regime which came into effect in 2010 is in eventful.
[55] ANTITRUST REPORT
NOTES
1 See, e.g., C-74/04 P Commission v. Volks- summarize the Commission’s enforce- wagen AG, [2006] ECR I-6585, at para. 36. ment policies and outline the legal 2 Commission Notice-Guidelines on Vertical standards established by the European Restraints, OJ C 130, of 19.05.2010, p.1. Courts. 8 3 Commission Regulation 330/2010 of 20 Article 101(2) TFEU provides that April 2010 on the application of Article restrictions of competition are automati- 101(3) of the Treaty on the Functioning of cally void, and hence unenforceable, the European Union to categories of vertical where they infringe the restriction of agreements and concerted practices,OJ competition prohibition contained in LIO2, 23.4.2010, pp.1-7. Article 101(1), unless the provision or agreementinquestioncanbenefitfrom 4 Commission Regulation (EC) No 2790/1999 an exemption because it satisfies the pro- of 22 December 1999 on the application of competitive conditions set forth in Article Article 81(3) of the Treaty to categories of 101(3) (i.e., contributes to improving the vertical agreements and concerted practices, production or distribution of goods or to OJ L 336, 29.12.1999, pp.21-25. promote technical progress, allows consu- 5 The predecessor Regulation 2790/1999 mers a fair share of the resulting benefits, included in the same Block Exemption does not impose restrictions which are not different types of distribution agreements indispensible to the attainment of such (such as franchising, exclusive distribu- objectives, and does not afford the possi- tion, selective distribution, exclusive bility of eliminating competition in respect supply) which had been dealt with sepa- of a substantial part of the products rately until at point in time. This concerned). Since the adoption of Regula- consolidated approach has been main- tion 1/2003, the assessment made under tained by the Block Exemption Regulation Article 101(3) TFEU needs to be made 330/2010. by the parties themselves, rather than requiring the Commission to take a view 6 The benefits of the safe harbor regime as to the enforceability of the relevant may in theory be removed at some point provisions of an agreement pursuant to a in the future from an individual party notification procedure. where market access is shown to be signif- 9 icantly restricted by the cumulative effects This is the inevitable by-product of any of parallel networks exhibiting similar regime that moves from a more prescrip- vertical restraints (see paras. 74-78 of the tive approach to one which is based more Guidelines), or from all competitors where on the appraisal of the enforceability of an such parallel networks of vertical agreement in light of the overall evalua- restraints account for more than ... of a tion of competition in the affected market. relevant market (Article 6). 10 Case C-439/09 Pierre Fabre Dermo- 7 A ‘‘Block’’ Exemption regulation speci- Cosme´tique v. Pre´sident de l’Autorite´ de la fiesthose‘‘safeharbor’’situationsfrom Concurrence & Ors., Judgment of 13 the restriction on competition prohibition October 2011 (NYR). set forth in Article 101(1) TFEU (ex Article 11 220 U.S. 373 (1911). 81(1) EC), where certain distribution prac- 12 tices are deemed to be compatible with 250 U.S. 300 (1919). competition rules if certain conditions 13 See United States v. Arnold, Schwinn & have been satisfied. Guidelines are exam- Co., 388 U.S. 365, 380 (1967); Continental ples of EU ‘‘soft law’’ instruments which
[56] I SSUE 3-4, 2011
T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 2009), available at http://new.abanet.org/ 58-59 (1977). antitrust/Searchable%20Antitrust%20Li 14 See discussion in P. Alexiadis and P. brary/comments_2009may6_leegincaseh_ Sullivan, Vertical restraints: new directions l.pdf. in EU policy, The European Antitrust 23 See S.75 (introduced January 25, 2011), Review 2004, pp. 68-71. bill tracking available at http://www. 15 Leegin, 551 U.S. at 881-82. govtrack.us/congress/bill.xpd?bill=s112- 75. 16 Id. at 890-91. 24 See PSKS, Inc. v. Leegin Creative Leather 17 Id. at 898. Prods., Inc., No. 2:03-CV-107, 2009 U.S. 18 Alan M. Barr, Antitrust Federalism in Dist. LEXIS 28505 (E.D. Tex. Apr. 6, 2009). Action—State Challenges to Vertical Price 25 PSKS, Inc. v. Leegin Creative Leather Fixing In the Post-Leegin World, The Anti- Prods., Inc., 615 F.3d 412, 416 (2010). trust Source, (Dec. 2009) (‘‘Despite the 26 demands of Leegin, Attorneys General Id. will not end their pursuit of RPM cases 27 Id. — 28 because of a central truth RPM means Id. at 419, 421. higher prices to consumers.’’). 29 19 These States include Colorado, Dela- See S.2261 (introduced Oct. 30, 2007), ware,Florida,Idaho,Massachusetts, bill tracking available at http://www. Michigan, Missouri, Nebraska, New govtrack.us/congress/bill.xpd?bill=s110- Mexico, Oklahoma, Oregon, Rhode 2261; S.148 (introduced Jan. 6, 2009), bill Island, Texas, Virginia, and Washington. tracking available at http://www.gov 30 track.us/congress/bill.xpd?bill=s111-148; These States include Alaska, Kentucky, H.R. 3190 (introduced Jul. 13, 2009), bill Louisiana, South Dakota, Utah, and tracking available at http://www.gov Wisconsin. The District of Columbia also track.us/congress/bill.xpd?bill=h111-3190. employs a similar statute. 31 20 Bye Bye Bargains? Retail Price Fixing, the Maryland Commercial Code § 11-204. Leegin Decision, and Its Impact on 32 Id. Consumer Prices: Hearing Before the 33 Cal. Bus. & Prof. Code § 16720(d). Subcomm. On Courts and Competition Policy of the Comm. on the Judiciary, 111th 34 Cal. Bus. & Prof. Code § 16720(e). Cong. (2009), available at http://judiciary. 35 Kansas law prohibits ‘‘all arrangements, house.gov/hearings/hear_090428_1.html. contracts, agreements, trusts or combinations 21 Letter from National Association of between persons’’ which tend to ‘‘advance, Attorneys General Letter to Sen. Herb reduce or control the price or the cost to the Kohl and Sen. Orrin G. Hatch (Oct. 27, producer or to the consumer of any such 2009), available at http://www.naag.org/ products or articles.’’ Kan. Stat. Ann. § 50- assets/files/pdf/signons/20091027.S_ 112. Montana law prohibits agreements 148.pdf; Letter from National Association ‘‘not to manufacture, sell, or transport an of Attorneys General Letter to Rep. John article of commerce below a common standard Conyers and Rep. Lamar Smith (Oct. 27, or figure.’’ Mont. Code Ann. § 30-14-205(h). 2009), available at http://www.naag.org/ New York’s statute states that ‘‘[a]ny assets/files/pdf/signons/20091027.HR_ contract provision that purports to restrain a 3190.pdf. The two letters are identical. vendee of a commodity from reselling such commodity at less than the price stipulated 22 Letter from ABA to Rep. Henry C. by the vendor or producer shall not be enforce- Johnson and Rep. Howard Coble (May 5, able or actionable at law.’’ N.Y. Gen. Bus.
[57] ANTITRUST REPORT
Law § 369-a. New Jersey law provides Complaint at } 10, People v. Bioelements, ‘‘[a]ny contract provision that purports to Inc., No. INC-10011659 (Cal. Super. Ct. restrain a vendee of a commodity from resel- Jan. 11, 2011). ling such commodity at less than the price 44 In this regard, see also A. I. Gavil, Resale stipulated by the vendor or producer shall not Price Maintenance in a Post-Leegin World: A be enforceable or actionable at law.’’ N.J. Stat. Comparative Look at Recent Developments in Ann. § 56:4-1.1. Ohio law prohibits agree- the United States and European Union, The ments ‘‘not to sell, dispose of, or transport an CPI Antitrust Journal, June 2010 (1). article or commodity, or an article of trade, use, 45 merchandise, commerce, or consumption below The EU expression ‘‘undertaking’’ a common standard figure or fixed value.’’ is used to cover all forms of corporate Ohio Rev. Code Ann. § 1331.01(B)(5). configuration, and even an individual 36 person. For ease of reference, however, These States include Arizona, Arkansas, this article will refer to the more familiar Connecticut, Hawaii, Indiana, Massa- concept of a ‘‘party’’. chusetts, Mississippi, Nevada, New 46 Hampshire, Rhode Island, South Carolina, Refer to Article 1(1)(a) of Regulation Tennessee, Texas, and West Virginia. For a 330/2010. Refer also to Article 2(2) as more detailed discussion of the price regards agreements between associations fixing laws in various States, see Michael of retailers and their members, where no Lindsay, Resale Price Maintenance and the individual retailer exceeds 50 Million World After Leegin, 21 Antitrust 32, 37-40 Euros in annual turnover. (2007). 47 See paragraph 25(a) of the Guidelines. 37 Complaint at } 20, New York v. Herman 48 Commission Notice on agreements of minor Miller, Inc., No. 08-cv-2977 (S.D.N.Y. importance which do not appreciably restrict Mar. 25, 2008). competition under Article 81(1) of the Treaty 38 Stipulated Final Judgment and Consent establishing the European Community,OJC Decree at 7, New York v. Herman Miller, 368 of 22.12.2001. Inc., No. 08-cv-2977 (S.D.N.Y. Mar. 25, 49 In other words, non-reciprocal distribu- 2008). tion arrangements can fall within the 39 Complaint, New York v. Herman Miller, scope of Block Exemption Regulation 330/ Inc., No. 08-cv-2977 (S.D.N.Y. Mar. 25, 2010 in one of two clear-cut situations, 2008). namely: (i) where the supplier of goods 40 is both a manufacturer and a distributor No. 400837/10, 2011 WL 198019, at *2 of those goods, whereas the buyer in ques- (N.Y. Sup. Ct. Jan. 14, 2011). tion provides a distribution function but 41 Id. at *8. does not compete at the level of manufac- 42 See Complaint at }} 10-12, People v. ture; and (ii) the supplier of goods is active DermaQuest, Inc., No. RG-10497526 (Cal. at a number of functional levels of trade, Super. Ct. Feb. 23, 2010), available at whereas the buyer is active only at the http://app3.naag.org/antitrust/docs/ retail level and does not compete at the 588.civil.CA%20v%20Dermaquest%20 functional level of purchase of the services Complaint.pdf; People v. DermaQuest, Inc., in question. No. RG-10497526, at *5 (Cal. Super. Ct. 50 For example, refer to the very good Feb. 23, 2010), available at http://app3. discussion on this issue in R. Subiotto naag.org/antitrust/docs/588.civil.CA% and C. Dautricourt, in ‘‘The Reform of 20v%20DermaQuest%20Judgment.pdf. European Distribution Law’’, World Compe- 43 People v. Bioelements, Inc.,No.INC- tition, Vol. 34, No.1 ( 2011), pp. 11-50, at 10011659 (Cal. Super. Ct. Jan. 11, 2011); pp. 18-23.
[58] I SSUE 3-4, 2011
51 Refer to the discussion on the ‘‘bottling SA [2006] ECR I-11987; Case 48/69 ICI v. problem’’ in the Guidelines, especially at Commission [1972] ECR 619, at para. 140; paras. 33 and 36. Case C-266/93 Volkswagen and VAG 52 Discussed by Subiotto and Dautricourt, Leasing [1995] ECR I-3477. op. cit., at pp. 20-21. 60 See Case COMP/36.264 Mercedes-Benz, 53 According to Article 7(e), where a OJ 2002 L257, p.1; at para. 155ff. market share does not exceed 30 percent 61 See discussion in the Guidelines,espe- initially at the time of contract but subse- cially at paras. 13-17. quently rises to above 35 percent, the 62 M. Brenning-Louko, A Gurin, L Peeper- exemption continues to apply for one korn and K Viertio¨,‘‘Vertical Agreements: calendar year after the 35 percent figure New Competition Rules for the Next has been reached. Decade’’, (2010) (2) The Competition 54 G. De Stefano, The new EU ‘Vertical Policy International Antitrust Journal, p.4. Restraints Regulation’: navigating the vast 63 Ibid, p.488. sea beyond safe harbours and hardcore restric- 64 tions, (2011) 31 (12) E.C.L.R 487. Reflecting the position in its prede- 55 cessor Block Exemption, the hardcore I. Lianos, New Kids on the Block: Retailer- restriction does not extend to maximum driven Vertical Practices and the New Regula- price restrictions, nor to ‘‘recommended’’ tion of Vertical Restraints in EU Competition prices. As to those situations where such Law, The Competition Policy International practices might be considered tantamount Antitrust Journal (2010) (2), at pp.5-6. to a minimum or fixed price, refer to 56 But see P. Lugard and T. van Dijk, ‘‘The discussion in the Guidelines at paras 223- New Block Exemption for Vertical Restraints: 229. (cf. para. 48). A Step Forward and a Missed Opportunity’’, 65 Refer to discussion at para. 225 of the CPI Antitrust Law Journal, June 2010 (2), Guidelines. who express the view that any serious 66 investigation of consumer harm needs to P. Lugard and T. van Dijk, The New EC take into account the prevailing down- Block Exemption for Vertical Restraints: A stream market structure. Step Forward and a Missed Opporunity, 57 (2010) (2) The Competition Policy Interna- An agent, for the purpose of selling or tional Antitrust Journal, p.7. purchasing goods, is defined in the Guide- 67 lines (at para. 12) as a ‘‘legal or physical Although refer to the examples set forth person vested with the power to negotiate in para. 51 of the Guidelines for situations and/or conclude contracts on behalf of another where particular online sales advertising person (the principal), either in the agent’s own and promotional activities could consti- name or in the name of the principal’’. tute ‘‘active’’ selling. 68 58 This ‘‘single economic entity’’ test See discussion at paras 49-51 of the constitutes an EU-specific application of Guidelines. the principle established in Copperweld 69 P. Marsden & P. Whelan, ‘‘Selective Corp. v. Independence Tube Corp., 467 U.S Distribution in the Age of Online Retail’’, 752, 777 (1984). See Joined Cases 40/73- (2010) 1 E.C.L.R. 26. 48/73, 54/73-56/73, 111/73, 113-114/73 70 As to the nature of a selective distribu- Suiker Unie & Other v. Commission [1975] tion network and the treatment under EU ECR 1663, para. 480. antitrust rules of such methods of distribu- 59 For example, see Case C-217/05 Confed- tion, refer to V. Korah and D. O’Sullivan, eracio´n Espan~ola de Empresarios de Estaciones ‘‘Distribution Agreements Under the EC de Servicio v. Compan~´ia Espan~ola de Petro´leos
[59] ANTITRUST REPORT
Competition Rules’’, Hart Publishing, distribution is much wider than that Oxford 2002. used in the case-law for selective, where 71 Ibid, p.36. the European courts have insisted that the benefits of selective distribution inure 72 F. Dethmers and P. Posthuma de Boer, only to those products which require the ‘‘Ten Years On: Vertical Agreements Under establishment of qualitative criteria for Article 81’’, (2009) 9 E.C.L.R. 424, 434. entry, based upon the nature of the 73 Accordingly, as was recognized by the products (highly technical or prestige European Court of Justice in AEG Tele- brands) and the level of direct and after- funken v. Commission:‘‘... it has always sales service which those products attract. been recognized in the case law of the Court See, for example, Case 27/76, Metro v. that there are legitimate requirements, such as Commission [1977] ECR 1875. The use of a the maintenance of a specialist trade capable of lesser standard can be reconciled with the providing specific services as regards high- Metro precedent because the Court estab- quality and high technology products, which lished that restrictions on cross-supply may justify a reduction of price competition between such members of a selective in favor of competition relating to factors distribution system did not infringe other than price. Systems of selective distribu- Article 101(1) TFEU, yet alone require a tion, in so far as they aim at the attainment of a ‘‘safe harbor’’. legitimate goal capable of improving competi- 76 See Guidelines, at para. 55. tion in relation to factors other than price, 77 therefore constitute an element of competi- See discussion in Guidelines,atparas tion which is in conformity with Article 189-191. [81(1)]...’’. Case 107/82, Allgemeine Elektri- 78 See Guidelines, at para. 56. cita¨ts-Gesellschaft AEG-Telefunken AG v. 79 See earlier discussion on the four condi- Commission [1983] ECR 3151, as from para- tions set forth in Article 101(3) TFEU. graph 33; cf. Case 75/84, Metro II [1986] 80 ECR 3021. Article 5(a) of Block Exemption Regula- Clearly, therefore, any selective distribu- tion 330/2010. Note that an obligation tion system will have a tendency to not to purchase more than 80 percent of a be dynamic in terms of price competition, buyer’s needs will be considered tanta- essentially because the dealers within the mount to a non-compete obligation. selective distribution framework are 81 A tacit renewal beyond this period will giving priority to the promotion of their be considered to constitute an indirect goods through criteria other than merely obligation which exceeds five years. price. In such an environment, having 82 Refer to Article 5(c) of Block Exemption recommended prices is totally consistent Regulation 330/2010. Although contra the with the philosophy behind establishing Commission precedent Parfums Givenchy, a selective distribution network. OJ 1992, L 236/11, at p.13, where the 74 See Saba, OJ 1976 L 28/19, at para 34. Commission was willing to accept a 75 Selective distribution is defined in restriction that only particular brands of Article 1(e) of Block Exemption Regulation competing manufacturers be sold by the 330/2010 as the situation where a supplier selective distributor. undertakes to sell the contract products 83 Article 5(b) of Block Exemption Regula- only to distributors selected on the basis tion 330/2010. of specified criteria and these distribu- 84 Query whether such an approach is tors undertake not to sell the contract possible in a distribution context under products to unauthorized distributors. the safe harbor regime where it is Interestingly, this definition of selective deemed that the licensing of intellectual
[60] I SSUE 3-4, 2011
property is not an ancillary aspect of the Exemption Regulation and Guidelines – distribution agreement (see discussion Practical Implications’’, CPI Antitrust earlier). Journal 2 (June 2010); refer also to Subiotto 85 In other words, these arrangements and Dautricourt, op. cit., at p. 16. should be assessed in a manner similar 92 Op. cit. to exclusive supply obligations (Guidelines 93 The Dutch courts have already had the at para. 176). opportunity to review differentiated 86 As rated by the Commission at para. 210 pricing schemes based on offline/online of the Guidelines, the assessment of any distribution methods. See the discussion negative effects on competition will be of Groen Trend & Keukens/AEP Home made on the basis of factors such as the Products, by A. Stoffer in E-Competition, geographic scope of the agreement, the No. 427 of 30 December 2005. strength of competition supplies and 94 Although it is just as clear that a dealer ... the possibility that these exist effects in a slective distribution system cannot from the widespread existence of such be prohibited from advertising on the agreements. Internet (see para 56 of the Guidelines). 87 See Press Release (in English) available 95 See Case T-19/92, Leclerc v. Commission at http://www.autoritedelaconcurrence. [1996] ECR II-1851, at para. 120; cf. Yves fr/user/standard.php?id_rub=368&id_ Saint Laurent Parfums,OJ1992L&2:24, article=1511. at p. 30. 88 See, for example, the approach taken 96 See Commission Press Release IP/ towards industrial franchise relationships 00/1418 of 6 December 2000 (re B&W in para. 34 of the Guidelines, as compared investigation). to other forms of franchising. 97 89 See M. Brenning-Luoko, A. Gurin, et al., Refer to OJ 1979 C 1/2. Refer to Guide- op. cit., at p.19. lines, especially at para 21. 98 90 A new generation of technology often As pioneered in the UK in cases such as: subsumes the older generation of tech- OFT Dairy Products (Decision of 10 August nology into an integrated market 2011: CE :3094-03); Argos Ltd. & Anor v. definition. See, for example, BSkyB/BT/ Office of Fair Trading [2006] EWCA Civ Matsushita, OJ L 312 of 6.12.1999, pp. 1-37. 1318; and Replica kit and Hasbro toys cases, 99 namely, Case CP/0871/01 Price-fixing of For example, on 9 September 2010, the Replica Football Kit [1 August 2003] and Norwegian Civil Court of Appeal held Case CP/0480-01 Agreements between that ‘‘Tine’’ was considered to have Hasbro UK Ltd, Argos Ltd and Littlewoods infringed the Norwegian Competition Litd Fixing the price of Hasbro Toys and Act, due to the Company’s negotiations Games [21 November 2003]; as also identi- of exclusivity agreements with Rema fied in the vertical distribution context in 1000. Those agreements created a signifi- the discussion in the Guidelines of up-front cant risk for the foreclosure of Tine’s sole payments systems and Category Manage- competitor, Synnøve Finden. On 14 July ment agreements (see above). Refer more 2009, the German Competition Authority, generally to O. Odudu, ‘‘Indirect Informa- (‘‘Bundeskartelamt’’), prohibited the tion Exchange: The Constituent Elements of exclusivity agreements that were con- Hub and Spoke Collusion’’, European cluded between Merck KG a (‘‘Merck’’), Competition Journal, August 2011, p.205. the leading producer of laboratory chemi- 91 cals in Germany, and VWR, the leading In this regard, see also K. Fountoukakos company in the trade of laboratory chemi- and K. Geeurickx, ‘‘The New vertical Block cals worldwide, and ordered the former
[61] ANTITRUST REPORT
either to supply chemical products to September 2009, B3-123/08 (Germany); other distributors or directly to end Tikkurila. SA., Castorama Polska Sp. zo., customers. Praktiker Polska Sp. zo., E-Competition, 100 For example, for France, see Article L. No. 32130 (Office for Competition and 420-1 of the French Commercial Code; and Consumer Protection, Poland); SC Inter- fruct SRL, SC Albinuta Shops SRL, SC Profi Article L. 442-5 of the Commercial Code. For ’ Germany,seetheGermanAct Against Rom Food SRL, e-Competition, No 37135 Restraints of Competition.ForItaly,see (Romanian Competition Authority); Section 2 of the Italian Antitrust Law Prohibition decision concerning RPM (Law n. 287 of 1990). For Poland,see practices in public tenders for hospital Article 5 of the Polish Act on Competition equipment, E-Competition, No 35733 and Consumer Protection of 15 December (Portuguese Competition Authority); 2000. For Spain,seetheSpanishLaw for Decision 4/0-02-14/11-12, Grand Prom the Defense of Competition. For the United a.d., Idea d.o.o., E-Competition, No. 37003 Kingdom, see The UK’s 1998 Competition (Serbian Competition Authority); See also b Act.ForSwitzerland,seeArticle5(1)of thecaseofBurda/Pressegro vertrieb,E- the Swiss Act on Cartels;Noticeonthe Competition, No. 31016 (Austria). Competition Law Treatment of Vertical 102 OFT, CA98 Decision: The Federation of Agreements (‘‘Notice on Vertical Agree- Wholesale Distributors and Vodafone, April ments’’), 2002 issued by the Swiss 2002. Competition Commission; and a draft 103 TheappealfromtheDecisionofthe Revised Notice on Vertical Agreements in Hellenic Competition Commission, Deci- September 2006. sion No. 437/V/2009, Fiat Auto SPA/Fiat 101 See, for example, Ciba Vision, WuW/F Auto Hellas SA/Fiat GroupAutomobiles DE-V 1813 – Kontaklinsen, Decision of 25 SPA/Fiat Credit Hellas SPA.
[62] ANNEX
DIFFERENCES BETWEEN THE 2000 AND 2010 EUROPEAN UNION VERTICALS REGIMES
RELEVANT SECTION 2000 VERTICALS REGIME (ARTICLE 81 EC) 2010 VERTICALS REGIME (ARTICLE 101TFEU)
Vertical Agreements Which Generally Fall Outside the Restrictive Agreements Prohibition Agreements of Vertical agreements between undertakings whose Changes percentage of market share to fall outside minor importance relevant market share is less than 10 percent are Article 101(1)TFEU to 15 percent. and SMEs generally considered to fall outside the scope of the Article. Changes percentageofmarketshareto15 percent. It is nevertheless specified that the prohibition may apply below the 10 percent threshold, if there is an appreciable effect on trade between Members States and on competition. I Agency agree- Lists two types of financial or commercial risk that Adds a third type of financial or commercial risk SSUE ments are material to the assessment of the genuine nature material to the definition of an agency agreement
of an agency agreement under Article 81(1) EC, for application of Article 101(1): 2011 3-4, [63] namely: Risks related to other activities undertaken on Risks directly related to the contracts con- the same product market, to the extent that the cluded and/or negotiated by the agent for principal requires the agent to undertake such the principal, such as financing of stocks; and activities, but not as an agent on behalf of the Risks related to market-specific investments. principal but for its own risk.
Adds more specific guidance on how to determine whether an agency relationship exists. Advises that the analysis should commence with contract-specific risks, then risks related to market-specific investments, then risks related to other required activities within that same product market. Application of the Block Exemption Regulation General Prerequi- Article 2(4) of the Block Exemption stated that the Deletes the original subsection (a), allowing sites exemption shall apply where competing undertak- exemption where the buyer has a total annual ings enter into a non-reciprocal vertical agreements turnover exceeding EUR 100 million. and: RELEVANT SECTION 2000 VERTICALS REGIME (ARTICLE 81 EC) 2010 VERTICALS REGIME (ARTICLE 101TFEU)
(a) the buyer has a total annual turnover not Slightly changes the language of subsection (c), now exceeding EUR 100 million, or subsection (b), to specifically refer to goods or (b) the supplier is a manufacturer and a distri- services at the retail level. butor of goods, while the buyer is a distributor not manufacturing goods competing with the contract goods, or (c) the supplier is a provider of services at several levels of trade, while the buyer does not provide competing services at the level of trade where it purchases the contract services.
‘‘Safe harbour’’ Article 3(1) stated that exemption applies where the Changes to text to state that, in order for the created by the supplier’s market share does not exceed 30 percent. exemption to apply, the supplier’s and the buyer’s NIRS REPORT ANTITRUST Block Exemption Article 3(2) stated that, for exclusive supply obli- market share must each be 30 percent or less. Regulation gations, the exemption shall apply on condition that Adds that there is no presumption that agreements the market share held by the buyer does not exceed with a supplier or buyer with above 30 percent [64] 30 percent of the relevant market on which it market share either fail or satisfy Article purchases the contract goods or services. 101(3)TFEU. Scope of the Block Exemption Regulation ‘‘Hardcore’’ restric- Describes the list of hardcore restrictions which lead Presumption- tions under the to the exclusion of the vertical agreement in its Adds a presumption stating that where there is a Block Exemption entirety from the scope the Block Exemption hardcore restriction in an agreement, that agree- Regulation Regulation. Individual exemption of vertical ment falls within Article 101(1)TFEU. Furthermore, agreements containing such hardcore restrictions is that agreement is unlikely to fulfill the conditions of unlikely. Article 101(3)TFEU. The relevant criteria listed in Article 101(3)TFEU can, however, be fulfilled in individual cases. Definition of ‘active’ sales- Definition of ‘active’ sales- ‘‘Active sales’’ means actively approaching indivi- Adds that the sending of unsolicited e-mails and dual customers inside another distributor’s actively approaching a specific customer group or exclusive territory or exclusive customer group by, customers in a specific territory through advertise- for example: direct mailings or visits; or actively ment on the Internet constitutes forms of active sales. approaching a specific customer group or custo- Adds explanation that advertisements or promo- mers in a specific territory allocated exclusively to tions that are only attractive to the buyer if they another distributor through advertisements in (also) reach a specific group of customers or custo- media, or other promotions specifically targeted at mers in a specific territory, are considered to RELEVANT SECTION 2000 VERTICALS REGIME (ARTICLE 81 EC) 2010 VERTICALS REGIME (ARTICLE 101TFEU)
that customer group or targeted at customers in that constitute examples of active selling to that territory; or establishing a warehouse or distribu- customer group or customers in that territory. tion outlet in another distributor’s exclusive territory. Definition of ‘passive’ sales- Definition of ‘passive sales’- ‘‘Passive sales’’ are those responding to unsolicited Deletes reference to the Internet. requests from individual customers, including the Adds that general advertising or promotional delivery of goods or services to such customers. measures are considered to be a reasonable way to General advertising or promotion in the media or on reach customers if they would be attractive for the the Internet that reaches customers in other distri- buyer to undertake these investments where they butors’ exclusive territories or customer groups but would not reach customers in other distributors’ which is a reasonable way to reach customers (exclusive) territories or customer groups. outside those territories or customer groups, for
instance to reach customers in non-exclusive terri- I SSUE tories or in one’s own territory, are passive sales. Internet sales- Internet sales- -,2011 3-4, [65] States that every distributor must be free to use the States that, in principle, every distributor must be Internet to advertise or sell products. allowed to use the Internet to sell products. States that, in general, the use of the Internet is not States that in general, having a website is considered considered to be a form of active sales into such to be a form of passive selling, since it is a reason- territories or customer groups, since it is a reason- able way to allow customers to reach the able way to reach every customer. distributor. Adds that if a customer opts to be kept (automati- cally) informed by the distributor and this leads to a sale, this constitutes a passive sale. The language used on the website or in the A reference to language options is done while communication plays normally no role in respect of stating that ‘‘Offering different language options on the whether a sale through the website would be website does not, of itself, change the passive character of considered to be a passive sale. such selling.’’ Lists a series of hardcore restrictions to the passive selling obligation, which includesagreementsto: Prevent customers located in another exclusive territory viewing an exclusive distributor’s website, e.g., through rerouting. This does not exclude agreeing that the distributor’s website is to offer a number of links to websites of other distributors and/or the supplier. RELEVANT SECTION 2000 VERTICALS REGIME (ARTICLE 81 EC) 2010 VERTICALS REGIME (ARTICLE 101TFEU)
Terminate a consumer’s transactions over the Internet once its credit card data reveals an addressthatisnotwithinthedistributor’s (exclusive) territory. Limit a distributor’s proportion of overall sales made over the Internet. This does not exclude the supplier requiring, without limiting the online sales of the distributor, that the buyer sells at least a certain absolute amount (in value or volume) of the products offline to ensure an efficient operation of its ‘‘bricks and mortar’’ shop (physical point of sales), nor does it preclude the supplier from NIRS REPORT ANTITRUST making sure that the online activity of the distributor remains consistent with the suppli- er’s distribution model (see paras. (54) and [66] (56)). This absolute amount of required offline sales can be the same for all buyers, or can be determined individually for each buyer on the basis of objective criteria, such as the buyer’s size in the network or its geographic location; oblige the distributor to pay a higher price for products intended to be resold by the distri- butor online than for products intended to be resold offline. This does not exclude the supplier agreeing with the buyer a fixed fee to support the latter’s offline or online sales efforts.
Active Internet sales- Active Internet sales- Websites specifically targeted at customers Online advertisement specifically addressed to primarily inside the territory or customer group certain customers is a form of active selling. For exclusively allocated to another distributor, for instance, territory based banners on third party instance, with the use of banners or links in pages of websites are a form of active sales into the terri- providers specifically available to these exclusively tories where these banners are shown. RELEVANT SECTION 2000 VERTICALS REGIME (ARTICLE 81 EC) 2010 VERTICALS REGIME (ARTICLE 101TFEU)
allocated customers, are considered to be ‘‘active’’ In general, efforts to be made specifically with sales. respect to a certain territory or in relation to a Unsolicited e-mails sent to individual customers or certain customer group constitutes active selling. specific customer groups are considered to consti- For instance, paying a search engine or online tute active selling. advertisement provider to have advertisements displayed specifically to users in a particular terri- tory amounts to active selling into that territory. Quality standards- Quality standards- The supplier may require quality standards for the Adds the condition ‘‘for selling by catalogue’’ as use of the Internet site to resell his goods, just as the another example of an acceptable quality standard supplier may require quality standards for a shop set by the supplier. or for advertising and promotion in general. The Adds that the supplier may require that its distri- latter may be relevant, in particular, for selective butors have one or more brick and mortar shops or I
distribution systems. showrooms as a condition for becoming a member SSUE ‘‘An outright ban on Internet or catalogue selling is of its distribution system. possible only if there is an objective justification for the Subsequent changes to such a condition are also -,2011 3-4, [67] restriction. In any case, the supplier cannot reserve to possible under the Block Exemption, except where itself sales and/or advertising over the Internet.’’ those changes have as their object to directly or indirectly limit the online sales by the distributors. Adds that a supplier may require that its distribu- tors use third party platforms to distribute the contract products only in accordance with the standards and conditions agreed between the supplier and its distributors for the distributors’ use of the Internet. Exceptions to the hardcore restriction in Article 4(b) Exceptions to the hardcore restriction in Article (restriction on territory a buyer to the agreement 4(b) (restriction on territory a buyer to the agree- may sell the contract goods or services)- ment may sell the contract goods or services)- It is permissible to: It is permissible to: restrict a wholesaler from selling to end users; restrict a wholesaler from selling to end users, restrict an appointed distributor in a selective which allows a supplier to keep the wholesale and distribution system from selling, at any level retail level of trade separate (this exception also of trade, to unauthorized distributors in covers allowing the wholesaler to sell to certain markets where such a system operated; and end users, for instance bigger end users, while restrict a buyer of components supplied for not allowing sales to (all) other end users); incorporation from reselling them to competi- restrict an appointed distributor in a selective tors of the supplier. distribution system from selling, at any level of RELEVANT SECTION 2000 VERTICALS REGIME (ARTICLE 81 EC) 2010 VERTICALS REGIME (ARTICLE 101TFEU)
trade, to unauthorized distributors in markets where such a system operated or where the supplier does not yet sell the contract products; and restrict a buyer of components supplied for incorporation from reselling them to competi- tors of the supplier.
Exceptions to the hardcore restriction in Article Exceptions to the hardcore restriction in Article 4(c) (restriction on active or passive sales to end 4(c) (restriction on active or passive sales to end users by members of a selective distribution users by members of a selective distribution system)- system)-
The hardcore restriction set out in Article 4(c) Adds phrase ‘‘without prejudice to the possibility of REPORT ANTITRUST concerns the active or passive sales to end users, prohibiting a member of the network from operating out whether professional end users or final consu- of an unauthorised place of establishment’’ to end of
[68] mers, by members of a selective distribution sentence. network. This means that dealers operating in a Adds phrase that dealers cannot be restricted in selective distribution system cannot be restricted thechoiceofuserstowhomtheymaysell,or in terms of the users or purchasing agents acting purchasing agents acting on behalf of those users on behalf of these users to whom they may sell. For ‘‘except to protect an exclusive distribution system example, the dealer should also be free to adver- operated elsewhere.’’ tise and sell with the help of the Internet. A Adds a hardcore restriction on ‘‘any obligations selective distribution network may be combined which dissuade appointed dealers from using the with exclusive distribution appointments, Internet to reach a greater number and variety of custo- provided that active and passive selling is not mers by imposing criteria for online sales which are not restricted anywhere across the range of distribu- overall equivalent to the criteria imposed for the sales tors. The supplier may therefore commit itself to from the brick and mortar shop.’’ It is furthermore supplying only to one dealer or a limited number stated that ‘‘[t]his does not mean that the criteria of dealers in a given territory. imposed for online sales must be identical to those imposed for offline sales, but rather that they should pursue the same objectives and achieve comparable results and that the difference between the criteria must be justified by the different nature of these two distribution modes.’’ The new text provides an example and nuances of this type of hardcore restriction. RELEVANT SECTION 2000 VERTICALS REGIME (ARTICLE 81 EC) 2010 VERTICALS REGIME (ARTICLE 101TFEU)
Selective Distribution- Selective Distribution- Restrictions can be imposed on the dealer’s ability Adds that a selective distribution system may not to determine the location of his business premises. be combined with exclusive distribution appoin- Selected dealers may be prevented from running tees as that would lead to a hardcore restriction of their business from different premises or from active or passive selling by the dealers under opening a new outlet in a different location. If Article 4(c), with the exception that restrictions the dealer’s outlet is mobile (‘shop on wheels’), can be imposed on the dealer’s ability to deter- an area may be identified outside which the mine the location of its business premises. mobile outlet cannot be operated. Adds a new provision that the use by a distributor of its own website cannot be considered to be the same thing as the opening of a new outlet in a different location.
Adds a new provision that the supplier may I commit itself to supplying only one dealer or a SSUE limited number of dealers in a particular part of -,2011 3-4, [69] the territory where the selective distribution system is applied. Exceptions to the hardcore restriction in Ar- ticle 4(d) (restriction of cross-supplies between distributors)- This new paragraph addresses the restriction of cross-supplies and selective distribution. States that selected distributors must remain free to purchase the contract products from other appointed distributors within the network, oper- ating either at the same or at a different level of trade. Consequently, selective distribution cannot be combined with vertical restraints aimed at forcing distributors to purchase the contract products exclusively from a given source. It also means that, within a selective distribution network, no restrictions can be imposed on appointed wholesalers as regards their sales of the product to appointed retailers. RELEVANT SECTION 2000 VERTICALS REGIME (ARTICLE 81 EC) 2010 VERTICALS REGIME (ARTICLE 101TFEU)
Conditions under States that Article 5 excludes certain obligations Individual cases of hardcore sales restrictions that the Block Exemp- fromtheexemption,eventhoughthemarket may fall outside of Article 101(1) TFEU or may tion Regulation threshold is not exceeded. Also states that the fulfill the conditions of Article 101(3)TFEU. exemption continues to apply to the remaining part Replaced with a new section. This new section of the vertical agreement if the problematic obliga- states that hardcore restrictions may be objectively tion is severable. necessary in exceptional cases for an agreement of a Discusses exclusions from the exemption, particular type or nature. ‘‘For example, a hardcore including: restriction may be objectively necessary to ensure that a public ban on selling dangerous substances to certain Non-compete obligations. Generally, non- customers for reasons of safety or health is respected.‘‘ compete obligations are not covered unless Efficiency defence- limited to five years or less, or that require Undertakings may always plead an efficiency the explicit consent of both parties to renew. defence under Article 101(3)TFEU in an individual Post term non-compete obligations. Such obli- REPORT ANTITRUST case. gations are normally not covered unless the Examples of (re)sale restrictions which may be obligation is indispensable to protect know- acceptable have been added, namely: [70] how and is limited to one year. Restriction of sales of competing goods in a Where substantial investments by the distri- selective distribution system. Generally, a butor to start up and/or develop the new restriction preventing dealers from buying market are necessary, restrictions of passive products for resale from specific competing sales by other distributors into such a territory buyers is not covered. or to such a customer group which are neces- sary for the distributor to recoup those investments during the first two years that the distributor is selling the contract goods or services in that territory or to that customer group. In the case of genuine testing of a new product in a limited territory or with a limited customer group and in the case of a staggered introduc- tion of a new product, the distributors appointed to sell the new product on the test market or to participate in the first round(s) of the staggered introduction may be restricted in their active selling outside the test market or the market(s) where the product is first introduced for the period necessary for the testing or introduction of the product. RELEVANT SECTION 2000 VERTICALS REGIME (ARTICLE 81 EC) 2010 VERTICALS REGIME (ARTICLE 101TFEU)
If appointed wholesalers located in different territories are obliged to invest in promotional activities in their designated territories to support the sales by appointed retailers, and it is not practical to specify in a contract the required promotional activities, restrictions on active sales by the whole-salers to appointed retailers in other wholesalers’ territories to overcome possible free riding. Where a manufacturer agrees to dual pricing with its distributors, because selling online leads to substantially higher costs for the manufac- turer than offline sales. I SSUE The relevant Relevant market share- Relevant market share- market for -,2011 3-4, [71] Market share of the supplier determines whether Revises section to state that market share of both the calculating the the block exemption applies. Only in the case of supplier and the buyer determine whether the 30 percent market exclusive supply is the market share of the buyer block exemption applies. ‘‘For agreements between share threshold decisive. small and medium-sized undertakings, it is gener- under the Block ally not necessary to calculate market shares.’’ Exemption Product market definition- Regulation Adds that retail markets may also be wider than the final consumers’ search area where homogeneous market conditions and overlapping local or regional catchment areas exist. Multiple parties- Adds that where one party to the agreement sells the contract goods or services to another party to the agreement, its market share must not exceed 30 percent as either a buyer or supplier for the exemption to apply. Replacement parts- A new section added to the effect that, in practice, the issue is whether a significant proportion of buyers make their choice by taking into account the ‘‘lifetime’’ costs of the product. If so, it indicates there is one market for the original equipment and spare parts combined. RELEVANT SECTION 2000 VERTICALS REGIME (ARTICLE 81 EC) 2010 VERTICALS REGIME (ARTICLE 101TFEU)
Enforcement Policy in Individual Cases Recommended Maximum resale price- Maximum resale price- and maximum The most important factor for assessing possible Generally, the Guidelines have been changed to be resale prices anticompetitive effects of maximum or recom- more accepting of maximum resale prices. The mended resale prices was the market position of the sentence that states that the practice of imposing a supplier. The stronger the market position of the maximum resale price or recommending a resale supplier, the higher the risk that a maximum resale price may infringe Article 101(1)TFEU if it leads to a price or a recommended resale price would lead to uniform price level has, for example, been deleted. a more or less uniform application of that price level The new Guidelines also delete the paragraph by the resellers, because they may use it as a focal discussing the importance of analyzing the market point for their pricing policies. position of competitors in assessing maximum The second most important factor for assessing resale prices. This is replaced with a new sentence possible anti-competitive effects of the practice of which states that ‘‘a maximum resale price may also REPORT ANTITRUST maximum and recommended prices was the market help to ensure that the brand in question competes more position of competitors. Especially in a narrow oligo- forcefully with other brands, including own label [72] poly situation, the practice of using or publishing products, distributed by the same distributor.’’ maximum or recommended prices might facilitate A new section has been added which discusses collusion between the suppliers by exchanging resale price maintenance and maximum resale information on the preferred price level and by price. reducing the likelihood of lower resale prices. The Resale price maintenance- practice of imposing a maximum resale price or Addssectiononresalepricemaintenance(RPM). recommending resale prices leading to such effects Discusses possible efficiencies related to RPM, might also infringe Article 81(1)EC. including: Inducing distributors to better take into account the manufacturer’s interest to promote a new product during an introductory period of expanding demand. Organizing in a franchise system or similar distribution system applying a uniform distri- bution format for a coordinated short term low price campaign (e.g. 2 to 6 weeks ‘‘in most cases’’). Preventing ‘‘free riding’’ at the distribution level. RELEVANT SECTION 2000 VERTICALS REGIME (ARTICLE 81 EC) 2010 VERTICALS REGIME (ARTICLE 101TFEU)
Upfront Access No explicit reference is made to the topic. The new Guidelines note that upfront access Payments payments might result in anti-competitive foreclo- sure of other suppliers, where the widespread use of such upfront access payments increases barriers to entry for small entrants. As such, ‘‘upfront access payments may have the same downstream foreclosure effect as an exclusive supply type of obligation.’’ Upfront access payments are also noted to be likely to increase the prices charged by the supplier for the contract products since the supplier must cover the expense of those payments. However, it is also acknowledged that the use of
upfront access payments may in many cases I SSUE contribute to an efficient allocation of shelf space for new products. -,2011 3-4, [73] Category Manage- No explicit reference is made to the topic. The new Guidelines note that although category ment management agreements will not be problematic as a general rule, they may sometimes distort compe- tition between suppliers, and finally result in the anti-competitive foreclosure of other suppliers, where the so-called ‘‘category captain’’ is able, due to its influence over the marketing decisions of the distributor, to limit or disadvantage the distribution of products of competing suppliers. Category management agreements are also noted, on the other hand, to allow distributors to have access to the supplier’s marketing expertise for a certain group of products and to achieve economies of scale, as they ensure that the optimal quantity of products is presented in a timely manner and directly on the shelves.