European Commission Adopts New Vertical Restraints Block Exemption Regulation

On April 20, 2010, the European Commission adopted a new Vertical Agreements Block Exemption Regulation and a revised set of accompanying guidelines on vertical restraints (VBER).

The new rules which provide a safe harbour for companies from Article 101 of the Treaty¹ on the Functioning of the European Union (TFEU) are due to enter into force on June 1, 2010. They will replace the existing block exemption regulation and guidelines and will be valid for a period of 12 years, expiring on May 31, 2022. Detailed guidelines have been published and will be adopted as well by the Commission in May. The VBER and the guidelines are available to download on the Commission’s Competition Directorate Web site.² Under both the current and new VBER, vertical agreements that do not qualify for exemption under the VBER are not necessarily illegal. Rather, agreements within the scope of Article 101 (1) that fall outside the VBER safe harbour need to be individually reviewed for potential exemption under Article 101 (3).

The VBER provides a transitional period of one year in order to provide time for existing agreements that qualify under the current VBER to be brought into conformance and to qualify for an exemption under the new VBER.

While the changes set forth in the new rules and guidelines are relatively limited, the VBER provides some important clarification of the legal standards applicable to resale price maintenance, online distribution, as well as new guidance on a certain number of commercial practices, including upfront access payments and category management agreements.³

As before, it remains important in any international distribution scheme to remember that falling into a safe harbour in one jurisdiction by no means ensures similar treatment in another jurisdiction. While the new VBER reflects some convergence with the United States on minimum price restraints, the new guidelines that accompany the VBER reconfirm that EU competition law is in general more hostile than U.S. antitrust law to vertical restrictions.

Safe Harbour of the VBER: Introduction of a Buyer’s Market Share Threshold

The most important change concerns the market share safe harbour. Under the current rules, distribution agreements where the supplier’s market share exceeds 30 percent do not qualify for the safe harbour under the VBER (except in the situation of exclusive supply, where the market share of only the buyer market share is relevant). With the new rules, while the 30-percent market share cap remains unchanged, the market share of both the supplier and the buyer are required not to exceed the 30-percent market share threshold in all cases, thus excluding large distributors with a non-insignificant market share from the benefit of the VBER. This change is designed to deal with anticompetitive effects of large purchases with significant market power.

Obviously, it is necessary, as an initial matter, to define the relevant market or markets to be taken into consideration. For the supplier, it is the market in which it sells the contract goods or services, and for the buyer, the market in which it purchases the contract goods or services. The Commission’s notice on relevant market definitions is available as well on its Web site.⁴

As is the case under the current rules, the new VBER requires both suppliers and purchasers to monitor their respective relevant market shares on an ongoing basis as the benefit of the VBER will not apply to agreements where the 30-percent market share threshold is exceeded.⁵

Hardcore Restrictions: Pro-Competitive Effects of Resale Price Maintenance (RPM)

The most serious anti-competitive restraints are referred to as “hardcore restrictions.” Any agreement containing a hardcore restriction such as resale price maintenance or territorial and customer restrictions on resale, will not qualify for the benefits of the VBER, will fall within Article 101(1), and are not likely to benefit from the exemption under Article 101(3) unless convincing evidence for likely pro-competitive effects is provided.

As in the United States until the recent Supreme Court decision in Leegin,⁶ minimum RPM was per se illegal in the European Union. That is to say, RPM, when found, was automatically illegal and no showing of justification was permitted.⁷ Recognizing that a similar approach as taken in the Leegin ruling may be permissible in the EU, the new VBER does not label RPM as per se illegal but rather, reflecting a softening of the Commission’s position, as one of a number of hardcore restrictions, which are “presumptively” illegal. Thus, the new adopted guidelines recognize, as the Court of Justice had ruled that there may be circumstances in which a previously assumed hardcore restriction (like market partitioning through pricing controls) may lead to efficiencies and consumer welfare benefits that would warrant an exemption under Article 101 (3).⁸ This might be the case where a manufacturer introduces a new product or brand, and where RPM may be helpful by giving the opportunity of organising a short-term promotional campaign and inducing distributors to respond to the manufacturer’s interest to promote the product. Here, the rationale is that resale price maintenance may provide distributors with the means and incentives to increase sales efforts, and where there is competition between distributors, this may induce them to expand overall demand for the product, making the launch a success.

Online Distribution: Significant New Guidance

Online distribution has been one of most controversial areas in European distribution law and the new guidance provided by the European Commission in this area is welcomed.⁹

As in the past, there remains for purposes of judging the legality of exclusive territories a distinction between restrictions imposed on active and passive sales. The European Commission maintains its position in the new VBER by stating that while active distribution (where a distributor actively and affirmatively approaches individual customers) may be restricted, passive distribution (where the distributor responds to unsolicited requests from individual customers) cannot, in principle, be restricted. However, these concepts are not necessarily self-evident. Thus, the concepts of active and passive sales are refined, and further guidance is provided. The devil is, of course, in the details. A non-exhaustive list of situations are reviewed in the new adopted guidelines. Restrictions that would fall outside the VBER safe harbour include:

• Preventing customers located outside a distributor’s territory from viewing its Web site or automatically re-routing such customers to their national Web sites
• Limiting the proportion of overall sales made over the Internet
• Requiring that a higher price be paid for products sold online¹⁰
• Requiring termination of Internet transactions if credit card data reveal an address outside the distributor’s territory

These restrictions are among the hardcore restrictions that, while not automatically prohibited, very likely would be viewed as an antitrust violation. Under the new VBER, suppliers may, however, impose an obligation to provide, after sales services for Internet selling. Further, online distributors may be required to have one or more physical location (“bricks and mortar” shops) or showrooms as a condition for becoming a member of a selective distribution system.

Other Changes

Other changes brought by the new rules include reducing the exceptions in which vertical agreements among competitors can qualify for the VBER. The new VBER removes the existing exception for non-reciprocal vertical agreements between competitors when the buyer has a turnover not exceeding €100 million.

In selective distribution systems, the new VBER establishes as a new hardcore restriction any conditions imposed on an appointed distributor to sell to unauthorized distributors in markets where such a system is not operated. The European Commission adopts a stricter approach to selective distributorship by limiting the potentially exclusionary nature of such arrangements to the territory where such a system is operated.¹¹

The new adopted guidelines also introduce a new third type of risk to be taken into account when assessing agency agreements, but which basically reflects the most recent EU case law. It concerns the risks related to other activities undertaken in the same product market, where the agent is required to operate independently in order to be allowed to engage in the agency activity. If such a risk is borne by the agent, the latter is likely to be treated as an independent distributor and the agency as “non genuine” under EU law.

The new rules provide new guidance on common commercial practices, including upfront access payments and category management agreements.

• Upfront access payments are fixed fees paid by suppliers to distributors to obtain access to their distribution network and remunerate services provided to the suppliers by the retailers — such as access to shelf space and promotion campaigns. Although the new rules say that they may result in anti-competitive foreclosure of other distributors, such agreements are in principle exempted by the VBER.
• Equally, category management agreements by which, within a distribution agreement, the distributor entrusts a particular supplier with the marketing of a particular category of product, are in principle exempted by the VBER. While such agreements may facilitate collusion and can result in foreclosure of other suppliers, the use of category management may also lead to efficiencies.

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¹  Article 101 (previously Article 81 proscribes concerted action, including vertical as well as horizontal restraints: e.g., price fixing, market divisions, exclusive dealing arrangements, resale price maintenance, tying arrangements, and so forth. Article 101 (1) is similar in substance to Section 1 of the Sherman Act. Article 101 (3) provides an efficiencies and consumer welfare exemption from Article 101 (1). The legal function of the VBER is to state the circumstances in which vertical restraints automatically qualify for the protection of Article 101 (3).

² http://ec.europa.eu/competition/

³ Moreover, since the modernization of the EU’s competition regime, effective in May 2004, there is increased responsibility placed on companies and their counsel to comply with EU legal principles.

⁴ http://ec.europa.eu/competition/

⁵ There are formulae for making this calculation that can be found on the mergers section of the Web site.

⁶ Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007). Please note that in the United States minimum price restraints are still treated as per se illegal restrictions under some individual state antitrust laws.

⁷ On the other hand, maximum resale price restrictions are generally permissible under U.S. law after the Supreme Court decision in State Oil Co. v. Khan, 522 U.S. 3, 11 (1997). In the European Union, the vertical restraint guidelines confirm that maximum resale price maintenance and recommended resale price are permissible within the 30-percent market share safe harbor but caution that there may be risks otherwise.

⁸ See Commission v. GlaxoSmithKline [Case C-501/06] (October 6, 2009). GlaxoSmithKline, while focused on interstate partitioning, was fundamentally concerned with controlling prices — RPM, in the broad sense.

⁹ Obviously, since the prior VBER was adopted in 1999, the amount of online commerce has skyrocketed.

¹⁰ The guidelines note a potential exception where sales online lead to substantially higher costs for the manufacturer such as from more customer complaints and warranty claims. Keep in mind that, as with RPM, the burden is on the person imposing the restriction to justify it under Article 101 (3).

¹¹ The territory where a selective distribution system is operated is the territory reserved for the system and which includes the possibility to reserve territory for a future expansion of the distribution network.

Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and colleagues. If you have any questions about this update or would like to discuss this topic further, please contact your Foley attorney or the following:

Howard W. Fogt
Partner
Washington, D.C.
202.672.5378
hfogt@foley.com

Alan D. Rutenberg
Partner
Washington, D.C.
202.672.5491
arutenberg@foley.com

Sophie Lignier
Of Counsel
Brussels, Belgium
slignier@foley.com