Have you entered into a B2B distribution agreement or other B2B vertical agreement and do you wonder whether there are competition issues that you should be considering as principal or distributor because of the market share covered in the B2B distribution agreement? This article sets out the competition issues that are applicable to distribution agreements and other vertical agreements if the thresholds are met. Below you will find out what these thresholds are and which requirements need to be met from a competition law point of view.
Hindering or restricting competition
There is national and EU legislation prohibiting any distribution or other vertical agreements with the intention to hinder or restrict competition, which a distribution agreement (referred to as a vertical agreement) could potentially do.
Which agreements are affected and how?
A vertical agreement is where the two parties in different parts of the supply chain enter into an agreement, such as distribution agreements, re-sale agreements and supply agreements. By doing so, especially if exclusivity is agreed upon, they prohibit or inhibit themselves to enter into similar contracts with other parties, thus restricting competition. EU competition law allows for such restrictions, however within strict boundaries. It creates a safe harbour for parties to enter into agreements in the supply chain. For example, parties in distribution agreements are prohibited in making arrangements in order to control prices or to restrict passive reselling.
What steps need to be taken to enter into a distribution agreement that does not appreciably hinder or restrict competition? The EU legislation that will be considered in this article is the De Minimis Notice and the Hard-core Restrictions.
What is permitted to include in a distribution agreement without hindering or restricting competition?
Distribution agreements may only contain certain terms where competition is hindered or affected, in the event that the :-
- the De Minimis Notice is applicable, or
- if the Hard-core Restrictions in the Commission block exemption regulation on vertical agreements is complied with.
What is the consequence for not complying?
It is important to consider this element in distribution agreements and other vertical agreements to avoid substantial fines that can be imposed. Furthermore, if any term in the distribution agreement contains a hardcore restriction, then the exemption will not apply to the whole agreement.
What is a De Minimis Notice? https://eur-lex.europa.eu/legal-content/NL/TXT/PDF/?uri=OJ:C:2014:291:FULL&from=EN
The De Minimis Notice came about after the Volk – Vervaecke (https://eur-lex.europa.eu/legal-content/NL/TXT/PDF/?uri=CELEX:61969CJ0005&from=EN judgment of 1969 of the European Court of Justice. The court ruled that the European Cartel ban does not apply to agreements where the competition between member states has not “appreciably” been affected. Shortly thereafter the EU published the first De Minimis Notice, which has been reviewed a number of times since then. The De Minimis Notice provides a safe harbour for agreements between undertakings that are considered by the EU to be of non-appreciable effects on competition. This safe harbour applies on the condition that the market shares of the undertakings entering into those agreements do not exceed the market share thresholds set out in the De Minimis Notice and provided that the agreements do not have as their object to restrict competition.
For the purposes of the application of the De Minimis Notice, the Hard-core restrictions as set out below in the EU block exemption regulation is generally considered as a restriction by object. Therefore, these agreements cannot benefit from the market share safe harbour set out in the De Minimis Notice.
Generally speaking, this De Minimis Notice consists of two different restrictions, relating firstly to the effect that the agreement has on competition, and secondly if the object of the agreement is to restrict competition.
- The effect restriction is quantified by the joint turnover of both parties EUR-Lex – 52004XC0427(06) – EN – EUR-Lex (europa.eu) . This should not exceed Euro 40 million and 15% to 5% of the joint market share depending on the type of agreement, and
- The object restriction de_minimis_notice_annex.pdf (europa.eu) is where the objectof the agreement is to restrict competition (such as the hardcore restrictions set out in the EU Block exemption referred to below.
Restrictions by effect and/or restriction by object?
Restrictions by effect arise from the fact that certain forms of arrangements can be regarded by their nature to be injurious to the proper functioning of competition. Restrictions by the object are those that by their very nature have the potential to restrict competition. The restrictions by the object can be distinguished as to whether they relate to market partitioning by territory and/or customer group or to limitations on the buyer’s ability to determine its resale price.
To summarise, the restrictions need to be examined based on the effect restrictions and the object restriction requirements set out by the Commission.
What are the Hard-core Restrictions for parties with at least 30% market share?
The EU has issued a regulation (EU/330/2010) where the EU provides for an exemption for vertical supply and distribution agreements. This Regulation sets out a hard-core list of restrictions that are prohibited between different parties entering into agreements in the distribution or production chain and where the market share exceeds 30%. EUR-Lex – cc0006 – EN – EUR-Lex (europa.eu)
This exemption only applies in the event that the following requirements are met:-
- The agreement does not contain any of the hardcore restrictions set out in the regulation
- The market share for both suppliers and buyers does not exceed 30%, and
- The 3 specific conditions on vertical restraints are complied with.
Requirements for vertical supply and distribution agreements
Please find below a summary of each of the above-mentioned requirements.
- Hardcore restrictions:-
- Pricing – fixed pricing and minimum pricing is not permitted, whereas maximum and recommended pricing is. It is permitted to agree upon minimum amount of sales. It is prohibited to have different pricing for online or offline purchases.
- Territory – In principle market partitioning is prohibited. Distributors must remain free to decide whether and to whom they sell. There are some exceptions to this rule whereby exclusive distribution and selective distribution is allowed. However, active sales to other countries are not allowed and passive sales are, meaning that purchasers should be free to buy the product and/or services where they want. This is not something that can be agreed upon between the supplier and the distributor. In relation to internet sales it is prohibited to reroute the customers to different distributors in a different territory, website blocking is prohibited as well as purchase limitations.
- Selective distribution where distributors are appointed based on certain pre-determined criteria which is allowed, but the distributors cannot be restricted in to whom they sell or purchase the products and/or services from other selected distributors.
- The supplier of spare parts may not be barred from selling spare parts to end-users, independent repairers or service providers, whereas distributors may be prevented from selling components to competitors of the supplier.
- Market share cap of 30%
Neither the supplier nor the buyer of the products and/or services has a market share of 30%. To clarify, the 30% is calculated for the supplier by way of the market share on the relevant supply market, i.e. the market on which the products and/or services are sold. The 30% of the buyer is the purchase market share, meaning the market where the products and/or services are purchased. So the cap applies to both these market independent of each other.
- Excluded restrictions
- The agreement should not contain a non-compete clause during the duration of the agreement. Non-competition clauses during term of the distribution agreement is only permitted if they do not exceed a fixed period of 5 years. Under certain strict circumstances this can be extended, albeit only expressly and not by implication.
- The agreement should not contain a non-compete clause after the termination of the agreement. Non-competition clause after expiry of the distribution agreement is only permitted if restricted to the territory with a maximum of one year.
- The agreement should not exclude certain specific brands for a selective distribution system.
Regulations regarding competition and distribution agreements
To conclude, competition is healthy and benefits the market as a whole and the EU has set out some clear rules on what this actually means, and what the consequences are if competitors intend to restrict or hinder the market. Please note that the exemption for vertical agreements is valid up until 31st May 2022, and the EU is in the process of producing a new regulation on vertical agreements. The status is that the public consultation round is closed, and the EU is planning to approve the new Group exemption during the second half of 2021. EU competition rules – revision of the Vertical Block Exemption Regulation (europa.eu).
What can you expect from the new regulation?
The new rules deal largely with the following:-
- the divergence of interpretation and
- clarity on issues such resale price maintenance and passive renewable non-competition clauses after termination of the distribution agreement.
- Updating the regulation to incorporate e-commerce market development, such as dual distribution, active sales restrictions, indirect online sales restrictions.
An update will be provided as soon as the new regulation is available.
What are the Brexit implications on international B2B distribution agreements?
As a result of the United Kingdom leaving the EU, the UK is treated as a third country and can, in principle, no longer rely on EU legislation. The Vertical Block Exemption is retained in UK law until the end of the transition period (expired on 21st December 2020) until the expiry of the Vertical Block Exemption on 31st May 2022.
What is the UK doing regarding distribution agreements in international trade?
The Competition and Markets Authority in the UK has announced that it will be reviewing the vertical block exemptions going forward to ensure that the block exemption still delivers the intended benefits for UK businesses and consumers.
Vertical Block Exemption
In short, this means that the Vertical Block Exemption will apply to all vertical agreements entered into with parties in the UK. As it is not clear at present what the conditions will be after the expiry of the Vertical Block Exemption, I would advise you to seek legal advice regarding this issue in the event that the vertical agreement you have entered into or will enter into extends beyond the period of 31st May 2022.
Are you looking for advice on the competition aspects of a distribution agreement or other vertical agreement that you are entering in, please feel free to contact me on (Madelon van Breemen) at +31 10 2092765 or by email at email@example.com