Blocked in

Dr Johnson, the 18th century literary titan, once observed: “Men more frequently require to be reminded than informed.” So it is with the European Commission’s new Vertical Agreements Block Exemption Regulation 330/2010 (20 April 2010). The new Regulation, together with accompanying Guidelines, comes into force on 1 June and replaces the current Verticals Regulation (2790/1999), due to expire on 31 May 2010. A transitional regime will apply until 31 May 2011. 

The new Regulation does not represent a radical departure from the Commission’s approach since 1999, but sharp eyes will notice a number of important changes.

Safe harbour

The Regulation exempts certain distribution, supply and similar agreements between undertakings operating at different levels of the production or distribution chain (so-called “vertical” agreements) from article 101(1) of the Treaty on the Functioning of the European Union (“TFEU”), formerly article 81(1) of the EC Treaty. Article 101(1) prohibits agreements, decisions of associations or undertakings, and concerting practices that have as their object or effect the prevention, restriction or distortion of competition. The Verticals Regulation defines “block exemptions”: certain categories of restrictions that the Commission considers likely to meet the exemption criteria in article 101(3).

The structure of the new Regulation remains the same: in order to benefit from the block exemption, both the buyer’s and the supplier’s market share must not exceed 30%, and the agreement must not contain any “hardcore” restrictions. The list of such restrictions is largely unchanged, but the Guidelines reflect experience and wider commercial developments since 1999 (such as the rise of e-commerce).

Importantly, where vertical agreements are concluded by firms whose market share exceeds 30%, there is no presumption that the agreement is illegal. However, since the Modernisation Regulation (Council Regulation (EC) No 1/2003), firms have been left to assess for themselves whether agreements fall within the article 101(3) exemptions.

Market share thresholds

The most important change is that the market share of both supplier and buyer must not exceed 30% (individually, not cumulatively). Under the old regime the 30% rule generally only applied to the supplier (except in cases of exclusive supply).

The Commission’s view is that the introduction of a buyer’s market share threshold will be beneficial to SMEs, which are most likely to be harmed by vertical restraints imposed by powerful buyers. However, this will almost certainly make the application of the new Regulation more complex, since legal advisers will now have to examine both the supplier’s and the buyer’s market shares. Some flexibility is available where market share nudges above 30% for a short period.

Other points of interest

Other points worth noting include:

“Active” and “passive” internet sales. The general rule that a supplier may restrict a buyer from actively pursuing sales into a territory or to a customer group reserved to another buyer or the supplier, but cannot restrict buyers from “passively” responding to unsolicited orders, remains unchanged. However, the new Guidelines pay much attention to how that rule applies to online distribution. The Commission’s view is that running a simple e-commerce website will usually only amount to “passive” sales, but it is possible to cross the line into “active” sales, for example by sending unsolicited emails to individual customers or to a certain territory, or conducting internet advertising targeted in this way. However, it’s nice to know that simply including language options on your website will not cross that line. Allowing users to click to view your website in French does not mean that you are actively promoting online sales in France.

Resale price maintenance (“RPM”). RPM will generally continue to be treated as a hardcore restriction, but interestingly the Guidance now accepts that in very specific circumstances RPM may actually lead to certain efficiencies. This is significant because for many years the setting of fixed or minimum prices was tantamount per se to breach of article 101(1).

Selective and exclusive distribution. The Guidelines discuss selective and exclusive distribution systems in detail, and how the rules apply to online activity as well as traditional “bricks and mortar” shops.

Upfront access payments. The Guidelines go into detail on the Commission’s views on fees paid by buyers in order to obtain access to a supplier’s distribution network. These are generally exempt, subject to the market share thresholds.

Category management agreements. The Guidelines also discuss the Commission’s treatment of agreements where a supplier takes responsibility for marketing a particular category of products for the buyer (including the products of competing suppliers). These are particularly important in the food and beverage sector and are generally exempt, subject to the market share thresholds.

To 2022 and beyond?

The new Regulation will remain in force until 31 May 2022. It will be interesting to find out then whether the Commission will be content to simply remind us of its approach, or inform us of a radical new one.

• Douglas McLachlan is an associate with Biggart Baillie LLP, specialising in competition, procurement and IP