December 2022 Blog

New leeway for distribution agreements

The new Vertical Block Exemption Regulation 2022/720, which replaces the previous, now expired, Vertical Block Exemption Regulation 330/2010, contains some significant innovations as well as clarifications. The following is an overview of the rules now applicable to distribution contracts.

Highlights

Importers or wholesalers who rely on dual distribution and compete with their distributors at the distribution level could not benefit from the exemption effect until now. Since 1 June 2022, these contracts also fall under the Vertical Block Exemption Regulation.

Exclusive territories may now be allocated to up to five dealers jointly, who are protected against competition from all other buyers of the supplier. This significantly increases the flexibility and options for shaping distribution systems. It is worthwhile to revise the distribution contracts now.

It is now easier to pass on territorial restrictions to the customers of the buyer.

A tacit extension of a non-compete clause of the buyer limited to five years may now be permissible subject to additional conditions. This may also be a reason to revise distribution agreements to make use of the new leeway.

Background

On 31 May 2022, the Vertical Block Exemption Regulation, which provided legal certainty in the area of distribution agreements, expired. Block Exemption Regulation No. 330/2010 on Vertical Agreements enabled a legally secure design of distribution systems and vertical agreements within its scope of application. Based on the principle of legal exception, anticompetitive provisions in vertical agreements falling within the scope of application of the Verticals Block Exemption Regulation are exempt and thus valid under antitrust law. According to the system of the Vertical Block Exemption Regulation, there are hardcore restrictions (or "black clauses") that render the exemption effect for the entire agreement containing the hardcore restriction null and void. In addition, the Vertical Block Exemption Regulation regulates a number of less serious restrictions ("grey" or "red" clauses), which are not exempt in themselves but do not affect the exemption of the remaining provisions of the agreement.

The European Commission is adhering to this successful block exemption system with the revised Vertical Block Exemption Regulation 2022/720. This corresponds in essence to the previous version and continues it seamlessly. The new vertical Block Exemption Regulation grants a transitional period of one year. The amendments are intended to address the development of the markets as well as the changed distribution landscape and, among other things, to newly regulate dual distribution and distribution via online intermediary services and online marketplaces.

Scope of application

The first changes have been made to the scope of application of the Vertical Block Exemption Regulation. Until now, according to Article 2 (4) of the Vertical Block Exemption Regulation, non-reciprocal agreements between competitors were excluded from the scope of application. Exceptionally, the scope of application was only opened if a manufacturer competed with its distributors at the distribution level ("dual distribution"). Here, distribution agreements of importers and wholesalers were excluded from the legal certainty of the vertical Block Exemption Regulation. With the new Article 2 (4), "importers and wholesalers" are treated equally to manufacturers. Thus, if the parties are competitors only at the downstream distribution level, but not at the "upstream level at which he purchases the contract goods", the Vertical Block Exemption Regulation will be applicable in future - even if the supplier is not a manufacturer. This is a welcome extension of the regulatory effect of the Vertical Block Exemption Regulation.

Providers of online platforms that compete with their principals at the distribution level are excluded from the scope of application of the Vertical Block Exemption Regulation 2022/720 pursuant to Article 2 (6). For providers such as Amazon, which in addition to intermediary services themselves distribute products to end customers, the effect of the block exemption is therefore not granted and an individual assessment under Article 101 TFEU is required.

Commercial agent's privilege

Furthermore, restrictions in contracts with so-called genuine commercial agents (and commission agents) are exempt from the ban on cartels in Article 101 TFEU. Price fixing and territorial allocation are therefore permissible without regard to the exceptions defined in the Vertical Block Exemption Regulation. However, where as restrictions do not relate to the contracts to be brokered but to the relationship between the commercial agent and the principal, they must always comply with the antitrust requirements (para. 43 Guidelines to Regulation 2022/720).

On the other hand, restrictions on non-genuine commercial agents who assume economic risks in connection with the brokered transaction are in line with the provisions of the Vertical Block Exemption Regulation. In this case, for example, prohibitions of passing on commission are hardcore restrictions (footnote 41 and para. 192 of the Guidelines to Regulation 2022/720). Allocation of Territories must then comply with the strict exemption rules. What is new are the additional explanations (para. 36 of the Guidelines) as to when the restrictions are not subject to examination with regard to a commercial agency transaction, even if the commercial agent simultaneously acts as an authorised dealer for the principal. Overall, the requirements do not seem very attractive, so that in practice it will often come down to an examination under the Vertical Block Exemption Regulation for all components and clauses in combined contracts.

Market partitioning

A particularly important issue in practice is the permissibility of territorial and customer restrictions. Many companies are interested in imposing resale territory requirements on their customers or in concluding customer protection agreements. Vertical Block Exemption Regulation 2022/720 has a new structure on this point and now distinguishes between distribution systems of exclusive distribution, selective distribution and free distribution.

The design of territory allocations is becoming more flexible: until now, territories or customer groups could be exclusively allocated to only one distributor at a time. From now on, an exclusive territory can also be allocated jointly to up to five distributors. The draft still provided that an allocation of a territory or a customer group to a "limited number of buyers" was also to be possible, with the number of customers should to be " determined in proportion to the allocated territory or customer group", " in such a way as to secure a certain volume of business that preserves their investment efforts". This would have created considerable uncertainty. The manufacturer is now given the possibility of jointly assigning in one country, for example, the exclusive handling of the market to two competing distributors, protected from all other buyers. The effectiveness of this territorial allocation will continue to depend on the other buyers (under antitrust law no distinction is made between authorised distributors and buyers) being prohibited from selling into these exclusive territories. Careful drafting and coordination of all distribution agreements therefore remains essential as soon as at least one exclusive distribution territory exists.

The Guidelines (para. 122) explicitly include the exemption for a transitional period when the supplier restructures its distribution system and needs time to negotiate the territorial restrictions in all contracts in a consistent manner.

Also new and to be welcomed is the explanation in para. 124 of the Guidelines according to which the supplier can already reserve a territory exclusively for himself if he only intends to assign or directly supply this territory exclusively "in the future".

Territorial restrictions can now also be passed on to customers of the buyer. The requirement of corresponding distribution agreements with the "supplier or with a party that was given distribution rights by the supplier", which was still provided for in the draft, has been dropped. This deletion, compared to the draft, suggests that it is now possible to impose the obligation on buyers to pass on the protection of a territory or a customer group through their own agreements with customers. Previously, an agreement concluded by the supplier with the second market level was necessary (in practice, therefore, a passing-on of the restriction was excluded). It has also become permissible to pass on the exclusion of non-authorised dealers within a selective territory to the customers of the buyer.

According to Article 4 lit. b) iii), restricting the place of establishment it is no longer only permissible in selective distribution but also vis-à-vis exclusive distributors.

In the case of a combination of exclusive distribution and selective distribution separated by territories, exclusive distributors and even their customers can now also be prohibited from selling to non-authorised distributors in the selective distribution territory. Conversely, authorised distributors in the selective distribution area may (continue to) be prohibited from actively selling to customers in the exclusive distribution area. The Regulation thus addresses the detailed regulations necessary in cases where different distribution systems coexist.

Non-compete agreements

One welcome development under the revised guidelines is that an automatic extension of non-compete clauses limited to five years is permissible under certain conditions (para. 248). Up to now, an automatic renewal resulted in a non-compete obligation to which the buyer was subject no longer being exempt and therefore being invalid. In practice, it will still have to be specified when the buyer is granted sufficient opportunity to terminate in order to make the automatic extension of the non-compete clause permissible under antitrust law.

Exchange of information

The simplification of the regulation in Article 2 of Regulation 2022/720 compared with the Commission's draft is to be welcomed. The latter provided for an additional market share threshold of (jointly) 10% for the exchange of information. Now the following applies: If the parties are competitors on the downstream distribution level, the exchange of information must be limited to such information that concerns the implementation of the distribution contract or is necessary to improve production or distribution. It is therefore always recommended to transmit data in aggregated form and, in particular, to share information on sales prices only with a time lag for the past. Information on sales prices is critical due to the fact that it may not be used for RPM or minimum price requirements.

Special features of internet sales

The "prevention of the effective use of the internet" was newly included as a core restriction in Article 4 lit. e). Recital 15 clarifies that the use of the internet by the buyer must not be prevented and that the exclusion of an "entire online advertising channel, such as price comparison services or search engine advertising" is not exempt. Thus, if internet sales are in fact prevented to a significant extent, the exemption of all other restrictions of the agreement (black clause) ceases to apply. This therefore has far-reaching consequences.

Price differences for products resold offline and online ("dual pricing") have become permissible according to the revised Guidelines (para. 209) as long as the price difference takes into account the different costs of the distribution channels. This standard now also applies to the differentiation of requirements for online distribution. The principle that requirements must be equivalent to those in stationary distribution no longer applies.

Clauses of online intermediary services that prohibit the purchaser of the intermediary service from offering more favourable prices via competing online intermediary services (across-platform retail parity obligations) are expressly not exempted and thus invalid as grey clauses under Article 5 (1) (d). This rule does not apply to narrow parity obligations which, for example, prohibit a hotel from offering more favourable prices on its own website or in its own distribution than via the intermediary portal. These are therefore exempted (if the market share is below 30%) under the Vertical Block Exemption Regulation and para. 254 of the revised Guidelines.  

The so-called "logo clause", according to which the use of online portals whose logo is recognisable to the end customer can be restricted, is omitted. The Guidelines adopt the case law of the ECJ (reference in para. 208), according to which the restriction of the use of online portals and online intermediary services must be examined in detail and must not de facto prevent the actual use of the internet by the customer.

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