The number of online sales have significantly increased in the latest years.
Worldwide, the value of online purchases of goods and services shows impressive figures:
2019: 3 thousand billion Euros (plus 20% as compared to 2018);
2020: 3,5 thousand billion Euros;
2021: 4 thousand billion Euros[1].
As online distribution of goods[2] is very likely to be (and very frequently is) impacted by competition laws and investigated by Competition Authorities, this chapter will try to give an overwiew of today’s concerned competition rules at European Union level in the perspective of international distribution contracts[3].
On 1 June, 2022, Commission Regulation EU 2022/720 of 10 May 2022, on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices (Vertical Block Exemption Regulation – VBER) has entered into force in all EU member states. Alongside the VBR, the European Commission has issued a communication (2022/C 248/01) containing a fresh and updated version of the Guidelines on Vertical Restraints (Vertical Guidelines), which aim to help undertakings correctly understand and apply the VBER. The VBER and the Vertical Guidelines replace the preceding EU 330/2010 Regulation (Old VBER) and the preceding Guidelines (Old Vertical Guidelines). The VBER will remain in force for 12 years.
The VBER (like the Old VBER) concerns the vertical agreements, as defined in Article 1.1.(a) of the VBER: “”vertical agreement” means an agreement […] entered into between two or more undertakings each of which operates, for the purposes of the agreement […], at a different level of the production or distribution chain, and relating to the conditions under which the parties may purchase, sell or resell certain goods or services” (Vertical Agreements). In light of this definition, distribution contracts certainly qualify as Vertical Agreements.
Vertical Agreements[4] are prohibited by Article 101(1) of the Treaty on the Functioning of the European Union (TFEU) to the extent that they “have as their object or effect the restriction, prevention or distortion of competition within the EU”. In particular, Vertical Agreements are prohibited if they:
“(a) directly or indirectly fix purchase or selling prices or any other trading conditions;
(b) limit or control production, markets, technical development, or investment;
(c) share markets or sources of supply;
(d) apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;
(e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.”
However, according to Article 101(3) of the TFEU, the prohibition can be declared inapplicable to a Vertical Agreement which “contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit, and which does not:
(a) impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives;
(b) afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question”.
In application of Article 101(3) of the TFEU, the VBER exempts the Vertical Agreements from the prohibition under Article 101(1) if they meet certain conditions: Article 2.1 of the VBER states that “Pursuant to Article 101(3) of the Treaty and subject to the provisions of this Regulation, it is hereby declared that Article 101(1) of the Treaty shall not apply to vertical agreements”.
Having this legal landscape in mind, we have to consider that in today’s distribution environment a growing number of manufacturers or suppliers not only sell goods through their distributors but also directly to final customers in direct competition with their distributors (the so-called Dual Distribution). So, in Dual Distribution, the parties to a distribution agreement do operate at different levels of the distribution chain; but, to some extent (which can be significant in some cases), they also operate at the same distribution level.
Most frequently, the direct distribution channel is operated online through the sellers’ own websites. In these circumstances, sellers tend to include in Vertical Agreements some restrictions to the online sale of products by their distributors. As such restrictions are very likely to fall under the prohibition of Article 101 of the TFEU, it is important to understand if and to what extent they are exempted from such prohibition by the VBER.
In general, according to Article 2.4 of the VBER, “The exemption provided for in [Article 2] paragraph 1 shall not apply to vertical agreements entered into between competing undertakings”. This statement could be interpreted as to leave Dual Distribution Vertical Agreements outside the exemption. In order to avoid any misunderstanding and provide undertakings with a clear guidance to the compliance of their distribution agreements with the EU laws, Article 2.4 of the VBER continues precising that the exemption “[…] shall apply where competing undertakings enter into a non-reciprocal[5] vertical agreement and […] (a) the supplier is active at an upstream level as a manufacturer, importer, or wholesaler and at a downstream level as an importer, wholesaler, or retailer of goods, while the buyer is an importer, wholesaler, or retailer at the downstream level and not a competing undertaking at the upstream level where it buys the contract goods […]”.
This is very important: also a Dual Distribution agreement can qualify as a Vertical Agreement and therefore benefit from the exemption under Article 101(1) of the TFEU.
However, the exemption from the prohibition under Article 101(1) of the TFEU allowed by the VBER, is not actually a general one. The VBER also lists some restriction clauses which, if included in a Vertical Agreement, cause the agreement to fall outside the exemption (Hardcore Restrictions). The Hardcore Restrictions are listed in Article 4[6]: “The exemption provided for in Article 2 shall not apply to vertical agreements which, directly or indirectly, in isolation or in combination with other factors under the control of the parties, have as their object” one of the Hardcore Restrictions.
One of these Hardcore Restrictions is about online sales and is defined in Article 4.(e): “the prevention of the effective use of the internet by the buyer or its customers to sell the contract goods […], without prejudice to the possibility of imposing on the buyer:
(i) other restrictions of online sales; or
(ii) restrictions of online advertising that do not have the object of preventing the use of an entire online advertising channel”.
This provision is completely new: nothing in the Old VBER dealt specifically with online sales. As a result, the matter was entirely ruled by the EU case law and by the Old Vertical Guidelines. In this regard, contractual restrictions were assessed based on the so-called equivalence principle: criteria for online sales can be imposed to the extent that they are overall equivalent to the criteria imposed for sales in brick-and-mortar shops, just as the supplier may require quality standards for a brick-and-mortar shop or for selling by catalogue or for advertising and promotion in general, thus creating an “electronic shop window” compliant with seller’s directions.
However, recent evidence indicates that online sales have developed into a self-standing, well-functioning and remunerative sales channel that no longer requires special protection relative to offline sales channels. Therefore, it is no longer justified to treat the imposition by suppliers of differing criteria for online and offline sales as Hardcore Restrictions.
Eventually, the VBER has created a new, more clear and actual scenario, better suited to modern distribution systems. As a general principle, The VBER definitely qualifies as Hardcore Restrictions those clauses in Vertical Agreements completely preventing a distributor from using the online sales channel to sell the products purchased from the supplier and/or from advertising such products online – i.e., the distributor must be allowed to have its online shop and to advertise it like a brick-and-mortar shop. Just as clearly, the VBER permits to impose other restrictions or conditions on the distributor concerning online sales and advertising. With the help of the Vertical Gudelines[7], we are able to carve out some contractual restrictions that are eligible to be attached to the sale of goods by a distributor in a Dual-Distribution Vertical Agreement.
A distributor can be required:
· to shape the online shop according to the seller’s guidelines (in terms of quality standards for the use of the internet site and the placement of the products;
· to have one or more brick-and-mortar shops or showrooms;
· to sell offline a certain quantity (in value or volume but not in percentage) of the products purchased from the seller;
· not to sell the products through marketplaces or through marketplaces which do not comply with certain quality standards;
· to comply with the sellers’ guidelines in advertising the products online (in terms of quality standards, specific content and/or information);
· not to avail itself of certain online advertising agencies which do not comply with quality standards;
· not to include the trade mark or trade name of the supplier in rhe domain name of the distributor;
· not to use certain price-comparison services or research engines.
These contractual restrictions imposed on a distributor amount to direct measures aimed at restricting the online sales. There are also indirect measures that can be included in a Dual Distribution Vertical Agreement. A very common practice in this regard relates to dual pricing: charging the same distributor a higher wholesale price for products intended to be sold through the online sales channel than for products to be sold offline (Dual Pricing). Dual Pricing was very likely to be regarded as a Hardcore Restriction under Article 101(1) of the TFEU: indeed, the Dual Pricing practice may well have the (indirect) effect of fixing (re)selling prices and limiting or sharing the distribution channels. If a distributor has to pay a higher price for a product to be sold online, he will likely be indirectly forced to channel his investments into sales through traditional, brick-and-mortar distribution. Nowadays, in consideration of the recent development of online sales described above in this chapter, also Dual Pricing is no more regarded as a Hardcore Restriction and can be included in a Dual-Distribution Vertical Agreement. The Vertical Guidelines[8] make clear that suppliers may set different wholesale prices for online and offline sales by the same distributor, as this may incentivise or reward an appropriate level of investments. Of course, the difference in the wholesale prices must be reasonably related to differences in costs or investments between the online and offline sales channels. Also, the difference in the wholesale price for online and offline sales should not have the object of restricting cross-border sales or of preventing the effective use of the internet by the buyer. Finally, while the parties are allowed to set up a control and reporting system aimed to implement Dual Pricing effectively (e.g., monitoring which goods are actually sold online or offline in order to proceed to post-final-sale wholesale price adjustment), any such system should not limit the amount of products the buyer can sell online.
Another practice which can result in a competition restriction in Dual-Distribution systems, is the exchange of information between the parties. As the parties to a Dual-Distribution Vertical Agreement also operate at the same downstream level, the exchange of certain information can be detrimental to competition: e.g., information concerning the future retail prices at which the seller or the buyer intend to sell the goods to final customers. As regards information exchange in Dual Distribution, Article 2.(5) of the VBER states that “The exceptions set out in [Article 2 ] paragraph 4, points (a) […] shall not apply to the exchange of information between the supplier and the buyer that is either not directly related to the implementation of the vertical agreement or is not necessary to improve the production or distribution of the contract goods or services, or which fulfils neither of those two conditions”. In a nutshell, we can say that the exchange of information between the parties in a Dual-Distribution Vertical Agreement is allowed to the extent that the information relate to the vertical relationship between the parties and not to their operations at the same downstream level (i.e., the same distribution chain level). The Vertical Guidelines[9] provide examples of information exchange which is permitted in a Dual-Distribution Vertical Agreement:
· technical information relating to the goods, including information relating to the registration, certification, handling, use, maintenance, repair, upgrading or recycling of the goods, notably where such information is required to comply with regulatory measures, and information that enables the supplier or buyer to adapt the goods to the requirements of the customer;
· logistical information relating to the production and distribution of the goods at the upstream or downstream levels, including information relating to production processes, inventory, stocks, sales volumes and returns;
· information relating to customer purchases of the goods, customer preferences and feedback;
· information relating to the prices at which the goods are sold by the supplier to the buyer;
· information relating to the supplier’s recommended or maximum resale prices for the goods and information relating to the prices at which the buyer resells the goods;
· information relating to the marketing of the goods, including information on promotional campaigns and information on new goods to be supplied under the Vertical Agreement;
· performance-related information, including aggregated information communicated by the supplier to the buyer relating to the marketing and sales activities of other buyers of the goods, as well as information relating to the volume or value of the buyer’s sales of the goods relative to its sales of competing goods.
As a conclusion of this chapter, it appears clearrly that one of the main objectives of the review of the VBER and of the Vertical Guidelines was to provide undertakings with up-to-date guidance on online sales restrictions in Dual-Distribution Vertical Agreements and ensure a harmonised approach to such restrictions across the EU. For this reason, the VBER and the Vertical Guidelines should be always taken in due consideration whenever drafting an international distribution contract meant to be performed, in all or in part, within the European Union.
The author is a Partner with Studio Legale e Tributario, Treviso, Italy
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[1] Figures are approximate. Source: Autorità Garante della Concorrenza e del Mercato (the Italian Competition Authority), case A528 -FBA AMAZON, decision n. 29925 of 30 November 2021, § 32.
[2] In this chapter, only distribution of goods will be considered, although similar rules apply to the distribution of services.
[3] The overwiew should not be regarded as exhaustive. For example, cases where the concerned undertakings hold significant shares of the relevant markets (Articles 3 and 8 of the VBER) were not taken into account. Also, examples taken from the Vertical Guidelines have been streamlined.
[4] And hence distribution agreements. In this chapter, Vertical Agreements shall always include distribution agreements.
[5] Non-reciprocal means in particular that the buyer of the contract goods does not also supply competing goods to the supplier (Vertical Guidelines § 4.4.3(93).
[6] The VBER also lists some restriction clauses, in Article 5, which do not cause the whole Vertical Agreement to fall outside the exemption but are singularly considered prohibited – the excluded restrictions. We will only deal with the Hardcore Restrictions because they directly impact on online sales.
[7] § 6.1.2.1(208)
[8] See generally § 6.1.2 of the Vertical Guidelines.
[9] § 4.4.3(99).
