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On-line distribution - protecting your brand under the new EU rules

May 2010

Industry Context

Next month the new EU Vertical Agreements Block Exemption ‘VABE’, replacing Regulation 2790/1999 (the ‘previous VABE’), will come into force. It’s been the subject of fairly intense lobbying, the central theme of which saw the interests of brand holders pitted against those active in the on-line retail space. The crux of the issue was that luxury brand-holders, keen to protect their brand’s status, wanted to be able to restrict distributors from selling via what they view as ‘down market’ on-line environments. On the other hand, those engaged in and promoting on-line selling such as EBAY, Amazon and to a certain extent, the European Commission itself (which, in addition to its competition enforcement responsibilities, also sees the on-line environment as a key driver to the internal market) wanted to make sure that, as a general principle, on-line selling is not restricted.

The resulting guidelines have drawn a line in the sand having clarified a number of points about the extent to which restrictions can be placed on on-line selling. In addition, the Commission has made a number of other important changes which limit VABE’s application in some circumstances, by narrowing the scope of the market share ‘safe harbour’ test and in other cases clarifying important legal concepts such as how to define ‘exclusive customer groups’.

Legal Background to Article 101 of the Treaty of the Functioning of the European Union (‘TFEU’)

Article 101 (1) of the TFEU prohibits agreements which restrict, prevent of distort competition which affect trade between Member States of the EU. If this is the case they are void and unenforceable under Article 101 (2). However, certain types of agreement which fall within the scope of Article 101 (1) are nevertheless exempted from the application of Article 101 (2) if they are, on balance, pro-competitive by falling within the scope of Article 101 (3). The VABE is a ‘block exemption’ which sets out a series of provisions and circumstances which apply to vertical agreements, within which businesses and legal practitioners can have legal certainty that their restrictions will fall within Article 101 (3) and be enforceable. Therefore provided that the agreement falls within the terms of the VABE and does not contain any ‘hardcore’ or ‘blacklisted’ restrictions, it will be exempt from Article 101 (1).

The major changes

The most important changes are summarised below:

In the previous VABE, a 30% market share threshold applied to the supplier of goods or services which imposed restrictions on the distributor and on a buyer that imposed exclusive supply obligations (i.e. where the vendor is required by the buyer to supply at least 80% of all or its goods or services exclusively to that buyer). The new VABE applies this 30% market share threshold to each undertaking party to an agreement, i.e. suppliers, buyers or distributors, in recognition of the fact that in certain circumstances, distributors themselves can have market power and if this is the case the use of exclusive or restrictive clauses can distort competition;
The definition of “active sales” (which may be restricted to an exclusive territory or exclusive customer group that has been reserved to the supplier or allocated by the supplier to another buyer) has been clarified in the Guidelines. Active sales include the sending of unsolicited e-mails as well as any advertisement or promotion that is only attractive to and consequently used by the distributor if it also reaches a specific group of customers. Therefore the following is considered to be active selling:

on-line adverts (such as territory based banner ads on third party websites) that are specifically addressed to certain customers;
paying a search engine or on-line provider of advertisements to have advertisements specifically served up to users in a particular territory;

The definition of “passive sales” (which cannot be prevented) is also clarified. The Commission considers that the internet is a powerful tool which can be used to reach additional and different customers than will be reached when only more traditional sales methods are used. Limits on internet sales are considered to be restrictions on passive selling and are therefore hardcore restrictions. Consequently, in principle:

every distributor must be allowed to sell via the internet and having a website is generally considered to be a form of passive selling, as is the receipt of (and processing of) an order by a customer following a visit to a website;
where a customer opts to be kept (automatically) informed by the distributor of offers or other sales information and this leads to a sale, this will be passive selling;
the language options on the website or on such a communication are considered a part of passive selling;
the following specific examples of restrictions on distributors are hardcore restrictions on passive selling:
- requiring the distributor to prevent customers located in another territory from viewing its website or requiring the distributor to automatically re-route customers to the manufacturer’s or another distributor’s website (although links to other websites are permissible);
- requiring the distributor to terminate consumers’ transactions over the internet once their credit card data reveal an address that its not within the distributor’s exclusive territory;
- requiring the distributor to limit the proportion of sales made over the internet, although the distributor may be required to sell at least a certain amount (in value or volume, which amount can be the same for all distributors or determined objectively according to the size of the network of geographic territory) of the products off-line to ensure an efficient operation of the distributor’s bricks and mortar shop. It does not preclude the supplier from making sure that the on-line operations are consistent with the supplier’s own distribution model;
requiring the distributor to pay a higher price for products intended to be sold on-line than for products to be sold offline. However, the supplier can agree with the distributor that the supplier pays a fixed fee to support the buyer’s off-line or on-line sales efforts; quality standards can be imposed on the use by a distributor of an internet site, in particular (but not only) in selective distribution, in the same way that suppliers may require that quality standards apply to shops or by catalogue selling;
distributors can be required only to use third party platforms in accordance with agreed standards and conditions for the distributor’s use of the internet e.g. the supplier can prevent the distributor from having links with third party platforms which would enable the customer to enter the distributor’s site through that third party (the so-called eBay provision);
a requirement that a selective distributor must have one or more bricks and mortar outlets is acceptable provided that the objective is not to limit on-line sales by the distributor;
if criteria imposed for on-line sales are not equivalent to criteria imposed for sales from bricks and mortar shops in a selective distribution system, this will be regarded as a hardcore restriction. However, it is recognised that in some circumstances, different criteria on and off-line might be objective, such as:
- a supplier might legitimately need to restrict the number of goods sold by the distributor to one customer in order to avoid sales to unauthorised distributors, this may need to be a different quantity in the on-line and off-line environments if it easier for an unauthorised dealer to obtain such products over the internet (or vice versa);
- in order to ensure timely delivery of products, the supplier might require the distributor to commit to instant delivery of offline products, however identical requirements cannot be imposed for on-line sales, so reasonably practical delivery times could be imposed instead;
- specific requirements could also be made in relation to an on-line after sales help desk in order to cover the cost of returned products and help with secure payment systems.

The new guidance also clarifies the meaning of ‘exclusive customer groups’ by explaining that there is no limit to the way they can be defined, e.g. by occupation and that it is also possible to define such groups by setting out a list of specific customers selected on the basis of objective criteria.

For more information about this and other EU or competition law matters please contact me.

Susannah Sheppard