Distribution and cartel prohibition
The cartel prohibition (Article 6 of the Competition Act and Article 101 TFEU) prohibits agreements between companies that restrict competition. The prohibition applies to agreements among competitors (horizontal), but also to agreements among companies operating in different stages of the production or distribution chain (vertical). Such agreements are void and may be fined by the European Commission (the Commission) or the Netherlands Authority for Consumers and Markets (ACM). A case in point is the €8 million fine imposed by ACM on electronics group LG for exercising undue influence over retailers’ online sales prices for LG televisions.
The new Block Exemption Regulation for Vertical Agreements (the Block Exemption) and the Guidelines on Vertical Restraints entered into force last year. Distribution agreements covered by the Block Exemption are exempt from the cartel prohibition and are permitted, in principle, provided that the market shares on the relevant market(s) of both the supplier and the distributor do not exceed 30% and the agreement does not contain what is known as ‘hardcore restrictions’ (see this blog). This is also elaborated in ACM’s Guidelines on Arrangements between Suppliers and Buyers (the ACM Guidelines).
Companies are well advised to know which agreements are or are not permitted. In this blog, we address the riskiest agreements and give five practical tips.
Vertical price maintenance
A supplier must leave a distributor free to set its own selling price. Any restriction of this freedom is likely to be deemed a violation of the cartel prohibition (vertical price maintenance).
Vertical price maintenance may take place either directly or indirectly. An example of a direct means is an agreement on a fixed or minimum selling price that a retailer must charge to its customers. An example of an indirect means is the granting of discounts if a certain price level is observed, or the threat of sanctions if a distributor fails to apply a certain price level. This also includes termination of an agreement on the grounds of price dumping (see this blog).
A supplier may, however, advise its buyers to apply a certain selling price. A supplier may also impose a maximum price, provided that it does not have the same effect in practice as a fixed or minimum price. Temporarily imposing a fixed resale price when introducing a new product, on entering a new market or during a short-term price reduction or promotion period is also permitted.
Vertical price maintenance is high on the regulators’ radar. ACM previously launched the “Who sets the retail price? The retailer, not the supplier” campaign to warn retailers about vertical price fixing. ACM has also issued warnings to suppliers of baby and children's products, smart electronic sports devices, dietary supplements, mobile television receivers and home furnishing products. Suppliers have also been forced to set up compliance programmes and send letters to their customers stating that retailers are free to set their own prices.
But it does not stop at warnings. For instance, ACM recently imposed a fine of almost €8 million on LG. It had previously imposed a fine of over €39 million on electronics group Samsung (see this blog). Both had actively influenced retailers’ (online) consumer prices of televisions (see this blog). Samsung has appealed this ruling (and LG may do the same).
We are curious to see whether the court will take account of the recent Super Bock judgment. In that judgment, the European Court of Justice clarified that vertical price-fixing agreements require (explicit or tacit) consent of distributors to apply the imposed resale prices. This condition appears to have been met in the Samsung and LG cases, because retailers adjusted their prices in response to the ‘recommended retail prices’.
It will also be interesting to see whether the court finds that ACM sufficiently investigated and demonstrated that this restricted competition. It is apparent from European case law that, in principle, a restriction of competition between distributors of the same brand (intrabrand competition) is harmful only if actual competition between different brands (interbrand competition) is weakened. This is not evident in either the Samsung or the LG case.
Selective and exclusive distribution
A supplier may opt to sell its goods or services only to distributors selected on the basis of specific criteria (selective distribution). Selective distribution is permitted, in principle, especially if distributors have been selected on the basis of objective, qualitative, proportional and non-discriminatory criteria (see this article). The Amsterdam District Court recently ruled in a dispute between HP and 123-Inkt that a selective distribution system is a restriction by object, but that the technological nature and profile of HP products on the market justify its necessity (unpublished ruling).
A supplier may also allocate territories or customer groups exclusively to a limited number of distributors (exclusive distribution). The Block Exemption allows exclusive allocation to a maximum of five distributors. The supplier may prohibit other distributors from actively selling in these territories. Passive sales to customers in these exclusive territories must, however, remain possible. Absolute territorial or customer restrictions are not exempt and may be a violation of the cartel prohibition. For example, the Commission recently investigated territorial restrictions between fashion company Pierre Cardin and clothing manufacturer Ahlers. The General Court recently confirmed that geoblocking of activation codes for video games is a violation of competition law.
It is possible to operate different distribution networks in parallel. A supplier may, for instance, prohibit its distributors (and their customers) from selling actively and passively to unauthorised distributors in territories where the supplier operates a selective system. Similarly, a supplier may prohibit selective distributors from selling actively into territories allocated exclusively to other distributors.
Exclusive purchasing & non-compete clause
It is not unusual to agree on a non-compete or exclusive purchasing obligation in a distribution relationship, (see our previous blogs here, here and here). Sometimes these agreements are prohibited under the cartel prohibition, which may lead to nullity of the clause or even the entire agreement (see this blog).
In principle, a non-compete or exclusive purchasing obligation is covered by the Block Exemption if the clause is not indefinite or lasts longer than five years. Non-compete obligations that are tacitly renewed after five years may fall under the Block Exemption if the distributor can renegotiate or terminate the distribution agreement after five years, so that the distributor can change supplier.
An exception is a non-compete or purchasing obligation under a franchise agreement. These are usually necessary for the franchise formula and permitted for the duration of the collaboration. An example is the judgment in the Multicopy case, in which the Amsterdam District Court ruled that the post-contractual non-compete clause fell outside the cartel prohibition.
Internet sales
Dual Pricing
In practice, suppliers sometimes charge different (wholesale) prices for their online and offline sales channels (dual pricing). Under the new Block Exemption, this is permitted if the price difference is reasonably related to the differences in the investments made by the distributor to sell in each channel. However, dual pricing is not permitted if the purpose of the difference in the selling price is to prevent the buyer from using the internet to sell the products to certain territories or customers.
Online marketplaces
A supplier may prohibit distributors from selling via online marketplaces (see this blog). This applies also to non-luxury products. This is different if, for instance, the agreement prevents the distributor from effectively using the internet to sell the products in certain territories or to certain customers. This may also be different if the supplier itself does sell via online marketplaces or does allow third parties to sell via online platforms.
Price comparison sites
Price comparison services (websites or apps) allow sellers to increase their visibility, generate traffic to their online shops and enable potential customers to find retailers, to compare different products and to compare offers for the same product. A blanket ban on price comparison services is not permitted. A supplier may, however, restrict the use of price comparison websites by distributors, for instance by requiring that the price comparison service used meets certain quality standards.
Dual distribution
Suppliers that also operate at retail level (dual distribution) must be careful when exchanging sensitive competitive information with their distributors. Only information exchange directly related to the performance of the distribution agreement and necessary to improve the production or distribution of goods may benefit from the Block Exemption. Examples include information on performance or information on customer feedback. Information on future resale prices or on individual customers will often not be necessary.
Practical tips
- Suppliers should refrain from putting pressure on distributors to follow the recommended price.
- Suppliers should refrain from terminating a distribution agreement on the grounds that a distributor charges too low a prices.
- Suppliers should be wary when imposing online restrictions on distributors. A blanket ban on internet sales is almost always prohibited.
- Suppliers should build in safeguards in dual distribution to prevent information from a distributor ending up with the internal team dealing with direct sales.
- If a supplier is guilty of resale price maintenance, explicitly distance yourself from it as a distributor.
More information on the new Block Exemption and Guidelines on Vertical Restraints can be found in our earlier blog.
Information on dawn raids by ACM and the European Commission can be found at invalacm.nl
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