EU Competition Rules for Distribution Agreements #6: Exclusive distribution

Why is competition law important in the distribution context?

Article 101(1) of the Treaty on the Functioning of the European Union prohibits anticompetitive agreements or concerted practices. Agreements infringing Article 101(1) are void and may expose your company to fines and/or damages before national courts and/or competition authorities. This is particularly important in the context of distribution agreements where private parties (i.e. your companies’ customers and competitors) are often the most likely to go to court or file complaints with competition authorities.

This note is part of a blog series in which we seek to provide guidance on the most relevant topics of EU competition law for distribution agreements. In this sixth blog we discuss exclusive distribution.

What is it?

An exclusive distribution system is defined in the Vertical Block Exemption Regulation (‘VBER’) as:

“a distribution system where the supplier allocates a territory or group of customers exclusively to itself or to a maximum of five buyers and restricts all its other buyers from actively selling into the exclusive territory or to the exclusive customer group.”

Assessment under the VBER

Exclusive distribution agreements can benefit from the exemption under the VBER, provided that the supplier’s and the buyer’s market share do not exceed 30%, the agreement does not contain any hardcore restrictions, and the number of distributors appointed per exclusive territory or customer group does not exceed five.

An exclusive distribution agreement can still benefit from the safe harbour under the VBER when it is combined with other non-hardcore vertical restraints, such as a non-compete obligation not exceeding five years, quantity forcing or exclusive purchasing.

Active sales v. Passive sales

In the context of exclusive distribution systems and the exemption provided for under the VBER the distinction between active and passive sales restrictions is very important.

The supplier is allowed to restrict active sales by the exclusive distributor and its direct customers into a territory or to a group of customers which the supplier has reserved for itself, or which it has allocated on an exclusive basis to a maximum of five other exclusive distributors. Passive sales restrictions on the other hand are a hard-core restriction under EU competition law and may not be imposed on the appointed exclusive distributor(s).

Active sales mean sales resulting from actively targeting customers by visits, letters, emails, calls or other means of direct communication, where passive sales are sales made in response to unsolicited orders.

The distinction between active sales and passive sales is in particular relevant in the context of e-commerce. In the Vertical Guidelines the European Commission acknowledges that the operation of an online store may have effects that extend beyond the seller’s physical trading area, including by enabling online purchases by customers located in other territories or customer groups. Nonetheless, such purchases are passive sales, provided that the seller does not actively target the specific customer or the specific territory or customer group to which the customer belongs. Online advertisements, on the other hand, that specifically address certain customers are considered active sales.

The Vertical Guidelines further clarify that offering a language option in an online store that is different from the languages commonly used in the territory in which the seller is established generally amounts to active selling. However, this does not apply to offering an English language option in an online store. As English is widely understood and used throughout the Union offering an English language option in an online store is normally considered passive selling. Similar to this, offering an online store with a generic, non-country-specific domain name (i.e. .com) is a form of passive selling, while setting up an online store with a top-level domain corresponding to a territory other than the one in which the seller is established, is considered an active selling strategy aimed at customers in that particular territory.

Noteworthy for companies that regularly participate in tenders is that the European Commission considers invitations to tender a form of unsolicited customer requests addressed to multiple potential sellers. Therefore the submission of a bid in response to an invitation to tender is considered a form of passive selling.

Key rules exclusive distribution

• Within an exclusive distribution system, the supplier allocates a territory or a group of customers exclusively to one or a limited number of buyers (maximum 5), while restricting all its other buyers within the EU from actively selling into the exclusive territory or to the exclusive customer group.
• Exclusive distribution agreements can benefit from the block exemption provided that:

• • the market share of the supplier and the buyer does not exceed 30%
  • the agreement contains no hard-core restrictions
  • the number of appointed distributors per exclusive territory or customer group does not exceed five.
• Exclusive distribution can be combined with other non-hardcore vertical restraints, such as a non-compete obligation not exceeding five years, quantity forcing or exclusive purchasing.

FAQ’s

As an exclusive distributor for supplier Z in territory X may I sell and deliver Z-branded products to a customer based in territory Y.

The answer to this question depends on the situation. If the sale to the customer based in territory Y is the result of an unsolicited request from that customer, it is considered a passive sales transaction that Z is not allowed to forbid. If however, the sales transaction is the result of actively targeting that particular customer, for example by visits, letters, emails, calls or other means of direct communication, you will act in breach of the active sales restriction in the exclusive distribution agreement.

As a supplier may I oblige my exclusive distributors to pass on the sales restriction that apply to them further “down the chain”?

Yes, in order to protect investment incentives such a pass-on is under the VBER exempted vis-à-vis the direct customers of the distributor.

If you have any questions about the contents of this note, please contact Minos van Joolingen, Martijn Jongmans or Sophia Wittkämper of Banning’s Competition & Regulatory Team, telephone number +31 73 692 77 52.