Overview
State of Play
Brexit has created a need for businesses to review their supply chains with respect to security of supply and the effectiveness of their distribution channels, both as regards the EU and other markets.
Companies should ensure that their existing supply and distribution arrangements:
- provide suitable efficiencies;
- are commercially and contractually fit for purpose in the post-Brexit period; and
- are safe from being struck down and from being subjected to fines and possible civil claims for violating competition law.
In addition to Brexit and the risks that it may present to market penetration and to maintaining your bottom line, EU and EU Member State competition authorities have never been more active and intrusive with respect to supply chain issues. They have been vigorous in pursuing and fining commercially rational business strategies that were designed to induce distributor investment, but which regulators perceive have shaped routes to market in an anti-competitive manner. Any business will be bound by EU competition law rules both before and after Brexit, when trading within the EU. Fines can be as high as 10% of group global sales. An example is the fine of €119 million imposed on Nintendo by the EU Commission, with its distributors also being fined, for preventing parallel imports between EU Member States.
Taking these issues in turn, a review of your distribution and supply arrangements may be necessary, in order to ensure that management processes and expectations align with legal considerations and your commercial needs.
How Steptoe Can Help
We can help you to:
- grow your bottom line by removing redundant channel costs that support functions end user segments do not value;
- reallocate channel costs to customer-valued functions by segment or channel;
- formulate routes to market that will assist you in inducing dealer investment, the transfer of risk to distributors and in facilitating market penetration in a manner that will add value by assisting you to grow market share, whilst avoiding regulatory risk.
In light of Brexit, we can work with you to ensure that your supply and distribution arrangements:
- guarantee that your suppliers have committed to supply crucial inputs matching specifications, within price bands, in volumes and in accordance with timelines that minimise cost to your business and which match your expectations;
- mitigate currency fluctuations issues;
- address the risk of tariff and other barriers that may arise once the UK is no longer part of the EU single market; and
- secure an integrated supplier-to-customer chain that will enable you to attain maximum product and geographic market penetration at margins that are in line with your requirements.
Other EU Developments Related to Distribution Agreements
In addition to the above post-Brexit issues, EU and EU Member State competition law enforcers have recently taken steps which significantly undermine traditional distribution models. In particular, they have:
- attacked certain agency distribution models in the online space;
- challenged the use of brands, trademarks and copyright where this valuable intellectual property has been deemed to have been employed as part of a market-foreclosing strategy;
- concluded that supplier-imposed obligations, designed to induce distributor investment and prevent free riding, are serious breaches of competition law, resulting in fines; and
- alleged that attempts to prevent free riding on brand specific investment, such as supplier-imposed restrictions on the use of online platforms and in relation to online advertised prices are very serious infringements of competition law.
Where EU or national competition authorities perceive that supply chain restrictions exist that regulators regard as being obviously damaging to consumer welfare (restrictions ‘by object’), significant fines are almost always imposed. Restrictions of this type do not require any effects-based analysis in order to be deemed anti-competitive. Other less pernicious restrictions that may foreclose markets require a degree of market-based assessment. It should be noted that restrictions in relation to EU supply arrangements are treated very differently compared to the US, where price and non-price related vertical restraints are generally evaluated by reference to their pro- and anti-competitive effects. Great care therefore needs to be exercised when employing US distribution business models in the EU market. We can assist you:
- by identifying any pernicious restrictions ‘by object’ that will likely attract fines irrespective of their effects;
- with a market-based evaluation in light of past regulatory rulings - such an evaluation is also commercially valuable when assessing end user preferences that shape effective routes to market.
If you would like us to discuss your existing supply chain arrangements and their suitability in the context of the current climate of commercial uncertainty and regulatory intrusion, please contact Paul Hughes, European Competition Counsel at Steptoe & Johnson’s London office. Paul is a commercial and competition lawyer, qualified as a Solicitor in both England and Wales and in Ireland, who has 30 years’ experience of dealing with distribution-related issues.