Antitrust & Competition Advisory - European Commission releases proposal on distribution agreements

On 28 July 2009, the European Commission issued a draft antitrust regulation and guidelines on distribution agreements between suppliers and retailers.¹  The proposal would replace existing rules, which exempt certain forms of distribution agreements from EU competition law, by no later than May 2010.²  The Commission proposes largely to renew these rules, but addresses additional requirements on three fronts: (i) Internet retailers, (ii) resale price maintenance and (iii) purchasing power of large retail chains.

The release of the proposed legislative package opens a two-month consultation to allow the industry and stakeholders to provide views and input on the proposal, in particular on the three topics, discussed below.  Companies and organizations may submit public comments until 28 September.

Internet Retailers

Sales over the Internet have expanded dramatically over the last few years. Under the existing rules, suppliers of luxury or complex goods can impose an obligation on their appointed retailers to maintain a “brick and mortar shop” or showroom before engaging in online distribution.  Purely online retailers, such as eBay, have militated against this restriction by arguing that the Internet complements rather than competes against traditional sales channels. Luxury goods manufacturers have battled to prevent online selling to avoid alleged “free riding” and to control quality over the distribution of their products.

The proposed rules maintain the possibility for suppliers, in a selective distribution system (suitable for luxury or experience goods),³  to require appointed retailers to maintain a brick and mortar shop. However, the European Commission insists that retailers should not be prevented or dissuaded from using the Internet as a retail channel, for instance by imposing criteria for online sales that are not equivalent to those imposed for the sales from “brick and mortar shops” or by requiring retailers to charge the recommended sales price.

Regarding exclusive distribution networks,⁴  the draft rules clarify that advertising and selling over the Internet, even where it reaches out to consumers located in territories exclusively allocated to other retailers, should not be restricted. It will be considered a hardcore restriction for suppliers to require the distributor to re-route consumers located in another exclusive territory to the allocated supplier’s or exclusive retailer’s website. Likewise, card-holder information should not be used to limit sales to certain categories of consumers.

While the Commission regards restrictions on online retailing with suspicion, it appears that lobbying efforts of luxury goods manufacturers have so far prevailed over attempts by purely online retailers to eliminate the “brick and mortar shop” requirement.

Resale Price Maintenance

In view of the U.S. Supreme Court’s ruling in Leegin,⁵  which provides that requiring the retailer to resale the products or services at a fixed or minimum price (a.k.a. “resale price maintenance” or RPM) should be reviewed under the rule of reason, the European Commission has considered whether a similar approach should be adopted in the EU.

Under the proposed rules and guidelines, RPM is considered a hardcore restriction, meaning that any agreement containing such a requirement would fall outside the safe harbors. The European Commission adds that there will be a rebuttable presumption that RPM violates Article 81(1) of the EC Treaty and is unlikely to meet the efficiency defense under Article 81(3) of the EC Treaty. On the other hand, the Commission lists three specific cases where RPM may generate pro-competitive benefits and, hence, overcome the presumption. In particular:

• RPM may be necessary to introduce a new product or enter into a new market. This rests on the theory that temporary RPM could induce retailers to invest in promotional efforts in order to generate and develop demand for the product;

• RPM may also be authorized in franchise systems to coordinate a short-term low price campaign; and

• Finally, RPM may be necessary to avoid loss leading practices of retailers with market power.

It is, however, anticipated that RPM will be allowed only exceptionally in the EU.

Buying power of large retail chains

The European Commission considers that the existing rules, by limiting the application of the 30% market share threshold to the supplier, do not adequately address the potential anticompetitive effects resulting from restrictions requested and obtained by large retail chains with market power. An obvious example, already captured in the existing regulation, is a large retailer with national coverage that secures exclusive supply commitments on the part of multiple brand owners.  The Commission has in mind additional restrictive practices that may have similar foreclosure effects on smaller retailers, e.g., appointed resellers imposing selective distribution criteria on their supplier which limit entry of new retailers or exclusive territories being granted to retailers with market power.

To address this concern, the Commission suggests extending the application of the market share test to retailers. Beyond an individual market share of 30% at the retail level, distribution agreements would not benefit from the exemption provided for by the regulation and the parties would need to self-assess the compatibility of their agreement applying the strict EU competition rules (in particular, Article 81(3) EC).

One of the main concerns of the Commission seems to be the collective exercise of market power by large retailer organizations.  However, it is unclear how the market share test, which will now apply to individual retailers, will play out in practice and how it will effectively and adequately deal with those concerns.

Conclusion

The Commission’s proposal, if adopted as is, would largely continue the EU’s unique competition rules governing distribution agreements between suppliers and retailers. However, those with Internet sales businesses may be disappointed with the Commission’s proposal, as may be others hoping for a shift toward the U.S.’s more laissez-faire rules on resale price maintenance. Uncertainty about the proposed tightening of rules for large retail organizations may also cause concerns for those selling to such groups and perhaps even for customers of large retail chains if they lose some benefits of high-volume purchasing by those retailers. Companies or organizations with concerns or suggestions are urged to make them known through comments to the Commission, which are due by 28 September 2009.

For More Information, Please Contact:

Yves Botteman, ybotteman@steptoe.com, +32 2 626 05 00 

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_{¹ Available at: http://ec.europa.eu/competition/consultations/2009_vertical_agreements/index.html.
² See, Commission regulation n° 2790/1999 of 22 December 1999 on the application of Article 81(3) of the Treaty to categories of vertical agreements and concerted practices, O.J. L 336/21 of 29 December 1999.
³ In a selective distribution agreement, the supplier undertakes to sell the contract goods only to distributors selected on the basis of specified criteria and where those distributors undertake not to sell the contract goods to unauthorized distributors.
⁴ In an exclusive distribution agreement, the supplier undertakes to sell his products to one distributor for resale in a particular territory. 
⁵ Leegin Creative Leather Products, Inc. v. PSKS, Inc., 127 S.Ct. 2705 (2007).}