Dual distribution arises when a supplier sells goods or services both directly and through independent distributors, thereby competing with those distributors on the downstream market. A classic example would be a clothing manufacturer that sells its clothes in its own shops, but also relies on independent retailers to sell them in their stores.
Dual distribution is by no means a new phenomenon. As early as 2010, it was already being used by manufacturers for a variety of reasons — for example, to set an example for their independent distributors in so-called flagship stores, or to offer end customers greater choice. Over the past decade, however, dual distribution has become increasingly important owing to the substantial rise in online sales.
The growing use of dual distribution has led the European Commission to examine whether the existing legal framework is still suited to changing market conditions, while stakeholders have also pointed out certain shortcomings. In this Countdown, we focus on information exchange in the context of dual distribution.
Information exchange between supplier and buyer is indispensable for the effective implementation of a vertical agreement, and such exchange is covered by the VBER where the vertical agreement itself benefits from the safe harbour of the VBER.
Pursuant to Article 2(4), first sentence, VBER, vertical agreements between competitors do not benefit from the safe harbour. Only certain forms of dual distribution qualify. That is, under Article 2(4), second sentence, non-reciprocal vertical agreements benefit from the block exemption if the supplier is a manufacturer and distributor of goods, or a service provider at different levels of trade, while the buyer is a distributor but not a manufacturer, or provides its goods and services at the retail level and is not a competitor at the level of trade where it purchases the contracted services.
At present, the exchange of information in dual distribution cases that benefit from the block exemption creates significant legal uncertainty, since it is not explicitly addressed in the VBER or the Vertical Guidelines. To the extent that such exchange forms part of the vertical agreement, it may fall within the safe harbour. However, insofar as it relates to the downstream (competitive) level, the VBER does not apply; instead, the stricter rules for exchanges of information between competitors, set out in the Horizontal Guidelines, are engaged.
The draft new VBER provides that information exchange in dual distribution will not be exempted where the parties’ combined market share exceeds 10% in the relevant retail market. In such circumstances, the exchange is assessed under the Horizontal Guidelines (Article 2(5) draft VBER).
This proposal was not supported by stakeholders. The European Commission subsequently published a new draft Vertical Guidelines document (also available on the DLC website) specifically addressing information exchange in dual distribution. This draft is no longer based on market share; rather, it states that the block exemption for dual distribution applies to all aspects of the vertical agreement, including any exchange of information between the parties necessary to improve the production or distribution of the contracted goods or services.
The draft sets out several examples of permissible exchanges, including:
By contrast, the following types of information will generally not be covered by the exemption:
Where the draft VBER applies to a dual distribution scenario, and the information exchanged is mentioned in the Vertical Guidelines or is otherwise necessary to enhance production or distribution of the contracted goods or services, the exchange is covered by the VBER.
Exchanges not benefiting from the exemption must be assessed individually under Article 101 TFEU, taking account of the Horizontal Guidelines. The other provisions of the vertical agreement may nevertheless still fall within the exemption.
Parties to an exchange not covered by the exemption may adopt safeguards to reduce the risk of horizontal concerns. For instance, they may share only aggregated data, introduce a time lag before exchanging information, or implement technical and administrative safeguards — such as information barriers or firewalls — to ensure that buyer information is accessible only to staff responsible for supplier activities, and not to those engaged in the supplier’s own direct sales operations where it competes with the buyer.
The reform of information exchange rules in dual distribution is a welcome development. While the Distribution Law Centre recognises the Commission’s concern that dual distribution could give rise to “false positives” (i.e. exchanges that pose serious horizontal risks but still benefit from exemption), introducing an additional market share threshold is not the right solution.
The new test, under which the draft VBER would cover exchanges of information necessary for dual distribution, marks an improvement — not least because the draft revised Vertical Guidelines provide concrete examples.
Nevertheless, the Commission has not yet published the proposed wording for the new Article 2(5) draft VBER. Furthermore, the draft Guidelines offer only illustrative examples of exchanges that may or may not be necessary, without supplying additional detailed guidance on the condition.
Lastly, the broad definition of “suppliers of online intermediary services” risks having unintended consequences, such as excluding from the block exemption distribution agreements between a supplier that opens its platform to buyers at their request (for example, where buyers lack the resources to set up their own online shop).
In the run-up to 1 June 2022, we will continue to provide you with regular updates and the legal insights you need to prepare your business for the future. Also visit the Distribution Law Centre platform and our LinkedIn page for more on the law governing vertical agreements, both competition and commercial. Twenty-seven specialist teams from across the EEA are working hard to make the platform your preferred source of guidance and information.
A translation of this Countdown newsletter is available in Portuguese.
Read all available DLC Countdown newsletters on the expected changes here.