What?
Classic concepts in the world of vertical agreements are those of "active selling" and "passive selling." Active selling involves actively approaching a particular customer group or territory. Passive selling consists of transactions in response to unsolicited requests from individual customers, without actively approaching such customers.
To protect the efforts and investments of exclusive but non-selective distributors, the block exemption regime permits, under strict conditions, that other distributors may refrain from actively selling into the territory or to a customer group assigned to an exclusive distributor. However, passive sales by such other distributors are always prohibited.
This Countdown addresses the last of three conditions (the passing-on prohibition) that must be satisfied for restrictions on active sales to be compatible with the block exemption and thus automatically exempt under EU competition rules. Given the complexity of the matter, the other two conditions (the exclusivity requirement and the parallel obligation) were covered in Countdowns Nos. 12 and 13.
Now?
The current Vertical Block Exemption Regulation ("VBER") essentially prohibits restrictions on active and passive sales. However, there is a limited exception, subject to strict cumulative conditions.
The first condition is that the restriction on active sales must target a territory or customer group that is either reserved for the supplier or exclusively assigned to a specific (sole) distributor (see DLC Countdown No. 12). This is called the "exclusivity condition". The second condition requires that the restriction on active sales be imposed on all buyers of the supplier (including all companies belonging to the same corporate group) (see DLC Countdown No. 13). This is called the "parallel obligation".
The third condition is that the restriction on active sales can only be imposed on the supplier's (direct) buyer. This will usually be the distributor appointed by the supplier. The supplier has no authority to require its distributor to, in turn, impose a restriction on active sales on its own customers. Hence, imposing an obligation on distributors to pass on the restriction on active sales to the next tier is not compatible with the block exemption of active sales restrictions. This is commonly referred to as the "pass-through prohibition".
The future as of 1 June 2022?
The Commission's proposals change the third condition.
The proposals give the supplier the right to require that a restriction on active sales also be imposed on the customers of a party to whom the supplier has granted distribution rights. This means that a supplier can require its distributors to pass on or roll over the restriction on active sales to the next level.
It seems to follow from the text that this ability to pass on or roll over is limited to one tier. In other words, the supplier cannot require its distributor to impose a restriction on active sales on its direct customer and, in turn, that these customers must also impose this restriction on their customers.
This may sound complicated, and it is. However, a practical example can be illuminating.
In practice?
Imagine that a producer of high-tech television sets appoints an exclusive distributor in every major city in the EEA countries. The producer requires these distributors to make specific investments and efforts for which it wants to provide some form of contractual protection. The protection takes the form of active sales restrictions imposed on the various distributors. Exclusive distributors are protected from active marketing by other distributors within their city. Under the current regime, it is possible for the distributor to sell the TV to a dealer in his city and then not subject that dealer to an active sales restriction. In other words, the supplier cannot require its distributors to impose the same active sales restriction on their customers (in this case, the dealer).
This is changed in the current proposals. The supplier can require distributors to pass on or roll over the active sales restriction to their customers. If that happens, the distributor in our example must impose the same active sales restriction on the merchant. This means that the merchant is contractually prevented from making active sales in other cities where an exclusive distributor has been appointed.
Assessment?
The ability to pass on or roll over active sales restrictions responds to concerns raised in the Expert Report. The Expert Report emphasised that in many real-life scenarios, the current regime is impractical and inefficient. Several contributors to the Distribution Law Center gave concrete examples of scenarios in which, without such an ability to pass on or roll over, the protection against freeriding simply did not work. The concerns applied particularly in the context of distribution setups that are not homogeneous, for example, with fully owned importers in some Member States and independent importers in others. The proposals also address the concern that it is easy to circumvent the restriction on active selling by using a reseller or dealer who is then free to actively sell wherever they choose.
The wording in the current proposals may present interpretation difficulties. Passing on is allowed only with respect to customers of "a party to whom the supplier has granted distribution rights." There is no question that this applies to distributors directly appointed by the supplier. But what about the customers of a distributor appointed by an independent importer, who in turn has been appointed by the supplier? Are the distributor's customers customers of "a party to whom the supplier has granted distribution rights"? The same question applies one level below. Imagine that the supplier's distributors work with sub-distributors. Is it possible to extend the active sales restriction obligation to customers of sub-distributors? Hopefully, the final version of the new vertical guidelines will clarify the position in this regard. We are in a high-stakes environment where legal certainty is essential.
Want to know more? Keep following us ...
We are counting down to 1 June 2022 and aim to provide you with regular updates and the legal know-how you need to fully prepare your business for the future. Also, be sure to check out the Distribution Law Center platform and our LinkedIn page for much more information on the laws governing vertical agreements, both competition and commercial. 27 specialised teams from across the EEA are working hard on the platform to make it your favourite source of guidance and information.
A translation of this Countdown newsletter is available in the following languages: Portuguese.
Read the available DLC Countdown newsletters on expected changes here.
