What?
Dual distribution occurs when a supplier sells goods or services both directly and through independent distributors, thus competing with these independent distributors on the downstream market. A classic example would be a clothing brand manufacturer that sells its clothing in its own stores, but also relies on independent retailers to sell the clothing in their stores.
Dual distribution is not a new phenomenon. Back in 2010, it was used by manufacturers for various reasons—for example, to set an example for their independent distributors in so-called "flagship stores" or to offer more choice to end customers. Over the past decade, however, dual distribution has become increasingly important due to the significant growth of online sales.
The increased use of dual distribution has led the European Commission to examine whether the existing legal framework is still suited to the changed market conditions, but it has also prompted stakeholders to raise certain shortcomings of the legal framework. This blog discusses the extension of the dual distribution exception to wholesalers and importers. Blog post No. 16 will focus on the specific market share limit for dual distribution introduced in the July 2021 drafts. Finally, blog posts Nos. 17 and 18 will address information exchange in the context of dual distribution.
How next?
The current Vertical Agreements Block Exemption Regulation (the "VBER") applies to vertical agreements, that is, agreements or concerted practices between two or more companies that, for the purposes of the agreement or concerted practice, operate at different levels of the production or distribution chain (Article 1(a) VBER).
Accordingly, Article 2(4) VBER states that the block exemption does not apply to vertical agreements entered into between competing companies. However, there is an exception for dual distribution "where competing firms enter into a non-reciprocal vertical agreement and 1.the supplier is a manufacturer and distributor of goods, while the buyer is a distributor and not a competing firm at the manufacturing level; or 2.the supplier provides services at different levels of trade, while the buyer provides its goods or services at the retail level and is not a competing firm at the level of trade where it purchases the contract services.
Thus, under the current regime, the exception does not apply to all forms of dual distribution. The exception in Section 2(4)(a) VBER applies only in situations where the supplier is both a manufacturer and a distributor of goods. As a result, importers and wholesalers who are not manufacturers cannot rely on the block exemption when competing with their independent distributors on the downstream market.
This is especially disadvantageous for smaller market players. Vertical integration is easier to achieve for market participants with more financial resources. In contrast, smaller manufacturers are more likely to use independent importers and wholesalers to spread their financial risk. This leads in practice to unequal treatment of similar vertical agreements. Within the same distribution network, the VBER will apply to some vertical agreements and not to others, even if these agreements contain the same contractual terms.
Let's make this practical with an example. Suppose a Finnish car manufacturer wants to distribute its models in the Netherlands and Spain. In Spain, the manufacturer has a subsidiary (importer A) that will import the cars. In the Netherlands, the manufacturer will use an independent importer (importer B). Importers A and B have each established a selective distribution network. If both importers A and B are also active at the retail level (for example, because they sell directly to larger end customers or operate some dealerships of their own), only the selective distribution network of importer A (because it forms an economic unit with the manufacturer) will benefit from the block exemption. In contrast, the same distribution agreements of importer B are not covered by this exemption. On the other hand, if importer B were to stop direct sales (which paradoxically restricts supply and competition), its selective distribution agreements would be covered by the block exemption.
What is the future after 1 June 2022?
Because of the above problems, the draft VBER now provides in Section 2(4)(a) that the exemption applies to non-reciprocal vertical agreements between competing firms where the supplier is a manufacturer, wholesaler, or importer and a distributor of goods, while the buyer is a distributor and not a competing firm at the manufacturing, wholesaling, or importing level. Thus, the exception that the VBER does not apply to vertical agreements entered into by competing companies is extended to wholesalers and importers.
In practice?
Since the buyer may not be a competing firm at the manufacturing, wholesale, or import level, the parties may only compete at the retail level. As a result, a manufacturer who is also an integrated importer/wholesaler and who, for example, appoints an independent importer/wholesaler in another country cannot benefit from the exemption for that appointment. On the other hand, distribution agreements between the independent importer/wholesaler and the independent dealers with whom the wholesaler competes would be covered.
Assessment?
The European Commission has acceded to stakeholders' request to extend the scope of the Article 2(4)(a) VBER exemption to importers and wholesalers (for their downstream agreements). This extension is certainly a laudable change that, to some extent, reduces the unequal treatment of similar vertical agreements, but it is clear from the above example that the European Commission has not provided a conclusive solution. Still, not all vertical agreements within the same distribution network will be able to benefit from the legal certainty of the block exemption.
Want to know more? Keep an eye on us...
With the countdown towards 1 June 2022, we aim to provide you regularly with the legal knowledge you need to fully prepare your business for the future. Also check the Distribution Law Center platform and our LinkedIn page for even more information on the laws applicable to vertical agreements, both competition and commercial. 27 specialised teams from across the EEA are working hard to turn the platform into your favourite source of guidance and information.
Read the available DLC Countdown newsletters on the expected changes here.
