EU Competition Rules for Distribution Agreements #4: Dual distribution

Why is competition law important in the distribution context?

Article 101(1) of the Treaty on the Functioning of the European Union prohibits anticompetitive agreements or concerted practices. Agreements infringing Article 101(1) are void and may expose your company to fines and/or damages before national courts and/or competition authorities. This is particularly important in the context of distribution agreements where private parties (i.e. your companies’ customers and competitors) are often the most likely to go to court or file complaints with competition authorities.

This note is part of a blog series in which we seek to provide guidance on the most relevant topics of EU competition law for distribution agreements. In this fourth blog we discuss dual distribution.

Dual distribution – What is it?

Dual distribution occurs where a supplier sells goods or services both directly and through independent distributors, thereby competing with these independent distributors on the downstream market. Dual distribution is not a new phenomenon but has become increasingly important due to the growth of online sales and the setting up of own online shops by suppliers. The result is that the supplier competes directly with its own distributors, blurring the distinction between competitors and non-competitors.

The competition law treatment of dual distribution, and in particular information exchange between the parties to dual distribution arrangements, is one of the more striking changes in the recently revised Vertical Block Exemption Regulation (‘VBER’).

Information exchange in dual distribution scenario’s

The unrestricted exchange of information within a dual distribution system is no longer block exempted under the VBER. Pursuant to Article 2(5) of the VBER, the safe harbor exemption does not apply to the exchange of information between a supplier and a customer in a dual distribution system that is: (a) not directly related to the implementation of the vertical agreement; (b) not necessary to improve the production or distribution of the contract goods or services; or (c) fulfills neither of those two conditions.

In the Guidelines on Vertical Restraints accompanying the VBER the European Commission clarifies that whether an exchange of information in a dual distribution scenario is directly related to the implementation of the vertical agreement and necessary to improve the production or distribution of the contract goods or services may depend on the particular model of distribution. For example:

• under an exclusive distribution agreement, it may be necessary for the parties to exchange information relating to their respective sales activities in particular territories or in respect of particular customer groups;
• under a franchise agreement, it may be necessary for the franchisor and franchisee to exchange information relating to the application of a uniform business model across the franchise network;
• in a selective distribution system, it may be necessary for the distributor to share information with the supplier relating to its compliance with the selection criteria and with any restrictions on sales to unauthorised distributors.

The Guidelines on Vertical Restraints further contain a non-exhaustive list of examples of information that may be considered necessary to improve the production or distribution of the contract goods or services and can therefore benefit from the safe harbor of the VBER, including:

• technical information about the product or service;
• information relating to production, inventory, stocks, sales volumes and returns;
• aggregated information relating to customer purchases, preferences and feedback;
• performance related information.

The following types of information do normally not improve the production or distribution of the contract goods and are therefore not eligible for the block exemption under the VBER:

• information relating to actual future prices at which the distributor or supplier will sell the goods or services,
• customer specific (non-aggregated) sales data
• information relating to goods sold by a distributor under its own brand name with a manufacturer of competing branded goods.

Information exchanges in the context of dual distribution that cannot benefit from an exemption the VBER must be assessed individually under Article 101 TFEU, taking into account the Horizontal Guidelines. This test is unlikely to be positive unless significant economic benefits can be demonstrated that outweigh the anti-competitive effect of sharing such information.

Parties to an information exchange that does not benefit from an exemption under the VBER can take precautions to minimize the competition law risk. For example, they may exchange only aggregated sales information or provide an appropriate delay between the generation of the information and the exchange. Another possible precaution is to use technical or administrative measures, such as Chinese walls, to ensure that buyer information is accessible only to the personnel responsible for the supplier’s upstream activities and not to the personnel responsible for the competing downstream direct sales activities of the supplier.

Key rules dual distribution

• Dual distribution can benefit from an exemption under the VBER.
• Information exchange between a supplier and its distributors in the context of a dual distribution scenario is possible within certain limits.
• The Guidelines on Vertical Restraints provide useful guidance on these boundaries.

FAQ’s

When a manufacturer decides to compete with its customers at the downstream level by opening an online store from which it sells directly to end customers, does this take the distribution agreement outside the scope of the VBER?
No, the fact that a manufacturer also competes with its customers at the downstream level does, in itself, not take the vertical supply agreement outside the scope of the VBER. However, in such a dual distribution scenario the block exemption does not apply to an exchange of information that is not directly related to the implementation of the vertical agreement or is not necessary to improve the production or distribution of the contract goods or services, or which fulfils neither of those two conditions.

Is the dual distribution exemption under the VBER also applicable to “hybrid” online platforms that act both as intermediaries and also sell products and services in direct competition with suppliers who use the platform?
No, pursuant to Article 2(6) of the VBER, the dual distribution exceptions set out in Article 2(4), points (a) and (b) of the VBER do not apply to vertical agreements relating to the provision of online intermediation services where the provider of the online intermediation services is also a competing undertaking on the relevant market for the sale of the intermediated goods or services.

In the view of the European Commission such providers may have an incentive to favour their own sales and the ability to influence the outcome of competition between undertakings that use their online intermediation services. Such vertical agreements may therefore raise concerns for competition in general on relevant markets for the sale of the intermediated goods or services and are therefore not eligible for any block exemption under the VBER.

If you have any questions about the contents of this note, please contact Minos van Joolingen, Martijn Jongmans or Sophia Wittkämper of Banning’s Competition & Regulatory Team, telephone number +31 73 692 77 52.