Episode 1, Vertical Agreements in the EU and UK: Agency Agreements

Fiona: Hello, everyone. I'd like to welcome you to the first episode in our podcast series on the new rules on vertical agreements in the EU and UK. In this series, we're focusing on the impact of the new rules on agency arrangements, dual distribution, traditional and online distribution models and areas where the EU and UK approaches have diverged. My name is Fiona Garside and I'm a Senior Expertise Lawyer in the Antitrust, Regulation and Foreign Investment team at Ashurst in London. I'm delighted to be joined today by Denis Fosselard, a partner in our team in Brussels, and Zac Davies, an associate in our Brussels team. Today, we're going to be talking about how the treatment of agency agreements has changed following the new Vertical Block Exemption Regulation. Thank you both for joining me.

Denis: Thank you, Fiona. I'm very happy to be here with you. And as you said, I'm a partner here in Brussels and I'm very excited to talk about agency agreements under the new guidelines of the Commission.

Zac: Likewise, thank you, Fiona, for organising this. I'm also very happy to be on this podcast and discussing vertical restrictions with you today.

Fiona: So as listeners may be aware on the 1st of June, 2022, the revised EU Vertical Block Exemption Regulation, also known as the VEBR entered into force alongside new vertical guidelines. On the same date, the new UK Vertical Agreements Block Exemption Order, which is also known as the VABEO entered into force. These block exemptions provide widely applicable safe harbours for vertical agreements from the EU and UK prohibitions on anti-competitive agreements, provided that the parties have market shares of less than 30% on their respective markets, and that the agreement does not contain any hardcore restrictions of competition.

So taking a step back, the prohibition on anti-competitive agreements applies to agreements between two or more undertakings. Agents have the power to negotiate and conclude contracts on behalf of another person, their principal. So in a genuine agency arrangement, the agent no longer acts as an independent economic operator and therefore there isn't an agreement between two separate undertakings. As this is an exception to the general rule, it should be construed narrowly. So Denis, what approach is generally taken to agency arrangements under the vertical guidelines?

Denis: Thank you, Fiona. As you might remember in the previous guidelines, the Commission used to make a distinction between genuine and non-genuine agents for the purpose of applying competition rules. The latter would have applied fully to agreements with non-genuine agents, while this scope of application of competition to agreements with genuine agents was very limited. The new guidelines do not refer anymore to this concept of genuine or non-genuine agents. They prefer to refer to agency agreements which fall outside the scope of the prohibition on anti-competitive agreements. However, the main principles of the previous guidelines are left and changed. There are agency agreements to which competition rules do not apply, except in a marginal manner, those who fall outside the scope of prohibition, and the other agency agreements, to which competition will apply more or less fully. An agency agreement will follow outside the scope of the prohibition on anti-competitive agreements, if the agent does not bear any significant financial or commercial risk for the agreements which the agents negotiate, or conclude, on principal's behalf.

The guidelines highlight three types of financial or commercial risk that should be considered when assessing whether an agency agreement falls outside the prohibition. First, contract specific risk. Second, market specific investment risk. And third, risk related to other activities undertaken on the same product market. The new guidelines clarify that significance in this context is assessed by reference to the agent's remuneration, rather than the revenue from selling the relevant goods or services. To be more practical, the guidelines provide a non-exhaustive list of conditions for an agreement to be categorised as an agency agreement falling outside the prohibition.

The agent does not acquire property in the goods bought or sold under the agreement. This is an important condition. If the agent does acquire property in the goods, the agreement will probably fall within the scope of the prohibition. Secondly, the agent does not contribute to the cost relating to the supply or purchase of the contract goods. Thirdly, the agent does not maintain stock of the contract goods at its own risk or cost. Fourthly, the agent does not take responsibility for customers non-performance of the contract, with the exception of loss of the agent's commission. Fifthly, the agent does not assume responsibility towards customers or other third parties for loss or damage resulting from the supplier of the goods, unless the agent is at fault. Sixthly, the agent is not directly or indirectly obliged to invest in sales promotion, unless the costs are fully reimbursed by the principal. Seven, the agent does not make market specific investments in equipment, premises, personnel training, or advertising. Finally, the agent does not undertake other activities in the same product market required by the principal under the agency relationship, unless those activities are fully reimbursed by the principal.

If the agent bears any of those costs or risks, then the agreement is very likely to fall within the scope of the prohibition on anti-competitive agreements. The question of risk is complex and must be assessed on a case by case basis. However, you see from the previous list that we have gone through, that it's rather rare that an agency agreement will fulfil all the conditions to be considered to fall outside the scope of the prohibition on anti-competitive agreements.

Fiona: Thanks Denis. Looking at the revised guidelines, Zac, following on from what Denis said, when will an agency arrangement fall within the scope of the prohibition on anti-competitive agreements?

Zac: Thanks, Fiona. So, as Denis said, the agency agreements in which the agent bears more than an in insignificant financial or commercial risk, will fall within the scope of the prohibition on anti-competitive agreements. However, the guidelines also include a new condition for an agency agreement to fall outside the scope of the prohibition on anti-competitive agreements, which is that the agent should not act for a large number of principals. This is based on the premise that agents acting for multiple principals are unlikely to be an auxiliary organ forming an integral part of the principal's undertaking.

The previous version of the guidelines indicated, on the contrary, that this circumstance alone had very little or no significance for the purpose of assessing the nature of an agency agreement. And this U-turn has not been explained in detailed by the Commission in the guidelines. The EU courts' case law suggests that the fact that an agent was acting for several principals could result in an agent not being a true agent for the purpose of applying the prohibition on anti-competitive agreements. However, the case law on this point was, in fact, quite limited. It may be that as it did in other parts of the guidelines, the Commission wanted to exclude platforms acting for a plurality of market players from the concept of genuine agency, as competition authorities wish to continue to be free to investigate the conduct of these platforms, and the potential risks that they raise for competition.

Fiona: Thanks, Zac. If we go back to some of the conditions in a little more detail, turning first to agents who temporarily acquire property in the goods they're selling on behalf of the principal. Denis, what additional guidance have we been provided with here?

Denis: Yes, the Commission has tweaked the criteria we discussed earlier, to make clear that where an agent temporarily, that is for a very brief period of time, acquires ownership of the contract goods while selling them on behalf of the principal, this does not preclude the finding that the agreement is a true, genuine agency agreement, that will fall outside the scope of the prohibition. However, in order for an agency agreement to fall outside the prohibition on anti-competitive agreements, in this situation, the agent must not incur any significant cost or risk in relation to the transfer of ownership, the same way as discussed previously.

I think this is a welcome clarification. Indeed, there are many situations in which, for instance, for tax purposes, a distributor (which objectively bears no risk in relation to the transactions it performs for the supplier) needs, nevertheless, to become the legal owner of the good delivered to the buyer for a fraction of time. This is a legal constraint and it should not interfere with the economic reality which clearly indicates, in such a situation, that the distributor acts as a genuine agent.

Fiona: Thanks, Denis. Let's talk next about dual role agents. Zac, how has the application of the prohibition on anti-competitive agreements, to dual role agents changed?

Zac: Thanks, Fiona. So an independent distributor of some of a supplier's goods or services may also act as an agent for other goods or services for the same supplier. And that's provided that the activities and risks covered by the agency agreement can effectively be delineated, for example, because they concern goods or services with additional functionalities or new features. These dual role distributors, as they're referred to, are honestly viewed with some suspicion by the Commission, and this is really reflected in the guidelines.

The Commission is effectively concerned that suppliers may intend to use the concept of agency to circumvent prohibitions, which apply to standard distribution agreements, such as the prohibition against RPM, also known as Resale Price Maintenance, whilst still requiring the distributor to support most of the commercial risk linked to the distribution of the products or services involved.

And this risk is particularly acute when the distributor acts in both roles in relation to products and services which are part of the same relevant market, or if the products are quite similar. For this reason, the guidelines introduce several conditions for a supplier to be able to claim that a dual role distributor acts as a genuine agent in relation to the distribution of the goods or services for which it acts as an agent.

For the agency agreement to be categorised as an agency agreement that falls outside the scope of the prohibition on anti-competitive agreements, the independent distributor must be genuinely free to enter into the agency agreement. For example, the agency relationship must not be de facto imposed by the principal through a threat to terminate or worsen the terms of the distribution relationship.

Similarly, the principal must not directly or indirectly impose on the agent an activity as an independent distributor, unless such activity is fully reimbursed by the principal. Moreover, and quite importantly, all relevant risks linked to the sale of goods or services covered by the agency agreement, including market specific investments, must be borne by the principal.

As a result of this last condition, if the distributor acts as an agent and reseller in relation to different goods which belong to the same relevant market, the market specific investments for the distribution of all goods belonging to the same market, will have to be borne by the supplier. For instance, if you're a distributor at selling smartphones under both a standard purchase and resale agreement, as well as an agency agreement, the latter covering only high end smartphones for example, where presumably the supplier is keen to set the resale price to keep the premium image of the product, the supplier may have to bear the market specific investments and costs to the distributor linked to the activity, of the distribution of all the smartphones of the supplier.

To identify market specific investments that the principal must reimburse, the principal should consider the hypothetical situation of an agent that is not yet active in the relevant market in order to determine which investments are relevant to the type of activity for which the agent is appointed. The only exception to the requirement to reimburse market specific investments, is when the investments relate exclusively to the independent distribution of differentiated products that are not sold under the agency agreement, even if in the same product market.

Fiona: And now finally turning to the last area we're planning to talk about today. The revised vertical guidelines have put a lot more emphasis on agreements in an online context. Denis, what additional guidance has been provided in terms of online agents?

Denis: The vertical guidelines, Fiona, make clear that before it is considered if agreements involving undertakings active in the online platform economy could be categorised as agency agreements, it is important to consider if such agreements do not potentially involve the supply of online intermediation services, or OIS, for which there is a specific discipline set up in the guidelines. For those interested in the specific rules applying to OIS and the way these rules may interface with those regarding agency agreements, we invite them to listen to our specific podcast dedicated to OIS, as this is a very complex and specific set of rules and principles.

I would, however, remember at this stage that, as we discussed previously, agents who act for multiple principals are not generally considered to be genuine agents and that online platforms, typically serve a very large number of sellers and principals. Therefore, it is unlikely that those platforms will be viewed as genuine agents when they act as agents, rather than OIS suppliers. And therefore, it is very likely that the prohibition on anti-competitive agreements will apply to the agency agreements between these platforms and their principals.

Fiona: Thank you both for that interesting overview of how the rules on vertical agreements have changed, in relation to agency arrangements. The revised vertical guidelines provide additional guidance. However, the criteria for being considered a genuine agent, as we've discussed, do remain hard to meet, in particular where a supplier uses the same company as an agent for some products and an independent distributor for others. If you're interested in learning more about the new EU Vertical Block Exemption Regulation and the Vertical Agreements Block Exemption Order in the UK, then we have a briefing available on our website, and watch out for the next episode in this podcast series. To ensure you don't miss out on any future episodes, do subscribe now on Apple Podcasts, Spotify, or your favourite podcast platform. And while you're there, please feel free to keep the conversation going and leave us a rating or a review. Until then, thanks for listening.