Episode 2, Vertical Agreements in the EU and UK: Dual Distribution

Fiona Garside:

Hello, everyone. I'd like to welcome you to the second 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 agreements, 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 Michael Holzhäuser, a partner in our Frankfurt office and Jessica Bracker, an associate in our Brussels team. Today, we're going to be talking about how the rules on dual distribution have changed following the new vertical block exemption regulation. Thank you both for joining me today.

Michael Holzhäuser:

Hi, Fiona exciting topic. Looking forward to the chat.

Jessica Bracker:

Hi Fiona. Thanks for having us.

Fiona Garside:

So, as listeners may be aware on the 1st of June 2022, the revised EU Vertical Block Exemption Regulation, or VBER, entered into force alongside new vertical guidelines. On the same date, the new UK Vertical Agreements Block Exemption Order (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 the agreement does not contain any hardcore restrictions of competition. Today, we're going to be focusing on how the new rules impact dual distribution arrangements: that means situations where supplier sells its goods directly to end consumers as well as through independent distributors. So as a result, the supplier is in direct competition with its distributors. Now, Michael, to set the scene, what was covered previously?

Michael Holzhäuser:

Well, generally speaking, the block exemption did not, and does not, exempt agreements between competing undertakings from the cartel prohibition. However, an exception is made for so called dual distribution, which describes the situation where the supplier is a manufacturer and the distributor is not. This means that the parties compete at the downstream level, but not the upstream. The European Commission considers the potential negative impact of the horizontal aspects on competition between the supplier and distributor to be less important than the potential positive impact of the vertical agreement on competition in general.

So, we see that explicitly in the new framework where the Commission has acknowledged that dual distribution agreements are vertical in nature, which means that the focus is on the vertical relationship between the parties rather than the potential horizontal implications. So accordingly, already under the previous rules, dual distribution agreements were covered by the block exemption and therefore comprehensively exempted from the application of the prohibition on anti-competitive agreements. It was unclear whether the block exemption also covered information exchange in this context or whether this needed to be individually assessed under the horizontal guidelines. However, as noted, it is an exception to the general rule that agreements between competing undertakings are not covered by the cartel prohibition and it has therefore been construed narrowly.

Fiona Garside:

Thanks Michael. So Jessica what's changed under the new rules?

Jessica Bracker:

I think that overall the new rules provide for a more comprehensive and clearer framework for companies engaging in dual distribution. Very importantly, the final version of the guidelines explicitly states that the new block exemption cover all aspects of the relevant vertical agreement and that includes information exchange. That's a very welcome clarification, especially given that in the initial draft block exemption and guidelines, which were published last year, the Commission proposed to significantly narrow down to scope for the exemption for dual distribution. And following reactions during the consultation process, the Commission has stepped back from this approach, and I think that's good news for businesses.

Also, there was a pressing need for clear guidance in that area because dual distribution has become increasingly common in recent years. Suppliers more and more often also sell their goods via their own website, and that's obviously the result of the growth of e-commerce and online sales. So if we move on to the concrete changes, which are made to reflect that new commercial environment, the first one to mention is actually an expansion to the scope of the block exemption. It has been extended to also cover dual distribution organised by wholesalers and importers. So, not only dual distribution organised by manufacturers as it was the case under the previous rules.

Fiona Garside:

And at the same time, one category of suppliers has been expressly excluded from the scope of the block exemption in this context.

Jessica Bracker:

Yes, that's right Fiona. The new block exemption doesn't apply to dual distribution arrangements organised by hybrid online platforms. So, those are providers of online intermediation services, which sell goods or services in competition with the companies to which they provide their intermediation services. This type of agreements is now outside the scope of the block exemption, and that means that they need to be assessed individually. The rationale for that exclusion is that the Commission considers there to be a potential power imbalance. So the online platform may have an incentive to favour their own sales and the ability to influence the outcome of the competition process between undertakings using their intermediation services. The last important change to mention, and that we have already to some extent unveiled earlier in the discussion is that the new rules provide a clearer approach to information exchange in the context of dual distribution: essentially the block exemption only covers information exchange which is necessary for the implementation of the vertical agreements.

Fiona Garside:

Thanks Jessica. Picking up on that last point, as Michael mentioned, dual distribution may raise competition concerns because it's an agreement between competitors at the downstream level. The flow of information between the supplier and distributor may therefore give rise to competition concerns. Michael, can we explore in a little more detail, when will this type of information exchange be covered by the block exemption?

Michael Holzhäuser:

Yes. Taking a step back, the rationale for permitting some information exchange is that it can contribute to pro-competitive effects of vertical agreements, including optimisation of production and distribution processes. However, not all exchanges of information are efficiency enhancing. For this reason, the commission has clarified when information exchange in the context of dual distribution arrangements will benefit from the block exemption. Previously, the guidelines did not provide any guidance of information exchange in this context and it was therefore not clear how the Commission would approach it. Now the information exchange must be firstly, directly related to the implementation of the vertical agreement and secondly, necessary to improve the production or distribution of the contract goods and services. So, this is a narrowing of the block exemption which previously covered all exchanges of information between suppliers and distributors in dual distribution arrangements. Essentially information can be shared to the extent it is necessary for the implementation of the dual distribution arrangement.

Fiona Garside:

And to help companies navigate this, the Commission has also provided additional guidance on the types of information that are likely to fall within the block exemption in the form of a so-called white list. Jessica, what types of information will generally be in scope?

Jessica Bracker:

It's generally the type of information you would expect to be covered. So for example, technical information about the goods which might be information relating to registration or certification, but also logistical information such as inventory or production processes. As would be expected, the supplier can also share its recommended or maximum retail prices with the distributor. Of course, that's provided that the distributor remains free to determine its own retail price. Importantly, information relating to the prices at which the contract goods were sold to the buyer in principle benefits from the exemption.

It's also worth noting that suppliers and distributors can share information relating to the marketing of contract goods. So for example, information on promotional campaigns and information on the launch of new goods or services. Interestingly, unlike the draft guidelines published for consultation, the white list in the final version doesn't explicitly cover information on future prices for the coordination of short term promotional campaigns. But when we look at the guidelines more broadly, it seems that exchanging this type of information would be covered because first as I just stated information relating to promotional campaigns is included on the white list. And second, the broader framework of the final guidelines still contain an exemption from the resale price maintenance prohibition for short term promotions.

Fiona Garside:

Thanks Jessica. For listeners interested in learning more about the resale price maintenance prohibition, we'll be covering that in more detail in a future episode. Now, Michael, what about the other side? What falls on the so-called blacklist?

Michael Holzhäuser:

Unsurprisingly information relating to future prices, as Jessica mentioned, at which the parties intend to sell the contract goods or services downstream that is unlikely to be covered by the block exemption. Similarly, individual information relating to identified end users is unlikely to be covered by the block exemption, unless it is necessary to enable the supplier or the buyer to satisfy the requirements of a particular end user. For example, in regulated sectors, such as pharmaceuticals, there may be regulatory requirements requiring information to be provided, or the information is needed to adapt goods to an end user requirements or to provide pre- or after-sale services.

Information can also be shared to implement or monitor compliance with the selective distribution agreement under which particular end users are allocated to the supplier or distributor. The vertical guidelines do not provide specific examples to that extent. However, situations such as the above should be covered given that there is a clear need for the information exchange.

Exchanging information relating to goods sold by a buyer under its own brand name will also not be covered by the block exemption unless those products are produced by the same manufacturer.

Fiona Garside:

Thanks Michael. It's helpful to have clearer guidance from the Commission on when information exchange will be covered by the block exemption. But what if there's a concern about the information being exchanged? What practical steps should suppliers and distributors be thinking about?

Jessica Bracker:

As with any situation where competitors may need to exchange some information, it is sensible to put in place measures to minimise the risk of infringing competition law. For example, companies could ensure information is sufficiently aggregated or historic, so it doesn't give rise to competition concerns. Companies can also consider how to ringfence any information to ensure it's only accessible to the people responsible for upstream activities and not to the people responsible for downstream direct sales. Depending on the internal structures, this could be an expensive exercise so companies should consider carefully whether this might be appropriate.

Michael Holzhäuser:

Maybe to add to this. It's important to make sure that internal guidelines and competition training are up to date and reflect the new rules on vertical agreements. However, these precautions will not bring information exchange within the scope of the block exemption, if it would not otherwise be. So the information exchange would therefore need to be assessed separately to consider whether it infringes competitional.

Fiona Garside:

Thank you both. For completeness we should note that the UK has adopted a similar approach and expanded the scope of the block exemption to cover suppliers who are manufacturers and importers as well. While the VABEO does not impose conditions for when information exchange will benefit from the block exemption, the final version of the VABEO guidance, which was published on the 12th of July has adopted the examples of information that will generally be covered so we see the white and blacklist being mirrored in the UK.

Michael Holzhäuser:

That's right. And given that there are no two separate sets of rules governing vertical agreements in the EU and UK companies should carefully consider both regimes. The divergence, if any, in the context of dual distribution is minimal, but if you are navigating the two regimes in parallel then watch out for our upcoming episode highlighting the key differences between the two regimes. Another important point to note is that national competition authorities and courts are not legally bound by vertical guidelines, but they will be a persuasive authority.

Fiona Garside:

Thank you both for that interesting overview of how the rules on vertical agreements have changed in relation to dual distribution. It's helpful that the types of suppliers covered have been extended to cover wholesalers and importers and not just manufacturers, but companies will need to carefully consider the guidance on information exchange. Particularly as many situations won't fit neatly within the example set out in the guidelines that we've been discussing today. 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, we have a briefing available on our website and watch out for the next episode in this podcast series.