The EC is reviewing a Block Exemption Regulation on Supply and Distribution Agreements. A suggested change would stop online sales of luxury brands unless the seller already had a bricks and mortar store. Amisha Patel and Miles Trower analyse.
Topic: Competition
Who: European Commission
Where: European Union
When: 28 July 2009
Law stated as at: 3 September 2009
What happened:
The European Commission published new proposed guidance clarifying the rights of suppliers and distributors in the context of online and offline marketing, sales and distribution (please note that the focus of this article is on new EC guidance affecting online and offline distribution, although the European Commission's latest regulatory proposals have a slightly wider ambit).
Background
On 31 May 2010, the vertical agreements block exemption regulation (No. 2790/1999) ("VBE") will expire. The VBE and its accompanying guidelines provide a regulatory safe-harbour for most types of supply and distribution agreement across the EU. In other words, provided an agreement meets the conditions for exemption set out in the VBE, the parties to it do not need to be concerned that such an agreement might fall foul of competition law, which could otherwise result in the unenforceability of all or part of the agreement or other consequences including fines. Thus, the VBE and its guidelines have considerable influence on the types of restriction that are found in such agreements as well as on the structure of supply and distribution networks.
In anticipation of the VBE's expiry, the European Commission (the "Commission") has recently published a draft replacement block exemption regulation (the "Draft Regulation") as well as new and improved accompanying guidelines (the "Proposed Guidelines").
Commission's proposal
On the whole, the text of the Draft Regulation does not depart radically from the existing VBE; indeed, the Commission considers that the existing VBE is working well. However, amongst other things, the Proposed Guidelines provide greater clarification on online selling (and the types of restriction that are and are not permissible in this area) – a clear indication of the Commission's recognition of the growth of sales over the Internet.
The Commission is keen to ensure that online selling, which is key to cross-border trade, is not unduly curtailed. However, the Commission also recognises that barring all restrictions on online selling could undermine the distribution of certain brands, result in free-riding and lead to lower levels of investment and customer service. Hence, the Commission has attempted to carry out a careful balancing act between these concerns.
The Commission starts from the premise that every distributor must be free to use the Internet to advertise or sell products. It considers that a restriction on a distributor's use of the Internet could only be compatible with the VBE or its replacement if such use would lead to active selling into, for instance, other distributors' exclusive territories or customer groups. In the context of Internet sales, active selling would involve a distributor sending unsolicited emails to customers located in a territory allocated exclusively to another distributor. However, general advertising on the Internet (irrespective of the language options used on any website) does not constitute active selling – even if it attracts customers from other territories. Instead, the Commission sees such activity as a form of passive selling, which should not be restricted except in very limited circumstances.
Indeed, the Commission has reinforced its condemnation of restrictions on passive Internet sales (which amount to hardcore restrictions on competition) by adding to the Proposed Guidelines the following examples of generally prohibited restrictions:
- requiring a distributor to prevent customers located outside of its territory from viewing its website, or to re-route them to another distributor’s website;
- requiring a distributor to reject transactions made on credit cards registered at an address outside of that distributor's territory;
- requiring a distributor to limit the number of sales made via the internet; and
- charging a higher price to distributors for goods that are intended to be sold online.
Similarly, if a supplier were to reserve all online sales or advertising to itself, this could also constitute a hardcore restriction of competition.
However, the Commission has also taken care to describe the types of restrictions on online selling that suppliers should generally be permitted to apply, for example:
- in respect of products (often of a high-end or complex nature) which are distributed through selective distribution networks (for example, where distributors undertake to meet certain quality standards), requiring distributors to have a bricks and mortar shop or showroom – perhaps if needed for advisory, demonstration or after-sales purposes – before engaging in online sales;
- stipulating that distributors' websites meet certain quality or 'look and feel' standards (in the same way that the supplier might stipulate similar standards for physical sales outlets);
- requiring distributors to sell a minimum volume or value of products offline in order to ensure the efficient operation of its physical outlets.
The Proposed Guidelines also suggest that certain payments may be made to support offline (or, indeed, online) sales and investments. Presumably, if such payments are only made available to physical outlets, suppliers will need to ensure that they do not disadvantage online sales disproportionately.
Why this matters:
The Proposed Guidelines update and, to some degree, clarify the Commission's approach to online selling. It follows that suppliers will need to give careful consideration to any dealings with distributors in the context of on-line sales; ensuring that any requirements imposed on distributors in respect of online activities do not fall foul of the of the Proposed Guidelines.
Nevertheless, suppliers will be able to take comfort from the fact that they can, in certain circumstances, exercise some degree of control over online sales. In particular, they may be able to prevent certain distributors from free-riding on the investments of others in marketing and brand promotion – whether through the judicious application of quality standards or proportionate reward schemes for those distributors who willing to undertake certain investments or provide value-added services.
At the same time, the Proposed Guidelines give distributors a clearer indication of the extent to which they can engage in online selling and the circumstances in which they might be able to challenge any unduly restrictive behaviour on the part of suppliers. It is hoped that this latest guidance will enhance online sales without undermining more traditional distribution formats, which may offer a wider range of value-added services to consumers.
Next steps
The public consultation on the Draft Regulation closes on 28 September 2009.
While the Commission has made some progress in addressing recent market developments in the on-line sales sector, it is still the case that the Proposed Guidelines are not as detailed as they could be. For example, the proposed Guidelines do not consider in any real detail the status and use of online auction sites, such as eBay, by distributors or the degree to which suppliers can differentiate between and reward online or offline selling.
As a result, interested parties (whether suppliers or distributors, and particularly those engaged in both online and offline selling) are encouraged to submit comments or questions to the Commission or contact Miles Trower at Osborne Clarke before the consultation closing date.
