Dual distribution in the EU – European Commission publishes new draft guidance | Hogan Lovells

introduction

Dual distribution has become increasingly important with the success of e-commerce. Dual distribution refers to the scenario in which a supplier sells goods or services not only through distributors, but also directly to customers, thereby competing with its independent distributors. This particularly covers the increasingly common scenario, where suppliers or manufacturers side-sell their products through their websites or physical stores.

Since dual distribution may raise significant antitrust issues, the European Commission (the “committee”) launched on February 4, 2022 an additional public consultation on its new project orientation project regarding information exchanged within the framework of the double distribution (the “Advice”), intended to be added to the vertical guidelines.

The Commission’s new draft guidelines were triggered by initial feedback from the consultation on the draft revised Vertical Block Exemption Regulation (“VBER”) and the Draft Revised Vertical Guidelines in 2021 where stakeholders indicated that there was a strong need for more guidance on the types of information that can be exchanged between a supplier and a buyer in a relationship of dual distribution.1

The current VBER exempts many vertical agreements, including dual distribution, from EU antitrust rules, provided that neither party has a relevant market share above 30%. However, in July 2021, the Commission tabled a controversial proposal that would burden the operation of a dual distribution system. The Commission has proposed that information exchanged between a supplier and a distributor in a dual distribution configuration should only be exempted from the competition rules if the market share of the parties is below 10%. This has been heavily criticized by the industry as increasing uncertainty for the market and adding bureaucracy. The now published draft guidance no longer refers to the 10% market share threshold. It remains to be seen whether this market share threshold will also be excluded from the final VBER.

The draft Guidance includes the following non-exhaustive clarifications for companies operating in dual distribution models:

Exchange of information generally exempt

According to the draft guidance, the exchange of next information exchanged between a manufacturer or a supplier and a distributor must in general advantage from the block exemption:

  • Technical informationsfor example regarding the registration, certification or processing of the contractual goods or services, as well as the information necessary to adapt the goods and services to the customer’s requirements;
  • Supply informationsuch as information relating to production, inventory, inventory, sales volumes and returns;
  • Aggregated information related to customer purchases, preferences and feedback;
  • Prices on which the contract goods Where services are sold by the supplier to the buyer;
  • Supplier Recommended Resale Prices Where maximum resale price for contractual goods or services provided that the buyer remains free to determine his selling price;
  • Marketing-related informationfor example new goods and services, promotional campaigns, etc.
  • Performance Informationincluding aggregate information provided by the supplier to the buyer regarding the marketing and sales activities of other buyers as long as these remain anonymous.

Exchange of information generally not exempt

The exchange of the next information exchanged between a manufacturer or supplier and a distributor is generally considered to be not exempt as part of the orientation project:

  • Real future prices to which the supplier Where the buyer will sell the goods or services downstream, unless this exchange is necessary to organize a coordinated campaign of low prices in the short term and provided that the the buyer remains free to determine his selling price;
  • Customer specific sales dataspecifically, not aggregated information about the value and volume of sales by customer, or information that identifies particular customers, unless such information is necessary to enable the supplier or the buyer to tailor the goods or services to the needs of customers or to provide warranty or after-sales services or distribute customers under an exclusive distribution agreement. This includes highly relevant point-of-sale (“POS”) or exhaustion data that parties may exchange in the aforementioned situations;
  • Information regarding goods sold by a buyer under his own brand with a manufacturer of competing branded products, unless the products are made by the same manufacturer.

To be clear, the fact that such an exchange of information does not benefit from an automatic block exemption does not mean that it is in itself illegal. However, it does not benefit from a safe harbor and therefore requires parties and their counsel to individually assess antitrust compliance. Although the Guide does not include an explicit standard for the use of firewalls or similar security measures, it specifies that any exchange of information It is not subject to the exemption should be assessed against the horizontal guidelines only2.

The corresponding exchange of information is not necessarily an infringement of EU competition law, however, such “exchanges are subject to the presumptions established by the case law of the Court of Justice of the European Union relating to the exchange of information between competitors. In particular, undertakings which participate in a concerted practice and which remain active on the market are presumed to take into account the information exchanged with their competitors to determine their behavior on the market.”

So what to do?

The draft guidance states that the following precautionary measures can reduce the risk that the exchange of information raises horizontal concerns:

  • Only enough aggregate (Sales) information is exchangedi.e. specific customers or (competitor) companies cannot be recognized by the information provided.
  • The information is shared with a appropriate time frame (what is appropriate may differ from one business activity to another, depending on when the information loses its competitive sensitivity).
  • Own teams are in place, i.e. the buyer’s information is only accessible to the seller’s personnel responsible for the upstream activities but not to the personnel responsible for the supplier’s downstream direct sales activities. This may also include firewalls and similar (technical) measures.

Next steps

Any company facing dual distribution is well advised to (re)examine and perhaps even audit its current dual distribution system in light of the new draft Guidance. The growing importance of dual distribution in many sectors of activity will certainly also sooner or later attract the interests of the Commission in matters of enforcement.

In addition, there is also the risk that a company will run into a “hub & spoke” constellation, i.e. a situation where market players at the horizontal level (“spokes”) share sensitive information via a vertical common actor (“hub”). A “clean” dual distribution setup also helps to minimize this risk.

Submissions for the new draft guidelines can only be made until February 18, 2022 before the draft guidelines described above become part of the new rules on vertical agreements, which are expected to come into force in June.

The references

Aurora J. William