AmCham EU Response to the European Commission s Consultation on the Review of the Vertical Restraints Block Exemption Regulation and Guidelines 1/2

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1 Avenue des Arts/Kunstlann 53, B-1000 Brussels, Belgium Telephone Fax Register ID: AmCham EU Response to the European Commission s Consultation on the Block Exemption Regulation and Guidelines 1/2 The vertical restraints block exemption regulation ( VRBE ) and accompanying explanatory guidelines ( Guidelines ) constituted a major improvement over the more form-based approach of the various block exemptions that preceded it. The current rules have generally worked well. However, given that there remain a number of ambiguities which complicate the application of the rules to complex distribution structures, and given that the rules are primarily enforced by national competition authorities and national courts, the current review is a timely opportunity for the Commission to further embed the economics-based assessment of vertical restraints which, it is submitted, justifies further simplification of the rules. AmCham EU welcomes the opportunity to comment on the proposals against this background. The aim should be to ensure consistent enforcement practices at the national level and legal certainty for businesses operating across Europe. AmCham EU urges the Commission to take this opportunity to draw a clear distinction between egregious restraints (absolute territorial restrictions and price-fixing designed to maintain prices artificially high and engender collusion at either the supplier or buyer level) and other restraints which should not be qualified as a restriction by object. The Guidelines should be shortened and revised to clearly spell out the circumstances in which supply arrangements falling outside the block exemption may give rise to competition law issues sufficient to merit regulatory intervention. 1. THE DRAFT COMMISSION REGULATION 1.1 The 30% Market Share Threshold at the Buyer Level The current VRBE safe harbour applies for as long as the supplier s market share does not exceed 30%. There is no presumption of unlawfulness above this threshold. This approach has worked well in practice as recognised at recital 2 of the proposed Regulation. Today, the buyer s market share is only relevant in relation to the narrowly defined context of exclusive supply contracts (where the supplier contractually agrees to sell the contract goods to one single buyer for resale or for a specific use in the EU). The draft Regulation would impose the 30% buyer market share threshold in all circumstances and will give rise to major practical issues as well as much legal uncertainty. Article 3 foresees that the 30% threshold applies to any of the relevant markets affected by the agreement. It presumably includes the markets on which either party sells the contract goods or services as well as the markets for downstream products which incorporate the contract goods. It is unclear whether the scope is potentially even broader. 1

2 It will frequently be difficult for a supplier to determine what the relevant downstream market is let alone calculate the downstream market shares of its customers in potentially multiple product/geographic markets (which might be narrowly defined) and to constantly monitor market shares to verify that the protection of the VRBE remains available. Often the supplier will not possess this data, and customers are very reluctant to provide such competitively sensitive information to the extent that it is available and reliable. The requirement to assess a buyer's market share becomes even more challenging if the buyer is not a reseller but incorporates the input into another product or if the buyer is a direct competitor of the supplier. What of the oil refiner or chemical producer selling basic commodities to buyers for use in numerous downstream applications? What of a brand owner with numerous relationships with exclusive distributors, franchisees, wholesalers, authorised dealers, retailers? In these various scenarios, there is room for debate as to whether the relevant geographic market is Europe-wide, national, regional or local. Monitoring buyers market shares over time will be a burdensome and speculative task in most sectors. What are the practical implications of the buyer s market share exceeding 30% in one geographic market but not in another? What if the buyer s market share exceeds 30% in relation to one of the several applications for which the contract product is sold under a distribution agreement? A blanket 30% buyer market share threshold will remove many unproblematic agreements from the block exemption safe harbour and is likely to feed commercial disputes without necessarily contributing to more competitive markets. There is also the very real danger of a chilling effect preventing suppliers from entering into unproblematic agreements with successful distributors, simply because the distributors may exceed the 30% threshold. This is likely to be a particular problem in the context of a small supplier seeking to join forces with a large and successful distributor, in order to penetrate a new market or territory. In this scenario, the new buyer market share cap risks harming competition within Europe, rather than strengthening it. The Commission does not explain why it is necessary to introduce a blanket buyer market share threshold after two decades of vertical block exemptions. As Europe expands and more authorities and courts have jurisdiction to apply these rules directly, and as other neighbouring countries look to Europe as inspiration for their own nascent competition regimes, it is imperative that the EU rules be a model of clarity and simplicity. The withdrawal mechanism in the current VRBE provides an adequate tool for regulatory intervention in those cases where a combination of supplier and buyer power is likely to give rise to anti-competitive outcomes. It would be preferable for the Commission to simply spell out in the guidelines the circumstances in which the exercise of buyer power is likely to be sufficiently problematic to merit regulatory intervention. Beyond long-term exclusive supply arrangements between a supplier and buyer each with market power, it is unclear where the problems lie. We note that the draft Guidelines appear to adopt a much wider definition of exclusive supply than that set out in Article 1(e) of the VRBE. Paragraph 188 read together with paragraph 152 suggests that the notion has been extended to agreements to sell only to one buyer in any territory (e.g., Flanders, Germany). This change, coupled with the existing withdrawal mechanism, should be sufficient to address any concerns. 2

3 1.2 Coverage of Vertical Agreements between Competitors The Commission is proposing to remove from the scope of the block exemption safe harbour supply agreements between competitors where the buyer has an annual turnover not exceeding 100 million. There is no explanation for why the Commission is proposing a stricter approach than has applied for the last 10 years. This situation occurs rarely but it might apply, for example, to a retailer selling multiple major brands who decides to introduce a competing own label brand of a certain product-range in its own stores. There is no apparent reason why this situation should now be excluded from the safe harbour. 1.3 Territorial Exclusivity The VRBE predecessor, Regulation 1983/83, permitted an active sales ban outside a territory exclusively allocated to a distributor. The proviso that active sales restraints be limited to territories that have been exclusively allocated to another distributor or exclusively reserved to the supplier was introduced in the current VRBE and has been a source of confusion and divergent interpretation. Most distribution systems are mixed and complex, involving long-standing and multiple relationships that evolve over time. Depending on the commercial strategies of a supplier and the different competitive conditions prevailing across Europe, a supplier may frequently choose to retain certain territories to itself, appoint exclusive distributors in some territories, and nonexclusive distributors in others. The notion of whether, how and to whom such territorial reservations have been made creates uncertainty about the availability of the VRBE safe harbour. The ban on active sales restrictions as currently formulated creates difficulties for companies who supply across Europe and maintain such complex distribution arrangements. At present, a supplier wishing to use active sales restrictions to incentivise its distributors may well be forced to opt for a more restrictive approach (i.e. exclusivity) than it would otherwise wish to implement. Active sales restrictions have a legitimate role to play in a non-exclusive distribution context in terms of protecting a distributor s investment in staff, training, facilities etc. As the Commission has long acknowledged, this investment is likely to lead to economic efficiencies and thus be procompetitive. However, AmCham EU submits that there is no good reason why recognition of these efficiencies should be confined to exclusive distribution agreements. For these reasons, the Commission should delete the prohibition of active sales restraints, and prohibit only attempts to restrict passive sales in circumstances where these are not justified by a substantial investment. This would also be in line with the more recent Technology Transfer Block Exemption, Regulation 772/ The Article 5 Grey Clauses The Commission is not proposing to change Article 5 of the Regulation which contains a list of clauses that fall outside the block exemption safe harbour but that do not call into question the applicability of the block exemption to the remainder of the agreement. 3

4 1.4.1 Non-Compete Clauses AmCham EU questions the need for the five year time limit at Article 5(a) of the VRBE for noncompete clauses (defined at Article 1(b) of the VRBE as a requirement that the buyer not manufacture, buy or sell competing products or purchase more than 80% (by value) of its total requirements from the supplier measured on the basis of prior annual purchases). This is a hangover from the old form-based approach to vertical restraints. Regulation 1984/83 allowed for a longer non-compete for goods or services sold by the buyer from premises or land owned by the supplier. Article 5(a) of the current Regulation limits this exception to situations where the buyer operates from premises and land owned by the supplier. There is no particular economic rationale for such a restrictive approach. Each non-compete clause should be judged on its merits as to whether it actually has a foreclosure effect on market entry. Below the 30% supplier market share threshold, there should be a presumption that this is not the case. At the very least, the Guidelines should expressly recognise that beyond a five year term, agreements which contain limited renewal periods or notice to terminate provisions are unlikely to cause foreclosure concerns. If the Commission chooses to maintain the current approach, it should clarify that requirements should be judged on a volume current year basis to avoid uncertainty, particularly in commodity sectors which experience considerable price fluctuations. This would have the added advantage of avoiding the difficulty of adjusting the gross sales value to exclude excise and other taxes and levies (which vary among Member States), and would be consistent with Article 8(a) of the draft Regulation which states that market sales volumes are reliable market information for the purpose of the calculation of the 30% market share threshold Post-Term Non Compete Clauses A more liberal approach to post-term non-competes is also merited. The limitation to a one-year term plus the condition that it be restricted to the land and premises from which the buyer has operated should apply only in the event that the supplier has market power and a corresponding ability to foreclose market access. A longer post-term restraint is justified where the supplier seeks to protect valuable know-how. It is curious in this respect that the revised Regulation contains a broader definition of know-how (see Article 1(e) of the draft Regulation) to include significant and useful rather than indispensable information without reflecting in the block exemption the legitimate aim of protecting such know-how post-term. 1.5 Absence of a Transitional Period No transitional period is foreseen. The Commission hopes to adopt the new rules in December 2009 and for them to enter into force in June The more complex rules proposed in the revised package will require suppliers to review and potentially amend contracts and relationships with large numbers of partners and an adequate transition period should be foreseen. 4

5 2. THE DRAFT GUIDELINES 2.1 Guidelines on Unilateral Conduct The draft Guidelines restate the principle that an agreement within the meaning of Article 81 can be implied where there is a "concurrence of wills" which can result from explicit or tacit acquiescence. Paragraph 25 explains that tacit acquiescence is present if a supplier s announcement of a unilateral reduction in supplies to prevent parallel trade is immediately complied with, and that the level of coercion (a system of monitoring and penalties) is also relevant if this system allows the supplier to implement in practice its policy. It is submitted that the additional clarification following footnote 15 in paragraph 25 risks oversimplifying the Court s findings in the Bayer case (T-41/96). In Bayer, the Court concluded that for as long as there is no concurrence of wills between the supplier and his wholesalers, the former may adopt the policy which he considers necessary, even if, by the very nature of its aim, for example, to hinder parallel imports, the implementation of that policy may entail restrictions on competition (para. 176). A unilateral policy to reduce supplies is therefore unproblematic in the absence of evidence of distributors cooperating in a clearly articulated policy to engage in anti-competitive conduct at the behest of the supplier Guidelines on Agency Agreements The current Guidelines clearly distinguish between independent reseller relationships and genuine agency arrangements. There are two types of financial or commercial risks which are material to the assessment of a genuine agency agreement: contract-related risks such as the financing of stocks; and risks relating to market-specific investments such as a sunk investment in specific premises. Paragraph 14 of the draft Guidelines would introduce a new third type of risk, namely " risks related to other product markets, to the extent that the principal requires the agent to undertake such activities - but not as an agent on behalf of the principal - and these activities are indispensable to engage in selling or purchasing the contract goods or services on behalf of the principal". This seems to be an attempt to reflect the findings of the Court of First Instance which indicated in Daimler Chrysler2 that risks taken on by the agent (in an independent reseller capacity) in markets other than the market for the agency goods can in some circumstances be capable of affecting the relationship between the principal and the other party in the agency market. But, contrary to the statement made in footnote 11 of the draft Guidelines, paragraph 113 of that judgment does not go as far as establishing that risks in other markets are relevant if those risks 2 AmCham EU would also highlight the Commission s statement at paragraph 25 that a system of monitoring and penalties, set up by a supplier to penalise those distributors who do not comply with its unilateral policy, points to tacit acquiescence with the supplier s unilateral policy, if the system allows the supplier to implement in practice its policy. The Court of Justice in Bayer (C-2/01P) suggested that tacit acceptance requires an invitation to jointly achieve an anti-competitive goal (paragraph 102 of the judgment). Given that a monitoring system with penalties does not involve active participation by distributors, it is difficult to reconcile the approach of the Commission with that of the Court. Case T-325/01, judgment of 15 September

6 are indispensable to engage in the agency activity. It is far from clear what is indispensable in this context means. In the Daimler Chrysler case, the other markets (warranty and repair services) were closely related to the main agency activity (the sale of new vehicles) AND the revenue earned by the agent in the reseller markets in that case was six times greater than the Commission earned in the (related) agency relationship. Paragraph 14 of the draft Guidelines seems to suggest that in this scenario, the indispensability test would be met, yet the Court reached the opposite conclusion holding that risks arising from the provision of repair services were not such as to impair the genuine nature of the car dealer agency relationship. The Court has therefore set a very high threshold for showing that risks undertaken in a related reseller market are so significant as ultimately to affect the main agency relationship. This clearly illustrates the difficulties of the proposed indispensability test. For the sake of simplicity and legal certainty we suggest that the Commission abandon this third criterion. 2.3 Resale Price Maintenance (RPM) The acknowledgment at paragraph 48 that the use of a particular supportive measure (such as the supplier printing a recommended resale price on the product or the supplier obligating the buyer to apply a most-favoured-customer clause) would not be considered in itself as leading to RPM is welcome. It would also be helpful to expressly confirm that the combination of price recommendations and retail price monitoring by a supplier does not in itself amount to RPM, even when those recommendations are to a significant degree followed by dealers. For RPM to exist, there must be additional evidence of pressure or incentives to implement the price recommendations. It is helpful that the draft Guidelines recognise at paragraph 219 that there are certain circumstances in which RPM may lead to efficiencies (introduction of a new product, short-term promotion, no loss-leader ), but the characterisation of RPM as a per se restriction by object and the application of a presumption that Article 81(3) is not available (see below) creates much legal uncertainty. The Commission should amend Article 4(a) of the draft Regulation (which sets out resale price maintenance as a hardcore restriction) to ensure that beneficial uses of RPM are not unnecessarily blacklisted. At the very least, the Guidelines should unequivocally state that the three exceptions are unlikely to infringe Article 81(1) in the first place and require the supplier to demonstrate efficiencies only in relation to the specific circumstances in which RPM is likely to be harmful as discussed at paragraph 219 (in particular, where it facilitates collusion at the supplier or at the distribution level). 2.4 The Burden of Proof Paragraph 46 of the Commission's Guidelines on the application of Article 81(3) acknowledges that Article 81(3) does not exclude a priori any type of agreement from its scope, whilst recognising that severe restrictions are unlikely to fulfil the conditions of Article 81(3). The draft Guidelines appear to go further, stipulating (at paras. 47, 92 and 219) that the inclusion of a hardcore restriction will give rise to a presumption that Article 81(3) is inapplicable. Only if Article 81(3) evidence is adduced, will the Commission be required to assess - and not just presume - the likely negative effects on the market before making an Article 81(3) assessment. This approach undermines the assurances elsewhere in the draft Guidelines that the parties are 6

7 free to put forward evidence to show that these restraints satisfy the conditions of Article 81(3). It would perhaps be appropriate if the hardcore list were limited to absolute territorial protection (where there is no substantial investment to justify a restriction on passive sales) and harmful resale price maintenance but, unfortunately, the hardcore list is longer than this and the current proposals, if adopted, would lengthen it further. Given that the current Commission Notice on the Application of Article 81(3) suggests that, in the context of vertical agreements, only resale price maintenance and absolute territorial protection should be considered as restrictions by object (paragraph 23), the proposed verticals Guidelines should expressly stipulate that other restraints will be subject to an effects-based analysis. The current proposals will lead to a more restrictive outcome for businesses, without a clear economics based rationale. The draft Guidelines should be amended to reflect the fact that while the inclusion of a hardcore restriction precludes the application of the VRBE, there should be no legal presumption operating against the parties. The Court of First Instance in the GSK case (Case T-168/01) currently under appeal has warned of the dangers of reaching presumptive conclusions without taking due account of the legal and economic context of the case at hand, including the impact of regulatory intervention on innovation incentives and the need to protect dynamic competition in the long run, and including the relevance of efficiencies on the basis of indirect effects.3 These are factors that are of particular relevance to all innovative sectors. AmCham EU calls on the Commission to limit the scope of the list of hardcore restraints in the Regulation and to clearly specify the obligation on competition authorities to fully assess the evidence of competitive harm versus claimed efficiencies in the specific circumstances of each case. 2.5 Active and Passive Sales The final sentence of paragraph 51 indicates that general advertising and promotion will be considered as passive selling if it would be attractive for the buyer to undertake these investments also if they would not reach customers in other distributor (exclusive) territories or customer groups. This added qualification is unhelpful as it adds greater uncertainty to the active/passive distinction. It would instead be helpful if the Commission gave specific examples of the kinds of advertising that will be considered as active or passive selling. AmCham EU welcomes the acknowledgement in Paragraph 56 that certain passive selling restrictions will not come within the scope of Article 81(1). However, the Commission should provide specific examples to reduce legal uncertainty in this area. 3 Advocate General Trstenjak in an opinion of 30 June 2009 (Case C-501/06) has concurred that in a case where certain circumstances [the pharmaceutical regulatory environment] could reduce the debit side of the overall assessment in terms of competition to be carried out under Article 81(3) EC, the examination of the likelihood of an appreciable objective advantage as the credit side must be undertaken with particular care (para 211). 7

8 2.6 Online Sales The distinction between active and passive selling in the online context is outdated, and the Commission should categorise online sales as being active, save in exceptional circumstances, to reflect technological developments. Under the current rules AmCham EU takes the view that, in certain circumstances, a requirement that a dealer sell a proportion of its total sales through a brick and mortar store and that dual pricing, the practice of charging a reseller a different price depending on whether the product is sold online or offline are lawful practices. Paragraph 52 of the draft Guidelines purport to blacklist such provisions as per se restrictions of competition that are presumptively unlawful. No explanation for this apparent change of policy is provided. Footnote 29 recognises that the supplier can require a certain absolute amount to be sold off-line for as long as there is no limitation on the quantity sold online. However, one may query whether this approach is justifiable in relation to a supplier that has a marginal market share and where the product is an experience product where the supplier wants the consumer to benefit from direct contact with the product before purchasing. Footnote 30 recognises that a supplier may wish to offer a buyer a "fixed fee" to support its off-line sales efforts which implicitly requires evidence that any price differentials between offline and online sales can be traced back to underlying cost differentials between the distribution models. This is a potentially significant administrative burden, not least because a supplier will not have precise information on its distributors' costs. If the most efficient way to allocate funds to ensure continued investment in the physical retail environment is to introduce a price differential then, in the absence of market power, a supplier should be free to do so for as long as the difference is not such as to effectively prevent online sales. The Commission should take a more nuanced approach to efforts by suppliers to ensure an adequate physical retail presence and to ensure that pure online retailers do not engage in practices that unduly damage their brand equity4 by imposing certain online selling criteria. 2.7 The Dangerous Substances Exception Paragraph 50 recognises that a prohibition requiring distributors not to sell dangerous products to certain customers is likely to be objectively necessary and thus fall outside of Article 81(1). Whereas the current Guidelines refer to a general ban, the draft Guidelines refer to a public ban. The latter appears potentially more restrictive than the former, and no explanation is given for the change of wording. In addition, the draft Guidelines appear to introduce a new requirement, that such a public ban should not restrict competition that would take place in its absence. It is unclear how a prohibition imposed on distributors to sell certain dangerous goods actively and passively to certain end users could be said not to be restrictive of competition in the market for those goods. 4 We refer to the OFT s recent announcement of its plans to launch a market study focusing especially on advertising and pricing practices online (and offline) such as the use of drip pricing tactics, baiting sales, sales prices advertised against high referencing pricing, etc. See Advertising and Pricing market study Q&As. See also the results of the EU-wide sweep on websites selling consumer electronic goods published on 9 September

9 AmCham EU is concerned that these changes will in practice render this exception entirely moot Guidance on Up-front Access Payments and Category Management Agreements Upfront Access Payments AmCham EU welcomes the Commission s acknowledgement in paragraphs 203 and 204 of the draft Guidelines that upfront access payments in many cases contribute to allocative efficiency. However, it is concerned that much of the description of the potential anti-competitive effects of such payments is somewhat abstract, creating a risk of legal uncertainty. This is especially worrying given that upfront access payments (and other payments made by suppliers to retailers, including slotting allowances and pay to stay fees) represent common business practices in several sectors. Further guidance from the Commission as to the circumstances in which such payments are likely to be problematic (preferably with examples) would be most welcome Category Management Agreements AmCham EU welcomes the acknowledgement by the Commission that the use of category management agreements can lead to efficiencies and therefore be pro-competitive (paragraph 209). However, there is a risk that the draft Guidelines overstate the risk of anti-competitive foreclosure of other suppliers. This is because a risk of foreclosure only really arises where a retailer gives up total control of a category to a category captain (thus enabling the captain to act to exclude competitors products). However, in reality, retailers normally remain in ultimate control of the products they stock, with the power to list and de-list products as they see fit. AmCham EU suggests that the Commission consider revising paragraph 206 of the draft Guidelines to reflect this. AmCham EU speaks for American companies committed to Europe on trade, investment and competitiveness issues. It aims to ensure a growth-orientated business and investment climate in Europe. AmCham EU facilitates the resolution of transatlantic issues that impact business and plays a role in creating better understanding of EU and US positions on business matters. Aggregate US investment in Europe totalled $1.8 trillion ( 1.24 trillion) in 2008 and currently supports 4.8 million direct jobs in Europe. 1 Please note that these comments are without prejudice to the views of the members of AmCham EU as regards the review of the Motor Vehicles Block Exemption. 2 ebay Group does not support the position set out in this paper. 9