COMMENTS ON THE REVIEW OF COMPETITION RULES FOR THE DISTRIBUTION SECTOR

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1 COMMENTS ON THE REVIEW OF COMPETITION RULES FOR THE DISTRIBUTION SECTOR Contributors: Luca Toffoletti (Partner and head of antitrust practice Milan Office); Bernard O Connor (Partner - Brussels Office); Domenico Gullo (Salary Partner - Rome Office); Emilio De Giorgi (Salary Partner - London Office) NCTM is a 300+ attorneys law firm with offices in Milan, Rome, Verona, Brussels and London. It has a widely recognized antitrust practice which covers all offices. ROMA Via Bissolati,76 Via di Monserrato, I 87 Roma 00 I 86 Roma tei tei Fax fax VERONA Stradone Porta Palio, Verona tei Гах BRUXELLES Rue de Spa, Bruxelles tei. +32 (0) Fax +32 (0) LONDON St Michael's I louse I George Yard, Lombard Street EC3V 9DF London Lei. +44 (0) fax +44 (0) Lo studio opera nel Regno Unito come NGTM LLP e in Belgio come NCTM Association d'avocats. L'elenco soci è disponibile presso;

2 COMMENTS ON THE REVIEW OF COMPETITION RULES FOR THE DISTRIBUTION SECTOR NCTM welcomes the opportunity to comment on the Commission s proposal for a revised Block Exemption Regulation (the Regulation ) and Guidelines on supply and distribution agreements (the Guidelines ). Our competition practice is frequently called on to advise clients active in both manufacture and distribution level. On the basis of this experience we set out in this response some comments we hope will be of assistance to the Commission in formulating the new framework for the assessment of vertical restraints. Our review does not purport to be exhaustive. As requested in the invitation to participate to the consultation, we focus our response on the Commission s suggested approach to buyers market power and restrictions on on-line sales. We conclude with a number of remarks on other aspects of the proposed draft Guidelines. 1. Buyers market power and modification of the rule on the market share The draft of the Regulation provides that for an exemption to apply the markets share held by each of the undertakings party to the agreement does not exceed 30% on any market affected by the agreement. This is the main amendment to the system currently in force. Its goal is to reflect increases in large distributors market power. The market share rule is widely used in the exemption regulations. It is considered that a rule based on a market share threshold gives legal certainty. The undertakings and the antitrust authorities should be not forced to perform complex economic analysis of benefits and anticcompetitive effects of every agreement. Moreover, the market shares rule would satisfy the need to focus on the economic effects of restraints rather than on their contractual form. However a market share rule approach may not be able to effectively achieve either of these two goals and the amended rule only amplifies the problem. As to the legal certainty, from the adoption of the Regulation and the Guidelines in 1999, the undertakings have found it difficult to assess their market shares and determine whether the relevant threshold is satisfied. The main problem is usually the definition of the relevant market especially when the parties are active in sectors that have never been the subject of examination by the Commission or by any national antitrust authority. Under the new system, the assessment of whether the threshold is met is even more complicated. In the most common scenario where an agreement containing a non-compete obligation is at issue not only the supplier s market share must be considered, but also the buyer s share. The new Guidelines now specify that the market(s) where it [the buyer] (re)sells the contract products must be considered. It is likely that in a number of cases the supplier lacks the necessary information to assess whether the restriction may benefit from the exemption. Usually the seller is a manufacturer not active in the downstream markets. The evaluation can be even more complicated when the distribution agreement relates to 2

3 intermediate products in sectors where vertically integrated undertakings operate. In addition to the practical difficulties concerning the calculation of the market share, the new provision requires some clarifications. The proposed Guidelines expressly refer to the necessity to consider the market(s) more than one where the buyer resells the contractual products. The typical case will be a seller that supplies to the buyer a range of products, where each product belongs to a different relevant product market. Another possibility is that the buyer is active in several relevant geographic markets. This is common at the retail level where the relevant geographic markets have local dimensions. It is possible that the buyer will have a market share greater than 30% only in one geographic market and well below the relevant threshold in all other markets where it operates. In such a situation it is not clear whether the agreement would still benefit from the exemption. If the answer is negative it may be that a relevant number of agreements will not be covered by the exemption leaving the undertakings in the difficult position to assess whether the agreement may benefit from exemption under Article 81(3). As to the economic effects, the use of a market share threshold is based on the belief that market share analysis is a reliable indicator of market power. The fact that an undertaking has a market share greater than 30% would reflect that it has a certain degree of market power and therefore it would be undesirable that it may benefit from automatic exemption. As acknowledged by the Commission in the communication on the enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings, market share analysis is a crude method to evaluate market power, and instead other factors should be taken into account. The competitive structure of the market, the dynamics of the market, the degree of product differentiation, barriers to entry and potential competitors are the main elements usually considered to assess market power. Such elements are not included in the Regulation and the result may be an over-emphasis on market share analysis. This problem already apparent in the current version of the Regulation may become exacerbated if the market share analysis is extended to the buyer. The risk is that too many agreements will lose the benefit of the general exemption in situations where the parties do not have effective market power but have shares greater than 30% in some relevant market. 2. Restrictions on on-line sales We welcome and support the efforts of the Commission to clarify the notion of passive sales in relation to internet sales. One of the restrictions that under the new system will be treated as a hardcore restrictions of passive selling is limiting the proportion of overall sales made by the distributor over the internet (para 52). Footnote 29 specifies that suppliers can, however, require that the distributor sells at least [a] certain absolute amount (in value or in volume) of the products off-line to ensure an efficient operation of its brick and mortar shop. Despite the fact that the provision stating that such request shall not limit the online sales of the distributor, in practice the supplier may achieve this effect by fixing an absolute amount at such 3

4 levels to limit the freedom of the buyer to resell the contractual products on-line. The likely result is that the antitrust authorities and the Courts will be involved in complicated disputes on the amount necessary to ensure the efficient operation of the brick and mortar shop in order to establish whether the requirement imposed by the supplier has to be treated as a hardcore restriction of passive selling. 3. Vertical agreements and concerted practices The new para. 25 of the proposed version of the Guidelines clarifies the notion of vertical agreements. In this respect one of the main issues is to identify when the collaboration between a manufacturer and one or more distributors to identify and prevent parallel imports and protect distributors from price competition may give rise to a concerted practice under Art. 81. One of the defences used by manufactures is that the alleged violation is an unilateral conduct which could infringe the competition rules solely if the manufacturer is in a position of dominance. In Bayer, the Commission qualified the conduct of the manufacturer and its wholesalers as constituting an agreement within the meaning of Article 81. The ECJ set aside the Commission s decision concluding that the Bayer s policy of reducing exports was an unilateral conduct that could be punished only when undertakings occupy a dominant position. The ECJ specified the elements to be satisfied for a conduct to be qualified as an agreement within the meaning of Article 81. Specifically, the ECJ emphasised the need for the subsequent acquiescence with measures adopted by the manufacturer. In other words, it is necessary that the restrictions imposed by the supplier have been tacitly accepted by the wholesalers. The new para. 25 could be interpreted as being inconsistent with Bayer where it states 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 this system allows the supplier to implement in practice its policy. The mere fact that the distributors are not able to react effectively to the system of restrictions and controls adopted by the manufacturer does not seem sufficient under Bayer to qualify the conduct of the parties as an agreement relevant for the application of Article 81. A wider interpretation of the notion of agreement to vertical agreement could lead to extend the prohibition of restrictive unilateral conduct in cases where the undertakings are not in dominant position. As suggested by some commentators, a better approach to protect the gray-market (parallel) could be the use of the notion of concerted practice. The Bayer decision does not explore this issue which should deserve a careful analysis. 4. Agency agreements The treatment of exclusive agency under the proposed Guidelines seems to be in conflict with the notion of the genuine agent as established by the ECJ. As noted by some commentators, in Suiker Unie and in Volkswagen the ECJ stressed the necessity that a genuine agent, as well as not bearing certain significant risks resulting from the contracts negotiated on behalf of the principal, operate as auxiliary organs forming an integral part of the principal s undertaking. In the recent CEPSA decision the ECJ stated that: it is 4

5 clear, however, from the case-law that agents can lose their character as independent traders only if they do not bear any of the risks resulting from the contracts negotiated on behalf of the principal and they operate as auxiliary organs forming an integral part of the principal s undertaking. In the new para 19, the proposed Guidelines states that exclusive agency provisions will in general not lead to anti-competitive effects. This statement assumes that there are certain cases where an exclusive agency agreement may have anti-competitive effects. Such a conclusion could be in contradiction with the case law of the ECJ under which the circumstance that the agent operates for only one principal is considered an essential element of genuine agency and as such prevents the application of Article 81. September 28,