Vertical Restraints: The Proposed Amendments to the Block Exemption Regulation And Guidelines Henriette Tielemans htielemans@cov.com + 32 2 549 52 52 David Hull dhull@cov.com + 32 2 549 52 35 Miranda Cole mcole@cov.com + 32 2 549 52 64
David Hull Partner, Covington & Burling LLP Tel: +32.2.549.5235 Email: dhull@cov.com David Hull is a partner in the firm's Brussels office and is head of its EU competition practice. He began practising EU competition law in 1984. He represents clients before the European Commission and EU courts in Luxembourg and advises them on all aspects of competition law. In the field of distribution law, he has deep experience in advising clients on the structuring of their pan-european distribution networks, and dealing with the full range of competition issues that they face, including parallel trade, pricing, non-competes, exclusivity and supply quotas. 2
Henriette Tielemans Partner, Covington & Burling LLP Tel: +32.2.549.5252 Email: htielemans@cov.com Henriette Tielemans is a partner in the firm s Brussels office who specializes in European distribution and franchising law, and European commercial matters. Ms. Tielemans regularly advises multinationals on all aspects of distribution and licensing, including commercial law aspects such as termination rights and dispute regulation mechanisms. The EC Block Exemption on Vertical Restraints, the EC Block Exemption on motor vehicles, price discrimination, warranty issues, parallel trade, retention of title issues, sales to grey traders or outside of allocated territories, no-competes, goodwill indemnities upon termination or expiry of the agreement, and market dominance, are only a handful of issues on which Ms. Tielemans regularly advises. Ms. Tielemans has particular expertise in structuring pan-european franchise networks, including registration of franchisors and pre-contractual disclosure requirements in a number of EU Member States. 3
Miranda Cole Special Counsel, Covington & Burling LLP Tel: +32.2.549.5264 Email: mcole@cov.com Miranda Cole is a special counsel based in the firm s Brussels office. She practices competition and communications law and policy, and has more than 15 years of experience in the field. Ms. Cole s competition law expertise encompasses merger control, actions under Article 102 EC, advisory work and actions before the European courts in Luxembourg. She has advised on over 55 mergers over the last five years, and has expertise in advising companies active in the technology and communications sectors. In addition, she has extensive experience in the communications sector, across all aspects of regulation, policy and competition law relating to the sector, and counselling relating to the impact of regulation on transactions. 4
Overview Introduction to The Current Rules Significant Proposed Changes Definition of Agreement 30% Buyer Market Share Threshold Resale Price Maintenance Online Sales 5
Legislative Framework Article 101 of the Treaty: prohibits anticompetitive agreements and concerted practices Article 102 of the Treaty: prohibits abuse of dominance Block Exemption on Vertical Restraints (Reg. No. 2790/1999) + detailed Guidelines Came into effect in 2000 and expires in May 2010 Applies to all distribution agreements where the supplier has less than 30% of the market 6
Block Exemption on Vertical Restraints Deals with restrictions that suppliers put on their supply chains (wholesale and retail) Does not tell you what you can put in your distribution agreement Tells you what you cannot put in the agreement (hard core restrictions) Agreement null and void + fines 7
Choices to be made Direct Sales Agency Franchise System Open System Selective Distribution Exclusive Distribution 8
Choosing the Right System for You: What is Your Greatest Concern? Maximum control of your retail chain? Sales by unauthorized resellers? Geographical concerns? 9
Whatever You Do, Do It EU Wide Avoid mixing systems Avoid white areas 10
Things You Are Always Allowed to Do (below the 30% market share threshold) Exclusive distribution system: Respect (limited) exclusivity granted to another distributor (active sales) Respect customer allocation (active sales) Ban competing products (max five years) Selective distribution system: Restrict sales to grey traders Location restriction Ban competing products (max five years) 11
Things You Are Never Allowed To Do Exclusive distribution system: Resale price maintenance (directly or indirectly) Restrict passive sales throughout the EU/EEA Restrict the "buyer of your buyer" -no cascade control (explains increasing elimination of third party wholesale function) Selective distribution system: Resale price maintenance (directly or indirectly) Restrict any sales in the EU/EEA (passive or active) Exclusive supply obligation 12
DON'TS (examples) No sales "outside the Territory" No sales to XYZ or certain categories of retailers (supermarkets) Different supply prices depending on location of end Customer Variable bonus rewarding local sales Monitoring system with penalties No internet sales 13
The Proposed Revisions 14
Timeline of the Revision Process July 28, 2009: Commission publishes draft revision to the Block Exemption Regulation and Guidelines and solicits comments by the end of September 2009. Late 2009 - Early 2010: Planned adoption of new rules by existing or new Commission. 31 May 2010: Expiration of the current Block Exemption Regulation. 15
Significant Proposed Changes Definition of a vertical agreement The 30% buyer market share threshold Resale price maintenance Category management Upfront access payments Online sales 16
Definition of a Vertical Agreement Why does it matter in practice? Unilateral acts by a non-dominant supplier fall outside scope of competition rules Most prominent example: supply quota systems where a supplier limits the amount of product available to its distributor in an attempt to cut down on parallel trade Widespread use in pharma sector, but can also be used in other sectors 17
Definition of a Vertical Agreement In case there is no explicit agreement the Commission will have to prove that the unilateral policy of one party receives the [explicit or tacit] acquiescence of the other party For instance, if after a supplier's announcement of a unilateral reduction of supplies in order to prevent parallel trade, distributors reduce immediately their orders and stop engaging in parallel trade, then those distributors tacitly acquiesce to the supplier's unilateral policy. Draft Guidelines on Vertical Restraints, 25 If the supplier doesn t need the compliance of the distributor, why is the distributor s compliance or refusal relevant? The fact that the distributor stops engaging in parallel trade does not necessarily mean that it agrees with the supplier s policy it may simply no longer have enough product available for export. 18
The 30% Buyer Market Share Threshold 19
The 30% Buyer Market Share Threshold The new requirement under the draft Block Exemption the market share of the buyer may not exceed 30%. The Commission is concerned about anticompetitive restrictions imposed by strong buyers (e.g. supermarkets). This requirement creates uncertainty for suppliers: How do you determine the buyer s market share? Even small buyers may be above the threshold in small markets. 20
Resale Price Maintenance 21
Resale Price Maintenance Resale price maintenance remains a hardcore restriction under the draft Block Exemption. Nevertheless, resale price maintenance may be justifiable in certain circumstances: Entry of a new product or entry of an existing product into a new market Avoiding sales as a loss leader Supporting short-term low-price sales campaigns 22
Category Management Agreements Retailer Category Captain 23
Category Management Agreements Agreements for the appointment of a category captain are block exempted below the market share thresholds. Above the thresholds, the Commission will look to whether such agreements result in the foreclosure of other suppliers or unlawful collusion among competitors. Even below the threshold, it is important that parties do not use their role as category captain to collude with competitors or exchange sensitive information with competitors. 24
Upfront Access Payments 25
Upfront Access Payments Upfront access payments include shelving fees, payto-stay fees, payments for access to distributor/ retailer promotion campaigns. Agreements providing for upfront access payments are block exempted below the market share thresholds. Above the thresholds, the Commission is concerned that such payments will foreclose other distributors/retailers or smaller suppliers. 26
Online Sales 27
Growth of online commerce (and ads) Online commerce increasingly significant: EU17 online retail revenues forecast to hit 203 billion by 2014, up from approximately 118 billion in 2008 [Forrester] while ca. 25% growth rates (seen until 2005) slowing, only slowing to ca. 8-10% - still not bad B2B and C2C ecommerce forecast to continue growing at over 10%. 28
Growth of online commerce (and ads) Online advertising also growing (in absolute terms and as proportion of all advertising): ongoing shift from traditional to online media [Randall Rothenberg, IAB] 2009 estimated share of online ad spend [IAB, emarketer] As proportion of total spend: UK 30% Spain 11% Italy 8% Germany 14% France 12% In absolute terms: UK 3.4 billion Spain 0.7 billion Italy 0.8 billion Germany 3.1 billion France 1.9 billion 29
What are online ads? Something more than just email? search ads natural/organic/classified ads Search ads Search ads Search ads Natural/organic ads Natural/organic ads 30
What are online ads? contextual ads Contextual ads Contextual ads 31
What are online ads? banner/display ads Banner ad Banner ad 32
The role of ad exchanges Search/contextual ads Search terms/page content matched to key words (& other target specifications) Ad exchange finds ads that match key words Auction performed and ads shown Model now used for banner/display ads page publisher tells exchange the page has space, and provides information about the user (based on past online activity, shopping habits etc) Advertisers bid on space (bids depending on user, time of day etc) Winners ad slotted into page User clicks on ad, and advertiser pays 33
The role of ad exchanges Advertisers can target ads by: language location (country, region, global) selecting sites (advertiser searches for sites to target) demographically-selected sites (generally using comscore panel data) Advertisers choose key words (as many as they choose) and write ads around those words Advertisers set budget (including maximum amount per click (for search ads, managed and automated content placements) Advertisers select bidding option (e.g., focus on clicks) 34
The Block Exemption and online ads The hardcore restrictions include a restriction by the supplier of the territory into which/customers to whom, a buyer may sell except to restrict active sales into the exclusive territory/to exclusive customers reserved to another buyer/the supplier (where the restriction does not limit sales by the buyer s customers) The active / passive distinction is the key restricting passive selling brings the entire agreement down 35
The Guidelines and online ads - today Para. 50 General advertising on the Internet that reaches customers in other distributors exclusive territories/customer groups but which is a reasonable way to reach customers outside those territories/groups are passive sales. Para. 51 A web site that is not specifically targeted at customers primarily inside another s territory/customer group (e.g., with banners/links specifically available to those customers) it is not a form of active selling. Unsolicited emails sent to customers (or groups) are active selling. A supplier cannot reserve to itself Internet sales and/or advertising. 36
The Guidelines and online ads - proposed Para. 51 General advertising on the Internet that reaches customers in other distributors exclusive territories/customer groups but which is a reasonable way to reach customers outside those territories/groups are passive sales. General advertising is a reasonable way to reach such customers if it would be attractive (for the buyer) to make these investments if they would not reach customers in other distributors exclusive territories/groups. Para. 52 Every distributor must be free to use the Internet to advertise or sell. A restriction could only be compatible with the VBER to the extent that promotion on/sales over the Internet would lead to active selling in/to another s territory/customers. Generally, the Internet is not active selling, since it is a reasonable way to reach every customer. The fact that it may have effects outside territory/customer groups results from the technology. 37
The Guidelines and online ads - proposed Para. 52 cont d. If a customer visits a site and contacts the distributor, that is passive selling. Language used on the website/in communication plays no role. The following are hardcore restrictions of passive selling by exclusive distributors: requiring them to prevent customers in one territory from viewing websites in another requiring them to automatically reroute such customers to others sites requiring them to terminate transactions once credit card data reveals an address outside the distributor s territory. Para. 53 Generally, a website is not considered to be a form of active selling to certain customers unless it is specifically targeted at these customers (e.g., online advertisement specifically addressed to certain customers is a form of active selling to those customers). 38
Are online ads active or passive selling? Guidelines (current and proposed) focus on online sales made to customers who navigate directly to sites Internet ads that are a reasonable way to reach customers outside others exclusive territories are a reasonable way to reach customers, and are passive selling Proposed Guidelines acknowledge that online promotion can be active, but para. 53 suggests that this is only the case when online ads are specifically addressed to certain customers. Are key word-based search, contextual and display/banner ads specifically addressed to the searcher/reader? They are (can be) bid on individually, reflecting: language location past online activity (including shopping habits) time demographics 39
Are online ads active or passive selling? Underlying principles: A supplier cannot reserve Internet advertising to itself Distributors must be free to use the Internet to advertise Take a Belgian (exclusive) distributor bidding on German search ads (where Germany is reserved to another exclusive distributor/supplier): If search and banner ads are active selling, can suppliers limit exclusive buyers from buying ads in territories reserved to another buyer/the supplier given the growth of such targeted advertising, would this be consistent with the underlying principles? If search and banner ads are passive selling, are all restrictions hardcore (such that a restriction on buying ads in territories reserved to another buyer/the supplier would nullify the entire agreement) or are there only specific restrictions that would do so (as per para. 52)? 40
QUESTIONS? You may join the queue to ask a question by pressing 14 now You can withdraw your question by pressing 13 at any time 41
Thank you David Hull dhull@cov.com Henriette Tielemans htielemans@cov.com Miranda Cole mcole@cov.com 42