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Brussels, 24 May 2000

Commission finalises new competition rules for distribution

The European Commission has put into place today the last building block of its new competition rules concerning supply and distribution agreements. It approved a set of Guidelines on "Vertical Restraints" which complement the new Block Exemption Regulation decided in December 1999.(1) Guidelines and Block Exemption Regulation together form the basis for a more economic and less regulatory competition policy towards "vertical agreements". These are agreements for the sale or purchase of goods or services between companies operating at different levels of the production or distribution chain. The reform mainly concerns industrial supply agreements, exclusive and selective distribution agreements, franchising agreements and single branding agreements in, for instance, the beer and petrol sectors. Such agreements are vital to the functioning of the economy. This reform of a key area of competition policy is part of the wider review undertaken by the Commission to modernise its rules on competition.(2)

"This important reform confirms the commitment of the Commission to review and modernise the Community rules on competition", Commissioner Mario Monti stated. "The aim is to simplify our rules and reduce the regulatory burden for companies, while ensuring a more effective control of vertical restraints implemented by companies holding significant market power. This will allow the Commission to concentrate in the future on important cases, in co-operation with the Member States, who will play an increased role in the application of Community competition rules".

The new rules will apply from 1 June 2000 and replace three old Block Exemption Regulations applicable to exclusive distribution, exclusive purchasing and franchising agreements respectively(3). Existing agreements will continue to benefit from the old Block Exemption Regulations until the end of 2001. The block exemption regulation for motor vehicle distribution and servicing agreements which expires in September 2002 is not affected by the new rules.

"Vertical agreements" may contain certain restrictions to competition which, in the absence of significant market power by the companies involved, nevertheless generally improve production and distribution of the goods and services concerned. However, such agreements can also have negative effects on the market, in particular by partitioning markets or by foreclosing markets.

The new rules embody a shift from the formalistic regulatory approach underlying the old legislation towards a more economic approach in the assessment of vertical agreements under the EU competition rules. The basic aim of this new approach is to simplify the rules applicable to supply and distribution agreements and to reduce the regulatory burden, especially for companies lacking market power like SMEs, while ensuring a more effective control of agreements entered into by companies holding significant market power. The new policy is based on a single Regulation with a wide scope of application, which block-exempts supply and distribution agreements concerning final and intermediary goods as well as services. The new Block Exemption Regulation allows companies whose market share is below 30% to benefit from a so-called safe harbour under the Community competition rules.

The safe harbour below 30% market share offers companies the freedom to create supply and distribution arrangements best suited to their individual commercial interests and to adapt to the changing economic conditions. However, the Block Exemption Regulation does not apply to two sets of restrictions.

The first set concerns the so-called hard-core restrictions. Companies are not allowed to use these restrictions in their agreements. In particular:

  • a producer may not impose on its distributors at which price to resell its products. However, maximum and recommended prices are normally permissible.

  • a producer may not restrict its distributors selling to any customer if it is an unsolicited order (passive sales). This means that each distributor must be free to respond to a request for the product or service made by any customer inside the Community. Distributors must be left free to also use the Internet to respond to such requests.

  • a producer applying a selective distribution system, for instance in the field of cosmetics, may neither restrict active nor restrict passive selling by the authorised distributors to end-users or other authorised distributors.

  • a producer buying components for incorporation in its own products, for instance a component for the manufacture of a household appliance, may not prevent the supplier of the components from selling these as spare parts to end-users or independent repairers.

These restrictions are prohibited in order to maintain free price competition between distributors for the benefit of consumers and to guarantee the consumers' right to purchase goods and services wherever they want inside the Community. The Commission will strictly enforce these prohibition rules that can also be applied directly by national competition authorities and national courts. Violations of these rules can be fined and give rise to claims of damages.

The second set of restrictions not covered by the new Regulation concerns certain restrictions which are not exempted but which may under certain circumstances nonetheless be compatible with the EC competition rules. The most important concerns non-compete obligations - requiring distributors to resell only the brands of one supplier - when their duration exceeds five years. Such agreements are not covered by the new Block Exemption Regulation as they may have a strong foreclosing effect on the market. In the Guidelines it is described under which circumstances long-term investments may justify a longer duration of non-compete obligations.

Above the 30% market share threshold, vertical agreements will not be covered by the new Block Exemption Regulation, but are not automatically presumed to be illegal either. They may require an individual examination under Article 81 of the Treaty which spells out the conditions under which agreements between companies may be exempted from EC competition rules. Companies in that situation are asked to do a self-assessment of the possible consequences of their vertical agreements under the law. The Guidelines assist them in carrying out such an assessment under the EC competition rules.

Background

It should be recalled that the new competition rules are the result of an in-depth policy review the main steps of which were the publication of a Green Paper in January 1997 and the publication, in September 1998, of a Communication on the application of EC competition rules to vertical restraints.(4) The wide ranging consultation assisted the Commission to set out in the latter document the framework for the proposed policy reform.

The Guidelines assist companies in carrying out their own assessment under the EC competition rules by explaining:

  • which vertical agreements generally do not distort competition and therefore fall outside Article 81(1). This concerns in particular agreements between SMEs, true agency agreements and agreements where neither the supplier nor the buyer holds a significant degree of market power;

  • which vertical agreements benefit from the safe harbour created by the Block Exemption Regulation. This is achieved by describing the conditions for application of the Block Exemption Regulation;

  • which circumstances may require the benefit of the Block Exemption Regulation to be withdrawn by the Commission or Member States authorities;

  • a number of market definition and market share calculation issues that may arise when companies apply the 30% market share threshold for application of the Block Exemption Regulation;

  • the enforcement policy of the Commission in cases not covered by the Block Exemption Regulation. A general framework of analysis is provided and this framework of analysis is applied to the most important specific vertical restraints, such as single branding, exclusive distribution and selective distribution.

The new policy will increase the freedom to contract, especially for small and medium sized companies and generally for companies without market power. It will take away the strait-jacket imposed by the old Block Exemption Regulations.

The guidelines will be revised in four years time in view of market developments and experience gathered by the Commission in applying the new policy.

As regards the automobile sector, it should be recalled that, at the time when this policy review exercise was launched in 1997, the Block Exemption Regulation No 1475/95 concerning car distribution had been in force for only two years. Furthermore, the car Regulation expires on the 30.09.2002, i.e. later than the old Block Exemption Regulations on exclusive distribution, exclusive purchasing and franchising. The Commission decided therefore to exclude this sector from the current policy review. During the discussions before the Council on the Commission's proposals in the field of vertical restraints, Member States were concerned not to prejudge the choice of the future exemption regime for car distribution. Thus, the Commission formally undertook to consult the Advisory Committee and industry immediately after having established an ad hoc report pursuant to Article 11 of Regulation n° 1475/95 (which is due by the end of 2000) and before deciding on the future exemption regime for the car sector.

The texts of the new Block Exemption Regulation and of the Guidelines are available on the internet at the following address:

http://ec.europa.eu/dg04/lawenten/en/entente3.htm#iii_1

(1) Commission Regulation (EC) No 2790/1999 of 22 December 1999 on the application of Article 81(3) of the Treaty to categories of vertical agreements and concerted practices, OJ L 336, 29.12.1999, p. 21-25.

(2) See in particular the plans of the Commission to modernize the procedural aspects of EC competition policy (Commission White Paper) and its review of EC competition policy towards horizontal agreements (OJ C 118, 27.4.2000).

(3) Commission Regulations (EEC) No 1983/83, OJ L 173, 30.6.1983, p. 1, (EEC) No 1984/83, OJ L 173, 30.6.1983, p. 5, and (EEC) No 4087/88, OJ L 359, 28.12.1988, p. 46.

(4) Respectively published as documents COM (96) 721 final and COM (98) 544 final.


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