On 20 April 2010, the European Commission published a new block exemption regulation for vertical agreements (“the new Regulation”), together with detailed guidelines (“the new Guidelines”) designed to assist companies and their legal advisers in applying the new rules.  The new Regulation, which will enter into force on 1 June 2010, will replace the previous block exemption regulation for vertical agreements which has been in force for the past ten years. 

 

“Vertical agreements” are agreements for the sale and purchase of goods or services which are entered into between companies operating at different levels of the production or distribution chain (e.g. distribution agreements between manufacturers and wholesalers or between wholesalers and retailers).  For the purposes of the block exemption, the parties to a vertical agreement are referred to as the “supplier” and the “buyer” or as the “supplier” and the “distributor”. 

 

The principal changes contained in the new Regulation and Guidelines relate to the introduction of a new buyer’s market share threshold and the adoption of new rules relating to internet sales.  In most other respects, the approach adopted by the Commission is broadly similar to that set out in the previous block exemption regime.

 

 

EU and Irish competition law prohibit agreements which prevent, restrict or distort competition.  The EU prohibition is contained in Article 101 of the Treaty on the Functioning of the European Union (TFEU), while the Irish prohibition is contained in Section 4 of the Competition Act 2002.  However, both EU and Irish competition law provide a block exemption from the application of the competition rules to certain types of vertical agreement, provided certain conditions are satisfied.  If an agreement satisfies the conditions set out in the block exemption, it will be exempted from the prohibition on anti-competitive agreements set out in Article 101 TFEU and/or Section 4 of the Competition Act 2002.

 

In the case of vertical agreements falling within the scope of EU competition law (i.e. where the agreement has an actual or potential effect on trade between EU Member States), the relevant block exemption was set out in Regulation 2790/1999 and in the Commission’s Guidelines on Vertical Restraints - which is due to be replaced by the new Regulation and Guidelines with effect from 1 June 2010.  In the case of agreements which only produce actual or potential effects on markets in Ireland, the relevant block exemption is currently contained in the Irish Competition Authority’s 2003 Notice and Declaration in Respect of Vertical Agreements and Concerted Practices.

 

 

Prior to adopting the new Regulation, the Commission conducted a consultation process which revealed that the vast majority of interested parties believed that the existing block exemption regulation, introduced in 2000, had worked very well in practice.  As a result, the new Regulation retains most of the elements of the previous regime: 

 

 

 

While retaining most of the features of the previous regime, the new Regulation introduces two important new changes:

 

 

Under the new Regulation, the block exemption will not apply unless the market shares of both the supplier and the buyer do not exceed 30%.  Under the previous rules, the 30% market share cap applied only to the supplier; no account was taken of the buyer’s market share.  The new rules take into account the fact that some buyers (typically large retailers and distributors) – and not only suppliers – may also have market power with potentially negative effects on competition.

 

It should be noted that if the market share of the supplier and/or the buyer exceeds 30% (and if the agreement contains no blacklisted restrictions), there is no presumption of illegality; it simply means that the agreement will not benefit from the protection afforded by the block exemption and will require detailed individual examination in order to determine whether its pro-competitive benefits outweigh any anti-competitive effects. 

 

 

The previous block exemption regulation and guidelines entered into force in 2000 and contained only limited references to the distribution of products via the internet.  With the growth in online sales that has occurred over the past ten years, it became necessary for the Commission to respond with more detailed guidance on the application of the block exemption regime to online sales.

 

The new Regulation maintains the distinction between active and passive sales, stipulating that a supplier may ban a distributor from making active (but not passive) sales into an exclusive territory or to an exclusive customer group which has been reserved to the supplier or allocated by the supplier to another distributor.  In recent years, debate had arisen as to the extent to which selling online could be deemed to constitute “active” or “passive” sales. 

 

The new Guidelines clarify that, in general, the fact that a distributor has a website is considered a form of passive selling which cannot be restricted in any way, notwithstanding the fact that the website may have effects outside the distributor’s territory or customer group.  Passive selling is stated to include: (i) customers visiting a website, contacting the distributor and proceeding to purchase a product; (ii) customers opting to be kept automatically informed via a distributor’s website; and (iii) language options on a website.  The Commission therefore regards the following as blacklisted restrictions on passive selling which cannot benefit from the block exemption:

 

 

By contrast, a supplier is entitled to ban a distributor from engaging in active sales via the internet into other distributors’ exclusive territories or customer groups.  The new Guidelines indicate that online advertising specifically addressed to certain customers constitutes a form of active selling to those customers (e.g. territory-based banners on third party websites or paying a search engine or online advertisement provider to have advertisements displayed specifically to users in a particular territory).  The new Guidelines also make it clear that a supplier is entitled to impose quality standards for the use of internet sites by its distributors.