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Parallel Sales and Selective Distribution: Regulatory Reliefs and Brand Protection

Parallel sales in distribution systems are a relevant and complex topic in antitrust law, having very significant practical impacts on commercial policies at all levels of the distribution chain. This phenomenon plays a particularly central role in selective distribution, a form of sales organisation in which the supplier establishes specific criteria for selecting authorised distributors, mainly with the aim of limiting the resale of its products outside the authorised network and protecting its brand prestige.

However, irrespective of the manufacturer's distribution plans, the distribution system can never be completely 'watertight' (which would otherwise be contrary to the founding principles of the European Union[1]), and it often happens that products are sold, even within the territory where an exclusive distribution system has been set up, by parallel sellers.

This article aims to clarify the essential requirements and conditions for a supplier to set up a selective distribution network and to analyse the legal means available to protect that network from unauthorised sales. These sales, made by unauthorised distributors through parallel channels, may in fact compromise both the brand image and the perceived quality of the products.

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1. Definition and purpose of selective distribution.

According to Article 1 of the EU Regulation 2022/720a selective distribution system is defined as a system in which the supplier undertakes to sell the contractual goods or services exclusively to selected distributors, based on specific criteria, and those distributors undertake not to resell those products to unauthorised resellers in the territories reserved for the system.

Selective distribution is essentially distinguished from exclusive distribution by the fact that the manufacturer may require the members of its network to sell products exclusively to authorised dealers, or alternatively also to external parties, provided that they meet the quality standards defined by the manufacturer and imposed on the authorised dealers themselves.[2]

Given that this is a structure that restricts competition in a very important way (certainly more than exclusive distribution), its applicability raises significant questions of compatibility with European antitrust rules, in particular in relation to theArticle 101 of the Treaty on the Functioning of the European Union (TFEU).[3]

First of all, it is necessary to start from the assumption that the legal principle adopted by the European legislator, most recently confirmed by EU Regulation 2022/720, is based on the assumption that selective distribution is designed to meet specific market needs that are not met by exclusive distribution. These needs mainly concern the protection of luxury or technologically advanced products, which require particularly complex and accurate commercial management.

Indeed, there is no doubt that the quality of such products derives not only from their material characteristics, but also from the manner in which they are sold, presented and marketed to the public. These ways help to preserve the style and prestigious image that gives them an aura of luxury, an essential element in distinguishing them from similar products in the eyes of consumers. With the consequence that any damage to this aura of luxury can compromise the perceived quality of the products themselves.[4]

In this context, the Court held, in particular, that the organisation of a selective distribution system aimed at ensuring a presentation that enhances prestige products at the point of sale may contribute to the reputation of the products in question and thus to safeguarding their aura of luxury.[5]

The protection of the aura and image of the trade mark is the main objective pursued by the manufacturer and, at the same time, as will be seen, represents the tool available to the proprietor to adequately protect himself against parallel sales.

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2. The requirements of the selective distribution system.

The Court's case law has established that, in order to assess the compatibility of a selective distribution system with Article 101, it is necessary to apply three criteria, better known as the criteria Metro (named after the famous ruling[6]), which can be summarised as follows:

• First, the nature of the goods or services in question must justify the adoption of a selective distribution system. This means that, depending on the specific characteristics of the product, such a system must be a legitimate requirement to preserve its quality and ensure its proper use (as anticipated, recourse to selective distribution may be legitimate for high-quality, technologically advanced products[7] or luxury goods[8]).
• Secondly, the selection of dealers must be based on objective criteria of a qualitative nature, established indiscriminately for all potential dealers and applied in a non-discriminatory manner.
• Thirdly, the criteria set must not exceed what is necessary.

Based on these assumptions, European case law, while recognising that selective distribution affects competition in the internal market, justifies its adoption if it is adopted with the aim of supporting specialised trade, capable of satisfying particular demands and guaranteeing the quality and technological value of the products distributed. These requirements make it possible to overcome competition based primarily on price by placing more emphasis on factors such as quality of service and after-sales support, elements that aim to achieve a legitimate result and contribute to qualitative competition.[9]

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3. Contractual clauses aimed at trade mark protection.

In the context of selective distribution, the manufacturer or supplier establishes a series of contractual commitments that the authorised retailer is obliged to respect in order to ensure the protection of the brand's positioning and image. Although the clauses may vary, they are mainly aimed at preserving quality standards and ensuring that products are displayed in a way that respects the image and reputation of the brand.

Below we analyse the most relevant contractual commitments that the selective distributor must fulfil, taking a cue from a recent order of the Court of Milan.[10]

Exclusivity and preservation of the brand imageOne of the main obligations concerns the exclusivity of the point of sale. The authorised retailer is obliged to display and sell products exclusively at its point of sale (whether physical or online), avoiding any display or sale outside. It is also forbidden to sell products in the vicinity that, due to their inferior nature or quality, could devalue the image of the brand represented. Retailers are sometimes allowed to market competing brands only if they are compatible with the image and reputation of the brand. In practice, the intention is to ensure that the products are placed in appropriate contexts and do not compromise the aura of exclusivity and luxury of the brand.

Product and brand display: The selective distribution contract imposes specific obligations on brand display. The retailer must position the products strategically, using dedicated displays and nameplates with the brand logo. This is aimed at highlighting the prestige of the brand. In addition, products must be presented in dedicated furniture, maintaining dimensional and visual characteristics that reflect their positioning. This attention to detail reinforces the perception of the brand and presents it to the consumer in a manner consistent with its luxury image.

Quality standards: To maintain a service and shopping experience aligned with brand expectations, the retailer must meet specific quality standards. This includes the competence of staff, who must have appropriate training and experience. The objective of these requirements is to ensure that every customer interaction reflects the brand's values, providing a superior service that is characterised by attention to detail and professionalism.

Advisory service to shops: In order to enhance the value of the products and support the customer in his choice (who in this case is the retailer), the authorised retailer may be required in some contracts to offer an appropriate advisory service. This service must be proportionate to the surface area of the shop, the number of brands present and the quantity of products available. The advice is conceived as an added value, aimed at enhancing the shopping experience and consolidating the perception of quality and brand specialisation.

Correct storage of products: The authorised retailer undertakes to offer customers perfectly preserved products with their original presentation or packaging. This ensures that the products are always in the best possible condition, reinforcing consumer confidence and preserving the quality associated with the brand.

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4. The so-called. selective repair

In selective distribution, the distributor often aims to maintain a high standard covering all stages of the sale - from offer to purchase to repair - in order to guarantee a consistent level of quality and a homogeneous consumer experience. In this context, there is a need to also include after-sales service in the network, creating a so-called selective repair system.

This choice is particularly relevant for those products that require specific maintenance, which is essential to preserve their quality and ensure optimal use.

EU case law has long held that selective distribution may require a sales and after-sales service tailored to the particularities of the specific type of distribution adopted.[11] On this subject, the Court of Milan has also recently ruled, in the present case and in general terms, that the admissibility of a selective resale system is not justified so much by the preservation of the image of the trade mark per se, which could lead to a restriction of competition, but rather by the objective of maintaining the quality of the products in their proper use, as well as the pursuit of a specialised trade, capable of offering specific services for products with a high level of quality and technology.[12]

On the basis of the above-mentioned case law, selective repair would seem to require an additional requirement over and above those for selective distribution: not only the protection of the prestige of the brand, but also the guarantee of the maintenance of product quality, which might otherwise be compromised by repairers outside the selective network who do not meet the quality standards imposed by the manufacturer on authorised members.

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5. Parallel sales in selective distribution systems.

5.1. Non-contractual relationships in the context of parallel sales.

It often happens that, even within a selective distribution system, sales are made by parties outside the authorised network, so-called parallel sales. These are sales by third parties with whom the manufacturer does not have a direct contractual relationship, but a relationship of a non-contractual nature. This implies that the terms of sale agreed upon between the right holder and the authorised resellers, being effective only between the parties, cannot be imposed on third parties, pursuant to Article 1372(2) of the Civil Code.

In other words, the supplier finds itself unable to directly enforce its contractual terms against unauthorised parties, and thus cannot resort to the legal instruments typical of contractual relations. Developing this principle, the same Court of Cassation has repeatedly confirmed that the owner cannot extend the contractual limitations of the selective network to unauthorised parties, unless there is actual prejudice to the image of the trade mark.[13]

Given the non-contractual nature of the relationship, in order to protect its brand and the quality of its distribution network, the supplier can/should thus rely on alternative legal instruments, mainly related to intellectual property law.[14]

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5.2. The principle of trade mark exhaustion: limits and protection of the brand image.

Article 7 of European Directive 2008/95/EC, implemented in Italy by Article 5 of the Industrial Property Code, introduced the principle of trade mark exhaustion into our legal system. According to this principle, once a product is placed on the EU market by the trademark owner or with his consent, the exclusive rights to that product are exhausted, limiting the exclusivity to the first act of marketing. However, there is an exception to this rule: Para. 2 of Art. 5 IPC allows the proprietor to oppose a subsequent sale if there are "legitimate reasons," such as the risk of damaging the luxury and prestige image of the trade mark.

Read also: Parallel sales and the principle of trade mark exhaustion.

Community case law has clarified that a selective distribution network may be considered among the 'legitimate grounds' for trade mark protection when unauthorised distribution risks compromising the image and distinctive value of luxury or high prestige products. In such cases, the objective of the selective network is not only to limit competition, but also to ensure that products are distributed in a context that preserves their exclusive aura, maintaining high quality standards and a shopping experience in line with the public's expectations for that type of product.[15]

In line with the above, national case law has confirmed that the trade mark proprietor may legitimately oppose resale outside the selective network only if such marketing results in actual or potential damage to the reputation of the trade mark.[16]

On the other hand, case law has made it clear that the third party cannot justify its parallel selling activity simply by claiming that it purchased the products from an authorised dealer who, in turn, breached his own contractual obligations.[17] Likewise, it is not sufficient to invoke non-compliance with the requirements by other authorised dealers as a pretext for legitimising the sale outside the network. In this regard, case law emphasises that "non-compliance with the requirements by other authorised dealers does not exclude the tort, and thus the breach of the general conditions of sale."[18]

It follows that, if the parallel sale is carried out in such a way as not to harm the image or perceived quality of the trade mark, the proprietor cannot oppose such resale, since, in the absence of actual or potential damage to the reputation of the trade mark itself, the legitimate reasons justifying the blocking of the parallel sale lapse.

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5.3. Proof of injury.

Finally, it is important to note that, in order to justify an exception to the principle of exhaustion, the mere danger or possibility of harm is not sufficient: the actual existence of concrete harm is required. Accordingly, the injury must emerge from specific and demonstrable circumstances; it is not sufficient, therefore, merely to point to a particular selling pattern implemented by third parties outside the selective network. It must be shown that those arrangements cause, in the specific case, serious harm to the aura of prestige of the trade mark.[19]

Case law has clarified that the "minimum measure of respect for the image" of luxury marks lies in the need for the products bearing those marks, characterised by refinement and intrinsic quality, not to be associated with similar but poor quality products, or with products that are entirely different and lacking in prestige. Ultimately, it is essential that the presentation of luxury products not be associated with other products lacking similar characteristics in order to preserve the exclusive image and high perceived value of the brand.[20]

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[1] This principle was first introduced, albeit with reference to exclusive selling, by the historic Grundig judgments, Judgment of 13 July 1966, Joined Cases Costen and Grundig 56/64 and 58/64.

[2] See Art. 4(c), VBER 720/2022.

[3] CFr. 146 et seq. Guidelines on Vertical Restraints 2022/C 248/01

[4]See to that effect, judgment of 23 April 2009, Copad, C-59/08, EU:C:2009:260, paragraphs 24-26 and case law cited therein

[5] In this sense, judgment of 23 April 2009, Copad, C-59/08, EU:C:2009:260, paragraph 29.

[6] Judgment of 25 October 1977, Metro/Commission, C-26/76.

[7] Case Metro v Commission, Case C-107/82 - AEG v Commission.

[8] See Case C-230/16 , Case Coty Germany.

[9] EU General Court of 25 October 1983, Telefunken v. Commission, 107/82, and Court of Justice of 13 October 2011, Pierre Fabre Dermo-Cosmétique, C-439/09, para. 39.

[10] Court of Milan, Order of 2 January 2023.

[11] EU General Court, Metro/Commission, judgment of 22 October 1980, 75/84, para. 54.

[12] Court of Milan, judgment of 27 September 2022, no. 7389.

[13] Supreme Court, 14 March 2023, No. 7378.

[14] Court of Milan, order of 17 March 2016; European Court of Justice, judgment of 30 November 2004, C-16/03; Court of Milan, judgment of 9 December 2008.

[15] EU Court of Justice, Case C-59/08, Copad vs. Christian Dior.

[16] Court of Milan, 11 January 2016; Court of Turin, 17 December 2018.

[17] Court of Milan, Order of 2 January 2023.

[18] Court of Milan, 20 July 2018.

[19] Court Milan, Order 17.3.2023.

[20] Court Milan, Order 12.1.2021.

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Management of online sales in distribution contracts and European antitrust.

The new regulation on vertical sales introduced for the first time a regulation on online sales, introducing in Art. 4 (e) a general prohibition to prevent "the effective use of the internet" by the buyer or its customers to sell the contract goods or service.

The previous regulation (330/2010) did not directly regulate any restrictions on online sales and these issues were only developed through important case law, including two Court of Justice rulings considered milestones in the field.

This article will briefly analyse the main impacts that the new regulations may have on online sales in the different distribution systems, i.e. exclusive, selective and free, with the aim of providing a general overview (avoiding excessive technicalities) and helping operators in the sector to orient themselves in an ever-changing and far from linear context.

1. Online sales in the former Regulation 330/2010.

As mentioned, in the absence of a legislative framework, the Court of Justice has helped to regulate a very important issue through two judgments, which are still relevant today and also help to interpret the novelty introduced by the current regulation.

The first, dated 13 October 2011, related to the Pierre Fabre case.[1] In that circumstance, the cosmetics and personal care products company had adopted a selective distribution system that required the physical and permanent presence of a graduate pharmacist at the point of sale in order to provide adequate advice to consumers. Thus, the company had not directly prohibited online sales, but had made it effectively impracticable by making it subject to an unworkable condition. The Court ruled that this provision entailed (de facto) an absolute ban on the use of the Internet, finding the contractual provision contrary to European competition law and the antitrust regulation, with the effect of rendering the entire agreement void.

The second ruling, known as 'Coty Germany', of 6 December 2017,[2] concerned the admissibility, in a selective distribution contract, of the clause prohibiting distributors from using recognisable third-party platforms (such as, for example, Amazon), i.e. platforms bearing a different name from that of the supplier's products, to sell the contractual products.

The matter had been brought before the Frankfurt Higher Regional Court, which had decided that the clause was to be considered contrary to the prohibition in Article 101(1) and not permissible under Paragraph 3 of that provision, nor under the exemption regulation then in force (330/2010), because it was contrary to Article 4(b) and (c) of that regulation. On appeal, the Oberlandesgericht Frankfurt decided to refer a question to the Court of Justice for a preliminary ruling on the legality of that clause.

The ECJ ruled that the prohibition of members of a selective luxury goods network from recognisably using third-party companies for sales via the Internet:

1. does not infringe Article 101(1) TFEU 'if that clause is intended to safeguard the luxury image of those products, is established indiscriminately and applied in a non-discriminatory manner, and is proportionate in relation to the objective pursued, which it is for the referring court to verify';
2. does not constitute a restriction of customers within the meaning of Article 4(b) of that regulation, nor a restriction of passive sales to end users within the meaning of Article 4(c) of that regulation.

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2. The effective use of the Internet and the novelties introduced by Regulation 720/2022

As pointed out, the regulation introduces in Art. 4 (e) a broad prohibition that precludes providers from significantly restricting Internet access. In view of the breadth of this prohibition, the Guidelines are intended to clarify its meaning and offer concrete guidance to providers. In particular, they point out that restrictions on the optimal use of the Internet are not only attributable to explicit prohibitions, but also emerge through indirect restrictions, giving examples of such indirect restrictions. Some of these examples are recalled:[3]

• Prevent the distributor and its customers from accessing its website or online shop from a different territory by redirecting them to the manufacturer's or another vendor's online shop.
• The distributor's obligation to cancel online transactions if the consumer's address is not in the buyer's territory.
• The obligation to sell contractual products only in a physical space or in the presence of specialised personnel, and to obtain prior authorisation from the supplier for online sales.
• It is forbidden for the purchaser to use trademarks of the supplier on its website or to operate online shops, regardless of their location.
• The ban on using entire online advertising channels, such as search engines or price comparison services.

On the contrary, contractual clauses requiring the distributor to:

• Adopt specific standards to ensure the quality or aesthetics of the online shop, particularly in the context of selective distribution.
• Impose requirements for the presentation of products in the online shop, such as a minimum number of items displayed or the use of brand names.
• Maintain the obligation for the retailer to operate physical shops or showrooms as a prerequisite for participating in the selective distribution network, selling offline a minimum quantity, in terms of value or volume, that is not proportional to total sales.
• Charge wholesale price differences for products sold online versus those sold offline. The latter condition is considered acceptable only if it does not effectively limit the use of the Internet for sales and if the price variation corresponds in a justifiable manner to the investments and costs incurred in selling through each channel.

Finally, restrictions imposed on online advertising are considered permissible as long as they do not prohibit the purchaser from taking full advantage of a specific advertising channel.[4] Such restrictions are legitimate when, for example, they require that advertising campaigns adhere to certain quality standards or when they provide for an obligation to avoid the use of low-quality online advertising services.

More generally, the new Regulation has brought interesting changes that are particularly relevant to the circumstance at hand and that may also have important impacts on the management of online sales, namely:

• The possibility of transferring active sales restrictions in exclusively allocated territories to the distributor's direct customers;[5]
• The possibility of structuring more closed selective distribution systems[6] than allowed under the previous regulation, which implicitly allowed exclusive distributors to also make active sales within the selective territory and in fact led to this model being effective only if it was introduced throughout Europe (read also: selective and exclusive distribution the mixed system works?);
• The introduction of the possibility to enforce restrictions on internet use also for exclusive distributors, including the possibility to adopt dual pricing for online and offline sales and to impose a minimum offline sales as a requirement for the continuation of the agreement;[7]
• The option, within a selective distribution system, to prohibit both active and passive sales by retailers to direct end users in an exclusive territory.[8]

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3. The distribution models of Regulation 720/2022.

Although the regulation introduces several new features compared to the previous model, the basic approach remains the same as previously developed. The regulation allows companies to enter into vertical agreements following essentially three models:

• exclusive distribution contracts, in which the manufacturer grants the distributor an area of exclusivity;
• selective distribution contracts, in which the manufacturer chooses its distributors and network members, based on pre-established quality standards;
• free distribution contracts, where neither exclusivity nor selective distribution is recognised.

The various models are outlined below, outlining the main characteristics they must adhere to, as outlined in the new regulation and based on the interpretation of the Guidelines.

Importantly, the new regulation specifies that distribution contracts are only antitrust compliant if neither party has a market share of more than 30% in the relevant sector. Otherwise, the contract will have to be assessed on a case-by-case basis, without benefiting from a presumption of legality. This issue has already been discussed above, so the point is recalled: Market share above 30% and impacts on distribution contracts.

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3.1. Exclusive distribution contracts.

According to Article 4 (a) and (b) of the Regulation, the exclusive distribution agreement may not contain specific clauses that would render the entire agreement void. In particular, clauses that entail:

• resale price maintenance, either directly or indirectly;
• the ban on passive sales by the distributor[9] in a territory exclusively assigned to another distributor (e.g. prohibiting the exclusive distributor in Italy from making passive sales in France, where there is an exclusive French distributor);
• obstacle to the effective use of the Internet by the distributor or its customers.

Instead, the manufacturer may impose the following restrictions:

• prohibit the distributor and its customers from making active sales, i.e. engaging in sales promotion, in territories exclusively assigned to others;
• prohibit the distributor and its customers from making both active and passive sales in areas designated for selective distribution;
• limit the distributor's place of establishment by defining where it may operate or establish its outlets;
• restricting sales, both active and passive, to end users by distributors operating at the wholesale level.

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3.2. Selective distribution contracts.

Selective distribution refers to a distribution system in which products are marketed exclusively through retailers who meet specific standards of professional competence, service quality and shop prestige set by the manufacturer. This method is mainly used for the marketing of technically complex products, which require a specific technical qualification on the part of the retailer, and luxury products, for which it is essential that sales take place in settings appropriate to their prestige. In order to ensure that the retailer meets the required characteristics, the manufacturer selects retailers (according to more or less strict criteria) and requires them not to sell the products outside the authorised network (as this would compromise the purpose of the selection).[10]

In this context, according to Art. 4 (c) of the Regulation, the manufacturer may not prohibit its selective distributor:

• cross-supplies between members of the selective distribution system operating at the same or different trading levels;
• the restriction of effective use of the Internet.

Conversely, the manufacturer may impose specific prohibitions on the selective distributor such as:

• prohibit distribution members from both active and passive sales to unauthorised distributors located within the selective territory;
• prohibit members of selective distribution from making active sales in exclusive territories;
• restricting active and passive sales to end consumers by members of the selective distribution system operating in the wholesale sector.
• restricting sales, both active and passive, to final consumers by members of the selective distribution system active in the retail trade, when these take place in territories subject to exclusive distribution;
• impose limitations on the location of the establishments of the members of the selective distribution system.

Selective distribution is distinguished from exclusive distribution mainly by the manufacturer's option to choose the dealers in its network, an option that introduces a restriction on competition, which is justifiable as initially outlined in the Metro judgment.[11] (and confirmed by the Guidelines published by the European Commission[12]) only when the nature of the goods requires such measures to protect their quality and ensure their proper use. Precisely for this reason, case law admits the application of this type of distribution only to technically high-tech products,[13] of high quality,[14] luxury or those that at least convey an aura of it[15] and requires that the selection of dealers be carried out according to objective quality criteria, applied uniformly and without discrimination. Furthermore, any criteria set by the manufacturer for the selection of dealers must be proportionate and necessary to maintain the quality and image of the products, without imposing restrictions or requirements that are not indispensable for the attainment of these ends.[16]

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3.3. Free distribution contracts.

The regulation in Art. 4. (d) also provides for the possibility to impose restrictions on distribution agreements which do not fall within the categories of exclusivity or selectivity. These restrictions aim to prevent such contracts from undermining the selective or exclusive distribution systems established by the manufacturer in various territories, e.g. a selective system in Italy and an exclusive one in France. Below is a list of the main restrictions:

• restrictions on active sales by the distributor and its direct customers in an exclusive territory.
• restrictions on sales, both active and passive, by the distributor and its customers to unauthorised distributors within a selective distribution system at any level of trade.
• the restriction concerning the location of purchasers' establishments.

Obviously, these restrictions are intended to protect markets subject to exclusive or selective distribution. In contrast, free markets remain open to any sales activity, both active and passive, by distributors outside these networks.

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4. Internet limitations in different distribution systems.

In order to give a practical approach and thus understand what limitations may be placed on online sales, an assessment of the potential impacts under the following assumptions will be made below:

• the adoption of an exclusive distribution system in Italy coupled with a free distribution system in France;
• the adoption of a selective distribution system in Italy coupled with a free distribution system in France;
• the application of an exclusive distribution system in both Italy and France;
• the introduction of a selective distribution system in Italy and exclusive in France.

Obviously, this represents a preliminary analysis to help understand which strategy to adopt and which to focus on for further investigation.

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4.1. Exclusive distribution in Italy and free in France.

In this context, the Italian exclusive distributor and its customers could not be prohibited from making active sales to France, as the French territory is not subject to exclusivity. On the contrary, it is possible to require the French distributor not to make active sales in Italy and to limit sales to non-passive sales.

A relevant restriction that could be implemented would be to prohibit distributors from active and passive retail sales, including direct sales to end users in France, in order to keep the levels of commercial distribution separate.

Certainly, it might be relevant to use dual pricing, considering the introduction of differentiated discounts for online sales, provided this can be justified on the basis of objective parameters.

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4.2. Selective distribution in Italy and free in France.

This model would have the same implications as the previous one. Since the target territory for sales is not covered by any form of containment.

The only relevant restriction that could be implemented would be to prohibit wholesale distributors from engaging in active and passive retail sales, including direct sales to end users in France, in order to keep commercial distribution levels separate.

Again, dual pricing could have a positive impact, as could making access to the selective distribution system conditional on the operation of physical shops or showrooms. More generally, the operation of a selective distribution system would still entail an increase in operating costs for distributors and network members. This circumstance, in itself, would contribute (perhaps only partially) to bringing prices into line with those of the French market, or at any rate would be an element to be evaluated in the development of the distribution strategy.

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4.3. Exclusive distribution in Italy and France.

Here we return to the classical model of exclusive distribution, where the manufacturer may only prohibit active sales, but not passive sales. A very relevant and innovative element compared to the previous regulation is the possibility to extend restrictions on active sales into territories exclusively allocated to other distributors to the distributor's direct customers.

For the rest, all the evaluations already carried out for the model described in section 5.1, to which reference is made, would apply. These include:

• the prohibition of wholesale distributors from engaging in active and passive retail sales;
• the use of dual pricing.

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4.4. Selective distribution in Italy and exclusive distribution in France.

Article 4(c)(iii) undoubtedly brings significant advantages in the control of the network and, as a direct effect, of online sales: it allows the manufacturer to prohibit the members of a selective distribution network from making both active and passive sales to retailers in territories subject to territorial exclusivity. Consequently, the prohibition, which in exclusive distribution only applies to wholesale distributors, may be extended to retailers in the context of selective distribution. This means that retailers which are part of the Italian selective distribution system could be prohibited from selling into the French territory if that territory was subject to an exclusivity agreement.

A very significant practical aspect is related to the fact that, even if it is possible to prevent members of the selective distribution network from selling to France, if they display prices on their online sites, these prices will still be visible in France (and cannot be blocked, according to the Geoblocking Regulation 2018/302).

Consideration could therefore be given to the option of prohibiting network members from displaying price lists and prices on their sites, making them available only upon request for a quote via a form or chatbox, a method often used online by retailers of high-end and luxury goods.

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5. Conclusions.

In this short report, an attempt has been made to illustrate the main regulatory and jurisprudential aspects concerning the novelties introduced by the new vertical sales regulation, with a particular focus on the implications for online sales. However, this is a general overview of the system, which cannot exhaust all the facets and specificities of a very complex and evolving subject.

Therefore, it is always appropriate to assess on a case-by-case basis the conditions and modalities for applying marketing restrictions to products, taking into account the characteristics of the market and the needs of the business.

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[1] Pierre Fabre Dermo-Cosmétique SAS v Président de l'Autorité de la concurrence, Case-439/09,

[2] Coty Germany GmbH v Parfümerie Akzente GmbH, Case C-230/16.

[3] See Paragraphs 206 et seq. of the Guidelines.

[4] See Para. 206(g) of the Guidelines.

[5] Art. 4(b)(i).

[6] Art. 4(c)(i)(1).

[7] Paragraph 209 of the Judas Guidelines.

[8] Art. 4(c)(i)(4).

[9] Art. 1 of Regulation 2022/720 (l) and (m): for "active sales" means the active and targeted contacting of customers through visits, letters, e-mails, telephone calls or other means of direct communication or through targeted advertising and promotion, offline or online, such as through print or digital media, including online media; price comparison tools or advertising associated with search engines, targeting customers in certain territories or customer groups; operating a website with a top-level domain that corresponds to certain territories; offering on a website language options commonly used in certain territories, when these languages are different from those commonly used in the territory where the buyer is established; for passive' sales means sales made in response to spontaneous requests from individual customers, including the delivery of goods or the provision of services to the customer, without the sale having been initiated by actively soliciting particular customers, groups of customers or territories, including sales resulting from participation in public tenders or response to private tenders.

[10] Art. 1 of Regulation 2022/720 (g).

[11] Metro SB-Großmärkte GmbH & Co. KG v Commission of the European Communities, Case C-26/76.

[12] See paragraph 149 of the Guidelines and more generally paragraph 4.6.2.3.Guidelines for individual assessment of selective distribution agreements'.

[13] See Case C-26/76 - Metro/Commission and Case C-107/82 - AEG/Commission.

[14] See Case C-230/16 - Coty Germany.

[15] See Case C-230/16 - Coty Germanypoints 25 to 29.

[16] Metro SB-Großmärkte GmbH & Co. KG v Commission of the European Communities, Case C-26/76.

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Information exchange and dual distribution: antitrust implications in distribution contracts

In the context of distribution relationships, antitrust issues arise whenever the grantor engages in activities that, even potentially, compete with the dealer. This situation, referred to in Regulation (EU) 2022/720 as 'dual distribution', raises particularly sensitive legal issues regarding the legality of information exchanged between the parties.

This article examines, also using the European Commission Guidelines, the concept of dual distribution, potential competition and information exchanged between potentially competing contractors.

Finally, it should be noted that information frequently exchanged between the dealer and the grantor, such as future prices and customer data, may fall into the category of unlawful information. Similarly, the acquisition of such information by the grantor may lead to civil law implications once the relationship is terminated, with particular reference to the right of the dealer to payment of a termination indemnity.

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1. Regulatory context and legal framework.

Article 101 of the Treaty on the Functioning of the European Union (TFEU) prohibits agreements between undertakings which may affect trade between member states and which have as their object or effect the prevention, restriction or distortion of competition within the internal market. However, Regulation (EU) 2022/720 introduces exceptions for vertical agreements, exempting, within the specified limits, all agreements of this nature (including, of course, exclusive sales or distribution agreements).

This is done on the assumption that such agreements, while restricting competition, may improve production efficiency, distribution or technological progress. In practice, this regulation recognises that although vertical agreements restrict European competition, they contribute to improving the production or distribution of products or to promoting technical or economic progress. By reserving for consumers a fair share of the resulting benefit, these agreements are to be regarded as legitimate, albeit within certain limits that are specified in the regulation itself, in particular in Article 2.

Against this background, Article 2(4) of the Regulation precludes the application of the antitrust exemption to vertical agreements entered into between competing undertakings, except in two circumstances: where such undertakings, although competitors, operate at different levels of the production or distribution chain and are not in direct competition in their respective fields. The underlying reason is to grant the exemption to those relationships between parties that, although competitors on a certain level of distribution, do not compete on the levels for which the vertical agreement was concluded.

Thus, if the parties compete both upstream and downstream, the vertical relationship does not automatically enjoy exemption; whereas if the parties compete only downstream, the exemption of the agreement extends to all its elements, including exchanges of information between the parties, provided that they are directly related to the implementation of the vertical agreement or necessary to improve the distribution of the goods and services covered by the agreement (Article 2.5).

The rationale is to prevent situations in which one of the parties may use information that is not strictly necessary, in order to obtain undue competitive advantages, with a view to entering the market in which the other party operates.

In this context, recitals 12 and 13 of the Regulation introduce the principle known as 'dual distribution', which occurs whenever a supplier markets goods or services both upstream and downstream, thereby competing with its independent distributors. Dual distribution typically occurs when a supplier sells its goods or services both directly to final consumers and through independent distributors. In doing so, the supplier competes with its own downstream customers, which may create potential conflicts of interest or market distortions. Dual distribution may also occur, for instance, when the manufacturer sells both to an importer and to distributors, in this case competing with its own importer.

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2. Potential competition.

It is important to emphasise that competition does not necessarily have to be actual, but it is sufficient that it is also only potential. Article 1(c) of the regulation defines a 'competing undertaking' as an entity that competes both actually and potentially. An actual competitor is an undertaking which is active on the same relevant market, whereas a potential competitor is an undertaking which, in the absence of the vertical agreement, would realistically have the possibility of entering the relevant market within a short period of time and incurring the necessary investments and costs.

Recital 90 of the Commission guidelines (which, although they have no binding force, are of crucial importance in decision-making practice and in the interpretation of the rules), emphasises that the assessment of potential competition must be based on realistic considerations, taking into account the market structure and the economic and legal context. An undertaking is treated as a potential competitor of another undertaking if, in the absence of the vertical agreement between the undertakings, it is likely that the first undertaking, within a short period of time (normally not exceeding one year), would make the necessary additional investments or incur other necessary costs to enter the relevant market in which the other undertaking is active.

This assessment must be based on realistic grounds, taking into account the market structure and the economic and legal environment. The mere theoretical possibility of entering a market is not sufficient, but there must be a real and concrete possibility that the undertaking will enter the market without encountering insurmountable barriers to entry. Conversely, it is not necessary to demonstrate with certainty that the undertaking will actually enter the relevant market and that it will subsequently be able to maintain its position.[1]

Thus, where an agreement has the effect of temporarily keeping an undertaking off the market, it is necessary to determine whether there would have existed, in the absence of that agreement, real and concrete possibilities for that undertaking to enter that market and compete with the undertakings established there.[2]

Proof of a situation of potential competition must be supported by a set of concordant factual elements taking into account the structure of the market and the economic and legal context governing its functioning, aimed at demonstrating that the undertaking concerned would, in the absence of the agreement, have had real and concrete possibilities of gaining access to the market in question.[3]

In this context, reference is made to a significant ruling by the Court of Justice, published on 26 October 2023, which is useful for a correct interpretation of the legislation in question.[4]

The subject matter of the dispute concerned the assessment of the compatibilitỳ, with the principles of Article 101 TFEU, of an agreement concluded between two companies: one active in the food distribution sector and the other active in the energy distribution and production sectors. The parties had entered into a partnership agreement to cooperate in distribution, offering discounts to customers of supermarkets operated by the first company for the supply of energy at the second company's outlets. This agreement included a non-compete clause, whereby the company active in the food sector undertook not to enter the energy market.

The case law of the Court states that the analysis must focus not so much on subjective elements, such as the presence or absence of an intention to compete in the absence of the agreement, but rather on factual elements. This includes the actual structure of the relevant market and contractual aspects, such as, for example, the inclusion of a non-compete agreement in the agreement under review. Such elements may provide a clear indicator of the existence of potential competition. With regard to the latter, it is noted that if the parties to a non-compete agreement did not consider themselves to be potential competitors, they would in principle have no valid reason to enter into such an agreement.[5] This last element, i.e. the inclusion of a non-compete covenant within the vertical agreement under consideration, is of significant importance, since it is far from rare for the grantor to undertake not to sell in the territory assigned to the dealer.

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3. Commission guidelines and their relevance.

In interpreting the regulation, the Commission's Guidelines once again come to the rescue. Paragraphs 99 and 100 of the Guidelines, in particular, provide examples of information that may or may not meet the requirements of Article 2(5), thus outlining which information is presumably legitimate and which may not be legitimate from an antitrust perspective.

Section 99 lists information that, by its nature, is directly related to the implementation of the vertical agreement and necessary to improve production or distribution. These include:

1. (a) Technical information: relating to the goods or services covered by the contract, necessary for compliance with regulatory measures and for adapting the goods or services to the customer's needs.
2. b) Logistical information: related to the production and distribution of goods or services in upstream or downstream markets.
3. (c) Customer information: concerning customers' purchases, preferences and reactions, provided it does not limit the territory or customers to whom the buyer may sell.
4. (d) Information on selling prices: charged by the supplier/manufacturer to the buyer for the contract goods or services.
5. (e) Resale price information: concerning recommended or maximum resale prices and the prices at which the buyer resells the goods or services, provided that they do not restrict the buyer's ability to determine its own selling price.
6. (f) Marketing information: relating to the marketing of the contract goods or services.
7. (g) Performance information: relating to the marketing and sales activities of other purchasers of the contract goods or services.

Point 100 lists information that is generally unlikely to meet these conditions. Namely:

1. (a) Information on future prices: concerning the future prices at which the supplier or buyer intends to sell the goods or services on the downstream market.
2. (b) Information on identified end users: unless it is necessary to fulfil the requests of a particular end user or to implement or monitor compliance with a selective or exclusive distribution agreement.
3. (c) Information on own-brand goods sold by a buyer: exchanged between the buyer and a manufacturer of competing branded goods, unless the manufacturer is also the producer of those own-brand goods.

In summary, paragraphs 99 and 100 of the Commission's Guidelines should be used by practitioners as a tool to understand the limits within which exchanges of information can take place without incurring antitrust violations in the context of vertical agreements between even potentially competing players.

Among the information certainly most commonly collected and exchanged between dealer and licensor are those relating to prices and end customers.

As has been seen, paragraph 100 of the Guidelines makes it clear that information on future prices is unlikely to be considered legitimate from an antitrust point of view, unlike past prices, which may instead be considered legitimate. The distinction lies in the Community legislator's desire to prevent the grantor, being in a position of (even potential) competition with the dealer, from using information on future prices to his own advantage in the market covered by his intermediary.

Similarly, the collection of information on end customers is only considered legitimate if it is necessary for the fulfilment of the vertical agreement (e.g. for the handling of warranties). It should also be noted that, from a civil law point of view, knowledge of end-customer data becomes relevant once the relationship is terminated, especially if the distributor or importer asserts its right to a severance payment. This is particularly important in some foreign jurisdictions, such as Germany, where knowledge of end-customer data is crucial for claims for indemnity.

- Read also - The Dealer's Indemnity in German Law

Recently, also in Italy, following the introduction of legislation in the automotive sector with the January 2023 law, the right to severance pay for dealers in the automotive sector was recognised, with a possible analogous extension to other sectors.

- Read also - The dealer's allowance in the automotive sector..

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4. Fines, penalties and procedural initiatives.

Non-compliance with antitrust law may be established not only by the Commission and the national antitrust authority, either on their own initiative or on the recommendation of third parties, but may also be brought to the attention of the ordinary courts by the other contracting party or by third parties who consider that they have suffered harm as a result of anti-competitive conduct.

As far as fines are concerned, the Commission has set a significant threshold of up to 10% of the total annual turnover in the last business year of the undertaking fined. This is due to the fact that the fine must have a 'sufficiently deterrent effect, in order not only to sanction the undertakings concerned (specific deterrent effect), but also to deter other undertakings from engaging in or continuing conduct contrary to Articles 101 and 102'.[6]

Similarly, national legislation[7] confers on the Authority the power to impose pecuniary sanctions in the presence of particularly serious unlawful conduct, which do not have "the nature of a civil asset measure (...) but of an administrative sanction with punitive connotations (akin to those of a criminal sanction)."[8]

As to the procedural steps that may be taken by the other contracting party or third parties, these include the ascertainment of a breach, the declaration of the nullity of the contractual relationship, actions for damages and the adoption of precautionary measures. In these cases, there are no predetermined upper limits for compensation; rather, the quantification of damages will be determined on a case-by-case basis, according to the general principles of compensation established by the law applicable to the individual situation.

Section 100(b) makes it explicitly clear that the acquisition of information relating to identified end users is hardly considered to be closely related to the performance of the vertical agreement unless such information is essential to optimise the production or distribution of the contract goods or services.

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[1] See Judgment of 30 January 2020, Generics (UK) and Others, C-307/18, EU:C:2020:52.

[2] Judgment of 30 January 2020, Generics (UK) and Others, C-307/18, EU:C:2020:52, paragraph 37. 3 Judgment of 30 January 2020, Generics (UK) and Others, C-307/18, EU:C:2020:52, paragraph 39.

[3] Judgment of 30 January 2020, Generics (UK) and Others, C-307/18, EU:C:2020:52, paragraph 39.

[4] Judgment of 26 October 2023, EDP - Energias de Portugal SA, C-331/21.

[5] Judgment of 26 October 2023, EDP - Energias de Portugal SA, C-331/21, paragraph 71.

[6] (see Guidelines on the method of setting fines imposed pursuant to Article 23(2)(a) of Regulation (EC) No 1/2003).

[7] Art. 15 Law 287/1990.

[8] Council of State, Judgment No. 1671 of 2001.

by admin

Competition and online trade: navigating dual distribution and hybrid intermediaries in antitrust law

Dual distribution' and 'hybrid intermediaries' emerge as salient concepts in the context of vertical agreements and antitrust law.

Dual distribution occurs when an entity chooses to market its products both directly and through external distributors, thus creating a situation of even potential competition with the latter. This phenomenon requires a careful analysis of market dynamics, especially with regard to the exchange of information between the parties involved. This is particularly relevant in the context of online sales, where it is imperative to prevent possible antitrust violations.

In parallel, hybrid intermediaries emerge in the context of online commerce when a platform simultaneously acts as a reseller for a supplier's products and as a seller of its own articles. In this scenario, a dynamic of potential competition develops between the two entities, given that, in this context, intermediaries may have an interest in furthering their own sales, as they also have the ability to influence the competitive landscape among the companies using their online intermediary services.

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1. Regulatory context and legal framework.

L'Article 101 of the Treaty on the Functioning of the European Union (TFEU) prohibits agreements between undertakings which may adversely affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the internal market.

However, the third paragraph of Article 101 provides for an exemption to this principle: agreements which, although restricting competition, contribute to improving the production or distribution of goods, or to technical or economic progress, remain valid, provided that a fair share of the resulting benefit is reserved for consumers.

Applying these principles to vertical agreements, i.e. contracts aimed at restricting competition, is far from easy. To assist practitioners in the complex analysis of compliance with Article 101(3) TFEU, the European Commission has issued specific regulations[1] - the last of which is the Regulation (EU) 2022/720). These regulatory documents aim to clearly delineate the boundaries within which vertical agreements, while restricting competition, may be considered lawful, ensuring that they actually contribute to the improvement of production, the distribution of products and technical and economic progress, consistent with Article 101.

Against this background, Article 2(1) of the regulation provides that, subject to specific exceptions detailed in the regulation itself, vertical agreements are automatically exempted. This premise is based on the assumption that, generally, such agreements are likely to generate positive economic impacts by optimising the production or distribution of products and stimulating technical or economic progress, while ensuring that an appropriate share of the benefits achieved is passed on to consumers.

As already explored in a previous article, Article 3 of the Regulation generally preserves the exemption for all those agreements in which both supplier and buyer do not exceed the 30% of shares in the relevant market; thus, all vertical agreements between entities that do not exceed these thresholds benefit from a presumption of legality, provided that the contracts do not incorporate hardcore restrictions (the so-called hard-core restrictionsoutlined in Article 4 of the regulation). These, essentially, in an exclusive distribution system, include the prohibition of resale price maintenance to the distributor, the prohibition of passive sales outside the exclusive territory and customer base, and the categorical ban on Internet use.

It is essential to stress that vertical agreements between competing undertakings, which do not benefit from the automatic exemption, are not subject to a presumption of illegality. Therefore, they should not be considered incompatible with the internal market, and consequently, prohibited, without a prior examination of their effects on competition. From a practical point of view, they will have to be assessed individually in order to verify their compliance with Article 101 of the Treaty.[2]

Read also: Market share above 30% and impacts on distribution contracts.

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2. Vertical agreements between competing undertakings.

2.1. Effective competition and dual distribution.

In this context, Article 2(4) of the Regulation excludes vertical agreements concluded between competing undertakings from the exemption.

However, the Regulation emphasises the need to examine effective competition in the specific context of the individual vertical agreement. In this perspective, Article 2(4)(a) and (b) grant exemption to vertical agreements between entities which, although competing on a horizontal level, do not compete directly at the precise levels of production or distribution involved in the vertical agreement in question.

The intention is to grant the exemption to those links between entities that, while competing at a certain stage of distribution, are not so at the levels for which the vertical agreement is configured, thereby focusing on the specific effect each agreement has on the market, irrespective of competition between the parties at other distribution levels.

With a view to a careful analysis of the actual competitive situation, irrespective of the roles played by the contracting parties in the market, recitals 12 and 13 of the regulation introduce a complementary principle called 'dual distribution'. This phenomenon occurs when the supplier markets goods or services both upstream and downstream, thereby competing with its independent distributors.

For example, dual distribution occurs when a shoe manufacturer, which initially distributed its products exclusively through distributors, decides to sell directly to shops, thus effectively entering into competition with its distributors, acting on the same level of the distribution chain.

In such a scenario, the vertical agreement would not automatically enjoy exemption as it would, in fact, become a relationship between competing parties.

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2.2. The exchange of information in dual distribution.

Within the context of dual distribution, a context in which situations of potential competition are greater than in 'traditional' markets is certainly to be found in online sales. Take the case, which is far from unusual, in which the manufacturer combines sales through distributors with direct online sales, whether through its own site or, for example, through the use of an application specially developed by it.

Although the manufacturer will make every effort to harmonise sales channels, it may not always succeed in this endeavour and may find itself in actual or potential (see section 4 below) competition with its distributors.

Regardless of the manufacturer's efforts to manage the two channels, one element that may be of significant practical relevance is the one introduced by Art. 2(5) of the regulation, which imposes an important limitation regarding any exchange of information between supplier and buyer.

Based on what is outlined in recitals 12 and 13 and Article 2(4), Article 2(5) of the regulation provides that in situations of agreements between competitors (irrespective of the circumstances that led to that circumstance), exchanges of information between supplier and buyer that are not directly related to the implementation of the vertical agreement or that are not indispensable to optimise the production or distribution of the contract goods or services are never exempted and, therefore, may potentially infringe antitrust law.

For the interpretation of Article 2(5) of the Regulation, one may consider the Commission guidelines.[3] Although they have no binding force, they are of crucial importance in decision-making practice and the interpretation of rules.

In particular, paras. 99 and 100 provide examples of information that may or may not meet the requirements of Art. 2(5), thus outlining which information is arguably legitimate and which may not be legitimate from an antitrust perspective.

The point 99 lists information that, by its nature, is directly related to the implementation of the vertical agreement and necessary to improve production or distribution. These include:

• Technical Informationrelated to the goods or services covered by the contract, necessary for compliance with regulatory measures and to adapt the goods or services to the customer's needs.
• Logistical informationrelated to the production and distribution of goods or services in upstream or downstream markets.
• Customer informationconcerning customers' purchases, preferences and reactions, provided they do not limit the territory or the customers to whom the buyer may sell.
• Information on sales prices: charged by the supplier/manufacturer to the buyer for the contract goods or services.
• Information on resale prices: concerning recommended or maximum resale prices and the prices at which the buyer resells the goods or services, provided that they do not restrict the buyer's ability to determine its own selling price.
• Marketing informationrelating to the marketing of the goods or services covered by the contract.
• Information on resultsrelating to the marketing and sales activities of other purchasers of the contract goods or services.

The point 100 lists information that is generally unlikely to fulfil these conditions. Namely:

• Information on future pricesconcerning the future prices at which the supplier or buyer intends to sell the goods or services on the downstream market.
• Information on identified end-usersunless they are necessary to meet the requirements of a particular end user or to implement or monitor compliance with a selective or exclusive distribution agreement.
• Information on own-brand goods sold by a buyerexchanged between the buyer and a manufacturer of competing branded goods, unless the manufacturer is also the producer of those own-brand goods.

The above-mentioned points should be used by practitioners as a tool to understand the limits within which exchanges of information can take place without incurring antitrust violations in the context of vertical agreements between even potentially competing parties.

Although the illustrations provided by the Commission may offer a partially useful guide for the supplier wishing to comply with the requirements laid down in Article 2(5), the distinction between information that may be shared and information that may not be shared needs to be assessed on a case-by-case basis. In principle, the latter can be said to be those data that, once shared, give a party, potentially in competition with its contractor, the ability to penetrate the market by exploiting a competitive advantage not in line with European competition principles.

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3. Online intermediaries performing a hybrid function.

A further aspect, explored in the context of competition between players operating at different market levels and which is specifically related to online sales, concerns vertical relationships with online intermediary service providers.

Concretely, this refers to the dynamics between a supplier and an online service intermediary, i.e. a platform that facilitates the sale of products or services.

In these relationships, which are categorised as vertical agreements since the platform acts as a mediator of the manufacturer's products, Article 2(6) of the regulation states:

"the exemptions in paragraph 4(a) and (b) do not apply to vertical agreements relating to the provision of online brokering services where the provider of such services is an undertaking competing on the relevant market for the sale of the goods or services being brokered. "

In essence, the legislation identifies a situation in which an online platform exercises a so-called 'hybrid function',[4] by acting both as an intermediary for the supplier's sales and by promoting the sale of its own products or services, which compete with the intermediated products. In this context, the exemptions provided for in subparagraphs (a) and (b) of Article 2(4) of the regulation are not applicable, considering that one finds oneself in a situation in which intermediaries may have an interest in promoting their own sales, as well as the ability to influence the outcome of competition between undertakings using their online intermediary services.[5]

Although the quoted legal text is not easy to read, we can try to simplify it, far from trivialising it, by emphasising that, once again, it is essential to examine the actual competitive relationship established between the contracting parties. In particular, if the online intermediary plays not only the role of intermediary, but also that of potential competitor on the same platform that it provides as a space for the sale of the contracting parties' products, we would clearly find ourselves in a situation of effective competition between subjects operating on the same distribution level and therefore of a relationship that is not exempt from the regulation under consideration.

As will be examined in more detail in the following section, in the context of hybrid brokering (analogous to dual distribution), competition from the platform does not necessarily have to manifest itself effectively; even potentially perceptible competition is sufficient. In this sense, it is sufficient that the provider of the online intermediation services, within a relatively short period of time (usually not exceeding one year), undertakes the necessary additional investments or incurs other indispensable costs in order to gain access to the relevant market for the sale of the goods or services being intermediated.[6]

It is essential to emphasise that the application of Article 2(6) of Regulation (EU) 2022/720 presupposes that the vertical agreement entered into by the online intermediary service provider performing a hybrid function cannot be classified as a commercial agency agreement, which does not fall within the scope of Article 101.[7]

Read also: But are online platforms commercial agents?

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4. Risks associated with potential competition.

It is important to emphasise that competition does not necessarily have to be actual, but it is sufficient that it is also only potential. Article 1(c) of the regulation defines a 'competing undertaking' as an entity that competes both actually and potentially. An actual competitor is an undertaking which is active on the same relevant market, whereas a potential competitor is an undertaking which, in the absence of the vertical agreement, would realistically have the possibility of entering the relevant market within a short period of time and incurring the necessary investments and costs.

The Guidelines further decline this definition.[8] They emphasise that the assessment of potential competition must be based on realistic considerations, taking into account the market structure and the economic and legal environment. A mere theoretical possibility of entering a market is not sufficient; there must be a real and concrete possibility, without insurmountable barriers to entry. In any event, it is not necessary to demonstrate with certainty that the undertaking will actually enter the relevant market and maintain its position.

In order to assess whether an undertaking, absent from a market, is in potential competition with undertakings present on that market, it is necessary to examine whether there are real and concrete possibilities for that undertaking to integrate the market and compete with the others. This criterion excludes the possibility of establishing potential competition based on mere assumptions or intentions not supported by concrete, preparatory actions.[9]

The assessment of the existence of potential competition must be made in the light of the market structure and the economic and legal framework governing its operation. Assessing potential competition involves a careful examination of the structure and context of the market, considering several key factors and operational dynamics. Below is a list of some key areas and points to explore during such an assessment:

• Market structure and context: The first phase of the assessment involves a careful analysis of the market and its functioning, observing not only the current distribution of companies and their market share, but also the prevailing dynamics, trends and business models.
• Regulatory constraints and intellectual property: The presence of regulatory barriers and intellectual property rights, such as patents and trademarks, need careful scrutiny, as they may create barriers to entry or otherwise affect the ability of new entrants to compete effectively in the marketplace. Indeed, intellectual property may restrict access to crucial technologies or knowledge and thus alter competitive dynamics.
• Determination and ability to enter the market: the assessment must extend to an enterprise's willingness and ability to penetrate the market. This involves analysing the resources, skills and strategies that the company can mobilise to enter the market, as well as its resolve to overcome any barriers. The firm's strategic decisions, investments and assets are therefore crucial in assessing the potential competitive impact.
• Preparatory measures and entry strategies: it is also crucial to observe what concrete steps the company has taken to prepare for entering the market. This could include developing or purchasing products, applying for relevant certifications or authorisations, and developing marketing and distribution plans. A detailed analysis of planned or already ongoing initiatives and operations can provide insight into the real intentions and capabilities of the company.
• Additional elements corroborating competition Potential: Other factors may offer additional indications of a firm's determination to be a competitive force. For example, the formation of agreements with other firms, especially if they were not previously active in the market of interest, may indicate the feasibility of their intentions and potential to compete effectively.

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5. Fines, sanctions and procedural initiatives

Non-compliance with antitrust law may be established not only by the Commission and the national antitrust authority, either on their own initiative or on the recommendation of third parties, but may also be brought to the attention of the ordinary courts by the other contracting party or by third parties who consider that they have suffered harm as a result of anti-competitive conduct.

With regard to fines, the Commission has set a significant threshold of up to 10% of annual turnover total realised in the last business year by the undertaking fined. This is due to the fact that the fine must have a 'sufficiently deterrent effect, in order not only to sanction the undertakings concerned (specific deterrent effect), but also to deter other undertakings from engaging in or continuing conduct contrary to Articles 101 and 102'.[10]

Similarly, national legislation[11] confers on the Authority the power to impose pecuniary sanctions in the presence of particularly serious unlawful conduct, which do not have "the nature of a civil asset measure (...) but of an administrative sanction with punitive connotations (akin to those of a criminal sanction)."[12]

As to the procedural steps that may be taken by the other contracting party or third parties, these include the ascertainment of a breach, the declaration of the nullity of the contractual relationship, actions for damages and the adoption of precautionary measures. In these cases, there are no predetermined upper limits for compensation; rather, the quantification of damages will be determined on a case-by-case basis, according to the general principles of compensation established by the law applicable to the individual situation.

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[1] Regulation (EU) 2022/720; Regulation (EC) No 330/2010: Regulation (EC) No 2790/1999.

[2] Point (48) and (91) of the Guidelines on Vertical Restraints.

[3] Guidelines on Vertical Restraints (2022/C 248/01).

[4] Point (104) of the Guidelines.

[5] Point (105) of the Guidelines.

[6] Point (106) of the Guidelines.

[7] Point (72) Commission guidelines.

[8] Point (90) of the Guidelines.

[9] Judgments of 30 January 2020, Generics (UK) and others/Competition and Markets AuthorityCase C-307/18, EU:C:2020:52, paragraphs 36-45;

[10] See Guidelines on the method of setting fines imposed pursuant to Article 23(2)(a) of Regulation (EC) No 1/2003.

[11] (Art. 15 Law 287/1990).

[12] Council of State, Judgment No. 1671 of 2001.

by admin

Market share above 30% and impacts on distribution contracts.

1. Framing.

As is well known, within the European market, the free market principle applies.

Article 101 of the Treaty on the Functioning of the EU deems incompatible with the internal market and prohibits all agreements between undertakings which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the internal market.

The third paragraph of Art. 101 does, however, provide for an exemption to this principle: agreements which, although restricting competition, contribute to improving the production/distribution of goods, or technical or economic progress, remain valid, provided that a fair share of the resulting benefit is reserved for consumers.

In order to decline these principles and provide operators with more clarity, so as to prevent the free market from de facto blocking the structuring of trade through the conclusion of agreements between private parties, the Commission has over the years issued the so-called regulations on vertical agreements, most recently the vertical sales regulation entered into force in June 2022, which aims to exempt, within certain limits, agreements between companies operating at different levels of the distribution chain (which fully includes the distribution contract) from a general non-compete clause.

In order to clarify the scope and content of the exemption regulation, the Commission published, concurrently with the entry into force of Reg. 720/2022, the "Guidelines on Vertical Restraints" so-called "Guidelines on Vertical Restraints".Orientations". Although this is an extremely authoritative text, which plays a key role in the interpretation of European legislation, it is not binding on the decision-making bodies. [1]

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2. The threshold of 30% and the safety zone of the regulation.

The new regulation maintains in Article 3 the exemption for all agreements in which both supplier and buyer do not exceed 30% of the shares in the relevant market; of which they enjoy a presumption of lawfulness all those vertical agreements between parties that do not exceed the above-mentioned thresholds, provided that the contracts do not contain hardcore restrictions prohibited by the regulation (the so-called hard-core restrictions of Article 4 of the regulation, which are essentially, in an exclusive distribution system, a prohibition on imposing the resale price on the distributor, a prohibition on passive sales outside the exclusive territory and customers, an absolute ban on the use of the Internet).

It is very important to emphasise that exceeding the 30% threshold does not create a presumption of illegality.

The purpose of the threshold imposed by Article 3 of the regulation is to establish a "security zone"and distinguish those agreements that enjoy a presumption of legality from those that require individual assessment. The fact that a vertical agreement does not fall within the 'safe harbour', therefore, does not mean that it is incompatible with the internal market and therefore prohibited.[2]

With the introduction of the 'safe harbour', the Commission wanted to prevent potentially more dangerous agreements (due to the greater market power of the undertakings concerned) from automatically benefiting from the exemption and escaping scrutiny as to their actual effects on the market. It is therefore crucial to ascertain whether individual agreements exceed that market share, an assessment that is far from easy, given the difficulty of identifying the relevant market (product and geographic) on which to calculate that market share and the actual impact of the agreement on that market.

In order to understand how the relevant marketI refer to what has already been written in the previous article. Briefly, in order to make this analysis operational and more organic, the relevant market is one in which:

• "all products and/or services are regarded as interchangeable or substitutable by the consumer, by reason of the products' characteristics, their prices and their intended use";
• "the undertakings concerned supply or purchase goods or services, [where] the conditions of competition are sufficiently homogeneous and [where] it can be distinguished from neighbouring geographic areas because the conditions of competition are appreciably different in those areas. "

Thus, the reference market on which the market share is to be calculated does not necessarily coincide with a single territory, but may be higher or lower; for this purpose, it must be ascertained whether companies located in areas other than the one in which the distributor makes its sales actually constitute an alternative source of supply.

As for the method of calculation of market shares (of the supplier and the buyer), Article 8 of the Regulation provides that they are to be assessed on the basis of the previous year's data on the value of sales and purchases, or, if not available, on the basis of reliable estimates.

If a market share does not initially exceed the 30% threshold, but subsequently exceeds it, the exemption continues to apply for a period of two consecutive financial years beginning with the year in which the 30% threshold was first exceeded.[3]

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3. Restrictions by object and effect.

As mentioned at the beginning of the article, Article 101 of the Treaty qualifies as incompatible with the internal market all agreements between undertakings which have 'as their object' or 'as their effect' the prevention, restriction or distortion of competition within the internal market.

There is thus a clear distinction between the notions of 'restriction by object' and 'restriction by effect', each subject to a different evidentiary regime.[4]

Indeed, there are agreements between undertakings that can be considered, by their very nature, harmful to the proper functioning of competition,[5] so much so that where they present 'restrictions by object", negative effects on competition need neither be sought nor proved in order to qualify them as unlawful, since they lead to reductions in production and price increases, to the detriment, in particular, of consumers.[6]

So-called 'restrictions of competition by object' are of an exceptional nature, of which they must be interpreted restrictively and thus applied to a very limited number, reserved precisely for those agreements that are so damaging to competition that it is unnecessary to examine their effects on the internal market.[7]

For cases relating to "restrictions as a result of', individual cases must be assessed on a case-by-case basis, taking into account the nature and quantity, whether limited or not, of the products covered by the agreement, the position and importance of the parties on the market for the products in question, the stand-alone character of the agreement or, on the contrary, its position in a complex of agreements.[8]

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4. Evaluation of individual clauses.

For the assessment of a possible withdrawal of the benefit of the exemption, it is necessary to determine the foreclosure and anti-competitive effects that individual agreements may have on consumers, leading to higher prices, limited choice of goods, lower quality of goods and reduced innovation or services at the level of the supplier.[9] The negative market effects that may result from vertical restraints and that EU competition law aims to prevent are:[10]

• anticompetitive foreclosure of the market against other suppliers or other buyers, as a result of the creation of barriers to entry or expansion;
• the weakening of competition between the supplier and its competitors (so-called competition inter-brand);
• weakening of competition between the buyer and its competitors (d. intra-brand competition).

From a very brief analysis, it can be deduced that agreements may contain contractual clauses that lead to a reduction in either intra-brand competition (i.e. competition between distributors of goods or services from the same supplier), or inter-brand competition (i.e. competition between distributors of goods or services from different suppliers).

In principle, the Commission considers it to be more "dangerous"agreements affecting inter-brand competition, as opposed to those affecting intra-brand competition: it is considered to be unlikely that a reduction in intra-brand competition (i.e. intra-brand) may in itself lead to negative effects for consumers if inter-brand competition (i.e. inter-brand) is strong.^[11]

This must certainly be taken into account when assessing the individual clauses normally contained within a distribution contract that have an impact on competition. The most important of these can be listed below:

• monarchism;
• exclusive supply;
• exclusive allocation of customers;
• ban on online sales.

Monarchism.

Monarchism (this is a translation of the phrase "single branding"), is a category in which numerous clauses affecting free competition fall, including:

• exclusive sourcing (whereby the buyer is obliged to purchase only contractual products from the supplier);
• non-compete obligation during the course of the relationship (where the purchaser undertakes not to resell products that compete with the contractual products);
• imposition of minimum purchase volumes.

In practice, this is a category that groups together agreements whose main characteristic is to induce the buyer to concentrate orders for a particular type of product with a single supplier.[12]

Of the above clauses, only the one relating to the de facto non-compete obligation impacts on competition inter-brand which, when combined with exclusive sourcing, will have an even greater impact, both on the market inter-brandthat on that intra-brand. In such a case, the distributor will be a single-brand distributor, which is obliged to purchase products only from the supplier, thereby impacting competition both within the contract market and on the competing market.

4.2. Exclusive supply.

Exclusive supply refers to restrictions that oblige or induce the supplier to sell the contract product only or primarily to a single buyer.

It is therefore the mirror image of the exclusive supply clause, since in the former, the supplier/dealer undertakes to supply (in a given market) only one buyer, and in the latter, it is the distributor who undertakes to obtain supplies only from the supplier, without the latter necessarily being granted exclusivity within the market where it operates.

Very often (but not always), the two clauses go hand in hand, so that an exclusive distribution relationship is coupled with an exclusive supply relationship.

In particular, in markets where the distribution of a brand is granted on an exclusive basis to one or more distributors, there will be a reduction in intra-brand competition, which does not necessarily reflect negatively on competition between distributors in general.^[13]

Where a supplier allocates a very large territory (e.g. that of an entire state) to a buyer/distributor without restricting the sale of the downstream market, anti-competitive effects are unlikely. Where appropriate, the same may be offset by advantages (ex Art. 101(3)) in terms of logistics and promotion, the buyer being particularly inclined to invest in the licensed trade mark.[14]

4.3. Exclusive allocation of customers.

This clause recognises exclusive sales of the contract products to a single buyer/distributor for the purpose of resale to a certain category or group of customers. Similarly, the distributor is often prohibited from active sales to other exclusively recognised purchasers.

This clause is also among those that have an intra-brand impact, provided that it is not included in combination with other clauses that actually impact competition between competing brands.

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5. Relevant Factors for the Evaluation of Agreements that Exceed the Threshold.

Now, in the case of a distribution relationship, the parties to which exceed the so-called 'safe harbour threshold' of 30%, understanding whether such clauses can benefit from the exemption must be thoroughly assessed on a case-by-case basis taking into account different elements, as well as the impact of such agreements on competition, with the understanding that the combination of the individual clauses with each other has a greater impact on competition.

The following factors are particularly relevant in determining whether a vertical agreement involves an appreciable restriction of competition:[15]

• the nature of the agreement;
• the market position of the parties;
• the market position of competitors (upstream and downstream);
• the market position of the buyers of the contract goods or services;
• barriers to entry;
• the level of the production or distribution chain concerned;
• the nature of the product;
• market dynamics.

Clearly, the greater the market share of contractors (supplier and buyer) on the relevant (upstream and downstream) markets, the greater the likelihood that their market power is high. This is particularly true when the market share reflects cost or other competitive advantages over competitors.[16]

Also relevant is the market position of competitors. Again, the stronger the competitive position of competitors and the greater their number, the lower the risk of foreclosing the market to competitors or weakening competition.[17]

If, for instance, the agreement includes single branding and/or exclusive supply clauses, but the competitors are sufficiently numerous and strong, the Commission considers that significant anti-competitive effects are unlikely: competitors are unlikely to be foreclosed if they have similar market positions and can offer similar products of equivalent quality. Foreclosure of potential entrants could possibly occur if several major suppliers also enter into single-branding agreements with a significant number of buyers in the relevant market.[18]

As for the barriers to entryat the level of the suppliers, these are commensurate with the ability of companies already established in the market to raise their price above the competitive price without causing new competitors to enter the market.

What is certain is that, insofar as it is relatively easy for competing suppliers to set up their own integrated distribution network or find alternative distributors for their product, it is again unlikely that there will be a real problem of foreclosure by having single branding clauses,[19] i.e. clauses that also impact on competition inter-brand. Similarly, even in the case of exclusive supply agreements, the presence of entry barriers at supplier level should not create problems insofar as competing purchasers are contractually recognised as being able to source from alternative sources and this is also easily realisable.[20]

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6. Concluding remarks.

In practice, there is no mathematical formula that makes it possible to identify a priori whether a distribution agreement, which exceeds the 30% quota, is actually exempt from the block exemption, since this depends on numerous factors, including the type and content of the competition-restricting contractual clauses within it and the impact these have on the reference market, which may be more or less competitive.

Thus, in order to understand whether a distribution agreement that exceeds the market threshold of 30% may nevertheless benefit from the exemption, it is necessary to analyse the individual case, also using the tools provided by the Commission and briefly referred to and summarised above. Simplifying (but far from trivialising), the most important elements that should prompt contractors to raise the threshold are:

• market shares held by them;[21]
• the assessment of the individual clauses contained within the agreement, their combination and their effects on the market, taking into account those that impact on competition inter-brand are riskier than those affecting the competition intra-brand;
• the actual competitive state of the market and the position of the major player.

In conclusion, it may reasonably be argued that distribution contracts that do not contain the hardcore restrictions set out in Article 4 of the Regulation, let alone those set out in Article 5, may be exempted, despite being concluded between parties with a market share quite relevant, if the market appears to be sufficiently competitive.

Indeed, if one analyses clauses which have an impact on inter-brand competition (i.e. exclusive purchasing obligation and non-compete agreement), even if these clauses prevent competitors from entering the market (i.e. the dealer is forbidden from supplying and reselling products other than those covered by the contract), in principle they may have a negative impact on competition if it can be shown that there are not enough players within the relevant market of reference who can perform similar services (and thus other dealers who can resell competing products).

On the other hand, as regards sales exclusivity, it essentially affects competition intra-brandwhere there is sufficient competition in the relevant market inter-brandthe clause should not create any particular antitrust problems, for the reasons stated above.

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7. Fines and ordinary actions.

Any non-compliance with antitrust law may not only be ascertained by the Commission and the relevant national authority - either at its own instance or at the instance of third parties - but may also be brought before the ordinary courts at the instance of the other contracting party or third parties who complain that anti-competitive conduct leads to an impairment of their interests.

With regard to fines, the threshold set by the Commission is particularly high, and is equal to up to 10% of the total annual turnover achieved in the previous business year by the undertaking fined. This is because the fine must have a 'sufficiently deterrent effect, in order not only to penalise the undertakings concerned (specific deterrent effect), but also to dissuade other undertakings from engaging in or continuing conduct contrary to Articles 101 and 102".[22]

Likewise, the domestic legislation,[23] recognises the Authority's power to impose fines where the unlawful conduct is characterised by seriousness, which have not '.nature of a civil asset measure (...) but of an administrative sanction with punitive connotations (akin to a criminal sanction)."[24]

As to ordinary actions, these are the typical ones, i.e. those seeking to ascertain a breach, those seeking to ascertain the nullity of the contractual relationship, those seeking to obtain damages, as well as those seeking to obtain a precautionary measure. In this case, no maximum thresholds are envisaged, but the quantification of damages will have to be calculated and assessed from time to time on the basis of the general principles of compensation provided for by the legislation applicable to the individual case.

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[1] Bortolotti, Distribution Contracts, Wolters Kluwer, 2022, p. 775.

[2] Point 48, Guidelines.

[3] Art. 8(d) of Regulation 2022/720.

[4] Judgment of 30 January 2020, Generics (UK) and Others, C-307/18, EU:C:2020:52, paragraph 63

[5] Judgment of 2 April 2020, Budapest Bank and Others, C-228/18, EU:C:2020:265, paragraph 35 and case law cited therein.

[6] In this sense, judgment of 30 January 2020, Generics (UK) and Others, C-307/18, EU:C:2020:52, paragraph 64.

[7] In this sense, Budapest Bank and Others, C-228/18, 2 April 2020, EU:C:2020:265, paragraph 54 and case law cited therein.

[8] In this sense, judgment 18.11.20221, Visma Enterprise, C-306/20, no. 75.

[9] Point 19, Guidelines.

[10] Point 18, Guidelines.

^[11] Point 21, Guidelines.

[12] Point 298, Guidelines.

^[13] Point 21, Guidelines.

[14] Point 135, Guidelines.

[15] Point 278, Guidelines.

[16] Point 282, Guidelines.

[17] Point 283, Guidelines.

[18] Point 303 and 328, Guidelines.

[19] Point 305, Guidelines.

[20] Point 326, Guidelines.

[21] I would point out that, if very high and in the presence of a market that is not particularly competitive, this could even constitute a dominant position hypothesis under Article 102, which I reserve the right to investigate further if requested.

[22] Guidelines on the method of setting fines imposed pursuant to Article 23(2)(a) of Regulation (EC) No 1/2003.

[23] Art. 15 Law 287/1990.

[24] Council of State, Judgment No. 1671 of 2001.

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