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 trade 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, do not compete 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 Article 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 its 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.