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 fined undertaking. 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.