The new European Regulation on Vertical Agreements and Concerted Practices maintains the exemption for all agreements in which both supplier and buyer do not exceed the 30% of market shares on the relevant market; all vertical agreements between parties that do not exceed these thresholds enjoy a presumption of lawfulness, provided that the contracts do not contain hardcore restrictions prohibited by the Regulation.

This has to be coordinated with the fact that over the past decades the Commission has issued a number of Notices, which aim to clarify a very relevant principle in antitrust matters, namely the inapplicability of the prohibition of Article 101(1) of the Treaty to agreements whose impact on trade between Member States or on competition is negligible.

Not to mention the theory de minimis developed by the Court of Justice, according to which the agreement does not fall under the prohibition of Article 101 if, in view of the weak position of the participants on the product market, it affects the market to an insignificant extent.

Applying these principles to exclusive distribution relationships is a far from easy task, and this article will attempt to provide the reader with an overview of the subject, thus offering food for thought and insight.

______________________________

1. Typical competition-restricting clauses in exclusive dealership contracts.

The new European Regulation 2022/720 on Vertical Agreements and Concerted Practices maintains the approach already adopted by Regulation 330/2010, under which all restrictive clauses of competition included within vertical relationships (as defined in Article 1) are automatically exempted, with the sole exception of a limited group of impermissible agreements.

The expressly prohibited covenants fall mainly into two groups, namely:

  • severe or fundamental restrictions (so-called hardcore restrictions), listed in the 4, the presence of which excludes the entire agreement from the benefit of the block exemption (and which, in an exclusive distribution system, are essentially the prohibition of resale price maintenance to the distributor, the prohibition of passive sales, and the prohibition of the use of the internet);
  • the restrictions set out in 5which, although not exempted by the Regulation, their presence does not prevent the rest of the agreement from benefiting from the exemption (and which, in an exclusive distribution system, are essentially the over five-year non-compete obligation[1] and the post-contractual non-compete obligation).

In the context of a dealership relationship, such an approach whereby everything that is not expressly prohibited (even if in itself restrictive of competition under Article 101) is implicitly authorised, is perfectly in line with the approach taken by the Commission in the (now distant) decision Grundig,[2] where the absolute protection of dealers and the creation of 'closed exclusive' distributions was deemed contrary to the principles of the European single market,[3] so-called 'open exclusivities' were considered admissible and in line with the European competition principle,[4] which in fact guarantees the possibility of parallel markets to the exclusive one.[5]

Read also: Parallel Sales in the EU. When and to what extent can a manufacturer control them?

In addition, therefore, to the classic (open) exclusivity clause, a further clause typically included in sales dealership contracts that may be deemed automatically exempted by the European Regulation (since it is not expressly prohibited) concerns the imposition of an obligation on the part of the supplier/dealer not to make sales (not even passive sales) to customers in the territory reserved exclusively for the dealer.

Similarly, it could be said, as indeed part of the doctrine affirms,[6] that a clause prohibiting the supplier/dealer from selling products to parties outside the territory, of which he is aware that they supply within the dealer's area, is also admissible.

Otherwise, a clause by which the distributor undertakes to obtain its supplies exclusively from the supplier would seem to fall within the scope of the definition of the non-compete obligation provided by Article 1(f)[7] and therefore subject to the time limit set out in Article 5 of the Regulation.

Having made a very brief 'roundup' of the typical clauses of exclusive dealership contracts that may have restrictive impacts on competition, we will examine below the impact that the market share of the supplier and dealer may have under antitrust law. On this point, in fact, it is noted that:

  • Article 3 of the Regulation provides that the exemption applies to all agreements in which both supplier and buyer do not exceed 30% of quotas in the "relevant market";
  • the European Commission, in line with the Court of Justice, in its Communication of 30.8.2014, set the market shares below which the prohibition of Article 101 is to be considered inapplicable, with the exception of restrictive clauses by 'object' and fundamental clauses;
  • the European Court of Justice developed the theory de minimisaccording to which in the presence of insignificant market shares, the individual agreement may not fall in full under the prohibition of Art. 101.

______________________________

2. Market shares above 30%.

The new regulation in Art. 3 has maintained, for all vertical agreements, the so-called safety zone provided for in the previous regulation,[8] delimited by the market share threshold of 30%, which must be exceeded by both the supplier and the buyer within the relevant market where they respectively sell and purchase the contract goods or services. They benefit from the automatic exemption granted by the Regulation, i.e. a presumption of lawfulness, provided also that they do not contain hardcore restrictions prohibited by Article 4 of the Regulation.

______________________________

2.1. Identification of the relevant market.

Applying this principle to exclusive dealerships, in order to understand whether the individual agreement enjoys this presumption, it is necessary to identify the relevant market of both the manufacturer and the seller and to assess whether both parties have a share of more than 30%.

In particular, it must be understood whether the reference market is the contractual one (and thus corresponds to the territory granted on an exclusive basis), or whether it must be broadened to include areas in which the dealer does not actively operate.

The answer, far from immediate, is partly offered by the Point 88 of the old Commission Guidelines (2010/C 130/01)as well as by the point 170 of the new guidelines. The latter, in particular, refers for the definition of the relevant market to the criteria used by the Commission in its Communication 97 /C 372/03.

First, it is necessary to understand and define what is meant by the relevant (product) market, which includes (point 7 of the 97 Communication):

"all products and/or services that are regarded as interchangeable or substitutable by the consumer, by reason of the products' characteristics, their prices and their intended use. "

Thus, in order to calculate 30%'s quota, it is first necessary to understand whether the contract products can be substituted by other similar products, based on the purposes for which they were conceived, designed and sold, from the point of view of the end consumer.

Having done so, one has to move on to the relevant geographic market (here is the definition, taken from paragraph 88 of the 2010 Commission Guidelines):

"The relevant geographic market comprises the area in which the undertakings concerned are involved in the supply or purchase of products or services, in which the conditions of competition are sufficiently homogeneous and can be distinguished from neighbouring geographical areas because the conditions of competition are significantly different in those areas. "

With specific reference to the relevant geographic market, paragraph 13 of the Notice clarifies:

"An undertaking or group of undertakings cannot exert a significant influence on current sales conditions, and in particular on prices, whether customers are able to switch easily to substitute products available on the market or to suppliers located elsewhere. Basically, the market definition exercise consists of identifying the actual alternative sources of supply for the customers of the companies concerned, both in terms of products/services the geographical location of suppliers. "

Paragraph 29 of the Notice would seem not to exclude that the relevant market may also be regional, but in order to be defined as 'relevant', it must actually be ascertained whether undertakings located in areas other than the area in which the distributor carries out its sales really constitute an alternative source of supply for consumers; this is done by means of an analysis of the characteristics of demand (importance of national or local preferences, current purchasing habits of consumers, product differentiation and brands, etc.), aimed at determining whether undertakings located in different areas really constitute an alternative source of supply for consumers.

On this point, the Commission states:

"The theoretical test is also based here on the substitution effects that arise in the event of a change in relative prices, and the question to be answered is always the same: whether the parties' customers would decide to turn to companies located elsewhere for their purchases, in the short term and with negligible costs. "

Point 50 of the Communication finally points out that obstacles and costs related to switching to suppliers located in another geographical area must also be evaluated.

It is stated precisely that:

"Perhaps the most obvious obstacle to switching to a supplier located in another area is the incidence of transport costs and possible transport difficulties resulting from regulatory requirements or the nature of the relevant products. The incidence of transport costs normally limits the geographical market radius for bulkier and lower-value products, although it should not be forgotten that disadvantages arising from transport costs may be offset by comparative advantages in terms of other costs (labour or raw material costs). "

In view of the foregoing, it may reasonably be argued that the relevant market for the purposes of the Regulation is not to be understood as the air to which the distributor has been granted exclusivity, but it is possible (if indeed this is the case) to extend that air to a larger, or smaller, geographical area.

Certainly, if within the same relevant market the licensor designates a large number of exclusive distributors, there will be an increased ease for final purchasers to travel to other areas to purchase the products sold, by virtue of the particular fragmentation of the market into several exclusive zones.[9]

If, on the other hand, the market in a given country is granted on an exclusive basis only to one dealer, and in that market both parties have a share of more than 30% of the relevant market, it will certainly be less easy (though far from impossible) to prove that the relevant reference market should be extended to a supranational area, not covered by the contractual exclusivity.

Importantly, however, the Commission considers that the mere exceeding of market shares under Article 3 does not automatically presume that the agreement (which does not contain hardcore restrictions of competition under Article 4) does not benefit from the block exemption.[10]

This will require an individual assessment of the likely effects of the agreement, with an invitation to the companies to make their own assessment, no notification being necessary.[11] The Commission suggests in §§ 97 ff. methods for evaluating these effects.

 

______________________________

3. Market share below 15%.

 

Over the past decades, the Commission has issued a number of Communications, most recently the current one of 30.8.2014which aim to clarify a very relevant principle in antitrust matters (a principle most recently reaffirmed by the Court of Justice in the judgment Expedia,[12]) i.e. the inapplicability of the prohibition in Article 101(1) of the Treaty to agreements whose effect on trade between Member States or on competition is negligible.

Article 5 of the Notice makes it clear that the Notice, although non-binding, is to be embraced as an essential tool for judges and responsible authorities in the interpretation of European competition law.

Article 8(b) states that the vertical agreement (in this case, the exclusive distribution agreement) is irrelevant if the shares held by each of the parties do not exceed 15% on any of the relevant markets affected by the agreement.[13]

In line with the case law of the Court of Justice, it is made clear that the inapplicability of the prohibition to minor restraints does not apply to restrictions for "object",[14] as well as the hardcore restrictions in Article 4 of the Regulation (i.e. prohibition of resale price maintenance, passive sales and the use of the Internet).

The Notice, on the other hand, expressly determines the applicability of the prohibition of restrictive practices to minor restraints under Article 5 of the Vertical Agreements Regulation. On this point, the second part of Article 14 provides that:

"The safe harbour is [...] relevant for agreements covered by a Commission block exemption regulation to the extent that such agreements contain a so-called excluded restriction.".

As we have seen, the clauses included in Article 5 of the Regulation (so-called excluded restrictions) that are most often used in exclusive distribution systems are the five-year non-compete covenant and the post-contractual non-compete covenant; these clauses, which by definition are excluded from the restrictions "by object", would therefore appear not to be automatically subject to the prohibition of Article 101, whenever the individual relationship does not exceed the relevant market share of 15% identified by the Commission.

______________________________

4. Market share below 2%.

In (far) 1969, the Court of Justice in its judgment Völk-Vervaeckehad developed a theory according to which the agreement does not fall under the prohibition of Article 101 if, in view of the weak position of the participants on the product market, it affects the market to an insignificant extent.

In the present case, the shares held were 0.008% in EEC production and 0.2% in Germany, and the Belgian dealer had a share of 0.6% in the Belgian and Luxembourg markets.

In that circumstance, the Court had recognised the possibility of establishing a relationship of even absolute exclusivity (and thus closed exclusivity), "because of the weak position of the participants on the market for the products concerned in the protected area."

In such cases (where the quota is "irrelevant"and not "negligible"as in the case outlined by the Commission), even agreements containing clauses would be valid hardcoreon the assumption that if the agreement does not have any appreciable effect on competition, the degree of dangerousness of the clauses contained therein cannot be relevant.[15]

It should be noted that it was deemed "an undertaking of sufficient size for its behaviour to affect trade'. a company holding 5% of the market,[16] thus a company holding 3%, if these percentages are higher than those of most competitors and taking into account their turnover.[17]

______________________________

 

[1] The new Regulation maintains the previous approach, leaving the five-year period unchanged, the new guidelines introduce (at §248) an important novelty with regard to the hypothesis (iii) of tacit renewal, non-compete clauses that are tacitly renewed beyond five years may be exempted, provided that the distributor is allowed to effectively renegotiate or terminate the vertical agreement containing the non-compete obligation with reasonable notice and without incurring unreasonable costs, and that the distributor is then able to switch to another supplier after the expiry of the five-year period.

[2] Decision Grundig-Costen, 23.9.1964.

[3] Closed' exclusivity is characterised by the fact that the dealer is granted perfect territorial protection by imposing on all distributors in the network not to resell to persons outside their area, and with the further obligation to impose this prohibition on their buyers, etc.

[4] Open exclusivity is characterised by the fact that the dealer obtains the right to be the only party to be supplied by the manufacturer in a given territory. In any case, the position guaranteed to the latter is not a 'monopoly', since parallel importers, albeit within the limits imposed by atitrust law (on this point cf. Parallel Sales in the EU. When and to what extent can a manufacturer control them?) will be able to purchase the goods from third parties (wholesalers or dealers in other areas), and then possibly resell them in the dealer's exclusive territory.

[5] On this point see Bortolotti, I contratti di distribuzione, p. 690, 2016, Wolters Kluwer.

[6] Bortolotti, p. 695.

[7]"Non-compete obligation' means any direct or indirect obligation [...] which obliges the buyer to purchase from the supplier or from another undertaking designated by the supplier more than 80 % of its total annual purchases of the contract goods or services.. "

[8] See Art. 3 Reg. 330/2010. Reg. 2790/99 postulated, as a condition for the exercise of the presumption, a market share (normally held by the supplier) not exceeding the threshold of 30%. The double threshold had also been advocated by the Commission with regard to the 1999 version; however, the proposal had been dropped due to widespread opposition by practitioners and then accepted in the 2010 regulation, given the awareness of the growing size of the 'buying power' of large-scale distribution, Restrictions by object, Ginevra Buzzone, Trento 2015.

[9] On this point see also §130 of the New Guidelines.

[10]§ 275 of the new Guidelines, in accordance with § 96 of the previous Guidelines.

[11] § 275 of the new Guidelines, in accordance with § 96 of the previous Guidelines.

[12] See Case C-226/11 Expedia, in particular paragraphs 16 and 17.

[13] Point 19 also states that "Where in the relevant market competition is restricted by the cumulative effect of agreements for the sale of goods or services entered into by several suppliers or distributors (cumulative foreclosure effect of parallel networks of agreements having similar effects on the market), the market share thresholds under paragraphs (8) and (9) are reduced to 5 %, both for agreements between competitors and for agreements between non-competitors. Individual suppliers or distributors whose market share does not exceed 5 % are in general not considered to contribute significantly to a cumulative foreclosure effect (3 ). Such an effect is also unlikely to arise where less than 30 % of the relevant market is covered by (networks of) parallel agreements having similar effects. "

[14] Since 1966, the Court has in fact indicated, in Consten & Grundig that 'for the application of Article 101(1), it is unnecessary to consider the actual effects of an agreement where it appears that it has as its object the restriction, prevention or distortion of competition' and specified in Société Technique Minière that, in order to consider an agreement restrictive by object, one must consider "the very object of the agreement, taking into account the economic circumstances in which it is to be applied. (...) If the examination of these clauses does not reveal a sufficient degree of harm to competition, the effects of the agreement will have to be examined and the agreement will be caught by the prohibition if it appears that competition has been prevented, restricted or distorted to an appreciable extent in practice.". Cf. Restrictions by object, Ginevra Buzzone, Trento 2015; Commission Staff Working Document Guidance on restrictions of competition 'by object'.

[15] Bortolotti, p. 653.

[16] Case 19-77, Miller International.

[17]