Dual distribution in the EU – the safe harbour shrinks

In July we reported that the European Commission published its proposals for updated distribution rules, consisting of a revamped Verticals Block Exemption Regulation (VBER) and related Guidelines (available here). The consultation is open until 17 September, with the new rules due to be finalised in time to enter into force on 1 June 2022.

One controversial aspect of the proposals is the approach to dual distribution (where a supplier sells goods or services not only through independent distributors but also directly to end customers in direct competition with its independent distributors). With suppliers now frequently selling products online via their own websites dual distribution has become far more prevalent than it was, and so this issue has grown in importance.

In relation to dual distribution, it is proposed to broaden the scope of the block exemption beyond distribution by manufacturers to also cover distribution by wholesalers and importers. However, at the same time it is proposed to materially narrow the scope of the block exemption in other respects:

• it will only apply in full if the parties’ aggregate retail market share does not exceed 10 per cent;
• if the aggregate retail market share is above 10 per cent but below 30 per cent, the exemption applies, but does not cover information exchanges between the parties, which are assessed separately; and
• it does not apply to online intermediation services (OIS) providers selling goods or services in competition with undertakings to which they provide OIS.

While we welcome the maintenance of the block exemption for dual distribution, we question its narrowing in this way, and we also believe that clear guidance on the permissible scope of information exchange in the dual distribution context outside of the new 10 per cent safe harbour is essential.

10 per cent market share threshold

In our view, the new 10 per cent market share threshold in respect of information sharing aspects of agreements adds unnecessary complexity to the self-assessment of the permissible scope of dual distribution. The Commission’s 2014 de minimis notice already provides comfort for agreements between competitors below the 10 per cent threshold. As such, and contrary to the current VBER regime, the new rules will not provide any additional guidance regarding information exchange. This is undesirable, not least as it is contrary to the Commission’s stated objectives in this review, which include simplification and streamlining of the rules.

Information exchange between suppliers and their independent distributors is essential to efficiently operate a distribution system. If the 10 per cent threshold is adopted as currently proposed, we see a risk that suppliers who are reliant on information exchange with their independent distributors will decide not to take the risk of selling directly into markets where they have concerns that they might exceed the 10 per cent threshold. The new rules are therefore likely to impact suppliers’ freedom of designing their distribution systems according to their business needs (another explicit objective of the VBER revision) and, at the same time, may deprive consumers of an additional sales channel.

It remains unclear why such a severe measure is taken given that the main rationale appears to be linked to information exchange in an online context only. The introduction of a general market share threshold of 10 per cent results in unnecessary uncertainty for offline sales channels.

Exclusion of hybrid OIS providers

The absolute exclusion of hybrid OIS providers (those that both provide intermediation services and also sell goods or services in competition with their users) from the benefit of block exemption is unnecessary, and denies the benefit of the safe harbour even to smaller hybrid companies. It appears that this absolute exclusion is inspired by the equation of hybrid platforms with digital gatekeepers, the latter being a concept from the draft Digital Markets Act which has been carried over into the present proposals. But this does not justify disadvantaging smaller OIS providers in this way, especially taking into account the (often very pro-competitive) dynamics such players bring into the market.

Guidance on information exchange 

Clear and practical guidance on information exchange in dual distribution scenarios is essential given that the safe harbour in this context is reduced to the general de minimis threshold. It is important to recognise that the exchange of a certain amount of information is necessary and ancillary to the proper functioning of many vertical agreements. Such information exchange is also often crucial in developing product and service innovations which benefit consumers. The approach to information exchange in any guidance should therefore recognise that a manufacturer or supplier is not prevented from having normal discussions about a vertical relationship with its distributors simply because it also competes at the downstream retail level.

The draft guidelines provide no guidance on these issues. The Commission intends cover these questions in the revised Horizontal Cooperation Guidelines, currently under review. However, in dual distribution the horizontal aspect is an ancillary concern in relation to a business structure which is essentially vertical in nature. This is the rationale for including some dual distribution arrangements within the safe harbour of the block exemption. In our view, at least ancillary information exchanges should therefore be addressed in the vertical guidelines as opposed to the upcoming horizontal guidelines. Postponing the relevant guidance to the revision of the Horizontal Cooperation Guidelines results in a significant uncertainty for undertakings in the interim period.

Especially if the lower 10 per cent threshold for information exchanges is maintained, it is of crucial importance to provide businesses with clear and pragmatic guidance to determine the circumstances in which the Commission recognizes the ancillary nature of information exchanges with distributors, and the circumstances in which they can be exempted under Article 101(3). It should also indicate whether, and if so when, certain exchanges of information are likely to be problematic and how any competition concerns can be addressed as a practical matter. UK and US precedents may provide useful inspiration in developing such guidance. Guidance should also recognise that many manufacturers and marketplaces institute information walls, clean teams and place limits on data access. Therefore, it should not be presumed that information flows create competitive concerns. It could also indicate the Commission’s view on the effectiveness of different types of such mechanisms.