Background

Economic theory of vertical restraints

Economic theory and competition law

Should distributors have more protection?

Vertical restraints put to the test of economic analysis

Structure of distribution law - Book plan

General bibliography

Introduction

Localizing the anticompetitive effects

Effect on trade between Member States

Scope ratione loci

Concept of an undertaking

Intra-group agreements

Scope ratione personae

Applicability of competition law to vertical agreements

Definition of the relevant market

Anticompetitive object or effect

Appreciability threshold

Concept of agreement and concerted practice

Prohibition of vertical restraints

Block exemptions

Individual exemptions and rule of reason

Exemption of vertical restraints

Control of vertical restraints

Prohibition

Exoneration

Restrictive agreements

Principle

Applications

Abuse of dominant position

Exclusive purchase/Exclusive supply

Resale outside network

International agreement

Exclusive distribution agreements

Manufacturer's guarantee

Protection of the brand

Protecting the network against third parties

Relations between the parties

Selective distribution

Hardcore restrictions

Individual exemptions

Rule of reason

Prohibition of restrictive agreements and individual exemptions

Distribution of new motor vehicles : Regulation No 330/2010

After-sales : Regulation No 461/2010

Block exemption

Motor vehicle distribution agreements

Merger control

Franchising

Commercial agency and competition

EU harmonization

International agency

Commercial agents

This book provides a wide-ranging review of the European rules relating to distribution: exclusive purchase and exclusive supply, exclusive and selective distribution, motor vehicle distribution, franchises, commercial agents.

European Distribution Law

The new approach first of all influenced national law, on the one hand through the principle of primacy in cases where EU law and national law are cumulatively applied, and on the other hand by imitation of EU law where only national law is applicable. In effect, the influence of European law today is such that national authorities and national courts naturally look to it when seeking remedies in  …

Scope of the block exemption regulations

For ten or so years, influenced by the economic analysis of vertical restraints, the Commission has clearly affirmed its desire to adopt an economic and less formalistic approach when implementing its block exemption regulations . This effects-based approach, announced in the Green Paper on competition policy and vertical restraints of 22 January 1997, was the inspiration for block exemption regulations 2790/1999 and 330/2010 and also the Motor Vehicle BER No 1400/2002 and No 461/2010, and their guidelines .

The effects-based approach consists in particular of the acknowledgment of the particularism of vertical relations, the determining of whether the exemption applies according to the market power of operators - measured in terms of market share, and the importance accorded to operators' economic freedom as well as their self-regulation.

The Guidelines on vertical restraints  published by the Commission codify much of the economic analysis of vertical relationships and the principal axioms of economic theory are clearly enunciated in them - “For most vertical restraints, competition concerns can only arise if there is insufficient competition at one or more levels of trade, that is, if there is some degree of market power at the level of the supplier or the buyer or at both levels. Vertical restraints are generally less harmful than horizontal restraints and may provide substantial scope for efficiencies” . The criteria for legal assessment also closely follow the economic theory of vertical restraints - “The assessment of whether a vertical agreement has the effect of restricting competition will be made by comparing the actual or likely future situation on the relevant market with the vertical restraints in place with the situation that would prevail in the absence of the vertical restraints in the agreement. In the assessment of individual cases, the Commission will take, as appropriate, both actual and likely effects into account” .

When the first vertical restraints regulation was adopted, the Commission set the maximum market share threshold at 30% for suppliers to be eligible for the block exemption (except in the highly theoretical case of exclusive supply contracts where the buyer's market share would be used). Under the new vertical restraints regulation (No 330/2010), the exemption is subject to a double market share threshold of 30% - assessed respectively for the supplier on the downstream distribution market and the distributor on the upstream purchase market. The market share threshold is therefore used to assess both the supplier's market power and the distributor's buyer power.

The consequence of the move from a legalistic, directive and standardized block exemption system - providing in detail those contract terms that are prohibited, those that may prove difficult and authorized terms - to a system of moderately supervised freedom based on an economic approach means that operators are responsible for self-assessing their agreements. They must evaluate their market share and determine whether or not it exceeds the dual 30% threshold, and ensure that their agreement or the market situation are not such as to expose them to a withdrawal of the exemption, and if over the “safe harbor” threshold, they must carry out their own assessment of the vertical agreements in light of the EU competition rules. The guidelines are to provide assistance for operators in respect of this self-assessment .

The effects-based approach adopted in the vertical restraints regulations has been the inspiration for all the second generation BERs, particularly the Motor Vehicle BER 1400/2002 and Regulation No 772/2004 on technology transfer agreements. 

For matters relating to motor vehicles, the Commission clearly showed its wish to have a more flexible set of rules that those set out in the previous regulation, No 1475/95. Regulation No 1400/2002 was “less prescriptive than Regulation No 1475/95, with a view to avoiding the “straitjacket” effect […] and to allowing the development of innovative distribution formats” . According to the Commission, it was based “on a more economic approach and on the principle that it is for the economic operators (manufacturers, dealers) to organize distribution according to their own needs”. Various characteristics can illustrate how the Motor Vehicle Regulation has taken on board the economic approach: 

- determination of the exemption according to market share threshold (30% in general and 40% for quantitative selective distribution of new vehicles);

- adoption of the general structure of the vertical restraints regulation, avoiding as far as possible the listing of mandatory provisions: only hardcore restrictions leading to the withdrawal of the exemption for the whole of the agreement and “red clauses” opposing the exemption of the obligation in question are still present; white and gray clauses have disappeared altogether;

- choice offered between different types of distribution - qualitative, qualitative and quantitative, or exclusive - for new vehicles;

- variety of possible contract models for the organization of sales and after-sales, subject to compliance with the provisions of the Regulation.

However, unlike the Vertical Restraints Regulation which adopted a purely economic approach, the Motor Vehicle Regulation combined that approach with the establishing of a veritable status for distributors. Exemption thus depended on standards which had no direct link with competition and were in fact concerned with the protection of competitors. In addition, there are many more conditions of applicability of the exemption than in the Vertical Restraints Regulation, as well as more “black” and “red” clauses. Operators' freedom of choice was often illusory. For the distribution of new vehicles, the choice of the qualitative and quantitative selective distribution model was virtually obligatory. 

During the evaluation of Regulation No 1400/2002, the Commission found there were perverse effects for many of the rules specific to the automobile sector that were absent from the general regulation. It has argued in favor of a return of the industry to the general scheme law of vertical restraints. However, due to the considerable resistance of automobile distributors and repairers, it was forced to defer application of the Vertical Restraints Regulation to motor vehicles by three years and adopt a hybrid regime: after-sales now come under both the Regulation No 461/2010 of 27 May 2010 and Vertical Restraints Regulation No 330/2010 since 1 June 2010 but the Motor Vehicle Regulation No 1400/2002 continued to apply to new vehicle sales until 1 June 2013.

Regulation No 772/2004 on technology transfer agreements  which has now been replaced by Regulation No 316/2014 of 21 March 2014  is also directly inspired by the economic approach. Exemption is subject to the absence of a market share exceeding a pre-determined threshold - 20 or 30% according to the case, as long as the agreement is free of hardcore restrictions. The regulation also provides for “red” clauses, which, although they do not put at risk the exemption of the agreement, are not exempted, and for a mechanism for withdrawal and non-application of the benefit of the regulation. Operators welcomed this legislation . Nevertheless, the Commission has faced much criticism for adopting an economic approach considered too biased (due to the inclusion of too many “red” clauses limiting the freedom of operators), and too general and unsuitable for the high-technology sector. Professionals have claimed that the market share threshold could prevent a greater legal certainty in the field, insofar as it is often difficult to precisely ascertain operators' market shares and that they are of little relevance on dynamic and constantly evolving markets . Some have proposed defining the threshold of the safe harbor, following the US guidelines relative to licensing agreements , taking into account the number of independent sources of technology . More fundamentally, economics commentators have been highly critical of the Commission's approach of sacrificing the legitimate protection of intellectual property rights by calling into question the right to transfer them freely by the use of licenses. According to them, the Commission has underestimated the positive incentive effects of intellectual property rights in the creation and motivation they engender in respect of future inventions and investments and the regulation would inevitably lead to an erosion of the value of those rights, a decrease in transfers in the form of licenses, an inefficient allocation of resources, R&D investments being diverted from Europe to the USA and a general despondency in respect of the effort to make new inventions. In addition, the lack of specialized national courts would render any efficient application of the regulation illusory, as this could only be ensured by a system of notification to a specialized authority.

As a result of the consultations carried out on the draft regulation, the Commission agreed to more flexibility in respect of the hardcore restrictions by granting a wider margin for maneuver to technology holders (whether in respect of the fixing of sale prices to third parties, limiting production or the sharing of markets or customers). On the other hand, it refused to compromise on the market share thresholds defined, arguing that the regulation was not intended to only apply to the high technology sector and that in any case, there was no assumption that the agreement was unlawful due to the non-application of the exemption.

See Guidelines on Vertical Restraints No 2000/C 291/01, at pt 102: "In the assessment of individual cases, the Commission will adopt an economic approach in the application of Article [101 TFEU] to vertical restraints. This will limit the scope of application of Article [101 TFEU] to undertakings holding a certain degree of market power where inter-brand competition may be insufficient".

Guidelines on Vertical Restraints No 2010/C 130/01, at pt 97: "In the assessment of individual cases, the Commission will take, as appropriate, both actual and likely effects into account. For vertical agreements to be restrictive of competition by effect they must affect actual or potential competition to such an extent that on the relevant market negative effects on prices, output, innovation, or the variety or quality of goods and services can be expected with a reasonable degree of probability".

U.S. Department of Justice and Federal Trade Antitrust Guidelines for the Licensing of Intellectual Property, 1995. 

Guidelines on Vertical Restraints, at pt 6.

Guidelines on Vertical Restraints, at pt 97.

Guidelines on Vertical Restraints, at pt 3.

Commission Regulation (EC) No 772/2004 of 27 April 2004, OJ L123, 27 April 2004. 

Regulation No 316/2014 of 21 March 2014 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of technology transfer agreements, OJEU L 93 of 28 March 2014.

Joint Comments of the American Bar Association's Sections of Antitrust law etc. on the application of the EU regulation: "the proposed reforms constitute a major improvement to the current highly complex and formalistic TTBER, introducing a conceptually sounder, more economics-based approach to the competition law treatment of technology licensing agreements". 

New generation block exemption regulations

The influence of economics on the law was clearly the intention of the authors of the regulations as a reaction to the excessive formalism of the previous regulations. In that sense, the regulations are part of a certain revolt by economics against the law or an “economization” of the rule of law. The economic approach to vertical restraints and the emphasis on taking the effects of agreements into account necessarily limit the prescriptive character of the rules. An undertaking's behavior is no longer the real reason for a sanction, which is determined mainly by its position and the structure of the market on which it evolves. Although the purely economic approach appears optimal in terms of efficiency, it is however hard to accept in terms of justice. It has also never been allowed to go through to its ultimate end; legal conditions have widely been re-injected into the competition rules. This principle is prevalent in all the competition rules (from cartels  to abuse of dominance ), and particularly in matters of vertical restraints. Examples of the re-appropriation of the rule by the law are legion within the area of vertical restraints and have moreover aroused the criticism of economists who only see their “imperfections”. The consideration of the market power of undertakings and effects of practices has resulted in the institution of market share thresholds on which the benefit of the exemption is conditional. This approach, hailed by businesses because of its simplicity and the legal certainty that it brings, has been systematically criticized by most economists who favor a case-by-case analysis. Although overall nowadays, practices are assessed by their effects measured with reference to market share thresholds of 5%, 15%, 30% or 40% or on a case-by-case basis, a certain number of types of behavior continue to be sanctioned per se, as “black clauses” which remove the benefit of the exemption for the whole of the agreement, or as conditional “red clauses” which limit the loss of the benefit to the anticompetitive clause alone. For economists, the notion of black clause or hardcore restrictions finds no equivalent in economic analysis: the economic effects of a restriction of competition should always be subject to an examination on a case by case basis . Some practices are in fact penalized for purely political reasons, insofar as they are contrary to the integration of European markets. This policy objective is clearly set out by the Commission in its Vertical Guidelines  even though it is somewhat in contradiction with the desire for economic efficiency and the well-being of consumers. The Commission's position is undoubtedly open to criticism in economic terms but, from a legal point of view, the rehabilitation of the rule by the law is indispensable. Efficiency does not have to be the only objective of legal rules. Going beyond the political objective of integration of the markets which explains part of the shift in the Vertical Restraints Regulation in respect of the economic approach, the need for legal certainty wholly justifies the preserving of a legal approach. A 100% case-by-case approach unaffected by the rule of precedent, like certain economists would like to see, would be unacceptable to undertakings. Operators need to be able to understand why they have been penalized and to be informed beforehand of the legal risk they incur: they need a simple and easy standard to interpret so they can avoid sanctions by ensuring their behavior is within the law. Operators cannot be sacrificed on the altar of economic efficiency but deserve to be protected by the law. Moreover, the law taking account of economic analysis would not be accepted, and efficiency would eventually suffer if standard conditions were not reintroduced in the rule of law. 

In matters of horizontal agreements, for example, it is not enough for the supervisory authorities to establish parallel behavior by certain undertakings on a market for it to infer the existence of a cartel between those undertakings. There must be additional evidence - either positive or negative - of concertation (Commission Decision No 85/202 of 31 March 1993, “Wood pulp”, LawLex200500004017JBJ). For vertical agreements, if, by virtue of the cumulative effect theory, an agreement only producing minimum restrictive effects can be prohibited solely due to the presence on the market of other similar agreements, for the prohibition to apply the EU courts require that the agreement in question must “make a significant contribution to the sealing-off effect” of the market (Case C-234/89 Delimitis v Henninger Bräu [1991] ECR I-935, LawLex200500003931JBJ).

According to the court, all behavior contributing to the development of a dominant undertaking will not constitute an abuse. To be prohibited, the behavior must be abnormal i.e. beyond what is necessary for the protection of the legitimate interests of the undertaking in question (Case 85/76 Hoffmann - La Roche v Commission [1979] ECR 461, LawLex200400002971JBJ.

See the Commission's new position in its Guidelines of 19 May 2010 regarding black clauses in general and retail price fixing in particular which may now be exempted through efficiencies.

Guidelines on Vertical Restraints of 2022, pt 5, recalling that “[a]rticle 101 of the Treaty also pursues the wider objective of achieving an integrated internal market, which enhances competition in the Union. Undertakings may not use vertical agreements to reestablish private barriers between Member States where State barriers have been successfully abolished” and pt 18: “the negative effects on the market which can result from vertical restraints and which Union competition law aims to prevent are, in particular, the following: (a) anticompetitive foreclosure of other suppliers or other buyers, by raising barriers to entry or expansion; (b) softening of competition between the supplier and its competitors and/or the facilitation of explicit or tacit collusion between competing suppliers, often referred to as the reduction of inter-brand competition; (c) softening of competition between the buyer and its competitors or the facilitation of explicit or tacit collusion between competing buyers, often referred to as the reduction of intra-brand competition where it concerns distributors of the goods or services of the same supplier(24); (d) the creation of obstacles to market integration, including in particular, limitations on the consumer's choice to purchase goods or services in any Member State.”

Block exemption regulations - economics vs law

The new approach first of all influenced national law, on the one hand through the principle of primacy in cases where EU law and national law are cumulatively applied, and on the other hand by imitation of EU law where only national law is applicable. In effect, the influence of European law today is such that national authorities and national courts naturally look to it when seeking remedies in legal disputes brought before them even when EU law is not applicable .

The block exemption regulations have also exerted a direct influence on the content of distribution agreements. In law, a BER defines clearly the conditions under which agreements may or may not be eligible for automatic exemption under the EU laws on restrictive agreements. However, by defining the conditions for exemption, the regulations have largely determined the framework and content of distribution agreements, in that operators endeavor to draft their agreements to comply with competition law in order to benefit from the legal certainty of block exemption.

The conditions under which products and services are distributed in the countries of the European Union and the European Economic Area have thus been very largely unified by the successive block exemption regulations. That influence has even gone further than the EU and EEA territory, reaching those countries wishing to join the EU or non-EU countries that are highly integrated to the territory through Association Agreements with similar provisions. The preparation and drafting of distribution contracts in Europe now depend on the block exemption regulations: operators tend to choose the distribution model which allows them to benefit from a block exemption in the largest number of countries as possible, before developing terms specific to the national markets where thresholds are exceeded. The contract type, conceived at the European level, is usually merely adapted to take account of the mandatory requirements of national law.

The French competition authorities consider on that, even when they are not applicable, BERs are a useful guide to analysis for the application of French law: See, concerning former BER 2790/1999: Competition Council Decision No 00-D-82 of 26 February 2001, ice-cream sector; No 01-D-45 du 19 July 2001, relative to an application submitted by the company Casino France; 15th Report of the Competition Council, 2001, 65-67, Annexes, 440; Competition Council Decision No 02-D-01, 22 January 2002, relative to an application submitted by the company SERAP; No 02-D-36 of 14 June 2002, relative to practices observed in the sector for the distribution of optical spectacles in the Lyon area market. The German legislator has declared, through the 7th Amendment of the GWB of 16 and 17 June 2005, which entered into force on 1 July 2005, that the conditions for exemption set out in its Article 2 para. 1 of the GWB are presumed to be fulfilled where the agreement meets the conditions set out by a EU block exemption regulation even in the absence of any effect on trade between Member States i.e. even when EU law is not applicable. The referral is called "dynamic" (dynamische Verweisung), as amendments to the EU texts are automatically integrated into German law.

European Distribution Law

12. Scope of the block exemption regulations

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Les notions juridiques connexes

12. Scope of the block exemption regulations

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Les notions juridiques connexes

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