Non-Exclusive: Dual Distribution and Exclusivity
This blog article is relevant to all companies which are parties to a vertical agreement (i.e. an agreement entered into between two parties operating at different levels of trade – typically distribution agreements) concerning the sale or purchase of products or services in the European Union/European Economic Area.
The European Commission adopted a new Vertical Block Exemption Regulation (VBER) and Guidelines on vertical restraints (Guidelines) last in 2022 which are the rules applicable to distribution agreements in the European Union.
In doing so, it made significant drafting changes to both documents by expanding certain sections and tightening up the drafting in others. The Commission inter alia introduced tighter rules for dual distribution, i.e. scenarios in which the seller and the buyer compete on the downstream market. We have published detailed comments on the new law here.
In advising clients we came across one point where the drafting left some uncertainty and which we thought is worth highlighting. This concerns the interplay of dual distribution and exclusive distribution. The concrete questions revolved whether within the scope of the block exemption a manufacturer is able to reserve its right to actively sell to customers in a territory which is at the same time exclusively allocated to one or more buyers.
In summary, we see it as confirmed that this is possible and within the scope of the block exemption.
History of the ‘parallel imposition’ requirement
As a principle, the supplier of goods or services must not impose on its buyers restrictions of sales into certain territories or customer groups. This is established case-law since the seminal European Court of Justice judgment in Consten/Grundig (joined cases 56 and 58/64).
One important exception to that rule is foreseen in the VBER in Art. 4(b)(i), (c)(i)(1) and (d)(i). Within the scope of the VBER a supplier may appoint up to five exclusive distributors in a given territory (or for a customer group) and may then impose restrictions of active sales into that territory by its other buyers. A condition for imposing these restrictions is that they are imposed uniformly (see Art. 1(1)(h) VBER) in order for the exclusive distribution system to be exempted from Art. 101(1) TFEU’s prohibition. This is sometimes called the ‘parallel imposition’ requirement and is based on the rationale that the intended pro-competitive effect of exclusive distribution, namely the possibility to recoup investment into marketing and the prevention of free-riding, would be put into question if the protection offered to the exclusive distributor(s) were not uniform.
In the 2000 version of the Guidelines, the Commission still considered that this territorial protection offered to the buyer must not only encompass active sales by rivalling distributors, but also those from the supplier itself:
‘A territory or customer group is exclusively allocated when the supplier agrees to sell his product only to one distributor for distribution in a particular territory or to a particular customer group and the exclusive distributor is protected against active selling into his territory or to his customer group by the supplier and all the other buyers of the supplier inside the Community.’ (emphasis added)
When the Guidelines were revised in 2010, this requirement was loosened:
‘A territory or customer group is exclusively allocated when the supplier agrees to sell its product only to one distributor for distribution in a particular territory or to a particular customer group and the exclusive distributor is protected against active selling into its territory or to its customer group by all the other buyers of the supplier within the Union, irrespective of sales by the supplier.’ (emphasis added)
It was thus made clear that sales by the supplier itself were irrelevant for the assessment of the territorial restriction. Hence, the supplier was able to reserve the right to serve customers in a territory exclusively allocated to a seller.
Territorial exclusivity in the 2022 Guidelines
New uncertainty?
The 2022 revision of the Guidelines brought about a further relaxation of the rules on active sales restrictions. Most notably, the Commission decided to allow ‘shared exclusivity’, meaning that the supplier may now appoint up to five exclusive distributors in a given territory.
As a result, the sections in the Guidelines dealing with exclusive distribution were rewritten and rearranged to a significant extent. The paragraph roughly corresponding to the excerpts cited above (para 122 of the 2022 Guidelines) does no longer include a reference to sales by the supplier.
The question now arises whether the Commission’s omission in the 2022 Guidelines of a reference to the supplier’s sales into exclusively allocated territories previously introduced by the 2010 Guidelines on the one hand, and the tightening of the rules on dual distribution on the other, signals a change of Commission policy back to its policy of 2000. This conclusion could be supported further by the newly added definition of an ‘exclusive distribution system’ which suggests a certain binary understanding, describing it as a system ‘where the supplier allocates a territory or group of customers exclusively to itself or to a maximum of five buyers’ (emphasis added).
In our view, however, it is clear that no such policy change was intended.
No indication of an actual change of policy
The Guidelines in various instances only refer to the requirement that in exclusive distribution systems, the buyer must be protected by active sales from ‘other buyers’ (2022 Guidelines, paras 117, 122, 219, 220). It does not mention protection from active sales in general.
Secondly, a more restrictive reading would run counter to the objective pursued by the revision of the VBER, namely to enlarge the flexibility offered to suppliers to organize their distribution system. The Commission in its Explanatory Note (p. 2) on the new VBER and Guidelines states that active sales restrictions was an area where false negatives were identified. The Commission referred to restrictions which were not covered by the block exemption but which would with sufficient certainty fulfil the conditions of Art. 101(3) TFEU. This stated objective would we undermined by reverting back to the more restrictive policy from over 20 years ago.
This conclusion is further supported by a hidden statement in the Guidelines in para. 98. In relation to exchange of information in a dual distribution scenario, it is explained that…
‘(…) under an exclusive distribution agreement, it may be necessary for the parties to exchange information relating to their respective sales activities in particular territories or in respect of particular customer groups. (…)’
While it would be theoretically possible to cooperate with one buyer as an exclusive distributor in a given territory, and operate a dual distribution model with this buyer in a another (non-exclusive) territory, the statement still implies that dual distribution and exclusive distribution are not mutually exclusive but instead may exist within the very same territory.
Conclusion
As a result of the above-mentioned considerations, a manufacturer will not have to accept active sales restrictions in relation to the territory allocated to up to five exclusive distributors and is able to (continue to) sell to customers in this territory.
