VAN BAEL & B E L L I S

Comments on the draft Vertical Agreements Block Exemption and Guidelines on Vertical Restraints

1. INTRODUCTION

1.1 Van Bael & Bellis welcomes the opportunity to submit comments on the Commission’s draft new vertical agreements block exemption regulation (the “draft VABER”) and the draft guidelines on vertical restraints (the “draft Vertical Guidelines”).

1.2 Overall, Van Bael & Bellis considers that the existing block exemption (“VABER”) and Vertical Guidelines have worked well in practice and have proven far superior to the excessively restrictive and form-based legal regime which applied to vertical agreements prior to 1999. We therefore welcome the fact that the drafts issued by the Commission for the most part do not incorporate substantial changes. However, for the reasons given below, we would urge the Commission to reconsider some of the changes it is proposing and, in addition, consider a limited number of additional changes which would, we would submit, significantly improve the existing framework. In the interests of economy, we will only make relatively brief comments in this document, but we would be pleased to expand upon specific points if this would be useful for the Commission’s services.

1.3 As a general introductory point, we would stress that the VABER is probably the instrument of EC competition law which is most used in practice by business on a day-to-day basis. This reflects the basic fact that vertical agreements are extremely common (indeed, any agreement for the sale of goods or services between two undertakings is a vertical agreement). Although the VABER only provides a legal safe harbour, nonetheless the certainty provided by this safe harbour is understandably treated with great importance by business, one reason being the relative complexity of the Vertical Guidelines. It is, therefore, in our view important that business is able to reasonably predict whether or not the block exemption applies to their agreements without incurring disproportionate costs or delays, as otherwise the value of the block exemption is questionable.

2. MARKET SHARE THRESHOLD

2.1 We would urge the Commission to reconsider the proposal to make the application of the block exemption to any agreement conditional on the 30% market share threshold being respected not only by the supplier but also by the buyer as now envisaged by the draft VABER.

2.2 The practical difficulty for a supplier to estimate the market share of each and every buyer forming part of its distribution system across the EU should not be under­estimated. It is not unusual in our experience for a supplier to appoint hundreds, if not thousands, of distributors in the EU. The determination of the relevant product and geographic markets on which the supplier alone operates, as well as identifying the data needed to assess its market share, is already a significant challenge under the current block exemption. This task may simply become impossible in practice if it is necessary for a supplier to define the product and geographic markets on which each of hundreds

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or thousands of its buyers operates as well as obtain the data needed to calculate the market share.

2.3 We would urge the following factors to be taken into account by the Commission in assessing this proposed change: (i) it may often not be possible for the supplier just to assume, as a methodological short-cut, that the buyer operates on a relevant market with the same product and geographic scope as the supplier, given that downstream distribution markets may frequently be broader in product terms but much narrower in geographic terms (requiring the type of complex assessments which suppliers would otherwise not need to make); (ii) suppliers may be competitors with their buyers downstream if suppliers also make direct sales, and therefore collecting the information necessary to calculate market shares may raise its own competition law concerns; and (iii) this rule would create an unhealthy incentive on suppliers to impose non-competes on their buyers to limit their market share in an attempt to avoid the loss of protection offered by the block exemption.

2.4 We would also suggest that the change to the current rule (under which the market share of the buyer is only determinative in case of an exclusive supply arrangement for the entire Community) is disproportionate in the light of the reason that we understand underlies the change. If the concern is indeed the ease with which the current rule can be circumvented by carving out a single, small non-exclusive territory simply in order to prevent the entire Community being allocated to one buyer, this would be more appropriately addressed by adopting a broader definition of exclusive supply in the block exemption (e.g., to cover any commitment by a supplier in an exclusive distribution system to appoint only one buyer to resell either in a territory or to a customer group). We would further propose that the application of the block exemption to any such broadly defined exclusive supply obligation would depend on the market share only of the buyer (and not also of the supplier) respecting the market share threshold.

2.5 We consider that the buyer’s market share should only determine the applicability of the block exemption to restraints which benefit the buyer, primarily an exclusive supply obligation. Indeed, it would be undesirable that the exemption of restraints which do not benefit the buyer should depend on the market share of the buyer. It is not apparent what theory of harm would support such an approach. Indeed, to the contrary, in circumstances where the market share of the buyer - but not the supplier - exceeds 30%, vertical restraints imposed by the supplier may be an important pro-competitive means of constraining the exercise of market power by the buyer. It is regrettable therefore to prevent the block exemption from applying to those restraints.

3. ACTIVE SALES RESTRICTIONS

3.1 We would urge the Commission to consider amending the current very limited circumstances under which an active sales restriction is exempted by the VABER, which are unchanged in the draft VABER and Vertical Guidelines. We would favour more freedom on suppliers to impose active sales restrictions.

3.2 The draft VABER released by the Commission would maintain the rule in the current block exemption that a distributor may only be restricted from making active sales in territories or to customers that have been either exclusively allocated to another distributor or exclusively reserved to the supplier for direct distribution (assuming

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selective distribution is not used). Furthermore, the draft Vertical Guidelines contain the current approach that no buyer can be prevented from selling actively into a territory even where only one distributor has been granted contractual exclusivity unless the supplier prohibits all its buyers in the entire EU from actively selling there. Active sales restrictions in other circumstances will continue to be treated as hardcore restrictions. We would urge the Commission to reconsider this approach, which we consider to be excessively strict and which, in our experience, makes it very difficult to ensure that active sales restrictions are in practice exempted by the block exemption particularly in large pan-European distribution systems.

3.3 The type of major practical uncertainties and problems which arise with the current approach include the following:

• A supplier may frequently be vertically integrated to a differing extent in different parts of the EU and therefore grant exclusivity at the wholesaler level in some countries whilst supplying retailers direct in other countries. In such a scenario, may a supplier under the current approach prevent a retailer appointed directly by it in one territory from selling actively at the retail level in another territory where the supplier (being vertically integrated to a lesser extent there) has granted exclusivity either (i) to an independent importer/wholesaler or (ii) to an affiliated importer/wholesaler and where retailers are appointed on a non­exclusive basis?

• A supplier may launch a product in some countries with no fixed plan to launch in others. In these circumstances, for how long may a supplier reserve a territory exclusively to itself without selling there?

• The inability under the block exemption to limit active sales in territories where co-exclusivity exists is undesirable as co-exclusivity is often intended to capture the complementary capabilities of distributors and is therefore pro-competitive.

The suggestion that no buyer can be prevented from selling actively even into an exclusively allocated territory unless the supplier prohibits all its buyers in the entire EU from actively selling there is particularly problematic in practice as suppliers acting on a pan European basis may contract with thousands of buyers at differing times under differing contractual arrangements, which can make it very difficult for a supplier, when it wishes to grant protection from active sales to a single exclusive distributor anywhere in the EU, to ensure that hundreds of other existing distributors across the EU are themselves already subject to an active sales restriction. If the Commission makes no other change, we would urge it to eliminate this suggestion, which is only contained in the Vertical Guidelines and not in the VABER. Indeed, if a distributor has been granted contractual exclusivity in a territory so that no other distributor can be appointed there by the supplier (providing protection from the most direct form of free-riding), it is very difficult to see why it is in addition necessary for the supplier to prevent all other buyers in the EU from selling actively there in order to justify a mere active sales restriction

3.4 In contrast to the current Vertical Guidelines (see paragraph 119 (10)), the draft Vertical Guidelines no longer suggest that, in the case of the genuine testing of a new product in a limited territory or customer group, the distributors appointed can be prevented from actively selling outside the test market for 1 year without infringing Article 81(1). We would urge the Commission to reconsider this deletion.

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4. RESTRICTIONS ON SELLING OVER THE INTERNET

4.1 As a general comment, we welcome the fact that additional guidance is provided in the draft Vertical Guidelines on the treatment of restrictions of resales over the internet. Given the sometimes divergent approaches being taken at the national level, we consider it important that the Commission issues specific guidance on this issue. We do not intend in this submission to engage in the more philosophical aspects of the debate that has raged in recent months in connection with internet sales restrictions. We will instead make some points on specific provisions contained in the draft Vertical Guidelines.

4.2 It is now expressly confirmed that a requirement on members of a selective distribution system to have bricks and mortar premises will be exempted by the block exemption provided they are also permitted to make both active and passive internet sales subject to criteria which are “equivalent” to those applied to bricks and mortar sales. Although we welcome this clarification, we have two specific comments. First, although the draft Guidelines only address this issue in the context of selective distribution (see paragraph 54), there would seem no reason why an obligation on a dealer to operate bricks and mortar premises in the context of other forms of distribution system should be treated any differently and we would urge the Commission to confirm this neutrality in the Vertical Guidelines. Second, according to the draft Vertical Guidelines, both sets of criteria must pursue the same objectives and achieve comparable results, and the difference between the criteria must be justified. In addition to the practical challenges of assessing such equivalence, this seems excessively strict taking into account that a supplier that chooses to appoint only e-tailers can benefit from the block exemption no matter what standards it chooses to impose on that sales channel (provided they do not amount to an indirect hardcore restriction).

4.3 Although the draft Vertical Guidelines indicate that a supplier may oblige a distributor to sell at least a minimum amount of the products from its bricks and mortar outlet (in order to ensure that the outlet is operated efficiently), they suggest that a requirement on a distributor to limit the proportion of its overall sales over the internet will be regarded as a hardcore restriction of passive sales. Given that a supplier may decide not to appoint a reseller because it is, for example, a pure e-tailer, it is difficult to see why, once a retailer with bricks and mortar premises is appointed, a supplier may not restrict it from dedicating so much of its activities to internet sales that it becomes almost, but not quite, a pure e-tailer. Thus, to ensure consistency, a supplier should be allowed to permit a distributor at least to require that any authorised distributor carries out most of its business in the supplier’s products through bricks and mortar premises.

4.4 A supplier will be considered to impose a hardcore restriction where a distributor is required to pay a higher price for products intended for internet sales than for products intended for off-line sales (this is apparently seen as restrictive dual pricing). However, in footnote 30 of the draft Vertical Guidelines, the Commission suggests that this approach does not prevent a supplier from offering a “fixed fee to support its off-line or online sales efforts”. Without debating the pros and cons of differential pricing, we would in any event suggest that the precise meaning of this should be clarified to avoid confusion. Would this, for example enable a supplier to fund a price promotion only of off-line sales of its products? Or would it only enable the supplier to contribute to costs incurred by the distributor in connection with off-line sales?

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4.5 The draft Vertical Guidelines suggest that a distributor will engage in active selling, which may be restricted in the context of exclusive distribution, where it uses forms of online advertising specifically targeted at certain customers. It would be helpful if specific examples could be provided.

5. COMBINATION OF SELECTIVE AND OTHER FORMS OF DISTRIBUTION IN THE EU

5.1 It appears that authorized resellers located in areas where a supplier operates a selective distribution system may be prevented from making active sales in areas where the supplier operates exclusive as opposed to selective distribution. This seems to be confirmed implicitly by paragraph 57 of the draft Vertical Guidelines, although we would welcome more direct confirmation of this as provided, in particular, in the framework of Commission Regulation 1400/2002 applicable to motor vehicle distribution (see recital 13, as well as Art. 4.1(d) & (e), of Commission Regulation 1400/2002 and also the reply to Q. 11 of the Commission’s FAQ document). Inter alia, we would recommend amending Art. 4(c) of the draft VABER to reflect Art. 4.1(d) & (e) of Commission Regulation 1400/2002 and thereby to confirm explicitly in the block exemption itself that restrictions of both active and passive sales to end-users are only automatically a hardcore restriction where applicable “in markets where selective distribution is used”. This would make it more clear that restrictions preventing members of a selective distribution system from actively selling in areas where exclusive distribution is used are capable of exemption under the VABER (as such areas would be exclusively allocated or reserved).

5.2 It appears from the amendment to Art. 4(b), third indent, of the draft VABER (as well as from an a contrario interpretation of paragraph 55 of the draft Vertical Guidelines) that a prohibition on members of, for example, an exclusive distribution system from selling to unauthorized resellers is not covered by the block exemption even if those unauthorized resellers are located in areas of the EU where the supplier does operate a selective distribution system. We find an inconsistency between this position and the fact that authorized resellers in a selective distribution system can be prevented from actively selling into exclusively allocated territories where selective distribution is not used (as discussed in 5.1 above). It does not seem justifiable to respect exclusivity in this manner despite the mix of systems but not to respect selectivity in areas where it is applied in the event of sales there by resellers appointed elsewhere under a different system.

6. QUANTITATIVE SELECTIVE DISTRIBUTION

6.1 In the light of the Gremeau litigation in France in the context of Commission Regulation 1400/2002, we would urge the Commission to clarify in the Vertical Guidelines that selective distribution is exempted by the VABER (i) without any requirement that the criteria imposed by the supplier are objectively justified and (ii) without an obligation on the supplier to act in a non-discriminatory manner in selecting which resellers to appoint to its selective distribution system. This is all the more important given that motor vehicle distribution is currently expected to be made subject to the VABER in due course.

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7. RESALE PRICE MAINTENANCE (RPM)

7.1 Although this remains a hardcore restriction that prevents the application of the block exemption, we welcome the fact that the Commission for the first time recognises certain situations where RPM may be justifiable under Article 81(3).

7.2 In particular, the draft Vertical Guidelines provide at paragraph 221 that, on the launch by a manufacturer of a new brand or its entry into a new market, RPM may “be helpful to induce” distributors to develop demand and provide them with the means to increase promotional efforts, i.e. by preventing free-riding among distributors. However, at paragraph 103 (1), the Commission reiterates the general observation that the avoidance of free riding among distributors is not a justification for vertical restraints where it is “practical” for a manufacturer to impose by contract effective promotion and/or service obligations on all distributors. Guidance on the implications of this important reservation with respect to the possible use of RPM on the launch of new brand would be welcome.

8. SINGLE BRANDING

8.1 In the analysis of single branding obligations (i.e. non-compete, quantity forcing and “English clauses”) outside the block exemption, the Commission appears to align to some extent the draft Vertical Guidelines with its analysis in its December 2008 Guidance Communication concerning its Article 82 enforcement practices. Thus, the draft Guidelines indicate in paragraph 128 that single branding obligations will in principle not have anti-competitive foreclosure effects unless the supplier is an unavoidable trading partner of the buyers subject to the non-compete restrictions (when, for example, the supplier’s products are “must stock items” or because its competitors are capacity constrained).

8.2 The remaining substantive discussion of single branding, however, remains largely unchanged, with a discussion of many factors that are relevant in assessing whether single branding has anti-competitive effects (including the duration or the market coverage of the non-competes). It would, therefore, be useful for the Commission to expressly confirm that these factors are only generally relevant where the supplier is an unavoidable trading partner or competitors are capacity constrained.

9. HARDCORE RESTRICTIONS

9.1 There is a change of approach to the assessment of hardcore restrictions outside the block exemption. The draft Vertical Guidelines indicate that there is a presumption that such restrictions will infringe Article 81(1) and will not qualify for exemption under Article 81(3) (which is the reason why the block exemption does not apply). However, the presumption that Article 81(3) does not apply will be rebuttable by the parties if they substantiate efficiency claims. Under the current framework, there is no such explicit presumption, although exemption is said to be unlikely.

9.2 This proposed new approach can be criticised as the party alleging an infringement of Article 81(1) always bears the burden of proof (as acknowledged, e.g., in paragraph 92 of the draft Vertical Guidelines). This burden may be relatively easy to discharge where a restriction is considered so serious as to be a restriction of competition “by object”; however, on the basis of the case law of the EC Courts, it is far

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from clear that all hardcore restrictions under the draft block exemption are necessarily restrictions by object. Thus, this amended approach may in certain circumstances weaken the rights of the defence to an extent which is not consistent with the basic principles of EC competition law.

10. AGENCY

10.1 The draft Vertical Guidelines maintain the Commission’s current position that the application of Article 81(1) to restrictions related to the sale of a principal’s products by an agent depends on whether or not the agent bears risk. In the current Vertical Guidelines, the Commission indicates that Article 81(1) will apply to restrictions on the sale of the contract goods where the agent bears risks related, inter alia, to after-sales or repair services in relation to the contract products. In the new draft, the Commission maintains this position where (i) the principal requires the agent to undertake such after-sales/repair activities at its own risk or to operate in any other product market at its own risk and where (ii) these activities are indispensable to sell the contract goods.

10.2 The draft Vertical Guidelines cite the judgement of the CFI in DaimlerChrysler in support of this position (see footnote 11). However, the consistency of this position with the judgment of the CFI in DaimlerChrysler is highly debatable. According to the CFI in that case, the fact that an agent selling motor vehicles is obliged to offer after-sales and repair services and bears risks in those after-markets does not make Article 81(1) applicable to restrictions imposed by the principal on the sale of the motor vehicles. Although the CFI did not expressly consider whether it was also commercially indispensable for the agents to provide after-sales services in order to act as agents in the sale of motor vehicles, the CFI did not suggest that this was a relevant consideration at all. It simply considered the risk born in after-sales services irrelevant to the determination of the application of Article 81(1) to the sale of motor vehicles.

28 September 2009

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