A common practice in distribution chains across the EU and in Bulgaria, dual distribution refers to a situation where a supplier sells goods or services in direct competition with its distributors, i.e. to retailers or end clients. Some of the competition concerns stemming from the ‘dual nature’ of the supplier-distributor relationship in these cases were subject to review by the European Commission in the last years.
The review process was part of the broader initiative of the Commission to revise the applicable rules on vertical agreements as the current Vertical Block Exemption Regulation (VBER) is set to expire on 31 May 2022.
Threshold for block exemption
In a draft revised VBER and Guidelines on Vertical Restraints (GVR) from July 2021, the European Commission proposed a rather restrictive approach to dual distribution and information exchange in particular. The latter was suggested to be covered by the block exemption only if the parties’ combined market share at the retail level was less than 10%. Following concerns expressed by the industry, on 4 February 2022 an expert report on information exchange in the context of dual distribution was published.
The expert report proposes a more flexible approach based on the nature of the information exchanged:
- information exchange that is (1) directly related and (2) proportionate to implement and/or facilitate the main non-restrictive vertical agreement should remain covered within the existing thresholds of the VBER, and
- only information exchange in dual distribution scenarios that do not satisfy one or both of the above criteria should be excluded from the block exemption.
The report’s authors consider that information exchange is an inherent part of any vertical agreement and normally pro-competitive. The pro-competitive effects may be missing mainly in situations in which the information exchange would either facilitate or result in vertical hardcore restraints (as defined in Art. 4 of the VBER) or horizontal by object restrictions.
The European Commission subsequently updated its proposed guidance on information exchange in dual distribution (the Guidance). It will form part of the new rules on vertical agreements, which are expected to enter into force on 1 June 2022.
The Guidance seems to abandon the initially proposed 10% market share threshold for block exemption of information exchange in a dual distribution framework. Below are some of the key takeaways from it:
- the exchange of information between a supplier and buyer in a dual distribution situation may not benefit from the safe harbor rules where it is “not necessary to improve the production or distribution of the contract goods or services by the parties“;
- the existence of the above criterion may vary depending on the type of distribution model (exclusive, selective distribution, franchise etc.);
- examples of exempted information exchange include: (1) technical information relating to the contract goods or services, (2) information related to the supply (e.g. inventory, stocks, sales volumes etc.), (3) aggregated customer sales data, (4) marketing information (e.g. promotional campaigns, new products etc.), and (5) performance-related information.
- examples of information that generally does not satisfy the above criterion: (1) actual future sale prices (unless required for the implementation of a short-term promotional campaign and without prejudice to the supplier’s right to recommend resale price or establish maximum resale prices), (2) customer-specific sales data (unless in each case such information is necessary to adapt the contract goods or services to the requirements of the customer or to provide guarantee or after-sales services or to allocate customers to an exclusive distributor), and (3) information relating to goods sold by a buyer under its own brand name (private label) with a manufacturer of competing branded goods, unless the manufacturer is also the producer of the own-brand goods.
- the latter practices would be subject to review as horizontal restraints, i.e. in line with the case law of the Court of Justice of the European Union relating to exchanges of information between competitors, meaning that a justification under Art. 101(3) of the TFEU would be difficult to substantiate.
The deadline for submission of opinions regarding the Guidance expired on 18 February 2022. Companies engaged in dual distribution systems are well advised to start reviewing their existing arrangements and practices before 1 June 2022 and, if necessary, implement corrective or pre-cautionary measures.
The information and opinions expressed in this article do not constitute a legal advice and should not be relied or acted upon as such.