On 29 September 2022 the Bulgarian Competition Protection Commission (CPC) adopted a commitments decision in proceedings involving an alleged violation of Art. 15 of the Bulgarian Competition Protection Act and Art. 101 of the TFEU by Nikon Europe B.V. and its Bulgarian authorized distributor. The decision provides rare insight on how the CPC approaches selective distribution, but also raises concerns about its application of the block exemption rules in Bulgaria.

By definition, in a selective distribution system the supplier undertakes to sell certain goods or services only to distributors selected on the basis of specified criteria. Those distributors undertake not to sell such goods or services to unauthorized distributors within a specific territory reserved by the supplier to operate the system. Depending on the type of criteria used by the supplier, selective distribution systems can be qualitative, quantitative or mixed.

Absent any hardcore restrictions in the distribution agreements and provided that the relevant market share thresholds are met, a selective distribution system, regardless of the type, is generally exempted under the EU block exemption rules. More importantly in relation to qualitative selective distribution, the EC’s Guidelines on vertical restraints make it clear that even if the qualitative criteria do not fulfil the criteria in ECJ’s milestone Metro case (Case 26/76), i.e. necessity, objectivity and uniformity/non-discrimination, the system may still benefit from the block exemption (para. 151).

In other words, absent significant market power or other specifics of the market and the practice in question, the supplier’s freedom to choose its distributors should generally prevail over intra-brand competition concerns.

Background

We understand from the public (redacted) version of the commitment decision that since 2015 Nikon has been operating a selective distribution system in Bulgaria covering its professional and semi-professional product lines. The applicable qualitative criteria were attached as appendices to the contracts with the authorized distributors.

In 2016 the applicant contacted Nikon’s authorized distributor in Bulgaria with a request for an up-to-date parts price list and repair instructions. The authorized distributor rejected the request stating that it relates to confidential information which is disclosed by Nikon only to authorized distributors and repairers. According to the Bulgarian distributor, the accession of new operators within Nikon Europe’s network of authorized repairers was not envisaged in the near future. It seems that following discussions between the applicant and Nikon Europe B.V. the applicant’s request was ultimately rejected once again which gave rise to the proceedings before the CPC.

CPC’s findings

On 19 September 2019 the CPC provided Nikon with a formal statement of objections in relation to a possible violation of Art. 15, para. 1 CPA and Art. 101, para. 1 TFEU. The CPC essentially found that Nikon had not implemented “pre-established and clearly articulated criteria for the selection of service partners, in contrast to the product distribution, where the authorization criteria (including in relation to online distribution) are exhaustively listed”. Interestingly, the CPC vaguely refers to the ancillary restraints doctrine by stating that the restriction of sale of spare parts only to authorized distributors/repairers cannot satisfy its objective necessity test. The CPC’s preliminary assessment is that the conduct of the parties will have the effect of limiting access to the market, given that only one company operates in the market for after-sales services of Nikon products.

According to the CPC, the block exemption rules were not applicable in this case because each of Nikon and the authorized distributor had 100% market share on the relevant markets. The latter were defined as the: (1) wholesale of spare parts and service equipment for photographic products branded Nikon, and (2) after-sale servicing of photographic products branded Nikon, (3) on the territory of Bulgaria. As the subject of the investigation in the proceedings was the conduct of Nikon Europe B.V. and its Bulgarian distributor in connection with a request for the purchase of spare parts for Nikon cameras and access to servicing information, the Commission “did not consider necessary to analyze in detail the market for the supply of photographic products in which Nikon Europe B.V. competes with other product suppliers”.

The CPC’s narrow approach to defining the relevant market calls into question whether a selective distribution system can benefit from the block exemption rules at all, since by definition it ‘capsulates’ intra-brand competition within a limited circle of operators. One of the main rationales behind the market thresholds and the block exemption mechanism in general is that a reduction of intra-brand competition is considered unlikely to lead to negative effects for consumers if inter-brand competition on the market is strong. By failing to assess the level of inter-brand competition on the market, the CPC’s approach in the Nikon case seems to ignore this rationale.

Commitments

The defendants have preferred not to confront the CPC’s approach and have proposed commitments addressing the identified competition concerns. From what appears to be an extensive back-and-forth exchange between the regulator and the parties, we understand that:

• Qualitative criteria should be accessible to third parties wishing to join the selective distribution network;
• Subjective criteria should be avoided, e.g. “to the supplier’s satisfaction” or “in an appropriate for the supplier manner”;
• Qualitative criteria must be precise. Objective, but not sufficiently precise criteria might also be unacceptable, e.g. “sufficient space / number of qualified personnel for…”;
• It seems that the CPC has requested from Nikon to include in its qualitative criteria an estimate of the investment required for obtaining all necessary equipment to service the respective product categories and to allow the authorized repairers to lease some of that equipment from third parties;
• Nikon has committed to apply its selective distribution policy and qualitative criteria in a non-discriminatory manner to each applicant

According to the CPC, the proposed commitments would address its concern that the criteria are arbitrary and “used as a formal barrier to the access of new entrants to the market for servicing of branded products”. A positive sign is that the CPC’s approach in this part of the decision seems (for the most part) in line with the Metro criteria established by the ECJ.

Takeaways

It would be interesting to see if the CPC will maintain its approach in future cases under Art. 15, para. 1 CPA and Art. 101, para. 1 TFEU, in particular in relation to the definition of the relevant market and the application of the block exemption rules. At this point it may be appropriate for companies to review their existing selective distribution policies and agreements to ensure they are aligned with the ECJ’s Metro criteria regardless of their market shares.

The information contained in this article is provided for information purposes and is not intended to be a legal advice and should not be relied or acted upon as such.