Concluding a distribution agreement is a fundamental step in the life of a company, but drafting it can be fraught with pitfalls. The wrong clause can have serious consequences in terms of competition law. Regulation (EU) 2022/720, which came into force on 1 June 2022, radically redefines the framework for analysing vertical agreements, i.e. contracts signed between players at different levels of the production or distribution chain (supplier and distributor, for example). Understanding its implications is essential if you are to secure your commercial practices. Our firm, experts in commercial and competition lawThe new text, which is at the heart of the wider issue of vertical restraints in competition law.
Background and objectives of Regulation (EU) 2022/720
This new European regulation, which replaces Regulation 330/2010, did not come out of thin air. It is the result of a lengthy evaluation that highlighted the inadequacy of the old rules in relation to modern economic realities, particularly the explosion in online commerce and the emergence of new players such as digital platforms. The European Commission's objective was twofold: firstly, to maintain a safe harbour for companies whose vertical agreements do not raise competition concerns, and secondly, to adapt the legal framework to take better account of new forms of distribution.
Evolution of competition rules for vertical restraints
Competition law, under Article 101 of the Treaty on the Functioning of the European Union (TFEU), prohibits in principle agreements that restrict competition. However, paragraph 3 of the same article provides an exemption for agreements that generate gains in economic efficiency (improved production, technical progress, etc.) that also benefit consumers. Block exemption regulations, such as Regulation 2022/720, are based on the premise that certain types of vertical agreement fulfil these conditions and can therefore be exempted automatically, without individual analysis, provided they comply with a certain number of rules.
The new text retains this philosophy but adjusts its contours. It reduces the scope of the safe harbour for certain practices considered potentially more harmful today, while extending it for others whose pro-competitive benefits have been demonstrated. It is therefore a balancing act aimed at providing a more predictable and relevant framework for businesses.
Key principles and new features
Regulation 2022/720 introduces a number of significant changes. The most significant is undoubtedly the adaptation of the analysis to the digital age. It acknowledges the growing complexity of distribution models, where a single player can be both a supplier and a competitor to its own distributors (dual distribution). New provisions also provide a more specific framework for online sales, dual pricing policies (different wholesale prices for products sold online and in-store) and parity obligations, often used by online booking platforms.
In essence, the regulation seeks to make a clearer distinction between clauses that legitimately structure a distribution network and those that are primarily aimed at partitioning markets and limiting competition to the detriment of the end consumer.
Scope of the block exemption
To benefit from the presumption of legality offered by the Regulation, a vertical agreement must meet several cumulative conditions. If one of these conditions is not met, the agreement is not automatically unlawful, but it must be subject to an individual analysis under Article 101 TFEU to ensure that it does not significantly restrict competition.
Market share conditions (30% threshold)
The fundamental condition for the application of the exemption relates to the economic power of the parties. The supplier's market share on the market for the sale of the contract goods or services must not exceed 30 %. Similarly, the buyer's market share on the market where it purchases these goods or services must not exceed 30 %. Calculating these market shares is sometimes a complex exercise, requiring a precise definition of the relevant market, both in terms of the products and the geographical area concerned. An error of assessment can lead a company to wrongly believe that it benefits from the exemption.
Companies and agreements concerned (including dual distribution)
The regulation applies to agreements between non-competitors. However, it also covers certain situations involving competitors. This is the case of dual distribution, where a supplier sells its products via independent distributors while selling them directly to end customers, thereby competing with its own network. The new regulation exempts such dual distribution agreements, provided that the combined market share of the parties on the retail market does not exceed 10 %. Above this threshold, and up to the general threshold of 30 %, the exemption remains possible, but with the exception of exchanges of information between the supplier and its distributor, which will then be analysed under the rules applicable to horizontal agreements (between competitors).
Relationship with other sector-specific regulations
It is important to note that this general exemption regulation may be superseded or supplemented by rules specific to certain sectors. For example, the automotive industry benefits from its own sector-specific exemption regulation. Similarly, technology transfer and research and development agreements are covered by other regulations. You should therefore always check whether specific rules apply to your field of activity before relying solely on Regulation 2022/720.
Hard-core restrictions (blacklist): what is never exempted
The Regulation sets out a list of restrictions considered so serious that they can never benefit from the block exemption. These are known as "hardcore restrictions of competition" or, more commonly, the "black list". The presence of just one of these clauses in a contract means that the whole agreement loses the benefit of the exemption.
Imposition of minimum or fixed selling prices
The distributor's freedom to set its own resale prices is a cardinal principle. Consequently, a supplier cannot impose a fixed selling price or a minimum selling price on its distributor. This prohibition is one of the most closely monitored by the competition authorities. Indirect practices, such as tying rebates to a price level or exerting pressure, are also prohibited. For a more detailed analysis of this subject, please consult our article on the price fixing and resale at a loss. The recommendation of a sale price or the setting of a maximum sale price remain authorised under certain conditions.
Limitations on freedom of resale (absolute territorial protection, online sales)
A supplier may not prohibit its distributor from responding to unsolicited requests from customers outside its territory or exclusive customer base. These "passive sales" must remain possible. Regulation 2022/720 has provided important clarifications as to what constitutes a hardcore restriction, particularly as regards the internet. Thus, purely and simply prohibiting the use of an online sales channel is a hardcore restriction. The analysis of internet restrictions has become a major issue. However, it remains possible to impose quality criteria for online sales (selective distribution) or to prohibit sales via third-party marketplaces under certain conditions.
Other restrictions (supply of components, parity obligations)
The blacklist also includes more specific prohibitions. For example, in a selective distribution system, it is prohibited to prevent members of the network from selling products to each other. Another typical restriction is that a buyer who supplies components is prohibited from using these components to produce goods for third parties.
Finally, the broad "parity obligations" (or "MFN", Most Favoured Nation), which oblige a seller to offer a platform the same or better conditions than those it offers on all its other sales channels (including its own website), are now on the blacklist.
Consequences of the presence of a black clause
Inserting a blacklist clause into a vertical agreement has a radical effect: the entire agreement is excluded from the benefit of the exemption. This means that it is presumed to be illegal. The company that drafted the agreement will then have to prove, in a complex individual analysis, that the agreement generates sufficient pro-competitive benefits to offset its harmful effects. In the event of an audit, the presence of such a clause exposes the company to heavy financial penalties and the invalidity of the agreement.
The conditions for exemption (excluded restrictions): clauses to be regulated
Alongside the black list, the regulation identifies a "grey list" of clauses, known as "excluded restrictions". Unlike the black list, these clauses do not render the exemption null and void for the entire agreement. Only the clause itself is deprived of the benefit of the exemption and must be analysed individually. The rest of the agreement may continue to be exempt if it complies with the other conditions.
Non-competition clauses (duration, post-contractual)
A non-competition obligation, which prohibits the buyer from manufacturing, buying or selling competing goods or services, is an excluded restriction if its duration is indefinite or exceeds five years. Such a clause may be tacitly renewable beyond five years, provided that the buyer can terminate it with reasonable notice. A post-contractual non-competition obligation is also excluded unless it is essential to protect the supplier's know-how, limited to the premises where the buyer used to operate, and for a maximum period of one year.
Restrictions on selective distribution (e.g. competing brands)
Under a selective distribution system, the supplier may require its distributors not to sell the brands of specific competitors. This clause is a restriction excluded from the benefit of the exemption. It must therefore be economically justified in order to be considered valid. The aim is to ensure that this requirement does not lead to an unjustified exclusion of competition on the market.
Parity obligations (extended scope)
The new regulation has softened its stance on certain parity obligations. While "broad" parity clauses are now on the black list, so-called "restricted" parity clauses are on the grey list. These are clauses that prohibit the seller from offering better conditions on its own direct sales site. These clauses do not qualify for exemption and must be justified on a case-by-case basis. This distinction is intended to provide a framework for the practices of platforms without prohibiting any form of parity, a technical subject at the heart of many questions about cartels and vertical restraints on the internet.
Withdrawal and exclusion from exemption
Even if an agreement complies with all the conditions and does not contain any black- or grey-listed clauses, it is not immune from scrutiny. The regulation provides for mechanisms enabling the competition authorities to intervene.
Withdrawal of exemption (cumulative effects)
The European Commission or a national competition authority may withdraw the benefit of the exemption for a specific agreement if it finds that it produces effects contrary to Article 101(3) TFEU. This situation typically arises where parallel networks of similar agreements, put in place by different suppliers, have a cumulative foreclosure effect. An individually innocuous agreement can thus become problematic because of the competitive environment in which it is embedded.
Withdrawal procedure and powers (Commission vs national authorities)
The European Commission can order a withdrawal for the entire territory of the European Union. A national competition authority, such as the Autorité de la Concurrence in France, can only do so for its national territory, if that territory has distinct competitive characteristics. The company concerned is then informed that its agreement, despite its appearance of conformity, is considered to be anti-competitive.
Exclusion regulations (parallel networks)
In more extreme cases, if it finds that parallel networks of similar agreements cover more than 50 % of a relevant market, the Commission may adopt a regulation rendering exemption regulation 2022/720 inapplicable on that market. It will then define the specific restrictions that will no longer be covered. This is a strong measure aimed at restoring competition on a structurally blocked market.
Practical implications and best practice for businesses
Regulation 2022/720 calls for renewed vigilance on the part of businesses. The first step is to audit all existing distribution, agency, franchise and other vertical agreements to ensure that they comply with the new rules. We must not forget the transition period, which ended on 31 May 2023. From now on, all agreements must be aligned. Particular attention should be paid to clauses on dual distribution, online sales, pricing policy and parity obligations.
Documenting the commercial strategy and the economic justification for the clauses is also good practice. Why impose a particular quality criterion for online sales? Why restrict the sale of competing brands? Having clear, substantiated answers can make all the difference in the event of an audit. Finally, regular monitoring of market share remains an essential exercise to ensure that the exemption remains within the safety zone.
Navigating the intricacies of competition and trade law vertical restrictions requires precise analysis and in-depth knowledge of the regulations. A simple clause can have major financial and commercial repercussions. For an analysis of your contracts and to bring your practices into line, contact our law firm with expertise in competition law.
Sources
- Commission Regulation (EU) 2022/720 of 10 May 2022 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices.
- Guidelines on vertical restraints (2022/C 248/01).
- Treaty on the Functioning of the European Union (TFEU), in particular Article 101.
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