Supply and distribution agreements: make the most of it by June!

By Natasha Tardif, Competition & Regulatory dept and Managing Partner, & Audrey Augusto, Senior associate, Reed Smith

Recently, the European Commission has been revisiting a number of its core competition law rules. Among these, is the well-known EU Regulation on Vertical Agreements.

The Regulation is a key compliance tool as it provides a safe harbour for supply and distribution agreements meeting certain conditions. Notably, these agreements will be deemed compliant with EU competition law where the parties’ market shares are below 30% and where the agreements do not contain very harmful restrictions of competition identified in the Regulation (“hardcore restrictions” or non-severable “excluded restrictions”).

Last year, the Commission adopted a new version of the Regulation, together with accompanying guidelines, and gave companies until 31 May 2023 to bring their existing contracts into compliance with the new legal framework. As the end of the transition period is approaching, it is important to review all supply and distribution agreements and ensure that they are in line with the new rules.

All the more so since non-compliance can lead to hefty fines. Over the last few years, the European Commission imposed fines totalling several hundreds of million euros on companies that had included hardcore sales restrictions in their agreements. Those restrictions ranged from the imposition of online resale prices for electronic goods, to the prohibition of online sales, and the restriction of cross-border sales between EU countries.

Choosing the best distribution model according to your business needs

Suppliers can choose between different distribution models to sell their goods and services. They can sell directly to consumers via agents or their own branches and websites, or appoint a network of distributors. They can opt for exclusive distribution, by allocating exclusive territories or customer groups to one or several distributors, for selective distribution, by appointing carefully selected distributors in particular where they sell luxury, high quality or high-tech products, as well as for franchising or for free distribution.

The leeway given to suppliers to organize their distribution network, and the obligations they can impose on their distributors, vary depending on the distribution model chosen so it is critical to opt for the best model according to the company’s business needs.

Ensuring appropriate pricing by recommending resale prices

Suppliers can set maximum prices and can recommend retail prices to their distributors when they sell or advertise the products, provided that this remains a genuine recommendation. Suppliers cannot implement measures to deter distributors from deviating from the recommended price level, for instance by making the grant of rebates subject to the distributors’ compliance with the price recommendation or by using threats of contract terminations, and cannot impose fixed or minimum prices. In some specific circumstances, the imposition of a fixed or minimum price for a limited period of time can be justified, for instance where the manufacturer introduces a new product or to organize a short-term low price campaign in a franchise system, but this would be subject to a case-by-case assessment.

Imposing quality standards for the use of the Internet

Distributors must be free to sell and advertise the goods or services online. However, suppliers can impose requirements relating to the way the products are sold, such as measures aimed at preserving the brand image through the imposition of quality standards (e.g. ban on the use certain websites not meeting the brand’s standards, requirements regarding the display of the products on the websites).

Be aware of specific rules applicable to online platforms

Providers of online intermediation services, such as online marketplaces, fall within the scope of the Regulation and the restrictions that they may impose on the users of their services, for instance in terms of prices or territories, could potentially constitute hardcore restrictions that would cause the agreements to lose the benefit of the exemption.

In addition, vertical agreements relating to the provision of online intermediation services, entered into with hybrid online platforms, which sell goods and services in competition with the businesses to which they provide intermediation services, do not benefit from the safe harbour created by the Regulation. This does not mean that agreements will be contrary to EU competition law, but that they should be subject to a careful individual assessment.

Imposing obligations to ensure the integrity of your distribution network

As a principle, a supplier cannot restrict the territory into which, or the customer to whom, its distributors can resell the goods or services, for instance by prohibiting them from selling outside a given country or to certain customers. However, some exceptions exist. For instance, a supplier can prevent distributors, and their customers, from selling to unauthorized distributors in the territory where it operates a selective distribution system or prevent distributors, and their direct customers, from actively selling into a territory or customer group that was allocated to an exclusive distributor.

Using dual distribution to increase sales

Dual distribution refers to the situation where a supplier sells its goods or services directly to end users and also through independent distributors, with whom it competes. Dual distribution generally benefits from the safe harbour created by the Regulation. However, exchanges of information between the supplier and its distributors should be limited to what is directly related to the implementation of the contract and necessary to improve the production or distribution of the contract goods or services (e.g. information on the production process, inventory or product stocks). Other information exchanges should be avoided (e.g. exchanges of future resale prices).

Do not miss indirect restrictions

Bear in mind that hardcore sales restrictions can also originate from indirect measures, which can be difficult to identify. Indirect restrictions correspond to measures aimed at inducing distributors to behave in a certain way, such as financial incentives to encourage distributors to comply with a fixed price, preventing distributors from using additional languages on the packaging to indirectly limit sales in certain territories, requiring distributors to seek the supplier’s prior authorisation before making individual online sales transactions, etc.

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