Dual Distribution in the EU – European Commission publishes new draft guidance

Introduction

Dual distribution has become more and more important with the success of e-commerce. Dual distribution means the scenario where a supplier sells goods or services not only via distributors but also directly to customers, thereby competing with its independent distributors. This covers in particular the increasingly common scenario, where suppliers or manufacturers sell their products in parallel via their websites or brick-and-mortar shops. 

Since dual distribution can raise important questions from an antitrust perspective, the European Commission (the “Commission”) has launched on 4 February 2022 an additional public consultation on its newly proposed draft guidance relating to information exchanged in the context of dual distribution (the “Guidance”), intended to be added to the Vertical Guidelines.

The Commission’s new draft Guidance was triggered by the initial feedback from the consultation on the draft revised Vertical Block Exemption Regulation (“VBER”) and the draft revised Vertical Guidelines in 2021 where stakeholders indicated that there was a strong need for more guidance on the types of information that can be exchanged between a supplier and a buyer in a dual distribution relationship.¹

The current VBER exempts many vertical agreements, including dual distribution, from EU antitrust rules provided neither party has a relevant market share of more than 30%. However, in July 2021, the Commission tabled a controversial proposal that would make the operation of a dual distribution scheme more burdensome. The Commission proposed that information exchanged between a supplier and a distributor in a dual distribution set-up would only be exempt from competition rules if the parties’ market share was less than 10%. This was heavily criticized by industry as increasing uncertainty for the market and adding red tape. The now published draft Guidance makes no reference to the 10% market share threshold anymore. It remains to be seen whether this market share threshold will also be excluded from the final VBER.

The draft Guidance includes the following non-exhaustive clarifications for companies active in dual distribution models:

The generally exempted information exchange

According to the draft Guidance, the exchange of the following information exchanged between a manufacturer or supplier and a distributor should in general benefit from the block exemption:

• Technical information, e.g. relating to the registration, certification or handling of the contract goods or services, as well as information required to adapt the goods and services to the requirements of the customer;
• Supply related information, such as information relating to production, inventory, stocks, sales volumes and returns;
• Aggregated information linked to customer purchases, preferences and feedback;
• Prices at which the contract goods or services are sold by the supplier to the buyer;
• Supplier’s recommended resale prices or maximum resale prices for the contract goods or services provided that the buyer remains free to determine its sale price;
• Marketing related information, e.g. new goods and services, promotional campaigns, etc.
• Performance-related information, including aggregated information by the supplier to the buyer relating to marketing and sales activities of other buyers as long as these stay anonymous.

The generally not exempted information exchange

The exchange of the following information exchanged between a manufacturer or supplier and a distributor is in general considered as being not exempted under the draft Guidance:

• Actual future prices at which the supplier or buyer will sell the goods or services downstream, unless such exchange is necessary to organise a coordinated short-term low price campaign and provided that the buyer remains free to determine its sale price;
• Customer-specific sales data, in particular, non-aggregated information on the value and volume of sales per customer, or information that identifies particular customers, unless such information is necessary to enable the supplier or buyer to adapt the goods or services to the customers’ requirements or to provide guarantee or after-sales services or to allocate customers under an exclusive distribution agreement. This includes the highly relevant point of sale (“POS”) or depletion data which the parties may exchange in the aforesaid situations;
• Information relating to goods sold by a buyer under its own brand name with a manufacturer of competing branded goods, unless the products are produced by the same manufacturer.

To be clear, the fact that such information exchange does not benefit from an automatic block exemption does not mean that it is per se illegal. However, it does not benefit from a safe harbour and, hence, require the parties and their advisors to assess compliance with antitrust rules individually. Whilst the Guidance does not include an explicit standard to use firewalls or similar security measures, it makes clear that any exchange of information that is not subject to the exemption has to be assessed solely against the Horizontal Guidelines².

Corresponding information exchange is not necessarily an infringement of EU competition law, however, such “exchanges are subject to the presumptions established by the case law of the Court of Justice of the European Union relating to exchanges of information between competitors. In particular, undertakings that participate in a concerted practice and that remain active on the market are presumed to take into account information exchanged with their competitors in determining their conduct on the market.”

So, what to do?

The draft Guidance sets out that the following precautionary measures can reduce the risk that the information exchange raises horizontal concerns: 

• Only sufficiently aggregated (sales) information is exchanged, i.e. specific customers or (competing) companies cannot be recognized by the information provided.
• Information is shared with an appropriate delay (what is appropriate might differ from business activity to business activity, depending on when the information loses its competitive sensitivity).
• Clean teams are set up, i.e. buyer’s information is accessible only to seller’s personnel responsible for the upstream activities but not to the personnel responsible for the supplier’s downstream direct sales activities. This can also include firewalls and similar (technical) measures. 

Next steps

Any company dealing with dual distribution is well advised to (re-)consider and maybe even audit its current dual distribution system in the light of the new draft Guidance. The increasing importance of dual distribution in many business areas will certainly also attract the Commission’s enforcement interests sooner or later. 

Moreover, there is also the risk of a company running into a “hub & spoke” constellation, i.e. a situation where market players at the horizontal level (“spokes”) share sensitive information through a vertical common player (“hub”). A “clean” dual distribution setup helps to minimize also this risk. 

Submissions concerning the new draft Guidance can only be made until 18 February 2022 before the above-outlined draft Guidance should become part of the new rules on vertical agreements, which are expected to enter into force this June.

Authored by Christoph Wuenschmann, Falk Schoening, Christian Ritz and Philipp Heuser.

References

¹ Cf. also the Expert Report on the review of the Vertical Block Exemption Regulation – Information exchange in dual distribution.

² Communication from the Commission — Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements, OJ C 11, 14.1.2011, p. 1–72.