PUBLIC CONSULTATION REVIEW OF THE COMPETITION RULES APPLICABLE TO VERTICAL AGREEMENTS OBSERVATIONS SUBMITTED BY THE EUROPEAN TEAM OF THE LAW FIRM CONTRAST1 I. INTRODUCTION 1. The objective of the present observations is not to promote or defend the interests of a particular company, group of companies or sector. The aim is exclusively to identify areas or points where a possible change or clarification may facilitate the use of the future block exemption, by eliminating interpretation issues or suggesting changes that may help reducing possible straightjacket effects of such future block exemption. 2. In this respect our observations are not limited to novelties introduced in the draft block exemption or the draft Vertical Guidelines, but address also provisions or points which are already included in block exemption Regulation 2790/99 and which the Commission proposes to leave unchanged. 3. The observations are made with reference to the draft block exemption (hereinafter the Draft ) and the draft vertical guidelines (hereinafter the Draft Guidelines ) that have been made available by the Commission for public consultation purposes. Hence, unless indicated otherwise, references in these observations are to that Draft and Draft Guidelines. 4. As some of the observations have been discussed with DG Competition before, their description is kept short and to the point. Needless to say, if the Commission would welcome a more elaborate presentation of any of the points, we are most certainly prepared to do so. II. OBSERVATIONS 1. Transfer of intellectual property rights 1 contrast, European & Business Law, http://www.contrast-law.be/, registered in the Commission's register of interest representatives (ID number 31524102279-77). Office Minervastraat 5 B-1930 Zaventem Τ +32 (0)2 275 00 75 F +32 (0)2 275 00 70 www.contrast-law.be 0 Maatschap v a n a d v o c a t e n b v b a BANK VAN BREDA 645-1470500-15 DERDENREKENING BANK VAN BREDA 645-1470510-25
5. Article 2(3) of the Draft addresses the extent to which the transfer of certain intellectual property rights is consistent with the applicability of the block exemption. The Draft Guidelines (continue to) state that the IP rights must be transferred to the buyer. This implies that subcontracting arrangements whereby the buyer transfers IP rights to his subcontractor, to the extent that they fall within Article 81(1) EC, cannot benefit from the block exemption. 6. From this perspective, the Draft remains too strict in our view. Indeed, the applicability of the block exemption should be extended to subcontracting agreements in the context of which IP is made available by the buyer in order to enable the subcontractor (i.e. the seller) to perform its production and supply obligations. 2. Horizontal and vertical implications 7. Article 2(4) deals with the applicability of the block exemption to vertical agreements entered into by competitors. From a conceptual perspective this provision does not address all of the horizontal implications which a vertical agreement may have. 8. For instance, if a vertical agreement serves to facilitate price collusion between suppliers, what is the impact of this issue on the applicability of the Draft to the vertical agreement concerned? In other instruments (see, section 4 of the Horizontal Guidelines dealing with joint purchasing 2 ), it is suggested that the horizontal analysis takes precedence over the vertical analysis. This seems to imply that the vertical assessment can only be positive if first the horizontal assessment has been completed successfully. 9. The Draft Guidelines do not address this particular issue. In order to avoid legal uncertainty, it would be helpful if the Draft Guidelines would state the principles applicable to the relationship between the horizontal and the vertical assessment. 3. Market share limit 10. In the experience of contrast the use of the 30% market share limit that is included in Regulation 2790/99 has not given rise to major practical difficulties. As stated by certain Commission officials, it is indeed correct that suppliers may be expected to have a reasonable understanding as to whether they exceed this limit. 11. The same argument is however not valid for the additional 30% market share limit that is introduced in the Draft. As stated in the Draft Guidelines (nr. 23) this limit must be assessed on the market where the buyer sells the relevant products or services. The definition of this retail market is substantially more complex. From a product or service 2 Guidelines on the applicability of Article 81 of the EC Treaty to horizontal cooperation agreements, OJ C 3, 06.01.2001, paragraph 117. 2
perspective, it will need to be assessed whether the market is limited to the product/service concerned or encompasses a basket or range of products. In this respect reference can be made to the case law of the Commission in the merger control area. 3 12. Similarly, it is substantially more difficult to define the relevant geographic market. Also on this point the merger control case law illustrates the difficulty with references to local markets and overlapping territories leading to regional or national markets extending beyond the local markets. 4 13. It would be incorrect for the Commission to assume that, if the 30% limit of Regulation 2790/99 has not created difficulties, it would be unreasonable to express concerns about the additional 30% market share limit. At least, the Commission should include in the Draft Guidelines clear indications as to how it expects said market share to be calculated with practical examples addressing realistic retail market situations. The existing Commission Notice addressing the definition of the market 5 is too theoretical in this respect and has proven to be of very limited practical assistance in the retail environment. 4. Active sales restrictions 14. The regime regarding the imposition of active sales restrictions in non-selective distribution settings (Article 4(b) first indent) is proposed to be left unchanged. This means that the 3 stringent conditions that result from Article 4(b) first indent Regulation 2790/99 and the Vertical Guidelines (paragraph 51) remain in place. This is regrettable. 15. As to the first condition (reservation by supplier or sole exclusivity in target territory) we truly fail to understand why, for instance, shared exclusivity in the target territory is not accepted. The argument that, in the case of shared exclusivity, freeriding is already admitted within the contract territory is clearly invalid and fails to convince. If the supplier imposes on the distributors that are appointed within the target territory the same qualitative requirements (requiring comparable investments), there remains a sound basis to protect these distributors against freeriders located outside the target territory. In fact, the protection against freeriding seems all the more acceptable as there is increased intrabrand competition within the target territory (between distributors that have all made comparable investments). It is perfectly valid to extend the same logic to the situation where the supplier has reserved the right to engage in direct selling in the target territory or where the supplier 3 Case IV/M.890, Blokker/Toys R Us, OJ L 316, 25.11.1998. 4 Case COMP/M.4590, Rewe/Delvita; Case IV/M.1221, Rewe/Meinl, OJ L 274, 23.10.1999. 5 Commission notice on the definition of relevant market for the purposes of Community competition law, OJ C 372, 09.12.1997. 3
has not contractually accepted not to appoint additional distributors within the target territory (i.e. a situation of non-exclusivity). This is one of the clear examples where the block exemption has a straightjacket effect. 16. As to the second condition (parallel imposition of the active sales restriction on the entire network), our experience demonstrates that this may rule out the workability of Article 4(b) first indent for complex networks with many dealers throughout Europe. This condition has in practice proven to be overly prescriptive and it seems to lack a proper economic justification. 17. The third condition (no restriction to be imposed on the customer of the buyer) has created legal uncertainty as to whether active sales restrictions can be circumvented via sub-dealers or traders that purchase from the exclusive distributor. It is not a realistic proposition to solve this problem by having the sub-dealer or trader participate in a threeparty agreement including also the supplier and the exclusive distributor. In our experience, such three-party agreements are highly unusual. Furthermore, this suggestion results again in a form over substance problem. It cannot be the objective of an economics-based block exemption that undertakings start entering into three-party agreements for the sole purpose of making the prevention of circumvention compatible with the block exemption. 18. More generally, we would like to invite the Commission to seriously consider the possibility of blacklisting only the restriction of passive sales in a non-selective context. 5. Wholesalers 19. With regard to Article 4(b) second indent it would be useful if the Draft Guidelines were to clarify whether this is an all-or-nothing exception. In other words, would the exception still apply in case the wholesaler is allowed to sell to certain (large) end user accounts? 6. Selective distribution 20. Given the discussions that have taken place before many national jurisdictions in this area, it would be very useful if the Draft Guidelines could clarify whether the quality requirements need to be uniform and imposed in a non-discriminatory manner. It is our understanding that, based on the definition included in Article 1(c) of the Draft, DG Competition takes the view that the undertakings enjoy considerable flexibility in this respect. If that is so, it would be appreciated to have this confirmed in the Draft Guidelines. 4
21. The same applies as to the quantitative limit in the context of a quantitative selective distribution system. Also on this issue there is an ongoing discussion as to whether that limit should be fixed, how it should be documented, under which conditions it can be changed, etc. As it is our understanding that also in this area DG Competition favours a liberal and flexible approach, language confirming the same in the Draft Guidelines would truly be welcomed. 22. Article 4(b) third indent of the Draft underscores the complexity (if not the practical impossibility) of combining selective distribution in one part of the Community and exclusive distribution in another part of the Community. If anything, the language added to Article 4(b) third indent underscores that it only makes sense to implement a selective distribution system if it is applied throughout the entire EEA. Otherwise the system can be undermined instantaneously by traders operating in the countries where the system has not been put in place. 7. Exports from and imports to the EEA from countries outside the EEA 23. It is our understanding that the current Vertical Guidelines must be interpreted as meaning that passive sales from the EEA towards third countries and passive sales from third countries towards the EEA can be prevented without violating the black list of the block exemption. Reference is made in this respect to the Javico case law of the Court. 6 In order to avoid unnecessary misunderstandings in this respect, it would be very helpful to include somewhat more explicit language in the Draft Guidelines. 8. Object or effect 24. It is clear from the language of both Regulation 2790/99 and the Draft that there is only a hardcore restriction if a restriction by object (and not by effect) applies. In view hereof, the difference between the by object and by effect notions is of immediate relevance to the application of the Draft. 25. Given the hardcore restrictions that are listed in Article 4 of both Regulation 2790/99 and the Draft, cases of direct restrictions by object will in principle not pose a problem. They can be identified fairly easily and hence should not create application difficulties. The position is different as regards indirect restrictions by object. Charging of service fees by a selling dealer to a receiving dealer (i.e. a dealer that has not sold the product, but that is located in the territory where the product will be used, maintained, repaired or benefit from warranty repairs) is a typical case where, based on the current 1983. 6 Case C-306/96, Javico International and Javico AG v Yves Saint Laurent Parfums, ECR (1998) I- 5
case law (including the recent opinion of Advocate General Trstenjak 7 ), it remains highly unclear whether a restriction by object or by effect applies. 26. It would be very helpful if the Draft Guidelines would include some explanation (illustrated with examples) as to how the concept of indirect restrictions by object must be understood. III. CONCLUSIONS 27. It is the experience of our team that Regulation 2790/99 has worked well and has enabled the business community to draft vertical agreements that match their legitimate expectations and that are not too much influenced by any straightjacket effect that block exemptions of the past tended to have. 28. As the Commission proposes to continue the current regime with a limited number of changes, it would be beneficial to take the practical experience of the past 10 years fully on board and to provide clarifications on the limited number of issues where interpretation or application questions have arisen. In this respect, it is useful to note that the legal community (including most certainly the courts) attach considerable importance to the language included in the Vertical Guidelines which they consider as a very authoritative source. Hence, any clarification will be of considerable value to both the business and the legal community. 7 Opinion of Advocate General Trstenjak delivered on 30 June 2009, Joined Cases C 501/06P, C 513/06P, C 515/06P and C 519/06P, GlaxoSmithKline. 6