Dual distribution, information exchange, and the EC’s consultation – practical and policy highlights

The European Commission has launched an “additional” public consultation on guidance regarding information exchange in dual distribution. More guidance is welcome, but timing is tight. This post provides a short overview of what the guidance/consultation are about and of their policy implications.

The Vertical Block Exemption Regulation (VBER) and the accompanying Vertical Guidelines lay out what kind of conduct and contractual clauses between customers (on any level of the supply chain) and suppliers are exempted from the cartel prohibition under European competition law. Both documents will expire on 31 May 2022, and then a new VBER and new Vertical Guidelines will enter into force.

While the European Commission has already run several feedback rounds on the new VBER and the new Vertical Guidelines, the suggested rules on dual distribution remained hotly debated. The additional public consultation is a reaction to this debate.

What is dual distribution?

In most cases, “dual distribution” describes scenarios where a manufacturer sells products to the market via retailers and also sells these products to customers directly:

Why is this being discussed now?

The published draft VBER foresees that agreements and information exchange between manufacturers and retailers in dual distribution systems would be block exempted from the cartel prohibition if the respective market shares of the manufacturer and its retailer(s) do not exceed 10% (today the threshold is at 30%). If market shares are above 10% but not above 30%, the block exemption would still apply, but would not cover information exchange between manufacturers and retailers. Many have argued that the 10%-threshold is too low and the uncertainty around information exchange too high, inter alia pointing to how common dual distribution has become:

In particular in times where it is relatively easy for manufacturers to sell to customers directly using the internet and digital tools, dual distribution is widely used across different industries. Many manufacturers that have relied solely on retailers for decades have introduced new distribution models and are seeking direct routes to (end-)customers, while not abandoning retailers. A prime example are consumer goods like clothing (where most brands today run their own online shops and sell via retailers), but the development can also be observed in a lot of more traditional business-to-business industries.

What are the consultation and guidance about?

With the consultation, the Commission introduces a draft guidance on information exchange in dual distribution, which is to become part of the new Vertical Guidelines. The consultation is meant to gather feedback on the draft guidance.

Here are five things to highlight in the guidance (unsurprisingly, the guidance has more):

  • Potential competition: In relation to the question whether a manufacturer and a retailer might be actual or potential competitors, the guidance confirms the view that the timeframe to be taken into account when assessing whether a company is a potential competitor is “normally not longer than one year”. This has broader implications than just dual distribution. In practice, the advice around the timeframe relevant to assess potential competition varies and can be to take up to three years or even more into account (which may still be the right approach depending on the industry).
  • Level of comfort: The information exchange the Commission generally considers to be permissible includes items that can used to be tricky in practice like sales volumes, aggregated information on customer purchases, information on marketing and information relating to the volume or value of a retailer’s sales of the contract goods relative to the retailer’s sales of competing goods.
  • Price campaigns: The Commission does generally not take issue with the exchange of information necessary to coordinate short-term low price campaigns.
  • Safeguards: If their shares are above the block exemption thresholds, the parties are advised to take precautionary measures regarding the exchange of necessary information, like exchanging only aggregated sales data and using internal firewalls.
  • Market share thresholds: The guidance and the consultation seem to remain silent on whether the Commission will hold onto the 10%-thresholds foreseen in the draft VBER. The expert report published alongside the draft guidance advises that information exchange in dual distribution should remain block exempted below 30%. Commentators see this as a sign that the Commission might be willing to indeed abandon the 10% and accept a threshold of 30% instead.

What are the policy implications?

There are three policy implications I find particularly noteworthy:

  • Flexibility: The consultation and guidance show that the Commission takes market feedback seriously and is willing to re-consider its position.
  • Timing: At the same time, the consultation and guidance come late in the process, with a little over three months to go until the current VBER and Vertical Guidelines expire. That also explains why the consultation period is only two weeks, until 18 February 2020.
  • Communication: Another blog recently floated the question whether the Commission is increasingly communicating “like a Central Bank? A newsletter here, a subtle hint or comment at a Q&A session there?” This might not be the case generally, but some could take the unclear stance on the market share threshold regarding dual distribution as an example for such a style of communication.

[Photo by Marcin Jozwiak on Unsplash]

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