20 Oct 2021

Introduction

Ensuring that your channel to market works for you is critical. Sometimes however, what businesses would like to achieve for their goods and services in terms of price stability; territorial restrictions; dual pricing; or use of marketplaces is not legally achievable. 

Changes are coming in Spring 2022 however. So too are potential fault lines between the EU and UK competition authorities post-Brexit that could have significant implications for businesses.

The current position

Restricting a buyer – be it distributor, agent, or franchisee – in some way down the supply chain is often a key objective for a supplier of goods or services. The restriction, often concerning the preservation of exclusivity or controlling sale prices, must be compliant with existing UK and EU competition laws however.

If it does not:

  • the restriction will be unenforceable;
  • the contract containing the restriction may also be unenforceable;
  • third parties may claim damages;
  • penalties may be imposed by the UK’s Competition and Markets Authority (CMA) or the European Commission (Commission); and
  • (under English law) directors and senior managers responsible for the infringement can be fined, disqualified (in the case of directors) and even imprisoned in the most serious cases. 

It’s important to note that the fact that the restriction is desirable from the supplier’s perspective is irrelevant! 

So what could be changing?

Online sales restrictions: The position of the Commission is that online intermediaries are to be treated as suppliers in their own right. As a consequence, their contracts with their suppliers and restrictions on both parties will fall outside of the proposed exemption from competition law.  It follows that where an intermediary is actively selling to consumers, an agreement between that intermediary and a retailer will not be exempt. 

In contrast, the Commission envisages that it will be possible for a supplier to restrict  a retailer in some ways from selling on online marketplaces provided that the parties’ shares of the relevant market are less than 30%.  In contrast, what is effectively a ban on online sales will be treated as an infringement of competition law unless capable of being justified.  So, for example, where a retailer is reliant on marketplaces for online sales, a ban on such selling will be an infringement of competition law. 

Dual pricing: Reflecting the increasing maturity of online retail, the Commission also proposes to derestrict the use of dual pricing.  As a result, it will be possible for suppliers to use different wholesale prices depending on whether the buyer will resell online or instore. 

The CMA appears to be moving in the same direction as the Commission although the CMA’s detailed thinking  is awaited. 

Dual distribution: A comparable derestriction where a manufacturer sells as a retailer but also supplies to a retailer is also proposed by the Commission. 

Whilst again the CMA is thinking along the same lines, clear differences are opening up between the two regulators. This is because where the agreement for manufacturer and retailer provides for the exchange of commercially confidential information, the derestriction will not apply if the combined market share of manufacturer and retailer is more than 10%.  In contrast, the CMA’s thinking appears to be that information exchanged between such business should be left to self-assessment by the businesses concerned as to the effect on competition. 

Exclusive distribution:  The grant of an exclusive territory or customer group to a distributor means (in the absence of other provisions in the distribution agreement) that the distributor has the right to actively sell in the territory to the exclusion of the supplier or other distributors.  However, the Commission proposes changes. 

If the Commission’s changes are implemented, it will be open to a supplier to appoint a limited number of “exclusive” distributors for a particular territory. Currently, the Commission advocates this “limited number” be determined in proportion to the territory or customer group granted and reflect the investment in the distributorship by each of the “limited number”.  

But if this is not further clarified many businesses will be left guessing as to which side of the line the exclusivity granted falls! It is also hoped that clarity will come from the CMA which is aligned to this innovative interpretation of “exclusivity”.  However, it is also possible that either the Commission or the CMA (or both) will fail to provide clarity or, in doing so, each will provide different clarity – leaving businesses confused! 

Another change proposed by the Commission (but not by the CMA) in respect of exclusive distribution agreements concerns attempts by suppliers to require buyers to pass selling restrictions down to the buyers’ customers.  Such attempts currently represent an infringement of competition law.  However, going forwards it is likely that requiring buyers to pass on sale restrictions to customers will be possible. 

Selective distribution: As the law stands at present, the same or equivalent selection criteria must be used for instore and online members of a selective distribution system.  However, both the Commission and the CMA consider that this should change. 

The Commission also proposes to allow the prevention of sales to unauthorised distributors in a selective distribution territory in the EU.  In contrast, the CMA’s position is awaited. 

Both changes are likely to be welcomed by brands and their authorised retailers coming within selective distribution systems. 

“MFN” clauses: These Most Favoured Nation clauses are used by online intermediaries to prevent suppliers from offering better terms to other online intermediaries. 

The Commission envisages in its proposed changes a distinction between wide and narrow MFNs. 

  • That the use of a wide MFN clause would need individual exemption whilst the rest of the distribution agreement would be exempted automatically. 
  • That a narrow MFN clause concerned only with the supplier’s own channel would not infringe competition law (as long as it otherwise came within the general exemption.) 

Whilst the CMA has proposed a similar approach in respect of narrow MFNs, its position in respect of wide MFNs is the opposite of the Commission. This is because the CMA continues to view wide MFNs as not being capable of being exempted. 

Take home points

  1. Each business will have its own distribution channel for its goods or services. But for some businesses it is likely that some of the constraints which they currently face will change, including:   
    • online sales restrictions;
    • dual pricing;
    • dual distribution;
    • exclusive distribution;
    • selective distribution; and
    • MFN clauses,
  2. Whilst the position so far as the law is concerned is very likely to change next Spring, the overwhelming majority of agreements in place will still reflect the law as it is at present. Depending on the terms of those agreements, it may be that many businesses will have to either terminate or agree variations of their existing agreements before they can put in place agreements which take advantage of the changes proposed by the Commission and the CMA. 
  3. Whilst it is likely that many of the changes proposed by the Commission and the CMA will end up being the same, is also likely that there will be some differences; and in some instances, a change implemented by one regulator will not be implemented by the other.

It is therefore essential that businesses trading across the EU and the UK take care as to how their distribution channels work and stay up to date with both UK and EU laws as they develop.

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