Duality on dual distribution resolved?

The increased use of dual distribution has led the European Commission to re-think the issue of information exchange within these systems. The proposal for these information exchanges to remain block-exempted under the revised Vertical Block Exemption Regulation caused so much uproar that new guidance was published for consultation on 4 February 2022.

Companies may want to double-check whether the information flow within their dual distribution systems match with the guidance’s list of exempted information exchanges. It may also be worthwhile to consider any of the suggested precautions.

Duality on dual distribution

On 9 July 2021, the Commission published a consultation with a draft revised Vertical Block Exemption Regulation (VBER) and accompanying Vertical Guidelines (see our August 2021 newsletter). One issue addressed in the draft revised VBER is the increased use of dual distribution systems, due to growing digitisation and online sales. The Commission feared that “the current exception for dual distribution is likely to exempt vertical agreements where possible horizontal concerns are no longer negligible”. The draft revised VBER therefore proposed a stricter safe harbour for dual distribution through the following market share thresholds:

• if the supplier and the distributor have a combined market share at retail level that does not exceed 10%, the exemption continues to apply in full. 
• if the supplier and the distributor have a combined market share at retail level between 10-30%, the exemption applies but any exchanges of information between the supplier and the distributor have to be assessed separately under the Horizontal Guidelines.
   

This proposed approach towards dual distribution drew significant criticism. All stakeholders negatively commented on the 10% market share threshold. In addition, there was a unanimous call for more clarity on the type of information the parties in a dual distribution relationship can exchange without falling outside the revised VBER’s safe harbour. 

Additional guidance on information exchange

The Commission seems to have taken the criticism to heart. On 4 February 2022, it published a consultation with new draft guidance on information exchange in dual distribution. The draft guidance clarifies that information exchange that is “necessary to improve the production or distribution of the contract goods or services by the parties” will be covered by the revised VBER’s safe harbour. 

The following (non-exhaustive) list of examples illustrates the type of information that, when exchanged, is generally considered to fulfil this ‘necessity’ condition:

• technical information relating to the contract goods or services (e.g. on registration, certification, regulatory or customer requirements);
• information relating to the supply of the contract goods or services (e.g. on production, inventory, stocks, sales volumes, returns);
• aggregated information relating to customer purchases, customer preferences or customer feedback;
• information relating to the prices at which the contract goods or services are sold by the supplier to the buyer;
• information relating to the supplier’s recommended resale prices or maximum resale prices and information relating to the buyer’s resell prices (provided this is not used for resale price maintenance and does not relate to actual future downstream sale prices);
• marketing information, including on new goods or services and promotional campaigns;
• performance-related information, including aggregated information on marketing and sales activities of other buyers (provided this does not enable the buyer to identify the activities of particular competing buyers) as well as information relating to the volume or value of the buyer’s sales of the contract goods or services relative to the buyer’s sales of competing goods or services).
   

The guidance lists the following types of information exchanges as generally “not necessary”:

• information on actual future prices at which the supplier or buyer will sell the contract goods or services downstream; 
• customer-specific sales data (including non-aggregated volume or value sales data per customer);
• information relating to goods sold by a buyer under its own brand name which is exchanged with a manufacturer of competing branded goods.
   

Information exchanges that do not fulfil the ‘necessity’ criterion will need to be assessed under the cartel prohibition of Article 101 TFEU, taking account of the Horizontal Guidelines (currently under review; see our August 2021 newsletter). To minimise the risk of horizontal concerns, the exchanging parties may take precautionary measures, such as exchanging only aggregated information, ensuring appropriate delays between the generation and the exchange of information, or limiting access to information through, for instance, firewalls. 

Conclusion

The consultation on the draft new guidance closed on 18 February 2022. For now, the guidance provides a welcome sneak peek on how to deal with information exchange in dual distribution scenarios. 

Even though the rules under the revised VBER and Vertical Guidelines (due to enter into force on 1 June 2022) have not been finalised yet, companies are well-advised to anticipate upcoming changes for their dual distribution systems and take stock of necessary tweaks and precautionary measures.

This article was published in the Competition Newsletter of March 2022. Other articles in this newsletter:

• Sustainability solutions sussed out soon
• Pfizer may be off the hook, but ACM pharma supervision continues
• Employers beware: final warning for “job cartels”