Territorial Restraints and Distribution in the European Union

1 Distribution and Franchising Committee: ABA Section of antitrust Law Territorial Restraints and Distribution in the European Union Thomas G. Funke*. The following article arose out of the 2013 ABA antitrust cross-border trade within the EU, Volkswagen was fined Spring Meeting panel entitled Enforcing Territorial Restrictions EUR 102 million in 1998 (reduced to EUR 90 million on in a Global Economy, in which the author participated. appeal) and Nintendo EUR 149 million in 2002 (reduced to EUR 119 million on appeal). European Union (EU) antitrust law is based not just on competition economics, but also on the policy objectives of This article outlines the issues that North American European integration.

2 In particular, EU rules on vertical manufacturers most typically face when devising their Restraints are strongly influenced by the goal to create Distribution strategy for the EU, as doing so will almost a single market comprising all the territories of the EU always require the manufacturer to adapt its international member states, in which national borders are no longer an model Distribution contract in several areas. obstacle for Given the ubiquitous nature of the Internet, online retailing is viewed as a tool to promote 1. The EU competition framework cross-border commerce between EU member states and for Distribution agreements enjoys particular Agreements between companies which may affect trade between the EU's member states and which have the Since the 1950s, the principle of free movement of goods, object or effect of restricting competition in the EU are persons and capital has been enshrined in the treaties on generally prohibited under Article 101 (1) of the Treaty on European integration.

3 Therefore, EU rules on vertical the Functioning of the European Union (TFEU), unless Restraints are keen to reduce price differentials between the economic benefits of the agreement outweigh its anti- different EU member states and generally encourage cross- competitive effects. Anyone invoking an efficiencies defence border trade between EU member states. Where a supplier will carry the burden of proof, unless they can rely on a safe of goods intends to exclusively allocate territories within harbor known as a block exemption. Through a series of the EU to a single distributor, or where a distributor is block exemption regulations, the EU legislator has defined prevented from selling to EU customers outside its allocated conditions under which certain categories of agreements are territory, European enforcers will likely consider this an considered compatible with EU antitrust law.

4 Impediment to competition. The EU Commission, in its capacity as the EU's antitrust agency, is not required to For Distribution agreements, the key instrument is prove anti-competitive effects of Territorial Restraints , as Commission Regulation (EU) No 330/2010, which is these are considered restrictions by object . For restricting commonly referred to as the Vertical Restraints Block * Dr. Thomas G. Funke, (Virginia), is a Partner with Osborne Clarke in Cologne (Germany) and can be contacted at 1 This policy goal is illustrated in the title of the speech by Joaqu n Almunia, Vice-Pr sident of the European Commission in charge of Competition, Competition serving the achievement of the Single Market (La concurrence au service de l'ach vement du march unique) (February 22, 2013): available at 2 The EU's Director-General for Competition, Alexander Italianer, has pointed out.

5 Our aim is to allow the Internet to continue to contribute to cross-border trade in the internal market while at the same time preserving existing Distribution models whose efficiency enhancing nature has been recognised. , September 2013 3. Distribution and Franchising Committee: ABA Section of antitrust Law Exemption Regulation or VRBER .3 This instrument b. Each reseller is prohibited from selling BPhones except applies across all of the 28 EU member states, and has in stores within its territory, no online sales, no stores been in force since 2010. It provides a safe harbor, so outside its territory;. that any Distribution system complying with it will be c.

6 The resellers must not sell to other resellers unless those are compatible with EU antitrust law. The VRBER comes authorized by Banana; and with a set of detailed guidelines that are not just applied by the European Commission, but also by the national d. Resellers receive discounts for purchases above particular competition authorities of the EU member states. volume thresholds. An agreement entered into between two or more companies The exclusive BPhone reseller with the territory of Germany operating at different levels of the production or Distribution gains a reputation as a low pricer. The German reseller's online chain, which relates to the conditions under which the parties store attracts customers not just from Germany but also from may purchase, sell or resell goods or services, may qualify for France.

7 When discussing a contract renewal with this reseller, the VRBER safe harbor, provided that: Banana indicates they are unhappy with the reseller's low pricing and with it filling orders from outside Germany. To try a) b oth the supplier and the buyer ( , the distributor). and reach a compromise, Banana offers a bonus system for the hold market shares of no more than 30%; and reseller based on volumes of sales to German residents only. b) the agreement does not contain any hard-core restriction Under the VRBER, Banana would normally be allowed to concerning, in essence, the distributor's ability to determine grant volume discounts and require its distributors not to its resale price, the ability of a component supplier to sell sell BPhones to non-authorized resellers.

8 And while it is its products as spare parts directly to independent repairers possible to assign a geographic market within the EU (such and most notably certain Territorial Restraints . as Germany) exclusively to one authorized distributor, the German distributor could not be prevented from filling non- 2. An Example of Territorial Restraints in the EU. solicited orders from France or other EU member states. As an example of the application of Territorial Restraints in the EU, consider the following: According to EU law, where a supplier sets up an exclusive Distribution network, it may legitimately prevent its BananaPhone (Banana) 4 is a manufacturer of distributors from actively selling into a territory granted a mobile communications device known as the BPhone.

9 Exclusively to another distributor or reserved for the Banana directly sells these internationally via its own website supplier itself. Where restrictions on active sales into such and company owned stores. Now, Banana has decided to territories are agreed between a supplier and distributor appoint resellers with a store-front presence in several European having a market share no higher than 30%, the agreement markets. Banana hopes all agreements with the store-front will benefit from the safe harbor of the BPhone resellers will contain all of the following provisions: The distinction between active sales and passive sales is vital, a. E. ach reseller has been given an exclusive geographic territory given that a supplier may only limit its European distributor's within the EU.

10 3 Commission Regulation No. 330/2010, 2010 (L102)1 on the application of Article 101 (3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices. 4 The hypothetical is modelled after a case study designed by Mr Tom Booth and presented by the author and additional panellists at the 2013 ABA antitrust Spring Meeting. 5 Where the market share of either party to the Distribution agreement is in excess of 30%, the arrangement will not benefit from the VRBER safe harbor, but may nonetheless qualify for individual exemption where the parties can demonstrate overwhelming efficien-cies that could not be achieved through less restrictive means.