Your business and internet selling

The EC Treaty sets out certain rules for agreements between businesses that may affect trade and restrict competition within the EU. With the introduction of a new 'block exemption' that contains various restrictions on internet selling, we look at the key points of the treaty and how this may affect your business and your online sales.

The EC Treaty (or more strictly now Article 101(1) of the Treaty on the Functioning of the European Union - TFEU) has always prohibited agreements between businesses that may affect trade and that have the object or effect of restricting competition within the EU. This is known as the Chapter I Prohibition and it applies to all types of vertical agreements. These are arrangements between two or more businesses that operate at different levels of the economy, such as an agreement between a supplier and a dealer or between a supplier and a customer.

'Block exemptions' are used by the EU in certain sectors or circumstances to mitigate the sweeping effects of Treaty prohibitions, where relaxation is sensible to avoid an undue administrative burden and/or disproportionate effect.

The vertical agreements block exemption reflects the fact that restrictions in vertical agreements are less likely to breach competition rules than those in horizontal agreements (agreements between businesses selling competing goods or services). Therefore, the Chapter I Prohibition does not apply to agreements which fall within the block exemption, giving them a so-called 'safe harbour'. 

Given that more and more consumers are using the internet to source goods and products, it is no surprise that the new vertical agreements block exemption contains various restrictions on internet selling. Distributors should be aware of these restrictions to ensure that their agreements do not fall outside the block exemption. In addition, most of the provisions of the earlier block exemptions have been retained, such as the deeming of resale price maintenance to be anti-competitive.

The new block exemption came into force on 1 June 2010 and the guidelines which accompany it give a number of useful examples of what may constitute a hardcore restriction. If a distribution agreement contains one or more hardcore restrictions, the whole agreement may be declared void, and would then be unenforceable.

Hardcore restrictions include:

• Preventing a customer in a different territory from accessing the distributor's website or automatically re-routing customers to the manufacturer's website
• Terminating a transaction if a customer's credit card details reveal their address is outside the distributor's territory
• Limiting the number of online sales a distributor makes through their website
• Making a distributor pay a supplier a higher price for products sold online as opposed to in a shop
• Paying an online advertising agency to display adverts to specific customers in other territories

However, in recognition of the increased use of the internet to sell goods, distribution agreements can provide for the following:

A supplier can set quality standards for a website, just as they may require a certain standard to be met in the distributor's shops. For example, a supplier can make it a condition of the contract that a distributor has a shop as well as a website. Suppliers can limit a distributor's use of a third party website by setting standards and conditions which govern the distributor's use of the internet to sell their products.

An agreement may prevent distributors selling to end users in order to keep the wholesale level of trade separate from the retail level. A supplier can also prohibit distributors selling to unauthorised distributors in their territory. If a distributor buys components from a supplier, the supplier can restrict who the distributor sells the components to, to prevent the distributors selling them to competitors.

Any obligations in an agreement which dissuade distributors from using the internet to reach a wider variety of customers will be regarded as a hardcore restriction; for example, imposing criteria for online sales which are not equivalent to criteria imposed on sales in distributors' shops. It is important to note that these criteria do not need to be identical, but they should have the same aims and objectives and achieve similar results. For example, a supplier can restrict a distributor from selling more than a certain number of products to an individual end user. This restriction may be stricter for the distributor's online sales as it may be easier for an unauthorised distributor to obtain the products via the internet.

A supplier can impose a condition that products are delivered immediately after sale in a shop, but an identical condition in relation to distributors' online sales cannot be imposed, so a supplier is entitled to specify suitable delivery times for distributors' online sales.

An agreement can provide that a distributor's website can share links to websites of other authorised distributors or the supplier.

An agreement can contain a requirement that a distributor sells a certain amount (value or volume) of products to a buyer through their shop, as long as this requirement does not indirectly limit the distributor's online sales. The requisite amount can be fixed for all buyers, or determined on an individual buyer's basis, depending on the buyer's size or location.

Other points to note

Due to the increase in market power of large distributors and retailers, the new block exemption provides that the market share of a buyer and the seller must now be considered in order to ascertain whether the block exemption applies to an agreement. Therefore from 1 June 2010, the 30% threshold is now applied to both sellers and buyers. If either party's share of the relevant market exceeds the threshold, they are unable to take advantage of the block exemption. This is to ensure that large distributors cannot use their buying power to impose anti-competitive contractual clauses on their suppliers which would put competitors and consumers at a disadvantage and potentially exclude them from the distribution market.

Summary

Distributors should check that their existing agreements do not contain any restrictions on internet selling that may constitute a hardcore restriction in order to ensure that they fall within the block exemption. Although vertical agreements that fall outside the block exemption do not automatically infringe the Chapter I prohibition, such agreements may be subject to scrutiny by regulatory authorities and if they are found to breach the prohibition, the parties may be liable for substantial fines.

There will be a transitional period from 1 June 2010 until 31 May 2011 for existing agreements to be amended where necessary to comply with the new block exemption.

Ian Holyoak is a Partner within the Michelmores Commercial Team. If you have any questions please contact Ian on 01392 687682 or at ian.holyoak@michelmores.com