As mentioned previously (for example here), the European Commission is currently reviewing the Vertical Agreements Block Exemption (“VABE”) and corresponding Vertical Guidelines. In response to a public consultation on VABE, interested parties requested further clarity on how competition law applies to undertakings that act as both distributor and agent to the same supplier.
To that end, the Commission recently published a Working Paper setting out the current guidelines on so-called “dual role” agents. The Paper is limited in scope; it focusses on markets comprising differentiated products with distinct characteristics that can be separated into those that are covered by an agency agreement and those that are distributed independently. It does not discuss situations where the dual role agent is an online platform which is currently a key topic in ongoing investigations such as that into Amazon in connection with its use of data obtained from its Marketplace. It does, however, provide helpful guidance on the criteria for “genuine” agency agreements outside of that platform context.
Agency agreements and Article 101
Whether a vertical relationship falls within the scope of Article 101 TFEU, which prohibits anti-competitive agreements and concerted practices, depends on the nature of the relationship in question. A distribution agreement will generally fall within Article 101 unless it is exempted under VABE, whereas a genuine agency agreement is outside the scope of Article 101.
The Working Paper sets out the relevant conditions for a genuine agency agreement. It is only in very narrow circumstances that an agency agreement will be deemed to be “genuine”.
For these purposes, the requirements of the Commercial Agents Directive are not relevant. Rather, a competition-specific analysis has to be carried out. According to that analysis, an agency relationship will not fall within the scope of Article 101 TFEU if the agent bears no, or only insignificant, risks of the three following types:
- Contract-specific risks related to the contracts concluded by the agent on behalf of the principal;
- Risks related to market-specific investments (i.e. investments specifically required for the type of activity for which the agent has been appointed by the principal); and
- Risks related to other activities undertaking in the same product market to the extent that the principal requires the agent to undertake such activities at the agent’s own risk.
The principal should fully reimburse the agent for all investments required to conclude contracts on its behalf. The Working Paper recommends that methods of reimbursement should be designed to ensure that they always cover all relevant market-specific investments.
Distributors that are also agents
The Working Paper highlights the importance of distinguishing between an agency and distribution relationship. This is crucial because in a genuine agency agreement, the principal may set the price for the products sold by the agent, whereas if a supplier sets the prices of its distributor, this will amount to resale price maintenance (a “hardcore” restriction of competition under the VABE). However, it is often difficult to distinguish between an agency agreement and a distribution agreement, particularly where an agent also acts as an independent distributor for the same supplier.
If the products being distributed under agreement cannot be easily differentiated, there is a significant risk of a dual role agent being influenced by the terms of the agency agreement when acting as an independent distributor. The Commission is particularly concerned that the prices set by the principal for products to be sold by its agent could influence the prices set by the agent when it is acting as a distributor. It is also concerned that ‘market-specific investments’ (such as fitting out of a shop, or training of sales staff) may be difficult to attribute where a reseller has a mixed role, raising questions over the ‘genuine’ nature of the agency aspect of the relationship, unless those investments have (for example) clearly been depreciated.
It has therefore emphasised that it is essential that, where the products are in the same market, agency and distribution activities are clearly delineated. It is generally more straightforward to distinguish between agency and distribution relationships where the products covered by the agency agreement are of a higher quality, or have novel features or additional functions, as this allows for some level of differentiation from products that the agent distributes independently on its own behalf. Any market-specific investments which relate to the agency products should be covered by the principal, including where relevant apportioning costs between the distribution and the agency.
It follows that where the lines between agency and distribution are at risk of blurring, businesses must take particular care to avoid setting prices or imposing unlawful restrictions on undertakings that are de facto distributors. However, businesses would undoubtedly benefit from further clarity on the types of product characteristics that allow the Commission to differentiate between agency and distribution activities.
What’s next for vertical agreements?
The Commission acknowledges that VABE and the Vertical Guidelines are in need of reform to make them better suited for use in modern markets, particularly online markets. In December 2020, the Commission published its Consultation on VABE reforms, which gives an insight into what a future VABE might look like. By mid-2021 the Commission plans to publish drafts of the new VABE and Guidelines, which will take effect when VABE expires in May 2022.
On this side of the Channel, the CMA is considering how best to shape the UK’s laws on vertical agreements following the expiry of the retained VABE, recently starting a consultation process on the application of VABE in the UK. It remains to be seen to what extent the UK will diverge from the EU’s approach to vertical agreements, and what this will mean for “dual role” agents in the UK. However, as the CMA has noted that it will draw on evidence from the Commission’s evaluation as part of its own review, it is likely that this latest Working Paper will inform the CMA’s review over the coming months.