Communication from the Commission on the application of the Community competition rules to vertical restraints - Follow-up to the Green Paper on vertical restraints
Date: 1998-09-30
Institutions: European Commission
Subjects: competition policy, distributive trades, single market, trade restriction, vertical agreement

26.11.98

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Communication  from  the  Commission  on  the  application  of  the  Community  competition  rules
to  vertical  restraints  (Follow(cid:220)up  to  the  Green  Paper  on  Vertical  Restraints)

(98/C  365/03)

(Text  with  EEA  relevance)

SECTION  I  -  INTRODUCTION

1.(cid:217)Shortcomings  of  current  policy

Thirdly,  as  the  BEs  only  cover  vertical  agreements
concerning  the  resale  of  final  goods  and  not  intermediate
goods  or  services(cid:216)(ˇ)  a  significant  part  of  all  vertical
agreements  are  not  covered  by  the  current  BEs,  even
when  the  parties  involved  have  no  market  power.  This
means  that  an  unnecessarily  large  number  of  vertical
restraints  could  in  principle  be  scrutinised,  resulting  in
legal  uncertainty  and  unnecessary  enforcement  costs.

concerning 

competition  policy 

Community 
vertical
restraints  has  a  history  of  nearly  forty  years.  Although
this  policy  has  been  successful  a  review  is  necessary.  The
reasons  for  this  review  were  amply  described  in  the
Green  Paper  on  Vertical  Restraints(cid:216)(˛).  The  Green  Paper
in  current
identified  a  number  of  shortcomings 
has 
policy,  which  can  be  summarised  as  follows.

First,  the  current  Block(cid:220)Exemption  Regulations  (BEs)
comprise  rather  strict  form(cid:220)based  requirements  and  as  a
result  are  considered  too  legalistic  and  work  as  a  strait(cid:220)
jacket.  This  is  especially  awkward  in  the  light  of  the
major  changes  in  methods  of  distribution  that  have  taken
place  and  still  are 
the  vertical
agreements  that,  sometimes  with  difficulty,  do  fall  within
the  current  BEs  a  compliance  burden  is  created  through
legal  uncertainty.  Companies  without
unnecessary 
significant  market  power  suffer  unnecessary  regulation
and  may  even  be  prevented  from  using  vertical  restraints
to  improve  their  competitive  position  in  the  market.

taking  place.  For 

Secondly,  for  those  agreements  that  fall  within  the  BEs
there  is  the  real  risk  that  the  Commission  is  exempting
agreements  that  distort  competition.  As  the  BEs  are
form(cid:220)based  instead  of  effect(cid:220)based  and  do  not  contain
any  market  share 
limit,  companies  with  significant
market  power  can  benefit  from  them.  The  sanction  of
withdrawal  is  in  this  respect  not  seen  as  a  real  deterrent
because  it  works  only  with  effect  for  the  future.  Thus,
the  present  BEs  exempt  for  instance,  non(cid:220)compete  obli(cid:220)
gations  up  to  100(cid:216)%  market  share  although  these  may
cause  serious  foreclosure  effects  and  allow  the  charging
of  exorbitant  prices  on  the  market  to  the  detriment  of
consumers.

2.(cid:217)Need  for  a  more  economics  based  approach

in  their  market  context.  It 

To  remedy  these  three  shortcomings  and  better  protect
the  primary  objective  of  Community
competition, 
competition  policy,  a  more  economics  based  approach  is
required.  Such  an  approach  should  be  based  on  the
effects  on  the  market;  vertical  agreements  should  be
is  only  when
analysed 
inter(cid:220)brand  competition  is  weak  and  market  power  exists
that  it  becomes  important  to  control  vertical  agreements.
This  should  facilitate  a  relaxation  of  the  form(cid:220)based
requirements,  ensure  that  fewer  agreements  are  covered
scrutiny  of
by  Article  85(1)  and  afford  a  better 
agreements  of  companies  having 
substantial  market
power.  This  can  be  depicted  as  follows.

Market  Power

Individual  Scrutiny

significant  market  power

Block(cid:220)Exempted/de minimis

All  types  of  Vertical  Restraints

Most  markets  are  fairly  competitive,  the  companies  not
having  market  power.  Therefore,  the  number  of  cases

(˛)(cid:217)Green  Paper  on  Vertical  Restraints 

in  Community
Competition  Policy,  COM(96)  721  final,  adopted  by  the
Commission  on  22.1.1997.

(ˇ)(cid:217)Only  under  the  Franchise  Block  Exemption  Regulation  (No

4087/88  of  30  November  1988)  are  services  covered.

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26.11.98

that  may  need  scrutiny,  as  depicted  below,  will  be
relatively  low.  This  is  confirmed  by  an  analysis  of  recent
merger  cases(cid:216)(˛).

the  Commission  will  have  the  burden  of  proof  that  the
agreement  in  question  infringes  Article  85(1)  and  will
have  to  examine  whether  the  agreement  does  or  does  not
fulfil  the  conditions  of  Article  85(3).

Number  of
Vertical
Restraints

Individual  Scrutiny

Block(cid:220)Exempted/de minimis

All  types  of  Vertical  Restraints

In  reforming  Community  competition  policy  in  the  field
the
of  vertical  restraints, 
following  objectives:

the  Commission  pursues 

-(cid:217)the  protection  of  competition,  which  is  the  primary
it
objective  of  Community  competition  policy,  as 
enhances  consumer  welfare  and  creates  an  efficient
allocation  of  resources;

-(cid:217)market 

integration, 

light  of  enlargement,
the 
which  remains  a  second  important  objective  when
assessing  competition  issues.

in 

covering 

regulation 

The  proposed  safe  harbour  consists  of  one  broad
umbrella  Block(cid:220)Exemption 
all
vertical  restraints  for  the  distribution  of  goods  and
services(cid:216)(ˇ).  This  regulation  uses  market(cid:220)share  thresholds
to  distinguish  between  agreements  that  are  or  are  not
block(cid:220)exempted.  By  being  based  primarily  on  a  black(cid:220)
clause  approach,  i.e.  defining  what  is  not  block  exempted
instead  of  defining  what  is  exempted,  it  avoids  the  strait(cid:220)
jacket  effect  and  facilitates  the  simplification  of  the
applicable  rules.  The  policy  will  ensure  that  the  vast
majority  of  vertical  agreements  where  no  significant  net
negative  effect  can  be  expected  no  longer  require  indi(cid:220)
vidual  scrutiny.  It  will  thereby  allow  the  Commission  and
national  competition  authorities  to  concentrate  on  the
important  cases.  It  treats  different  forms  of  vertical
agreements  having  similar  effects 
in  a  similar  way,
preventing  unjustified  differentiation  in  policy  between
forms  or  sectors  and  avoiding  a  policy  bias  in  the  choice
companies  make  concerning  their  formats  of  distribution.
In  order  to  maintain  a  sufficient  level  of  legal  certainty
the  Block(cid:220)Exemption  regulation  will  be  supplemented  by
guidelines  detailing  the  Commission’s  policy  concerning
individual 
share
the  Block(cid:220)
thresholds  and  possible  withdrawal  of 
Exemption  below  the  thresholds.

the  market 

examination 

above 

In  addition,  the  effects  on  the  overall  level  of  legal
certainty  for  business,  the  enforcement  costs  to  business
and  competition  authorities,  and  the  possibilities  for
improving  decentralisation  have  to  be  taken  into  account.

3.(cid:217)Structure  of  the  present  communication

The  policy  proposal  set  out  in  this  Communication  is
based  on  a  more  economic  approach.  This  is  required,  as
was  explained  above,  to  remedy  the  shortcomings  of
current  policy.  For  situations  without  significant  market
power  a  safe  harbour  needs  to  be  created,  thus  providing
a  presumption  of  legality  for  those  vertical  restraints  that
likely  to  have  no  net  negative  effects.  Vertical
are 
restraints  falling  outside  the  safe  harbour  will  not  be
presumed  to  be  illegal  but  may  need  individual  exam(cid:220)
individual  examination,
ination. 

the  context  of 

In 

(˛)(cid:217)In  more  than  80(cid:216)%  of  the  merger  cases  dealt  with  under  the
Merger  Regulation  in  1997,  the  market  shares  of  the  indi(cid:220)
vidual  parties  were  below  25(cid:216)%.  As  these  merger  cases  only
concern  large  companies  and  often  the  most  narrow  market
definition  is  looked  at  in  the  first  phase  of  investigation  in
order  to  clear  the  merger,  it  can  be  expected  that  in  the
economy  as  a  whole,  market  shares  will  be  even  lower.

This  Communication  has  the  following  structure:

-(cid:217)Section  II  summarises  the  comments  the  Commission

received  on  the  Green  Paper;

-(cid:217)Section  III  provides  an  economic  assessment  of

vertical  restraints  and  their  effects;

-(cid:217)Section  IV  discusses 

the 

issues  of  market(cid:220)share

thresholds  and  legal  certainty;

(ˇ)(cid:217)Motor  vehicle  distribution  is  the  only  sector  not  covered  by
this  exercise,  see  Green  Paper  on  Vertical  Restraints  in
Community  Competition  Policy,  p.  2,  footnote  No  2.

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-(cid:217)Section  V  describes  the  proposed  new  policy;

-(cid:217)Section  VI  describes  the  procedural  steps  which  will

be  followed  to  adopt  the  proposed  policy.

Most  commentators  however  pointed  out  the  difficulties
of  defining  markets  and  assessing  market  shares.  These
difficulties  were  said  to  give  rise  to  a  high  degree  of  legal
uncertainty  and  the  majority  of  those  who  commented
did  not  favour  a  market(cid:220)share  cap.  In  the  course  of  the
consultation  exercise,  the  support  for  the  use  of  a
market(cid:220)share  test  increased,  but  companies  asked  the
Commission  to  adopt  sufficient  flanking  measures  so  as
to  make  the  market(cid:220)share  test  operable.

SECTION  II  -  SUMMARY  OF  REACTIONS  TO  THE
GREEN  PAPER

In  the  Green  Paper,  five  options  were  described,  namely:

1.(cid:217)Written  submissions  on  the  Green  Paper

associations 

representing 

companies.  Only 

The  consultation  exercise  launched  by  the  Green  Paper
produced  227  written  submissions.  A 
large  majority
(64(cid:216)%)  of  the  submissions  came  from  either  companies
or 
6
submissions  were  received  from  consumer  organisations.
Of  the  companies  and  associations  of  companies  who
made  submissions,  a  large  percentage  (31(cid:216)%)  came  from
either  the  beer  or  petrol  sector.  The  primary  concern  of
most  submissions  was 
(37(cid:216)%  of  all
submissions).  Only  41  submissions  (18(cid:216)%),  mainly  from
academics  and  national  authorities,  placed  their  primary
emphasis  on  the  protection  of  competition.

legal  certainty 

Most  submissions  believe  the  current  system  to  be  too
legalistic  and  favour  a  more  economic  approach.  It  is  felt
that  an  economic,  effects(cid:220)based  approach  rather  than  a
clause(cid:220)based  approach  would  be  more  suitable 
for
dealing  with  a  dynamic  sector  such  as  distribution.  The
current  system  tends  to  produce  negative  effects  on  the
evolution  of  distribution,  preventing  undertakings  from
introducing  new  and 
innovative  distribution  formats
which  could  lead  to  substantial  gains  in  terms  of  effi(cid:220)
ciency.  Of  those  who  commented  on  this  issue  95(cid:216)%
favour  a  more  economic  approach,  while  97(cid:216)%  believe
that  the  current  system  has  too  much  of  a  strait(cid:220)jacket
effect.  Of  those  who  commented  on  the  competition
effects  of  vertical  restraints,  42(cid:216)%  view  vertical  restraints
as  having  primarily  a  positive  effect  on  competition,
while  50(cid:216)%  are  of  the  view  that  vertical  restraints  may
have  both  positive  and  negative  effects  on  competition.
As  possible  negative  effects,  foreclosure  and  dampening
of  competition  were  mentioned,  with  the  former  being
seen  as  the  main  problem.

While  there  is  general  consensus  on  the  need  for  a  more
economic  based  approach,  there  is  no  agreement  on  how
to  implement  such  an  approach.  Nearly  half  (41(cid:216)%)  of
those  that  commented  on  market(cid:220)share  tests  believe
market  shares  to  be  a  good  indicator  of  market  power.

1.(cid:217)Option  I:  maintain  the  current  system;

2.(cid:217)Option 

II:  wider  block  exemptions  without  a

market(cid:220)share  cap;

3.(cid:217)Option  III:  more  focused  block  exemptions  with  a

market(cid:220)share  cap  of  [40(cid:216)%(cid:129);

4.(cid:217)Option  IV(cid:220)I:  negative  clearance  presumption  up  to
[20(cid:216)%(cid:129)  and  above  wider  block(cid:220)exemptions  without  a
market(cid:220)share  cap;  and

5.(cid:217)Option  IV(cid:220)II:  negative  clearance  presumption  up  to
[20(cid:216)%(cid:129)  and  above  wider  block(cid:220)exemptions  with  a
market(cid:220)share  cap  of  [40(cid:216)%(cid:129).

It  was  stated  clearly  in  the  Green  Paper  that  the  list  of
options  proposed  was  not  exhaustive.  It  is  therefore  not
surprising  that  three  other  options  have  been  proposed
by  several  interested  parties(cid:216)(˛),  namely:

6.(cid:217)An  umbrella  block(cid:220)exemption:  one  wide  block(cid:220)
exemption  based  on  a  blacklist  approach  and  without
market  shares;

7.(cid:217)Guidelines:  no  block(cid:220)exemption  but  only  guidelines
indicating  how  the  Commission  would  apply  Article
85  in  individual  cases;

8.(cid:217)A  control(cid:220)of(cid:220)abuse 

system:  all  vertical  restraints
the
would  be  presumed  a  priori 
Commission  having  the  power  to  suspend  the  positive
presumption  only  with  effect  for  the  future.

lawful,  with 

(˛)(cid:217)A  number  of  other  individual  options  were  proposed,  such

as  a  foreclosure  test  based  on  market  shares.

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Set  out  below  is  a  statistical  breakdown  of  support  for  the  various  options  referred  to  above:

Options

In  favour

Not  in  favour

No
comment

1.(cid:217)Option  I  (maintain  current  system):

16,6(cid:216)%

51,6(cid:216)%

31,8(cid:216)%

2.(cid:217)Option  II  (wider  block(cid:220)exemptions  without  a  market(cid:220)share

cap)

46,2(cid:216)%

23,3(cid:216)%

30,5(cid:216)%

3.(cid:217)Option 

III 

(more 

focused  block(cid:220)exemptions  with  a

market(cid:220)share  cap  of  [40(cid:216)%(cid:129))

6,7(cid:216)%

59,6(cid:216)%

33,7(cid:216)%

4.(cid:217)Option  IV(cid:220)I  (negative  clearance  presumption  up  to  [20(cid:216)%(cid:129)
and  above  wider  block(cid:220)exemptions  without  a  market(cid:220)share
cap)

20,2(cid:216)%

59,5(cid:216)%

20,3(cid:216)%

5.(cid:217)Option  IV(cid:220)II  (negative  clearance  presumption  up  to  [20(cid:216)%(cid:129)
and  above  wider  block(cid:220)exemptions  with  market(cid:220)share  cap
of  [40(cid:216)%(cid:129))

8,1(cid:216)%

82,4(cid:216)%

9,5(cid:216)%

6.(cid:217)Umbrella  Block(cid:220)exemption  without  market  shares

17(cid:216)(cid:217)(cid:216)%

4,9(cid:216)%

78,1(cid:216)%

7.(cid:217)Guidelines  only

1,8(cid:216)%

10,8(cid:216)%

87,4(cid:216)%

8.(cid:217)Control(cid:220)of(cid:220)abuse  system

10,8(cid:216)%

6,3(cid:216)%

82,9(cid:216)%

2.(cid:217)Public  hearing

commentators  stressed  that  a  market(cid:220)share  test  would  be
feasible  and  is  the  best  possible  indicator  of  market
power  available.  No  alternatives  were  provided.

On  6  and  7  October  1997,  the  Commission  organised  a
public  hearing  for  industry  and  other  interested  parties
on  the  Green  Paper.  Companies,  associations,  law  firms,
consumer  organisations  etc.  who  had  made  a  written
submission  were  invited  to  come  to  the  hearing.  Most
Member  States  also  sent  observers,  as  did  the  EFTA
Surveillance  Authority,  Norway, 
a
Iceland, 
the  Central  and  Eastern
considerable  number  of 
European  countries.

and 

There  was  a  large  element  of  consensus  that  market
power  and  a  reduction  in  inter(cid:220)brand  competition  are  the
circumstances  under  which  vertical  restraints  may  have
negative  effects.  There  was  similar  consensus  that  the
Commission  sould  adopt  a  more  economic  approach  to
get  away  from  the  current  legalistic  strait(cid:220)jacket.  Most
also  considered  that  there  is  a  link  between  market
power  and  market  share  but  stressed  that  they  are  not
synonymous.

In  the  light  of  the  increased  legal  uncertainty  that  a
market  share  test  would  bring  to  those  who  currently
benefit  from  existing  BE  Regulations,  a  large  majority
were  against  introduction  of  such  a  test  to  limit  the
applicability  of  block(cid:220)exemptions.  A  limited  number  of

On  the  question  of  which  vertical  restraints  should
remain  per  se  prohibited  there  was  consensus  that  resale
price  maintenance  and  absolute  territorial  protection
should  not  be  covered  by  any  block(cid:220)exemption  and
should  in  most  cases  also  not  qualify  for  individual
exemption.  However, 
individual
exemption  should  not  be  completely  excluded.  At  the
hearing  support  was  expressed  to  allow  true  maximum
resale  price  maintenance,  it  being  recognised  that  it  is
difficult  to  identify  what  a  true  maximum  price  is.

it  was  argued 

that 

On  the  argument  that  vertical  restraints  can  help  to  solve
free  rider  problems,  i.e.  to  ensure  that  the  one  who
makes  an  effort  is  able  to  appropriate  all  the  benefits  the
effort  engenders,  opinions  were  divided.  At  the  hearing
some  argued  that  free  rider  problems  occur  quite  often,
especially  through  the  actions  of  retailers  outside  the
official  dealer  network.  This  was  argued  by  represen(cid:220)
tatives  from  amongst  others  the  car,  perfumes,  petrol,
consumer  electronics  and  toy  industries.  They  favoured
action  to  stop  "leakage’  from  the  system,  including  the
power  to  ban  parallel  imports.  However,  it  was  not
explained  whether  real  free(cid:220)rider  problems  were  at  the

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heart  of  the  problem  -  that  is  that  the  outside  retailers
truly  profit  from  the  investments  made  by  the  network
-  or  whether  the  issue  was  really  one  of  trying  to  shut
out  certain  retailers  in  order  to  reduce  competition  and
increase  prices.  The  latter  argument  was  mentioned  by
large
several  participants, 
retailers.  These 
vital
importance  of  parallel  imports  to  enable  them  to  make
use  of  price  differences  between  Member  States.

including  distributors  and 
the 

commentators 

stressed 

It  was  recognised  that 
in  order  to  achieve  a  more
economic  approach,  a  compromise  has  to  be  found
between  such  an  approach  and  legal  certainty.  A  number
of  participants  were  of  the  opinion  that  most  vertical
agreements  are  innocuous  from  a  competition  point  of
view  or  are  even  pro(cid:220)competitive.  They 
therefore
favoured  either  option  II  (wider  block(cid:220)exemptions),
Option  IV(cid:220)I  (the  same 
to  a  negative
clearance  presumption)  or  one  very  wide  block(cid:220)
exemption,  preferably  with  only  black  clauses.  A  few
were  in  favour  of  a  future  policy  using  market  share
thresholds  as  in  Option  IV(cid:220)II  (block(cid:220)exemptions  with  a
market(cid:220)share  cap)  or  a  foreclosure  test  based  on  market
shares.

in  addition 

It  was  stressed  that,  in  the  event  market(cid:220)share  tests  were
introduced,  the  Commission  should  provide  as  many
flanking  measures  as  possible  to  protect  legal  certainty.
In  particular,  it  was  mentioned  that  the  Commission
should  1.  provide  guidelines  on  the  application  of  the
rules  above  the  market(cid:220)share  thresholds,  2.  solve  the
problem  of  automatic  nullity  under  Article  85(2)  where  a
it 
company  has  failed  to  notify  because 
incorrectly
introduce  a
share,  3.  possibly 
assessed 
non(cid:220)opposition  procedure,  and  4.  reduce  the  burden  of
notification.

its  market 

3.(cid:217)Opinions  of  the  Community  Institutions  and  of  the

Member  States

The  European  Parliament

to 

is  opposed 

its  Resolution  of  18  July  1997 

the  European
In 
Parliament  notes  that,  apart  from  the  de  minimis  notice,
business 
the  use  of  a  market(cid:220)share
approach  and  that  this  approach  is  not  always  the  most
efficient  indicator  of  market  power.  It  therefore  calls  on
the  Commission  to  examine  the  possibility  of  using  other
parameters.  It  stresses  the  need  to  secure  legal  certainty
for  SMEs  so  that  voluntary  retail  chains  are  put  on  the
same  footing  as  large  integrated  groups,  particularly  in
terms  of  a  common  pricing  strategy.  It  also  calls  on  the
Commission  to  examine  whether  it  is  necessary  to  draw
up  a  block(cid:220)exemption  regulation  for  selective  distribution
the  special
and  asks 

for  attention 

to  be  paid 

to 

commercial  or  financial  advantages  in  beer  supply  and
service(cid:220)station  agreements.

The  Parliament  expresses  a  preference  for  a  system  in
which  the  vertical  agreements  of  companies  having  less
than  10(cid:216)%  market  share  fall  outside  Article  85(1).  Above
this  threshold,  block(cid:220)exemptions  should  leave  more  room
for  flexibility  without  disturbing  the  balance  between  the
contracting  parties.  Above  a  certain  market 
share
threshold  the  benefit  of  a  block(cid:220)exemption  should  be
easy  to  withdraw.  Only  if  such  an  easy  withdrawal
procedure 
the  Commission
consider  creating  block(cid:220)exemptions  that  do  not  apply
above  a  certain  market(cid:220)share  threshold,  and  then  only
for  companies  with  a  significant  turnover.

is  not  possible 

should 

The  Economic  and  Social  Committee

In  its  Opinion  of  4  June  1997  the  Economic  and  Social
Committee  recognises  that  the  current  block(cid:220)exemption
regulations  are  too  rigid  and  often  difficult  to  interpret.
Emphasis  should  be  placed  on  the  importance  of  market
structure  in  assessing  the  effects  of  vertical  restraints,
together  with  the  need  to  focus  on  the  market  impact,
rather  than  the  formal  content  of  agreements.  The
Committee 
the  block(cid:220)
exemptions  to  apply  to  upstream  linkages  in  the  supply
chain  between  producers  and  suppliers  of  necessary
inputs.  The  wider  the  coverage  of  the  block(cid:220)exemptions,
the  less  the  need  for  individual  notifications  of  vertical
agreements.  It  would  also  welcome  the  addition  of  a
non(cid:220)opposition  procedure.

favour  of  expanding 

in 

is 

While  not  opposed  to  Option  II  (wider  block(cid:220)exemptions
without  a  market(cid:220)share  cap)  the  Committee  strongly
recommends  Option  IV,  Variant  I  (Option  II  with  a
negative  clearance  presumption  up  to  [20(cid:216)%(cid:129)).  It  has
reservations  about  Option  IV,  Variant  II  (Option  IV(cid:220)I
with  a  market(cid:220)share  cap  of  [40(cid:216)%(cid:129)).  However,  if  the
Commission  were  able  to  introduce  Option  IV,  Variant
I,  combined  with  extremely  wide  block(cid:220)exemptions,  then
the  Committee  could  see  a  case  for  a  procedural
mechanism 
distribution
agreements  with  high  market  shares.

for  monitoring 

vertical 

Committee  of  the  Regions

In  its  Opinion  of  12  June  1997  the  Committee  of  the
Regions  considers  that  the  multi(cid:220)faceted  nature  of  the
question  of  vertical  restraints  makes  it  difficult  to  select  a
single  option  which  is  not  highly  debatable  for  one  sector
or  another.  Whichever  option  is  selected,  agreements  -
such  as  those  for  beer  -  must  be  safeguard.  Views  other
than  those  of  manufacturers  and  distributors  should  be
brought  into  the  process  of  assessing  consumer  benefit.

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In  relation  to  Options  III  and  IV,  the  introduction  of
market(cid:220)share  thresholds  only  makes  sense  if  these  are
expressed  in  terms  of  the  entire  Community  market.  The
Committee  believes  that  ultimately  the  option  which
should  be  selected  is  Option  I.

Member  States

the  Green  Paper.  Many  of 

All  but  one  of  the  fifteen  Member  States  made  written
submissions  on 
these
submissions  were  made  on  a  preliminary  basis.  There  was
no  clear  consensus  on  the  format  of  future  policy  in  this
area.  With  regard  to  the  options  set  out  in  the  Green
Paper,  none  of  the  Member  States  expressed  a  pref(cid:220)
erence  for  Option  I  or  III,  four  gave  a  preference  for
Option  II,  three  gave  a  preference  for  Option  IV,
Variant  I,  and  two  gave  a  preference  for  Option  IV,
Variant  II.  The  remaining  five  Member  States  put
forward  other  substantive  options  of  their  own.  These
may  be  summarised  as  follows:

1.(cid:217)a  negative(cid:220)clearance  regulation  providing  that  almost
all  vertical  restraints  would  be  deemed  a  priori  lawful,
irrespective  of  market  share,  with  the  Commission,
national  authorities  and  national  judges  having  the
power  to  declare  the  regulation 
inapplicable  with
retroactive  effect  if  there  is  no  effective  competition
or  if  there  are  high  barriers  to  entry  in  the  market;

2.(cid:217)a  single  block(cid:220)exemption  for  all  vertical  agreements,
with  a  market(cid:220)share  threshold  of  [25(cid:216)%(cid:129).  Above  this
market  share,  agreements  would  be  covered  by  the
individual  exemption  system.  Below  this  threshold,  the
Commission  would  have  the  power  of  withdrawal  for
problematic  cases;

level  above  which  a  company 

3.(cid:217)a  negative  clearance  regulation  with  two  market(cid:220)share
thresholds.  The  first  (25(cid:220)40(cid:216)%)  to  indicate  the  market
likely  to
share 
second
substantial  market  power.  The 
exercise 
(60(cid:220)80(cid:216)%)  to  indicate  the  possible  restrictions  caused
by  companies  with  at  least  a  10(cid:220)15(cid:216)%  market  share  in
case  of  a  cumulative  effect  of  parallel  network
agreements;

is 

to 

the  need 

to  change 

The  first  element  of  general  consensus  amongst  the
Member  States  relates 
the
Commission’s  current  policy  on  vertical  restraints.  It  is
recognised  that  the  adoption  of  a  more  economic  based
approach  would  of  necessity  result  in  a  system  with  less
legal  certainty  for  companies  with  market  power  who
currently  benefit  from  existing  BE  Regulations.  The
second  element  of  consensus  relates  to  the  most  recent
vertical
according 
economic 
restraints  should  only  be  considered  as  capable  of
harming  competition  when  they  are 
linked  to  some
degree  of  market  power.  The  third  element  of  consensus
relates  to  the  need  for  maintaining  the  importance  given
to  the  market  integration  objective  in  the  assessment  of
vertical  restraints,  particularly 
light  of  future
enlargement.

to  which 

literature, 

in  the 

As  a  follow  up  to  this  consensus  there  appear  to  be  two
trends  of  thought.  The  first  tends  to  simply  promote  the
introduction  of  a  level  of  flexibility  within  the  existing
system  by  reducing  the  regulatory  approach  of  the
current  block(cid:220)exemption  regulations.  A  second  approach
is  based  on  the  need  to  adopt  a  real  change  in  policy.
This  second  approach  has  two  major  hypotheses.  The
first 
is  based  on  maintaining  the  current  prohibition
system  of  Article  85.  This  system  could  be  adjusted  by
the  introduction  of  market(cid:220)share  thresholds.  The  aim  of
these  thresholds  would  be  to  determine,  on  the  basis  of
the  market(cid:220)power  level,  both  the  absence  of  grounds  for
the  application  of  Article  85(1)  and 
field  of
application  of  a  single,  wide  block(cid:220)exemption  covering
all  vertical  restraints.  The  second  hypothesis  is  based  on
a  switch  from  a  prohibition  to  a  control  of  abuse  system.
This  system  would  in  effect  grant  almost  all  vertical
restraints  an  a  priori  presumption  of  compatibility  with
Article  85(1),  with  the  possibility  for  the  Commission  to
withdraw  this  positive  presumption  with  effect  only  for
the  future.

the 

In  the  course  of  the  consultation  exercise,  the  positions
expressed  by  the  Member  States  on  the  Green  Paper
have  evolved  and  led  to  a  greater  consensus  on  the
policy  proposal  set  out  in  this  communication,  i.e.  one
broad  Block(cid:220)Exemption  regulation  limited  by  one/two
market(cid:220)share  threshold(s).

irrespective  of  market 

4.(cid:217)a  single  black(cid:220)clause  block(cid:220)exemption.  The  exemption
share.  The
would  apply 
Commission  would  be  able  to  ask  for 
individual
notifications.  The  block(cid:220)exemption  would  confer
provisional  validity  upon  vertical  agreements,  which
could  be  withdrawn  only  with  effect  for  the  future;

SECTION  III  -  ECONOMICS  OF  VERTICALS

1.(cid:217)Vertical  restraints  and  market  power

5.(cid:217)broader  and  more 

the
application  of  which  would  be  controlled,  a  posteriori
by  the  national  competition  authorities.

flexible  block(cid:220)exemptions, 

As  indicated  in  the  introduction,  economics  tells  us  that
in  the  field  of  vertical  restraints  competition  concerns
can  only  arise 
inter(cid:220)brand
competition,  i.e.  if  there  exists  a  certain  degree  of  market

insufficient 

there 

is 

if 

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the  other  hand, 

power.  On  the  one  hand,  the  fiercer  the  inter(cid:220)brand
competition  is,  the  more  likely  it  is  that  vertical  restraints
have  no  negative  effect  or  at  least  a  net  positive  effect.
On 
inter(cid:220)brand
competition,  the  more  likely  it  is  that  vertical  restraints
have  a  net  negative  effect.  This  means  that  the  same
vertical  restraint  can  have  different  effects  depending  on
the  market  structure  and  on  the  market  power  of  the
company  applying  the  vertical  restraint.

the  weaker 

the 

In  economics,  market  power  is  usually  defined  as  the
power  to  raise  price  above  the  competitive  level  (in  the
short  run  marginal  cost,  in  the  long  run  average  total
cost).  In  other  words,  a  company  has  market  power  if  it
has  a  perceptible  influence  on  the  price  against  which  it
can  sell  and  if  by  charging  a  price  above  the  competitive
level  it  is  able,  at  least  in  the  short  term,  to  obtain  supra(cid:220)
normal  profits.  Most  economists  would  agree  that  there
exists  market  power  below  the  level  of  dominance  as
defined  by  the  Court  of  Justice.  This  view  was  also
expressed  in  the  Green  Paper(cid:216)(˛),  to  indicate  that  vertical
restraints  can  harm  competition  below  the 
level  of
dominance  and  therefore  that  Article  86  and  merger
control  will  not  suffice.  Article  85  needs  to  be  applied  to
vertical  restraints,  in  particular  in  oligopolistic  markets
where  none  of  the  individual  companies  hold  a  dominant
position.

It  is  also  generally  recognised  that  vertical  restraints  are
less  harmful  than  horizontal  competition
on  average 
restraints.  The  main  reason 
treating  a  vertical
for 
restraint  more  leniently  than  a  horizontal  restraint  lies  in
the  fact  that  the 
latter  may  concern  an  agreement
between  competitors  producing  substitute  goods/services
while  the  former  concerns  an  agreement  between  a
supplier  and  a  buyer  of  a  particular  product/service.  In
horizontal  situations  the  exercise  of  market  power  by
one  company  (higher  price  of  its  product)  will  benefit  its
an 
competitors.  This  may  provide 
to
incentive 
competitors 
to  behave  anti(cid:220)
induce  each  other 
competitively.  In  vertical  situations  the  product  of  the
one  is  the  input  for  the  other.  This  means  that  the
exercise  of  market  power  by  either  the  upstream  or
downstream  company  would  normally  hurt  the  demand
for  the  product  of  the  other.  The  companies  involved  in
to
the  agreement  may 
prevent  the  exercise  of  market  power  by  the  other  (so
called  self(cid:220)policing  character  of  vertical  restraints).

therefore  have  an 

incentive 

to 

can  only  try  to  increase  its  profits  by  optimising  its
manufacturing  and  distribution  processes,  with  or
without  the  help  of  vertical  restraints.  However,  when  it
does  have  market  power  it  can  also  try  to  increase  its
profits  at  the  expense  of  its  direct  competitors  by  raising
their  costs  and  at  the  expense  of  its  buyers/consumers  by
trying  to  appropriate  some  of  their  surplus.  This  can
happen  when  the  upstream  and  downstream  company
share  the  extra  profits  or  when  one  of  the  two  imposes
the  vertical  restraint  and  thereby  appropriates  all  the
extra  profits.

2.(cid:217)The  negative  effects

2.1.(cid:217)Individual vertical restraints

The  negative  effects  on  the  market  that  may  result  from
anti(cid:220)competitive  vertical  agreements  and  that  Community
competition  law  aims  at  preventing  are  the  following:

-(cid:217)foreclosure,  either  of  other  suppliers  or  of  other

buyers;

-(cid:217)the  deterioration  of  price  and  non(cid:220)price  conditions
available  to  consumers,  either  for  one  particular
brand  (reduction  of 
intra(cid:220)brand  competition)  or
between  different  brands  (reduction  of  inter(cid:220)brand
competition);

-(cid:217)collusion  amongst  suppliers  or  buyers  facilitated  by

vertical  restraints;

-(cid:217)the  creation  of  obstacles 

integration,
including,  most  of  all,  limitations  on  the  freedom  of
the  European  consumers  to  purchase  a  good  or
service  in  any  Member  State  they  may  choose.

to  market 

Such  negative  effects  may  result  from  various  vertical
restraints.  Special  care  is  needed  due  to  the  fact  that
agreements  which  are  different  in  form  may  have  the
impact  on  competition.  To  analyse
same  substantive 
these  possible  negative  effects  it  is  appropriate  to  divide
four  groups:  an  exclusive(cid:220)
vertical 
distribution 
a
resale(cid:220)price  maintenance  group  and  a  market(cid:220)parti(cid:220)
tioning  group.  The  vertical  restraints  within  each  group
seem  to  have  similar  negative  effects  on  competition.

single(cid:220)branding 

into 
a 

restraints 

group, 

group, 

However,  this  self(cid:220)restraining  character  should  not  be
over(cid:220)estimated.  When  a  company  has  no  market  power  it

(˛)(cid:217)Green  Paper  on  Vertical  Restraints 

in  Community

Competition  Policy,  point  303.

Before  describing  the  four  groups  a  number  of  general
points  need  to  be  made.  First,  the  analysis  applies  to  both
goods  and  services,  although  certain  restraints  are  mainly

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used  in  the  distribution  of  goods.  This  is  why  throughout
this  text  the  term  good(s)  means  both  good(s)  and
service(s)  unless  otherwise  stated.  Secondly,  vertical
agreements  can  be  concluded  for  intermediate  and  final
goods  and  services.  Unless  otherwise  stated  the  analysis
and  arguments  in  the  text  apply  to  all  levels  of  trade  and
the  neutral  terms  supplier  and  buyer  are  used.  When
only  a  specific 
indicated.
Thirdly,  the  classification  is  based  upon  what  could  be
described  as  the  basic  components  of  vertical  restraints.
In  practice  many  vertical  agreements  make  use  of  more
than  one  of  these  components.  To  give  an  example,
exclusive  distribution  usually  limits  the  number  of  buyers
the  supplier  can  sell  to  and  often  at  the  same  time  limits
the  area  where  the  buyers  can  be  active.  The  first
component  may  lead  to  foreclosure  of  other  buyers  while
the  second  component  may  lead  to  market  partitioning.

implicated  this 

level 

is 

is 

Exclusive(cid:220)distribution  group

Under  the  heading  of  exclusive  distribution  come  those
agreements/components  that  have  as  their  main  element
that  the  manufacturer  is  selling  only  to  one  or  a  limited
number  of  buyers.  This  may  be  to  restrict  the  number  of
buyers  for  a  particular  territory  or  group  of  customers,
or  to  restrict  the  kind  of  buyers.  This  group  comprises
amongst  others  exclusive  distribution  and  exclusive
customer  allocation  as  the  supplier  limits  its  sales  to  only
one  buyer  for  a  certain  territory  or  class  of  customers.  It
also  comprises  exclusive  supply  and  quantity  forcing  on
the  supplier,  where  an  obligation  or  incentive  scheme
agreed  between  the  supplier  and  the  buyer  makes  the
former  to  sell  on  a  particular  market  only  or  mainly  to
one  buyer.  This  group 
selective
distribution,  where  the  conditions  imposed  on  or  agreed
with  the  selected  dealers  may  limit  their  number.

comprises 

also 

is  concerned,  since 
it  will  also 

There  are  two  main  effects  on  competition:  1.  certain
buyers  within  that  market  can  no  longer  buy  from  this
particular  supplier,  i.e.  it  leads,  in  particular  in  the  case
of  exclusive  supply,  to  foreclosure,  and  2.  as  far  as  the
less
distribution  of  final  goods 
distributors  will  offer  this  good 
lead  to
reduced  intra(cid:220)brand  competition.  In  the  case  of  wide
exclusive  territories  or  in  case  of  exclusive  customer  allo(cid:220)
cation  the  result  may  be  total  elimination  of  intra(cid:220)brand
competition.  In  addition,  when  a  selective  distribution
agreement  is  used  rather  strictly,  i.e.  not  many  stores  can
less 
carry 
in(cid:220)store
competition.
competition 
Furthermore,  selective  distribution  contains  a  limitation
on  resale  since  approved  dealers  may  only  sell  to  end
consumers  and  other  approved  dealers.

to 
inter(cid:220)brand 

the  product, 

reduced 

it  also 

leads 

and 

Single(cid:220)branding  group

those
the  heading  of  single  branding  come 
Under 
agreements/components  that  have  as  their  main  element
that  the  buyer  is  induced  to  concentrate  his  orders  for  a
particular  type  of  good  with  one  supplier.  The  group
comprises  amongst  others  non(cid:220)compete  and  quantity
forcing  on  the  buyer,  where  an  obligation  or  incentive
scheme  agreed  between  the  supplier  and  the  buyer  makes
the  latter  purchase  its  requirements  for  a  particular  good
or  service  and  its  substitutes  only  or  mainly  from  one
supplier.

There  are  two  main  effects  on  competition:  1.  other
suppliers  in  that  market  cannot  sell  to  the  particular
buyers,  i.e.  foreclosure  of  competing  suppliers,  and  2.  as
far  as  the  distribution  of  final  goods  is  concerned,  the
particular  retailers  will  only  sell  one  brand,  therefore
there  will  be  no  in(cid:220)store  competition  in  their  shops.  Both
effects  may 
inter(cid:220)brand
competition.

reduction 

to  a 

lead 

in 

in 

inter(cid:220)brand  competition  may  be
The  reduction 
mitigated  by 
stronger  ex(cid:220)ante  competition  between
suppliers  to  obtain  the  single  branding  contracts,  but  the
longer  the  duration  the  more  likely  it  will  be  that  this
effect  will  not  be  strong  enough  to  fully  compensate  for
the  lack  of  inter(cid:220)brand  competition.

Resale(cid:220)price  maintenance  group

Under  the  heading  of  resale  price  maintenance  (RPM)
come  those  agreements/components  that  have  as  their
main  element  that  the  buyer  is  obliged  or  induced  to
resell  not  below  a  certain  price,  at  a  certain  price  or  not
above  a  certain  price.  This  group  comprises  minimum,
resale  prices.
fixed,  maximum  and 
Maximum  and 
resale  prices,  while
unlikely  to  have  negative  effects,  may  work  as  fixed
RPM.  As  RPM  relates  to  the  resale  price  it  is  mainly
relevant  for  the  distribution  of  final  goods.

recommended 

recommended 

There  are  two  main  effects  of  minimum  and  fixed  RPM
longer
on  competition:  1. 

the  distributors  can  no 

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compete  on  price  for  that  brand,  leading  to  a  total  elimi(cid:220)
nation  of  intra(cid:220)brand  price(cid:220)competition,  and  2.  there  is
increased  transparency  on  price  and  responsibility  for
price  changes,  making  horizontal  collusion  between
manufacturers  or  distributors  easier,  at  least  in  concen(cid:220)
trated  markets.  The  reduction  in  intra(cid:220)brand  competition
may,  as  it  leads  to  less  downward  pressure  on  the  price
for  the  particular  good,  have  as  an  indirect  effect  a
reduced  level  of  inter(cid:220)brand  competition.

Market(cid:220)partitioning  group

the  heading  of  market  partitioning  come
Under 
agreements/components  that  have  as  their  main  element
that  the  buyer  is  restricted  as  to  where  it  either  sources
or  resells  a  particular  good  or  that  the  supplier 
is
restricted  to  whom  it  may  sell  its  good.  This  group
includes  exclusive  purchasing,  where  an  obligation  or
incentive  scheme  agreed  between  the  supplier  and  the
buyer  makes  the  latter  purchase  its  requirements  for  a
particular  good  or  service  exclusively  from  the  supplier,
but  leaving  the  buyer  free  to  buy  and  sell  competing
territorial  sales
goods  or  services.  It  also 
restrictions,  customer  sales  restrictions,  after(cid:220)market  sales
restrictions,  prohibitions  of  resale  and  tying.

includes 

The  main  effect  on  competition 
is  a  reduction  of
intra(cid:220)brand  competition  that  may  help  the  supplier  or  the
buyer  (in  case  of  after(cid:220)market  sales  restrictions)  to
partition  the  market  and  thus  hinder  market  integration.
This  may  facilitate  price  discrimination.  Tying  is  slightly
the  odd  one  out.  Its  main  effect  is  that  the  buyers  may
pay  a  higher  price  for  the  tied  good  than  they  would
otherwise  do  but  it  may  also  lead  to  foreclosure  of  other
suppliers  and  reduced 
in  the
market  of  the  tied  good.

inter(cid:220)brand  competition 

2.2.(cid:217)Combinations of vertical restraints

The  next  question  to  be  considered  is  whether  a  combi(cid:220)
nation  of  different  vertical  restraints 
the
negative  effects.  In  the  Green  Paper  a  rather  prominent
place  is  given  to  the  argument  that  certain  combinations
of  vertical  restraints  are  better  for  competition  than  their
use  in  isolation  from  each  other(cid:216)(˛).  Although  this  may
occasionally  be  the  case,  it  does  not  appear  to  be  the

increases 

(˛)(cid:217)Green  Paper,  point  67.

general  rule.  In  general  the  opposite  seems  true,  a  combi(cid:220)
nation  usually  aggravates  the  possible  negative  effects.

a 

combines 

reduction 

distribution 

For  example,  a  combination  of  single  branding  with
exclusive 
of
inter(cid:220)brand  competition  with  a  reduction  of  intra(cid:220)brand
competition.  In  the  case  of  final  goods  a  market  is
created  with  local  brand  monopolists  without  in(cid:220)store
competition.  Also,  to  foreclosure  at  manufacturer  level  is
added  foreclosure  at  the  retail  level.  This  means  that  not
only  may  it  be  difficult  for  a  manufacturer  to  sell  a  new
brand  as  stores  are  tied  to  one  brand,  but  also  that  new
entrants 
the  retail  market  may  have  difficulty
obtaining  some  of  the  leading  brands.  This  results  in  a
situation  where  it  may  be  both  difficult  to  find  outlets
and  unprofitable  to  set  up  new  outlets.

to 

Another  example 
is  the  combination  of  one  of  the
restraints  of  the  exclusive  distribution  group  like  selective
distribution  with  RPM.  To  the  reduction  of  intra(cid:220)brand
competition  of  the  first 
is  added  the  elimination  of
intra(cid:220)brand  price  competition  of  the  second.  This  quickly
leads  to  a  total  elimination  of  intra(cid:220)brand  competition.
This  elimination  of  intra(cid:220)brand  competition  may  also
help 
tendencies  between  manu(cid:220)
facturers  facilitated  by  RPM.  In  general,  this  combi(cid:220)
nation  does  also  not  make  sense  from  an  efficiency  point
of  view  as  both  protect  the  margin  of  the  retailer.  One  of
these  restraints  would  normally  suffice  to  overcome,  for
example,  a  free  rider  problem  between  retailers.

to  sustain  collusive 

A  combination  of  one  of  the  restraints  of  the  single
branding  group  with  RPM  may  combine  a  reduction  of
inter(cid:220)brand  competition  resulting  from  a  lack  of  in(cid:220)store
competition  with  a  facilitation  of  collusive  behaviour
between  the  manufacturers  induced  by  RPM.  Collusive
behaviour  may  become  easier  as  the  lack  of  in(cid:220)store
competition  takes  away  some  of  the  competitive  pressure.
In  addition,  the  reduction  of  inter(cid:220)brand  competition  is
combined  with  a  loss  of  intra(cid:220)brand  price  competition
resulting  from  RPM.

Finally,  all  combinations  of  vertical  restraints  which
make  arbitrage  either  by 
final  customers  or  by
distributors  more  difficult,  if  not  impossible,  are  negative
from  a  market  integration  perspective.  Examples  include
the  combination  of:  1. 
restriction
combined  with  selective  distribution  at  the  same  level  of
distribution,  2.  exclusive  distribution  combined  with
exclusive  purchasing,  and  3. 
selective  distribution
combined  with  exclusive  purchasing.

territorial 

sales 

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Certain  combinations  may  however  be  viewed  more
positively,  because  it  can  be  argued  that  one  of  the
vertical  restraints  limits  the  possible  negative  effects  of
the  other.  In  the  combination  of  exclusive  distribution
with  maximum  RPM  the  latter  restraint  may  help  the
supplier  to  limit  possible  price  increases  the  buyer  may
want  to  implement  under  the  protection  of  the  territorial
exclusivity  obtained.  The  same  reasoning  can  be  applied
selective  distribution  and
to 
maximum  RPM.  Also 
the  combination  of  exclusive
distribution  with  quantity  forcing  on  the  buyer  may  work
in  the  same  way  as  the  latter  may  prevent  the  distributor
from  raising  his  prices.

combination  of 

the 

3.(cid:217)The  positive  effects

It  is  said  that  in  a  number  of  situations  the  usual  arm’s
length  dealings  between  manufacturer  and  retailer,
determining  only  price  and  quantity  of  a  certain  trans(cid:220)
action,  lead  to  a  sub(cid:220)optimal  level  of  investments  and
sales.  The  following  generalisations  can  be  made  about
this:

1.(cid:217)The 

this  - 

level  of 

investments  and  sales  - 

first  and  main  reason  why 

i.e.  a
sub(cid:220)optimal 
is
supposed  to  happen  is  the  existence  of  some  form  of
free(cid:220)rider  problem.  The  person  who  makes  an  effort
may  not  be  able  to  appropriate  all  the  benefits  his  or
her  effort  engenders  and  may  therefore  be  inclined  to
invest  sub(cid:220)optimally.  This  may  be  the  result  of  free
riding  by  one  retailer  on  the  promotion  efforts  of
similar
another  retailer.  Exclusive  distribution  or 
restrictions  or  RPM  may  be  helpful  in  avoiding  such
free  riding.  Free(cid:220)riding  can  also  occur  between  manu(cid:220)
facturers  where  one  invests  in  promotion  in  the  shops
for  its  brand,  thereby  also  attracting  customers  for  its
competitors.  Non(cid:220)compete  type  restraints  can  help  to
overcome  this  latter  type  of  free(cid:220)riding.

the  retailers  effective  service  requirements  concerning
the  pre(cid:220)sales  services(cid:216)(˛).

Free(cid:220)riding  between  manufacturers  is  also  limited  by
rather  strict  conditions.  Where  a  product  is  promoted
by  the  manufacturer  through  national  advertising
there  seems  to  be  little  scope  for  a  free(cid:220)rider  issue  to
arise  that  could  be  addressed  through  non(cid:220)compete
obligations  imposed  on  the  distributors.  Only  in  case
the  promotion  takes  place  in  certain  retail  outlets
could  a  non(cid:220)compete  type  agreement  help  capture  the
full  benefits.  In  addition, 
it  can  only  occur  on
pre(cid:220)sales  service,  it  must  not  be  possible  to  make  the
promotion  brand  specific  and 
likely  for
relatively  new  and  complex  products  as  customers
may  otherwise  already  very  well  know  what  they
want.

is  only 

suppose  a  real 

2.(cid:217)A  second  general  point  that  needs  to  be  made
is
concerns  the  possible  divergence  between  what 
privately  efficient  and  what  is  efficient  from  a  total
welfare/consumer  point  of  view.  What  is  privately
efficient  is  not  always  good  for  total  welfare.  To  go
back  to  the  free(cid:220)riding  between  retailers  or  between
manufacturers.  Let  us 
free(cid:220)rider
problem  exists  and  sales  can  be  expanded  by  inducing
more  pre(cid:220)sales  services  although  this  would  also  lead
to  higher  prices.  When  these  extra  services  are  valued
equally  by  the  majority  of  consumers  this  may  very
well  lead  to  higher  total  welfare.  But  when  the  infra(cid:220)
marginal  consumers  (that  is  those  who  are  already
buying  at  the  current  price/service  level)  know  what
they  want  and  do  not  appreciate  the  extra  service,
they  only  suffer  from  the  higher  price,  especially  if
there  is  insufficient  inter(cid:220)brand  competition.  It  may  be
privately  efficient  to 
level  to
attract  more  marginal  consumers  and  thereby  increase
sales,  but  total  welfare  may  nonetheless  suffer.

increase  the  service 

issue,  something  that 

For  there  to  be  a  problem  there  needs  to  be  a  real
free(cid:220)rider 
is  not  always  so
obvious.  Free(cid:220)riding  between  retailers  can  only  occur
on  pre(cid:220)sales  services  and  not  on  after(cid:220)sales  services.
The  good  needs  to  be  relatively  new  or  technically
complex  as  the  customer  otherwise  may  very  well
know  what  he  wants  from  past  purchases.  And  the
good  must  be  of  a  reasonably  high  value  as  it  is
otherwise  not  attractive  for  a  customer  to  go  to  one
shop  for  information  and  to  another  to  buy.  On  top
of  this,  when  all  these  conditions  are  fulfilled  it  must
not  be  practical  for  the  manufacturer  to  agree  with

3.(cid:217)A  special  form  of  free(cid:220)riding 

is  the  certification
free(cid:220)rider  issue.  The  hypothesis  is  that  certain  retailers
perform  a  valuable  service  by 
"good’
products.  The  fact  that  these  retailers  sell  a  certain

identifying 

(˛)(cid:217)The  standard  argument  against  contractability  of  service
requirements  is  that  the  costs  of  monitoring  and  the  contract
costs  may  be  prohibitive  for  the  manufacturer  in  case  of  a
large  number  of  small  retailers.

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its 

introduction  may  fail.  If  this 

product  signifies  to  the  consumer  that  it  is  a  good
buy.  This  hypothesis  may  sometimes  be  useful  for
explaining  the  introduction  of  new  products.  New
and  complex  products  are  first  stocked  by  high(cid:220)
quality,  high(cid:220)margin  stores  where  they  are  bought  by
avant(cid:220)garde  consumers.  Gradually 
reputation
becomes  established  and  demand  grows  enough  for  it
to  be  sold  through  low(cid:220)price  chains.  If  the  manu(cid:220)
facturer  cannot  initially  limit  its  sales  to  the  premium
stores,  it  runs  the  risk  of  being  delisted  and  the
product 
is  true,  a
problem  analogous  to 
invention  patent  protection
exists.  It  may  be  necessary  to  provide  temporary
protection  against  price  discounters  to  help  the  intro(cid:220)
duction  of 
the  product.  However,  a  period  of
protection  which  is  too  long  may  only  delay  the
into  the  mature,  price(cid:220)competitive
product  moving 
stages  of 
the  disadvantage  of
consumers.  This  means,  at  best,  that  there  may  be  a
reason  to  allow  for  a  limited  duration  a  restriction  of
the  exclusive  distribution  or  RPM  kind;  enough  to
guarantee  introduction,  but  not  so  long  as  to  hinder
large(cid:220)scale  dissemination.

life  cycle, 

its 

to 

there  are 

4.(cid:217)Yet  another  special  form  of  free  riding  is  the  so(cid:220)called
"hold(cid:220)up’  problem.  Sometimes 
specific
investments  to  be  made  by  either  the  supplier  or  the
buyer,  such  as  in  special  equipment  or  training.  In
such  a  case,  after  the  investments  have  been  made  the
investor  becomes  to  a  certain  extent  prisoner  to  the
other  side.  The  balance  of  power  will  shift.  In  fear  of
this  the  necessary 
investments  may  not  be  made,
unless  ex(cid:220)ante  supply  arrangements  can  be  fixed.  The
investor  fears  that  the  other  side  will  free  ride  on  its
investment.  However,  as  in  the  free  riding  example
between  retailers,  there  are  a  number  of  conditions
which  have  to  be  met  before  such  a  risk  is  real.  First,
the  investment  must  be  sunk  and  specific  to  deal  with
that  other  party  only.  Secondly, 
it  must  be  a
long(cid:220)term  investment  which  is  not  recouped  in  the
short  run.  And  thirdly,  the  investment  must  be  asym(cid:220)
metric;  i.e.  one  invests  more  than  the  other.  Only
when  these  conditions  are  met  can  there  be  a  real
limited
reason  to  have  a  vertical  restraint  for  a 
the
duration,  of 
investment 
the
exclusive  distribution  or  exclusive  supply  type  when
the  investment  is  made  by  the  buyer.

type  when 
the  supplier  and  of 

the  non(cid:220)compete 

is  made  by 

a  final  price  that  even  exceeds  the  monopoly  price  an
integrated  company  would  charge,  to  the  detriment  of
their  collective  profits  and  consumers.  In  this  case
quantity  forcing  on  the  buyer  or  maximum  RPM
could  help  the  manufacturer  bring  the  price  down  to
monopoly  level.

large  measure  of 

substitutability  between 

6.(cid:217)In  the  economic  literature  it  is  explained  that  there  is
a 
the
different  vertical  restraints.  This  means  that  the  same
inefficiency  problem  can  be 
solved  by  different
vertical  restraints.  For  example,  as  explained  above,
the  problem  of  free(cid:220)riding  between  retailers  or  the
certification  free(cid:220)rider  problem  can  be  solved  by
means  of  exclusive  distribution  or  fixed  or  minimum
RPM.  This  is  of  importance  as  the  negative  effects  on
competition  may  differ  between  the  various  vertical
restraints.  This  plays  a  role  when  indispensability  is
discussed  under  Article  85(3).  As  RPM  is  generally
considered  to  be  less  acceptable  from  a  competition
point  of  view  this  is  a  reason  only  to  allow  exclusive
distribution  or  other  less  serious  restraints  and  not
RPM.

4.(cid:217)General  rules  for  the  evaluation  of  vertical  restraints

In  evaluating  vertical  restraints  from  a  competition  policy
perspective,  some  general  rules  can  be  formulated.

intra(cid:220)brand 

it  can  be  said  that  vertical
As  a  first  general  rule 
restraints  which  reduce 
inter(cid:220)brand  competition  are
generally  more  harmful  than  vertical  restraints  that  only
reduce 
example,
non(cid:220)compete  obligations  are  likely  to  have  more  net
negative  effects  than  exclusive  distribution.  The  former,
by  foreclosing  other  brands,  may  prevent  these  brands
from  reaching  the  market.  The  latter,  while  foreclosing
certain  buyers,  does  not,  in  general,  prevent  the  good
from  reaching  the  final  consumer.

competition. 

For 

5.(cid:217)The  last  reason  for  sub(cid:220)optimal  sales  that  should  be
mentioned,  is  the  problem  of  "double  marginalisation’.
In  case  both  the  manufacturer  and  the  retailer  have
market  power  each  will  set  its  price  above  marginal
cost.  They  both  add  their  margin  that  exceeds  the  one
that  would  exist  under  competition.  This  may  result  in

A  second  general  rule  is  that  exclusive  agreements  are
generally  worse 
than  non(cid:220)exclusive
for  competition 
agreements.  Exclusive  agreements  make,  by  the  express

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language  of  the  contracts  or  their  practical  effects,  one
party  fulfil  all  or  practically  all  its  requirements  from
another  party.  For  example,  a  non  compete  obligation
makes  that  the  buyer  purchases  only  one  brand,  while
leaves  the  buyer  scope  to  purchase
quantity  forcing 
competing  goods.  The  degree  of  foreclosure  is  therefore
different,  while  often  the  efficiencies  are  remarkably
similar.

a  somewhat  less  serious  restriction.  It  concerns  the
possible  extension  of  market  power  from  one  market
into  another.  Possible  efficiency  arguments  ("need  to
assure  the  buyer  uses  the  right  sort  of  input  for  the
fragile  machine  we  sold  him  as  breakdowns  may  hurt
our  products  image’  or  "joint  delivery  is  cost  saving’)
may  be  limited.  Exclusive  purchasing,  i.e.  the  obli(cid:220)
gation  to  source  directly  from  one  supplier  without  a
restriction  on  selling  competing  brands,  is  the  last
serious  restriction  within  this  group.

A  third  general  rule  that  can  be  formulated  is  that  the
possible  negative  effects  of  vertical  restraints  are  rein(cid:220)
forced  when  not  just  one  supplier  with  its  buyers  practies
a  certain  vertical  restraint  but  when  also  other  suppliers
and  their  buyers  organise  their  trade  in  a  similar  way.
These  so  called  cumulative  effects  may  be  a  problem  in  a
number  of  sectors.  To  make  a  valid  assessment  of  the
effects  of  a  cumulation  of  vertical  agreements  requires  a
sector  wide  investigation  and  overview.  The  issue  of
withdrawal  of  the  proposed  BE  Regulation  is  reviewed  in
the
section  V(cid:220)3  and  will  be  further  developed 
guidelines.

in 

In  addition  to  these  three  general  rules  some  further
points  can  be  made:

-(cid:217)RPM  is  usually  considered  to  be  more  restrictive  than
the  other  vertical  restraints.  In  case  of  efficiencies  it
can  often  be  replaced  by  less  competition  distorting
restraints  with 
is
in  most  countries
reflected  by  the  current  policy 
which  tends  to  be  very  strict  on  RPM  while  allowing
exclusive  distribution  in  certain  market  conditions.

similar  positive  effects.  This 

-(cid:217)Community  competition  policy,  with  its  emphasis  on
the  necessity  to  protect  arbitrage  and  the  general
prohibition  on  resale  restrictions,  reflects  the  concern
to  further  market  integration.

-(cid:217)Restraints  agreed  for 

intermediate  goods  are 

in
general 
less  harmful  than  restraints  affecting  the
distribution  of  final  goods.  As  intermediate  goods  are
not  sold  to  final  consumers  but  are  used  as  an  input,
brand  and  image  are  less  important.  This  makes  a
less
intra(cid:220)brand 
possible 
important.  This  distinction  between  intermediate  and
final  goods  and 
in
guidelines.

services  will  be 

competition 

taken  up 

loss  of 

-(cid:217)Within  the  RPM  group,  fixed  and  minimum  price
maintenance  are  serious  restraints.  Maximum  and
recommended  prices,  when 
really  maximum  or
recommended,  are  not  considered  to  be  restrictive  of
competition.

SECTION  IV  -  MARKET(cid:220)SHARE  THRESHOLDS  AND
LEGAL  CERTAINTY

1.(cid:217)Existing  block(cid:220)exemptions

regulations 

The  present  block(cid:220)exemption 
(exclusive
distribution,  exclusive  purchasing  and  franchising)  follow
a  legalistic  clause(cid:220)based  approach  where  the  focus  is  on
the  freedom  of  action  of  dealers  and  on  intra(cid:220)brand
competition  between  dealers  belonging 
the  same
distribution  system.  Apart  from  the  withdrawal  system
and  the  possible  application  of  Article  86,  the  exemptions
are  granted  for  all  companies  irrespective  of  market
power.

to 

-(cid:217)Within  the  market(cid:220)partitioning  group  restriction  of
resale  and  after(cid:220)market  sales  restrictions  seem  the
worst  as  they  allow  market  partitioning  without  clear
possible  efficiencies.  "Tying’  is  in  general  considered

system  exempts 

This 
from  Article  85(1),  without
distinction,  companies  with  1(cid:216)%  and  100(cid:216)%  market
share  even  for  non(cid:220)compete  obligations  and  certain
combinations  of  vertical  restraints  such  as  exclusive  and
selective  distribution  (see  franchising  regulation).  It  leads
to  the  result  that  small  operators  (the  vast  majority  of
companies)  suffer  unnecessarily  strict  regulation  while

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companies  with  significant  market  power  can  protect
themselves  simply  by  drafting  the  contract  clauses  so  as
to  fit  within  the  existing  block(cid:220)exemption  regulations.

The  Commission  can  withdraw  the  benefit  of  these
exemption  regulations  only  with  effect  for  the  future.
Companies  with  market  power  can  apply  the  most
serious  restrictions  until 
the  Commission  adopts  a
prohibition  decision.  There  is  no  pressure  on  companies
to  change  their  agreements  or  conduct  because  they
effectively  enjoy  provisional  validity  for  their  contracts.
Therefore,  the  preventive  effect  of  the  prohibition  system
of  Article  85(1) 
to
lost. 
competition  can  be  caused  without  any  remedy  for  the
past  (e.g.  market  foreclosure  through  exclusive  dealings).
At  the  same  time,  smaller  operators  are  prevented  from
using  vertical  restraints  in  an  innovative  way  to  improve
their  competitive  position  on  the  market.  This  hinders
the  development  of  new  dynamic  forms  of  distribution.
Therefore 
regulations
the 
cannot  be  carried  forward.

existing  block(cid:220)exemption 

Irreparable  damage 

is 

2.(cid:217)Economic  approach  and  market(cid:220)share  thresholds

Two  policy  conclusions  can  be  drawn  from  the  economic
learning  described  in  the  previous  section:  firstly,  in  the
absence  of  market  power,  a  presumption  of  legality  for
for  certain
vertical  restraints  can  be  made  except 
hardcore  restrictions;  secondly,  when  market  power
exists,  no  general  presumption  of  legality  can  be  made.
Therefore,  it  makes  economic  sense  to  use  market(cid:220)share
thresholds  to  limit  the  application  of  a  block(cid:220)exemption
regulation.

It  is  clear  that  market  share  is  not  a  substitute  for  market
power.  In  an  individual  case  the  establishment  of  an
infringement  in  respect  of  a  particular  vertical  restraint
can  normally  only  be  assessed  by  looking  at  all  aspects  of
market  structure  and  market  behaviour.  However,  such  a
market  analysis  imposes  significant  enforcement  costs  on
the  competition  authority  and  cannot  be  applied  to  every
single  case.

It  is  possible  to  make  two  policy  assumptions  that  assist
in  this  market  analysis.  First,  in  the  majority  of  cases  a
market  share  of  20(cid:216)%  is  normally  insufficient  to  bring
about  net  negative  effects  on  competition  that  would
result  from  vertical  restraints  practised  by  a  single  firm.

Secondly,  for  certain  vertical  restraints  in  the  light  of
significant  efficiencies  a  block(cid:220)exemption  up  to  40(cid:216)%
market  share,  which  is  the  level  at  which  a  risk  of
dominance  starts,  can  be  envisaged.  Above  that  level
there  is  a  risk  that  the  last  condition  of  Article  85(3)  is
no  longer  fulfilled.  Accordingly,  the  use  of  market(cid:220)share
thresholds 
in  a  block(cid:220)exemption  regulation  does  not
establish  an  infringement  but  serves  to  exclude  certain
categories  of  vertical  restraints  from  the  application  of
Article  85(1)  by  applying  Article  85(3).

the 

By  working  with  these  two  policy  assumptions  based  on
market  share  only,  the  Commission  is  aware  that  it  may
exempt  certain  agreements  that  do  not  justify  exemption.
The  higher  the  market  shares  used  the  higher  that  risk
will  be.  The  Commission  considers  that  the  market(cid:220)share
thresholds  of  20(cid:216)%  and  40(cid:216)%  linked  to  the  nature  of  the
vertical  restraint  and 
importance  of  efficiencies
levels  for  a  future  block(cid:220)
involved  are  appropriate 
exemption  regulation.  However,  the  exact  level  of  the
market(cid:220)share  thresholds  and  the  question  of  whether  one
should  only  work  with  one  threshold  instead  of  two  will
be  reconsidered  by  the  Commission  in  the  course  of  the
consultation  on  the  BE  and  the  guidelines  (see  expla(cid:220)
nation  following  hereafter).  The  Commission  intends  to
maintain  the  withdrawal  mechanism  for  the  rare  cases
where  a  serious  competition  problem  may  arise  below
these  levels  of  market  shares.  The  withdrawal  mechanism
will  in  particular  be  applied  in  cumulative  effect  cases
(see  Section  V  for  further  details).

Nobody  has  been  able  to  suggest  a  better  single  indicator
than  market  share  for  use  in  a  block(cid:220)exemption  regu(cid:220)
lation.  The  only  alternative  would  be  to  only  work  with
guidelines  that  would  make  it  possible  to  use  the  full  set
of  market  factors  for  the  assessment  of  vertical  restraints.
The  Commission  considers 
the
present  stage,  represent  too  radical  a  change  and  afford
industry  a  lower  level  of  legal  certainty  than  the  use  of  a
block(cid:220)exemption  with  market(cid:220)share  thresholds.

this  would,  at 

that 

involve  a  certain  degree  of 

Competition  rules  are  economic  rules  that  by  their  very
nature 
legal  uncertainty.
Companies  holding  market  power  are  exposed  to  the  risk
of  violating  the  competition  rules.  The  Commission
pursues  the  objective  to  create  a  reasonable  level  of  legal
certainty  for  industry  that  is  compatible  with  the  efficient
protection  of  competition.  The  use  of  market(cid:220)share
thresholds  makes  it  possible  to  create  the  link  between  a
more  economic  approach  and  legal  certainty.

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Market  shares  are  not  an  unknown  phenomenon  in  the
Community  competition  rules.  Industry  has  been  living
for  many  years  with  market(cid:220)share  thresholds  which
dispense  with  notification  (see  the  15(cid:216)%  market  share  in
Article  4(2)  of  Council  Regulation  No  17),  create  a
presumption  of  negative  clearance  (see  the  10(cid:216)%  market
share  in  the  Notice  on  agreements  of  minor  importance
or  the  25(cid:216)%  market  share  threshold  in  the  Merger  Regu(cid:220)
lation)  or  grant  a  block(cid:220)exemption  (see  the  10(cid:216)%  and
20(cid:216)%  market(cid:220)share  thresholds  in  Regulations  (EEC)  No
417(cid:216)85(cid:216)(˛)  and  (EEC)  No  418/85(cid:216)(ˇ).  This  has  not
created  an 
legal  uncertainty  for
level  of 
industry.

intolerable 

3.(cid:217)Market(cid:220)share  cap  a  condition  for  a  wider  block(cid:220)

exemption

for 

for  cars, 

the  present  system 

intermediate  goods  or 

the  majority  of  vertical
Under 
agreements  are  not  covered  by  any  block(cid:220)exemption
regulation.  Only  goods  for  resale  are  covered  as  far  as
exclusive  distribution,  exclusive  purchasing  and  fran(cid:220)
selective
chising  are  concerned.  Except 
distribution 
is  not  covered  by  any  block(cid:220)exemption.
There  is  no  block(cid:220)exemption  for  services  (except  for
franchising), 
for  goods
undergoing  processing.  To  the  extent  that  a  block(cid:220)
exemption  applies,  it  sets  out  which  clauses  are  exempted
(white(cid:220)list 
that
everything  else  is  not  exempted.  This  approach  limits  the
scope  of  application  of  the  existing  block(cid:220)exemptions
and  results  in  excessive  regulation  for  industry.  At  the
moment,  the  majority  of  companies  are  not  covered  by
any  block(cid:220)exemption  and  thus  either  take  the  risk  of  not
notifying  or  of  notifying  and  accepting  in  most  cases  a
comfort  letter  from  the  Commission.

approach)  with 

consequence 

the 

The  Commission  wants  to  correct  this  situation  by
considerably  widening  the  existing  block(cid:220)exemptions  to
include  services,  intermediate  goods,  goods  for  resale
combined  with  transformation  and  selective  distribution.
It  also  wants  to  largely  replace  the  present  white(cid:220)list
approach  by  a  black(cid:220)list  approach.  The  Commission
considers  that  this  will  ultimately  give  legal  certainty  to
more  companies  than  the  present  narrow  clause(cid:220)based
block(cid:220)exemption  approach.  With  a  much  wider  block(cid:220)
to  continue
exemption, 

is,  however, 

impossible 

it 

(˛)(cid:217)Commission  Regulation  (EEC)  No  417/85  of  19  December
1984  on  the  application  of  Article  85(3)  of  the  Treaty  to
categories  of  specialisation  agreements  (OJ  L  53,  22.2.1985,
p.  1).

(ˇ)(cid:217)Commission  Regulation  (EEC)  No  418/85  of  19  December
1984  on  the  application  of  Article  85(3)  of  the  Treaty  to
categories  of  research  and  development  agreements  (OJ
L  53,  22.2.1985,  p.  5).

irrespective 

power.  The
exempting 
Commission  therefore 
its  future
in 
Block(cid:220)Exemption  Regulation  with  two  parameters:  the
nature  of  the  vertical  restraint  and  the  level  of  market
power  involved.

of  market 
intends  to  work 

4.(cid:217)No  presumption  of  illegality  above  the  market(cid:220)share

cap

that 

recognises 

The  Commission 
the  use  of  a
market(cid:220)share  cap  will  create  a  certain  degree  of  uncer(cid:220)
tainty  for  companies  as  to  the  application  of  the  BE
is  due  to  the  difficulty  of  defining
regulation.  This 
markets  and  assessing  a  company’s  position  on  the
relevant  product  and  geographic  market.  It  also  results
from  the  volatility  of  market  shares  that  change  over
time.

However,  this 
following  two  elements:

legal  uncertainty 

is  mitigated  by  the

-(cid:217)The  use  of  market(cid:220)share  thresholds  does  not  create  a
presumption  of  illegality  above  the  market(cid:220)share  cap.
The  market(cid:220)share  threshold  will  only  operate  as  a
safe  harbour,  to  distinguish  the  agreements  that  are
presumed  to  be  legal  from  those  which  may  require
individual  examination.  In  respect  of  the  latter,  the
Commission  will  continue  to  bear  the  burden  of
proof  that  the  agreement  in  question  does  violate
Article  85(1)  and  will  have  to  examine  whether  the
agreement  does  fulfil  the  conditions  of  Article  85(3).
This  is  the  normal  situation  of  an  agreement  not
covered  by  a  block(cid:220)exemption  regulation.  Above  the
threshold,  three  situations  can  thus  arise:  negative
clearance,  individual  exemption  or  a  prohibition  ex
if  the  conditions  of  Article  85(3)  are  not
tunc 
fulfilled.

-(cid:217)Companies  will  need  to  know  what  policy  the
Commission  is  going  to  apply  above  the  thresholds.
The  Commission  therefore  intends  to  issue  a  set  of
guidelines  which  should  basically  cover  three  issues:
the  scope  of  Article  85(1)  above  the  market(cid:220)share
cap,  the  Commission’s  policy  under  Article  85(3)  and
its  policy  of  withdrawal  of  the  benefit  of  the  block(cid:220)
exemption,  particularly 
in  cumulative(cid:220)effect  cases.
These  guidelines  should  set  out  clear  and  simple  rules
so  as  to  allow  companies  to  make  in  most  cases  their
own  assessment  under  Article  85(1)  and  (3).  The
objective  must  be  to  reduce  the  enforcement  cost  for

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industry  and  to  eliminate  as  far  as  possible  notifi(cid:220)
cations  of  agreements  that  do  not  raise  any  serious
competition  problem.

a  more 

Since  the  BE  regulation  uses  market(cid:220)share  thresholds
combined  with 
to
vertical  restraints,  less  agreements  will  be  covered  by
Article  85(1).  A  consistent  application  of  the  guidelines
and  the  publication  of 
leading  decisions  will  further
increase  the  level  of  legal  certainty  for  industry.

economic 

approach 

a  real  doubt  about  the  applicability  of  Article  85(3);
this  reduction  in  notifications  is  very  likely  to  occur,
as  is  evident  from  those  agreements  already  covered
by  Article  4(2)  of  Regulation  No  17  which  are  not
normally  notified.  This  will  allow  the  Commission  to
reduce  the  advance  control  system  based  on  notifi(cid:220)
cations  and 
the
competition  authorities  of  Member  States  on  the
more  important  cases,  thereby  increasing  the  effi(cid:220)
ciency  of  the  Community  competition  rules.  The
objective 
is  to  reduce  the  enforcement  costs  to
industry  and  to  eliminate  as  far  as  possible  notifi(cid:220)
cations  which  do  not  raise  any  serious  competition
problems.

to  concentrate, 

together  with 

5.(cid:217)Revision  of  Article  4(2)  of  Regulation  No  17

Legal  certainty  will  be  further  enhanced  by  the  following
additional  elements:

If  a  company  makes  a  mistake  in  assessing  its  market
share,  it  should  not  be  punished  for  the  fact  that  it  has
not  notified  its  agreement.  At  present  the  Commission
can  only  exempt  back  to  the  date  of  notification.
Therefore,  if  a  contract  infringed  Article  85(1)  and  has
not  been  notified,  a  national  judge  may  declare  the
contract  null  and  void  for  the  sole  reason  that  it  has  not
been  notified,  even  if  all  the  conditions  of  Article  85(3)
are  fulfilled.

To  change  that  situation  it  will  be  necessary  to  modify
Article  4(2)  of  Council  Regulation  No  17  so  that  all
vertical  distribution  agreements  can  be  exempted  retro(cid:220)
actively  when  notification  takes  place  at  a  later  date.
Such  a  change  will  have  several  beneficial  effects:

-(cid:217)where  a  company  has  made  a  mistake 

the
assessment  of  its  market  share  and  is  not  covered  by
the  block(cid:220)exemption,  the  Commission  will  be  able  to
exempt  retroactively  provided  all  the  conditions  of
Article  85(3)  were  fulfilled  from  the  beginning;

in 

-(cid:217)it  will  eliminate  artificial  litigation  before  national
courts,  where  the  competition  rules  are  often  invoked
to  escape  from  contractual  obligations  even  though
there 
this  will
strengthen  the  civil  enforceability  of  contracts  by
putting  the  emphasis  on  protection  of  competition
instead  of  protection  of  private 
interests  often
unrelated  to  competition;

is  no  real  competition  problem; 

-(cid:217)it  will  reduce  the  number  of  notifications  presently
occurring  with  a  view  to  obtaining  legal  certainty;
companies  will  not  have  to  notify  in  advance  to
obtain  the  benefit  of  an  individual  exemption,  but  can
make  their  own  assessment  under  Article  85(1)  and
(3)  and  avoid  the  cost  of  notification  unless  they  have

-(cid:217)cumulative  effects  resulting  from  networks  of  vertical
restraints  will  only  be  subject  to  the  withdrawal
system,  with  effect  for  the  future;

-(cid:217)in 

the  event  of  a  dual(cid:220)threshold 

the
agreements  of  SMEs  will  be  subject  to  the  higher
market(cid:220)share  cap.  However,  they  will  remain  subject
to  withdrawal  and  hardcore  restrictions;

system 

-(cid:217)for  the  calculation  of  the  market(cid:220)share  thresholds,

the  following  rules  will  apply:

(i) coverage  by  the  future  block(cid:220)exemption  will  be
based  on 
the  relevant  antitrust  market  as
explained  in  the  Commission  Notice  on  market
definition(cid:216)(˛);

(ii) the  market  share  will  be  based  on  data  for  the

preceding  financial  year;

(iii)(cid:217)the  market  share  can  be  calculated  on  the  basis
of  sales  volume  where  there  is  insufficient  data
on  sales  value;

(iv) agreements 

the  block(cid:220)
remain  covered  by 
exemption  regulation  for  a  period  of  two  years
as  long  as  the  threshold  is  not  exceeded  by  more
than  5(cid:216)%  market  share;

(v)

if  the  threshold  is  exceeded,  including  the  5(cid:216)%
increase  referred  to  in  point  (iv),  a  grace  period
of  one  year  will  apply  during  which  period

(˛)(cid:217)Commission  Notice  on  the  definition  of  relevant  market  for
the  purposes  of  Community  competition  law  (OJ  C  372,
9.12.1997,  p.  5).

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the  block(cid:220)exemption  regulation  will  continue  to
apply;  the  grace  period  would  start  in  the  year
following 
the
financial  year 
the 
threshold  was  exceeded;

in  which 

-(cid:217)in  general,  it  will  only  be  necessary  to  estimate  the
market  share  of  the  supplier,  as  it  is  this  market  share
that  decides  whether  an  agreement  is  block  exempted
or  not.  However,  in  cases  of  exclusive  supply  the
market  share  of  the  buyer  may  have  to  be  used  as  the
relevant  indicator.  In  addition,  the  guidelines  will
address  the  issue  of  how  the  Commission  will  take
account  of  the  buyer’s  market  position  in  the  analysis
of  individual  cases.

is  recognised  that  these  measures  will  not  create
It 
absolute 
legal  certainty.  However,  a  more  economic
approach  is  incompatible  with  absolute  legal  certainty.
The  aim  of  the  present  revision  exercise  is  to  bring  about
a  new  balance  between  a  more  economic  approach  and  a
reasonable  level  of  legal  certainty.  This  new  approach  is
ultimately  to  the  benefit  of  smaller  operators  without
market  power  which  are  the  vast  majority  of  companies.
It  will  also  be  to  the  benefit  of  bigger  companies
operating  in  competitive  markets.  However,  companies
with  significant  market  power  which  would  practice  anti(cid:220)
competitive  vertical  restraints  will  be  subjected  to  stricter
control  to  the  benefit  of  competition,  other  competitors
and  finally  consumers.

6.(cid:217)Increased  decentralisation

Under  the  existing  BE  regulation,  there  is  very  little
scope  for  decentralised  application  of  the  Community
competition  rules.  If  a  company  drafts  its  agreement  in
accordance  with  the  BE  regulations  there  is  no  scope  for
the  application  of  Article  85(2)  by 
the  national
competition  authorities  or  the  national  courts,  because
all  companies  are  covered  up  to  100(cid:216)%  market  share  and
only  the  Commission  has  the  power  to  withdraw  the
benefit  of  those  BE  regulations.  Therefore,  while  the
existing  block(cid:220)exemptions  apply  third  parties  have  no
other  course  of  action  than  to  bring  a  complaint  to  the
Commission.

competition  authorities 
the
benefit  of  the  BE  regulation  in  their  territory  if  the
conditions  of  Article  85(3)  are  no  longer  fulfilled.

to  withdraw 

the  power 

The  Commission  will  closely  cooperate  with  national
competition  authorities  and  courts  to  assist  them  in  the
increased  application  of  Article  85.  This  cooperation  is
already  operational  since  the  adoption  of  the  notices  on
cooperation  with  national  competition  authorities(cid:216)(˛)  and
national  courts(cid:216)(ˇ).

SECTION  V  -  POLICY  PROPOSAL

1.(cid:217)Different  options

During  the  Green  Paper  exercise  the  policy  options
described  in  Section  II  (see  in  particular  the  Table  in
II.1)  were  reviewed.  Most  of  these  are  not  acceptable  as
they  would  not  solve  the  three  major  shortcomings  of
current  policy: 
regulation,
neglect  of  market  power  and  block(cid:220)exemptions  which
are  too  narrow.

strait(cid:220)jacket 

form(cid:220)based 

Option  I  of  the  Green  Paper  retains  all  these  short(cid:220)
comings.  Options  II  and  IV(cid:220)I  reduce  the  strait(cid:220)jacket
effect  but  increase  the  neglect  of  market  power.  The
umbrella  block(cid:220)exemption  without  market  shares  takes
the  neglect  of  market  power  to  the  extreme.  Option  III
and  Option  IV(cid:220)II  do  take  account  of  market  power  but
do  stay  too  much  with  narrow  block(cid:220)exemptions  with  a
strait(cid:220)jacket  effect.

Two  other  options,  fundamentally  different  from  the  one
that 
is  proposed  below,  would  not  solve  the  main
drawbacks  of  the  current  policy.  The  first,  which  relies
single  black  clause  block(cid:220)exemption  without
on  a 
confer  provisional
market(cid:220)share 
validity  upon  vertical  agreements,  subject  only  to  with(cid:220)
drawal  with  effect  for  the  future.  This  solution  would
lead  to  the  elimination  of  the  preventive  effect  which  is
inherent 
in  the  prohibition  system  provided  for  by
Article  85  and  based  on  the  ex  tunc  nullity  of  anti(cid:220)com(cid:220)

thresholds,  would 

Under  the  new  proposed  BE  regulation,  decentralised
is
application  of 
opened  up  for  national  competition  authorities  and
courts  above  the  market(cid:220)share  threshold(s)  of  the  BE
regulation.  In  addition  it  is  proposed  to  give  national

the  Community  competition  rules 

(˛)(cid:217)Notice  on  cooperation  between  national  competition  auth(cid:220)
orities  and  the  Commission  in  applying  Articles  85  and  86  of
the  EC  Treaty  (OJ  C  313,  15.10.1997,  p.  3).

(ˇ)(cid:217)Notice  on  cooperation  between  national  courts  and  the
Commission  in  applying  Articles  85  and  86  of  the  EC  Treaty
(OJ  C  39,  13.2.1993,  p.  6).

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petitive  practices.  It  should  be  recalled  that  such  a
preventive  effect  plays  a  fundamental  role  in  ensuring
effective  compliance  by  the  companies  and,  ultimately,
sound  competition  conditions.

(subject 

that  vertical  restraints 

The  second  option  that  is  not  acceptable  is  to  start  from
to
the  presumption 
hardcore)  are  in  general  not  anti(cid:220)competitive  and  thus
can  be  covered  by  a  wide  negative(cid:220)clearance  regulation,
the  benefit  of  which  can  be  taken  away  with  retroactive
effect  in  cases  where  competition  is  distorted  without
any  offsetting  gains  in  efficiency.  This  general  positive
presumption  is  supported  neither  by  economic  thinking
nor  enforcement  experience.  Furthermore, 
it  would
result  in  increased  legal  uncertainty  for  industry.  In  fact,
as  there  would  be  no  market(cid:220)share  limits  that  would
create  a  safe  harbour  the  national  courts,  the  national
competition  authorities  and  the  Commission  could  all
retroactively  declare  the  negative  clearance  inapplicable
at  any  level  of  market  power.

2.(cid:217)The  proposed  new  policy

in  the 

introduction,  future  policy
As  was  explained 
should  avoid  the  three  major  shortcomings  of  current
policy.  The  new  policy  should  first  and  foremost  protect
competition  and  market 
integration.  It  should  also
provide  a  reasonable  level  of  legal  certainty  for  business,
result  in  acceptable  enforcement  costs  for  industry  and
the  competition  authorities  and  increase  decentralisation.

In  order  to  avoid  the  shortcomings  and  strike  the  right
balance  between  these  different  objectives,  a  profound
change  of  policy  is  necessary.  The  main  characteristics  of
the  proposed  policy  are  the  following:

-(cid:217)The  basis  is  one,  very  wide,  Block(cid:220)Exemption  regu(cid:220)
lation  ("the  Block(cid:220)Exemption’)  that  covers  all  vertical
restraints  concerning  intermediate  and  final  goods
and  services,  except  for  a  limited  number  of  hardcore
restraints.  This  solves  the  shortcoming  of  block(cid:220)
exemptions  which  are  too  narrow.

-(cid:217)It  makes  use  of  market(cid:220)share  caps  to 

in 

link  the
exemption  to  market  power.  The  issue  of  whether
one  or  two  market(cid:220)share  thresholds  should  be  used
has  not  yet  been  decided.  A  single(cid:220)threshold  system
has  advantages  in  terms  of  clarity  and  simplicity(cid:216)(˛).
A  dual(cid:220)threshold  system  allows  an  economically
justified  gradation 
treatment  of  vertical
the 
restraints  reflecting  differences  in  their  likely  anti(cid:220)
is
competitive  effects.  Below 
assumed  that  vertical  restraints  have  no  significant
net  negative  effects.  This  means  that  the  agreements
either  fall  outside  Article  85(1)  or,  when  falling
within  Article  85(1),  with 
the
hardcore  restraints,  may  be  block(cid:220)exempted.  The
hardcore  restraints  are  mainly  related  to  resale  price
maintenance  and  to  restrictions  on  resale  which  are
deemed  not  to  justify  block(cid:220)exemption  in  the  light  of
the  market  integration  objective.

the  exception  of 

thresholds 

such 

it 

-(cid:217)In  case  of  a  single(cid:220)threshold  system  the  threshold
would  lie  in  the  range  of  25(cid:220)35(cid:216)%  market  share,
clearly  below  what  is  usually  perceived  as  the  level  of
dominance.  In  case  of  a  dual(cid:220)threshold  system  the
first  and  main  market(cid:220)share  cap  would  be  around
20(cid:216)%.  Above  the  20(cid:216)%  threshold  there  is  room  to
exempt  certain  vertical  restraints  up  to  a  higher  level
of  around  40(cid:216)%.  Such  an  approach  with  market
share(s)  takes  away  the  shortcoming  of  neglect  of
market  power  and,  by  eliminating  the  vast  majority
of  notifications,  probably  80  to  90(cid:216)%  of  all  cases,  it
the  national
the  Commission  and 
will  allow 
competition  authorities 
the
important  cases.

concentrate  on 

to 

-(cid:217)It  will  create  a  safe  harbour  to  distinguish  the
agreements  that  are  presumed  to  be  legal  from  those
which  may  require  individual  examination.  Vertical
restraints  falling  outside  the  safe  harbour  will  not  be
presumed  to  be  illegal  but  may  need  individual  exam(cid:220)
ination.  In  respect  of  agreements  that  fall  outside  the
BE  the  Commission  will  continue  to  bear  the  burden
of  proof  that  the  agreement  in  question  does  infringe
Article  85(1)  and  will  have  to  examine  whether  the
agreement  does  fulfil  the  conditions  of  Article  85(3).

-(cid:217)It  is  based  mainly  on  a  black(cid:220)clause  approach,  i.e.
defining  what 
instead  of
defining  what  is  exempted.  This  removes  the  strait(cid:220)
jacket  effect.

is  not  block(cid:220)exempted 

(˛)(cid:217)In  the  course  of  consultation  on  this  document  a  majority  of
the  Member  States  expressed  a  preference  for  a  single(cid:220)
threshold  system.

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three 

This  is  the  normal  situation  for  an  agreement  not
covered  by  a  block(cid:220)exemption  regulation.  Above  the
threshold, 
situations  may  arise:  negative
clearance,  individual  exemption  or  prohibition  if  the
conditions  of  Article  85(3)  are  not  fulfilled.  The
proposed  policy  will  provide  for  guidelines  detailing
the  Commission’s  policy 
individual
negative  clearance,  exemption  or  prohibition  above
the  market(cid:220)share  thresholds  and  possible  withdrawal
of  the  Block(cid:220)Exemption  below  the  thresholds.

concerning 

-(cid:217)There  will  be  a  number  of  flanking  measures  as
outlined  in  the  previous  section.  The  most  important
one  is  the  extension  of  Article  4(2)  of  Regulation  17
to  all  vertical  distribution  agreements(cid:216)(˛).  Taken
together  as  a  package  with  the  other  elements  of  the
proposal,  i.e.  the  fact  that  this  very  wide  Block(cid:220)
Exemption  will  cover  many  agreements  that  are  not
presently  covered  by  a  block(cid:220)exemption,  the  possible
gradation  in  exemption,  and  guidelines,  the  overall
level  of  legal  certainty  for  industry  will  be  improved.

-(cid:217)It  will  be  compatible  with  improved  decentralisation.
National  courts  and  national  competition  authorities
will  be  able  to  apply  the  Block(cid:220)Exemption,  and,
with  the  help  of  guidelines,  apply  Article  85(1)
above  the  market(cid:220)share  thresholds.  Furthermore,  if
Article  85(1)  is  not  applicable  because  there  is  no
appreciable  effect  on  trade  between  the  Member
States  or  on  competition,  the  BE  will  not  apply.  It  is
also  proposed  that  the  national  competition  auth(cid:220)
orities,  on  the  basis  of  clear  and  well  specified
criteria,  would  have  the  power  to  withdraw  the
in  respect  of  their
benefit  of  the  BE  Regulation 
territory.

This  more  economic  approach  is  based  upon  the  investi(cid:220)
gations  made  for  the  Green  Paper,  a  careful  analysis  of
all  the  comments  received  on  the  Green  Paper,  the
Commission’s  experience  in  past  vertical  cases,  Court
judgments  and  study  of  the  relevant  economic  and  legal
literature.

3.(cid:217)Specific  points

The  following  specific  points  can  be  made  about  the
proposed  new  policy:

-(cid:217)The  proposal  will  contain  a 

list  will 

fall  outside 

that  always 

in  any  event 

list  of  hardcore
the  Block(cid:220)
restrictions 
Exemption.  This 
include
agreements  concerning  minimum  and  fixed  resale
prices  and  absolute  territorial  protection.  In  addition,
the  Commission  proposes  to  protect  the  possibility  of
arbitrage  by  intermediate  and  final  purchasers  to  a
to  blacklist  more
greater  extent  and 
therefore 
generally  resale  restrictions 
these
far  as 
restrictions  result  from  factors  under  the  control  of
the  parties.  The  following  may  then  be  defined  as
hardcore  restrictions  that  would  fall  outside  the
Block(cid:220)Exemption:

so 

in 

1.(cid:217)fixed  resale  prices  or  minimum  resale  prices;

2.(cid:217)maximum  resale  prices  or  recommended  resale
fixed  or
in  reality  amount 
prices  which 
minimum  resale  prices  as  a  result  of  a  pressure
exercised  by  any  of  the  parties;

to 

3.(cid:217)the  prevention  or  restriction  of  active  or  passive
resales,  imports  or  exports  to  final  or  non(cid:220)final
buyers,  other  than  (a)  the  restriction  on  active
sales  in  the  territory  of  an  exclusive  distributor,  (b)
to  exclusively
the  restriction  on  active 
allocated 
restriction  on
(c) 
members  of  a  selective  distribution  system  from
selling  to  unauthorised  distributors,  and  (d)  the
restriction  on  the  buyer  of  intermediate  goods
and/or  services  from  selling  these  to  other  direct
or  indirect  buyers  of  the  supplier;

customers, 

sales 
the 

4.(cid:217)the  prevention  or  restriction  of  cross(cid:220)supplies
between  distributors  at  the  same  or  different  levels
of  distribution 
selective
distribution  system  or  between  distributors  of
these  different 
i.e.
exclusive  or  selective  distribution  combined  with
exclusive  purchasing;

systems  of  distribution: 

in  an  exclusive  or 

5.(cid:217)the  combination,  at  the  same  level  of  distribution,
of  selective  distribution  and  exclusive  distribution
containing  a  prohibition  or  restriction  on  active
selling;

(˛)(cid:217)A  draft  of  the  required  Council  Regulation 

is 

jointly

submitted  with  this  Communication.

6.(cid:217)the  combination,  at  the  same  level  of  distribution,
of  selective  distribution  and  exclusive  customer
allocation;

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7.(cid:217)an  obligation  on  the  supplier  of  an  intermediate
good  not  to  sell  the  same  good  as  a  repair  or
replacement  good  to  the  independent  aftermarket.

which  the  buyer  operates  or  in  equivalent  situations.
The  guidelines  will  take  account  of  the  particular
relationship  between 
investments  and
long 
duration  limits.

term 

-(cid:217)Where  a  single(cid:220)threshold  system  is  chosen,  all  the
non(cid:220)hardcore  vertical  restraints  are  covered  below
this  threshold.

-(cid:217)There  are  a  number  of  vertical  agreements  that  are
in  the  future  be
generally  considered  or  would 
considered  to  fall  outside  Article  85.  These  include
qualitative  selective  distribution,  service  requirements
and  maximum  and  recommended  resale  prices  if  they
do  not  amount  to  fixed  RPM.

-(cid:217)Where  a  dual(cid:220)threshold 

to 

system 

is  chosen, 

lead  to  a  form  of  exclusivity 

the
non(cid:220)hardcore  vertical  restraints  including  the  more
serious  ones  are  subject 
the  first  and  main
threshold  of  20(cid:216)%  market  share.  These  include  the
like
restraints  that 
exclusive  supply,  exclusive  customer  allocation  and
non(cid:220)compete.  As  explained  in  section  III,  exclusive
vertical  restraints  are  in  general  more  likely  to  have
significant  anti(cid:220)competitive  effects  than  non(cid:220)exclusive
restraints,  while  the  latter  may  often  achieve  the  same
efficiencies.  To  the  extent  that  selective  distribution
falls  within  Article  85(1),  it  is  also  subject  to  this
threshold  in  view  of  its  considerable  potential  to
reduce  both  intra  and  inter(cid:220)brand  competition.  Tying
also  falls  under  this  threshold.  The  first  threshold
covers  all  possible  vertical  restraints  and  combinations
of  vertical  restraints  unless  otherwise  stated.

-(cid:217)Again  assuming  a  dual(cid:220)threshold  system,  the  second
threshold  of  40(cid:216)%  would  cover  vertical  restraints
that,  on  the  basis  of  the  economic  thinking  or  past
policy  experience,  lead  to  less  serious  restrictions  of
competition.  Firstly,  one  finds  here  the  non(cid:220)exclusive
type  of  agreements  such  as  quantity  forcing  on  buyer
or  supplier.  As  they  leave  room  for  dealing  with
others  they  are 
less  serious  than  their  exclusive
counterparts.  Two  exclusive  types  of  agreement  are
also 
exclusive
distribution,  as  it  does  not  directly  harm  inter(cid:220)brand
competition  and  often  has  efficiencies,  and  2.
exclusive  purchasing,  as  it  does  not  lead  to  fore(cid:220)
closure  or  a  direct 
inter(cid:220)brand
competition.  Lastly,  this  threshold  would  also  apply
to  agreements  between  SMEs.

reduction  of 

threshold: 

subject 

this 

to 

1. 

-(cid:217)It 

to 

effects 

foreclosure 

is  proposed 

impose  a  duration 

limit  on
in  view  of  the  possible
non(cid:220)compete  agreements 
with
serious 
connected 
non(cid:220)compete  obligations.  The  Commission 
is  also
considering  imposing  a  duration  limit  for  exclusive
purchasing  combined  with  quantity  forcing  on  the
buyer.  The  Commission 
further  considering
dispensing  with  the  duration  limits  in  the  particular
cases  where  the  supplier  owns  the  premises  from

is 

-(cid:217)As  was 

indicated  at  the  end  of  Section  III  the
possible  negative  effects  of  vertical  restraints  are  rein(cid:220)
forced  when  a  number  of  suppliers  and  their  buyers
practice  a  certain  vertical  restraint.  These  cumulative
effects  may  be  a  problem  in  a  number  of  sectors.
Making  a  valid  assessment  of  the  effects  of  such  a
cumulation  of  vertical  agreements  may  require  a
sector(cid:220)wide  investigation  and  overview.  In  general
only  a  competition  authority  can  be  expected  to
gather  such  sector(cid:220)wide  information,  as  it  may  not  be
readily  available  to 
individual  companies.  It  also
seems  fair  to  treat  all  companies  the  same  if  they  add
significantly  to  the  total  effect.  Such  cases  of  cumu(cid:220)
lative  effect,  where 
individual  suppliers  are
covered  by  the  Block(cid:220)Exemption,  will  be  addressed
by  withdrawal  of  the  Block(cid:220)Exemption  with  effect
for  the  future.  It 
is  proposed  that  not  only  the
Commission  but  also  the  national  competition  auth(cid:220)
orities  will  have  the  power  to  withdraw  the  benefits
of  the  BE.

the 

The  Commission  will  indicate  when  withdrawal  is
unlikely  and  when  withdrawal  is  likely.  It  is  proposed
that  withdrawal  would  be  unlikely  when  less  than  a
certain  proportion  of 
foreclosed
the  market 
through 
similar  agreements  and  would  also  be
unlikely  when  the  individual  firm’s  market  share  is
below  a  certain  level.

is 

to 

the  Commission’s  experience, 

According 
the
possible  negative  outcome  resulting  from  the  cumu(cid:220)
lative  effect  of  the  same  type  of  vertical  restraints  are
especially  at  issue  in  the  field  of  selective  distribution.
To  address  this  problem,  it  is  proposed  that  the
inapplicable  to
Block(cid:220)Exemption  may  be  declared 
companies  operating  a  selective  distribution  system
on  a  market  where  more  than  two(cid:220)thirds  of  the  total
sales 
is  channelled  through  parallel  networks  of
selective  distribution.  As  the  companies  concerned
in  possession  of  such  a  sector(cid:220)wide
may  not  be 
information,  it  is  proposed  that  this  condition  would
future  Block(cid:220)
not  operate  automatically.  The 
the
that 
Exemption  Regulation  would  provide 

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26.11.98

Commission  would,  at  its  own  initiative,  establish
that  the  aforesaid  condition  is  fulfilled  in  respect  of  a
specific  market  and  fix  a  transition  period  at  the
expiry  of  which  the  Block(cid:220)Exemption  would  no
selective  distribution
longer 
agreements  relating  to  that  market.  Such  a  transi(cid:220)
tional  period  should  not  be  shorter  than  six  months.
The  Commission  will  publish  a  decision  to  this  effect
in  the  Official  Journal  of  the  European  Communities.

applicable 

be 

to 

The  subject  matter  of  the  1979  Notice  on  subcon(cid:220)
tracting(cid:216)(ˇ)  also  remains  outside  the  scope  of  the  BE
regulation.  However,  vertical  agreements  relating  to
the  supply  of  goods,  produced  on  the  basis  of  specifi(cid:220)
cations  given  by  the  buyer  to  the  supplier,  but  not
involving  the  use  of  know(cid:220)how  or  patent  rights  of  the
buyer  for  the  manufacture  of  these  goods,  will  be
covered.

-(cid:217)The  choice  has  been  made  to  propose  one  wide
block(cid:220)exemption  regulation  instead  of  different  regu(cid:220)
lations  for  specific  forms  of  vertical  restraints  or
sectors.  It  thus  treats  different  forms  of  vertical
restraints  having  similar  effects 
in  a  similar  way,
preventing  unjustified  differentiation  between  forms
or  sectors.  In  this  way  it  is  avoided,  to  the  greatest
extent  possible,  to  have  a  policy  bias  in  the  choice
formats  of
concerning 
companies  make 
distribution.  The  company’s  choice  should  be  based
on 
commercial  merit  and  not  on  unjustified
differences  in  exemptability.  This  has  a  number  of
consequences  that  are  spelled  out  in  the  next  points.

their 

-(cid:217)It  is  proposed  to  cover  selective  distribution  in  the
Block(cid:220)Exemption  regulation.  Care  has  been  taken  to
stay  as  close  as  possible  to  the  current  policy  as
formulated  in  past  Commission  decisions  and  Court
judgments.  This  means  that  the  supplier,  in  order  to
be  covered  by  the  BE,  may  not  exclude  a  priori
certain  forms  of  distribution  and  may  only  apply
selective  distribution  on  condition  that  the  nature  of
type  of
the  good  or 
distribution  and  the  selection  criteria  are 
imple(cid:220)
mented  objectively  and 
in  a  non(cid:220)discriminatory
manner.  The  supplier  may  also  not  specify  the
identity  of  competing  brands  to  be  sold  by  the  auth(cid:220)
orised  distributor.

service  requires 

such  a 

-(cid:217)Vertical  agreements  relating  to  the  manufacture  of
goods,  in  particular  when  they  involve  the  use  of
know(cid:220)how  or  patents,  are  not  covered.  Licence
(EEC)  No
agreements  covered  by  Regulation 
240/96(cid:216)(˛)  on  the  transfer  of  technology  will  be
future  BE  regulation.
the 
outside 

the  scope  of 

-(cid:217)As 

it 

relating 

regards  vertical  agreements 

the
to 
is
distribution  or  supply  of  goods  or  services, 
proposed  that  the  BE  regulation  cover  intellectual
property  rigths  to  the  extent  that  these  do  not  relate
to  the  manufacture  of  goods  and  are  1.  indispensable
for  and  complementary  to  those  agreements  which
are  exempted,  and  2.  contain  obligations  which  are
not  more  restrictive  of  competition  than  those  vertical
restraints  which  are  exempted  under  the  draft  BE
Regulation.  This  relates  to  restrictions  on  the  use  and
application  of 
the
context  of  vertical  agreements  covered  by  the  future
block(cid:220)exemption  regulation.

intellectual  property  rights 

in 

-(cid:217)Agreements  where  the  buyer  of  software  on(cid:220)sells  this
software  to  the  final  consumer  without  obtaining  any
copyright  over  it  are  considered  as  agreements  for
the  supply  of  goods  for  resale  for  the  purposes  of  this
BE.  The  treatment  of  software  agreements  beyond
this  requires  further  consideration.

-(cid:217)Franchising,  while  being  covered,  will  not  be  given
any  preferential  treatment  in  the  Block(cid:220)Exemption
regulation  as  it  is  a  combination  of  vertical  restraints.
is  a  combination  of  selective
Usually  franchising 
distribution  and  non(cid:220)compete  obligations  in  relation
to  goods  which  are 
the
franchise.  Sometimes,  other  elements  like  a  location
clause  or  territorial  exclusivity  are  added.  These
combinations  will  be  treated  according  to  the  general
criteria  set  forth  in  the  BE.

the  subject  matter  of 

the 

involve 

-(cid:217)Certain  distribution  forms  -  in  particular  franchising
- 
licensing  of  Intellectual  Property
Rights  (IPR).  In  franchising,  the  transfer  of  IPR  is  an
essential  element  of  this  distribution  format  and  is
used  to  assimilate  the  commercial  practises  of  the
franchisee  as  closely  as  possible  to  those  of  the  fran(cid:220)

(˛)(cid:217)Commission  Regulation  (EC)  No  240/96  of  31  January
1996  on  the  application  of  Article  85(3)  to  certain  categories
of  technology  transfer  agreements  (OJ  L  31,  9.2.1996,  p.  2).

(ˇ)(cid:217)Notice  on  subcontracting  agreements  (OJ  C(cid:216)1,  3.1.1979,

p.  2).

26.11.98

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to 

chisor.  This  licensing  may  include  restrictions  which
are  necessary  or  complementary 
the  vertical
restraints  placed  on  the  sale  of  the  goods  or  services.
While  vertical  restraints  on  the  goods  or  services  are
important  from  a  competition  perspective  and  may
result  in  a  franchise  agreement  falling  within  the
scope  of  Article  85(1),  these  necessary  or  comple(cid:220)
mentary  restraints  must  be  examined  in  the  light  of
the  need  to  protect  the  know(cid:220)how  provided  or  the
maintenance  of  the  network’s 
identity  and  repu(cid:220)
tation(cid:216)(˛).

-(cid:217)The  Block(cid:220)Exemption  Regulation  will  not  cover
vertical  agreements  between  actual  or  potential
competitors,  except  where 
is  a
non(cid:220)reciprocal  one  and  no  party  has  an  annual
turnover  exeeding  ECU  100  million.

the  agreement 

-(cid:217)A  transitional  period  for  the  adaptation  of  existing
agreements  to  the  BE  is  anticipated  but  remains  to  be
determined.

4.(cid:217)Conclusions

The  proposed  new  policy  will  create  a  more  efficient
protection  of  competition  by  allowing  the  competition
authorities  to  concentrate  their  efforts  on  those  cases
involving  market  power.  It  will  do  away  with  the  strait(cid:220)
jacket  effect  of  current  regulation  and  will  reduce  the
industry.  The  smaller
enforcement  costs 
operators,  especially,  will  benefit  from  this  and  from  the
enhanced  level  of  legal  certainty.

imposed  on 

There  are  four  pillars  on  which  this  new  policy  is  based:

-(cid:217)It 

is  further  proposed  that  the  Block(cid:220)Exemption
Regulation  will  cover  the  vertical  agreements  of
associations  of  independent  retailers  when  the  indi(cid:220)
vidual  members  of  the  association  are  SMEs  as
defined  in  the  Annex  to  Commission  Recommen(cid:220)
dation  96/280/EC.  In  the  case  of  a  dual(cid:220)threshold
system  these  agreements  would  fall  under  the  lower
threshold.  What  is  contemplated  here  are  retailers
who  associate  themselves  under  a  common  format  to
sell  to  final  consumers.  It  is  recognised  that  there  are
horizontal  aspects 
the
coverage  by  the  BE  is  subject  to  the  proviso  that
these  horizontal  aspects  do  not  infringe  Article  85.

these  associations  and 

to 

-(cid:217)For  reasons  of  coherence  and  unity  of  policy  it  is
proposed  not  to  retain  sector  specific  rules  for  beer
and  petrol(cid:216)(ˇ).  There  are 
insufficient  economic  or
legal  reasons  to  continue  to  have  a  special  regime  for
these  sectors.  In  as  far  as  sector  specific  treatment  is
in  the
justified  this  will  be  taken 
guidelines.

into  account 

-(cid:217)It  is  proposed  not  to  apply  the  rule  of  severability  but
to  make  the  exemption  of  agreements  dependent  on
all  the  provisions  in  the  BE  being  complied  with.

-(cid:217)one  broad  umbrella  Block(cid:220)Exemption  Regulation
services  with

goods 
applying 
market(cid:220)share  threshold(s)  and  a  black(cid:220)list  approach;

both 

and 

to 

-(cid:217)guidelines  detailing  the  policy  above  the  thresholds

and  possible  withdrawal  of  the  BE;

-(cid:217)the  adjustment  of  Article  4(2)  of  Regulation  17  to
reduce  the  number  of  notifications,  to  stop  artificial
litigation  before  national  courts  and  strengthen  the
civil  enforceability  of  contracts;

-(cid:217)an  increase  in  the  role  of  national  competition  auth(cid:220)
in  the  application  of
orities  and  national  courts 
Article  85(1)  above  the  market(cid:220)share  thresholds  and
the  withdrawal  of  the  BE  below  the  thresholds.

SECTION  VI  -  PROCEDURE

1.(cid:217)Legislative  changes

the  policy  proposal  outlined 

Implementation  of 
in
Section  V  will  require  three  new  legislative  texts,  namely
two  Council  amending 
the
Commission’s  powers  under  Regulation  No  19/65/
EEC(cid:216)(˛)  and  amending  Article  4(2)  of  Regulation  No  17,
and  a  Commission  block(cid:220)exemption  regulation  covering
all  vertical  restraints  in  almost  all  sectors  of  distribution.

regulations 

extending 

(˛)(cid:217)See  Pronuptia  v.  Schillgalis,  Case  161/84,  [1986(cid:129)  ECR  353,

paras  23(cid:220)24.

(ˇ)(cid:217)The  Block(cid:220)Exemption  regulation  on  car  distribution,  which

expires  in  2002,  is  not  covered  by  the  current  proposal.

(˛)(cid:217)OJ  36,  6.3.1965,  p.  533/65.

C  365/24

EN

Official  Journal  of  the  European  Communities

26.11.98

The  first  Council  amending  regulation  is  required  to
grant  the  Commission  the  power  to  declare  by  way  of  a
block(cid:220)exemption  regulation  that  Article  85(1)  shall  not
apply  to  certain  categories  of  vertical  agreements  entered
into  between  economic  operators.  This  is  because  the
current  enabling  regulation  (Regulation  No  19/65/EEC)
is  restricted  to  a  limited  number  of  vertical  restraints,
namely,  exclusive  distribution  of  goods 
for  resale,
exclusive  purchase  of  goods  for  resale,  obligations  in
respect  of  exclusive  supply  and  exclusive  purchase  for
resale,  and  restrictions 
the
assignment  or  use  of  industrial  property  rights.  It  is  also
limited  to  agreements  entered  into  between  two  parties.

in  relation 

imposed 

to 

The  second  Council  amending  regulation  relates  to  the
amendment  of  Article  4(2)  of  Regulation  No  17,  the
First  Regulation  implementing  Articles  85  and  86  of  the
Treaty.  This 
is  necessary  because  under  the  current
system  the  date  upon  which  an  exemption  can  enter  into
effect  cannot  precede  the  date  of  notification.  The
Commission  wants  to  change  that  system  so  as  not  to
punish  those  companies  which  under  the  new  more
system  working  with  market(cid:220)share
economic  based 
thresholds  may  make  mistakes  in  the  assessment  of  their
market  position.  Section  IV.5  of 
this  policy  paper
outlines  a  number  of  measures  which  are  necessary  to
create  a  reasonable  level  of  legal  certainty  for  economic
operators.  The  proposed  amendment  to  Article  4(2)  of
Regulation  No  17  is  the  most  important  of  the  measures
identified.  This  is  because  under  Regulation  No  17,  as
currently  worded,  the  earliest  date  upon  which  an  indi(cid:220)
vidual  exemption  can  have  effect,  subjet  to  certain
limited  exceptions,  is  the  date  of  notification  and  not  the
date  of 
that
many  vertical  agreements  falling  under  Article  85(1),
despite  fulfilling  the  requirements  for  exemption  under
Article  85(3),  are  automatically  void  under  Article  85(2)
until  they  have  been  notified  to  the  Commission.  The
fact 
such  agreements  are  automatically  void,
pending  notification,  has  two  negative  effects.  First,  it
results  in  an  unnecessarily  high  number  of  notifications
and  secondly,  it  results  in  the  competition  rules  being
used  as  a  strategic  tool  to  avoid  the  enforcement  of
contracts,  rather  than  as  a  means  to  address  competition
problems.  The  objective  of  the  draft  amending  text  is  to
enable  the  Commission  to  exempt  retroactively  when  the
notification  takes  place  at  a  later  date.  The  practical
effect  of  such  a  legislative  amendment  is  that  companies
would  no 
longer  have  to  notify  vertical  agreements
which  they  do  not  believe  to  cause  competition  concerns,
simply  to  ensure  legal  certainty.  Instead,  companies  will
place  greater  weight  on  their  own  analysis  of  the
economic  effects  of 
issue,
knowing  that  in  the  event  of  subsequent  litigation  it

the  agreement.  This  has 

the  vertical  restraints  at 

the  effect 

that 

would  not  be  too  late  to  apply  for  an  exemption  under
Article  85(3).

The  current  Commission  block(cid:220)exemption  regulations  in
the  field  of  distribution,  adopted  pursuant  to  Regulation
No  19/65/EEC,  are  limited  to  exclusive  distribution(cid:216)(˛),
franchising(cid:216)(—),  and  motor(cid:220)
exclusive  purchasing(cid:216)(ˇ), 
vehicle  distribution(cid:216)((cid:209)).  These 
the
regulations,  with 
the  block(cid:220)exemption  on  motor(cid:220)vehicle
exception  of 
distribution  which  has  been  excluded  from  the  scope  of
the  current  review,  cannot  be  satisfactorily  amended  to
provide  for  the  change 
in  this
Communication.  Therefore,  subject  to  the  adoption  of
the  two  Council  Regulations  outlined  above,  a  new
Commission  Regulation  will  be  proposed.  The  Regu(cid:220)
lation  will  extend  to  all  vertical  restraints  in  all  sectors  of
distribution  other  than  motor  vehicles,  covering,  inter
alia,  selective  distribution,  services,  intermediate  goods
and  agreements  between  more  than  two  parties  each
operating  at  different  levels  in  the  distribution  chain.  In
the  light  of  the  new  regulation  the  de  minimis  notice  may
need  to  be  reviewed.

in  policy  proposed 

2.(cid:217)Procedural  steps  and  timing

The  first  procedural  step  will  be  the  adoption  by  the
Council  of  the  two  new  Council  Regulations.  It  is  only
following  adoption  of  these  two  Regulations  that  work
can  commence  on  the  procedural  steps  leading  to  the
adoption  by  the  Commission  of  a  new  group  exemption
regulation  and  a  set  of  guidelines  in  the  field  of  vertical
restraints.  The  Commission  will 
two
submit 
documents 
for  consultation  with  Member
together 
States,  industry  and  other  third  parties.  This  being  the
case,  all  the  legislative  changes  required  to  implement  the
policy  proposals  outlined 
in  this  Communication  are
envisaged  to  be  in  place  by  the  year  2000.

these 

(˛)(cid:217)Commission  Regulation  (EEC)  No  1983/83  of  22  June,
1983  on  the  application  of  Article  85(3)  of  the  Treaty  to
categories  of  exclusive(cid:220)distribution  agreements  (OJ  L  173,
30.6.1983,  p.  1).

(ˇ)(cid:217)Commission  Regulation  (EEC)  No  1984/83  of  22  June  1983
on  the  application  of  Article  85(3)  of  the  Treaty  to
categories  of  exclusive(cid:220)purchasing  agreements  (OJ  L  173,
30.6.1983,  p.  5).

(—)(cid:217)Commission  Regulation  (EEC)  No  4087/88  of  30  No(cid:220)
vember  1988  on  the  application  of  Article  85(3)  of  the
Treaty  to  categories  of  franchise  agreements  (OJ  L  359,
28.12.1988,  p.  46).

((cid:209))(cid:217)Commission  Regulation  (EC)  No  1475/95  of  28  June  1995
on  the  application  of  Article  85(3)  of  the  Treaty  to  certain
categories  of  motor  vehicle  distribution  and 
servicing
agreements  (OJ  L  145,  29.6.1995,  p.  25).