Source: EURLEX
Language: en
Format: md

**EN**

# **EN EN**

EUROPEAN COMMISSION

Brussels, 10.5.2010
SEC(2010) 411 final

**COMMISSION NOTICE**

**Guidelines on Vertical Restraints**

# **EN EN**

**COMMISSION NOTICE**

**Guidelines on Vertical Restraints**

**(Text with EEA relevance)**

## **TABLE OF CONTENTS Paragraphs Page**

I. INTRODUCTION 1-7

1. Purpose of the Guidelines 1-4

2. Applicability of Article 101 to vertical agreements 5-7

II. VERTICAL AGREEMENTS WHICH GENERALLY FALL 8-22

OUTSIDE THE SCOPE OF ARTICLE 101(1)

1. Agreements of minor importance and SMEs 8-11

2. Agency agreements 12-21

2.1 Definition of agency agreements 12-17

2.2 The application of Article 101(1) to agency agreements 18-21

3. Subcontracting agreements 22

III. APPLICATION OF THE BLOCK EXEMPTION 23-73

REGULATION

1. Safe harbour created by the Block Exemption Regulation 23

2. Scope of the Block Exemption Regulation 24-46

2.1 Definition of vertical agreements 24-26

2.2 Vertical agreements between competitors 27-28

2.3 Associations of retailers 29-30

2.4 Vertical agreements containing provisions on intellectual 31-45
property rights (IPRs)

2.5 Relationship to other block exemption regulations 46

3. Hardcore restrictions under the Block Exemption Regulation 47-59

4. Individual cases of hardcore sales restrictions that may fall
outside Article 101(1) or may fulfil the conditions of
Article 101(3)

60-64

# EN 2 EN

5. Excluded restrictions under the Block Exemption Regulation 65-69

6. Severability 70-71

7. Portfolio of products distributed through the same 72-73
distribution system

IV. WITHDRAWAL OF THE BLOCK EXEMPTION AND

DISAPPLICATION OF THE

BLOCK EXEMPTION REGULATION

74-85

1. Withdrawal procedure 74-78

2. Disapplication of the Block Exemption Regulation 79-85

V. MARKET DEFINITION AND MARKET SHARE 86-95

CALCULATION

1. Commission Notice on definition of the relevant market 86

2. The relevant market for calculating the 30 % market share 87-92
threshold under the Block Exemption Regulation

3. Calculation of market shares under the Block Exemption 93-95
Regulation

VI. ENFORCEMENT POLICY IN INDIVIDUAL CASES 96-229

1. The framework of analysis 96-127

1.1. Negative effects of vertical restraints 100-105

1.2. Positive effects of vertical restraints 106-109

1.3. Methodology of analysis 110-127

1.3.1. Relevant factors for the assessment under Article 101(1) 111-121

1.3.2. Relevant factors for the assessment under Article 101(3) 122-127

2. Analysis of specific vertical restraints 128-229

2.1. Single branding 129-150

2.2. Exclusive distribution 151-167

2.3. Exclusive customer allocation 168-173

2.4. Selective distribution 174-188

2.5. Franchising 189-191

2.6. Exclusive supply 192-202

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2.7. Upfront access payments 203-208

2.8. Category management agreements 209-213

2.9. Tying 214-222

2.10. Resale price restrictions 223-229

# EN 4 EN

**I.** **INTRODUCTION**

**1.** **Purpose of the Guidelines**

(1) These Guidelines set out the principles for the assessment of vertical agreements
under Article 101 of the Treaty on the Functioning of the European Union*
(hereinafter "Article 101") [1] . Article 1(1)(a) of Commission Regulation (EU)
No 330/2010 of 20 April 2010 on the application of Article 101(3) of the Treaty on
the Functioning of the European Union to categories of vertical agreements and
concerted practices [2] (hereinafter referred to as the "Block Exemption Regulation")
(see paragraphs (24) to (46)) defines the term "vertical agreement". These Guidelines
are without prejudice to the possible parallel application of Article 102 of the Treaty
on the Functioning of the European Union (hereinafter "Article 102") to vertical
agreements. These Guidelines are structured in the following way:

–
Section II (paragraphs (8) to (22)) describes vertical agreements which
generally fall outside Article 101(1);

–
Section III (paragraphs (23) to (73)) clarifies the conditions for the application
of the Block Exemption Regulation;

–
Section IV (paragraphs (74) to (85)) describes the principles concerning the
withdrawal of the block exemption and the disapplication of the Block
Exemption Regulation;

–
Section V (paragraphs (86) to (95)) provides guidance on how to define the
relevant market and calculate market shares;

–
Section VI (paragraphs (96) to (229)) describes the general framework of
analysis and the enforcement policy of the Commission in individual cases
concerning vertical agreements.

(2) Throughout these Guidelines, the analysis applies to both goods and services,
although certain vertical restraints are mainly used in the distribution of goods.
Similarly, vertical agreements can be concluded for intermediate and final goods and
services. Unless otherwise stated, the analysis and arguments in these Guidelines
apply to all types of goods and services and to all levels of trade. Thus, the term
"products" includes both goods and services. The terms "supplier" and "buyer" are
used for all levels of trade. The Block Exemption Regulation and these Guidelines do

      - With effect from 1 December 2009, Articles 81 and 82 of the EC Treaty have become Articles 101 and,
102, respectively, of the Treaty on the Functioning of the European Union ("TFEU"). The two sets of
provisions are, in substance, identical. For the purposes of these Guidelines, references to Articles 101
and 102 of the TFEU should be understood as references to Articles 81 and 82, respectively, of the
EC Treaty where appropriate. The TFEU also introduced certain changes in terminology, such as the
replacement of "Community" by "Union" and "common market" by "internal market". The terminology
of the TFEU will be used throughout these Guidelines.
1 These Guidelines replace the Commission Notice – Guidelines on Vertical Restraints, OJ C 291,
13.10.2000, p. 1.
2 OJ L 102, 23.4.2010, p. 1.

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not apply to agreements with final consumers where the latter are not undertakings,
since Article 101 only applies to agreements between undertakings.

(3) By issuing these Guidelines, the Commission aims to help companies conduct their
own assessment of vertical agreements under EU competition rules. The standards
set forth in these Guidelines cannot be applied mechanically, but must be applied
with due consideration for the specific circumstances of each case. Each case must
be evaluated in the light of its own facts.

(4) These Guidelines are without prejudice to the case-law of the General Court and the
Court of Justice of the European Union concerning the application of Article 101 to
vertical agreements. The Commission will continue to monitor the operation of the
Block Exemption Regulation and Guidelines based on market information from
stakeholders and national competition authorities and may revise this notice in the
light of future developments and of evolving insight.

**2.** **Applicability of Article 101 to vertical agreements**

(5) Article 101 applies to vertical agreements that may affect trade between Member
States and that prevent, restrict or distort competition ("vertical restraints") [3] .
Article 101 provides a legal framework for the assessment of vertical restraints,
which takes into consideration the distinction between anti-competitive and
pro-competitive effects. Article 101(1) prohibits those agreements which appreciably
restrict or distort competition, while Article 101(3) exempts those agreements which
confer sufficient benefits to outweigh the anti-competitive effects [4] .

(6) For most vertical restraints, competition concerns can only arise if there is
insufficient competition at one or more levels of trade, that is, if there is some degree
of market power at the level of the supplier or the buyer or at both levels. Vertical
restraints are generally less harmful than horizontal restraints and may provide
substantial scope for efficiencies.

(7) The objective of Article 101 is to ensure that undertakings do not use agreements – in
this context, vertical agreements – to restrict competition on the market to the
detriment of consumers. Assessing vertical restraints is also important in the context
of the wider objective of achieving an integrated internal market. Market integration
enhances competition in the European Union. Companies should not be allowed to
re-establish private barriers between Member States where State barriers have been
successfully abolished.

3 See _inter alia_ judgments of the Court of Justice in Joined Cases 56/64 and 58/64 _Grundig-Consten v_
_Commission_ [1966] ECR 299; Case 56/65 _Technique Minière_ v _Maschinenbau Ulm_ [1966] ECR 235;
and judgment of the Court of First Instance in Case T-77/92 _Parker Pen_ v _Commission_

[1994] ECR II-549.
4 See Communication from the Commission - Notice – Guidelines on the application of Article 81(3) of
the Treaty, OJ C 101, 27.4.2004, p. 97 for the Commission’s general methodology and interpretation of
the conditions for applying Article 101(1) and in particular Article 101(3).

# EN 6 EN

**II.** **VERTICAL AGREEMENTS WHICH GENERALLY FALL OUTSIDE THE**

**SCOPE OF ARTICLE 101(1)**

**1.** **Agreements of minor importance and SMEs**

(8) Agreements that are not capable of appreciably affecting trade between Member
States or of appreciably restricting competition by object or effect do not fall within
the scope of Article 101(1). The Block Exemption Regulation applies only to
agreements falling within the scope of application of Article 101(1). These
Guidelines are without prejudice to the application of Commission Notice on
agreements of minor importance which do not appreciably restrict competition under
Article 81(1) of the Treaty establishing the European Community _(de minimis_ ) [5] or
any future _de minimis_ notice.

(9) Subject to the conditions set out in the _de minimis_ notice concerning hardcore
restrictions and cumulative effect issues, vertical agreements entered into by noncompeting undertakings whose individual market share on the relevant market does
not exceed 15 % are generally considered to fall outside the scope of Article 101(1) [6] .
There is no presumption that vertical agreements concluded by undertakings having
more than 15 % market share automatically infringe Article 101(1). Agreements
between undertakings whose market share exceeds the 15 % threshold may still not
have an appreciable effect on trade between Member States or may not constitute an
appreciable restriction of competition [7] . Such agreements need to be assessed in their
legal and economic context. The criteria for the assessment of individual agreements
are set out in paragraphs (96) to (229).

(10) As regards hardcore restrictions referred to in the _de minimis_ notice, Article 101(1)
may apply below the 15 % threshold, provided that there is an appreciable effect on
trade between Member States and on competition. The applicable case-law of the
Court of Justice and the General Court is relevant in this respect [8] . Reference is also
made to the possible need to assess positive and negative effects of hardcore
restrictions as described in particular in paragraph (47) of these Guidelines.

(11) In addition, the Commission considers that, subject to cumulative effect and hardcore
restrictions, vertical agreements between small and medium-sized undertakings as
defined in the Annex to Commission Recommendation of 6 May 2003 concerning
the definition of micro, small and medium-sized enterprises [9] are rarely capable of
appreciably affecting trade between Member States or of appreciably restricting
competition within the meaning of Article 101(1), and therefore generally fall
outside the scope of Article 101(1). In cases where such agreements nonetheless
meet the conditions for the application of Article 101(1), the Commission will
normally refrain from opening proceedings for lack of sufficient interest for the

5 OJ C 368, 22.12.2001, p. 13.
6 For agreements between competing undertakings the _de minimis_ market share threshold is 10 % for
their collective market share on each affected relevant market.

7
See judgment of the Court of First Instance in Case T-7/93 _Langnese-Iglo_ v _Commission_ [1995]
ECR II-1533, paragraph 98.
8
See judgments of the Court of Justice in Case 5/69 _Völk_ v _Vervaecke_ [1969] ECR 295;
Case 1/71 _Cadillon_ v _Höss_ [1971] ECR 351 and Case C-306/96 _Javico_ v _Yves Saint Laurent_ [1998]
ECR I-1983, paragraphs 16 and 17.
9 OJ L 124, 20.5.2003, p. 36.

# EN 7 EN

European Union unless those undertakings collectively or individually hold a
dominant position in a substantial part of the internal market.

**2.** **Agency agreements**

_2.1_ _Definition of agency agreements_

(12) An agent is a legal or physical person vested with the power to negotiate and/or
conclude contracts on behalf of another person (the principal), either in the agent's
own name or in the name of the principal, for the:

–
purchase of goods or services by the principal, or

–
sale of goods or services supplied by the principal.

(13) The determining factor in defining an agency agreement for the application of
Article 101(1) is the financial or commercial risk borne by the agent in relation to the
activities for which it has been appointed as an agent by the principal. [10] In this
respect it is not material for the assessment whether the agent acts for one or several
principals. Neither is material for this assessment the qualification given to their
agreement by the parties or national legislation.

(14) There are three types of financial or commercial risk that are material to the
definition of an agency agreement for the application of Article 101(1). First, there
are the contract-specific risks which are directly related to the contracts concluded
and/or negotiated by the agent on behalf of the principal, such as financing of stocks.
Secondly, there are the risks related to market-specific investments. These are
investments specifically required for the type of activity for which the agent has been
appointed by the principal, that is, which are required to enable the agent to conclude
and/or negotiate this type of contract. Such investments are usually sunk, which
means that upon leaving that particular field of activity the investment cannot be
used for other activities or sold other than at a significant loss. Thirdly, there are the
risks related to other activities undertaken on the same product market, to the extent
that the principal requires the agent to undertake such activities, but not as an agent
on behalf of the principal but for its own risk.

(15) For the purposes of applying Article 101(1), the agreement will be qualified as an
agency agreement if the agent does not bear any, or bears only insignificant, risks in
relation to the contracts concluded and/or negotiated on behalf of the principal, in
relation to market-specific investments for that field of activity, and in relation to
other activities required by the principal to be undertaken on the same product
market. However, risks that are related to the activity of providing agency services in
general, such as the risk of the agent's income being dependent upon its success as an
agent or general investments in for instance premises or personnel, are not material
to this assessment.

10
See judgment of the Court of First Instance in Case T-325/01 _Daimler Chrysler_ v _Commission_ [2005]
ECR II-3319; judgments of the Court of Justice in Case C-217/05 _Confederación Espanola de_
_Empresarios de Estaciones de Servicio_ v _CEPSA_ [2006] ECR I-11987; and Case C-279/06 _CEPSA_
_Estaciones de Servicio SA_ v _LV Tobar e Hijos SL_ [2008] ECR I-6681.

# EN 8 EN

(16) For the purpose of applying Article 101(1), an agreement will thus generally be
considered an agency agreement where property in the contract goods bought or sold
does not vest in the agent, or the agent does not himself supply the contract services
and where the agent:

(a) does not contribute to the costs relating to the supply/purchase of the contract
goods or services, including the costs of transporting the goods. This does not
preclude the agent from carrying out the transport service, provided that the
costs are covered by the principal;

(b) does not maintain at its own cost or risk stocks of the contract goods, including
the costs of financing the stocks and the costs of loss of stocks and can return
unsold goods to the principal without charge, unless the agent is liable for fault
(for example, by failing to comply with reasonable security measures to avoid
loss of stocks);

(c) does not undertake responsibility towards third parties for damage caused by
the product sold (product liability), unless, as agent, it is liable for fault in this
respect;

(d) does not take responsibility for customers' non-performance of the contract,
with the exception of the loss of the agent's commission, unless the agent is
liable for fault (for example, by failing to comply with reasonable security or
anti-theft measures or failing to comply with reasonable measures to report
theft to the principal or police or to communicate to the principal all necessary
information available to him on the customer's financial reliability);

(e) is not, directly or indirectly, obliged to invest in sales promotion, such as
contributions to the advertising budgets of the principal;

(f) does not make market-specific investments in equipment, premises or training
of personnel, such as for example the petrol storage tank in the case of petrol
retailing or specific software to sell insurance policies in case of insurance
agents, unless these costs are fully reimbursed by the principal;

(g) does not undertake other activities within the same product market required by
the principal, unless these activities are fully reimbursed by the principal.

(17) This list is not exhaustive. However, where the agent incurs one or more of the risks
or costs mentioned in paragraphs (14), (15) and (16), the agreement between agent
and principal will not be qualified as an agency agreement. The question of risk must
be assessed on a case-by-case basis, and with regard to the economic reality of the
situation rather than the legal form. For practical reasons, the risk analysis may start
with the assessment of the contract-specific risks. If contract-specific risks are
incurred by the agent, it will be enough to conclude that the agent is an independent
distributor. On the contrary, if the agent does not incur contract-specific risks, then it
will be necessary to continue further the analysis by assessing the risks related to
market-specific investments. Finally, if the agent does not incur any contract-specific
risks and risks related to market-specific investments, the risks related to other
required activities within the same product market may have to be considered.

# EN 9 EN

_2.2_ _The application of Article 101(1) to agency agreements_

(18) In the case of agency agreements as defined in section 2.1, the selling or purchasing
function of the agent forms part of the principal's activities. Since the principal bears
the commercial and financial risks related to the selling and purchasing of the
contract goods and services all obligations imposed on the agent in relation to the
contracts concluded and/or negotiated on behalf of the principal fall outside
Article 101(1). The following obligations on the agent's part will be considered to
form an inherent part of an agency agreement, as each of them relates to the ability of
the principal to fix the scope of activity of the agent in relation to the contract goods
or services, which is essential if the principal is to take the risks and therefore to be
in a position to determine the commercial strategy:

(a) limitations on the territory in which the agent may sell these goods or services;

(b) limitations on the customers to whom the agent may sell these goods
or services;

(c) the prices and conditions at which the agent must sell or purchase these goods
or services.

(19) In addition to governing the conditions of sale or purchase of the contract goods or
services by the agent on behalf of the principal, agency agreements often contain
provisions which concern the relationship between the agent and the principal. In
particular, they may contain a provision preventing the principal from appointing
other agents in respect of a given type of transaction, customer or territory (exclusive
agency provisions) and/or a provision preventing the agent from acting as an agent or
distributor of undertakings which compete with the principal (single branding
provisions). Since the agent is a separate undertaking from the principal, the
provisions which concern the relationship between the agent and the principal may
infringe Article 101(1). Exclusive agency provisions will in general not lead to anticompetitive effects. However, single branding provisions and post-term non-compete
provisions, which concern inter-brand competition, may infringe Article 101(1) if
they lead to or contribute to a (cumulative) foreclosure effect on the relevant market
where the contract goods or services are sold or purchased (see in particular
Section VI.2.1). Such provisions may benefit from the Block Exemption Regulation,
in particular when the conditions provided in Article 5 of that Regulation are
fulfilled. They can also be individually justified by efficiencies under Article 101(3)
as for instance described in paragraphs (144) to (148).

(20) An agency agreement may also fall within the scope of Article 101(1), even if the
principal bears all the relevant financial and commercial risks, where it facilitates
collusion. That could, for instance, be the case when a number of principals use the
same agents while collectively excluding others from using these agents, or when
they use the agents to collude on marketing strategy or to exchange sensitive market
information between the principals.

(21) Where the agent bears one or more of the relevant risks as described in
paragraph (16), the agreement between agent and principal does not constitute an
agency agreement for the purpose of applying Article 101(1). In that situation, the

# EN 10 EN

agent will be treated as an independent undertaking and the agreement between agent
and principal will be subject to Article 101(1) as any other vertical agreement.

**3.** **Subcontracting agreements**

(22) Subcontracting concerns a contractor providing technology or equipment to a
subcontractor that undertakes to produce certain products on the basis thereof
(exclusively) for the contractor. Subcontracting is covered by Commission notice of
18 December 1978 concerning the assessment of certain subcontracting agreements
in relation to Article 85(1) of the EEC Treaty [11] (hereinafter "subcontracting notice").
According to that notice, which remains applicable, subcontracting agreements
whereby the subcontractor undertakes to produce certain products exclusively for the
contractor generally fall outside the scope of Article 101(1) provided that the
technology or equipment is necessary to enable the subcontractor to produce the
products. However, other restrictions imposed on the subcontractor such as the
obligation not to conduct or exploit its own research and development or not to
produce for third parties in general may fall within the scope of Article 101 [12] .

**III.** **APPLICATION** **OF** **THE** **BLOCK** **EXEMPTION** **REGULATION**

**1.** **Safe harbour created by the Block Exemption Regulation**

(23) For most vertical restraints, competition concerns can only arise if there is
insufficient competition at one or more levels of trade, that is, if there is some degree
of market power at the level of the supplier or the buyer or at both levels. Provided
that they do not contain hardcore restrictions of competition, which are restrictions of
competition by object, the Block Exemption Regulation creates a presumption of
legality for vertical agreements depending on the market share of the supplier and the
buyer. Pursuant to Article 3 of the Block Exemption Regulation, it is the supplier's
market share on the market where it sells the contract goods or services and the
buyer's market share on the market where it purchases the contract goods or services
which determine the applicability of the block exemption. In order for the block
exemption to apply, the supplier’s and the buyer’s market share must each be 30 %
or less. Section V of these Guidelines provides guidance on how to define the
relevant market and calculate the market shares. Above the market share threshold of

30 %, there is no presumption that vertical agreements fall within the scope of
Article 101(1) or fail to satisfy the conditions of Article 101(3) but there is also no
presumption that vertical agreements falling within the scope of Article 101(1) will
usually satisfy the conditions of Article 101(3).

**2.** **Scope of the Block Exemption Regulation**

_2.1_ _Definition of vertical agreements_

(24) Article 1(1)(a) of the Block Exemption Regulation defines a "vertical agreement" as
"an agreement or concerted practice entered into between two or more undertakings
each of which operates, for the purposes of the agreement or the concerted practice,

11 OJ C 1, 3.1.1979, p. 2.
12 See paragraph 3 of the subcontracting notice.

# EN 11 EN

at a different level of the production or distribution chain, and relating to the
conditions under which the parties may purchase, sell or resell certain goods
or services".

(25) The definition of "vertical agreement" referred to in paragraph (24) has four main
elements:

(a) The Block Exemption Regulation applies to agreements and concerted
practices. The Block Exemption Regulation does not apply to unilateral
conduct of the undertakings concerned. Such unilateral conduct can fall within
the scope of Article 102 which prohibits abuses of a dominant position. For
there to be an agreement within the meaning of Article 101 it is sufficient that
the parties have expressed their joint intention to conduct themselves on the
market in a specific way. The form in which that intention is expressed is
irrelevant as long as it constitutes a faithful expression of the parties' intention.
In case there is no explicit agreement expressing the concurrence of wills, the
Commission will have to prove that the unilateral policy of one party receives
the acquiescence of the other party. For vertical agreements, there are two ways
in which acquiescence with a particular unilateral policy can be established.
First, the acquiescence can be deduced from the powers conferred upon the
parties in a general agreement drawn up in advance. If the clauses of the
agreement drawn up in advance provide for or authorise a party to adopt
subsequently a specific unilateral policy which will be binding on the other
party, the acquiescence of that policy by the other party can be established on
the basis thereof [13] . Secondly, in the absence of such an explicit acquiescence,
the Commission can show the existence of tacit acquiescence. For that it is
necessary to show first that one party requires explicitly or implicitly the
cooperation of the other party for the implementation of its unilateral policy
and second that the other party complied with that requirement by
implementing that unilateral policy in practice [14] . For instance, if after a
supplier's announcement of a unilateral reduction of supplies in order to
prevent parallel trade, distributors reduce immediately their orders and stop
engaging in parallel trade, then those distributors tacitly acquiesce to the
supplier's unilateral policy. This can however not be concluded if the
distributors continue to engage in parallel trade or try to find new ways to
engage in parallel trade. Similarly, for vertical agreements, tacit acquiescence
may be deduced from the level of coercion exerted by a party to impose its
unilateral policy on the other party or parties to the agreement in combination
with the number of distributors that are actually implementing in practice the
unilateral policy of the supplier. For instance, a system of monitoring and
penalties, set up by a supplier to penalise those distributors that do not comply
with its unilateral policy, points to tacit acquiescence with the supplier's
unilateral policy if this system allows the supplier to implement in practice its
policy. The two ways of establishing acquiescence described in this paragraph
can be used jointly;

13
Judgment of the Court of Justice in Case C-74/04 P _Commission_ v _Volkswagen AG_ [2006] ECR I-6585 _._
14
Judgment of the Court of First Instance in Case T-41/96 _Bayer AG_ v _Commission_ [2000] ECR II-3383 _._

# EN 12 EN

(b) The agreement or concerted practice is between two or more undertakings.
Vertical agreements with final consumers not operating as an undertaking are
not covered by the Block Exemption Regulation. More generally, agreements
with final consumers do not fall under Article 101(1), as that article applies
only to agreements between undertakings, decisions by associations of
undertakings and concerted practices of undertakings. This is without prejudice
to the possible application of Article 102;

(c) The agreement or concerted practice is between undertakings each operating,
for the purposes of the agreement, at a different level of the production or
distribution chain. This means for instance that one undertaking produces a raw
material which the other undertaking uses as an input, or that the first is a
manufacturer, the second a wholesaler and the third a retailer. This does not
preclude an undertaking from being active at more than one level of the
production or distribution chain;

(d) The agreements or concerted practices relate to the conditions under which the
parties to the agreement, the supplier and the buyer, "may purchase, sell or
resell certain goods or services". This reflects the purpose of the Block
Exemption Regulation to cover purchase and distribution agreements. These
are agreements which concern the conditions for the purchase, sale or resale of
the goods or services supplied by the supplier and/or which concern the
conditions for the sale by the buyer of the goods or services which incorporate
these goods or services. Both the goods or services supplied by the supplier and
the resulting goods or services are considered to be contract goods or services
under the Block Exemption Regulation. Vertical agreements relating to all final
and intermediate goods and services are covered. The only exception is the
automobile sector, as long as this sector remains covered by a specific block
exemption such as that granted by Commission Regulation (EC) No 1400/2002
of 31 July 2002 on the application of Article 81(3) of the Treaty to categories
of vertical agreements and concerted practices in the motor vehicle sector [15] or
its successor. The goods or services provided by the supplier may be resold by
the buyer or may be used as an input by the buyer to produce its own goods or
services.

(26) The Block Exemption Regulation also applies to goods sold and purchased for
renting to third parties. However, rent and lease agreements as such are not covered,
as no good or service is sold by the supplier to the buyer. More generally, the Block
Exemption Regulation does not cover restrictions or obligations that do not relate to
the conditions of purchase, sale and resale, such as an obligation preventing parties
from carrying out independent research and development which the parties may have
included in an otherwise vertical agreement. In addition, Article 2(2) to (5) of the
Block Exemption Regulation directly or indirectly excludes certain vertical
agreements from the application of that Regulation.

15 OJ L 203, 1.8.2002, p. 30.

# EN 13 EN

_2.2_ _Vertical agreements between competitors_

(27) Article 2(4) of the Block Exemption Regulation explicitly excludes "vertical
agreements entered into between competing undertakings" from its application.
Vertical agreements between competitors are dealt with, as regards possible collusion
effects, in the Commission Guidelines on the applicability of Article 81 of the
EC Treaty to horizontal cooperation agreements [16] . However, the vertical aspects of
such agreements need to be assessed under these Guidelines. Article 1(1)(c) of the
Block Exemption Regulation defines a competing undertaking as "an actual or
potential competitor". Two companies are treated as actual competitors if they are
active on the same relevant market. A company is treated as a potential competitor of
another company if, absent the agreement, in case of a small but permanent increase
in relative prices it is likely that this first company, within a short period of time
normally not longer than one year, would undertake the necessary additional
investments or other necessary switching costs to enter the relevant market on which
the other company is active. That assessment must be based on realistic grounds; the
mere theoretical possibility of entering a market is not sufficient. [17] A distributor that
provides specifications to a manufacturer to produce particular goods under the
distributor's brand name is not to be considered a manufacturer of such own-brand

goods.

(28) Article 2(4) of the Block Exemption Regulation contains two exceptions to the
general exclusion of vertical agreements between competitors. These exceptions
concern non-reciprocal agreements. Non-reciprocal agreements between competitors
are covered by the Block Exemption Regulation where (a) the supplier is a
manufacturer and distributor of goods, while the buyer is only a distributor and not
also a competing undertaking at the manufacturing level, or (b) the supplier is a
provider of services operating at several levels of trade, while the buyer operates at
the retail level and is not a competing undertaking at the level of trade where it
purchases the contract services. The first exception covers situations of dual
distribution, that is, the manufacturer of particular goods also acts as a distributor of
the goods in competition with independent distributors of its goods. In case of dual
distribution it is considered that in general any potential impact on the competitive
relationship between the manufacturer and retailer at the retail level is of lesser
importance than the potential impact of the vertical supply agreement on competition
in general at the manufacturing or retail level. The second exception covers similar
situations of dual distribution, but in this case for services, when the supplier is also a
provider of products at the retail level where the buyer operates.

_2.3_ _Associations of retailers_

(29) Article 2(2) of the Block Exemption Regulation includes in its application vertical
agreements entered into by an association of undertakings which fulfils certain
conditions and thereby excludes from the Block Exemption Regulation vertical
agreements entered into by all other associations. Vertical agreements entered into

16 OJ C 3, 6.1.2001, p. 2. A revision of those Guidelines is forthcoming.
17 See Commission Notice on the definition of the relevant market for the purposes of Community
competition law, OJ C 372, 9.12.1997, p. 5, paragraphs 20 to 24, the Commission's Thirteenth Report
on Competition Policy, point 55, and Commission Decision 90/410/EEC in Case No IV/32.009 —
_Elopak/Metal Box-Odin_, OJ L 209, 8.8.1990, p. 15.

# EN 14 EN

between an association and its members, or between an association and its suppliers,
are covered by the Block Exemption Regulation only if all the members are retailers
of goods (not services) and if each individual member of the association has a
turnover not exceeding EUR 50 million. Retailers are distributors reselling goods to
final consumers. Where only a limited number of the members of the association
have a turnover exceeding the EUR 50 million threshold and where these members
together represent less than 15 % of the collective turnover of all the members
combined, the assessment under Article 101 will normally not be affected.

(30) An association of undertakings may involve both horizontal and vertical agreements.
The horizontal agreements must be assessed according to the principles set out in the
Guidelines on the applicability of Article 81 of the EC Treaty to horizontal
cooperation agreements [18] . If that assessment leads to the conclusion that a
cooperation between undertakings in the area of purchasing or selling is acceptable, a
further assessment will be necessary to examine the vertical agreements concluded
by the association with its suppliers or its individual members. The latter assessment
will follow the rules of the Block Exemption Regulation and these Guidelines. For
instance, horizontal agreements concluded between the members of the association
or decisions adopted by the association, such as the decision to require the members
to purchase from the association or the decision to allocate exclusive territories to the
members must first be assessed as a horizontal agreement. Once that assessment
leads to the conclusion that the horizontal agreement is not anticompetitive, an
assessment of the vertical agreements between the association and individual
members or between the association and suppliers is necessary.

_2.4_ _Vertical agreements containing provisions on intellectual property rights (IPRs)_

(31) Article 2(3) of the Block Exemption Regulation includes vertical agreements
containing certain provisions relating to the assignment of IPRs to or use of IPRs by
the buyer in its application and thereby excludes all other vertical agreements
containing IPR provisions from the Block Exemption Regulation. The Block
Exemption Regulation applies to vertical agreements containing IPR provisions
where five conditions are fulfilled:

(a) The IPR provisions must be part of a vertical agreement, that is, an agreement
with conditions under which the parties may purchase, sell or resell certain
goods or services;

(b) The IPRs must be assigned to, or licensed for use by, the buyer;

(c) The IPR provisions must not constitute the primary object of the agreement;

(d) The IPR provisions must be directly related to the use, sale or resale of goods
or services by the buyer or its customers. In the case of franchising where
marketing forms the object of the exploitation of the IPRs, the goods or
services are distributed by the master franchisee or the franchisees;

18 See paragraph (27).

# EN 15 EN

(e) The IPR provisions, in relation to the contract goods or services, must not
contain restrictions of competition having the same object as vertical restraints
which are not exempted under the Block Exemption Regulation.

(32) Such conditions ensure that the Block Exemption Regulation applies to vertical
agreements where the use, sale or resale of goods or services can be performed more
effectively because IPRs are assigned to or licensed for use by the buyer. In other
words, restrictions concerning the assignment or use of IPRs can be covered when
the main object of the agreement is the purchase or distribution of goods or services.

(33) The first condition makes clear that the context in which the IPRs are provided is an
agreement to purchase or distribute goods or an agreement to purchase or provide
services and not an agreement concerning the assignment or licensing of IPRs for the
manufacture of goods, nor a pure licensing agreement. The Block Exemption
Regulation does not cover for instance:

(a) agreements where a party provides another party with a recipe and licenses the
other party to produce a drink with this recipe;

(b) agreements under which one party provides another party with a mould or
master copy and licenses the other party to produce and distribute copies;

(c) the pure licence of a trade mark or sign for the purposes of merchandising;

(d) sponsorship contracts concerning the right to advertise oneself as being an
official sponsor of an event;

(e) copyright licensing such as broadcasting contracts concerning the right to
record and/or broadcast an event.

(34) The second condition makes clear that the Block Exemption Regulation does not
apply when the IPRs are provided by the buyer to the supplier, no matter whether the
IPRs concern the manner of manufacture or of distribution. An agreement relating to
the transfer of IPRs to the supplier and containing possible restrictions on the sales
made by the supplier is not covered by the Block Exemption Regulation. That means,
in particular, that subcontracting involving the transfer of know-how to a
subcontractor [19] does not fall within the scope of application of the Block Exemption
Regulation (see also paragraph (22)). However, vertical agreements under which the
buyer provides only specifications to the supplier which describe the goods or
services to be supplied fall within the scope of application of the Block Exemption
Regulation.

(35) The third condition makes clear that in order to be covered by the Block Exemption
Regulation, the primary object of the agreement must not be the assignment or
licensing of IPRs. The primary object must be the purchase, sale or resale of goods or
services and the IPR provisions must serve the implementation of the vertical
agreement.

19 See the subcontracting notice (referred to in paragraph (22)).

# EN 16 EN

(36) The fourth condition requires that the IPR provisions facilitate the use, sale or resale
of goods or services by the buyer or its customers. The goods or services for use or
resale are usually supplied by the licensor but may also be purchased by the licensee
from a third supplier. The IPR provisions will normally concern the marketing of
goods or services. An example would be a franchise agreement where the franchisor
sells goods for resale to the franchisee and licenses the franchisee to use its trade
mark and know-how to market the goods or where the supplier of a concentrated
extract licenses the buyer to dilute and bottle the extract before selling it as a drink.

(37) The fifth condition highlights the fact that the IPR provisions should not have the
same object as any of the hardcore restrictions listed in Article 4 of the Block
Exemption Regulation or any of the restrictions excluded from the coverage of the
Block Exemption Regulation by Article 5 of that Regulation (see paragraphs (47) to
(69) of these Guidelines).

(38) Intellectual property rights relevant to the implementation of vertical agreements
within the meaning of Article 2(3) of the Block Exemption Regulation generally
concern three main areas: trade marks, copyright and know-how.

_Trade mark_

(39) A trade mark licence to a distributor may be related to the distribution of the
licensor's products in a particular territory. If it is an exclusive licence, the agreement
amounts to exclusive distribution.

_Copyright_

(40) Resellers of goods covered by copyright (books, software, etc.) may be obliged by
the copyright holder only to resell under the condition that the buyer, whether
another reseller or the end user, shall not infringe the copyright. Such obligations on
the reseller, to the extent that they fall under Article 101(1) at all, are covered by the
Block Exemption Regulation.

(41) Agreements, under which hard copies of software are supplied for resale and where
the reseller does not acquire a licence to any rights over the software but only has the
right to resell the hard copies, are to be regarded as agreements for the supply of
goods for resale for the purpose of the Block Exemption Regulation. Under that form
of distribution, licensing the software only occurs between the copyright owner and
the user of the software. It may take the form of a "shrink wrap" licence, that is, a set
of conditions included in the package of the hard copy which the end user is deemed
to accept by opening the package.

(42) Buyers of hardware incorporating software protected by copyright may be obliged by
the copyright holder not to infringe the copyright, and must therefore not make
copies and resell the software or make copies and use the software in combination
with other hardware. Such use-restrictions, to the extent that they fall within
Article 101(1) at all, are covered by the Block Exemption Regulation.

_Know-how_

(43) Franchise agreements, with the exception of industrial franchise agreements, are the
most obvious example of where know-how for marketing purposes is communicated

# EN 17 EN

to the buyer [20] . Franchise agreements contain licences of intellectual property rights
relating to trade marks or signs and know-how for the use and distribution of goods
or the provision of services. In addition to the licence of IPR, the franchisor usually
provides the franchisee during the life of the agreement with commercial or technical
assistance, such as procurement services, training, advice on real estate, financial
planning etc. The licence and the assistance are integral components of the business
method being franchised.

(44) Licensing contained in franchise agreements is covered by the Block Exemption
Regulation where all five conditions listed in paragraph (31) are fulfilled. Those
conditions are usually fulfilled as under most franchise agreements, including master
franchise agreements, the franchisor provides goods and/or services, in particular
commercial or technical assistance services, to the franchisee. The IPRs help the
franchisee to resell the products supplied by the franchisor or by a supplier
designated by the franchisor or to use those products and sell the resulting goods or
services. Where the franchise agreement only or primarily concerns licensing
of IPRs, it is not covered by the Block Exemption Regulation, but the Commission
will, as a general rule, apply the principles set out in the Block Exemption
Regulation and these Guidelines to such an agreement.

(45) The following IPR-related obligations are generally considered necessary to protect
the franchisor's intellectual property rights and are, where these obligations fall under
Article 101(1), also covered by the Block Exemption Regulation:

(a) an obligation on the franchisee not to engage, directly or indirectly, in any
similar business;

(b) an obligation on the franchisee not to acquire financial interests in the capital
of a competing undertaking such as would give the franchisee the power to
influence the economic conduct of such undertaking;

(c) an obligation on the franchisee not to disclose to third parties the know-how
provided by the franchisor as long as this know-how is not in the public
domain;

(d) an obligation on the franchisee to communicate to the franchisor any
experience gained in exploiting the franchise and to grant the franchisor, and
other franchisees, a non-exclusive licence for the know-how resulting from that
experience;

(e) an obligation on the franchisee to inform the franchisor of infringements of
licensed intellectual property rights, to take legal action against infringers or to
assist the franchisor in any legal actions against infringers;

(f) an obligation on the franchisee not to use know-how licensed by the franchisor
for purposes other than the exploitation of the franchise;

20 Paragraphs 43-45 apply by analogy to other types of distribution agreements which involve the transfer
of substantial know-how from supplier to buyer.

# EN 18 EN

(g) an obligation on the franchisee not to assign the rights and obligations under
the franchise agreement without the franchisor's consent.

_2.5_ _Relationship to other block exemption regulations_

(46) Article 2(5) states that the Block Exemption Regulation does "not apply to vertical
agreements the subject matter of which falls within the scope of any other block
exemption regulation, unless otherwise provided for in such a regulation". The Block
Exemption Regulation does not therefore apply to vertical agreements covered by
Commission Regulation (EC) No 772/2004 of 27 April 2004 on the application of
Article 81(3) of the Treaty to categories of technology transfer agreements [21],
Regulation 1400/2002 on the application of Article 81(3) of the Treaty to categories
of vertical agreements and concerted practices in the motor vehicle sector [22] or
Commission Regulation (EC) No 2658/2000 of 29 November 2000 on the
application of Article 81(3) of the Treaty to categories of specialisation agreements [23]
and Commission Regulation (EC) No 2659/2000 of 29 November 2000 on the
application of Article 81(3) of the Treaty to categories of research and development
agreements [24] exempting vertical agreements concluded in connection with horizontal
agreements, or any future regulations of that kind, unless otherwise provided for in
such a regulation.

**3.** **Hardcore restrictions under the Block Exemption Regulation**

(47) Article 4 of the Block Exemption Regulation contains a list of hardcore restrictions
which lead to the exclusion of the whole vertical agreement from the scope of
application of the Block Exemption Regulation [25] . Where such a hardcore restriction
is included in an agreement, that agreement is presumed to fall within Article 101(1).
It is also presumed that the agreement is unlikely to fulfil the conditions of
Article 101(3), for which reason the block exemption does not apply. However,
undertakings may demonstrate pro-competitive effects under Article 101(3) in an
individual case [26] . Where the undertakings substantiate that likely efficiencies result
from including the hardcore restriction in the agreement and demonstrate that in
general all the conditions of Article 101(3) are fulfilled, the Commission will be
required to effectively assess the likely negative impact on competition before

21 OJ L 123, 27.4.2004, p. 11.
22 See paragraph (25).
23 OJ L 304, 5.12.2000, p. 3.
24 OJ L 304, 5.12.2000, p. 7.
25 This list of hardcore restrictions applies to vertical agreements concerning trade within the Union. In so
far as vertical agreements concern exports outside the Union or imports/re-imports from outside the
Union see judgment of the Court of Justice in Case C-306/96 _Javico_ v _Yves Saint Laurent_ [1998]
ECR I-1983. In that judgment the ECJ held in paragraph 20 that "an agreement in which the reseller
gives to the producer an undertaking that it will sell the contractual products on a market outside the
Community cannot be regarded as having the object of appreciably restricting competition within the
common market or as being capable of affecting, as such, trade between Member States".
26 See in particular paragraphs 106 to 109 describing in general possible efficiencies related to vertical
restraints and Section VI.2.10 on resale price restrictions. See for general guidance on this the
Communication from the Commission - Notice – Guidelines on the application of Article 81(3) of the
Treaty, OJ C 101, 27.4.2004, p. 97.

# EN 19 EN

making an ultimate assessment of whether the conditions of Article 101(3) are
fulfilled [27] .

(48) The hardcore restriction set out in Article 4(a) of the Block Exemption Regulation
concerns resale price maintenance (RPM), that is, agreements or concerted practices
having as their direct or indirect object the establishment of a fixed or minimum
resale price or a fixed or minimum price level to be observed by the buyer. In the
case of contractual provisions or concerted practices that directly establish the resale
price, the restriction is clear cut. However, RPM can also be achieved through
indirect means. Examples of the latter are an agreement fixing the distribution
margin, fixing the maximum level of discount the distributor can grant from a
prescribed price level, making the grant of rebates or reimbursement of promotional
costs by the supplier subject to the observance of a given price level, linking the
prescribed resale price to the resale prices of competitors, threats, intimidation,
warnings, penalties, delay or suspension of deliveries or contract terminations in
relation to observance of a given price level. Direct or indirect means of achieving
price fixing can be made more effective when combined with measures to identify
price-cutting distributors, such as the implementation of a price monitoring system,
or the obligation on retailers to report other members of the distribution network that
deviate from the standard price level. Similarly, direct or indirect price fixing can be
made more effective when combined with measures which may reduce the buyer's
incentive to lower the resale price, such as the supplier printing a recommended
resale price on the product or the supplier obliging the buyer to apply a mostfavoured-customer clause. The same indirect means and the same "supportive"
measures can be used to make maximum or recommended prices work as RPM.
However, the use of a particular supportive measure or the provision of a list of
recommended prices or maximum prices by the supplier to the buyer is not
considered in itself as leading to RPM.

(49) In the case of agency agreements, the principal normally establishes the sales price,
as the agent does not become the owner of the goods. However, where such an
agreement cannot be qualified as an agency agreement for the purposes of applying
Article 101(1) (see paragraphs (12) to (21)) an obligation preventing or restricting
the agent from sharing its commission, fixed or variable, with the customer would be
a hardcore restriction under Article 4(a) of the Block Exemption Regulation. In order
to avoid including such a hardcore restriction in the agreement, the agent should thus
be left free to lower the effective price paid by the customer without reducing the
income for the principal [28] .

(50) The hardcore restriction set out in Article 4(b) of the Block Exemption Regulation
concerns agreements or concerted practices that have as their direct or indirect object
the restriction of sales by a buyer party to the agreement or its customers, in as far as
those restrictions relate to the territory into which or the customers to whom the
buyer or its customers may sell the contract goods or services. This hardcore
restriction relates to market partitioning by territory or by customer group. That may
be the result of direct obligations, such as the obligation not to sell to certain

27 Although, in legal terms, these are two distinct steps, they may in practice be an iterative process where
the parties and Commission in several steps enhance and improve their respective arguments.
28 See, for instance, Commission Decision 91/562/EEC in Case No IV/32.737 — _Eirpage_, OJ L 306,
7.11.1991, p. 22, in particular recital (6).

# EN 20 EN

customers or to customers in certain territories or the obligation to refer orders from
these customers to other distributors. It may also result from indirect measures aimed
at inducing the distributor not to sell to such customers, such as refusal or reduction
of bonuses or discounts, termination of supply, reduction of supplied volumes or
limitation of supplied volumes to the demand within the allocated territory or
customer group, threat of contract termination, requiring a higher price for products
to be exported, limiting the proportion of sales that can be exported or profit passover obligations. It may further result from the supplier not providing a Union-wide
guarantee service under which normally all distributors are obliged to provide the
guarantee service and are reimbursed for this service by the supplier, even in relation
to products sold by other distributors into their territory [29] . Such practices are even
more likely to be viewed as a restriction of the buyer's sales when used in
conjunction with the implementation by the supplier of a monitoring system aimed at
verifying the effective destination of the supplied goods, such as the use of
differentiated labels or serial numbers. However, obligations on the reseller relating
to the display of the supplier's brand name are not classified as hardcore. As
Article 4(b) only concerns restrictions of sales by the buyer or its customers, this
implies that restrictions of the supplier’s sales are also not a hardcore restriction,
subject to what is stated in paragraph (59) regarding sales of spare parts in the
context of Article 4(e) of the Block Exemption Regulation. Article 4(b) applies
without prejudice to a restriction on the buyer's place of establishment. Thus, the
benefit of the Block Exemption Regulation is not lost if it is agreed that the buyer
will restrict its distribution outlet(s) and warehouse(s) to a particular address, place or
territory.

(51) There are four exceptions to the hardcore restriction in Article 4(b) of the Block
Exemption Regulation. The first exception in Article 4(b)(i) allows a supplier to
restrict active sales by a buyer party to the agreement to a territory or a customer
group which has been allocated exclusively to another buyer or which the supplier
has reserved to itself. A territory or customer group is exclusively allocated when the
supplier agrees to sell its product only to one distributor for distribution in a
particular territory or to a particular customer group and the exclusive distributor is
protected against active selling into its territory or to its customer group by all the
other buyers of the supplier within the Union, irrespective of sales by the supplier.
The supplier is allowed to combine the allocation of an exclusive territory and an
exclusive customer group by for instance appointing an exclusive distributor for a
particular customer group in a certain territory. Such protection of exclusively
allocated territories or customer groups must, however, permit passive sales to such
territories or customer groups. For the application of Article 4(b) of the Block
Exemption Regulation, the Commission interprets “active” and “passive” sales as
follows:

29 If the supplier decides not to reimburse its distributors for services rendered under the Union-wide
guarantee, it may be agreed with these distributors that a distributor which makes a sale outside its
allocated territory, will have to pay the distributor appointed in the territory of destination a fee based
on the cost of the services (to be) carried out including a reasonable profit margin. This type of scheme
may not be seen as a restriction of the distributors' sales outside their territory (see judgment of the
Court of First Instance in Case T-67/01 _JCB Service_ v _Commission_ [2004] ECR II-49, paragraphs 136
to 145).

# EN 21 EN

–
“Active” sales mean actively approaching individual customers by for instance
direct mail, including the sending of unsolicited e-mails, or visits; or actively
approaching a specific customer group or customers in a specific territory
through advertisement in media, on the internet or other promotions
specifically targeted at that customer group or targeted at customers in that
territory. Advertisement or promotion that is only attractive for the buyer if it
(also) reaches a specific group of customers or customers in a specific territory,
is considered active selling to that customer group or customers in that
territory.

–
“Passive” sales mean responding to unsolicited requests from individual
customers including delivery of goods or services to such customers. General
advertising or promotion that reaches customers in other distributors'
(exclusive) territories or customer groups but which is a reasonable way to
reach customers outside those territories or customer groups, for instance to
reach customers in one's own territory, are considered passive selling. General
advertising or promotion is considered a reasonable way to reach such
customers if it would be attractive for the buyer to undertake these investments
also if they would not reach customers in other distributors' (exclusive)
territories or customer groups.

(52) The internet is a powerful tool to reach a greater number and variety of customers
than by more traditional sales methods, which explains why certain restrictions on
the use of the internet are dealt with as (re)sales restrictions. In principle, every
distributor must be allowed to use the internet to sell products. In general, where a
distributor uses a website to sell products that is considered a form of passive selling,
since it is a reasonable way to allow customers to reach the distributor. The use of a
website may have effects that extend beyond the distributor's own territory and
customer group; however, such effects result from the technology allowing easy
access from everywhere. If a customer visits the web site of a distributor and contacts
the distributor and if such contact leads to a sale, including delivery, then that is
considered passive selling. The same is true if a customer opts to be kept
(automatically) informed by the distributor and it leads to a sale. Offering different
language options on the website does not, of itself, change the passive character of
such selling. The Commission thus regards the following as examples of hardcore
restrictions of passive selling given the capability of these restrictions to limit the
distributor's access to a greater number and variety of customers:

(a) an agreement that the (exclusive) distributor shall prevent customers located in
another (exclusive) territory from viewing its website or shall automatically rerout its customers to the manufacturer's or other (exclusive) distributors'
websites. This does not exclude an agreement that the distributor’s website
shall also offer a number of links to websites of other distributors and/or the

supplier;

(b) an agreement that the (exclusive) distributor shall terminate consumers'
transactions over the internet once their credit card data reveal an address that

is not within the distributor's (exclusive) territory;

(c) an agreement that the distributor shall limit its proportion of overall sales made
over the internet. This does not exclude the supplier requiring, without limiting

# EN 22 EN

the online sales of the distributor, that the buyer sells at least a certain absolute
amount (in value or volume) of the products offline to ensure an efficient
operation of its brick and mortar shop (physical point of sales), nor does it
preclude the supplier from making sure that the online activity of the
distributor remains consistent with the supplier's distribution model (see
paragraphs (54) and (56)). This absolute amount of required offline sales can
be the same for all buyers, or determined individually for each buyer on the
basis of objective criteria, such as the buyer's size in the network or its
geographic location;

(d) an agreement that the distributor shall pay a higher price for products intended
to be resold by the distributor online than for products intended to be resold
offline. This does not exclude the supplier agreeing with the buyer a fixed fee
(that is, not a variable fee where the sum increases with the realised offline
turnover as this would amount indirectly to dual pricing) to support the latter’s
offline or online sales efforts.

(53) A restriction on the use of the internet by distributors that are party to the agreement
is compatible with the Block Exemption Regulation to the extent that promotion on
the internet or use of the internet would lead to active selling into, for instance, other
distributors' exclusive territories or customer groups. The Commission considers
online advertisement specifically addressed to certain customers as a form of active
selling to those customers. For instance, territory-based banners on third party
websites are a form of active sales into the territory where these banners are shown.
In general, efforts to be found specifically in a certain territory or by a certain
customer group is active selling into that territory or to that customer group. For
instance, paying a search engine or online advertisement provider to have
advertisements displayed specifically to users in a particular territory is active selling
into that territory.

(54) However, under the Block Exemption the supplier may require quality standards for
the use of the internet site to resell its goods, just as the supplier may require quality
standards for a shop or for selling by catalogue or for advertising and promotion in
general. This may be relevant in particular for selective distribution. Under the Block
Exemption, the supplier may, for example, require that its distributors have one or
more brick and mortar shops or showrooms as a condition for becoming a member of
its distribution system. Subsequent changes to such a condition are also possible
under the Block Exemption, except where those changes have as their object to
directly or indirectly limit the online sales by the distributors. Similarly, a supplier
may require that its distributors use third party platforms to distribute the contract
products only in accordance with the standards and conditions agreed between the
supplier and its distributors for the distributors' use of the internet. For
instance, where the distributor's website is hosted by a third party platform, the
supplier may require that customers do not visit the distributor's website through a
site carrying the name or logo of the third party platform.

(55) There are three further exceptions to the hardcore restriction set out in Article 4(b) of
the Block Exemption Regulation. All three exceptions allow for the restriction of
both active and passive sales. Under the first exception, it is permissible to restrict a
wholesaler from selling to end users, which allows a supplier to keep the wholesale
and retail level of trade separate. However, that exception does not exclude the

# EN 23 EN

possibility that the wholesaler can sell to certain end users, such as bigger end users,
while not allowing sales to (all) other end users. The second exception allows a
supplier to restrict an appointed distributor in a selective distribution system from
selling, at any level of trade, to unauthorised distributors located in any territory
where the system is currently operated or where the supplier does not yet sell the
contract products (referred to as "the territory reserved by the supplier to operate that
system" in Article 4(b)(iii)). The third exception allows a supplier to restrict a buyer
of components, to whom the components are supplied for incorporation, from
reselling them to competitors of the supplier. The term "component" includes any
intermediate goods and the term "incorporation" refers to the use of any input to
produce goods.

(56) The hardcore restriction set out in Article 4(c) of the Block Exemption Regulation
excludes the restriction of active or passive sales to end users, whether professional
end users or final consumers, by members of a selective distribution network,
without prejudice to the possibility of prohibiting a member of the network from
operating out of an unauthorised place of establishment. Accordingly, dealers in a
selective distribution system, as defined in Article 1(1)(e) of the Block Exemption
Regulation, cannot be restricted in the choice of users to whom they may sell, or
purchasing agents acting on behalf of those users except to protect an exclusive
distribution system operated elsewhere (see paragraph (51)). Within a selective
distribution system the dealers should be free to sell, both actively and passively, to
all end users, also with the help of the internet. Therefore, the Commission considers
any obligations which dissuade appointed dealers from using the internet to reach a
greater number and variety of customers by imposing criteria for online sales which
are not overall equivalent to the criteria imposed for the sales from the brick and
mortar shop as a hardcore restriction. This does not mean that the criteria imposed
for online sales must be identical to those imposed for offline sales, but rather that
they should pursue the same objectives and achieve comparable results and that the
difference between the criteria must be justified by the different nature of these two
distribution modes. For example, in order to prevent sales to unauthorised dealers, a
supplier can restrict its selected dealers from selling more than a given quantity of
contract products to an individual end user. Such a requirement may have to be
stricter for online sales if it is easier for an unauthorised dealer to obtain those

products by using the internet. Similarly, it may have to be stricter for offline sales if
it is easier to obtain them from a brick and mortar shop. In order to ensure timely
delivery of contract products, a supplier may impose that the products be delivered
instantly in the case of offline sales. Whereas an identical requirement cannot be
imposed for online sales, the supplier may specify certain practicable delivery times
for such sales. Specific requirements may have to be formulated for an online aftersales help desk, so as to cover the costs of customers returning the product and for
applying secure payment systems.

(57) Within the territory where the supplier operates selective distribution, this system
may not be combined with exclusive distribution as that would lead to a hardcore
restriction of active or passive selling by the dealers under Article 4(c) of the Block
Exemption Regulation, with the exception that restrictions can be imposed on the
dealer's ability to determine the location of its business premises. Selected dealers
may be prevented from operating their business from different premises or from
opening a new outlet in a different location. In that context, the use by a distributor
of its own website cannot be considered to be the same thing as the opening of a new

# EN 24 EN

outlet in a different location. If the dealer's outlet is mobile, an area may be defined
outside which the mobile outlet cannot be operated. In addition, the supplier may
commit itself to supplying only one dealer or a limited number of dealers in a
particular part of the territory where the selective distribution system is applied.

(58) The hardcore restriction set out in Article 4(d) of the Block Exemption Regulation
concerns the restriction of cross-supplies between appointed distributors within a
selective distribution system. Accordingly, an agreement or concerted practice may
not have as its direct or indirect object to prevent or restrict the active or passive
selling of the contract products between the selected distributors. Selected
distributors must remain free to purchase the contract products from other appointed
distributors within the network, operating either at the same or at a different level of
trade. Consequently, selective distribution cannot be combined with vertical
restraints aimed at forcing distributors to purchase the contract products exclusively
from a given source. It also means that within a selective distribution network, no
restrictions can be imposed on appointed wholesalers as regards their sales of the
product to appointed retailers.

(59) The hardcore restriction set out in Article 4(e) of the Block Exemption Regulation
concerns agreements that prevent or restrict end-users, independent repairers and
service providers from obtaining spare parts directly from the manufacturer of those
spare parts. An agreement between a manufacturer of spare parts and a buyer that
incorporates those parts into its own products (original equipment
manufacturer (OEM)), may not, either directly or indirectly, prevent or restrict sales
by the manufacturer of those spare parts to end users, independent repairers or
service providers. Indirect restrictions may arise particularly when the supplier of the
spare parts is restricted in supplying technical information and special equipment
which are necessary for the use of spare parts by users, independent repairers or
service providers. However, the agreement may place restrictions on the supply of
the spare parts to the repairers or service providers entrusted by the original
equipment manufacturer with the repair or servicing of its own goods. In other
words, the original equipment manufacturer may require its own repair and service
network to buy spare parts from it.

**4.** **Individual cases of hardcore sales restrictions that may fall outside the scope of**
**Article 101(1) or may fulfil the conditions of Article 101(3)**

(60) Hardcore restrictions may be objectively necessary in exceptional cases for an
agreement of a particular type or nature [30] and therefore fall outside Article 101(1).
For example, a hardcore restriction may be objectively necessary to ensure that a
public ban on selling dangerous substances to certain customers for reasons of safety
or health is respected. In addition, undertakings may plead an efficiency defence
under Article 101(3) in an individual case. This section provides some examples for
(re)sales restrictions, whereas for RPM this is dealt with in section VI.2.10.

(61) A distributor which will be the first to sell a new brand or the first to sell an existing
brand on a new market, thereby ensuring a genuine entry on the relevant market, may
have to commit substantial investments where there was previously no demand for

30 See paragraph 18 of Communication from the Commission - Notice – Guidelines on the application of
Article 81(3) of the Treaty, OJ C 101, 27.4.2004, p. 97.

# EN 25 EN

that type of product in general or for that type of product from that producer. Such
expenses may often be sunk and in such circumstances the distributor may not enter
into the distribution agreement without protection for a certain period of time against
(active and) passive sales into its territory or to its customer group by other
distributors. For example such a situation may occur where a manufacturer
established in a particular national market enters another national market and
introduces its products with the help of an exclusive distributor and where this
distributor needs to invest in launching and establishing the brand on this new
market. Where substantial investments by the distributor to start up and/or develop
the new market are necessary, restrictions of passive sales by other distributors into
such a territory or to such a customer group which are necessary for the distributor to
recoup those investments generally fall outside the scope of Article 101(1) during the
first two years that the distributor is selling the contract goods or services in that
territory or to that customer group, even though such hardcore restrictions are in
general presumed to fall within the scope of Article 101(1).

(62) In the case of genuine testing of a new product in a limited territory or with a limited
customer group and in the case of a staggered introduction of a new product, the
distributors appointed to sell the new product on the test market or to participate in
the first round(s) of the staggered introduction may be restricted in their active
selling outside the test market or the market(s) where the product is first introduced
without falling within the scope of Article 101(1) for the period necessary for the
testing or introduction of the product.

(63) In the case of a selective distribution system, cross supplies between appointed
distributors must normally remain free (see paragraph (58)). However, if appointed
wholesalers located in different territories are obliged to invest in promotional
activities in ‘their’ territories to support the sales by appointed retailers and it is not
practical to specify in a contract the required promotional activities, restrictions on
active sales by the wholesalers to appointed retailers in other wholesalers’ territories
to overcome possible free riding may, in an individual case, fulfil the conditions of
Article 101(3).

(64) In general, an agreement that a distributor shall pay a higher price for products
intended to be resold by the distributor online than for products intended to be resold
offline ("dual pricing") is a hardcore restriction (see paragraph (52)). However, in
some specific circumstances, such an agreement may fulfil the conditions of
Article 101(3). Such circumstances may be present where a manufacturer agrees
such dual pricing with its distributors, because selling online leads to substantially
higher costs for the manufacturer than offline sales. For example, where offline sales
include home installation by the distributor but online sales do not, the latter may
lead to more customer complaints and warranty claims for the manufacturer. In that
context, the Commission will also consider to what extent the restriction is likely to
limit internet sales and hinder the distributor to reach more and different customers.

**5.** **Excluded restrictions under the Block Exemption Regulation**

(65) Article 5 of the Block Exemption Regulation excludes certain obligations from the
coverage of the Block Exemption Regulation even though the market share threshold
is not exceeded. However, the Block Exemption Regulation continues to apply to the

# EN 26 EN

remaining part of the vertical agreement if that part is severable from the nonexempted obligations.

(66) The first exclusion is provided for in Article 5(1)(a) of the Block Exemption
Regulation and concerns non-compete obligations. Non-compete obligations are
arrangements that result in the buyer purchasing from the supplier or from another
undertaking designated by the supplier more than 80 % of the buyer's total purchases
of the contract goods and services and their substitutes during the preceding calendar
year (as defined by Article 1(1)(d) of the Block Exemption Regulation), thereby
preventing the buyer from purchasing competing goods or services or limiting such
purchases to less than 20 % of total purchases. Where, in the first year after entering
in the agreement, for the year preceding the conclusion of the contract no relevant
purchasing data for the buyer are available, the buyer's best estimate of its annual
total requirements may be used. Such non-compete obligations are not covered by
the Block Exemption Regulation where the duration is indefinite or exceeds five
years. Non-compete obligations that are tacitly renewable beyond a period of five
years are also not covered by the Block Exemption Regulation (see the second
subparagraph of Article 5(1)). In general, non-compete obligations are exempted
under that Regulation where their duration is limited to five years or less and no
obstacles exist that hinder the buyer from effectively terminating the non-compete
obligation at the end of the five year period. If, for instance, the agreement provides
for a five-year non-compete obligation and the supplier provides a loan to the buyer,
the repayment of that loan should not hinder the buyer from effectively terminating
the non-compete obligation at the end of the five-year period. Similarly, when the
supplier provides the buyer with equipment which is not relationship-specific, the
buyer should have the possibility to take over the equipment at its market asset value
once the non-compete obligation expires.

(67) The five-year duration limit does not apply when the goods or services are resold by
the buyer "from premises and land owned by the supplier or leased by the supplier
from third parties not connected with the buyer". In such cases the non-compete
obligation may be of the same duration as the period of occupancy of the point of
sale by the buyer (Article 5(2) of the Block Exemption Regulation). The reason for
this exception is that it is normally unreasonable to expect a supplier to allow
competing products to be sold from premises and land owned by the supplier without
its permission. By analogy, the same principles apply where the buyer operates from
a mobile outlet owned by the supplier or leased by the supplier from third parties not
connected with the buyer. Artificial ownership constructions, such as a transfer by
the distributor of its proprietary rights over the land and premises to the supplier for
only a limited period, intended to avoid the five-year limit cannot benefit from this
exception.

(68) The second exclusion from the block exemption is provided for in Article 5(1)(b) of
the Block Exemption Regulation and concerns post term non-compete obligations on
the buyer. Such obligations are normally not covered by the Block Exemption
Regulation, unless the obligation is indispensable to protect know-how transferred by
the supplier to the buyer, is limited to the point of sale from which the buyer has
operated during the contract period, and is limited to a maximum period of one year
(see Article 5(3) of the Block Exemption Regulation). According to the definition in
Article 1(1)(g) of the Block Exemption Regulation the know-how needs to be

# EN 27 EN

"substantial", meaning that the know-how includes information which is significant
and useful to the buyer for the use, sale or resale of the contract goods or services.

(69) The third exclusion from the block exemption is provided for in Article 5(1)(c) of the
Block Exemption Regulation and concerns the sale of competing goods in a selective
distribution system. The Block Exemption Regulation covers the combination of
selective distribution with a non-compete obligation, obliging the dealers not to resell
competing brands in general. However, if the supplier prevents its appointed dealers,
either directly or indirectly, from buying products for resale from specific competing
suppliers, such an obligation cannot enjoy the benefit of the Block Exemption
Regulation. The objective of the exclusion of such an obligation is to avoid a
situation whereby a number of suppliers using the same selective distribution outlets
prevent one specific competitor or certain specific competitors from using these
outlets to distribute their products (foreclosure of a competing supplier which would
be a form of collective boycott) [31] .

**6.** **Severability**

(70) The Block Exemption Regulation exempts vertical agreements on condition that no
hardcore restriction, as set out in Article 4 of that Regulation, is contained in or
practised with the vertical agreement. If there are one or more hardcore restrictions,
the benefit of the Block Exemption Regulation is lost for the entire vertical
agreement. There is no severability for hardcore restrictions.

(71) The rule of severability does apply, however, to the excluded restrictions set out in
Article 5 of the Block Exemption Regulation. Therefore, the benefit of the block
exemption is only lost in relation to that part of the vertical agreement which does
not comply with the conditions set out in Article 5.

**7.** **Portfolio of products distributed through the same distribution system**

(72) Where a supplier uses the same distribution agreement to distribute several
goods/services some of these may, in view of the market share threshold, be covered
by the Block Exemption Regulation while others may not. In that case, the Block
Exemption Regulation applies to those goods and services for which the conditions
of application are fulfilled.

(73) In respect of the goods or services which are not covered by the Block Exemption
Regulation, the ordinary rules of competition apply, which means:

(a) there is no block exemption but also no presumption of illegality;

(b) if there is an infringement of Article 101(1) which is not exemptible,
consideration may be given to whether there are appropriate remedies to solve
the competition problem within the existing distribution system;

(c) if there are no such appropriate remedies, the supplier concerned will have to
make other distribution arrangements.

31 An example of indirect measures having such exclusionary effects can be found in Commission
Decision 92/428/EEC in Case No IV/33.542 — _Parfum Givenchy_, OJ L 236, 19.8.1992, p. 11.

# EN 28 EN

Such a situation can also arise where Article 102 applies in respect of some products
but not in respect of others.

**IV.** **WITHDRAWAL** **OF** **THE** **BLOCK** **EXEMPTION** **AND** **DISAPPLICATION**

**OF** **THE** **BLOCK** **EXEMPTION** **REGULATION**

**1.** **Withdrawal procedure**

(74) The presumption of legality conferred by the Block Exemption Regulation may be
withdrawn where a vertical agreement, considered either in isolation or in
conjunction with similar agreements enforced by competing suppliers or buyers,
comes within the scope of Article 101(1) and does not fulfil all the conditions of
Article 101(3).

(75) The conditions of Article 101(3) may in particular not be fulfilled when access to the
relevant market or competition therein is significantly restricted by the cumulative
effect of parallel networks of similar vertical agreements practised by competing
suppliers or buyers. Parallel networks of vertical agreements are to be regarded as
similar if they contain restraints producing similar effects on the market. Such a
situation may arise for example when, on a given market, certain suppliers practise
purely qualitative selective distribution while other suppliers practise quantitative
selective distribution. Such a situation may also arise when, on a given market, the
cumulative use of qualitative criteria forecloses more efficient distributors. In such
circumstances, the assessment must take account of the anti-competitive effects
attributable to each individual network of agreements. Where appropriate,
withdrawal may concern only a particular qualitative criterion or only the
quantitative limitations imposed on the number of authorised distributors.

(76) Responsibility for an anti-competitive cumulative effect can only be attributed to
those undertakings which make an appreciable contribution to it. Agreements entered
into by undertakings whose contribution to the cumulative effect is insignificant do
not fall under the prohibition provided for in Article 101(1) [32] and are therefore not
subject to the withdrawal mechanism. The assessment of such a contribution will be
made in accordance with the criteria set out in paragraphs (128) to (229).

(77) Where the withdrawal procedure is applied, the Commission bears the burden of
proof that the agreement falls within the scope of Article 101(1) and that the
agreement does not fulfil one or several of the conditions of Article 101(3). A
withdrawal decision can only have ex nunc effect, which means that the exempted
status of the agreements concerned will not be affected until the date at which the
withdrawal becomes effective.

(78) As referred to in recital 14 of the Block Exemption Regulation, the competition
authority of a Member State may withdraw the benefit of the Block Exemption
Regulation in respect of vertical agreements whose anti-competitive effects are felt in
the territory of the Member State concerned or a part thereof, which has all the
characteristics of a distinct geographic market. The Commission has the exclusive

32
Judgment of the Court of Justice of 28 February 1991 in Case C-234/89, _Stergios Delimitis_ v _Henninger_
_Bräu AG_ [1991] ECR I-935 _._

# EN 29 EN

power to withdraw the benefit of the Block Exemption Regulation in respect of
vertical agreements restricting competition on a relevant geographic market which is
wider than the territory of a single Member State. When the territory of a single
Member State, or a part thereof, constitutes the relevant geographic market, the
Commission and the Member State concerned have concurrent competence for
withdrawal.

**2.** **Disapplication of the Block Exemption Regulation**

(79) Article 6 of the Block Exemption Regulation enables the Commission to exclude
from the scope of the Block Exemption Regulation, by means of regulation, parallel
networks of similar vertical restraints where these cover more than 50 % of a

relevant market. Such a measure is not addressed to individual undertakings but
concerns all undertakings whose agreements are defined in the regulation
disapplying the Block Exemption Regulation.

(80) Whereas the withdrawal of the benefit of the Block Exemption Regulation implies
the adoption of a decision establishing an infringement of Article 101 by an
individual company, the effect of a regulation under Article 6 is merely to remove, in
respect of the restraints and the markets concerned, the benefit of the application of
the Block Exemption Regulation and to restore the full application of Article 101(1)
and (3). Following the adoption of a regulation declaring the Block Exemption
Regulation inapplicable in respect of certain vertical restraints on a particular market,
the criteria developed by the relevant case-law of the Court of Justice and the
General Court and by notices and previous decisions adopted by the Commission
will guide the application of Article 101 to individual agreements. Where
appropriate, the Commission will take a decision in an individual case, which can
provide guidance to all the undertakings operating on the market concerned.

(81) For the purpose of calculating the 50 % market coverage ratio, account must be taken
of each individual network of vertical agreements containing restraints, or
combinations of restraints, producing similar effects on the market. Article 6 of the
Block Exemption Regulation does not entail an obligation on the part of the
Commission to act where the 50 % market-coverage ratio is exceeded. In general,
disapplication is appropriate when it is likely that access to the relevant market or
competition therein is appreciably restricted. This may occur in particular when
parallel networks of selective distribution covering more than 50 % of a market are
liable to foreclose the market by using selection criteria which are not required by the
nature of the relevant goods or which discriminate against certain forms of
distribution capable of selling such goods.

(82) In assessing the need to apply Article 6 of the Block Exemption Regulation, the
Commission will consider whether individual withdrawal would be a more

appropriate remedy. This may depend, in particular, on the number of competing
undertakings contributing to a cumulative effect on a market or the number of
affected geographic markets within the Union.

(83) Any regulation referred to in Article 6 of the Block Exemption Regulation must
clearly set out its scope. Therefore, the Commission must first define the relevant
product and geographic market(s) and, secondly, must identify the type of vertical
restraint in respect of which the Block Exemption Regulation will no longer apply.

# EN 30 EN

As regards the latter aspect, the Commission may modulate the scope of its
regulation according to the competition concern which it intends to address. For
instance, while all parallel networks of single-branding type arrangements shall be
taken into account in view of establishing the 50 % market coverage ratio, the
Commission may nevertheless restrict the scope of the disapplication regulation only
to non-compete obligations exceeding a certain duration. Thus, agreements of a
shorter duration or of a less restrictive nature might be left unaffected, in
consideration of the lesser degree of foreclosure attributable to such restraints.
Similarly, when on a particular market selective distribution is practised in
combination with additional restraints such as non-compete or quantity-forcing on
the buyer, the disapplication regulation may concern only such additional restraints.
Where appropriate, the Commission may also provide guidance by specifying the
market share level which, in the specific market context, may be regarded as
insufficient to bring about a significant contribution by an individual undertaking to
the cumulative effect.

(84) Pursuant to Regulation No 19/65/EEC of 2 March 1965 of the Council on the
application of Article 85(3) of the Treaty to certain categories of agreements and
concerted practices [33], the Commission will have to set a transitional period of not
less than six months before a regulation disapplying the Block Exemption Regulation
becomes applicable. This should allow the undertakings concerned to adapt their
agreements to take account of the regulation disapplying the Block Exemption
Regulation.

(85) A regulation disapplying the Block Exemption Regulation will not affect the
exempted status of the agreements concerned for the period preceding its date of
application.

**V.** **MARKET DEFINITION AND MARKET SHARE CALCULATION**

**1.** **Commission Notice on definition of the relevant market**

(86) The Commission Notice on definition of the relevant market for the purposes of
Community competition law [34] provides guidance on the rules, criteria and evidence
which the Commission uses when considering market definition issues. That Notice
will not be further explained in these Guidelines and should serve as the basis for
market definition issues. These Guidelines will only deal with specific issues that
arise in the context of vertical restraints and that are not dealt with in that notice.

**2.** **The relevant market for calculating the 30 % market share threshold under the**
**Block Exemption Regulation**

(87) Under Article 3 of the Block Exemption Regulation, the market share of both the
supplier and the buyer are decisive to determine if the block exemption applies. In
order for the block exemption to apply, the market share of the supplier on the
market where it sells the contract products to the buyer, and the market share of the
buyer on the market where it purchases the contract products, must each be 30 % or

33 OJ 36, 6.3.1965, p. 533/65, English special edition: OJ Series I Chapter 1965-1966, p. 35.
34 OJ C 372, 9.12.1997, p. 5.

# EN 31 EN

less. For agreements between small and medium-sized undertakings it is in general
not necessary to calculate market shares (see paragraph (11)).

(88) In order to calculate an undertaking’s market share, it is necessary to determine the
relevant market where that undertaking sells and purchases, respectively, the contract
products. Accordingly, the relevant product market and the relevant geographic
market must be defined. The relevant product market comprises any goods or
services which are regarded by the buyers as interchangeable, by reason of their
characteristics, prices and intended use. The relevant geographic market comprises
the area in which the undertakings concerned are involved in the supply and demand
of relevant goods or services, in which the conditions of competition are sufficiently
homogeneous, and which can be distinguished from neighbouring geographic areas
because, in particular, conditions of competition are appreciably different in those

areas.

(89) The product market definition primarily depends on substitutability from the buyers'
perspective. When the supplied product is used as an input to produce other products
and is generally not recognisable in the final product, the product market is normally
defined by the direct buyers' preferences. The customers of the buyers will normally
not have a strong preference concerning the inputs used by the buyers. Usually, the
vertical restraints agreed between the supplier and buyer of the input only relate to
the sale and purchase of the intermediate product and not to the sale of the resulting
product. In the case of distribution of final goods, substitutes for the direct buyers
will normally be influenced or determined by the preferences of the final consumers.
A distributor, as reseller, cannot ignore the preferences of final consumers when it
purchases final goods. In addition, at the distribution level the vertical restraints
usually concern not only the sale of products between supplier and buyer, but also
their resale. As different distribution formats usually compete, markets are in general
not defined by the form of distribution that is applied. Where suppliers generally sell
a portfolio of products, the entire portfolio may determine the product market when
the portfolios and not the individual products are regarded as substitutes by the
buyers. As distributors are professional buyers, the geographic wholesale market is
usually wider than the retail market, where the product is resold to final consumers.
Often, this will lead to the definition of national or wider wholesale markets. But
retail markets may also be wider than the final consumers’ search area where
homogeneous market conditions and overlapping local or regional catchment areas
exist.

(90) Where a vertical agreement involves three parties, each operating at a different level
of trade, each party's market share must be 30 % or less in order for the block
exemption to apply. As specified in Article 3(2) of the Block Exemption Regulation,
where in a multi party agreement an undertaking buys the contract goods or services
from one undertaking party to the agreement and sells the contract goods or services
to another undertaking party to the agreement, the block exemption applies only if its
market share does not exceed the 30 % threshold both as a buyer and a supplier. If,
for instance, in an agreement between a manufacturer, a wholesaler (or association of
retailers) and a retailer, a non-compete obligation is agreed, then the market shares of
the manufacturer and the wholesaler (or association of retailers) on their respective
downstream markets must not exceed 30 % and the market share of the wholesaler

(or association of retailers) and the retailer must not exceed 30 % on their respective
purchase markets in order to benefit from the block exemption.

# EN 32 EN

(91) Where a supplier produces both original equipment and the repair or replacement
parts for that equipment, the supplier will often be the only or the major supplier on
the after-market for the repair and replacement parts. This may also arise where the
supplier (OEM supplier) subcontracts the manufacturing of the repair or replacement
parts. The relevant market for application of the Block Exemption Regulation may be
the original equipment market including the spare parts or a separate original
equipment market and after-market depending on the circumstances of the case, such
as the effects of the restrictions involved, the lifetime of the equipment and
importance of the repair or replacement costs [35] . In practice, the issue is whether a
significant proportion of buyers make their choice taking into account the lifetime
costs of the product. If so, it indicates there is one market for the original equipment
and spare parts combined.

(92) Where the vertical agreement, in addition to the supply of the contract goods, also
contains IPR provisions — such as a provision concerning the use of the supplier's
trademark — which help the buyer to market the contract goods, the supplier's
market share on the market where it sells the contract goods is relevant for the
application of the Block Exemption Regulation. Where a franchisor does not supply
goods to be resold but provides a bundle of services and goods combined with IPR
provisions which together form the business method being franchised, the franchisor
needs to take account of its market share as a provider of a business method. For that
purpose, the franchisor needs to calculate its market share on the market where the
business method is exploited, which is the market where the franchisees exploit the
business method to provide goods or services to end users. The franchisor must base
its market share on the value of the goods or services supplied by its franchisees on
this market. On such a market, the competitors may be providers of other franchised
business methods but also suppliers of substitutable goods or services not applying
franchising. For instance, without prejudice to the definition of such market, if there
was a market for fast-food services, a franchisor operating on such a market would
need to calculate its market share on the basis of the relevant sales figures of its
franchisees on this market.

**3.** **Calculation of market shares under the Block Exemption Regulation**

(93) The calculation of market shares needs to be based in principle on value figures.
Where value figures are not available substantiated estimates can be made. Such
estimates may be based on other reliable market information such as volume figures
(see Article 7(a) of the Block Exemption Regulation).

(94) In-house production, that is, production of an intermediate product for own use, may
be very important in a competition analysis as one of the competitive constraints or
to accentuate the market position of a company. However, for the purpose of market
definition and the calculation of market share for intermediate goods and services, inhouse production will not be taken into account.

35 See for example Commission Decision in _Pelikan/Kyocera_ (1995), COM(96) 126 (not published),
point 87, and Commission Decision 91/595/EEC in Case No IV/M.12 — _Varta/Bosch_, OJ L 320,
22.11.1991, p. 26, Commission Decision in Case No IV/M.1094 — _Caterpillar/Perkins Engines_,
OJ C 94, 28.3.1998, p. 23, and Commission Decision in Case No IV/M.768 — _Lucas/Varity_, OJ C 266,
13.9.1996, p. 6. See also point 56 of the Notice on the definition of the relevant market for the purposes
of Community competition law (see paragraph 86).

# EN 33 EN

(95) However, in the case of dual distribution of final goods, that is, where a producer of
final goods also acts as a distributor on the market, the market definition and market
share calculation need to include sales of their own goods made by the producers
through their vertically integrated distributors and agents (see Article 7(c) of the
Block Exemption Regulation). "Integrated distributors" are connected undertakings
within the meaning of Article 1(2) of the Block Exemption Regulation [36] .

**VI.** **ENFORCEMENT POLICY IN INDIVIDUAL CASES**

**1.** **The framework of analysis**

(96) Outside the scope of the block exemption, it is relevant to examine whether in the
individual case the agreement falls within the scope of Article 101(1) and if so
whether the conditions of Article 101(3) are satisfied. Provided that they do not
contain restrictions of competition by object and in particular hardcore restrictions of
competition, there is no presumption that vertical agreements falling outside the
block exemption because the market share threshold is exceeded fall within the scope
of Article 101(1) or fail to satisfy the conditions of Article 101(3). Individual
assessment of the likely effects of the agreement is required. Companies are
encouraged to do their own assessment. Agreements that either do not restrict
competition within the meaning of Article 101(1) or which fulfil the conditions of
Article 101(3) are valid and enforceable. Pursuant to Article 1(2) of Council
Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules
on competition laid down in Articles 81 and 82 of the Treaty [37] no notification needs
to be made to benefit from an individual exemption under Article 101(3). In the case
of an individual examination by the Commission, the latter will bear the burden of
proof that the agreement in question infringes Article 101(1). The undertakings
claiming the benefit of Article 101(3) bear the burden of proving that the conditions
of that paragraph are fulfilled. When likely anti-competitive effects are
demonstrated, undertakings may substantiate efficiency claims and explain why a
certain distribution system is indispensable to bring likely benefits to consumers
without eliminating competition, before the Commission decides whether the
agreement satisfies the conditions of Article 101(3).

(97) The assessment of whether a vertical agreement has the effect of restricting
competition will be made by comparing the actual or likely future situation on the
relevant market with the vertical restraints in place with the situation that would
prevail in the absence of the vertical restraints in the agreement. In the assessment of
individual cases, the Commission will take, as appropriate, both actual and likely
effects into account. For vertical agreements to be restrictive of competition by effect
they must affect actual or potential competition to such an extent that on the relevant
market negative effects on prices, output, innovation, or the variety or quality of
goods and services can be expected with a reasonable degree of probability. The
likely negative effects on competition must be appreciable [38] . Appreciable
anticompetitive effects are likely to occur when at least one of the parties has or

36 For these market definition and market share calculation purposes, it is not relevant whether the
integrated distributor sells in addition products of competitors.
37 OJ L 1, 4.1.2003, p. 1.
38 See Section II.1.

# EN 34 EN

obtains some degree of market power and the agreement contributes to the creation,
maintenance or strengthening of that market power or allows the parties to exploit
such market power. Market power is the ability to maintain prices above competitive
levels or to maintain output in terms of product quantities, product quality and
variety or innovation below competitive levels for a not insignificant period of time.
The degree of market power normally required for a finding of an infringement under
Article 101(1) is less than the degree of market power required for a finding of
dominance under Article 102.

(98) Vertical restraints are generally less harmful than horizontal restraints. The main
reason for the greater focus on horizontal restraints is that such restraints may
concern an agreement between competitors producing identical or substitutable
goods or services. In such horizontal relationships, the exercise of market power by
one company (higher price of its product) may benefit its competitors. This may
provide an incentive to competitors to induce each other to behave anticompetitively. In vertical relationships, the product of the one is the input for the
other-, in other words, the activities of the parties to the agreement are
complementary to each other. The exercise of market power by either the upstream
or downstream company would therefore normally hurt the demand for the product
of the other. The companies involved in the agreement therefore usually have an
incentive to prevent the exercise of market power by the other.

(99) Such self-restraining character should not, however, be over-estimated. When a
company has no market power, it can only try to increase its profits by optimising its
manufacturing and distribution processes, with or without the help of vertical
restraints. More generally, because of the complementary role of the parties to a
vertical agreement in getting a product on the market, vertical restraints may provide
substantial scope for efficiencies. However, when an undertaking 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 and ultimately 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 uses vertical
restraints to appropriate all the extra profits.

_1.1_ _Negative effects of vertical restraints_

(100) The negative effects on the market that may result from vertical restraints which EU
competition law aims at preventing are the following:

(a) anticompetitive foreclosure of other suppliers or other buyers by raising
barriers to entry or expansion;

(b) softening of competition between the supplier and its competitors and/or
facilitation of collusion amongst these suppliers, often referred to as reduction
of inter-brand competition [39] ;

(c) softening of competition between the buyer and its competitors and/or
facilitation of collusion amongst these competitors, often referred to as

39 By collusion is meant both explicit collusion and tacit collusion (conscious parallel behaviour).

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reduction of intra-brand competition if it concerns distributors' competition on
the basis of the brand or product of the same supplier;

(d) the creation of obstacles to market integration, including, above all, limitations
on the possibilities for consumers to purchase goods or services in any Member
State they may choose.

(101) Foreclosure, softening of competition and collusion at the manufacturers' level may
harm consumers in particular by increasing the wholesale prices of the products,
limiting the choice of products, lowering their quality or reducing the level of
product innovation. Foreclosure, softening of competition and collusion at the
distributors' level may harm consumers in particular by increasing the retail prices of
the products, limiting the choice of price-service combinations and distribution
formats, lowering the availability and quality of retail services and reducing the level
of innovation of distribution.

(102) On a market where individual distributors distribute the brand(s) of only one
supplier, a reduction of competition between the distributors of the same brand will
lead to a reduction of intra-brand competition between these distributors, but may not
have a negative effect on competition between distributors in general. In such a case,
if inter-brand competition is fierce, it is unlikely that a reduction of intra-brand
competition will have negative effects for consumers.

(103) Exclusive arrangements are generally more anti-competitive than non-exclusive
arrangements. Exclusive arrangements, whether by means of express contractual
language or their practical effects, result in one party sourcing all or practically all of
its demand from another party. For instance, under a non-compete obligation the
buyer purchases only one brand. Quantity forcing, on the other hand, leaves the
buyer some scope to purchase competing goods. The degree of foreclosure may
therefore be less with quantity forcing.

(104) Vertical restraints agreed for non-branded goods and services are in general less
harmful than restraints affecting the distribution of branded goods and services.
Branding tends to increase product differentiation and reduce substitutability of the
product, leading to a reduced elasticity of demand and an increased possibility to
raise price. The distinction between branded and non-branded goods or services will
often coincide with the distinction between intermediate goods and services and final
goods and services.

(105) In general, a combination of vertical restraints aggravates their individual negative
effects. However, certain combinations of vertical restraints are less anti-competitive
than their use in isolation. For instance, in an exclusive distribution system, the
distributor may be tempted to increase the price of the products as intra-brand
competition has been reduced. The use of quantity forcing or the setting of a
maximum resale price may limit such price increases. Possible negative effects of
vertical restraints are reinforced when several suppliers and their buyers organise
their trade in a similar way, leading to so-called cumulative effects.

_1.2._ _Positive effects of vertical restraints_

(106) It is important to recognise that vertical restraints may have positive effects by, in
particular, promoting non-price competition and improved quality of services. When

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a company has no market power, it can only try to increase its profits by optimising
its manufacturing or distribution processes. In a number of situations vertical
restraints may be helpful in this respect since the usual arm's length dealings between
supplier and buyer, determining only price and quantity of a certain transaction, can
lead to a sub-optimal level of investments and sales.

(107) While trying to give a fair overview of the various justifications for vertical
restraints, these Guidelines do not claim to be complete or exhaustive. The following
reasons may justify the application of certain vertical restraints:

(a) To solve a "free-rider" problem. One distributor may free-ride on the
promotion efforts of another distributor. That type of problem is most common
at the wholesale and retail level. Exclusive distribution or similar restrictions

may be helpful in avoiding such free-riding. Free-riding can also occur
between suppliers, for instance where one invests in promotion at the buyer's
premises, in general at the retail level, that may also attract customers for its
competitors. Non-compete type restraints can help to overcome free-riding [40] .

For there to be a problem, there needs to be a real free-rider issue. Free-riding
between buyers can only occur on pre-sales services and other promotional
activities, but not on after-sales services for which the distributor can charge its
customers individually. The product will usually need to be relatively new or
technically complex or the reputation of the product must be a major
determinant of its demand, as the customer may otherwise very well know
what it wants, based on past purchases. And the product 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. Lastly, it must not be practical
for the supplier to impose on all buyers, by contract, effective promotion or
service requirements.

Free-riding between suppliers is also restricted to specific situations, namely to
cases where the promotion takes place at the buyer's premises and is generic,
not brand specific.

(b) To "open up or enter new markets". Where a manufacturer wants to enter a
new geographic market, for instance by exporting to another country for the
first time, this may involve special "first time investments" by the distributor to
establish the brand on the market. In order to persuade a local distributor to
make these investments, it may be necessary to provide territorial protection to
the distributor so that it can recoup these investments by temporarily charging a
higher price. Distributors based in other markets should then be restrained for a
limited period from selling on the new market (see also paragraph (61) in
Section III.4). This is a special case of the free-rider problem described under
point (a).

40 Whether consumers actually benefit overall from extra promotional efforts depends on whether the
extra promotion informs and convinces and thus benefits many new customers or mainly reaches
customers who already know what they want to buy and for whom the extra promotion only or mainly
implies a price increase.

# EN 37 EN

(c) The "certification free-rider issue". In some sectors, certain retailers have a
reputation for stocking only "quality" products. In such a case, selling through
those retailers may be vital for the introduction of a new product. If the
manufacturer cannot initially limit its sales to the premium stores, it runs the
risk of being de-listed and the product introduction may fail. There may,
therefore, be a reason for allowing for a limited duration a restriction such as
exclusive distribution or selective distribution. It must be enough to guarantee
introduction of the new product but not so long as to hinder large-scale
dissemination. Such benefits are more likely with "experience" goods or
complex goods that represent a relatively large purchase for the final consumer.

(d) The so-called "hold-up problem". Sometimes there are client-specific
investments to be made by either the supplier or the buyer, such as in special
equipment or training. For instance, a component manufacturer that has to
build new machines and tools in order to satisfy a particular requirement of one
of its customers. The investor may not commit the necessary investments
before particular supply arrangements are fixed.

However, as in the other free-riding examples, there are a number of conditions
that have to be met before the risk of under-investment is real or significant.
Firstly, the investment must be relationship-specific. An investment made by
the supplier is considered to be relationship-specific when, after termination of
the contract, it cannot be used by the supplier to supply other customers and
can only be sold at a significant loss. An investment made by the buyer is
considered to be relationship-specific when, after termination of the contract, it
cannot be used by the buyer to purchase and/or use products supplied by other
suppliers and can only be sold at a significant loss. An investment is thus
relationship-specific because it can only, for instance, be used to produce a
brand-specific component or to store a particular brand and thus cannot be used
profitably to produce or resell alternatives. Secondly, it must be a long-term
investment that is not recouped in the short run. And thirdly, the investment
must be asymmetric, that is, one party to the contract invests more than the
other party. Where these conditions are met, there is usually a good reason to
have a vertical restraint for the duration it takes to depreciate the investment.
The appropriate vertical restraint will be of the non-compete type or quantityforcing type when the investment is made by the supplier and of the exclusive
distribution, exclusive customer allocation or exclusive supply type when the
investment is made by the buyer.

(e) The "specific hold-up problem that may arise in the case of transfer of
substantial know-how". The know-how, once provided, cannot be taken back
and the provider of the know-how may not want it to be used for or by its
competitors. In as far as the know-how was not readily available to the buyer,
is substantial and indispensable for the operation of the agreement, such a
transfer may justify a non-compete type of restriction, which would normally
fall outside Article 101(1).

(f) The “vertical externality issue”. A retailer may not gain all the benefits of its
action taken to improve sales; some may go to the manufacturer. For every
extra unit a retailer sells by lowering its resale price or by increasing its sales
effort, the manufacturer benefits if its wholesale price exceeds its marginal

# EN 38 EN

production costs. Thus, there may be a positive externality bestowed on the
manufacturer by such retailer’s actions and from the manufacturer’s
perspective the retailer may be pricing too high and/or making too little sales
efforts. The negative externality of too high pricing by the retailer is sometimes
called the “double marginalisation problem” and it can be avoided by imposing
a maximum resale price on the retailer. To increase the retailer’s sales efforts
selective distribution, exclusive distribution or similar restrictions may be
helpful [41] .

(g) "Economies of scale in distribution". In order to have scale economies
exploited and thereby see a lower retail price for itsproduct, the manufacturer
may want to concentrate the resale of its products on a limited number of
distributors. To do so, it could use exclusive distribution, quantity forcing in
the form of a minimum purchasing requirement, selective distribution
containing such a requirement or exclusive sourcing.

(h) "Capital market imperfections". The usual providers of capital (banks, equity
markets) may provide capital sub-optimally when they have imperfect
information on the quality of the borrower or there is an inadequate basis to
secure the loan. The buyer or supplier may have better information and be able,
through an exclusive relationship, to obtain extra security for its investment.
Where the supplier provides the loan to the buyer, this may lead to noncompete or quantity forcing on the buyer. Where the buyer provides the loan to
the supplier, this may be the reason for having exclusive supply or quantity
forcing on the supplier.

(i) "Uniformity and quality standardisation". A vertical restraint may help to
create a brand image by imposing a certain measure of uniformity and quality
standardisation on the distributors, thereby increasing the attractiveness of the
product to the final consumer and increasing its sales. This can for instance be
found in selective distribution and franchising.

(108) The nine situations listed in paragraph (107) make clear that under certain conditions,
vertical agreements are likely to help realise efficiencies and the development of new
markets and that this may offset possible negative effects. The case is in general
strongest for vertical restraints of a limited duration which help the introduction of
new complex products or protect relationship-specific investments. A vertical
restraint is sometimes necessary for as long as the supplier sells its product to the
buyer (see in particular the situations described in paragraph (107)(a), (e), (f), (g) and
(i)).

(109) A large measure of substitutability exists between the different vertical restraints. As
a result, the same inefficiency problem can be solved by different vertical restraints.
For instance, economies of scale in distribution may possibly be achieved by using
exclusive distribution, selective distribution, quantity forcing or exclusive sourcing.
However, the negative effects on competition may differ between the various vertical
restraints, which plays a role when indispensability is discussed under Article 101(3).

41 See however the previous footnote.

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_1.3._ _Methodology of analysis_

(110) The assessment of a vertical restraint generally involves the following four steps [42] :

(a) First, the undertakings involved need to establish the market shares of the
supplier and the buyer on the market where they respectively sell and purchase
the contract products.

(b) If the relevant market share of the supplier and the buyer each do not exceed
the 30 % threshold, the vertical agreement is covered by the Block Exemption
Regulation, subject to the hardcore restrictions and excluded restrictions set out
in that Regulation.

(c) If the relevant market share is above the 30 % threshold for supplier and/or
buyer, it is necessary to assess whether the vertical agreement falls within
Article 101(1).

(d) If the vertical agreement falls within Article 101(1), it is necessary to examine
whether it fulfils the conditions for exemption under Article 101(3).

1.3.1. Relevant factors for the assessment under Article 101(1)

(111) In assessing cases above the market share threshold of 30 %, the Commission will
undertake a full competition analysis. The following factors are particularly relevant
to establish whether a vertical agreement brings about an appreciable restriction of
competition under Article 101(1):

(a) nature of the agreement;

(b) market position of the parties;

(c) market position of competitors;

(d) market position of buyers of the contract products;

(e) entry barriers;

(f) maturity of the market;

(g) level of trade;

(h) nature of the product;

(i) other factors.

(112) The importance of individual factors may vary from case to case and depends on all
other factors. For instance, a high market share of the parties is usually a good
indicator of market power, but in the case of low entry barriers it may not be

42 These steps are not intended to present a legal reasoning that the Commission should follow in this
order to take a decision.

# EN 40 EN

indicative of market power. It is therefore not possible to provide firm rules on the
importance of the individual factors.

(113) Vertical agreements can take many shapes and forms. It is therefore important to
analyse the nature of the agreement in terms of the restraints that it contains, the
duration of those restraints and the percentage of total sales on the market affected by
those restraints. It may be necessary to go beyond the express terms of the
agreement. The existence of implicit restraints may be derived from the way in
which the agreement is implemented by the parties and the incentives that they face.

(114) The market position of the parties provides an indication of the degree of market
power, if any, possessed by the supplier, the buyer or both. The higher their market
share, the greater their market power is likely to be. This is particularly so where the
market share reflects cost advantages or other competitive advantages vis-à-vis
competitors. Such competitive advantages may, for instance, result from being a first
mover on the market (having the best site, etc.), from holding essential patents or
having superior technology, from being the brand leader or having a superior
portfolio.

(115) Such indicators, namely market share and possible competitive advantages, are used
to assess the market position of competitors. The stronger the competitors are and the
greater their number, the less risk there is that the parties will be able to individually
exercise market power and foreclose the market or soften competition. It is also
relevant to consider whether there are effective and timely counterstrategies that
competitors would be likely to deploy. However, if the number of competitors
becomes rather small and their market position (size, costs, R&D potential, etc.) is
rather similar, such a market structure may increase the risk of collusion. Fluctuating
or rapidly changing market shares are in general an indication of intense competition.

(116) The market position of the parties’ customers provides an indication of whether or
not one or more of those customers possess buyer power. The first indicator of buyer
power is the market share of the customer on the purchase market. That share reflects
the importance of its demand for possible suppliers. Other indicators focus on the
position of the customer on its resale market, including characteristics such as a wide
geographic spread of its outlets, own brands including private labels and its brand
image amongst final consumers. In some circumstances, buyer power may prevent
the parties from exercising market power and thereby solve a competition problem
that would otherwise have existed. This is particularly so when strong customers
have the capacity and incentive to bring new sources of supply on to the market in
the case of a small but permanent increase in relative prices. Where strong customers
merely extract favourable terms for themselves or simply pass on any price increase
to their customers, their position does not prevent the parties from exercising market

power.

(117) Entry barriers are measured by the extent to which incumbent companies can
increase their price above the competitive level without attracting new entry. In the
absence of entry barriers, easy and quick entry would render price increases
unprofitable. When effective entry, preventing or eroding the exercise of market
power, is likely to occur within one or two years, entry barriers can, as a general rule,
be said to be low. Entry barriers may result from a wide variety of factors such as
economies of scale and scope, government regulations, especially where they

# EN 41 EN

establish exclusive rights, state aid, import tariffs, intellectual property rights,
ownership of resources where the supply is limited due to for instance natural
limitations [43], essential facilities, a first mover advantage and brand loyalty of
consumers created by strong advertising over a period of time. Vertical restraints and
vertical integration may also work as an entry barrier by making access more
difficult and foreclosing (potential) competitors. Entry barriers may be present at
only the supplier or buyer level or at both levels. The question whether certain of
those factors should be described as entry barriers depends particularly on whether
they entail sunk costs. Sunk costs are those costs that have to be incurred to enter or
be active on a market but that are lost when the market is exited. Advertising costs to
build consumer loyalty are normally sunk costs, unless an exiting firm could either
sell its brand name or use it somewhere else without a loss. The more costs are sunk,
the more potential entrants have to weigh the risks of entering the market and the
more credibly incumbents can threaten that they will match new competition, as sunk
costs make it costly for incumbents to leave the market. If, for instance, distributors
are tied to a manufacturer via a non-compete obligation, the foreclosing effect will be
more significant if setting up its own distributors will impose sunk costs on the
potential entrant. In general, entry requires sunk costs, sometimes minor and
sometimes major. Therefore, actual competition is in general more effective and will
weigh more heavily in the assessment of a case than potential competition.

(118) A mature market is a market that has existed for some time, where the technology
used is well known and widespread and not changing very much, where there are no
major brand innovations and in which demand is relatively stable or declining. In
such a market, negative effects are more likely than in more dynamic markets.

(119) The level of trade is linked to the distinction between intermediate and final goods
and services. Intermediate goods and services are sold to undertakings for use as an
input to produce other goods or services and are generally not recognisable in the
final goods or services. The buyers of intermediate products are usually wellinformed customers, able to assess quality and therefore less reliant on brand and
image. Final goods are, directly or indirectly, sold to final consumers that often rely
more on brand and image. As distributors have to respond to the demand of final
consumers, competition may suffer more when distributors are foreclosed from
selling one or a number of brands than when buyers of intermediate products are
prevented from buying competing products from certain sources of supply.

(120) The nature of the product plays a role in particular for final products in assessing
both the likely negative and the likely positive effects. When assessing the likely
negative effects, it is important whether the products on the market are more
homogeneous or heterogeneous, whether the product is expensive, taking up a large
part of the consumer's budget, or is inexpensive and whether the product is a one-off
purchase or repeatedly purchased. In general, when the product is more
heterogeneous, less expensive and resembles more a one-off purchase, vertical
restraints are more likely to have negative effects.

(121) In the assessment of particular restraints other factors may have to be taken into
account. Among these factors can be the cumulative effect, that is, the coverage of

43 See Commission Decision 97/26/EC (Case No IV/M.619 — _Gencor/Lonrho_ ), OJ L 11, 14.1.1997,
p. 30.

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the market by similar agreements of others, whether the agreement is "imposed"
(mainly one party is subject to the restrictions or obligations) or "agreed" (both
parties accept restrictions or obligations), the regulatory environment and behaviour
that may indicate or facilitate collusion like price leadership, pre-announced price
changes and discussions on the "right" price, price rigidity in response to excess
capacity, price discrimination and past collusive behaviour.

1.3.2. Relevant factors for the assessment under Article 101(3)

(122) Restrictive vertical agreements may also produce pro-competitive effects in the form
of efficiencies, which may outweigh their anti-competitive effects. Such an
assessment takes place within the framework of Article 101(3), which contains an
exception from the prohibition rule of Article 101(1). For that exception to be
applicable, the vertical agreement must produce objective economic benefits, the
restrictions on competition must be indispensable to attain the efficiencies,
consumers must receive a fair share of the efficiency gains, and the agreement must
not afford the parties the possibility of eliminating competition in respect of a
substantial part of the products concerned [44] .

(123) The assessment of restrictive agreements under Article 101(3) is made within the
actual context in which they occur [45] and on the basis of the facts existing at any
given point in time. The assessment is sensitive to material changes in the facts. The
exception rule of Article 101(3) applies as long as the four conditions are fulfilled
and ceases to apply when that is no longer the case [46] . When applying Article 101(3)
in accordance with these principles it is necessary to take into account the
investments made by any of the parties and the time needed and the restraints
required to commit and recoup an efficiency enhancing investment.

(124) The first condition of Article 101(3) requires an assessment of what are the objective
benefits in terms of efficiencies produced by the agreement. In this respect, vertical
agreements often have the potential to help realise efficiencies, as explained in
section 1.2, by improving the way in which the parties conduct their complementary
activities.

(125) In the application of the indispensability test contained in Article 101(3), the
Commission will in particular examine whether individual restrictions make it
possible to perform the production, purchase and/or (re)sale of the contract products
more efficiently than would have been the case in the absence of the restriction
concerned. In making such an assessment, the market conditions and the realities
facing the parties must be taken into account. Undertakings invoking the benefit of
Article 101(3) are not required to consider hypothetical and theoretical alternatives.
They must, however, explain and demonstrate why seemingly realistic and
significantly less restrictive alternatives would be significantly less efficient. If the
application of what appears to be a commercially realistic and less restrictive

44 See Communication from the Commission - Notice – Guidelines on the application of Article 81(3) of
the Treaty, OJ C 101, 27.4.2004, p. 97.
45 See Judgment of the Court of Justice in Joined Cases 25/84 and 26/84 _Ford_ [1985] ECR 2725.
46 See in this respect for example Commission Decision 1999/242/EC (Case No IV/36.237 – _TPS_ ),
OJ L 90, 2.4.1999, p. 6. Similarly, the prohibition of Article 101(1) also only applies as long as the
agreement has a restrictive object or restrictive effects.

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alternative would lead to a significant loss of efficiencies, the restriction in question
is treated as indispensable.

(126) The condition that consumers must receive a fair share of the benefits implies that
consumers of the products purchased and/or (re)sold under the vertical agreement
must at least be compensated for the negative effects of the agreement. [47] In other
words, the efficiency gains must fully off-set the likely negative impact on prices,
output and other relevant factors caused by the agreement.

(127) The last condition of Article 101(3), according to which the agreement must not
afford the parties the possibility of eliminating competition in respect of a substantial
part of the products concerned, presupposes an analysis of remaining competitive
pressures on the market and the impact of the agreement on such sources of
competition. In the application of the last condition of Article 101(3), the relationship
between Article 101(3) and Article 102 must be taken into account. According to
settled case law, the application of Article 101(3) cannot prevent the application of
Article 102 [48] . Moreover, since Articles 101 and 102 both pursue the aim of
maintaining effective competition on the market, consistency requires that
Article 101(3) be interpreted as precluding any application of the exception rule to
restrictive agreements that constitute an abuse of a dominant position [49] . The vertical
agreement may not eliminate effective competition, by removing all or most existing
sources of actual or potential competition. Rivalry between undertakings is an
essential driver of economic efficiency, including dynamic efficiencies in the form of
innovation. In its absence, the dominant undertaking will lack adequate incentives to
continue to create and pass on efficiency gains. Where there is no residual
competition and no foreseeable threat of entry, the protection of rivalry and the
competitive process outweighs possible efficiency gains. A restrictive agreement
which maintains, creates or strengthens a market position approaching that of a
monopoly can normally not be justified on the grounds that it also creates efficiency
gains.

**2.** **Analysis of specific vertical restraints**

(128) The most common vertical restraints and combinations of vertical restraints are
analysed in the remainder of these Guidelines following the framework of analysis
developed in paragraphs (96) to (127). Other restraints and combinations exist for
which no direct guidance is provided in these Guidelines. They will, however, be
treated according to the same principles and with the same emphasis on the effect on
the market.

47 See paragraph 85 of Communication from the Commission - Notice – Guidelines on the application of
Article 81(3) of the Treaty, OJ C 101, 27.4.2004, p. 97.
48 See Judgment of the Court of Justice in Joined Cases C-395/96 P and C-396/96 P _Compagnie Maritime_
_Belge_ [2000] ECR I-1365, paragraph 130. Similarly, the application of Article 101(3) does not prevent
the application of the Treaty rules on the free movement of goods, services, persons and capital. These
provisions are in certain circumstances applicable to agreements, decisions and concerted practices
within the meaning of Article 101(1), see to that effect Judgment of the Court of Justice in
Case C-309/99 _Wouters_ [2002] ECR I-1577, paragraph 120.
49 See in this respect Judgment of the Court of First Instance in Case T-51/89 _Tetra Pak_ _(I)_ [1990]
ECR II-309. See also paragraph 106 of Communication from the Commission - Notice – Guidelines on
the application of Article 81(3) of the Treaty, OJ C 101, 27.4.2004, p. 97.

# EN 44 EN

_2.1._ _Single branding_

(129) Under the heading of "single branding" fall those agreements which have as their
main element the fact that the buyer is obliged or induced to concentrate its orders
for a particular type of product with one supplier. That component can be found
amongst others in non-compete and quantity-forcing on the buyer. A non-compete
arrangement is based on an obligation or incentive scheme which makes the buyer
purchase more than 80% of its requirements on a particular market from only one
supplier. It does not mean that the buyer can only buy directly from the supplier, but
that the buyer will not buy and resell or incorporate competing goods or services.
Quantity-forcing on the buyer is a weaker form of non-compete, where incentives or
obligations agreed between the supplier and the buyer make the latter concentrate its
purchases to a large extent with one supplier. Quantity-forcing may for example take
the form of minimum purchase requirements, stocking requirements or non-linear
pricing, such as conditional rebate schemes or a two-part tariff (fixed fee plus a price
per unit). A so-called "English clause", requiring the buyer to report any better offer
and allowing him only to accept such an offer when the supplier does not match it,
can be expected to have the same effect as a single branding obligation, especially
when the buyer has to reveal who makes the better offer.

(130) The possible competition risks of single branding are foreclosure of the market to
competing suppliers and potential suppliers, softening of competition and facilitation
of collusion between suppliers in case of cumulative use and, where the buyer is a
retailer selling to final consumers, a loss of in-store inter-brand competition. Such
restrictive effects have a direct impact on inter-brand competition.

(131) Single branding is exempted by the Block Exemption Regulation where the supplier's
and buyer’s market share each do not exceed 30 % and are subject to a limitation in
time of five years for the non-compete obligation. The remainder of this section
provides guidance for the assessment of individual cases above the market share
threshold or beyond the time limit of five years.

(132) The capacity for single branding obligations of one specific supplier to result in
anticompetitive foreclosure arises in particular where, without the obligations, an
important competitive constraint is exercised by competitors that either are not yet
present on the market at the time the obligations are concluded, or that are not in a
position to compete for the full supply of the customers. Competitors may not be able
to compete for an individual customer’s entire demand because the supplier in
question is an unavoidable trading partner at least for part of the demand on the
market, for instance because its brand is a ‘must stock item’ preferred by many final
consumers or because the capacity constraints on the other suppliers are such that a
part of demand can only be provided for by the supplier in question. [50] The market
position of the supplier is thus of main importance to assess possible anti-competitive
effects of single branding obligations.

(133) If competitors can compete on equal terms for each individual customer’s entire
demand, single branding obligations of one specific supplier are generally unlikely to
hamper effective competition unless the switching of supplier by customers is

50
Judgment of the Court of First Instance in Case T-65/98 _Van den Bergh Foods_ v _Commission_ [2003]
ECR II-4653, paragraphs 104 and 156.

# EN 45 EN

rendered difficult due to the duration and market coverage of the single branding
obligations. The higher its tied market share, that is, the part of its market share sold
under a single branding obligation, the more significant foreclosure is likely to be.
Similarly, the longer the duration of the single branding obligations, the more
significant foreclosure is likely to be. Single branding obligations shorter than one
year entered into by non-dominant companies are generally not considered to give
rise to appreciable anti-competitive effects or net negative effects. Single branding
obligations between one and five years entered into by non-dominant companies
usually require a proper balancing of pro- and anti-competitive effects, while single
branding obligations exceeding five years are for most types of investments not
considered necessary to achieve the claimed efficiencies or the efficiencies are not
sufficient to outweigh their foreclosure effect. Single branding obligations are more
likely to result in anti-competitive foreclosure when entered into by dominant
companies.

(134) When assessing the supplier's market power, the market position of its competitors is
important. As long as the competitors are sufficiently numerous and strong, no
appreciable anti-competitive effects can be expected. Foreclosure of competitors is
not very likely where they have similar market positions and can offer similarly
attractive products. In such a case, foreclosure may, however, occur for potential
entrants when a number of major suppliers enter into single branding contracts with a
significant number of buyers on the relevant market (cumulative effect situation).
This is also a situation where single branding agreements may facilitate collusion
between competing suppliers. If, individually, those suppliers are covered by the
Block Exemption Regulation, a withdrawal of the block exemption may be necessary
to deal with such a negative cumulative effect. A tied market share of less than 5 %
is not considered in general to contribute significantly to a cumulative foreclosure
effect.

(135) In cases where the market share of the largest supplier is below 30 % and the market
share of the five largest suppliers is below 50 %, there is unlikely to be a single or a
cumulative anti-competitive effect situation. Where a potential entrant cannot
penetrate the market profitably, it is likely to be due to factors other than single
branding obligations, such as consumer preferences.

(136) Entry barriers are important to establish whether there is anticompetitive foreclosure.
Wherever it is relatively easy for competing suppliers to create new buyers or find
alternative buyers for their product, foreclosure is unlikely to be a real problem.
However, there are often entry barriers, both at the manufacturing and at the
distribution level.

(137) Countervailing power is relevant, as powerful buyers will not easily allow
themselves to be cut off from the supply of competing goods or services. More
generally, in order to convince customers to accept single branding, the supplier may
have to compensate them, in whole or in part, for the loss in competition resulting
from the exclusivity. Where such compensation is given, it may be in the individual
interest of a customer to enter into a single branding obligation with the supplier. But
it would be wrong to conclude automatically from this that all single branding
obligations, taken together, are overall beneficial for customers on that market and
for the final consumers. It is in particular unlikely that consumers as a whole will
benefit if there are many customers and the single branding obligations, taken

# EN 46 EN

together, have the effect of preventing the entry or expansion of competing
undertakings.

(138) Lastly, "the level of trade" is relevant. Anticompetitive foreclosure is less likely in
case of an intermediate product. When the supplier of an intermediate product is not
dominant, the competing suppliers still have a substantial part of demand that is free.
Below the level of dominance an anticompetitive foreclosure effect may however
arise in a cumulative effect situation. A cumulative anticompetitive effect is unlikely
to arise as long as less than 50 % of the market is tied.

(139) Where the agreement concerns the supply of a final product at the wholesale level,
the question whether a competition problem is likely to arise depends in large part on
the type of wholesaling and the entry barriers at the wholesale level. There is no real
risk of anticompetitive foreclosure if competing manufacturers can easily establish
their own wholesaling operation. Whether entry barriers are low depends in part on
the type of wholesaling, that is, whether or not wholesalers can operate efficiently
with only the product concerned by the agreement (for example ice cream) or
whether it is more efficient to trade in a whole range of products (for example frozen
foodstuffs). In the latter case, it is not efficient for a manufacturer selling only one
product to set up its own wholesaling operation. In that case, anti-competitive effects
may arise. In addition, cumulative effect problems may arise if several suppliers tie
most of the available wholesalers.

(140) For final products, foreclosure is in general more likely to occur at the retail level,
given the significant entry barriers for most manufacturers to start retail outlets just
for their own products. In addition, it is at the retail level that single branding
agreements may lead to reduced in-store inter-brand competition. It is for these
reasons that for final products at the retail level, significant anti-competitive effects
may start to arise, taking into account all other relevant factors, if a non-dominant
supplier ties 30 % or more of the relevant market. For a dominant company, even a
modest tied market share may already lead to significant anti-competitive effects.

(141) At the retail level, a cumulative foreclosure effect may also arise. Where all suppliers
have market shares below 30 %, a cumulative anticompetitive foreclosure effect is
unlikely if the total tied market share is less than 40 % and withdrawal of the block
exemption is therefore unlikely. That figure may be higher when other factors like
the number of competitors, entry barriers etc. are taken into account. Where not all
companies have market shares below the threshold of the Block Exemption
Regulation but none is dominant, a cumulative anticompetitive foreclosure effect is
unlikely if the total tied market share is below 30 %.

(142) Where the buyer operates from premises and land owned by the supplier or leased by
the supplier from a third party not connected with the buyer, the possibility of
imposing effective remedies for a possible foreclosure effect will be limited. In that
case, intervention by the Commission below the level of dominance is unlikely.

(143) In certain sectors, the selling of more than one brand from a single site may be
difficult, in which case a foreclosure problem can better be remedied by limiting the
effective duration of contracts.

# EN 47 EN

(144) Where appreciable anti-competitive effects are established, the question of a possible
exemption under Article 101(3) arises. For non-compete obligations, the efficiencies
described in points (a) (free riding between suppliers), (d), (e) (hold-up problems)
and (h) (capital market imperfections) of paragraph (107), may be particularly
relevant.

(145) In the case of an efficiency as described in paragraph (107)(a), (107)(d) and (107)(h),
quantity forcing on the buyer could possibly be a less restrictive alternative. A noncompete obligation may be the only viable way to achieve an efficiency as described
in paragraph (107)(e), (hold-up problem related to the transfer of know-how).

(146) In the case of a relationship-specific investment made by the supplier (see
paragraph (107)(d) ), a non-compete or quantity forcing agreement for the period of
depreciation of the investment will in general fulfil the conditions of Article 101(3).
In the case of high relationship-specific investments, a non-compete obligation
exceeding five years may be justified. A relationship-specific investment could, for
instance, be the installation or adaptation of equipment by the supplier when this
equipment can be used afterwards only to produce components for a particular buyer.
General or market-specific investments in (extra) capacity are normally not
relationship-specific investments. However, where a supplier creates new capacity
specifically linked to the operations of a particular buyer, for instance a company
producing metal cans which creates new capacity to produce cans on the premises of
or next to the canning facility of a food producer, this new capacity may only be
economically viable when producing for this particular customer, in which case the
investment would be considered to be relationship-specific.

(147) Where the supplier provides the buyer with a loan or provides the buyer with
equipment which is not relationship-specific, this in itself is normally not sufficient
to justify the exemption of an anticompetitive foreclosure effect on the market. In
case of capital market imperfection, it may be more efficient for the supplier of a
product than for a bank to provide a loan (see paragraph (107)(h)). However, in such
a case the loan should be provided in the least restrictive way and the buyer should
thus in general not be prevented from terminating the obligation and repaying the
outstanding part of the loan at any point in time and without payment of any penalty.

(148) The transfer of substantial know-how (paragraph (107)(e)) usually justifies a noncompete obligation for the whole duration of the supply agreement, as for example in
the context of franchising.

(149) _Example of non-compete obligation_

The market leader in a national market for an impulse consumer product, with a
market share of 40 %, sells most of its products (90 %) through tied retailers (tied
market share 36 %). The agreements oblige the retailers to purchase only from the
market leader for at least four years. The market leader is especially strongly
represented in the more densely populated areas like the capital. Its competitors,
10 in number, of which some are only locally available, all have much smaller
market shares, the biggest having 12 %. Those 10 competitors together supply
another 10 % of the market via tied outlets. There is strong brand and product
differentiation in the market. The market leader has the strongest brands. It is the

# EN 48 EN

only one with regular national advertising campaigns. It provides its tied retailers
with special stocking cabinets for its product.

The result on the market is that in total 46 % (36 % + 10 %) of the market is
foreclosed to potential entrants and to incumbents not having tied outlets. Potential
entrants find entry even more difficult in the densely populated areas where
foreclosure is even higher, although it is there that they would prefer to enter the
market. In addition, owing to the strong brand and product differentiation and the
high search costs relative to the price of the product, the absence of in-store interbrand competition leads to an extra welfare loss for consumers. The possible
efficiencies of the outlet exclusivity, which the market leader claims result from
reduced transport costs and a possible hold-up problem concerning the stocking
cabinets, are limited and do not outweigh the negative effects on competition. The
efficiencies are limited, as the transport costs are linked to quantity and not
exclusivity and the stocking cabinets do not contain special know-how and are not
brand specific. Accordingly, it is unlikely that the conditions of Article 101(3) are
fulfilled.

(150) _Example of quantity forcing_

A producer X with a 40 % market share sells 80 % of its products through contracts
which specify that the reseller is required to purchase at least 75 % of its
requirements for that type of product from X. In return X is offering financing and
equipment at favourable rates. The contracts have a duration of five years in which
repayment of the loan is foreseen in equal instalments. However, after the first two
years buyers have the possibility to terminate the contract with a six-month notice
period if they repay the outstanding loan and take over the equipment at its market
asset value. At the end of the five-year period the equipment becomes the property of
the buyer. Most of the competing producers are small, twelve in total with the
biggest having a market share of 20 %, and engage in similar contracts with different
durations. The producers with market shares below 10 % often have contracts with
longer durations and with less generous termination clauses. The contracts of
producer X leave 25 % of requirements free to be supplied by competitors. In the last
three years, two new producers have entered the market and gained a combined
market share of around 8 %, partly by taking over the loans of a number of resellers
in return for contracts with these resellers.

Producer X's tied market share is 24 % (0,75 × 0,80 × 40 %). The other producers'
tied market share is around 25 %. Therefore, in total around 49 % of the market is
foreclosed to potential entrants and to incumbents not having tied outlets for at least
the first two years of the supply contracts. The market shows that the resellers often
have difficulty in obtaining loans from banks and are too small in general to obtain
capital through other means like the issuing of shares. In addition, producer X is able
to demonstrate that concentrating its sales on a limited number of resellers allows
him to plan its sales better and to save transport costs. In the light of the efficiencies
on the one hand and the 25 % non-tied part in the contracts of producer X, the real
possibility for early termination of the contract, the recent entry of new producers
and the fact that around half the resellers are not tied on the other hand, the quantity
forcing of 75 % applied by producer X is likely to fulfil the conditions of
Article 101(3).

# EN 49 EN

_2.2_ _Exclusive distribution_

(151) In an exclusive distribution agreement, the supplier agrees to sell its products to only
one distributor for resale in a particular territory. At the same time, the distributor is
usually limited in its active selling into other (exclusively allocated) territories. The
possible competition risks are mainly reduced intra-brand competition and market
partitioning, which may facilitate price discrimination in particular. When most or all
of the suppliers apply exclusive distribution, it may soften competition and facilitate
collusion, both at the suppliers' and distributors' level. Lastly, exclusive distribution
may lead to foreclosure of other distributors and therewith reduce competition at that
level.

(152) Exclusive distribution is exempted by the Block Exemption Regulation where both
the supplier's and buyer's market share each do not exceed 30 %, even if combined
with other non-hardcore vertical restraints, such as a non-compete obligation limited
to five years, quantity forcing or exclusive purchasing. A combination of exclusive
distribution and selective distribution is only exempted by the Block Exemption
Regulation if active selling in other territories is not restricted. The remainder of this
section provides guidance for the assessment of exclusive distribution in individual
cases above the 30 % market share threshold.

(153) The market position of the supplier and its competitors is of major importance, as the
loss of intra-brand competition can only be problematic if inter-brand competition is
limited. The stronger the position of the supplier, the more serious is the loss of intrabrand competition. Above the 30 % market share threshold, there may be a risk of a
significant reduction of intra-brand competition. In order to fulfil the conditions of
Article 101(3), the loss of intra-brand competition may need to be balanced with real
efficiencies.

(154) The position of the competitors can have a dual significance. Strong competitors will
generally mean that the reduction in intra-brand competition is outweighed by
sufficient inter-brand competition. However, if the number of competitors becomes
rather small and their market position is rather similar in terms of market share,
capacity and distribution network, there is a risk of collusion and/or softening of
competition. The loss of intra-brand competition can increase that risk, especially
when several suppliers operate similar distribution systems. Multiple exclusive
dealerships, that is, when different suppliers appoint the same exclusive distributor in
a given territory, may further increase the risk of collusion and/or softening of
competition. If a dealer is granted the exclusive right to distribute two or more
important competing products in the same territory, inter-brand competition may be
substantially restricted for those brands. The higher the cumulative market share of
the brands distributed by the exclusive multiple brand dealers, the higher the risk of
collusion and/or softening of competition and the more inter-brand competition will
be reduced. If a retailer is the exclusive distributor for a number of brands this may
have as result that if one producer cuts the wholesale price for its brand, the
exclusive retailer will not be eager to transmit this price cut to the final consumer as
it would reduce its sales and profits made with the other brands. Hence, compared to
the situation without multiple exclusive dealerships, producers have a reduced
interest in entering into price competition with one another. Such cumulative effect
situations may be a reason to withdraw the benefit of the Block Exemption

# EN 50 EN

Regulation where the market shares of the suppliers and buyers are below the
threshold of the Block Exemption Regulation.

(155) Entry barriers that may hinder suppliers from creating new distributors or finding
alternative distributors are less important in assessing the possible anti-competitive
effects of exclusive distribution. Foreclosure of other suppliers does not arise as long
as exclusive distribution is not combined with single branding.

(156) Foreclosure of other distributors is not an issue where the supplier which operates the
exclusive distribution system appoints a high number of exclusive distributors on the
same market and those exclusive distributors are not restricted in selling to other
non-appointed distributors. Foreclosure of other distributors may however become an
issue where there is buying power and market power downstream, in particular in the
case of very large territories where the exclusive distributor becomes the exclusive
buyer for a whole market. An example would be a supermarket chain which becomes
the only distributor of a leading brand on a national food retail market. The
foreclosure of other distributors may be aggravated in the case of multiple exclusive
dealership.

(157) Buying power may also increase the risk of collusion on the buyers' side when the
exclusive distribution arrangements are imposed by important buyers, possibly
located in different territories, on one or several suppliers.

(158) Maturity of the market is important, as loss of intra-brand competition and price
discrimination may be a serious problem in a mature market but may be less relevant
on a market with growing demand, changing technologies and changing market
positions.

(159) The level of trade is important as the possible negative effects may differ between
the wholesale and retail level. Exclusive distribution is mainly applied in the
distribution of final goods and services. A loss of intra-brand competition is
especially likely at the retail level if coupled with large territories, since final
consumers may be confronted with little possibility of choosing between a high
price/high service and a low price/low service distributor for an important brand.

(160) A manufacturer that chooses a wholesaler to be its exclusive distributor will
normally do so for a larger territory, such as a whole Member State. As long as the
wholesaler can sell the products without limitation to downstream retailers there are
not likely to be appreciable anti-competitive effects. A possible loss of intra-brand
competition at the wholesale level may be easily outweighed by efficiencies obtained
in logistics, promotion etc., especially when the manufacturer is based in a different
country. The possible risks for inter-brand competition of multiple exclusive
dealerships are however higher at the wholesale than at the retail level. Where one
wholesaler becomes the exclusive distributor for a significant number of suppliers,
not only is there a risk that competition between these brands is reduced, but also that
there is foreclosure at the wholesale level of trade.

(161) As stated in paragraph (155), foreclosure of other suppliers does not arise as long as
exclusive distribution is not combined with single branding. But even when
exclusive distribution is combined with single branding anticompetitive foreclosure
of other suppliers is unlikely, except possibly when the single branding is applied to

# EN 51 EN

a dense network of exclusive distributors with small territories or in case of a

cumulative effect. In such a case it may be necessary to apply the principles on single
branding set out in section 2.1. However, when the combination does not lead to
significant foreclosure, the combination of exclusive distribution and single branding
may be pro-competitive by increasing the incentive for the exclusive distributor to
focus its efforts on the particular brand. Therefore, in the absence of such a
foreclosure effect, the combination of exclusive distribution with non-compete may
very well fulfil the conditions of Article 101(3) for the whole duration of the
agreement, particularly at the wholesale level.

(162) The combination of exclusive distribution with exclusive sourcing increases the
possible competition risks of reduced intra-brand competition and market
partitioning which may facilitate price discrimination in particular. Exclusive
distribution already limits arbitrage by customers, as it limits the number of
distributors and usually also restricts the distributors in their freedom of active
selling. Exclusive sourcing, requiring the exclusive distributors to buy their supplies
for the particular brand directly from the manufacturer, eliminates in addition
possible arbitrage by the exclusive distributors, which are prevented from buying
from other distributors in the system. As a result, the supplier's possibilities to limit
intra-brand competition by applying dissimilar conditions of sale to the detriment of
consumers are enhanced, unless the combination allows the creation of efficiencies
leading to lower prices to all final consumers.

(163) The nature of the product is not particularly relevant to the assessment of possible
anti-competitive effects of exclusive distribution. It is, however, relevant to an
assessment of possible efficiencies, that is, after an appreciable anti-competitive
effect is established.

(164) Exclusive distribution may lead to efficiencies, especially where investments by the
distributors are required to protect or build up the brand image. In general, the case
for efficiencies is strongest for new products, complex products, and products whose
qualities are difficult to judge before consumption (so-called experience products) or
whose qualities are difficult to judge even after consumption (so-called credence
products). In addition, exclusive distribution may lead to savings in logistic costs due
to economies of scale in transport and distribution.

(165) Example of exclusive distribution at the wholesale level

On the market for a consumer durable, A is the market leader. A sells its product
through exclusive wholesalers. Territories for the wholesalers correspond to the
entire Member State for small Member States, and to a region for larger Member
States. Those exclusive distributors deal with sales to all the retailers in their

territories. They do not sell to final consumers. The wholesalers are in charge of
promotion in their markets, including sponsoring of local events, but also explaining
and promoting the new products to the retailers in their territories. Technology and
product innovation are evolving fairly quickly on this market, and pre-sale service to
retailers and to final consumers plays an important role. The wholesalers are not
required to purchase all their requirements of the brand of supplier A from the
producer himself, and arbitrage by wholesalers or retailers is practicable because the
transport costs are relatively low compared to the value of the product. The
wholesalers are not under a non-compete obligation. Retailers also sell a number of

# EN 52 EN

brands of competing suppliers, and there are no exclusive or selective distribution
agreements at the retail level. On the EU market of sales to wholesalers A has around
50 % market share. Its market share on the various national retail markets varies

between 40 % and 60 %. A has between 6 and 10 competitors on every national
market. B, C and D are its biggest competitors and are also present on each national
market, with market shares varying between 20 % and 5 %. The remaining producers
are national producers, with smaller market shares. B, C and D have similar
distribution networks, whereas the local producers tend to sell their products directly
to retailers.

On the wholesale market described in this example, the risk of reduced intra-brand
competition and price discrimination is low. Arbitrage is not hindered, and the
absence of intra-brand competition is not very relevant at the wholesale level. At the
retail level, neither intra- nor inter-brand competition are hindered. Moreover, interbrand competition is largely unaffected by the exclusive arrangements at the
wholesale level. Therefore it is likely, even if anti-competitive effects exist, that also
the conditions of Article 101(3) are fulfilled.

(166) Example of multiple exclusive dealerships in an oligopolistic market

On a national market for a final product, there are four market leaders, which each
have a market share of around 20 %. Those four market leaders sell their product
through exclusive distributors at the retail level. Retailers are given an exclusive
territory which corresponds to the town in which they are located or a district of the
town for large towns. In most territories, the four market leaders happen to appoint
the same exclusive retailer ("multiple dealership"), often centrally located and rather
specialised in the product. The remaining 20 % of the national market is composed of
small local producers, the largest of these producers having a market share of 5 % on
the national market. Those local producers sell their products in general through
other retailers, in particular because the exclusive distributors of the four largest
suppliers show in general little interest in selling less well-known and cheaper
brands. There is strong brand and product differentiation on the market. The four
market leaders have large national advertising campaigns and strong brand images,
whereas the fringe producers do not advertise their products at the national level. The
market is rather mature, with stable demand and no major product and technological
innovation. The product is relatively simple.

In such an oligopolistic market, there is a risk of collusion between the four market
leaders. That risk is increased through multiple dealerships. Intra-brand competition
is limited by the territorial exclusivity. Competition between the four leading brands
is reduced at the retail level, since one retailer fixes the price of all four brands in
each territory. The multiple dealership implies that, if one producer cuts the price for
its brand, the retailer will not be eager to transmit this price cut to the final consumer
as it would reduce its sales and profits made with the other brands. Hence, producers
have a reduced interest in entering into price competition with one another. Interbrand price competition exists mainly with the low brand image goods of the fringe
producers. The possible efficiency arguments for (joint) exclusive distributors are
limited, as the product is relatively simple, the resale does not require any specific
investments or training and advertising is mainly carried out at the level of the
producers.

# EN 53 EN

Even though each of the market leaders has a market share below the threshold, the
conditions of Article 101(3) may not be fulfilled and withdrawal of the block
exemption may be necessary for the agreements concluded with distributors whose
market share is below 30 % of the procurement market.

(167) Example of exclusive distribution combined with exclusive sourcing

Manufacturer A is the European market leader for a bulky consumer durable, with a
market share of between 40 % and 60 % in most national retail markets. In Member

States where it has a high market share, it has less competitors with much smaller
market shares. The competitors are present on only one or two national markets. A’s
long time policy is to sell its product through its national subsidiaries to exclusive
distributors at the retail level, which are not allowed to sell actively into each other's
territories. Those distributors are thereby incentivised to promote the product and
provide pre-sales services. Recently the retailers are in addition obliged to purchase
manufacturer A's products exclusively from the national subsidiary of manufacturer
A in their own country. The retailers selling the brand of manufacturer A are the
main resellers of that type of product in their territory. They handle competing
brands, but with varying degrees of success and enthusiasm. Since the introduction
of exclusive sourcing, A applies price differences of 10 % to 15 % between markets
with higher prices in the markets where it has less competition. The markets are
relatively stable on the demand and the supply side, and there are no significant
technological changes.

In the high price markets, the loss of intra-brand competition results not only from
the territorial exclusivity at the retail level but is aggravated by the exclusive
sourcing obligation imposed on the retailers. The exclusive sourcing obligation helps
to keep markets and territories separate by making arbitrage between the exclusive
retailers, the main resellers of that type of product, impossible. The exclusive
retailers also cannot sell actively into each other's territory and in practice tend to
avoid delivering outside their own territory. As a result, price discrimination is
possible, without it leading to a significant increase in total sales. Arbitrage by
consumers or independent traders is limited due to the bulkiness of the product.

While the possible efficiency arguments for appointing exclusive distributors may be
convincing, in particular because of the incentivising of retailers, the possible
efficiency arguments for the combination of exclusive distribution and exclusive
sourcing, and in particular the possible efficiency arguments for exclusive sourcing,
linked mainly to economies of scale in transport, are unlikely to outweigh the
negative effect of price discrimination and reduced intra-brand competition.
Consequently, it is unlikely that the conditions of Article 101(3) are fulfilled.

_2.3._ _Exclusive customer allocation_

(168) In an exclusive customer allocation agreement, the supplier agrees to sell its products
to only one distributor for resale to a particular group of customers. At the same time,
the distributor is usually limited in its active selling to other (exclusively allocated)
groups of customers. The Block Exemption Regulation does not limit the way an
exclusive customer group can be defined; it could for instance be a particular type of
customers defined by their occupation but also a list of specific customers selected
on the basis of one or more objective criteria. The possible competition risks are

# EN 54 EN

mainly reduced intra-brand competition and market partitioning, which may in
particular facilitate price discrimination. Where most or all of the suppliers apply
exclusive customer allocation, competition may be softened and collusion, both at
the suppliers' and the distributors' level, may be facilitated. Lastly, exclusive
customer allocation may lead to foreclosure of other distributors and therewith
reduce competition at that level.

(169) Exclusive customer allocation is exempted by the Block Exemption Regulation when
both the supplier's and buyer's market share does not exceed the 30 % market share
threshold, even if combined with other non-hardcore vertical restraints such as noncompete, quantity-forcing or exclusive sourcing. A combination of exclusive
customer allocation and selective distribution is normally a hardcore restriction,
as active selling to end-users by the appointed distributors is usually not left free.
Above the 30 % market share threshold, the guidance provided in paragraphs (151)
to (167) applies also to the assessment of exclusive customer allocation, subject to
the specific remarks in the remainder of this section.

(170) The allocation of customers normally makes arbitrage by the customers more
difficult. In addition, as each appointed distributor has its own class of customers,
non-appointed distributors not falling within such a class may find it difficult to
obtain the product. Consequently, possible arbitrage by non-appointed distributors
will be reduced.

(171) Exclusive customer allocation is mainly applied to intermediate products and at the
wholesale level when it concerns final products, where customer groups with
different specific requirements concerning the product can be distinguished.

(172) Exclusive customer allocation may lead to efficiencies, especially when the
distributors are required to make investments in for instance specific equipment,
skills or know-how to adapt to the requirements of their group of customers. The
depreciation period of these investments indicates the justified duration of an
exclusive customer allocation system. In general the case is strongest for new or
complex products and for products requiring adaptation to the needs of the individual
customer. Identifiable differentiated needs are more likely for intermediate products,
that is, products sold to different types of professional buyers. Allocation of final
consumers is unlikely to lead to efficiencies.

(173) Example of exclusive customer allocation

A company has developed a sophisticated sprinkler installation. The company has
currently a market share of 40 % on the market for sprinkler installations. When it
started selling the sophisticated sprinkler it had a market share of 20 % with an older
product. The installation of the new type of sprinkler depends on the type of building
that it is installed in and on the use of the building (office, chemical plant, hospital
etc.). The company has appointed a number of distributors to sell and install the
sprinkler installation. Each distributor needed to train its employees for the general
and specific requirements of installing the sprinkler installation for a particular class
of customers. To ensure that distributors would specialise, the company assigned to
each distributor an exclusive class of customers and prohibited active sales to each
others' exclusive customer classes. After five years, all the exclusive distributors will
be allowed to sell actively to all classes of customers, thereby ending the system of

# EN 55 EN

exclusive customer allocation. The supplier may then also start selling to new
distributors. The market is quite dynamic, with two recent entries and a number of
technological developments. Competitors, with market shares between 25 % and
5 %, are also upgrading their products.

As the exclusivity is of limited duration and helps to ensure that the distributors may
recoup their investments and concentrate their sales efforts first on a certain class of
customers in order to learn the trade, and as the possible anti-competitive effects
seem limited in a dynamic market, the conditions of Article 101(3) are likely to be
fulfilled.

_2.4._ _Selective distribution_

(174) Selective distribution agreements, like exclusive distribution agreements, restrict the
number of authorised distributors on the one hand and the possibilities of resale on
the other. The difference with exclusive distribution is that the restriction of the

number of dealers does not depend on the number of territories but on selection
criteria linked in the first place to the nature of the product. Another difference with
exclusive distribution is that the restriction on resale is not a restriction on active

selling to a territory but a restriction on any sales to non-authorised distributors,
leaving only appointed dealers and final customers as possible buyers. Selective
distribution is almost always used to distribute branded final products.

(175) The possible competition risks are a reduction in intra-brand competition and,
especially in case of cumulative effect, foreclosure of certain type(s) of distributors
and softening of competition and facilitation of collusion between suppliers or
buyers. To assess the possible anti-competitive effects of selective distribution under
Article 101(1), a distinction needs to be made between purely qualitative selective
distribution and quantitative selective distribution. Purely qualitative selective
distribution selects dealers only on the basis of objective criteria required by the
nature of the product such as training of sales personnel, the service provided at the
point of sale, a certain range of the products being sold etc. [51] The application of such
criteria does not put a direct limit on the number of dealers. Purely qualitative
selective distribution is in general considered to fall outside Article 101(1) for lack of
anti-competitive effects, provided that three conditions are satisfied. First, the nature
of the product in question must necessitate a selective distribution system, in the
sense that such a system must constitute a legitimate requirement, having regard to
the nature of the product concerned, to preserve its quality and ensure its proper use.
Secondly, resellers must be chosen on the basis of objective criteria of a qualitative
nature which are laid down uniformly for all and made available to all potential
resellers and are not applied in a discriminatory manner. Thirdly, the criteria laid
down must not go beyond what is necessary [52] . Quantitative selective distribution
adds further criteria for selection that more directly limit the potential number of

51 See for example judgment of the Court of First Instance in Case T-88/92 _Groupement d'achat Édouard_
_Leclerc v Commission_ [1996] ECR II-1961.
52
See judgments of the Court of Justice in Case 31/80 _L'Oréal_ v _PVBA_ [1980] ECR 3775, paragraphs 15
and 16; Case 26/76 _Metro I_ [1977] ECR 1875, paragraphs 20 and 21; Case 107/82 _AEG_ [1983]
ECR 3151, paragraph 35; and judgment of the Court of First Instance in Case T-19/91 _Vichy_ v
_Commission_ [1992] ECR II-415, paragraph 65.

# EN 56 EN

dealers by, for instance, requiring minimum or maximum sales, by fixing the number
of dealers, etc.

(176) Qualitative and quantitative selective distribution is exempted by the
Block Exemption Regulation as long as the market share of both supplier and buyer
each do not exceed 30 %, even if combined with other non-hardcore vertical
restraints, such as non-compete or exclusive distribution, provided active selling by
the authorised distributors to each other and to end users is not restricted. The Block

Exemption Regulation exempts selective distribution regardless of the nature of the
product concerned and regardless of the nature of the selection criteria. However,
where the characteristics of the product [53] do not require selective distribution or do
not require the applied criteria, such as for instance the requirement for distributors
to have one or more brick and mortar shops or to provide specific services, such a
distribution system does not generally bring about sufficient efficiency enhancing
effects to counterbalance a significant reduction in intra-brand competition. Where
appreciable anti-competitive effects occur, the benefit of the Block Exemption
Regulation is likely to be withdrawn. In addition, the remainder of this section
provides guidance for the assessment of selective distribution in individual cases
which are not covered by the Block Exemption Regulation or in the case of
cumulative effects resulting from parallel networks of selective distribution.

(177) The market position of the supplier and its competitors is of central importance in
assessing possible anti-competitive effects, as the loss of intra-brand competition can
only be problematic if inter-brand competition is limited. The stronger the position of
the supplier, the more problematic is the loss of intra-brand competition. Another
important factor is the number of selective distribution networks present in the same
market. Where selective distribution is applied by only one supplier on the market,
quantitative selective distribution does not normally create net negative effects
provided that the contract goods, having regard to their nature, require the use of a
selective distribution system and on condition that the selection criteria applied are
necessary to ensure efficient distribution of the goods in question. The reality,
however, seems to be that selective distribution is often applied by a number of the
suppliers on a given market.

(178) The position of competitors can have a dual significance and plays in particular a
role in case of a cumulative effect. Strong competitors will mean in general that the
reduction in intra-brand competition is easily outweighed by sufficient inter-brand
competition. However, when a majority of the main suppliers apply selective
distribution, there will be a significant loss of intra-brand competition and possible
foreclosure of certain types of distributors as well as an increased risk of collusion
between those major suppliers. The risk of foreclosure of more efficient distributors
has always been greater with selective distribution than with exclusive distribution,
given the restriction on sales to non-authorised dealers in selective distribution. That
restriction is designed to give selective distribution systems a closed character,
making it impossible for non-authorised dealers to obtain supplies. Accordingly,
selective distribution is particularly well suited to avoid pressure by price discounters

53 See for example judgments of the Court of First Instance in Case T-19/92, _Groupement d'achat_
_Edouard Leclerc_ v _Commission_ [1996] ECR II-1851, paragraphs 112 to 123; Case T-88/92 _Groupement_
_d'achat Edouard Leclerc_ v _Commission_ [1996] ECR II-1961, paragraphs 106 to 117, and the case law
referred to in the preceding footnote.

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(whether offline or online-only distributors) on the margins of the manufacturer, as
well as on the margins of the authorised dealers. Foreclosure of such distribution
formats, whether resulting from the cumulative application of selective distribution
or from the application by a single supplier with a market share exceeding 30 %,
reduces the possibilities for consumers to take advantage of the specific benefits
offered by these formats such as lower prices, more transparency and wider access.

(179) Where the Block Exemption Regulation applies to individual networks of selective
distribution, withdrawal of the block exemption or disapplication of the Block
Exemption Regulation may be considered in case of cumulative effects. However, a
cumulative effect problem is unlikely to arise when the share of the market covered
by selective distribution is below 50 %. Also, no problem is likely to arise where the
market coverage ratio exceeds 50 %, but the aggregate market share of the five
largest suppliers (CR5) is below 50 %. Where both the CR5 and the share of the
market covered by selective distribution exceed 50 %, the assessment may vary
depending on whether or not all five largest suppliers apply selective distribution.
The stronger the position of the competitors which do not apply selective
distribution, the less likely other distributors will be foreclosed. If all five largest
suppliers apply selective distribution, competition concerns may arise with respect to
those agreements in particular that apply quantitative selection criteria by directly
limiting the number of authorised dealers or that apply qualitative criteria, such as a
requirement to have one or more brick and mortar shops or to provide specific
services, which forecloses certain distribution formats. The conditions of
Article 101(3) are in general unlikely to be fulfilled if the selective distribution
systems at issue prevent access to the market by new distributors capable of
adequately selling the products in question, especially price discounters or onlineonly distributors offering lower prices to consumers, thereby limiting distribution to
the advantage of certain existing channels and to the detriment of final consumers.
More indirect forms of quantitative selective distribution, resulting for instance from
the combination of purely qualitative selection criteria with the requirement imposed
on the dealers to achieve a minimum amount of annual purchases, are less likely to
produce net negative effects, if such an amount does not represent a significant
proportion of the dealer's total turnover achieved with the type of products in
question and it does not go beyond what is necessary for the supplier to recoup its
relationship-specific investment and/or realise economies of scale in distribution. As
regards individual contributions, a supplier with a market share of less than 5 % is in
general not considered to contribute significantly to a cumulative effect.

(180) Entry barriers are mainly of interest in the case of foreclosure of the market to nonauthorised dealers. In general, entry barriers will be considerable as selective
distribution is usually applied by manufacturers of branded products. It will in
general take time and considerable investment for excluded retailers to launch their
own brands or obtain competitive supplies elsewhere.

(181) Buying power may increase the risk of collusion between dealers and thus
appreciably change the analysis of possible anti-competitive effects of selective
distribution. Foreclosure of the market to more efficient retailers may especially
result where a strong dealer organisation imposes selection criteria on the supplier
aimed at limiting distribution to the advantage of its members.

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(182) Article 5(1)(c) of the Block Exemption Regulation provides that the supplier may not
impose an obligation causing the authorised dealers, either directly or indirectly, not
to sell the brands of particular competing suppliers. Such a condition aims
specifically at avoiding horizontal collusion to exclude particular brands through the
creation of a selective club of brands by the leading suppliers. That kind of obligation
is unlikely to be exemptible when the CR5 is equal to or above 50 %, unless none of
the suppliers imposing such an obligation belongs to the five largest suppliers on the
market.

(183) Foreclosure of other suppliers is normally not a problem as long as other suppliers
can use the same distributors, that is, as long as the selective distribution system is
not combined with single branding. In the case of a dense network of authorised
distributors or in the case of a cumulative effect, the combination of selective
distribution and a non-compete obligation may pose a risk of foreclosure to other
suppliers. In that case, the principles set out in section 2.1. on single branding apply.
Where selective distribution is not combined with a non-compete obligation,
foreclosure of the market to competing suppliers may still be a problem where the
leading suppliers apply not only purely qualitative selection criteria, but impose on
their dealers certain additional obligations such as the obligation to reserve a
minimum shelf-space for their products or to ensure that the sales of their products
by the dealer achieve a minimum percentage of the dealer's total turnover. Such a
problem is unlikely to arise if the share of the market covered by selective
distribution is below 50 % or, where this coverage ratio is exceeded, if the market
share of the five largest suppliers is below 50 %.

(184) Maturity of the market is important, as loss of intra-brand competition and possible
foreclosure of suppliers or dealers may be a serious problem on a mature market but
is less relevant on a market with growing demand, changing technologies and
changing market positions.

(185) Selective distribution may be efficient when it leads to savings in logistical costs due
to economies of scale in transport and that may occur irrespective of the nature of the
product (paragraph (107)(g)). However, such an efficiency is usually only marginal
in selective distribution systems. To help solve a free-rider problem between the
distributors (paragraph (107)(a) ) or to help create a brand image (paragraph (107)(i)
), the nature of the product is very relevant. In general, the case is strongest for new
products, complex products, products whose qualities are difficult to judge before
consumption (so-called experience products) or whose qualities are difficult to judge
even after consumption (so-called credence products). The combination of selective
distribution with a location clause, protecting an appointed dealer against other
appointed dealers opening up a shop in its vicinity, may in particular fulfil the
conditions of Article 101(3) if the combination is indispensable to protect substantial
and relationship-specific investments made by the authorised dealer
(paragraph (107)(d)).

(186) To ensure that the least anti-competitive restraint is chosen, it is relevant to see
whether the same efficiencies can be obtained at a comparable cost by for instance
service requirements alone.

# EN 59 EN

(187) Example of quantitative selective distribution

On a market for consumer durables, the market leader (brand A) with a market share
of 35 %, sells its product to final consumers through a selective distribution network.
There are several criteria for admission to the network: the shop must employ trained
staff and provide pre-sales services, there must be a specialised area in the shop
devoted to the sales of the product and similar hi-tech products, and the shop is
required to sell a wide range of models of the supplier and to display them in an
attractive manner. Moreover, the number of admissible retailers in the network is
directly limited through the establishment of a maximum number of retailers per
number of inhabitants in each province or urban area. Manufacturer A has
6 competitors in that market. Its largest competitors, B, C and D, have market shares
of respectively 25, 15 and 10 %, whilst the other producers have smaller market
shares. A is the only manufacturer to use selective distribution. The selective
distributors of brand A always handle a few competing brands. However, competing
brands are also widely sold in shops which are not member of A's selective
distribution network. Channels of distribution are various: for instance, brands B and
C are sold in most of A's selected shops, but also in other shops providing a high
quality service and in hypermarkets. Brand D is mainly sold in high service shops.
Technology is evolving quite rapidly in this market, and the main suppliers maintain
a strong quality image for their products through advertising.

On that market, the coverage ratio of selective distribution is 35 %. Inter-brand
competition is not directly affected by the selective distribution system of A. Intrabrand competition for brand A may be reduced, but consumers have access to low
service/low price retailers for brands B and C, which have a comparable quality
image to brand A. Moreover, access to high service retailers for other brands is not
foreclosed, since there is no limitation on the capacity of selected distributors to sell
competing brands, and the quantitative limitation on the number of retailers for brand
A leaves other high service retailers free to distribute competing brands. In this case,
in view of the service requirements and the efficiencies these are likely to provide
and the limited effect on intra-brand competition the conditions of Article 101(3) are
likely to be fulfilled.

(188) Example of selective distribution with cumulative effects

On a market for a particular sports article, there are seven manufacturers, whose
respective market shares are: 25 %, 20 %, 15 %, 15 %, 10 %, 8 % and 7 %. The five
largest manufacturers distribute their products through quantitative selective
distribution, whilst the two smallest use different types of distribution systems, which
results in a coverage ratio of selective distribution of 85 %. The criteria for access to
the selective distribution networks are remarkably uniform amongst manufacturers:
the distributors are required to have one or more brick and mortar shops, those shops
are required to have trained personnel and to provide pre-sale services, there must be
a specialised area in the shop devoted to the sales of the article and a minimum size
for this area is specified. The shop is required to sell a wide range of the brand in
question and to display the article in an attractive manner, the shop must be located
in a commercial street, and that type of article must represent at least 30 % of the
total turnover of the shop. In general, the same dealer is appointed selective
distributor for all five brands. The two brands which do not use selective distribution

usually sell through less specialised retailers with lower service levels. The market is

# EN 60 EN

stable, both on the supply and on the demand side, and there is strong brand image
and product differentiation. The five market leaders have strong brand images,
acquired through advertising and sponsoring, whereas the two smaller manufacturers
have a strategy of cheaper products, with no strong brand image.

On that market, access by general price discounters and online-only distributors to
the five leading brands is denied. Indeed, the requirement that this type of article
represents at least 30 % of the activity of the dealers and the criteria on presentation
and pre-sales services rule out most price discounters from the network of authorised
dealers. The requirement to have one or more brick and mortar shops excludes
online-only distributors from the network. As a consequence, consumers have no
choice but to buy the five leading brands in high service/high price shops. This leads
to reduced inter-brand competition between the five leading brands. The fact that the
two smallest brands can be bought in low service/low price shops does not
compensate for this, because the brand image of the five market leaders is much
better. Inter-brand competition is also limited through multiple dealership. Even
though there exists some degree of intra-brand competition and the number of
retailers is not directly limited, the criteria for admission are strict enough to lead to a
small number of retailers for the five leading brands in each territory.

The efficiencies associated with these quantitative selective distribution systems are
low: the product is not very complex and does not justify a particularly high service.
Unless the manufacturers can prove that there are clear efficiencies linked to their
network of selective distribution, it is probable that the block exemption will have to
be withdrawn because of its cumulative effects resulting in less choice and higher
prices for consumers.

_2.5._ _Franchising_

(189) Franchise agreements contain licences of intellectual property rights relating in
particular to trade marks or signs and know-how for the use and distribution of goods
or services. In addition to the licence of IPRs, the franchisor usually provides the
franchisee during the life of the agreement with commercial or technical assistance.
The licence and the assistance are integral components of the business method being
franchised. The franchisor is in general paid a franchise fee by the franchisee for the
use of the particular business method. Franchising may enable the franchisor to
establish, with limited investments, a uniform network for the distribution of its
products. In addition to the provision of the business method, franchise agreements
usually contain a combination of different vertical restraints concerning the products
being distributed, in particular selective distribution and/or non-compete and/or
exclusive distribution or weaker forms thereof.

(190) The coverage by the Block Exemption Regulation of the licensing of IPRs contained
in franchise agreements is dealt with in paragraphs (24) to (46). As for the vertical
restraints on the purchase, sale and resale of goods and services within a franchising
arrangement, such as selective distribution, non-compete obligations or exclusive
distribution, the Block Exemption Regulation applies up to the 30 % market share

# EN 61 EN

threshold [54] . The guidance provided in respect of those types of restraints applies also
to franchising, subject to the following two specific remarks:

(a) The more important the transfer of know-how, the more likely it is that the
restraints create efficiencies and/or are indispensable to protect the know-how
and that the vertical restraints fulfil the conditions of Article 101(3);

(b) A non-compete obligation on the goods or services purchased by the franchisee
falls outside the scope of Article 101(1) where the obligation is necessary to
maintain the common identity and reputation of the franchised network. In
such cases, the duration of the non-compete obligation is also irrelevant under
Article 101(1), as long as it does not exceed the duration of the franchise
agreement itself.

(191) Example of franchising

A manufacturer has developed a new format for selling sweets in so-called fun shops
where the sweets can be coloured specially on demand from the consumer. The
manufacturer of the sweets has also developed the machines to colour the sweets.
The manufacturer also produces the colouring liquids. The quality and freshness of
the liquid is of vital importance to producing good sweets. The manufacturer made a
success of its sweets through a number of own retail outlets all operating under the
same trade name and with the uniform fun image (style of lay-out of the shops,
common advertising etc.). In order to expand sales the manufacturer started a
franchising system. The franchisees are obliged to buy the sweets, liquid and
colouring machine from the manufacturer, to have the same image and operate under
the trade name, pay a franchise fee, contribute to common advertising and ensure the
confidentiality of the operating manual prepared by the franchisor. In addition, the
franchisees are only allowed to sell from the agreed premises, to sell to end users or
other franchisees and are not allowed to sell other sweets. The franchisor is obliged
not to appoint another franchisee nor operate a retail outlet himself in a given
contract territory. The franchisor is also under the obligation to update and further
develop its products, the business outlook and the operating manual and make these
improvements available to all retail franchisees. The franchise agreements are
concluded for a duration of 10 years.

Sweet retailers buy their sweets on a national market from either national producers
that cater for national tastes or from wholesalers which import sweets from foreign
producers in addition to selling products from national producers. On that market the
franchisor's products compete with other brands of sweets. The franchisor has a
market share of 30 % on the market for sweets sold to retailers. Competition comes
from a number of national and international brands, sometimes produced by large
diversified food companies. There are many potential points of sale of sweets in the
form of tobacconists, general food retailers, cafeterias and specialised sweet shops.
The franchisor's market share of the market for machines for colouring food is
below 10 %.

Most of the obligations contained in the franchise agreements can be deemed
necessary to protect the intellectual property rights or maintain the common identity

54 See also paragraphs (86) to (95), in particular paragraph (92).

# EN 62 EN

and reputation of the franchised network and fall outside Article 101(1). The
restrictions on selling (contract territory and selective distribution) provide an
incentive to the franchisees to invest in the colouring machine and the franchise
concept and, if not necessary to, at least help maintain the common identity, thereby
offsetting the loss of intra-brand competition. The non-compete clause excluding
other brands of sweets from the shops for the full duration of the agreements does
allow the franchisor to keep the outlets uniform and prevent competitors from
benefiting from its trade name. It does not lead to any serious foreclosure in view of
the great number of potential outlets available to other sweet producers. The
franchise agreements of this franchisor are likely to fulfil the conditions for
exemption under Article 101(3) in as far as the obligations contained therein fall
under Article 101(1).

_2.6_ _Exclusive supply_

(192) Under the heading of exclusive supply fall those restrictions that have as their main
element that the supplier is obliged or induced to sell the contract products only or
mainly to one buyer, in general or for a particular use. Such restrictions may take the
form of an exclusive supply obligation, restricting the supplier to sell to only one
buyer for the purposes of resale or a particular use, but may for instance also take the
form of quantity forcing on the supplier, where incentives are agreed between the
supplier and buyer which make the former concentrate its sales mainly with one
buyer. For intermediate goods or services, exclusive supply is often referred to as
industrial supply.

(193) Exclusive supply is exempted by the Block Exemption Regulation where both the
supplier's and buyer's market share does not exceed 30 %, even if combined with
other non-hardcore vertical restraints such as non-compete. The remainder of this
section provides guidance for the assessment of exclusive supply in individual cases
above the market share threshold.

(194) The main competition risk of exclusive supply is anticompetitive foreclosure of other
buyers. There is a similarity with the possible effects of exclusive distribution, in
particular when the exclusive distributor becomes the exclusive buyer for a whole
market (see section 2.2, in particular paragraph (156)). The market share of the buyer
on the upstream purchase market is obviously important for assessing the ability of
the buyer to impose exclusive supply which forecloses other buyers from access to
supplies. The importance of the buyer on the downstream market is however the
factor which determines whether a competition problem may arise. If the buyer has
no market power downstream, then no appreciable negative effects for consumers
can be expected. Negative effects may arise when the market share of the buyer on
the downstream supply market as well as the upstream purchase market exceeds
30 %. Where the market share of the buyer on the upstream market does not exceed
30 %, significant foreclosure effects may still result, especially when the market
share of the buyer on its downstream market exceeds 30 % and the exclusive supply
relates to a particular use of the contract products. Where a company is dominant on
the downstream market, any obligation to supply the products only or mainly to the
dominant buyer may easily have significant anti-competitive effects.

(195) It is not only the market position of the buyer on the upstream and downstream
market that is important but also the extent to and the duration for which it applies an

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exclusive supply obligation. The higher the tied supply share, and the longer the
duration of the exclusive supply, the more significant the foreclosure is likely to be.
Exclusive supply agreements shorter than five years entered into by non-dominant
companies usually require a balancing of pro- and anti-competitive effects, while
agreements lasting longer than five years are for most types of investments not
considered necessary to achieve the claimed efficiencies or the efficiencies are not
sufficient to outweigh the foreclosure effect of such long-term exclusive supply
agreements.

(196) The market position of the competing buyers on the upstream market is important as
it is likely that competing buyers will be foreclosed for anti-competitive reasons, that
is, to increase their costs, if they are significantly smaller than the foreclosing buyer.
Foreclosure of competing buyers is not very likely where those competitors have
similar buying power and can offer the suppliers similar sales possibilities. In such a
case, foreclosure could only occur for potential entrants, which may not be able to
secure supplies when a number of major buyers all enter into exclusive supply
contracts with the majority of suppliers on the market. Such a cumulative effect may
lead to withdrawal of the benefit of the Block Exemption Regulation.

(197) Entry barriers at the supplier level are relevant to establishing whether there is real
foreclosure. In as far as it is efficient for competing buyers to provide the goods or
services themselves via upstream vertical integration, foreclosure is unlikely to be a
real problem. However, there are often significant entry barriers.

(198) Countervailing power of suppliers is relevant, as important suppliers will not easily
allow themselves to be cut off from alternative buyers. Foreclosure is therefore
mainly a risk in the case of weak suppliers and strong buyers. In the case of strong
suppliers, the exclusive supply may be found in combination with non-compete
obligations. The combination with non-compete obligations brings in the rules
developed for single branding. Where there are relationship-specific investments
involved on both sides (hold-up problem) the combination of exclusive supply and
non-compete obligations that is, reciprocal exclusivity in industrial supply
agreements may often be justified, in particular below the level of dominance.

(199) Lastly, the level of trade and the nature of the product are relevant for foreclosure.
Anticompetitive foreclosure is less likely in the case of an intermediate product or
where the product is homogeneous. Firstly, a foreclosed manufacturer that uses a
certain input usually has more flexibility to respond to the demand of its customers
than the wholesaler or retailer has in responding to the demand of the final consumer
for whom brands may play an important role. Secondly, the loss of a possible source
of supply matters less for the foreclosed buyers in the case of homogeneous products
than in the case of a heterogeneous product with different grades and qualities. For
final branded products or differentiated intermediate products where there are entry
barriers, exclusive supply may have appreciable anti-competitive effects where the
competing buyers are relatively small compared to the foreclosing buyer, even if the
latter is not dominant on the downstream market.

(200) Efficiencies can be expected in the case of a hold-up problem (paragraph (107)(d)
and (107)(e)), and such efficiencies are more likely for intermediate products than for
final products. Other efficiencies are less likely. Possible economies of scale in
distribution (paragraph (107)(g)) do not seem likely to justify exclusive supply.

# EN 64 EN

(201) In the case of a hold-up problem and even more so in the case of economies of scale
in distribution, quantity forcing on the supplier, such as minimum supply
requirements, could well be a less restrictive alternative.

(202) Example of exclusive supply

On a market for a certain type of components (intermediate product market) supplier
A agrees with buyer B to develop, with its own know-how and considerable
investment in new machines and with the help of specifications supplied by buyer B,
a different version of the component. B will have to make considerable investments
to incorporate the new component. It is agreed that A will supply the new product
only to buyer B for a period of five years from the date of first entry on the market. B
is obliged to buy the new product only from A for the same period of five years.
Both A and B can continue to sell and buy respectively other versions of the
component elsewhere. The market share of buyer B on the upstream component
market and on the downstream final goods market is 40 %. The market share of the
component supplier is 35 %. There are two other component suppliers with
around 20-25 % market share and a number of small suppliers.

Given the considerable investments, the agreement is likely to fulfil the conditions of
Article 101(3) in view of the efficiencies and the limited foreclosure effect. Other
buyers are foreclosed from a particular version of a product of a supplier with 35 %
market share and there are other component suppliers that could develop similar new
products. The foreclosure of part of buyer B's demand to other suppliers is limited to
maximum 40 % of the market.

_2.7._ _Upfront access payments_

(203) Upfront access payments are fixed fees that suppliers pay to distributors in the
framework of a vertical relationship at the beginning of a relevant period, in order to
get access to their distribution network and remunerate services provided to the
suppliers by the retailers. This category includes various practices such as slotting
allowances [55], the so called pay-to-stay fees [56], payments to have access to a
distributor's promotion campaigns etc. Upfront access payments are exempted under
the Block Exemption Regulation when both the supplier's and buyer's market share
does not exceed 30 %. The remainder of this section provides guidance for the
assessment of upfront access payments in individual cases above the market share
threshold.

( 204) Upfront access payments may sometimes result in anticompetitive foreclosure of
other distributors if such payments induce the supplier to channel its products
through only one or a limited number of distributors. A high fee may make that a
supplier wants to channel a substantial volume of its sales through this distributor in
order to cover the costs of the fee. In such a case, upfront access payments may have
the same downstream foreclosure effect as an exclusive supply type of obligation.
The assessment of that negative effect is made by analogy to the assessment of
exclusive supply obligations (in particular paragraphs (194) to (199)).

55 Fixed fees that manufacturers pay to retailers in order to get access to their shelf space.
56 Lump sum payments made to ensure the continued presence of an existing product on the shelf for
some further period.

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(205) Exceptionally, upfront access payments may also result in anticompetitive
foreclosure of other suppliers, where the widespread use of upfront access payments
increases barriers to entry for small entrants. The assessment of that possible
negative effect is made by analogy to the assessment of single branding obligations
(in particular paragraphs (132) to (141)).

(206) In addition to possible foreclosure effects, upfront access payments may soften
competition and facilitate collusion between distributors. Upfront access payments
are likely to increase the price charged by the supplier for the contract products since
the supplier must cover the expense of those payments. Higher supply prices may
reduce the incentive of the retailers to compete on price on the downstream market,
while the profits of distributors are increased as a result of the access payments. Such
reduction of competition between distributors through the cumulative use of upfront
access payments normally requires the distribution market to be highly concentrated.

(207) However, the use of upfront access payments may in many cases contribute to an
efficient allocation of shelf space for new products. Distributors often have less
information than suppliers on the potential for success of new products to be
introduced on the market and, as a result, the amount of products to be stocked may
be sub-optimal. Upfront access payments may be used to reduce this asymmetry in
information between suppliers and distributors by explicitly allowing suppliers to
compete for shelf space. The distributor may thus receive a signal of which products
are most likely to be successful since a supplier would normally agree to pay an
upfront access fee if it estimates a low probability of failure of the product
introduction.

(208) Furthermore, due to the asymmetry in information mentioned in paragraph (207),
suppliers may have incentives to free-ride on distributors' promotional efforts in
order to introduce sub-optimal products. If a product is not successful, the
distributors will pay part of the costs of the product failure. The use of upfront access
fees may prevent such free riding by shifting the risk of product failure back to the
suppliers, thereby contributing to an optimal rate of product introductions.

_2.8._ _Category Management Agreements_

(209) Category management agreements are agreements by which, within a distribution
agreement, the distributor entrusts the supplier (the "category captain") with the
marketing of a category of products including in general not only the supplier's
products, but also the products of its competitors. The category captain may thus
have an influence on for instance the product placement and product promotion in
the shop and product selection for the shop. Category management agreements are
exempted under the Block Exemption Regulation when both the supplier's and
buyer's market share does not exceed 30 %. The remainder of this section provides
guidance for the assessment of category management agreements in individual cases
above the market share threshold.

(210) While in most cases category management agreements will not be problematic, they
may sometimes distort competition between suppliers, and finally result in
anticompetitive foreclosure of other suppliers, where the category captain is able, due
to its influence over the marketing decisions of the distributor, to limit or
disadvantage the distribution of products of competing suppliers. While in most

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cases the distributor may not have an interest in limiting its choice of products, when
the distributor also sells competing products under its own brand (private labels), the
distributor may also have incentives to exclude certain suppliers, in particular
intermediate range products. The assessment of such upstream foreclosure effect is
made by analogy to the assessment of single branding obligations (in particular
paragraphs (132) to (141)) by addressing issues like the market coverage of these
agreements, the market position of competing suppliers and the possible cumulative
use of such agreements.

(211) In addition, category management agreements may facilitate collusion between
distributors when the same supplier serves as a category captain for all or most of the
competing distributors on a market and provides these distributors with a common
point of reference for their marketing decisions.

(212) Category management may also facilitate collusion between suppliers through
increased opportunities to exchange via retailers sensitive market information, such
as for instance information related to future pricing, promotional plans or advertising
campaigns [57] .

(213) However, the use of category management agreements may also lead to efficiencies.
Category management agreements may allow distributors to have access to the
supplier's marketing expertise for a certain group of products and to achieve
economies of scale as they ensure that the optimal quantity of products is presented
timely and directly on the shelves. As category management is based on customers'
habits, category management agreements may lead to higher customer satisfaction as
they help to better meet demand expectations. In general, the higher the inter-brand
competition and the lower consumers' switching costs, the greater the economic
benefits achieved through category management.

_2.9_ _Tying_

(214) Tying refers to situations where customers that purchase one product (the tying
product) are required also to purchase another distinct product (the tied product)
from the same supplier or someone designated by the latter. Tying may constitute an
abuse within the meaning of Article 102 [58] . Tying may also constitute a vertical
restraint falling under Article 101 where it results in a single branding type of
obligation (see paragraphs (129) to (150)) for the tied product. Only the latter
situation is dealt with in these Guidelines.

(215) Whether products will be considered as distinct depends on customer demand. Two
products are distinct where, in the absence of the tying, a substantial number of
customers would purchase or would have purchased the tying product without also
buying the tied product from the same supplier, thereby allowing stand-alone

57 Direct information exchange between competitors is not covered by the Block Exemption Regulation,
see Article 2(4) of that Regulation and paragraphs 27-28 of these Guidelines.
58
Judgment of the Court of Justice in Case C-333/94 P _Tetrapak_ v _Commission_ [1996] ECR I-5951,
paragraph 37. See also Communication from the Commission – Guidance on the Commission's
enforcement priorities in applying Article 82 of the EC Treaty to abusive conduct by dominant
undertakings, OJ C 45, 24.2.2009, p. 7.

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production for both the tying and the tied product [59] . Evidence that two products are
distinct could include direct evidence that, when given a choice, customers purchase
the tying and the tied products separately from different sources of supply, or indirect
evidence, such as the presence on the market of undertakings specialised in the
manufacture or sale of the tied product without the tying product [60], or evidence
indicating that undertakings with little market power, particularly on competitive
markets, tend not to tie or not to bundle such products. For instance, since customers
want to buy shoes with laces and it is not practicable for distributors to lace new
shoes with the laces of their choice, it has become commercial usage for shoe
manufacturers to supply shoes with laces. Therefore, the sale of shoes with laces is
not a tying practice.

(216) Tying may lead to anticompetitive foreclosure effects on the tied market, the tying
market, or both at the same time. The foreclosure effect depends on the tied
percentage of total sales on the market of the tied product. On the question of what
can be considered appreciable foreclosure under Article 101(1), the analysis for
single branding can be applied. Tying means that there is at least a form of quantityforcing on the buyer in respect of the tied product. Where in addition a non-compete
obligation is agreed in respect of the tied product, this increases the possible
foreclosure effect on the market of the tied product. The tying may lead to less
competition for customers interested in buying the tied product, but not the tying
product. If there is not a sufficient number of customers that will buy the tied product
alone to sustain competitors of the supplier on the tied market, the tying can lead to
those customers facing higher prices. If the tied product is an important
complementary product for customers of the tying product, a reduction of alternative
suppliers of the tied product and hence a reduced availability of that product can
make entry onto the tying market alone more difficult.

(217) Tying may also directly lead to prices that are above the competitive level, especially
in three situations. Firstly, if the tying and the tied product can be used in variable
proportions as inputs to a production process, customers may react to an increase in
price for the tying product by increasing their demand for the tied product while
decreasing their demand for the tying product. By tying the two products the supplier
may seek to avoid this substitution and as a result be able to raise its prices.
Secondly, when the tying allows price discrimination according to the use the
customer makes of the tying product, for example the tying of ink cartridges to the
sale of photocopying machines (metering). Thirdly, when in the case of long-term
contracts or in the case of after-markets with original equipment with a long
replacement time, it becomes difficult for the customers to calculate the
consequences of the tying.

(218) Tying is exempted under the Block Exemption Regulation when the market share of
the supplier, on both the market of the tied product and the market of the tying
product, and the market share of the buyer, on the relevant upstream markets, do not
exceed 30 %. It may be combined with other vertical restraints, which are not
hardcore restrictions under that Regulation, such as non-compete obligations or

59
Judgment of the Court of First Instance in Case T-201/04 _Microsoft_ v _Commission_ [2007] ECR II-3601,
paragraphs 917, 921 and 922.
60 Judgment of the Court of First Instance in Case T-30/89 _Hilti_ v _Commission_ [1991] ECR II-1439,
paragraph 67.

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quantity forcing in respect of the tying product, or exclusive sourcing. The remainder
of this section provides guidance for the assessment of tying in individual cases
above the market share threshold.

(219) The market position of the supplier on the market of the tying product is obviously of
central importance to assess possible anti-competitive effects. In general, this type of
agreement is imposed by the supplier. The importance of the supplier on the market
of the tying product is the main reason why a buyer may find it difficult to refuse a
tying obligation.

(220) The market position of the supplier's competitors on the market of the tying product
is important in assessing the supplier’s market power. As long as its competitors are
sufficiently numerous and strong, no anti-competitive effects can be expected, as
buyers have sufficient alternatives to purchase the tying product without the tied
product, unless other suppliers are applying similar tying. In addition, entry barriers
on the market of the tying product are relevant to establish the market position of the
supplier. When tying is combined with a non-compete obligation in respect of the
tying product, this considerably strengthens the position of the supplier.

(221) Buying power is relevant, as important buyers will not easily be forced to accept
tying without obtaining at least part of the possible efficiencies. Tying not based on
efficiency is therefore mainly a risk where buyers do not have significant buying

power.

(222) Where appreciable anti-competitive effects are established, the question whether the
conditions of Article 101(3) are fulfilled arises. Tying obligations may help to
produce efficiencies arising from joint production or joint distribution. Where the
tied product is not produced by the supplier, an efficiency may also arise from the
supplier buying large quantities of the tied product. For tying to fulfil the conditions
of Article 101(3), it must, however, be shown that at least part of these cost
reductions are passed on to the consumer, which is normally not the case when the
retailer is able to obtain, on a regular basis, supplies of the same or equivalent
products on the same or better conditions than those offered by the supplier which
applies the tying practice. Another efficiency may exist where tying helps to ensure a
certain uniformity and quality standardisation (see paragraph (107)(i)). However, it
needs to be demonstrated that the positive effects cannot be realised equally
efficiently by requiring the buyer to use or resell products satisfying minimum
quality standards, without requiring the buyer to purchase these from the supplier or
someone designated by the latter. The requirements concerning minimum quality
standards would not normally fall within the scope of Article 101(1). Where the
supplier of the tying product imposes on the buyer the suppliers from which the
buyer must purchase the tied product, for instance because the formulation of
minimum quality standards is not possible, this may also fall outside the scope of
Article 101(1), especially where the supplier of the tying product does not derive a
direct (financial) benefit from designating the suppliers of the tied product.

_2.10_ _Resale price restrictions_

(223) As explained in section III.3, resale price maintenance (RPM), that is, agreements or
concerted practices having as their direct or indirect object the establishment of a
fixed or minimum resale price or a fixed or minimum price level to be observed by

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the buyer, are treated as a hardcore restriction. Where an agreement includes RPM,
that agreement is presumed to restrict competition and thus to fall within
Article 101(1). It also gives rise to the presumption that the agreement is unlikely to
fulfil the conditions of Article 101(3), for which reason the block exemption does not
apply. However, undertakings have the possibility to plead an efficiency defence
under Article 101(3) in an individual case. It is incumbent on the parties to
substantiate that likely efficiencies result from including RPM in their agreement and
demonstrate that all the conditions of Article 101(3) are fulfilled. It then falls to the
Commission to effectively assess the likely negative effects on competition and
consumers before deciding whether the conditions of Article 101(3) are fulfilled.

(224) RPM may restrict competition in a number of ways. Firstly, RPM may facilitate
collusion between suppliers by enhancing price transparency on the market, thereby
making it easier to detect whether a supplier deviates from the collusive equilibrium
by cutting its price. RPM also undermines the incentive for the supplier to cut its
price to its distributors, as the fixed resale price will prevent it from benefiting from
expanded sales. Such a negative effect is particularly plausible where the market is
prone to collusive outcomes, for instance if the manufacturers form a tight oligopoly,
and a significant part of the market is covered by RPM agreements. Second, by
eliminating intra-brand price competition, RPM may also facilitate collusion between
the buyers, that is, at the distribution level. Strong or well organised distributors may
be able to force or convince one or more suppliers to fix their resale price above the
competitive level and thereby help them to reach or stabilise a collusive equilibrium.
The resulting loss of price competition seems especially problematic when the RPM
is inspired by the buyers, whose collective horizontal interests can be expected to
work out negatively for consumers. Third, RPM may more generally soften
competition between manufacturers and/or between retailers, in particular when
manufacturers use the same distributors to distribute their products and RPM is
applied by all or many of them. Fourth, the immediate effect of RPM will be that all
or certain distributors are prevented from lowering their sales price for that particular
brand. In other words, the direct effect of RPM is a price increase. Fifth, RPM may
lower the pressure on the margin of the manufacturer, in particular where the
manufacturer has a commitment problem, that is, where it has an interest in lowering
the price charged to subsequent distributors. In such a situation, the manufacturer
may prefer to agree to RPM, so as to help it to commit not to lower the price for
subsequent distributors and to reduce the pressure on its own margin. Sixth, RPM
may be implemented by a manufacturer with market power to foreclose smaller
rivals. The increased margin that RPM may offer distributors, may entice the latter to
favour the particular brand over rival brands when advising customers, even where
such advice is not in the interest of these customers, or not to sell these rival brands
at all. Lastly, RPM may reduce dynamism and innovation at the distribution level.
By preventing price competition between different distributors, RPM may prevent
more efficient retailers from entering the market or acquiring sufficient scale with
low prices. It also may prevent or hinder the entry and expansion of distribution
formats based on low prices, such as price discounters.

(225) However, RPM may not only restrict competition but may also, in particular where it
is supplier driven, lead to efficiencies, which will be assessed under Article 101(3).
Most notably, where a manufacturer introduces a new product, RPM may be helpful
during the introductory period of expanding demand to induce distributors to better
take into account the manufacturer’s interest to promote the product. RPM may

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provide the distributors with the means to increase sales efforts and if the distributors
on this market are under competitive pressure this may induce them to expand
overall demand for the product and make the launch of the product a success, also for
the benefit of consumers [61] . Similarly, fixed resale prices, and not just maximum
resale prices, may be necessary to organise in a franchise system or similar
distribution system applying a uniform distribution format a coordinated short term
low price campaign (2 to 6 weeks in most cases) which will also benefit the
consumers. In some situations, the extra margin provided by RPM may allow
retailers to provide (additional) pre-sales services, in particular in case of experience
or complex products. If enough customers take advantage from such services to
make their choice but then purchase at a lower price with retailers that do not provide
such services (and hence do not incur these costs), high-service retailers may reduce
or eliminate these services that enhance the demand for the supplier's product. RPM
may help to prevent such free-riding at the distribution level. The parties will have to
convincingly demonstrate that the RPM agreement can be expected to not only
provide the means but also the incentive to overcome possible free riding between
retailers on these services and that the pre-sales services overall benefit consumers as
part of the demonstration that all the conditions of Article 101(3) are fulfilled.

(226) The practice of recommending a resale price to a reseller or requiring the reseller to
respect a maximum resale price is covered by the Block Exemption Regulation when
the market share of each of the parties to the agreement does not exceed the 30 %
threshold, provided it does not amount to a minimum or fixed sale price as a result of
pressure from, or incentives offered by, any of the parties. The remainder of this
section provides guidance for the assessment of maximum or recommended prices
above the market share threshold and for cases of withdrawal of the block

exemption.

(227) The possible competition risk of maximum and recommended prices is that they will
work as a focal point for the resellers and might be followed by most or all of them
and/or that maximum or recommended prices may soften competition or facilitate
collusion between suppliers.

(228) An important factor for assessing possible anti-competitive effects of maximum or
recommended resale prices is the market position of the supplier. The stronger the
market position of the supplier, the higher the risk that a maximum resale price or a
recommended resale price leads to a more or less uniform application of that price
level by the resellers, because they may use it as a focal point. They may find it
difficult to deviate from what they perceive to be the preferred resale price proposed
by such an important supplier on the market.

(229) Where appreciable anti-competitive effects are established for maximum or
recommended resale prices, the question of a possible exemption under
Article 101(3) arises. For maximum resale prices, the efficiency described in
paragraph (107)(f) (avoiding double marginalisation), may be particularly relevant. A
maximum resale price may also help to ensure that the brand in question competes
more forcefully with other brands, including own label products, distributed by the
same distributor.

61 This assumes that it is not practical for the supplier to impose on all buyers by contract effective
promotion requirements, see also paragraph 107 point (a).

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