Vertical agreements block exemption

27/10/2010

By James Herbert, Partner and Head of Corporate & Commercial

In June 2010, a new block exemption affecting vertical agreements came into force, recognising, amongst other things, the growth in online trade.

Vertical agreements are agreements between parties operating at different levels of the market, such as distribution, agency and franchising agreements. These agreements often include terms that are, in principle, anti-competitive and technically illegal, for example, geographic restrictions on markets.

It is recognised, however, that the inclusion of these technically illegal terms, for businesses up to a certain size - with up to 30% of the market share - can actually stimulate competition, which in turn benefits consumers. The new block exemption sets out what is permissible. The most notable change is to list restrictions that are permissible in relation to online sales. 

Where a trader operates online, before the new exemption came into force, it was unclear whether ‘passive’ online sales were permitted. These are sales that result from a customer contacting the trader, rather than from the trader’s marketing activities.

Some examples of passive sales that cannot be restricted are responding to unsolicited requests from individual customers or hosting a website, even if accessible from outside the distributor’s territory.

At the same time, the new exemption makes clear that certain active online sales can be restricted by contract. Some examples are the distributor sending unsolicited emails to customers or conducting online advertising specifically targeted at certain territories or customers.

There are also new rules in relation to selective distribution systems, where distributors are chosen based on whether they meet certain criteria linked to the products in question. These products tend to be luxury goods, where image is very important to the manufacturer. For example, the selected distributor can be required to sell at least a certain amount of products offline through actual shops so that consumers can see and test products.

These rules are not easy to navigate and specialist drafting is needed when entering into vertical agreements. Bear in mind that even very small businesses can have a market share in excess of the thresholds and you should contact us if you have any concerns.