As part of its review of the Vertical Agreements Block Exemption, Commission Regulation 330/2010 (“VABE”), the European Commission published a Working Paper on 5th February 2021 setting out the Commission’s preliminary views on the applicability of Article 101 TFEU to situations where distributors also act as agents for different products in the same product market for the same supplier (“the Working Paper”).
In its Working Paper the Commission concluded that the existence of a genuine agency agreement is not incompatible with the agent also acting as an independent distributor for the same supplier within the same product market, provided that the principal fully reimburses the activities that it contractually requires the agent to engage in both during and in preparation for the agent’s role. However, it emphasises that a strict demarcation of responsibilities and costs is necessary between the representative’s role as agent and distributor to ensure the principal fully reimburses the representative’s agency activities and does not distort competition.
Background
One of the criticisms of stakeholders in the Commission’s review of the VABE and its accompanying Guidelines on vertical restraints (“the Guidelines”), was that the EU Commission’s guidance in the Guidelines was not sufficiently clear as to whether an undertaking active on a downstream market may act both as a genuine agent and as an independent distributor for different products in the same product market for the same supplier (“dual role” agents). In addition, the Commission has noted a trend towards the increased use of models combining agency and distribution in consumer goods markets, under which a single undertaking combines the functions of agent and independent distributor for the same principal/supplier.
The Commission has therefore felt it is important to produce draft guidance in the form of a Working Paper to assist companies dealing with these types of situation. See a copy here:
https://ec.europa.eu/competition/consultations/2018_vber/working_paper_on_dual_role_agents.pdf
The Working Paper explores this issue and provides guidance on the issues to be considered, building on the guidance on the concept of “genuine agency”, which falls outside Article 101(1), currently contained in the Guidelines. The Working Paper only relates to markets comprising differentiated products that present distinct characteristics, such as higher quality, novel features or additional functions, which permit them to be distinguished objectively between those covered by the agency agreement and those distributed independently. The guidance does not cover situations where the company acting as agent and distributor is an online platform and in particular the live issue as to whether the agency concept is applicable to online platforms.
The Working Paper
The Working Paper sets out how companies should assess dual role agency relationships. Issues material to their assessment are as follows:
– Framework of assessment.
The Commission highlights the risk of a potential conflict of interest in adopting a dual role appointment.
Where a genuine agent undertakes other activities for the same or other suppliers at its own risk, there is a risk that the conditions imposed on the agent for its agency activity will influence its incentives and limit its decision-making freedom when it sells products as an independent activity. That risk is heightened where the products covered by the agency relationship and those distributed independently by the agent belong to the same product market.
The possible adverse consequences include an influence over the prices charged by the agent acting independently. In addition, the use of dual role system with the same supplier raises difficulties in distinguishing between investments and costs that relate to the agency function, and those only related to the independent activity. Therefore, to be able to assess whether an agency agreement falls outside the scope of Article 101(1) in instances where an agent has a dual role within the same product market, it is important to be able to effectively delineate the activities that are covered by the agency agreement and the risks associated to them. This can be relatively easy where the products concerned have distinct characteristics. However, where they don’t there is a significant risk of the agent being influenced by the terms of the agency agreement, notably regarding the price setting, for the products it distributes independently.
The Guidelines currently explain that the extent of the assumption of commercial and financial risks in the agreement between the agent and principal is a key factor in determining whether there is a genuine relationship of agency. An agreement will be regarded as a genuine agency agreement if the agent bears little or no contract-specific risks in relation to the products covered by the agency appointment. Therefore, risks related to market-specific investments or risks related to other activities undertaken in the same product market should not be shouldered by the principal. That is a matter for the undertaking in its role as independent distributor.
The Commission comments in its Working Paper that compliance with the requirements set out in the Guidelines must be assessed in a very strict manner to avoid a misuse of the agency concept and in particular should not be misused by suppliers to circumvent the application of Article 101(1).
– Applicability of Article 101(1) to agency agreements with agents that act in a dual role for the same principal.
It is possible to have a genuine agency agreement where the agent also acting as an independent distributor within the same product market for the same principal provided that the principal fully reimburses the activities that it contractually requires the agent to engage in within the scope of its agency appointment. This usually happens when the undertaking’s main activity is to sell products under an agency arrangement with the remainder being sold independently under a distribution arrangement.
In other situations, where an agent acts in a dual role, the agency agreement may only fall outside Article 101(1) if:
- the distributor is genuinely free to enter into the agency agreement (for example there are no threats to terminate or worsen the terms of the distribution relationship); and
- all relevant risks linked to the sale of goods covered by the agency agreement to third parties are strictly borne by the principal and there is a clear delineation between the risks associated between the agency relationship and those where the agent acts as an independent distributor. Any co-mingling of risks may lead to anti-competitive outcomes.
For the agency agreement to fall outside the scope of Article 101(1), all investments required for a genuine agent to negotiate or conclude contracts with third parties on the relevant market should be reimbursed, including market-specific investments, whether or not the agent is also acting as an independent distributor. Therefore, in relation to the above the Working Paper provides guidance on how to separate out contract-specific risks and risks related to market-specific investments or other risks related to agency and distributor activities undertaken in the same product market. The Working Paper highlights one particular situation. In a scenario where genuine agency agreements are entered into with existing independent distributors, some of the market specific investments may already have been incurred by the agent when acting as an independent distributor. In these situations, it is the Commission’s view that the Principal will have to cover those costs and reimburse the agent.
– Methods of financing the risks related to the activities covered by the agency agreement.
There is no particular method is required for a principal to reimburse an agent for costs or risks undertaken for an agreement to qualify as a genuine agency agreement, as long as relevant costs are fully covered by the principal. However, the Working Paper states that whatever method is chosen it must ensure it always covers all the relevant costs, so that the genuine agent bears no, or only insignificant, risks of the relevant financial or commercial risk.
The Commission states that where the relevant costs are reimbursed by way of a percentage of the price of the product sold under the agency agreement, the principal should also take into account that when setting the lump sum or fixed percentage, that it adequately reflects any cost variation that may exist between genuine agents operating in different member states, or between genuine agents operating under different business models.
– Market monitoring.
The Commission explains in the Working Paper that it remains concerned about the dual role model as this may raise competition concerns as regards the incentives of the agent/independent distributor or the possible impact on sales conditions and in particular the pricing of the products sold as part of the independent activity. Therefore, the Commission will carefully monitor developments in this area, and may revise the principles proposed in the Working Paper if there are indications that the implementation of a dual role for agents in the same product market risks giving rise to competition concerns. This may result from competition law investigations undertaken in individual cases. This Working Paper therefore does not commit the Commission and only contains their provisional views in preparation of the adoption of the revised Guidelines (expected in May 2022).
Conclusion
Although only provisional the Working Paper does provide some welcome guidance to those companies who operate a dual role agency /distribution model in relation to products in the same product market. In particular the Working Paper gives the green light to the dual role concept as long as costs incurred by the agent whether during or in preparation for his role as agent are fully reimbursed by the principal.
