Agent and distributor: Working paper by the European Commission on dual role agents

31 maart 2021

The European Commission (“Commission”) is currently reviewing the Vertical Block Exemption Regulation and corresponding Guidelines on Vertical Restraints. These documents aim at providing guidance to the market regarding vertical agreements that are or are not allowed.

In the context of this review, stakeholders have indicated that the current guidelines provide insufficient guidance as to whether an undertaking may act both as a genuine agent and as an independent distributor for a same supplier (so-called “dual role” agents). The relevance of this distinction is that different competition rules apply to agency and distribution relationships. Distribution agreements fall within the scope of Article 101 of the Treaty on the Functioning of the European Union (“TFEU”), which prohibits a supplier to impose resale prices on its distributor, while agency relationships fall outside the scope of Article 101, meaning that the principal may set resale prices for the agent.

The Commission fears that the information that the dual role agent gains in its quality of agent will influence its conduct when acting as a distributor of the same party, which will lead to a restriction of competition. These risks are particularly acute in instances where the products covered by the agency relationship and those distributed independently by the agent are similar.

Against that background, the Commission published a Working Paper setting out the current rules on dual role agents. The Working Paper is limited in scope. It only relates to dual role agents (re)selling differentiated products that present distinct characteristics, which allows to distinguish objectively between those covered by the agency agreement and those distributed independently. Also, the paper does not discuss situations where the dual role agent is an online platform.

Conditions for a genuine agency relationship

The determining factor in defining agency 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. In this respect, the qualification given to their agreement by the parties or national legislation, is not relevant for the material assessment. As such, it must be noted that the conditions set out by the Commission under competition law are more narrow than the Dutch rules regarding agency.

There are three types of financial or commercial risks that are material to the definition of an agency agreement for the application of Article 101(1), namely:

  1. contract-specific risks related to the contracts concluded by the agent on behalf of the principal (e.g. financing of stock);
  2. risks related to market-specific investments, which are investments specifically required for the type of activity for which the agent has been appointed by the principal; and
  3. risks related to other activities undertaken in the same product market, to the extent that the principal requires the agent to undertake such activities.

The Working Paper requires no particular reimbursement method for an agreement to qualify as a genuine agency agreement, provided that the relevant costs are fully covered by the principal. Compliance with these requirements has to be assessed in a very strict manner to avoid a misuse of the agency concept.

The Working Paper requires no particular reimbursement method for an agreement to qualify as a genuine agency agreement, provided that the relevant costs are fully covered by the principal. Compliance with these requirements has to be assessed in a very strict manner to avoid a misuse of the agency concept.

Dual role agents – Delineation agency / distribution

The Working Paper emphasises the importance of being able to effectively delineate the activities that are covered by the agency agreement. This is easier when the agent undertakes a dual role in a market comprising differentiated products presenting objectively distinct characteristics (such as higher quality, novel features or additional functions). Conversely, in product markets comprising products not presenting objectively distinct characteristics, such delineation appears more difficult and there may therefore be 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 Commission’s current position is that in order for the agency agreement to fall outside the scope of Article 101 TFEU, all investments required for a genuine agent to 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 a distributor. Also in a scenario where the agency agreement is entered into with an existing distributor, the fact that some of the market-specific investments may already have been incurred by the agent when acting as a distributor, does not mean they do not have to be covered by the principal (this may be adjusted proportionately for depreciated investments).

The only market-specific investments that the principal would not have to cover would be those that relate exclusively to the sale of differentiated products that are not covered by the agency agreement and distributed independently. Conversely, market-specific investments needed for both types of products would have to be covered by the principal because the agent would not be able to operate on the market as an agent without incurring these costs.

Next steps

The current Vertical Block Exemption Regulation expires on 31 May 2022. The European Commission plans to publish a draft for the new regulation and guidelines by mid-2021, which will take effect when Vertical Block Exemption Regulation expires.

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