D2C Selling Risks

I was delighted to speak at this year's ABA antitrust law spring meeting on the topic of D2C sales and how much information can lawfully be shared when the supplier competes with its channel partners downstream.? With thanks to panel chair @SandyPastroff, and fellow panelists @DeirdreMcEvoy-Cappock @PaulaAzevedo @CraigWaldman

Here's the gist of my intervention for those interested in the topic.

In the EU, we have legislation - the vertical restraints block exemption regulation and guidelines - that provides a safe harbour presumption of lawfulness to all sorts of supply and distribution arrangements provided a limited number of prohibited "hard-core" restraints are avoided, and the parties' market shares do not exceed 30% at their respective levels of trade. The current rules expire at the end of May and, in the next few weeks, a revised set of rules will be adopted to apply as of 1 June 2022.?

The new rules will be updated in important ways to adjust to the market power of the big retail platforms as well as recognising the prevalence of suppliers engaging in B2C online sales alongside their channel partners.? In this "dual distribution" context, there are two major changes proposed that are likely to be disruptive.

First, hybrid platforms that provide intermediation services to suppliers but that also sell the suppliers' products in their own name, will be excluded from the safe harbour.? All aspects of their purchase agreements with suppliers, and their intermediation agreements with the retailers that sell via their platforms, will fall to be assessed on a case-by-case basis.?This will make it much easier for any competition authority to investigate the platforms going forward, but the proposed blanket approach creates considerable uncertainty for all concerned.

Second, tougher rules will apply to the exchange of information between a supplier and its buyers where the supplier also competes at any downstream resale level.?

For the last 20 years, the competition rules have recognised that in a non-reciprocal agreement where the supplier is present at the distribution level itself, its relations with the independent resellers of its products remain primarily vertical in nature and within the safe harbour.?

Because of the growth in direct/platform online sales by many suppliers in the past decade, the European Commission initially proposed to assess any information exchange in the dual distribution context under the stricter competition rules governing horizontal agreements between competitors wherever the parties' combined market share at the downstream level was 10% or more.?

Broad opposition to the blanket exclusion of information exchanges from the block exemption sent the Commission back to the drawing board.?In February 2022, it published a short consultation paper proposing to include information exchanges in the verticals safe harbour but only to the extent the exchange is "necessary to improve the production or distribution" of the contract goods/services in question.?The question of what is or is not "necessary" is inherently vague and made more difficult by the suggestion that the answer may vary depending on the distribution model in question (exclusive, selective, franchising).?

This is a problem, not least because it greatly increases the risk of divergent interpretations at the level of national competition authorities and courts.? Anticipating this, the Commission has proposed a non-exhaustive list of the information it considers likely to meet the "necessary to improve production/distribution" criterion.? It also flags that the following sorts of data are generally unlikely to do so:

1.??????information on the actual future prices at which the supplier or buyer will sell the contract goods/services downstream, unless that is necessary to organise a coordinated short-term low price campaign;

2.??????customer-specific sales data, including non-aggregated information on the value and volume of sales per customer, or information that identifies particular customers, unless that is necessary to enable the supplier or buyer to adapt the contract goods/services to the requirements of the customer, or to provide guarantee or after-sales services, or to allocate customers under an exclusive distribution arrangement.?

These exchanges fall to be assessed under the Commission's horizontal guidelines which recognise the potential for efficiency gains, but which treat the exchange of commercially sensitive information as presumptively anti-competitive.?That presumption comes with case law pronouncements that parties are deemed to take account of such information in determining their conduct on the market, and that any such exchange will be harmful even if sporadic or unsolicited.?

The proposed exclusion of customer-specific sales data will be highly disruptive. ?There are many good reasons justifying detailed information exchange of customer-specific sales data in a dual distribution context, and no ostensible reason to justify flipping the switch from presumed lawfulness to unlawfulness.?The supplier is usually not in the business of using data to spot opportunities to undercut its own dealers.?Below the 30% market-share threshold levels, it is safe to assume that inter-brand competition will keep the supplier honest and its relationships with its downstream channel partners aligned in protecting and promoting the brand equity and the overall end-customer service proposition.

The draft guidelines acknowledge that exchanges of such information may be acceptable if the parties put certain safeguards in place such as data aggregation rules, or internal firewalls to ensure that the buyer's data are only available to the supplier's personnel responsible for its upstream business and not its downstream direct sales activities.?Many suppliers are understandably pushing back at a construct that adds complexity and costs for no apparent reason.? We'll see whether the Commission has been listening when it adopts the final texts in the next few weeks.?