Vertical Agreements & the EU Vertical Rules for Distribution in France (Reg. 2022/720)

A distribution contract is never only a contract. Whatever its form — an exclusive concession, a selective network, an exclusive-purchase tie — it is also a vertical agreement between undertakings at different levels of the supply chain, and as such it is measured against the prohibition on anti-competitive agreements in Article 101(1) TFEU and Article L 420-1 of the Commercial Code. Regulation (EU) 2022/720 defines a vertical agreement as one "concluded between two or more undertakings each operating, for the purposes of the agreement, 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" (Art. 1(1)(a)).

Because negotiating an individual exemption for every distribution contract would be unworkable, EU law provides a block exemption: a safe harbour within which vertical agreements are presumed compatible with competition law and need no individual analysis. The harbour has a market-share ceiling, a list of "hardcore" restrictions that forfeit it entirely, and a list of "excluded" clauses that fall outside it without dragging the rest of the agreement down. This guide sets out that framework — the machinery underlying our guides on exclusive, selective and exclusive-purchase distribution, which cross-refer here for the detail.

Why does competition law reach a distribution contract at all?

Because a vertical restraint, though agreed between a supplier and its own distributor, affects third parties and the market. A vertical agreement is generally less harmful than a horizontal one between competitors (Guidelines, point 10), but the distinction is immaterial where competition is in fact affected. The restraints typical of distribution do affect it: they can restrict competing suppliers' access to the market, make market shares more rigid — which, where networks exist, can favour collusion between promoters little inclined to confront one another — and eliminate inter-brand competition at the point of sale.

The harm is characteristically a foreclosure harm, felt less in the single contract than in the aggregate: a web of parallel vertical restraints can close a market to new or smaller operators. That is why the modern analysis looks past the individual clause to the parties' market power and to any cumulative network effect — and why the block exemption is built around market share rather than around lists of permitted clause types.

Not every distribution relationship engages Article 101(1). A genuine agency agreement — where the intermediary does not bear the commercial and financial risks of the transactions it negotiates for its principal — is treated as falling outside the prohibition, because the agent is assimilated to the principal rather than acting as an independent operator; the boundaries of genuine agency are addressed in our guide on commercial agency and EU competition law. The vertical rules discussed here bite where the distributor is an independent undertaking buying to resell on its own account and risk — the position in every distribution contract proper.

What a prohibited agreement risks

The stakes are not merely regulatory. An agreement caught by the prohibition is void, and the nullity of a hardcore-tainted vertical agreement can reach the whole contract; the practice can be pursued by the competition authorities and can found private claims by those it harms. This is why the block exemption matters so much in practice: it converts an uncertain, fact-heavy competition analysis into a workable presumption of legality, provided the agreement stays within the harbour.

The safe harbour: the 30% market-share test

The block exemption of Regulation (EU) 2022/720 applies where the market share held by the supplier on the market where it sells, and by the buyer on the market where it purchases, each does not exceed 30% (Arts. 3 and 8). Both shares matter: a low supplier share does not save an agreement if the buyer's share on its market is too high, and where a wholesaler is involved both the upstream and downstream markets must be assessed. Within the ceiling, and absent a hardcore restriction, the agreement is exempted and needs no further analysis.

How the share is measured

Market power is the pivot of the whole regime — the capacity, over a significant period, to charge prices above the competitive level, or to hold output, quality, product diversity or innovation below it; in short, the capacity to abstract oneself from competition. It is assessed, somewhat roughly, through market share: the ratio of an undertaking's turnover on the relevant market to the turnover of all undertakings active on it. Defining that market — the products that are substitutes for one another, and the geographic area — is therefore the first practical step, and often the decisive one, because a narrow market definition raises the shares and a broad one lowers them.

Below the ceiling: minor-importance agreements

Beneath the exemption sits a further threshold. Where the supplier and the buyer each hold less than 15% of the market, the agreement is generally of minor importance and does not fall under Article 101(1) at all — save a restriction by object, to which the Commission generally assimilates the hardcore restrictions, or a cumulative network effect (CJEC, 9 July 1969, Volk). Where the restrictive effect is produced by parallel networks — the supplier's own ties (a network cumulative effect) or the similar contracts of competing suppliers and their networks (a networks cumulative effect) — the sensitivity threshold is lowered from 15% to 5%.

How the regime came to be built this way

The market-share approach is itself the product of a deliberate shift. The earliest block-exemption regulations listed condemned ("black"), conditionally admitted ("grey") and admitted or required ("white") clauses, producing a rigid, prescriptive uniformity as contracts scrupulously — and often merely formally — reproduced the regulatory wording. To end that rigidity, Regulation No 2790/1999 turned to targeting the specific restrictions of competition at issue and assessing the parties by market share; it was followed by Regulation No 330/2010, and then by Regulation (EU) 2022/720 of 10 May 2022, the regulation now in force.

One condition and one refinement complete the picture of the safe harbour. The exemption applies on condition that the vertical agreement is not reciprocal — that is, that the parties are genuinely at different levels of the chain rather than mutually restraining each other as competitors (Art. 4(a) and (b); recital 12). And the exchange of information between supplier and buyer benefits from the exemption only where it is directly related to the implementation of the vertical agreement and necessary to improve the production or distribution of the contract goods or services (recital 13) — a caution aimed principally at dual-distribution situations, discussed below.

The hardcore restrictions (Article 4): what voids the exemption

Some restrictions are so serious that their mere presence forfeits the block exemption for the whole agreement — not just for the offending clause. These "hardcore" restrictions (restrictions caractérisées) are generally treated as restrictions by object and carry the nullity of the entire agreement. They are the first thing to check in any distribution contract.

(a) Resale-price maintenance

Imposing a resale price is hardcore, with one exception: a maximum resale price is permitted, as is a recommended one. But even a maximum or a recommended price is condemned where it amounts, in effect, to a fixed or minimum price "under the effect of pressure or incentives exercised by one of the parties" (Art. 4(a)) — so a "recommended" price policed by threats or rewards is treated as an imposed one. A minimum or fixed resale price is never exempt, and imposing one is separately prohibited under French law, developed in our guide on imposed resale prices. The online-intermediation platform is treated as a supplier, so it too cannot impose a fixed or minimum price on the business using its service (Guidelines, point 194).

(b)–(c) Territory, customers and selective distribution

Restrictions on the territory into which, or the customers to whom, a buyer may sell are hardcore, subject to defined carve-outs — notably the protection of an exclusive territory or customer group reserved to the supplier or allotted to an exclusive distributor. The pivotal distinction here is between active and passive selling. Under the Regulation, active sales mean the active targeting of customers — by visits, letters, emails, calls, or targeted advertising and promotion, online or offline, including a website whose top-level domain corresponds to specific territories, or offering languages commonly used on specific territories different from the buyer's own (Art. 1(1)(f)); passive sales are those responding to spontaneous requests from individual customers, including delivery not initiated by active targeting (Art. 1(1)(m)). A supplier may protect an exclusive distributor against active sales into its territory, but passive sales must always remain free. In a selective system, restricting members' active or passive sales, or their cross-supplies, is in principle hardcore; a supplier may, however, restrict selective distributors' active sales into a territory it operates as an exclusive-distribution system (Art. 4(c)(i)(1)), and may bar resale to unauthorised distributors located in the selective territory (Art. 4(c)(i)(2)). The detail belongs to our exclusive- and selective-distribution guides.

(d) Restricting the freedom to resell

A restriction, in whatever form, of the buyer's freedom to resell is hardcore (Art. 4(d)) — an obligation not to resell to certain buyers, to refer certain customer orders to other distributors, to share the benefit of certain resales, or a refusal or limitation of warranty or bonus for certain resales, especially where a monitoring system (labels, serial numbers) lets the supplier check the products' real destination (Guidelines, point 50). The carve-outs are narrow: restricting the buyer's place of establishment (Art. 4(d)(iii)); protecting a territory or customer group the supplier has reserved (Art. 4(d)(i)); or a wholesaler's resale to end users (Art. 4(d)(iv)) — but in each case passive sales must remain free (Guidelines, point 240), and every independent repairer must be able to obtain spare parts from the supplier or the distributor (Art. 4(d)(v)).

(e) Online sales

Preventing the effective use of the internet by the buyer or its customers to sell the contract goods is hardcore (Art. 4(e); Guidelines, points 203 and following). Mere restrictions on online sales or online advertising remain possible, under a principle of equivalence between online and offline constraints, but an outright or disguised ban is not. A ban can be indirect: requiring the distributor to prevent customers in another territory from viewing its site, to seek the supplier's authorisation before individual online transactions, or banning the use of online advertising channels — to which the Commission assimilates search engines and price-comparison services — or forbidding the use of the supplier's trade marks online, or the creation or use of the distributor's own online shop (Guidelines, point 206 and following). Dual pricing, geo-blocking and a ban on online advertising are, in principle, objectionable.

Two clarifications matter. First, a restriction on the use of third-party marketplaces is not a hardcore restriction under Article 4(e), provided it does not result in an impossibility of selling online; it can even meet the Metro criteria or qualify for individual exemption, and can serve to protect brand image, discourage counterfeits, ensure pre- and after-sales service, or preserve a direct customer relationship (Guidelines, points 208, 334 and 338). Second, a network head may agree with its distributors to run a common online store, or to network their sites — each remaining master of its own prices — because online selling is then no longer "prevented" within Article 4(e). This is developed in our selective-distribution guide.

The excluded restrictions (Article 5): severable, not exempt

Article 5 lists restrictions of a different order. Unlike a hardcore restriction, an excluded restriction does not forfeit the exemption for the whole agreement; the clause simply does not benefit from the block exemption and must be assessed on its own, while the rest of the agreement can still be exempt. The excluded restrictions are:

• A non-compete of indefinite duration or exceeding five years (Art. 5(1)(a)) — that is, a single-branding obligation to buy more than 80% of annual requirements from the supplier, tied for too long. Five years is regarded as enough to let the distributor amortise the investment required to market the products; beyond that, the tie is not covered. Two accommodations exist: where the supplier lets the distributor use premises or land it owns or leases, the tie may exceed five years but not beyond the period of occupation (Art. 5(2)); and where the supplier acquires equipment to place at the distributor's disposal, the tie may be extended by the time needed to amortise that investment.
• A post-contractual non-compete (Art. 5(1)(b)).
• In selective distribution, an obligation not to sell the brands of particular competing suppliers — the supplier may require that other notable brands be present but cannot impose or exclude their identity (Art. 5(1)(c)).
• The "wide" parity obligation preventing a buyer that uses an online-intermediation service from offering better conditions through competing intermediation services (Art. 5(1)(d)).

Spotting the clauses that cost you the exemption

Because a single hardcore restriction voids the exemption for the whole agreement, the practical discipline is to screen a distribution contract for them before anything else. The tool lists the clauses that most often prove fatal; a positive answer does not automatically mean illegality, but it means the clause needs to be justified or removed.

Dual distribution and hybrid platforms

Two modern situations test the edges of the exemption. In dual distribution, a supplier sells both through independent distributors and directly itself, in competition with them. The Regulation continues to exempt such arrangements, but it treats the exchange of information between supplier and distributor with more caution: information exchange benefits from the block exemption only where it is directly related to the implementation of the vertical agreement and necessary to improve the production or distribution of the contract goods or services (Art. 4, read with recital 13).

The hybrid platform is the sharper problem. An online-intermediation service is treated by the Regulation as a supplier rather than a buyer (Art. 1(1)(d)), so it cannot impose a fixed or minimum sale price on the business using its service, and it cannot impose the "wide" parity that would stop that business offering better conditions through a competing intermediation service (Art. 5(1)(d)). Where the operator of a selective or distribution network runs a common online store, or networks its distributors' sites — each remaining master of its own prices, and the customer able to choose its supplier — online selling is no longer "prevented" within Article 4(e). But if that operator, alongside the intermediation service it provides to its distributors, also sells the products itself (dual distribution), it risks being characterised as a hybrid platform, which Article 2(6) excludes from the benefit of the exemption — even though the Commission acknowledges it is unlikely to prioritise proceedings against such relationships.

When the exemption is withdrawn — or was never available

The block exemption is a presumption, not a guarantee. Two situations take an agreement outside it.

Withdrawal of the exemption

Even where an agreement meets all the conditions of the Regulation, the benefit of the exemption may be withdrawn if significant restrictive effects on competition are found — for example a price-fixing arrangement between distributors. The agreements that contributed significantly to the restrictive effect must then conform to the withdrawal decision; an undertaking whose market share does not exceed 5% is regarded as not contributing significantly to a cumulative effect. Withdrawal — a rare step — is normally decided by the Commission, but may also be decided by a national competition authority for agreements producing significant anti-competitive effects on all or part of the national territory; and where an ordinary court applies Articles 101 and 102 TFEU, its judgment must be transmitted to the Commission (Regulation No 1/2003, Art. 15(2)). Beyond individual withdrawal, the Commission may by regulation disapply the exemption where parallel networks of similar vertical restraints cover more than 50% of the relevant market — that is, in a cumulative-effect case (Art. 7).

Outside the safe harbour

An agreement that exceeds the 30% ceiling, or that carries a restriction outside the exemption, is not thereby unlawful. It falls to be assessed individually under Article 101(3) TFEU (and Article L 420-4 of the Commercial Code), on four conditions that must be cumulatively satisfied: the agreement must improve the production or distribution of goods, or promote technical or economic progress; reserve to users a fair share of the resulting benefit; impose only restrictions indispensable to those objectives; and not give the parties the possibility of eliminating competition for a substantial part of the products in question. In the Commission's assessment these conditions are generally met by the standard distribution restraints — exclusive purchase, exclusive and selective distribution — because they improve distribution, planning and supply and pass a fair share of the benefit to users through a regular and readier supply. Losing the safe harbour therefore raises the analytical burden rather than deciding the outcome.