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Agent for Change? Publication by the European Commission of a Working Paper providing guidance in relation to dual role agents

Agent for Change? Publication by the European Commission of a Working Paper providing guidance in relation to dual role agents

Background
On 5 February, the European Commission published a Working Paper setting out guidance on the circumstances which may warrant disapplication of the prohibition on anti-competitive arrangements contained in Article 101(1) TFEU in cases where the same entity acts both as an independent distributor and as an agent for products of the same supplier.

The Working Paper was published in the context of the Commission's ongoing review of the Vertical Block Exemption Regulation (Commission Regulation (EU) No 330/2010) (VBER), which is scheduled to expire on 31 May 2022, and the accompanying Commission Guidelines on Vertical Restraints (the Guidelines). The VBER and the Guidelines provide clarity on the circumstances in which arrangements between businesses operating at different levels of the production or distribution chain and relating to the conditions under which the parties may purchase, sell or resell certain goods or services (so-called "vertical" arrangements) may fall outside the scope of Article 101(1) TFEU.

Launched in 2018, the VBER review process comprises both an evaluation and an impact assessment phase. Key milestones of the VBER review process to date have included the publication in September 2020 of a Staff Working Document summarizing the results of the evaluation phase (which involved evidence-gathering initiatives such as a public consultation, a stakeholder workshop and a targeted NCA consultation), as well as the issuing in October 2020 of the Inception Impact Assessment and the launch of a public consultation on policy options and their likely impact, which remains ongoing.

The objective of the Working Paper of 5 February is to address feedback from respondents to the Commission's consultations, who have highlighted the lack of available guidance on the applicability of the VBER and Guidelines to distributors who simultaneously act as agents and as independent distributors of a supplier's products. The Commission has noted the increasing prevalence in consumer goods markets of such "dual role" agency models, under which a single undertakings combines the functions of agent and as independent distributor for the same principal.

Agency agreements under the current guidelines

The Working Paper re-states the core principles laid down in the current Guidelines – i.e. that in the case of "genuine" agency agreements, obligations imposed on the agent in relation to contracts concluded and/or negotiated on behalf of the principal will be able to avail of a safe harbour from Article 101(1) TFEU where the selling or purchasing function of the agent forms part of the principal's activities and the principal bears the commercial and financial risks related to the selling or purchasing of the contract goods or services. This must be assessed on a case-by-case basis, taking account of the economic reality of the situation.

Three types of risk are material to the question of whether a genuine agency agreement arises, namely (i) contract-specific risks; (ii) risks relating to market-specific investments; and (iii) risks related to other activities undertaken in the same product market, to the extent that the principal requires the agent to undertake such activities, not as an agent on behalf of the principal, but for its own risk. An agreement will not qualify as a genuine agency agreement unless the agent bears no, or only insignificant, risks falling with the three aforementioned categories. Investments that are common to agency activities in general (e.g. the cost of renting a shop or staff salaries, provided they can also be used for the sale of different goods unrelated to the agency agreement) are not considered material to such an assessment.

Categories of risks which cannot be borne by an agent in order for an agreement to qualify as a genuine agency agreement

Contract-Specific Risks

Market-Specific Investments

Risks relating to other activities in the same product market

When seeking to apply these principles to dual role agents, the Commission highlights the difficulty of distinguishing between those investments/costs which are attributable only to the products or services covered by the agency agreement and those which are attributable to the distributor's independent distribution functions. This delineation exercise will be particularly challenging where the products concerned belong to the same product market and do not present objectively distinct characteristics, in which case there may be a significant risk of the agent being influenced by the terms of the agency agreement (including pricing) when devising distribution strategies for those goods which it distributes on its own behalf. Conversely, the less interchangeable the goods forming part of the agency agreement and those distributed by the agent independently, the less likely it is that these risks will occur.

Guidance provided by the Commission in relation to agency agreements involving dual role agents

In its Working Paper, the Commission indicates that based on experience gathered to date, agency agreements involving dual role agents may only fall outside Article 101(1) TFEU if: (i) the distributor is genuinely free to enter into the agency agreement; and (ii) all relevant risks linked to the sale of goods covered by the agency agreement to third parties are borne by the principal, provided that those activities and risks can be effectively delineated. As a supplement to the core underlying principal that commercial and financial risk must be borne by the principal in order for an agency agreement to fall outside the scope of Article 101(1) TFEU, additional guidance has also been provided by the Commission in its Working Paper. The guidance focuses on market-specific investments (e.g., investments in furnishing a shop or in training sales staff that are specifically required for selling products in the relevant market and that cannot be used commercially for activities in other product markets or only at a significant loss), which have been found to be particularly fundamental in the case of dual role agents. Two themes are elaborated upon in greater detail, namely the types of market-specific investments which must be covered by a principal and the means of reimbursing agents for costs incurred under agency agreements:

Types of Market-Specific Investments to be Covered by a Principal

Methods of Reimbursing Risks under Agency Agreements

Where an agency agreement is entered into with an existing independent distributor, market-specific investments that have already been incurred by the distributor will still need to be covered by the principal. Reimbursement may be adjusted proportionately in the case of depreciation of the investments.
Where investments are partly required specifically for the type of activity for which the agent has been appointed by the principal and are partly common to the provision of agency services generally (e.g., investments in a website or general advertising), the principal should cover a share of the costs as they are likely (at least in part) to be market-specific.
The only market-specific investments that the principal would not have to cover would be those relating to the sale of differentiated products in the same product market that are not covered by the agency agreement and are distributed independently.

No particular method of reimbursement is required, provided that the relevant costs are covered in full by the principal.
Reimbursement by means of a fixed lump sum or through payment of a share of the revenues generated under the agency agreement is permitted.
A system should be in place to allow the agent to readily declare and request the reimbursement of any costs that exceed the lump sum or fixed percentage of revenues.
Monitoring and review of any changes to relevant costs may also be required so that reimbursement levels can be adapted accordingly.
Reimbursement should adequately reflect any cost variation between agents in different Member States and between those operating under different business models.
An appropriate cost reimbursement mechanism should be ensured for agents who make market-specific investments and who are reimbursed by means of a percentage of the price of the products sold, but who may not make any sales for a period of time.

The Commission makes it clear that it will engage in active market monitoring and that it retains the right to revise any of the principles articulated in the Working Paper if the dual role agency model is raising competition concerns, in particular if there is evidence that the terms of agency agreements are influencing the actions of those who also distribute at their own risk.

Conclusion

While the Commission's Working Paper provides welcome commentary in an area which previously lacked any meaningful institutional guidance, it is likely that the issue of whether arrangements entered into by suppliers with dual role agents can be classified as genuine agency agreements will continue to pose complex issues for clients. In particular, challenges will remain in determining how costs should be allocated in cases where a distributor acts as both an agent and as an independent distributor for goods belonging to the same product market. The question of how to appropriately apportion costs to a principal where those costs are partly common to agency activities generally and partly specific to the activities required to be performed under the relevant agency agreement will also require close analysis.
It is to be hoped that additional clarity will be provided as the VBER process evolves and moves towards its conclusion, with finalisation of the impact assessment phase mooted for Q4 2021. This includes the provision of guidance in relation to situations where the company acting as agent and distributor is an online platform (an issue on which the Commission has expressly reserved its position to date).

For more information on this topic please contact any member of the EU, Competition & Procurement team.

Date published: 16 March 2021

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