By Michael J. Dean

1. EUROPE: INTRODUCTION

1.1 Europe and the EU n1

To appreciate the approach of some important EU laws to distribution it is necessary to understand the context of the formation, operation and objectives of the EU. This paper, therefore, begins with a more general introduction to Europe before turning to the hugely influential antitrust doctrines on vertical restraints. It will further discuss specific issues relating to selective distribution networks and to online distribution, as well as commercial laws relevant to e-commerce. More general commercial aspects regarding distributorships and agency in Europe will also be covered, before finally looking at some jurisdiction and choice of law issues. To skip the background intro turn to page 3.

"Europe" means different things to different people. In its broadest sense it comprises a range of economies in varying stages of development economically, politically, socially and legally. Europe is wider than the EU. Unfortunately, Europe is becoming a more complex entity to describe.

The European Union (EU) or European Community (EC) (terms not precisely interchangeable) is the main trading bloc within which there is a common core of trading rules which can be described as European. This paper describes a number of existing rules and initiatives of which US companies involved in distribution should be aware.

n1 The European Union was established in 1992 by the Treaty of Maastricht, and is based on 3 pillars. The first pillar comprises the preexisting European Communities, largely based on the original Treaty of Rome, which will be familiar to many business people. The other two pillars represent co-operation in the areas of (i) Common Foreign & Security Policy, (ii) Police and Judicial Co-operation in Criminal Matters.

Many myriad rules and laws could be of relevance to a particular distribution activity; this paper will concentrate on those which regularly provide problems for US exporters in setting up distribution arrangements, operating or terminating them.

1.2 EEA

Europe is not just the EU of 27 Member States. n2 In addition, there is a rump of the European Free Trade Association (EFTA) which, together with the EU, makes up the European Economic Area (EEA). Conditions of trading within the EEA are very similar but not identical to those in the EU. The EEA comprises the 27 EU Member States and three EFTA States - Norway, Iceland and Liechtenstein. Switzerland, although a member of EFTA, is not a party to the EEA Agreement. The EFTA States have, as part of their obligations under the EEA, adopted many of the regulatory trade laws applicable within the EU to ensure that similar market conditions prevail. The essential difference, as far as trade is concerned, is that the EFTA States do not adopt the Common External Tariff for imports from the US, and goods are not in free circulation until they have satisfied the external tariff shared by all EU States.
n2 The current Member States are Germany. France, Italy, Luxembourg, Belgium, the Netherlands, UK, Ireland, Denmark, Greece, Spain, Portugal, Sweden, Finland, Austria, Poland, Estonia, Latvia, Lithuania, the Czech Republic, Slovakia, Hungary, Slovenia, Cyprus, Malta and, as of 1 January 2007, Bulgaria and Romania.
After the latest enlargements of the EU, taking effect on 1 May 2004 and 1 January 2007, the EU has a combined population of 480 million people n3. Most new States are former members of what was known as, to use an old fashioned term, the Eastern Bloc. Their economies have been in transition and their political and legal systems have been developed and strengthened to a greater or lesser degree. Each was required to meet a range of conditions on matters such as guarantees of democracy and a functioning market economy which can cope with the existing EU regime. Accordingly, they have adopted EU legislation, in parallel with any domestic laws.
n3 In addition, the EU is in negotiations with Turkey and Croatia with a view to accession, at the earliest, in 2014.

Supporters of enlargement view this as a chance to unite Europe peacefully, extending the stability and prosperity of current Member States to a wider group of countries.

1.3 The Euro

Among the 27 States of the EU, conditions for doing business are obviously very different. One major difference is that only 13 of the 27 Member Sates have embarked upon European Monetary Union and have adopted the single currency, the Euro. These States together constitute what is known as "the Euro Zone". The Euro Zone countries are Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain and, as of 1 January 2007, Slovenia. The Euro is also used in Andorra, Monaco, San Marino, the Vatican and some French overseas territories. It is also the official currency in Montenegro and Kosovo. It remains to be seen when (and if) the UK will join the single currency. Denmark rejected membership in a referendum in 2000. Sweden's referendum in 2003 rejected the Euro.

As between the Euro Zone and other territories, commercial issues of pricing in terms of price positioning, price transparency or product size are worthy of close consideration.

In addition, although a number of trading rules set at the central EU level are similar, or indeed identical, throughout the EU there remains a body of differing national laws to be borne in mind when trading in Member States.

A brief description of the EU, its legal instruments and the institutions is found in Annex 1.

1.4 EU Law and State Law

Within Europe it may be necessary to examine the law of a particular territory in relation to a distribution problem. That domestic law may or may not take its inspiration from EU law. It is often also necessary to determine the impact of a rule of EU law. By way of example, where a US supplier terminates his German distributor due to his unsatisfactory pricing regime, the following laws may be applicable:

- German competition law on resale price maintenance;

- EU competition law on resale price maintenance;

- German Commercial Code provisions and case law on distribution and agency contracts; n4

n4 Article 89b German Commercial Code.

- The EC Directive on Commercial Agents which will govern contrary German law n5;

- EC or German cartel law if the pricing arrangement is part of a conspiracy among producers;

- US or German law of the contract.

n5 Directive 86/653, [1986] OJ L 382/17. Implemented in the UK by the Commercial Agents Regulations 1993.

2. EUROPEAN COMPETITION LAW

To a much greater degree than is the case in the US vertical distribution arrangements within Europe have had to comply with, often detailed, EU antitrust provisions on vertical restraints. This continues to be an important feature in drafting distribution arrangements or assessing agreements should disputes arise.

It is therefore important to set out the basic approach to EU competition laws to vertical arrangements and, in doing so, to briefly describe the EU competition law regime.

2.1 Domestic and European Competition Laws
2.1.1 Overlapping Jurisdictions, Increasingly Harmonised Rules

EU antitrust law is a separate body of law distinct from the antitrust laws of the individual Member States. EU law heavily influences individual State laws and individual State authorities enforce EU law as well as domestic law.

Where EU competition law conflicts with domestic competition law, European law will prevail in any case with a "Community dimension". For example, where an agreement affecting inter-state trade meets the criteria for exemption from the prohibition in EU competition law, domestic competition authorities cannot condemn that arrangement under domestic law but must respect the exemption. Likewise, where EU competition law prohibits an arrangement, a contrary domestic finding will not save it. The European Commission has issued Guidelines explaining how it assesses whether an agreement or a conduct has an "effect on trade", and therefore has a Community dimension. n6 The relationship between EU and domestic competition laws has further been clarified by the so-called "Modernisation Regulation" of 2003 whereby, if there is an effect on trade between Member States, only EU law can be applied (although stricter national law on unilateral conduct may be applicable). n7

All anti-trust regimes recognise that cartels are unwelcome and will broadly agree on what constitutes anti-competitive conduct. However, in the area of vertical agreements, divergence is likely between individual State rules and EU rules and between EU rules and US law. EU policy on vertical arrangements is driven by the objective to create a single market in Europe, largely absent from domestic concerns. EU law limits the extent to which private agreements might reinstate or replicate barriers between Member States' markets, even where such arrangements would only affect intra-brand competition.

For example, an arrangement whereby a supplier confers absolute territorial protection to a distributor in order to protect the latter's investment in introducing a product on a new geographic market may be acceptable and even regarded as pro-competitive under domestic competition law, but may nevertheless be found to breach EU competition law. n8

2.1.2 Attorney Privilege in the EU and the Member States

Antitrust issues cannot be assumed to receive the same or similar treatment under EC law as under the domestic competition laws of the Member States. One area in which the EU differs radically in approach from the US, and also from the approach of a number of EU Member States, is the treatment of attorney privilege.

It is worth noting that the European Court of Justice (ECJ) has ruled in AM&S n9 that legal privilege in EC competition proceedings is recognised both before the ECJ and in European Commission proceedings. The privilege extends to communications exchanged after the initiation of Commission proceedings, and also to legal advice given prior to any proceedings but having a relationship with the subject matter of antitrust procedures.

However, there are important limits to EC attorney privilege. The lawyer must be "independent", which means in-house lawyers' communications do not enjoy privilege. This is in direct contrast with UK competition law which expressly provides legal privilege to in-house lawyers.

Further, of great interest to US attorneys, EC competition law restricts privilege to those lawyers entitled to practice his or her profession before the courts of one of the Member States. Clearly, this excludes the vast majority of US attorneys whether in-house or in private practice. Therefore, legal advice of US attorneys is not privileged and advice may be discoverable and used in an investigation.

The situation of in-house lawyers under EC law may be undergoing a change. In an interim order in the Akzo case n10, the Court of First Instance (CFI) barred the Commission from using certain documents obtained in a "dawn raid", including communications between Akzo's managers and its in-house lawyers. The ECJ overturned the interim order on appeal, but on grounds of lack of urgency, rather than basing itself on AM&S. The final CFI ruling in the Akzo case is still pending, and will be eagerly awaited by in-house lawyers around the EU.

Therefore, in advising by e-mail your colleagues or clients in Europe, make sure you bear in mind that your communications may be discoverable by the authorities.

n6 Guidelines on the effect of trade concept contained in Articles 81 and 82 of the Treaty, [2004] OJ C 101/81.

3. EU Competition Law - Article 81 EC

Community competition law has as its nucleus Articles 81 and 82 of the EC Treaty. Both Treaty Articles have direct effect in the Member States. n11 Attorneys seeking to understand the application of competition law to distribution must also negotiate a range of EC Regulations, Commission Notices, decisions and European Court judgments. EU competition law policy is driven by the European Commission subject to the legal interpretations of the European Court. In this section, the prohibition of restrictive practices in Article 81 EC will be discussed. The prohibition in Article 82 EC against abuse of dominance is discussed further below.

n11 Direct effect means that individuals in the Member States can rely directly upon the rights conferred upon them by the provisions directly in the domestic courts. See also Case C-127/73 BRT v. Sabam 1 [1974] ECR 51; [1974] 2 CMLR 238.

3.1 Art 81 EC: The Rule

Article 81(1) of the European Community Treaty creates a prohibition against an extremely wide range of anti-competitive agreements and practices. It reads as follows:

"The following shall be prohibited as incompatible with the common market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market, and in particular those which:

- directly or indirectly fix purchase or selling prices or any other trading conditions;

- limit or control production, markets, technical development, or investment;

- share markets or sources of supply;

- apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;

- make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts."
Article 81(2) provides that such arrangements are automatically void.

Individual agreements which fall within Article 81 will not be void and prohibited if they meet the criteria for exemption in Article 81(3) (discussed below).

- attempts by the supplier to prevent a distributor selling to purchasers intending to resell outside the distributor's territory, i.e. protecting other territories from parallel trade; n12

- attempts by the supplier to set minimum prices for distributors' downstream sales, or to prevent distributors from using discounts; n13

- attempts by the supplier to discourage online reselling by distributors; n14

- excessively long-term distribution agreements, tying in the "weaker" party; n15 and

- excessively exclusive agreements, foreclosing the market to competitors n16.

n12 See e.g. T-325/01, DaimlerChrysler v Commission, in which the CFI partially upheld the Commission's decision that the car maker had agreed with its distributors various measures to prevent parallel trade between Member States. See also the Commission's JCB decision (COMP/35.918), largely upheld on appeal to the CFI and ECJ (cases T-67/01 and C-167/04), in which JCB was ultimately fined [euro] 30 million for agreeing with its distributors to partition the market. In 2002, Nintendo was [euro] 168 million, and its distributors were also fined, for agreeing on absolute territorial protection to prevent parallel trade (COMP/35.587).

3.2 Art 81 EC: "Agreement" or Unilateral Conduct?

In the distribution context, what is regarded as an "agreement" for the purposes of Article 81 EC has received much attention over the years. The European Commission has adopted a wide approach as to what amounts to an agreement. The Commission has found or "deemed" agreements to exist although the parties involved claimed to have acted unilaterally. Examples include Ford of Europe's decision not to supply right hand drive vehicles (suitable for British roads) to dealers in Germany (who could otherwise sell to purchasers exporting to the UK); n17 AEG's non-admission of certain distributors to its selective distribution system in order to maintain high retail prices; n18 and Sandoz' systematic undersupply to distributors parallel-exporting from a territory and marking invoices "export prohibited". n19 In each of these cases, the Commission found the distributors had tacitly accepted the conduct as being a term of the distribution agreement.
n17 Commission Decision 82/628, Re Ford AG Werke, [1982] OJ L256.
n18 Commission Decision 82/69, Re AEG-Telefunken [1982] OJ L117.
n19 Commission Decision 87/409, Re Sandoz [1987] OJ L222.

On appeal in the Ford case, the ECJ upheld the Commission's decision that admission to a selective distribution network implied a "tacit acceptance" by the distributor of Ford's policy of restricting sales to the UK market. It ruled that "admission to the Ford dealer network implies an acceptance by the contracting parties of the policy pursued by Ford with regard to the models to be delivered to the German market". As a result, Ford's application for negative clearance under Art 81(1) was refused. n20 In Volkswagen the German car manufacturer was fined [euro] 102m for introducing a bonus system that would be cancelled or altered if more than 15% of its Italian distributor's quarterly sales were to buyers outside of Italy. In tandem with this, VW introduced a quota system of restricting supplies to dealers so they were unable to meet orders from other EU countries. n21 An agreement was found to exist because the supplier was found to be relying on the contractual context.

Recently, the European Courts have shown a more restrictive approach than that of the Commission with regard to finding that an agreement is in place. In a case concerning the chemicals giant Bayer, the Commission was overruled by the European Courts. n22 The Court ruled that for an agreement to fall under Art 81, it must consist of a true "concurrence of the wills" between undertakings, the manner in which such will is expressed being unimportant. This case may be narrowly distinguished from the Ford ruling in that Bayer at no time informed its wholesalers of the reasons behind limiting its supply of the drug Adalat (which was 40% cheaper on Spanish and French markets than in the UK), although it became increasingly obvious that the latter knew. The ECJ's Bayer ruling suggests that a distributor's mere knowledge of a restrictive conduct practiced by its supplier may not suffice for an agreement to be caught by Article 81(1).

The Courts' approach in Bayer was confirmed recently, in a second Volkswagen case. The Commission had found in 2001 n23 that letters and circulars sent out by VW to its German dealers, asking them to give limited or no discounts on sales of the VW Passat, amounted to resale price maintenance in violation of Art 81. VW was fined [euro] 31m. On appeal, the CFI found in 2003 that the Commission had failed to establish the existence of an "agreement" for the purpose of applying Art 81. The CFI accepted VW's argument that the letters constituted unilateral action only, concluding that the Commission had failed to show that there was concurrence of wills between VW and the German distributors. n24 It appears that, for there to have come to existence a concurrence of wills in situations of seemingly unilateral behaviour, it must either be possible to infer the anti-competitive restriction from the distribution agreement (cf. Ford, AEG and BMW), or the distributors must have either expressly or tacitly acquiesced to the restriction imposed originally unilaterally by the supplier (cf. Sandoz). n25

n23 Commission Decision 2001/711.
n24 Case T-208/01, upheld on appeal to the ECJ, case C-74/04, judgment of 13 July 2006
n25 This was suggested by AG Tizzano in his opinion in the VW appeal to the ECJ, C-74/04.

3.3 Art 81 EC: Agreement "Between Undertakings" or Internal Group Practice?

Most anti-trust problems related to distribution can be avoided by taking distribution "in-house"; i.e. by having wholly or partly owned subsidiaries, which do not enjoy autonomy, undertake distribution. For Article 81 to apply to an agreement, it must be between independent undertakings and, if there is a lack of autonomy on the part of a subsidiary, Article 81 will not apply to an agreement with its parent. n26 In Viho, territorial restraints prohibiting distributors from selling outside their territories were not caught by Article 81(1), since the distributors were all subsidiaries, forming part of the same economic unit. n27 A subsidiary owned jointly by two companies is not considered to be an autonomous legal entity for the purposes of Article 81 because no one company exerts control n28.

n26 C-15/74 Centrafarm v Sterling, 1974 ECR 1147.

The classification, in practice, of a distribution arrangement as constituting an agency relationship can also have consequences for the applicability of Article 81. In situations of true agency, the agent does not negotiate contracts on its own behalf but merely acts as a conduit between the principal and the buyer, between which parties the contract will be concluded. Although some restrictive clauses in the agreement between the principal and the agent may be caught by Article 81 - e.g. post-termination non-competes - others will not, because they relate not to the agent's commercial freedom but to the contract to be drawn up directly between the principal and the buyer. Thus, whereas resale price maintenance is one of the most unacceptable types of restrictive practices in "normal" distribution agreements, they are not caught when made in the context of agency. The Commission and the European Courts take a factual, rather than a formalistic, approach as to when a relationship is to be treated as one of agency under Article 81. In two recent decisions, relating to agreements between DaimlerChrysler and its German and Spanish distributors n29 and Spanish oil company CEPSA and a number of Spanish service stations n30 respectively, the European Courts have clarified that the decisive factor is to what extent the distributor/agent assumes commercial risk in relation to the sold products/services. Of relevance is for example which party bears the risk for lost or destroyed goods, unsold goods, buyers' failure to pay, transport costs, advertising costs etc. n31