With the cost-of-living crisis in the EU and the associated shrinkflation of consumer goods, territorial supply constraints are in the public discussion spotlight once again. The Netherlands and seven other EU Member States have proposed to address this situation through EU legislation, calling for a prohibition on discrimination in B2B relations between businesses based on their place of establishment.

Against this background, in order to address the perceived price differences for identical products within the EU, the European Commission fined Mondelēz EUR 337.5 million on 23 May 2024.

Following an almost 5-year long investigation, the Commission found that Mondelēz contractually restricted the cross-border trade of various chocolate, biscuit and coffee products. The company is also said to have abused its dominant position through strategies limiting cross-border sales of chocolate tablets.

The Commission’s press release states that Mondelēz benefited from a 15% fine reduction for cooperating during the investigation. Nonetheless, the fine imposed on Mondelēz is the highest ever imposed by the Commission in a case concerning parallel trade restrictions. 

The Mondelēz decision is the latest in a series of decisions concerning internal market-partitioning. Between 2018 and 2021, the Commission fined US clothing companies, a large beer company, companies selling licensed merchandise products, a hotel group from Spain, and an online gaming platform company. Depending on the circumstances of each case, the Commission sanctioned under Art. 101(1) TFEU or Art. 102 TFEU.

Cross-border trade restrictions identified by the Commission

Art. 101(1) TFEU and 102 TFEU, as well as Art. 53(1) and 54 of the EEA Agreement, prohibit agreements or practices that can constitute a threat to freedom of trade between the EU Member States in a manner that might harm the objectives of the single market among the EU Member States.

The table below summarises the cross-border trade restrictions that the Commission identified in its press release about the Mondelēz fine.

Different marketing strategies within the internal market

The free flow of goods is one of the key pillars of the EU. The internal market allows traders to buy products in a country where prices are lower and sell them in another country where prices are higher, thereby creating pressure to reduce prices.

Therefore, pursuing different marketing strategies in different territories must be done with caution, with an understanding of the purposes of any such differences. The aim must be to maximise local market opportunities, not to restrict parallel trade.

On the other hand, imposing export (out of the EEA) obligations and re-import restrictions (into the EEA) based on trademark law is, in principle, possible, as it does not affect the free flow of goods within the EEA.

Below we discuss how companies can apply different marketing strategies in different territories to maximise local market opportunities.

Benefiting from the VBER safe harbour

In principle, vertical restraints are presumed legal if they are part of vertical agreements concluded by companies that have a market share below 30%, unless the agreement contains certain hardcore restrictions. These restrictions include resale price maintenance, and restrictions on the territory or customers to which the buyer may actively or passively sell the goods.

Such restrictions can only be allowed under exceptional circumstances.

For instance, selective and exclusive distributor systems allow distributors to be protected from certain sales. This can be achieved when a supplier introduces restrictions to protect the integrity of a selective or exclusive distribution system against free-riding by unauthorised distributors. Suppliers can introduce sales restrictions for sales into areas where other distribution systems apply.

• A distributor (and its customers) in an exclusive/open system can be prohibited from active and passive selling to unauthorised distributors located in territories where the selective distribution system is operated.
• A distributor (and its customers) in a selective/open system can be prohibited from active sales in exclusive territories.

However, cross-network sales must not be restricted, neither among authorised wholesalers nor between authorised retailers and wholesalers.

Dual pricing and other mechanisms

The EU vertical guidelines permit a wholesale price differentiation between products sold online and offline (dual pricing), provided it is not aimed at restricting sales to territories or customers. 

The same principles should apply regarding territorial differentiation (domestic sales vs sales abroad). Such a differentiation can be required to incentivise or reward an appropriate level of investments in certain EU Member States. For instance, the level of brand recognition can differ, a certain product category can face fierce competition from a domestic brand, or pressure from household brands may justify additional marketing spending.

Nonetheless, where the difference in the wholesale price is aimed at preventing sales of goods to territories, this is a hardcore restriction within the meaning of Art. 4, point (e) of Regulation (EU) 2022/720. It is unlawful if a higher price makes selling abroad unprofitable or financially unsustainable, or where dual pricing is used to limit the quantity of products made available to a buyer for sale in another EU Member State.

Notably, the parties may agree on an appropriate method to implement dual pricing, including, for example, an ex-post balancing of accounts based on actual sales.

Apart from dual pricing, a supplier can require wholesalers not to sell to end users, thus allowing the supplier to keep the wholesale and retail levels of trade separate. We also believe that the supplier can require wholesalers to sell above the wholesale level. Such a mechanism would allow the supplier to avoid the brand-damaging practice of selling permanently at a loss.

It is also relevant in practice that a supplier can provide different retail price recommendations. This is common, for instance, in the recommended retail price printed on packaging.

Reducing locally supplied volumes or applying different labels in different EU Member States must always be done to reflect local market needs. This is further discussed below.

An agreement or a unilateral practice

In the context of consumer goods distribution, distinguishing between an agreement and unilateral conduct depends on one party acquiescing to the other party’s unilateral conduct.

Using this approach, the competition authority can identify certain practices as Art. 101(1) TFEU or Art. 102 TFEU infringements, depending on the factual circumstances.

A dominant company has less room to maneuver

The EU vertical guidelines do not apply to unilateral conduct. However, unilateral conduct must comply with the competition law rules. The company that holds dominance regarding certain products sold through certain channels must review its different marketing strategies from the perspective of possible abuse. 

For instance, the following decisions must be objectively justified:

• changing the product size or layout or removing certain language versions from a product label;
• reducing or reducing promotions volumes (promotion caps).

Verifying such marketing decisions can be crucial for the company’s compliance and long-term success in the internal market.

Useful guidance from the CJEU jurisprudence is also offered by joined Cases C-468/06 to C-478/06, where the court held that a dominant company’s refusal to meet orders in full is not per se abusive. Although a dominant undertaking must not refuse to fulfil ordinary orders from an existing customer simply because some of those orders are likely to be resold in another EU Member State, it is entitled “to counter in a reasonable and proportionate way the threat to its own commercial interests potentially posed by” orders of “significant quantities of products that are essentially destined for parallel export” (§ 71).

Who is dominant?

Dominance is defined as a position of economic strength enjoyed by an undertaking that enables it to prevent effective competition from being maintained on the relevant market.

To determine whether a company holds a dominant position, the relevant market, in both its product and geographical dimensions, should first be defined, and then the market power of the company concerned should be assessed.

In practice, consumer goods supply markets can be segmented into on-trade and off-trade channels, as the demand in each of these channels is different. The on-trade channel concerns the distribution of consumer goods to HoReCa customers, while the off-trade channel concerns distribution to wholesalers that supply to retailers and convenience stores.

The existence of a dominant position derives from a combination of several factors, including the following ones:

• Market share in absolute terms and when compared with the shares of competitors;
• The ability to increase prices;
• The existence of significant barriers to entry and expansion in the market;
• The fact that off-trade customers have limited countervailing buying power.

These factors come from a 2019 Commission decision in which a large beer company was found to have abused its market position on the Belgian beer market.

Action points for companies

Companies with a large product portfolio which sell products dedicated to certain territories should consider the following actions:

• Companies should train their sales teams on how to respond to sales requests concerning sales abroad and parallel trade. Also, they should review contracts and verify internal documents to exclude any wrongdoing.
• If the company holds a dominant position in certain market channels, it would be strategically prudent to adopt distinct approaches for dominant and non-dominant product channels.
• Finally, any complaints concerning price differences should be reviewed so that any wrongdoing can be quickly addressed and resolved.

If you need more information or further guidance in this area, please contact Marcin Alberski or Nicolas Carbonnelle. 

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