On 9 July, the European Commission published its draft revised Vertical Block Exemption Regulation (VBER) and the corresponding Vertical Guidelines. The VBER concerns vertical agreements, which are agreements between companies operating at a different level (e.g. production, distribution etc.) about the conditions under which the parties may purchase, sell or resell products. The current VBER (Regulation (EU) No 330/2010) was previously revised more than ten years ago. Since then, the market environment has changed significantly, in particular due to the growth of e-commerce. Main topics in the review of the VBER, which started already in 2018, arose because of the new business model developing online. "Vertical agreements, such as those between suppliers of goods or services and their distributors, are common across all sectors of the EU economy. The proposed revised rules aim to keep up with market developments that have transformed the way businesses around the world operate, including the growth of e-commerce and online platforms, during the last decade", said Margrethe Vestager, who is in charge of competition policy within the European Commission, when the draft revised VBER and Vertical Guidelines were published last Friday.
The proposed changes should reflect these market developments: for instance, the scope of the VBER regarding dual distribution will be limited against the background that more and more manufacturers sell online and thus become competitors with their distributors. On the other hand, the scope of the VBER will be extended to certain situations for active sales restrictions including shared exclusivity and a "pass on"-possibility. Further, the draft revised VBER now includes rules for parity obligations, which have been heavily disputed in recent years. Besides, rules on online sales restrictions are now included directly in the VBER and the Commission provides guidance on specific questions regarding indirect measures restricting online sales like the dual pricing and platform bans in the draft revised Vertical Guidelines. The Commission also clarifies how to assess platforms as market players under the VBER and gives more detailed guidance on how national competition authorities can withdraw the benefit of the block exemption. Last but not least, the draft revised rules aim to reduce compliance costs for businesses, notably small and medium-sized enterprises, by simplifying and clarifying provisions perceived as particularly complex and difficult to implement.
The draft revised VBER provides for significant changes in the area of dual distribution (i.e. situations in which a supplier sells its goods or services directly to the end customers competing with its distributors at a retail level).
Dual distribution is covered by the VBER safe harbour as an exception from the general rule that competitors cannot benefit from the VBER. The draft revised rules change this dual distribution exception significantly, introducing more restrictions in this respect.
The safe harbour for dual distribution will now be limited only to instances where the parties’ aggregated market share in the retail market does not exceed 10%. For distribution agreements where the aggregate market share of parties at a retail level is above 10% and below 30%, there will be an additional but more limited safe harbour, covering all aspects of the agreement except for information exchanges between the parties.
Also, the safe harbour will not be available at all to providers of online intermediation services that have a hybrid function (i.e. that also sell goods or services competing with their clients, such as those to which they provide online intermediation services).
The reason for such a significant tightening of the current rules is – according to the Commission – the increase of dual distribution and connected competition concerns on the market (resulting from the growth of e-commerce that facilitated direct sales by suppliers, either via their own e-shops or via online marketplaces).
Most Favoured Nation Clauses (MFNs) that require a company to offer the same or better conditions to its contract party as those offered on any other party have been block exempted under the VBER for many years.
With the rise of online sales and in particular the online platform economy such clauses have become the focus of intense discussion again. Intermediary platforms, such as booking portals or price comparison tools, have increasingly reverted to parity obligations causing suppliers of goods or services wishing to use such platforms not to offer, sell or resell their goods or services to end users under more favourable conditions using competing online intermediation services or any other sales/marketing channel.
Such intermediation services are not easy to categorise using the concepts and terms of the existing VBER. As a result, the enforcement actions of national competition authorities and courts are inconsistent, leading to a patchwork within the EU. The draft revised VBER aims at reconciling the various concepts by providing explicit rules for MFNs/parity obligations.
When dealing with parity obligations, the draft revised VBER essentially differentiates between obligations covering direct sales channels and indirect sales channels via intermediation services.
- Across-platform retail parity obligations that cause sellers not to sell goods or services under more favourable conditions via competing intermediation platforms (sometimes called “wide parity obligation”) are no longer block exempted (Article 5(1)(d) draft revised VBER). Such across-platform parity obligations relating to indirect sales channels will have to be assessed individually under Article 101(3) TFEU. Guidance on the assessment can be found in sections 6.2.4 and 8.2.5 of the draft revised Vertical Guidelines.
- All other types of parity obligations/MFN clauses that only relate to sales channels operated by a supplier of goods or services (i.e. direct channels, also called “narrow parity obligation”) remain block exempted.
The draft revised VBER further clarifies that suppliers of online intermediation services are “suppliers” in the context of the VBER (Article 1(1)(d)). This clarification became necessary because in some national decisions, notably in Germany, suppliers of intermediary services were qualified as agents and therefore “buyers” under Article 1(1)(h) VBER. This may of course re-open the discussion as to whether a parity obligation falls within the scope of Article 4(a) VBER, because arguably by means of a parity clause the platform operator as the “supplier” restricts the retailer as the “buyer” in determining the retailer’s sale price.
Active sales restrictions
Under the current VBER, only under narrowly described circumstances a supplier is allowed to restrict the distributor from actively approaching individual customers. For example, this is the case when the supplier wishes to restrict a distributor from approaching customers in other territories than the ones exclusively appointed to it, if and when these other territories are reserved for other exclusively appointed distributors or to the supplier itself. Upon reflection of the VBER, the Commission concluded that the exceptions provided create many limitations and – more importantly – are unclear.
The draft revised VBER has included the definitions for active and passive sales, as well as the restriction thereof. Part of these definitions was included in the current Vertical Guidelines. In order to provide additional clarity, examples of active selling online have been added, such as the use of advertising on search engines targeting specific territories, offering website language options that are different from the ones commonly used in the appointed territory or offering a website with a domain name that corresponds with another territory than the one the distributor is appointed to. When the limitation to active (or passive) sales aims to prevent the distributor or its customers from effectively using the Internet for selling their goods or services or from effectively using one or more online advertising channels, it will be deemed a restriction under the VBER and characterised as a hardcore restriction. This means that the entire agreement in which the provision is concluded cannot benefit from a block exemption from the cartel prohibition. An individual assessment is required to assess whether the restriction can be justified.
Not only does the Commission aim to provide clarifications, it also includes additional possibilities for suppliers to protect and further design their distribution systems. The draft revised VBER, for instance, introduces shared exclusivity. A clear example is the introduction of the "pass on". The draft revised VBER allows for a supplier to also restrict other distributors and their customers or parties to which it has given distributor rights to actively sell in exclusively allocated territories. This "pass on" also applies to members of selective distribution systems that are restricted from actively selling in an exclusively appointed territory. In addition, the draft revised VBER clarifies and enhances the restriction of active or passive sales by members of the selective distribution system or their customers to unauthorised distributors located within the territory of a selective distribution system.
Another example is the possibility for the supplier to appoint more than one exclusive distributor for a territory or customer group, to the extent that the number of appointed distributors are in proportion to the size or volume of the territory or customer group.
Indirect measures restricting online sales
The draft revised VBER clarifies for the first time how to assess online restrictions: A restriction, which has as its object to prevent the buyers or their customers from effectively using the internet for selling products online or for online advertising constitutes a hardcore restrictions and thus cannot be block exempted. The Commission included here the key take-aways from past case law regarding online restrictions, in particular the key decisions of the European Court of Justice Pierre Fabre (2011) about the indirect total ban to sell online as well as Coty (2017) concerning an online marketplace ban.
The draft revised Vertical Guidelines list now even examples for such prohibited direct and indirect online restrictions including stipulations from the Geoblocking Regulation, the requirement of a physical presence of a specialised person in a brick and mortar store or the requirement of prior supplier's approval for selling online. These are indications, but in general an overall assessment should be necessary. However, market specific or individual circumstances of one or specific customers should not be taken into account. In the past, the German Bundeskartellamt wanted to consider the significant role of online marketplaces in Germany and qualify marketplace bans as hardcore restrictions whereas the draft revised Vertical-Guidelines explicitly mention that a ban on sales on online marketplaces is in principle block exempted if other online channels (e.g. own website, online advertising channels) remain available to the buyers. The Commission's intention is very clear: guarantee the harmonised application of the VBER across the EU.
The Commission wants to give more room for dual pricing. Quite surprisingly the Commission states in the draft revised Vertical Guidelines that charging the same distributor a higher wholesale price for products intended to be sold online than for products to be sold offline (so-called dual pricing) shall be block exempted. However, this new rule is not unlimited: the price differences should reflect different costs incurred and different investments made in the specific distribution channel and may also not make online sales unprofitable.
Further, the equivalence principle will be softened under the draft revised rules. Up to now the practice of the competition authorities in the EU is governed by the equivalence principle which means that the selective criteria for click stores have to be overall equivalent to the criteria imposed on brick stores. According to the Commission's Explanatory Note, the online business no longer needs special protection by qualifying indirect measures restricting online sales per se as hardcore restrictions. Consequently, a lack of equivalence is acceptable provided that such restrictions do not, directly or indirectly, have as their object to prevent customers from online purchases.
To stress the possibility of marketplace bans, the Commission dedicated a separate chapter to this topic providing also guidance for cases where the VBER does not apply because the parties exceed the market share threshold of 30%. In particular, a marketplace ban should be possible in the view of the Commission where the supplier has no contractual relationship to the marketplace operator. The Commission does not distinguish between luxury and other brand products. Further, the Commission suggests an assessment be made if, for example, brand protection and service quality could be achieved by less restrictive means, such as by an own brand shop within the online marketplace.
Another specific chapter is dedicated to restrictions on the use of price comparison tools having the function as online advertising channels. A direct or indirect total ban of price comparison tools are in general qualified by the Commission as a hardcore restriction. Imposing quality standards remains possible.
Guidance relating platform economy
The draft revised VBER points out that while the online platform economy plays an increasingly important role in the distribution of goods and services, it is not always easy to categorise these new services applying the traditional concepts for relationships between suppliers and distributors from the offline world. The draft revised VBER therefore includes a definition of online intermediation services providers, based on a similar definition in the P2B Regulation, and stipulates that online intermediation services providers qualify as suppliers under the VBER. Substantively, the draft regulates that online intermediation services cannot benefit from the dual distribution exemption if they offer sell goods or services themselves (i.e. hybrid platforms). Furthermore, direct or indirect obligations preventing a buyer of online intermediation services from offering, selling or reselling goods or services to end users under more favourable conditions using a competing online intermediation service is excluded from the block exemption. These new rules as well as the application of other rules to online intermediation services providers are explained in a new chapter of the draft revised Vertical Guidelines; this includes explanations why online platform providers cannot qualify as “genuine agents”, which are not considered in a competitive relationship with their principal. The Commission points out that the proposed changes of the VBER regarding the platform economy are consistent with the proposal for the Digital Markets Act (DMA) as the focus of the DMA is on digital gatekeepers, which do not meet the market share threshold of the VBER and therefore do not benefit from the block exemption.
Withdrawal of the benefit of the VBER in individual cases
The draft revised Vertical Guidelines provide specific guidance to the national competition authorities (NCAs) on when they can withdraw the benefit of the VBER to individual cases, providing them with the conditions and procedure to do so. The draft revised Vertical Guidelines now include more detailed explanations than those offered in the equivalent section in the current Vertical Guidelines with the aim of reinforcing this capacity of NCAs, which seems to have been used scarcely in the past.
Interestingly, the draft revised Vertical Guidelines expressly state that member states courts are in principle not allowed to adopt such withdrawal decisions (given that Article 29(2) of Regulation 1/2003 does not mention them), unless they are appointed as a ‘competition authority’ as per Article 35 of Regulation 1/2003.
- Both NCAs and the Commission may face two situations: (i) where a vertical agreement has by itself (in isolation) restrictive effects, which are not compatible with Article 101(3) TFEU and (ii) where the vertical agreement causes such effects in conjunction with other similar agreements (networks of parallel vertical agreements).
- ‘Similar’ vertical agreements are those, which contain similar restrictions such as shared exclusivity, exclusive supply, selective distribution, parity obligations or non-compete obligations.
- The draft revised Vertical Guidelines make it explicit that the possibility of the Commission withdrawing the benefit of the VBER as a result of a complaint (as per Article 29(1) Regulation 1/2003) may include NCAs as complainants. As a new provision introduced in the draft revised Vertical Guidelines, it is established that if at least three NCAs request the Commission to withdraw the benefit of the VBER, the Commission will discuss it in the context of the ECN to adopt a decision on taking good care of those NCAs views.
- As already established by the current Vertical Guidelines, a NCA can withdraw the benefit from VBER in cases where the restrictive effects take place in its territory or a part thereof, which can be considered as a distinct geographic market; similarly, the Commission has exclusive competence to decide on EU-wide withdrawals, which affect a geographic market wider than the territory of one member state (as well as concurrent competence with NCAs regarding regional or national markets provided that there is an effect in cross-border trade).
- The draft revised Vertical Guidelines now expressly state that if several national or regional geographic markets are affected, various NCAs could decide the withdrawal of the benefit of the VBER separately and in parallel.
- The draft revised Vertical Guidelines expressly state now that the two main applicable conditions to adopt a withdrawal decision – (i) showing that the VBER applies to the vertical agreement, and (ii) demonstrating that one of the conditions in Article 101(3) is not met – apply both to the Commission and to the NCAs.
- Finally, the draft revised Vertical Guidelines make an interesting point when they explain that a Commission’s withdrawal decision may include the imposition of a remedy or even the adoption of interim measures. No similar statement is made regarding withdrawals by NCAs, but this would seem to be possible if permissible under the relevant national competition provisions.
Simplification of rules and streamlining of guidance
In order to reduce the compliance costs assumed by companies, both the draft revised VBER and the draft revised Vertical Guidelines have been simplified and structured in a clearer way, including much more detail on certain previously unclearly expressed topics, clearer examples, and added explanatory content to many sections. Some examples of these improvements are:
- Article 4 (b) of the draft revised VBER, regarding territorial and customer restrictions under the distribution systems is restructured and now includes three sections regarding all restrictions and exceptions to these restrictions specifically for each type of distribution system: selective, exclusive, and free distribution (those not included in any of the previous two).
- Section 4 (6) of the draft revised Vertical Guidelines includes an explanation of the main distribution systems, with special explanation of selective distribution systems, exclusive distribution systems, and franchising. It includes all the criteria under which they are allowed as well as illustrative examples.
- Section 3 (2) of the draft revised Vertical Guidelines further elaborates on the definition of agency agreements and sets good and enlightening examples to follow up on it.
- Section 6 (1) (1) of the draft revised Vertical Guidelines reorganises and concentrates all the previously scattered provisions on Retail Price Maintenance (RPM) practices.
The Commission invites parties to provide comments on the draft revised VBER and Vertical Guidelines by 17 September 2021. The new VBER will probably come into force on 1 June 2022.
For more information on the revised VBER and the Vertical Guidelines and how it could affect your business, contact your CMS client partner or CMS experts: Kai Neuhaus, Malgorzata Urbanska, Carlos Vérgez, Dr Dietmar Rahlmeyer, Dr Björn Herbers, Annemieke Hazelhoff and Nadine Herda.