New EU Competition Rules For Vertical Agreements Enter Into Force On 1 June 2022 - Antitrust, EU Competition

Following a comprehensive review and consultation process, the new revised EU vertical agreements block exemption Regulation (VBER) and Guidelines have now been published and will come into force on 1 June 2022. The Commission's stated objectives of the review process were to adjust the safe harbour under the VBER to eliminate false positives (where the previous rules were considered too permissive) and reduce false negatives (where the previous rules were seen as too restrictive), and to provide simpler, clearer and up-to-date rules and guidance for businesses in order to assess their agreements for compliance with the competition rules, in particular in light of the growth of online sales and online platforms.

As a result, the new VBER and Guidelines contain substantial changes that will shape how businesses design their vertical agreements. On the whole, the rules have been simplified and provide greater flexibility. Article 4 VBER, which contains the list of hardcore restrictions, is now more clearly structured, listing the permitted territorial/customer restrictions for each type of distribution agreement and allowing greater flexibility in the design of distribution models. The approach to online sales restrictions, which recognises that significant developments in e-commerce have taken place since the previous VBER was adopted in 2010, no longer treats the majority of online sales restrictions as passive sales restrictions (which are never permitted) and recognises that online sales and bricks-and-mortar sales are inherently different in nature.

But there are also several areas where the rules are now more restrictive. Although the exemption for dual distribution agreements now covers more levels of the supply chain (including importers and wholesalers in addition to manufacturers), any information exchanges under the agreement that are not directly related to the implementation of the agreement and necessary to improve the production or distribution of the contract goods or services will not be exempt. Across-platform, or 'wide' retail parity clauses will now become excluded restrictions and there are new rules for online intermediation services providers, who will qualify as suppliers and whose agreements will not be categorised as agency agreements that fall outside the scope of Article 101(1) TFEU.

Businesses will have until 31 May 2023 to ensure their current agreements comply with the new rules.

We have set out below a summary of the key changes and would be happy to discuss with you more specifically how the revised rules will impact your business.

Dual distribution agreements

The safe harbour of the VBER does not apply to vertical agreements between competing undertakings, but there is an exception for dual distribution agreements, where a supplier is a manufacturer and also sells its goods or services directly to end customers, therefore competing with its independent distributors at retail level. While the exception previously only covered manufacturers, Article 2(4) VBER now extends it to also cover wholesalers and importers.

But due to the increase in the use of dual distribution, in particular in the context of online sales, the Commission also expressed concerns that the exception for dual distribution agreements risks exempting vertical agreements where possible horizontal concerns, in particular in relation to the exchange of commercially sensitive information between the parties, are no longer negligible. As a result, Article 2(5) VBER now provides that the safe harbour for dual distribution agreements only applies to the exchange of information between the supplier and the buyer where the exchange is directly related to the implementation of the vertical agreement and necessary to improve the production or distribution of the contract goods or services. Further clarification on information exchange in the context of dual distribution is provided in the Guidelines, which provide non-exhaustive lists of examples of information exchanges that are or are not likely to meet the test (white and black lists) (paragraphs 99 – 101).

In addition the Guidelines provide examples of possible precautions (exchanging information in aggregated form, use of clean teams or firewalls) that companies may want to consider in order to minimise the risk that information exchange will raise competition concerns (paragraph 103).

Finally, Article 2(6) VBER clarifies that vertical agreements relating to the provision of online intermediation services (OIS) are not exempt where the OIS provider has a hybrid function (i.e. competes on the market for which it provides the online intermediation services). The Commission notes that it is unlikely to prioritise enforcement in relation to hybrid OIS agreements, provided they do not contain 'by object' restrictions or where the provider does not have significant market power (paragraphs 106 – 109).

Territorial and customer restrictions

Article 4 VBER (list of hardcore restrictions) has been restructured and simplified, setting out more clearly the prohibited and permitted restrictions for each type of distribution agreement (exclusive distribution, selective distribution and 'free' distribution). It provides businesses with more flexibility in designing their distribution systems according to their business needs, enabling them to operate different distribution systems in different territories of the EU.

Exclusive distribution

The VBER introduces the concept of shared exclusivity, allowing a supplier to appoint up to a maximum of five distributors for an exclusive territory or customer group (Article 4(b)(i)). The appointed distributors may be protected from active sales into their allocated territory or customer group by all the supplier's other buyers (whether they operate under an exclusive, selective or free distribution system). Active and passive sales restrictions by shared distributors within the exclusive territory or customer group cannot be restricted.
The supplier can also pass on the active sales restriction and require its buyers to prohibit their direct customers from making active sales into exclusive territories or customer groups. A restriction on active sales further down the distribution chain will not benefit from the safe harbour.
A combination of exclusive and selective distribution in the same territory of the EU, for example an exclusive wholesaler and selected retailers, will not benefit from the safe harbour of the VBER.

Selective distribution

The supplier can restrict active or passive sales by exclusive and 'free' distributors and their customers to unauthorised resellers located in a territory where the supplier operates a selective distribution system, regardless of whether those distributors and their customers are located inside or outside that territory. Again, this makes it possible for a supplier to operate selective and exclusive distribution systems in different parts of the EU.
The Guidelines also make it clear that a selective distribution system benefits from the VBER regardless of the nature of the products, the type of selection criteria (qualitative and/or quantitative) or whether or not these selection criteria are published.

Free distribution

A free distribution system is defined as a model under which a supplier operates neither an exclusive nor a selective distribution system.
The supplier may restrict active sales by the buyer and its direct customers into a territory or customer group allocated by the supplier exclusively to a maximum of five exclusive distributors.
The supplier may restrict active or passive sales by the buyer and its customers to unauthorised distributors located in a territory where the supplier operates a selective distribution system.
The supplier can restrict the buyer's place of establishment

Resale price maintenance (RPM)

The approach to RPM is unchanged and it remains a hardcore restriction under Article 4 VBER. The Guidelines now make it clear that imposing minimum advertised prices (MAPs), prohibiting distributors from advertising prices below a certain amount set by the supplier, also qualify as indirect RPM. Although distributors remain free to sell at prices that are lower than those advertised, the Commission considers that distributors are disincentivised from doing so by restricting their ability to advertise available discounts. On the other hand, MAPs may nonetheless meet the conditions of Article 101(3) TFEU and benefit from an individual exemption, where they are used to prevent a particular distributor from using the product of a supplier as a loss leader (paragraphs 189 and 197).

In the context of the so-called fulfilment contracts, whereby a supplier enters into an agreement with a buyer for the purpose of fulfilling a supply agreement concluded previously between the supplier and a customer, the Guidelines clarify that the imposition of a resale price by the supplier is not RPM. The rule may apply, for example, where customers purchase goods from an undertaking active in the online platform economy which is operated by a group of independent retailers under a common brand, and that undertaking determines the price for the sale of the goods and forwards orders to the retailers for fulfilment. The exemption applies as long as the undertaking that provides the fulfilment services is selected by the supplier (i.e. the customer 'waives' its right to choose the undertaking that should execute the agreement) (paragraph 193).

Finally, the Guidelines provide (slightly) expanded guidance regarding potential efficiencies of RPM (paragraph 197).

Online sales restrictions

In line with the case law (Pierre Fabre and Coty), a new hardcore restriction has been added to the VBER (Article 4(e)), for agreements that have the object of preventing the effective use of the internet by the buyer or its customers to sell the contract goods or services, including restrictions that have the object of preventing the use of one or more entire online advertising channels. This is without prejudice to the possibility of imposing other online sales restrictions on the buyer, or restrictions of online advertising that do not have the object of preventing the use of an entire online advertising channel.

The Guidelines set out a framework for the assessment of online sales restrictions. The following are examples of restrictions that indirectly prevent the effective use of the internet and will therefore qualify as hardcore restrictions (paragraph 206):

Requiring the buyer to prevent customers located in another territory from viewing its website or online store, or to re-route customers to the online store of the manufacturer or another distributor;
Requiring the buyer to reject payments using a credit card address outside its territory;
Requiring sales to be made in a physical space or in the physical presence of specialised personnel;
Prohibiting the buyer's use of the supplier's trademarks or brand names on its website or online store.

Examples of requirements relating to online sales that can benefit from the safe harbour of the VBER include (paragraph 208):

Quality requirements;
Requirements regarding the display of the contract goods or services in the online store;
A direct or indirect ban on the use of online marketplaces;
Requirement to operate an offline store;
Requirement to make a minimum absolute volume of sales offline (but not as a proportion of total sales) to ensure the efficient operation of the offline store.

The new definitions of active and passive sales restrictions set out in Article 1(1) VBER and the Guidelines (paragraphs 202 -210) also clarify the type of online restrictions that qualify as active sales restrictions and can therefore be imposed in order to protect exclusive and selective distributors, and passive sales restrictions which should not be imposed.

Setting up an online store, the use of search engine optimisation to improve visibility or ranking of the online store, offering an app in an app store are all forms of passive selling. Offering a language option in an online store that is different from the language commonly used in the territory of the seller, establishing an online store with a top-level domain relating to a territory different from that where the seller is established, targeted advertising or promotions are all a form of active selling and can be prevented in order to protect exclusive or selective distributors.

Dual pricing

A requirement for the buyer to pay a different wholesale price for products intended to be resold online than for products to be resold offline (dual pricing) can benefit from the safe harbour of the VBER, as it may incentivise or reward an appropriate level of investment in online or offline sales channels, provided it does not have the object of restricting sales to particular territories or customers. This will be the case where the difference in the wholesale price makes online selling unprofitable or financially unsustainable, or where it is used to limit the quantity of products made available to the buyer for sale online. Dual pricing will benefit from the safe harbour where the difference in the wholesale price is 'reasonably related' to the differences in the investments and costs incurred by the buyer to make the sales in each channel.

Equivalence principle

The Commission recognises that online and offline channels have different characteristics. In the context of selective distribution suppliers will no longer be required to impose the same qualitative criteria for online sales as they impose for sales in bricks and mortar shops (equivalence principle), provided the requirements imposed for online sales do not indirectly have the object of preventing the effective use of the internet by the buyer.

Online marketplaces and price comparison websites

Restrictions relating to the use of particular online channels, such as online marketplaces, will benefit from the safe harbour of the VBER provided they do not indirectly have the object of preventing the use of the internet by the buyer to sell the contract goods or services to particular territories or customers (paragraph 347).

A total ban on the use of price comparison services prevents the buyer from using an entire online advertising channel, which is a hardcore restriction under Article 4(e) VBER. Restrictions on the use of price comparison websites which do not directly or indirectly prevent the use of all price comparison services (for example a requirement that the price comparison service meets certain quality standards) can benefit from the safe harbour of the VBER (paragraph 349).

Treatment of online intermediation services

The online platform economy plays an increasingly important role for the distribution of goods and services and the new VBER and Guidelines provide specific rules and guidance relating to the platform economy.

Article 1(1)(e) VBER contains a definition of online intermediation services and Article 1(1)(d) states that providers of online intermediation services qualify as suppliers. The implications of this clarification and the application of the VBER to online intermediation services are set out in the Guidelines:

The Guidelines make it clear that agreements entered into by undertakings active in the platform economy will typically not meet the conditions to be categorised as agency agreements that fall outside the scope of Article 101(1) TFEU (paragraph 46).
The market share of the undertaking providing online intermediation services in order to establish whether the VBER applies, is calculated on the relevant market for the supply of those services.
Restrictions imposed by the provider of online intermediation services on the buyers of those services, relating to the price at which, the territories into which, the customer to whom the intermediated goods or services may be sold, online advertising and online selling, will need to comply with Article 4 VBER.
The provider of online intermediation services cannot impose across-platform retail parity obligations on buyers of those services (Article 5(1)(d) VBER).
The safe harbour of the VBER does not apply to so-called hybrid platforms, where a provider of online intermediation services also sells goods or services in competition with undertakings to which it provides the online intermediation services (Article 2(6) VBER). Instead such agreements will need to be assessed on an individual basis for compliance with Article 101 TFEU, taking into account the Commission's Guidelines on horizontal cooperation agreements.

The provisions on online intermediation services are in line with the EU Digital Markets Act, where the focus is on digital gatekeepers. However, the definition of online intermediation services providers may include undertakings with different business models, not all of which will be gatekeepers, and it remains to be seen how this new regime will apply to them in practice.

Parity obligations (MFN clauses)

Most favoured nation (MFNs) or parity clauses, that require a business to offer the same or better conditions to its contracting party as those offered on any other sales channel, have until now benefited from the safe harbour of the VBER. The Commission's evaluation however showed an increase in the use of parity obligations across sectors, notably by online platforms, and several national competition authorities have also held that such clauses can have negative effects on competition. As enforcement experience indicates that not all parity clauses can be assumed to generally meet the conditions of Article 101(3) TFEU, across-platform (i.e.'wide') retail parity obligations will now become excluded restrictions under Article 5 VBER.

Any direct or indirect obligation, causing a buyer of online intermediation services not to offer, sell or resell goods or services to end users under more favourable conditions via competing online intermediation services will be excluded from the safe harbour of the VBER and will need to be assessed individually under Article 101 TFEU. The Guidelines provide further guidance on the factors to be taken into account when carrying out such assessment (paragraphs 356 – 378).

All other parity obligations, including narrow retail parity clauses and wholesale parity clauses will continue to benefit from the VBER safe harbour.

Agency agreements

The definition of agency agreements that fall outside the scope of Article 101(1) TFEU, where the agent bears no (or only insignificant), financial or commercial risk associated with the contract concluded or negotiated on behalf of the principal, remains unchanged. The Guidelines now expand on a number of key concepts. By way of example:

The Guidelines clarify that a principal may use various methods in order to reimburse the relevant risks, where they ensure that the agent bears no, or only insignificant risk, provided there is a clear distinction between the amount intended to cover the relevant risks and costs and any other amounts paid to the agent.
The fact that the agent temporarily, for a brief period of time, acquires the property in the contract goods does not preclude the existence of an agency agreement that falls outside the scope of Article 101(1) TFEU, provided that the agent does not incur any costs or risks in relation to the transfer of the property.

There is also new guidance on dual role agents, which provides that an independent distributor of some goods or services of a supplier may also acts as agent for other goods and services for the same supplier, provided that the activities and risks covered by the agency agreement can be effectively delineated (paragraph 36).

Finally, as discussed above, the Guidelines clarify that agreements by undertakings active in the online platform economy will generally not qualify as agency agreements, as they typically act as independent economic operators and serve a very large number of sellers, which prevents them from effectively becoming part of any of the sellers' undertakings.

Sustainability

The Guidelines recognise that sustainable development is a priority objective for the EU to which efficient supply and distribution agreements may be able to contribute. But vertical agreements that pursue sustainability objectives are not a distinct category of vertical agreement under the competition rules and will need to meet the conditions of the VBER in order to benefit from its safe harbour. The Guidelines provide examples of how sustainability goals can constitute an efficiency under Article 101(3) TFEU:

In the context of a selective distribution agreement qualitative criteria may refer to the achievement of sustainability objectives, for example a requirement for the buyers to have recycling facilities in their outlets or to ensure that goods are delivered via sustainable means (paragraph 144).
Exclusivity obligations may be used to incentivise long-term investment in sustainable technology, such as a hydropower plant or wind farm to address increased demand for renewable energy (paragraph 316).

Other Commission guidelines may be relevant, such as the Commission's guidelines on the application of Article 101(3) TFEU and the guidelines on horizontal cooperation agreements, the latest draft version of which now includes a new chapter on the assessment of sustainability agreements (see our blog post here).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.