|In recent months we have seen a number of regulatory initiatives with an impact on various aspects of the Czech online business environment go forward. There is a lot to unpack, so we have prepared a series of Legal Insights which will help you understand what will change in 2023. Through January, we are publishing three articles focusing on the most important legal developments. Today, our series continues with a second article focusing on B2B distribution agreements and their compliance with Czech and EU competition law. Specifically, we focus on online sales and changes relevant to Czech manufacturers, wholesalers and distributors.|
In June 2022, a new EU vertical block exemption regulation ("VBER") formally entered into effect. The VBER is directly applicable in the whole EU and also applies to strictly national cases in the Czech Republic. However, the transition period for adhering to the new rules will only end on 31 May 2023, so there is still time to review and update distribution agreements. Generally, it is now standard that products are sold not only in stores but also online. Inevitably, many distribution agreements have to address online sales and do so using various approaches, from completely prohibiting online sales by the customer, through different pricing, to implicitly allowing online sales under the same conditions as offline sales.
Let's start by looking at the VBER rules applicable to online sales and the changes compared to the old vertical block exemption rules. We'll then discuss relevant enforcement trends in the Czech Republic that play a role in online sales.
Old and new rules for online distribution
One of the main elements of the VBER, especially for B2B suppliers, is that it refrains from requiring the so-called equivalence principle for offline and online sales. Under the new rules, the supplier is explicitly permitted to apply different prices for products intended for offline and online sales (i.e. dual pricing). Nevertheless, the differences must still be objectively justified, so the supplier must set the prices to reflect the different investment and other costs associated with offline and online channels. At the same time, higher prices for online channels cannot lead to effective prevention of online sales by the customer. For example, the supplier is now allowed to set lower prices for offline sales to give the customer space to invest the profits from higher margins into better on-site services or sales promotions.
Moreover, the abandonment of the equivalence principle also means that the supplier will be able to impose additional conditions on online sellers, if these are justified. For example, under the new rules the supplier may require online sellers to use a safe payment method, reimburse consumers' costs associated with returning the products, or operate a help desk.
Second, the VBER clarifies what constitutes active and passive online sales. The differentiation is important, since only active sales to other countries can be prohibited to online sellers, while forbidding passive (non-solicited) sales is generally not allowed. For example, it is now clear that a simple online advertising targeted to specific territories, the option of a language selection different from the domestic territory of the online seller or operating a website with a foreign domain name (such as xy.sk for online distributors appointed for the Czech Republic only) is understood as active sales. As such, the supplier may in certain forms of a distribution system prohibit these kinds of promotions to its customers active in online sales.
Third, the VBER now explicitly gives the supplier the ability to ban use of online marketplaces (if other conditions for the exemption, such as market share thresholds, are met), unless doing so would effectively prevent online sales completely. In other words, if the customer can operate its own online store, the supplier may usually require it not to use marketplaces.
Fourth, the VBER clarifies when and under what conditions suppliers may restrict the use of price comparison tools by customers. An outright ban on price comparison tools will be considered as a hardcore restriction and cannot benefit from the exemption, but restrictions on particular price comparison tools (e.g. on the basis of quality requirements) are possible, if they do not prevent effective use of the internet (and, again, other conditions such as market shares are met).
On balance, the VBER now allows slightly more restrictive provisions in distribution agreements with respect to online sales and promotion by distributors. However, every agreement must be analysed individually in terms of whether it meets the other conditions of the VBER (mainly the 30 % market share threshold for both sides). Other changes or clarifications in the VBER not discussed above (see here for another of our Legal Insights) also result in the need for a comprehensive assessment of existing agreements before the transition period expires on 31 May 2023.
Enforcement trends relevant for the online world
Relationships between suppliers and customers active in online sales are also affected by current enforcement trends of the European Commission and, in the Czech context, by the Czech Competition Authority ("CCA"). We elaborated on these trends in one of our previous Legal Insights. Some of the conclusions can be expanded to B2B agreements in the online world.
First, the CCA will continue to take a hard line on resale price maintenance agreements (RPMs). These are most common in online sales, because the internet allows competing distributors to regularly monitor other distributors' prices. Therefore, "complaints" by distributors to suppliers about the pricing behaviour of other distributors appear more frequently. As correctly addressing such complaints can be a challenge, regular training of suppliers' salesforce is a must.
Second, the CCA is now willing to accept quasi-leniency requests even in cases of vertical agreements. Parties to distribution agreements active in online sales can therefore benefit from closely monitoring their relationships with suppliers or customers, allowing them to detect possible anticompetitive behaviour early. If they can identify such a case, they may even be awarded full immunity from a potential fine.
Third, given the above-mentioned risks, especially regarding RPM in the online world, it can be sensible for suppliers and distributors to implement a suitable compliance policy. Besides preventing anticompetitive conduct by employees and, in case of outliers, allowing for the possibility of applying for leniency, compliance policies are now accepted by the CCA as a reason to decrease a potential fine.
It is impossible to state whether the situation in 2023 will generally benefit suppliers or customers more in the online world. The VBER tends to give more leeway to suppliers in how they restrict their customers' online activities, but certain clauses would still be regarded as hardcore restrictions that cannot be exempted by the VBER. Distribution agreements may still be reviewed until 31 May 2023, when the transition period ends.
Accordingly, the CCA will likely continue to focus on the supply side of distribution agreements, as RPM cases are enforced and sanctions are imposed only against suppliers. However, it also seems that suppliers will have more room to use the leniency tool and could incur smaller fines if they have a good compliance policy in place, which was not the case in the past.
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.