New competition law rules for distribution agreements - the new Vertical Block Exemption Regulation
After a long consultation period, the European Commission recently published the new Block Exemption Regulation for Vertical Agreements (Regulation (EU) 2022/720 "VBER"). The regulation will enter into force on 1 June 2022. New Guidelines on vertical restraints ("Guidelines") will accompany the new VBER. Both replace the previous set of rules from 2010. Agreements which comply with the old VBER will benefit from a transitional period until 31 May 2023 before compliance with the new VBER becomes mandatory in order to benefit from the exemption.
The Commission's aim in revising the rules was to bring them in line with new market developments, especially in the digital economy. Although the number of changes is limited, they have great practical relevance especially (but not only) for online and dual distribution.
2. Much remains unchanged
Like its predecessors, the VBER 2022 applies to vertical agreements. An agreement is vertical if, for the purposes of the agreement, the parties operate at different levels of the production or distribution chain and it concerns the conditions under which the parties purchase, sell or resell goods or services. In addition to distribution, authorised dealer and franchise agreements, this also includes, inter alia, purchase and supply agreements. Commercial agency contracts are also included, unless they are already exempt from the prohibition of anticompetitive agreements based on the exception for commercial agents.
The market share limit for the exemption also remains unchanged. As under the VBER 2010, the exemption is subject to the requirement that neither the market share of the supplier nor the share of demand of the buyer exceeds 30%. During the consultation phase, the Commission had considered introducing an additional combined market share threshold of 10% on the retail market for dual distribution settings. This additional threshold was widely criticised and ultimately did not become part of the new rules.
The general structure of the VBER also remains unchanged. Hardcore restrictions (also called "black clauses"), which lead to the agreement losing the benefit of the exemption, are listed in Art 4. As before, they include resale price maintenance, territorial and customer restrictions and restrictions on the sale of spare parts to independent repair or service companies. Art 5 VBER continues to list the so-called "grey clauses", including in particular non-competition obligations. Although grey clauses are not exempted, the exemption continues to apply to the rest of the contract. The new VBER brings about changes and clarifications to both black and grey clauses.
3. Significant changes brought about by the VBER 2022
3.1. Changes regarding dual distribution
While, contrary to the Commission's original proposal, no additional market share threshold was ultimately introduced (cf. 2 above), the new VBER nevertheless contains substantial changes for dual distribution:
- Under the VBER 2010, the exemption was limited to constellations in which a manufacturer marketed its goods both directly and through distributors. The VBER 2022 extends the exemption to dual distribution at different levels of the supply chain. It covers dual distribution not only by manufacturers, but also by importers and wholesalers.
- Dual distribution by providers of online intermediation services however is excluded from exemption. While agreements between platforms and distributors may benefit from exemption, this does not apply to so-called hybrid platforms which are both active in the sale of goods or services and offer online intermediation services to competing sellers of the same goods or services. The concern underlying this carve-out is that hybrid platforms might distort the outcome of competition on the market for sale of the intermediated goods or services in favour of their own trading activities.
- Moreover, Art 2(5) VBER 2022 limits the scope of the exemption as regards exchanges of information in dual distribution scenarios. Exchanges of information which are not directly related to the implementation of the agreement and are not necessary to improve the production or distribution of the goods or services concerned do not benefit from the exemption. This carve-out aims to exclude from the exemption exchanges of information which concern the horizontal relationship between the distribution activities of the hybrid supplier and its independent dealers. Such exchanges of information however are not automatically prohibited. Rather, they fall to be assessed under the Commission's Horizontal Cooperation Guidelines.
3.2. Changes to black clauses
3.2.1. Territory and customer restrictions
The rules on the exemption of restrictions of the distributor's right to sell the contract goods or services into certain territories or to certain customers have been completely revised. The changes increase the freedom to design distribution systems in conformity with the VBER.
- Exclusive distribution agreements (exclusivity in favour of the distributor)
Previously, restrictions of active (but not passive) sales by distributors into territories or to customers were exempted if the supplier had reserved these territories or customers for itself or allocated them to another dealer. The VBER 2022 extends the scope of to restrict the sales of distributors, in particular as follows:
- Restrictions of active sales are now permitted into territories or to customers assigned not only to one, but to up to five exclusive distributors;
- Suppliers may now restrict active and passive sales by exclusive distributors to unauthorised distributors in another territory where they operate a selective distribution system. Previously, such restrictions were considered hardcore restrictions, which meant that protection against grey market sales could no longer be ensured if exclusive and selective distribution coexisted in adjacent territories.
- Unlike before, these restrictions may also be passed on to the customers of the tied distributor (i.e. the second distribution level).
- Rules for selective distribution systems
The rules regarding selective distribution systems have been reworded, but largely correspond to prior law. As before, active and passive grey market sales, i.e. sales to unauthorised distributors in the selective distribution area, may be prohibited. In return, cross-supplies among selective distributors may not be restricted (with the exception of sales by members at the wholesale level to final consumers).
One important clarification brought about by the VBER 2022 is that suppliers may restrict active sales by members of a selective distribution system to exclusively allocated territories or customer groups. While such restrictions were already permissible under the VBER 2010, this was not readily apparent from the text of previous regulation.
- Rules for free distribution
For the first time, the VBER 2022 provides for rules for restrictions on buyers who are neither exclusive nor selective distributors (Art 4 lit d). Such buyers may be subject to restrictions of their
- active sales into exclusive territories or to exclusively reserved customers; and
- active and passive sales to unauthorised distributors in selective distribution areas.
3.2.2. Online sales
The VBER 2022 contains explicit rules regarding restrictions of online sales, which previously had to be inferred from case law and guidelines. Pursuant to Art 4 lit e VBER 2022, restrictions of the effective use of the internet for the sale of contract goods and services are now considered hardcore restrictions. This essentially corresponds to existing case law, pursuant to which restrictions which de facto amount to a prohibition of online sales do not benefit from exemption (ECJ Case C-439/09 Pierre Fabre).
In contrast, restrictions on online advertising which are not aimed at preventing the use of an entire online advertising channel, as well as other restrictions on online sales, may benefit from exemption. The Guidelines provide a number of clarifications:
- A "restriction of an entire online advertising channel" exists if the distributor is prevented from using entire channels such as search engines and price comparison services. This corresponds to case law, pursuant to which such restrictions did not benefit from exemption under the VBER 2010 (Commission AT.40428 Guess; German Federal Supreme Court KVZ 41/17 Asics);
- In contrast, restrictions on the use of online marketplaces continue to benefit from exemption (ECJ C-230/16 Coty);
- Dual pricing, i.e. the application of different wholesale prices depending on whether the distributor sells the goods through online or offline channels, is no longer automatically considered a hardcore restriction. If the price difference is reasonably related to the difference in costs of each distribution channel, it can benefit from exemption. On the other hand, dual pricing which aims to restrict sales to certain territories or customers or to reduce the overall volume of internet sales will be qualified as hardcore restrictions;
- Under the VBER, suppliers may also lay down quality specifications for online sales, for example for the design of the online shop or with regard to the presentation of the supplier's goods. Contrary the previous Guidelines, online sales criteria no longer need to be equivalent to those for offline sales. However, they must not aim at preventing the effective use of the internet by the buyer.
- The requirement that distributors must have an offline shop remains permissible, as does the requirement of a minimum sales volume in offline sales.
3.2.3. Clarifications regarding resale price maintenance
Pursuant to Art 4 lit a VBER 2022, resale price maintenance ("RPM") remains a hardcore restriction. This does not extend to the imposition of maximum sale prices and (non-binding) recommended prices, which continue to be exempted. The new Guidelines however provide some clarifications that are relevant for the application of the prohibition of RPM:
- The setting of minimum advertised prices is regarded as indirect RPM and therefore constitutes a hardcore restriction under Art 4 lit a VBER 2022;
- The imposition of fixed or minimum sale prices by providers of online intermediation services for transactions which they arrange is also qualified as RPM;
- For the first time, the Guidelines provide guidance on the fulfilment of contracts by third parties, for example the fulfilment of individual orders by a customer on the basis of a framework agreement concluded with a supplier. If the supplier choses the fulfilment partner, the supplier may determine the sales price charged by the fulfilment partner without this being deemed RPM. On the other hand, the arrangement may be deemed RPM if the customer chooses the fulfilment partner.
In exceptional cases, RPM may be justified by efficiencies. In addition to the examples already contained in the old Guidelines (product launch, coordination of advertising campaigns, enabling additional customer service), RPM may also be justified in order to prevent individual distributors from using the product for loss-leading offers which are detrimental to the brand. However, the burden of proof for demonstrating that the criteria individual exemption are met rests with the supplier. These criteria have been proven difficult to prove in practice.
3.3. Changes to grey clauses
3.3.1. More flexibility for the duration of non-competition clauses
Among the VBER's most important rules in practice is the grey clause of Art 5(1)(a). Pursuant to this provision, non-compete obligations (i.e., exclusivity in favour of the supplier) only benefit from exemption if are limited to a maximum duration of five years.
According to the new Guidelines, tacit extensions of non-compete obligations beyond five years may benefit from exemption if the buyer can effectively terminate or renegotiate the contract after five years. The notice periods granted for and the costs associated with termination must be reasonable and allow for an effective change of supplier.
3.3.2. No exemption for wide price parity clauses employed by online platforms
Price parity clauses imposed by online platform were generally regarded as benefiting from exemption under the VBER 2010. The VBER 2022 now exclude so-called "wide" price parity clauses, i.e. clauses which induce users which offer their services on the platform not to sell at more favourable conditions on other platforms, from exemption. In contrast, "narrow" price parity clauses, which prevent users from offering more favourable conditions for direct sales of their goods or services, continue to benefit from exemption.
The VBER 2022 increases the scope for structuring distribution relationships. In particular, it provides additional flexibility for agreements on territorial and customer restrictions and non-competition clauses. The new VBER however provides for stricter rules than its predecessor the area of online sales, and in particular for online marketplaces - an area which has been in the focus of the competition authorities for a long time.
Manufacturers and buyers along the supply chain are in any case well advised to review their existing contracts for future legal compliance and at the same time evaluate whether the VBER 2022 can open up advantages for their own distribution model.
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.