Following a comprehensive evaluation process which began in 2018, the EU Commission published on 9 July 2021 its long-awaited draft vertical agreement block exemption regulation (Draft VBER) and accompanying guidelines (Draft Guidelines). Both documents are available here.
The current VBER and Guidelines, which date from 20101, are widely considered to be a useful tool for self-assessment of vertical agreements. However, given the exponential growth of online sales and tectonic shifts in how consumers buy goods and services across the EU in the past decade, including the development of new players such as online marketplaces, the current regime is in dire need of an upgrade.
This article explores the proposed new regime in depth and highlights where businesses will most likely need to adjust their distribution agreement to comply with the new regime and/or benefit from new exemptions before it enters into force on 1 June 2022. Notably, the Draft VBER does provide for a one-year transitional period until 31 May 2023 for distribution agreements already in force on 31 May 2022 which meet the existing conditions for exemption. This window will give businesses some time to reflect on the changes and, if necessary, adapt their commercial agreements.
What is the VBER?
Article 101(1) of the Treaty on the Functioning of the European Union (TFEU) prohibits agreements which restrict competition. Article 101(3) TFEU sets out the exception to this prohibition for agreements, which contribute to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefits.
Agreements between entities active at different levels of the supply chain, (a manufacturer and distributor for example) are referred to as vertical agreements. Competition law has long established that vertical agreements may be able to benefit from the Article 101(3) exemption.
The Vertical Agreement Block Exemption Regulation (VBER) is a regulation which automatically exempts through a safe harbour under Article 101(3) TFEU vertical agreements which comply with a set of criteria, namely:
The VBER comes with detailed guidance which provides crucial insight into its interpretation in relation to the main types of vertical agreement and distribution structure. These Guidelines also contain the Commission's policy considerations in relation to vertical agreements falling outside the safe harbour of the VBER. This is invaluable guidance for the self-assessment businesses and their legal advisors are expected to undertake to ensure distribution agreements comply with competition law. The current regime is applicable across the EU. The rules were retained within UK law after Brexit.
The current VBER came into force in 2010 and will expire on 31 May 2022 in the EU and UK. This article looks at the EU Commission's proposed new regime in detail. The UK is undertaking its own assessment in parallel and we are beginning to see some divergence.
The proposals retain the structure and substance of the current VBER, whilst readjusting certain rules, in particular around the distinction of exclusive, selective and other forms of distribution. The Draft Guidelines address topical issues like dual distribution, dual pricing, retail parity obligations, active sales restrictions and certain indirect measures restricting online sales. They provide extensive guidance on concepts which in practice had become difficult to self-assess and more clarity on the scope of Article 101 TFEU relating (true) agency agreements and so-called de minimis restrictions of competition. The proposals also offer more flexibility for distributors who wish to combine different types of distribution models, oblige their distributors to pass-on sales restrictions to their customers or want to appoint multiple exclusive distributors.
Adjustments to the Draft VBER and Draft Guidelines may still be made to reflect public comments, but we anticipate that most of the proposed changes will also be included in the final regulation and guidelines.
Summary of the key changes
1. The scope and structure of the Draft VBER
The heart of the Draft VBER is Article 4. It sets out the so-called hardcore restrictions, which if included in an agreement will automatically remove the benefit of the safe harbour. In the Draft VBER, the headline restrictions remain unchanged. Retail price maintenance (RPM), namely restricting a distributor's ability to determine its sale price, unsurprisingly remains a hardcore restriction regardless of the distribution structure. Territorial and customer restrictions are also retained as hardcore restrictions.
The Draft VBER however sets out the varying exceptions around territorial and customer restrictions within a clearer structure, looking at i) exclusive distribution, ii) selective distribution and iii) free distribution in turn. It explicitly allows for more flexibility in the design and structure of the distribution models than was previously envisaged. In addition, the Draft VBER introduce new definitions providing more clarity to businesses in particular SMEs who typically have small inhouse legal teams. The aim is to simplify the rules and ultimately reduce compliance costs for businesses.
1.1 Exclusive distribution
Within an exclusive distribution system, a supplier allocates a territory or customer group exclusively to a distributor and can restrict other buyers from actively selling into the exclusive territory or to the exclusive customer group. The existing permitted restrictions have been carried through in the new VBER. The Commission however has introduced the following new provisions:
i. Shared exclusivity
The Draft VBER sets out a new concept of 'shared exclusivity', where a supplier can appoint 'one or a limited number' of exclusive distributors in a given territory or customer group in addition to distributing the products itself2. More clarity is provided within the Draft Guidelines on this new concept where it is stated that the number of exclusive distributors i) should not be large and ii) should be proportionate to the exclusive territory or customer group in a way which guarantees a certain volume of business to preserve their investment effort3. The Commission is of the view that all shared exclusive distributors should also benefit from the same protection against active sales from outside buyers. Finally, passive and active sales between such distributors cannot be restricted4.
ii. Active sales restrictions can be passed on
The Draft VBER will now allow the supplier to demand a 'pass on' of the active sales restriction to the buyer's customers5, if they have entered into a distribution agreement with the supplier or with a party that was given distribution rights by the supplier. This new provision extends the reach of active sales restrictions and provides reinforced protection for the investment incentives of exclusive distributors.
iii. Protection of selective distributors in a different territory
The Draft VBER caters for more flexibility within distribution structures and particularly the co-existence of both selective and exclusive networks. The new provision in Art 4(b)(ii) explicitly allows a supplier to protect its selective distributors by allowing the restriction of active and passive sales by an exclusive distributor to unauthorised distributors into a territory where the supplier operates a selective distribution system. Again, this restriction (on both active and passive sales) can also be passed on to an exclusive distributor's commercial customers.
1.2 Selective distribution
Within a selective distribution system, a supplier sells the goods or services only to distributors and (often) retailers selected on the basis of specified criteria and where these distributors undertake not to sell such goods or services to unauthorised distributors or retailers within the territory reserved by the supplier. Again, the Commission has built on the existing permissions and introduced a few more provisions:
i. Protection of exclusive distributors in a different territory
The Draft VBER now allows the restriction of active sales by selective distributors or their customers into an exclusive territory or customer group6. This mirrors the new provision in Art 4(b)(ii) Draft VBER and crystallises the Commission's acceptance of combined distribution.
ii. Active and passive sales restrictions can be extended to selective distributor's customers
The Draft VBER will now allow the supplier to restrict a selective distributor's customers from making active or passive sales to unauthorised distributors located within the selective distribution territory7. This builds on the existing provision which allows passive and active sales restrictions to non-authorised distributors within a selective network. Such restrictions can now be passed on to the buyer's customers.
iii. Equivalence principle
The equivalence principle previously required selective suppliers to impose the same or equivalent criteria on their online distributors and brick and mortar distributors. The Draft Guidelines soften this stance on the basis that online businesses no longer need this protection reflecting that online and offline channels have different characteristics. A selective supplier is no longer required to impose on its authorised distributors identical criteria for online and physical sales,8 as long as the lack of equivalence does not have as its object the prevention of online sales.
1.3 Free distribution
A free (or open) distribution system is defined by the absence of an exclusive or a selective structure. Previously free distribution did not grant distributors the ability to restrict passive or active sales. The new provisions however, in unison with the previously covered provision, now cater for combined structures. It allows free suppliers to protect their selective or exclusive territories by restricting
(i) active sales by the buyer or its customers into a territory or customer group reserved to the supplier or allocated to one (or a limited number of) exclusive distributors; and
(ii) active and passive sales by the buyer or its customers to unauthorised distributors located with a selective distribution system.
2. Dual Distribution exception now reflects growing horizontal dynamics
Although the VBER is aimed at vertical agreements, the safe harbour is extended to dual distribution scenarios. This reflects the fact that the line between competitors and non-competitors is increasingly blurred. The advent of online sales has only increased this phenomenon with many brand owners selling both through distributors and directly on their websites in parallel. Article 2(4) of the current VBER grants the benefit of the safe harbour to non-reciprocal agreements between competitors, where for instance the supplier is a manufacturer and a distributor of goods, while the buyer is a distributor and not a competing manufacturer.
The Draft VBER looks set to retain the dual distribution exception, even extending it to wholesalers and importers. However, it proposes a new aggregated market share threshold of 10% at retail level to benefit from the exception9. This is a momentous change, which is already facing criticisms from stakeholders and will undoubtedly be challenged in the response to the consultation. It highlights the Commission's increasing concern around the horizontal dynamics within vertical agreements. Nonetheless, the Draft VBER somewhat softens its stance by providing that if the combined market share does exceed the 10% threshold while still falling below 30%, the block exemption will still apply except for any exchange of information between the parties. Such exchanges will have to be assessed under the rules applicable to horizontal agreements10.
3. Dual pricing will be block exempted
The Commission's previous position was to protect online sales at all costs. At the time the current VBER came into force in 2010, online sales were a new sales channels, which needed protecting. However, the commercial landscape has drastically changed in the last 10 years and even more so since the COVID-19 pandemic.
Given this shift, the Commission looks set to fundamentally change its focus. Requiring a distributor to pay a different price for products intended to be resold online than products to be resold offline (dual pricing) was previously a hardcore restriction. The Draft Guidelines make it clear that it no longer will be11. Dual pricing will now benefit from the safe harbour as long as the restriction aims to incentivise, or reward appropriate levels of investment respectively made online and offline.
This change will be welcomed by suppliers and physical distributors who have long complained about free riding and the inability to recoup the marketing and customer support investments as well as the costs of maintaining brick & mortar stores. However, it does mean careful drafting of agreements will be needed capture the purpose of the dual pricing.
4. Online sales restrictions
Previously online sales restrictions only featured in the Guidelines as an example of passive or active sales. Their inclusion within the Draft VBER itself is noteworthy. Online sales restrictions are now defined as restrictions which directly or indirectly, have as their object the prevention of the effective use of the internet as a sales or advertising channel12. The new assessment will therefore be whether a restriction prevents the effective use of the internet. This is not a new assessment and was mentioned in the Commission's e-commerce inquiry. Its inclusion within the draft VBER crystalises its status for self-assessment and underlines the continued significance of the Internet as a sales channel.
4.1 Marketplace bans
Marketplaces were non-existent or at best minor players when the current VBER was issued in 2010. The Draft Guidelines define marketplaces as online platforms which connect merchants and potential customers with a view to enabling direct purchases. Amazon and eBay (to name only two) have now become behemoth e-commerce platforms. As expected, the Draft Guidelines provide clarity on the permissibility of restrictions of on sales via online marketplaces.
Since the 2017 Coty ruling of the EU Court of Justice13, which established that marketplace bans are acceptable in the context of the selective distribution of luxury goods, there has been an ongoing debate on the permissibility of such restrictions beyond this initial scope. The Commission now ends this debate and clarifies in the Draft Guidelines that restrictions on sales through online marketplaces are block exempted in vertical agreements if the market share thresholds are met. This exemption applies to all products. According to the Commission,"suppliers may wish to restrict the use of online marketplaces by their buyers, for instance to protect the image and positioning of their brand, to discourage the sale of counterfeit products, to ensure sufficient pre- and post-sale services or to ensure that the retailer maintains direct a relationship with customers14".
The Commission explicitly clarifies that the restrictions on marketplace sales are not hardcore restrictions since it only limits the modalities of the buyer's online sales and not the sales to a specific territory or customer group. For this reason, only a platform ban that prevents the actual or effective use of the internet for online sales will constitute a hardcore restriction15. If, however, the prohibition of sales on certain online marketplaces still allows buyers to sell their goods via other online channels (e.g. their own website and online advertising channels), it is not a hardcore restriction16).
4.2 Restrictions on the use of online advertising channels
The Commission also indicates in the Draft Guidelines that comparison websites are regarded as online advertising channels since they re-direct customers to the website of a retailer. It is of the view that direct or indirect prohibitions on the use of online advertising channels (such as price comparison tools or search engine advertising) have the object of preventing distributors from effectively using the internet as a sales channels and therefore are hardcore restrictions. Similarly, a requirement on a distributor not to use a supplier's trademark or brand name on its website will be a hardcore restriction.
In line with the Geo-blocking regulation,17 which deals with unilateral geo-blocking, the Draft Guidelines codify in very direct terms the position on bilateral geo-blocking. This is in line with the Commission's decision to fine Valve and a number of game publishers for similar geo-blocking agreements in January 202118. A requirement or contractual clause that a distributor prevent customers located in another territory from viewing its website or automatically re-route its customers will both be hardcore restrictions19.
5. The platform economy
Online platforms (aka online intermediation services) such as marketplaces or price comparison tools play an increasingly important role in the distribution of goods and services. Their role however is multifaceted and therefore not always easy to categorise within traditional parameters.
In the first instance, the Commission is proposing to treat providers of online intermediation services as 'suppliers' within the meaning of the VBER irrespective of whether the provider is a party to the transaction it facilitates20. This reflects the definitions within the Platform-to-Business (P2B) Regulation (EU) 2019/1150 on promoting fairness and transparency for business users of online intermediation services. This also means that online intermediation services providers cannot qualify as agents for the purposes of Art 101(1) TFEU21. The Commission is of the view that they are independent economic operators. The significance of this is that the seller who uses the platform is defined as a 'buyer' of those intermediation services. As such, the supplier is not permitted to set the 'buyer's' price, but can recommend that the seller list at a competitive price, and there is no general duty for the platform to carry a seller's products22.
6. Wide retail parity obligations now excluded restriction
Retail parity obligations (often referred to as Most-Favoured-Nation clauses or MFNs) have long been shrouded in uncertainty. They can take many forms, but typically require a supplier of goods or services to offer them to another party on conditions that are no less favourable than the conditions offered by the supplier to certain other parties or on certain other channel. The conditions could relate to price, inventory, availability or any other terms.
They are very common in the context of online platforms where the case law has drawn an important distinction between 'wide' and 'narrow' retail price parity clauses. 'Wide' retail price parity clauses typically require retailers (e.g. hotels) to publish on a price comparison tool or online marketplace (e.g. online hotel booking site) the same or better price and conditions as those published on any other sales channel. While 'narrow' retail price parity clauses typically require retailers to publish on a price comparison or online marketplace the same or better price and conditions as those published on its own (direct) website.
A decade's worth of conflicting national enforcement on the rules and many EU Commission investigations ending in commitments resulted in a confusing picture. The Commission had previously confirmed that it would provide more guidance on how such clauses should be analysed and does deliver on this promise in the Draft VBER and Guidance.
The Draft VBER removes the benefit of the block exemption for 'wide' parity obligations, which should now be treated as Excluded Restrictions. This means that, whilst they are not 'hardcore restrictions' and therefore are severable from the rest of the agreement, the pro and anti-competitive effects of 'wide' parity obligations will need to be assessed under Art 101(3) TFEU. 'Narrow' retail parity obligations and wholesale price parity clauses remain block exempted.
7. Next steps for the EU regime
All interested parties are now invited to comment on the proposals by 17 September 2021. Thereafter, the Commission will assess the evidence gathered from the impact assessment and the stakeholder comments. It expects the final revised VBER and Guidelines to be published in time to enter into force on the day after the current VBER expires on 31 May 2022.
The beginning of divergence with UK rules on vertical agreements
In parallel with the EU, the UK is currently consulting on the content of its future rules for supply chain agreements. In June 2021 it published a consultation document setting out its current thinking. You can read our full analysis of the proposals here.
Already there appears to be an element of divergences between the two regimes. This is regrettable for international businesses and could ultimately increase compliance cost. In practice, it is also likely that businesses will opt for the stricter approach to avoid accidental non-compliance and to save costs.
The UK has not yet published a draft VABEO so this position could change, in addition the UK will be keeping a close eye on EU proposals. We set out below the current two likely deviations.
2. Art 4(b)(i) Draft VBER
3. Para 102 Draft Guidelines
4. Para 103 Draft Guidelines
5. Art 4(b)(i) Draft VBER and Para 206 Draft Guidelines
6. Art 4(c)(i) first hyphen Draft VBER
7. Art 4(c)(ii) second hyphen Draft VBER
8. Para 221 Draft Guidelines
9. Art 2(4)(a) and (b) Draft VBER
10. Art 2(5) Draft VBER
11. Para 195 Draft Guidelines
12. Art 1(n) Draft VBER
13. Our article summarising the ECJ's Coty judgement (case C-230/16) of 6 December 2017 is available here
14. Para 315 Draft Guidelines
15. Para 13 Draft VBER
16. Para 316 Draft Guidelines
17. You can find the full text of the Geo-blocking Regulation (EU) 2018/302 here
18. You can find the full text of the Commission's Valve decision here
19. Para 192 Draft Guidelines
20. Art 1(1)(d) Draft VBER
21. Para 44 Draft Guidelines
22. Para 179 Draft Guidelines
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.