Authors: Luis Blanquez and Steve Cernak
The adoption of the new Vertical Block Exemption Regulation and Guidelines has created a hectic few months in the European Union for those in the world of antitrust and distribution agreements.
1. The European Commission updates existing vertical rules
On May 10, 2022, the European Commission (EC) adopted the new Vertical Block Exemption Regulation (VBER), together with the new Guidelines on Vertical Restraints. The core of applicable rules to vertical agreements––those entered into between undertakings operating at different levels of the distribution chain––remains the same, but the EC has now introduced some significant changes, especially for online sales and platforms. The new VBER entered into force on June 1, 2022, and will expire on May 31, 2034. There is also a transitional period of one year for those agreements already in force that satisfy the conditions for exemption under the old VBER, but do not satisfy the conditions under the new VBER.
Like the old, the new VBER allows parties to vertical agreements to determine their compatibility with Article 101(1) of the Treaty on the Functioning of the European Union (“TFEU”), by establishing a safe harbor exemption. In a nutshell, when the share of both buyer and seller does not exceed 30% of the relevant market, and absent any “hardcore restrictions” such as territorial or customer restrictions or resale price maintenance among others, their vertical agreements are automatically exempted. Agreements that do not satisfy the VBER conditions may still qualify for an individual exemption under Article 101(3) TFEU.
a. Dual Distribution
Dual distribution happens when a supplier is both active upstream, at the wholesale level, but also downstream, selling directly to end customers in competition with other retailers. For instance, through its own online shop or a marketplace.
The new VBER––similarly to the old draft––covers dual distribution as a safe harbor, even though it excludes vertical agreements between competitors. But the new draft includes two important nuances:
- First, the protection is now extended to cover not only manufacturers, but also importers and wholesalers. With one wrinkle: The so called “hybrid function”. Vertical agreements involving online intermediation services (OIS)––such as those provided by marketplaces or app stores among others––, where the provider acts as both a reseller of the same intermediated goods or services and competes with the same companies to which it provides those OIS, are excluded from the exception.
- Second, it introduces a novel two-prong test to determine when information exchanges in a dual distribution scenario are exempted: (i) when they are directly related to the implementation of the vertical agreement; and (ii) they are also necessary to improve the production or distribution of the contract goods or services. The Guidelines also provide (i) a non-exhaustive “white list” of examples that benefit from the exemption, such as technical information, or recommended or maximum resale prices, among others; and (ii) a “black list” of information exchanges not covered––such as information related to future prices downstream, etc…
b. Parity Obligations / MFNs
Parity obligations, also known as Most Favored Nation clauses or MFNs, require the seller to offer to the purchaser the same or better conditions offered: (i) to those on any other retail sales channel or platforms (wide parity clauses), or through the seller’s direct sales channel, usually its own online website (narrow parity clauses).
Under the new VBER, wide parity clauses are not covered anymore, and companies need to assess them under the individual exemption of Article 101(3) TFEU. But there is again one wrinkle: When it comes to narrow parity obligations in vertical agreements involving the provision of OIS, they may be still excluded from the block exemption in highly concentrated markets with cumulative effects and lack of efficiencies.
c. Exclusive and Selective Distribution Systems
The new VBER updates the old definitions of active sales (seller actively approaches a customer) and passive sales (unsolicited request from customer) in light of the new online business environment. For instance, an online website making sales with a domain name from a territory different from the one the distributor is established, or even just using a different language to the one officially established in that territory, is now considered an active sale.
It also introduces what is called “shared exclusivity,” which is the ability to designate up to five exclusive distributors per territory or customer group.
A supplier may also now require exclusive (as opposed to selective) distributors to impose those same restrictions on active sales to their direct (as opposed to indirect) buyers or territories exclusively allocated to other distributors. But a supplier passing on the same restrictions further down the distribution chain is not block exempted. This is a significant difference from selective distribution systems, where the supplier is allowed to impose such restrictions through the whole distribution chain.
Last, the new rules allow for a combination of both exclusive and selective distribution systems in different (as opposed to the same) territories. In practice, this means that a supplier may prevent its exclusive distributors from one territory to make active or passive sales to unauthorized distributors in other territories where there is a selective distribution system in place. And vice versa, distributors from a selective system in one territory may be banned from actively selling into a territory where there is an exclusive distribution system in place. Restrictions on passive sales in an exclusive distribution system are still considered hardcore restrictions.
d. Resale Price Maintenance
The European Commission still considers Resale Price Maintenance (“RPM”) a hardcore restriction under the new rules. Thus, it is not block exempted under any distribution system and needs to be individually assessed under Article 101(3) TFUE.
The Commission has now introduced some further guidance on minimum advertised prices (MAPs) and fulfilment contracts.
MAPs prohibit the distributor from advertising prices below a level set by the supplier. Under the new VBER––and contrary to what happens in the U.S.––MAPs qualify as an indirect means to apply RPM, a hardcore restriction.
Under a fulfillment contract, the supplier enters into a vertical agreement with a purchaser for the purpose of executing a supply agreement between the supplier and a specific customer. The imposition of a resale price may be considered RPM when the company providing the fulfillment services is selected by the customer (as opposed to the supplier).
e. Online Intermediation Service Providers
Providers of online intermediation services (OIS)––i.e., online marketplaces, app stores, price comparison tools and social media services, etc.––qualify under the new rules as suppliers and may benefit from the block exemption. Therefore, an OIS provider is not considered a buyer of the goods or services offered by third parties using such OIS and cannot impose any hardcore restrictions on the buyers of those services.
The block exemption does not apply to vertical agreements relating to the provision of OIS when the OIS provider has a hybrid function and competes on the relevant market for the sale of the intermediated goods or services. These agreements again require an individual assessment under 101(3) TFUE.
f. Online Sales
By having a system of dual pricing in place, a supplier charges different prices to the same distributor, depending on whether they are online or offline sales.
Under the new VBER, a dual pricing policy is not considered a hardcore restriction anymore as long as it incentivizes or rewards the appropriate level of investments, either online or offline and is reasonably related to differences in costs or investments between the online and offline sales channels. But most importantly, it may also not have the object of preventing the effective use of the internet by the buyer to sell the contract goods or services to particular territories or customers. This is now a new hardcore restriction.
The Commission has abandoned the old equivalence principle, when a supplier had to impose equivalent criteria to online sales and those from brick-and-mortar shops. But once again, only as long as those criteria do not indirectly aim to prevent the buyer’s effective use of the internet to sell the contract goods or services to particular territories or customers. Thus, restrictions addressed to ensure the quality of an online store, the use of a particular online sales channel (i.e., a ban on online marketplaces), or to limit online advertising––provided none of them have the object of preventing the use on an entire advertising channel––are covered by the block exemption. But other restrictions, such as those imposed on an entire online advertising channel (i.e., price comparison websites), or requiring a buyer to make a minimum number of sales online, remain hardcore restrictions.
2. Final Conclusions
Considering all these new changes, U.S. companies active in the European Union should carefully review their relevant distribution agreements.
It is particular important that businesses review their agreements relating to online sales, where the European Commission has not only come up with updated rules, but also with a new obligation for businesses to carry out an individual assessment to determine whether their distribution agreements have the object of preventing the effective use of the internet.
US companies may be surprised to learn that some of their business practices, while compatible with U.S. antitrust rules, may still breach EU competition rules. MAPs are a very good example, but there are many others.
Image by Peggy und Marco Lachmann-Anke from Pixabay