News Update Competition

21 July 2021

The European Commission ("the EC") has taken another key step in revising the Vertical Block Exemption Regulation (“VBER”) and Vertical Guidelines that started in October 2018. The VBER aims to ensure that vertical agreements are compatible with Article 101(1) of the Treaty on the Functioning of the European Union ("TFEU") by creating a safe harbour.

The EC is currently assessing how to adapt these rules to the market developments of the last ten years due to the evolution of e-commerce and online platforms. To this end, the EC published the revised VBER and Vertical Guidelines ("draft VBER" and "draft Guidelines" respectively) drafts on 9 July 2021 for consultation.

These revised rules, now open for consultation up until 17 September 2021, after a final proposal by the EC, will enter into force on 1 June 2022. They are a major development in competition law in the single market and will have an important impact on companies active in the single market. We describe and assess all the most significant changes below.

Key proposed changes

Objectives
The draft VBER specifies that the proposed changes have three objectives:

• To readjust the VBER's safe harbour to its intended scope, regarding dual distribution, parity obligations, active sales restrictions and certain indirect measures restricting online sales.
• To provide guidance for e-commerce and online platforms. In particular, clarifying how to apply the VBER and the Vertical Guidelines to online sales and advertising restrictions, and specific rules and guidance relating to the platform economy are included;
• To reduce compliance costs for companies, especially for small and medium-sized enterprises, by streamlining and clarifying certain provisions that are currently perceived as particularly complex.

Dual distribution
Dual distribution – a situation where a supplier sells its goods or services directly to the end customers, in addition to its distributors and therefore competing with its distributors at retail level – currently falls within the VBER's safe harbour. However, dual distribution may give rise to horizontal concerns. The draft VBER, therefore, proposes a new approach to dual distribution agreements.

On the one hand, the draft VBER proposes to expand the dual distribution safe harbour by no longer referring only to manufacturers, but also to wholesalers and importers. On the other hand, to address horizontal concerns, the draft VBER proposes to remove the safe harbour for dual distribution when the joint market share of the undertakings involved at retail level exceeds 10% (Article 2(4)(a) and (b) draft VBER).

However, an additional safe harbour is created for suppliers who, combined with its distributors at retail level, have a market share that exceeds 10%, but remains below 30%. In such instances, the exchange of information between these parties will be excluded from the 30% exemption and is to be assessed under the rules for horizontal agreements. Moreover, vertical agreements should not contain any restrictions by object to fall under dual distribution exemptions.

Under the draft VBER, providers of online intermediation services (platforms) cannot benefit of the VBER when they sell goods or services in competition with companies to which they provide online intermediation services.

Parity and most-favoured-nation (MFN) clauses
Parity and MFN clauses require companies to offer its contracting partner conditions that are at least as favourable as those offered in other distribution channels. These types of clauses are increasingly used, notably by online platforms, and are exempted under the current VBER. However, national competition authorities believe that these “wide” parity clauses – i.e. obligations that require parity with other indirect sales or marketing channels, such as other platforms or other online intermediation services – produce certain anti-competitive effects.

As a response to these concerns, the draft VBER removes the general exemption for “wide” parity clauses and shift such clauses to the category of excluded restrictions under the draft VBER. Wide parity clauses therefore will require an individual assessment under Article 101(3) TFEU and no longer benefit from the safe harbour.

In contrast, "narrow parity" clauses – i.e. parity obligations relating to direct distribution channels such as websites – as well as parity obligations for wholesale remain exempted under the draft VBER.

Active sales restrictions
Active sales restrictions limit a distributor's ability to actively approach customers in a specific territory or customer groups defined by other criteria. The current VBER does not regulate the use of shared exclusivities between two or more distributors in a particular territory. Suppliers often believe that the current rules are complex and unclear, preventing them from designing a specific distribution system that fits their business needs.

The draft VBER and draft Guidelines address this issue as follows:

• Including a definition of active sales in the draft VBER and clarifying on the interaction of the different distribution schemes with each other in the draft Guidelines.
• Providing the possibility of shared exclusivity. This allows a supplier to appoint more than one exclusive distributor in a particular territory or for a particular customer group. The draft Guidelines clarify that the number of appointed distributors should be proportionate to the allocated territory or customer group so that it secures a certain business volume that preserves the distributor's investment efforts. This should avoid fragmenting the single market.
• Specifying the possibility that suppliers in exclusive distribution systems must oblige their distributors to pass on investment incentives to their customers. This should increase the protection exclusive distributors' investment incentives.
• Providing reinforced protection for selective distribution systems by allowing restrictions from sales by unauthorised distributors located within the selective distribution network.

Online sales: dual pricing and equivalence
The draft VBER allows dual pricing – the possibility of charging the same distributor a higher wholesale price for online and offline sales. Under the current VBER, this constitutes a hardcore restriction, but the draft VBER and draft Guidelines exempt dual pricing if it serves as an incentive or remuneration for appropriate investments and are proportionate to the costs of the respective distribution channel.

The draft VBER also proposes to leave behind the "equivalence principle" in selective distribution systems – the requirement that the naturally different criteria for online and offline channels must be equivalent overall. This reflects the view that online and offline channels have different features and corresponding approaches.

Nevertheless, both dual pricing and non-equivalence are only allowed if the practices in question do not restrict online sales.

More guidance on e-commerce and online platforms
The draft VBER qualifies and clarifies that online sales restrictions are a hardcore restriction; such clauses prevent distributors or their customers from effectively using the internet for the purpose of selling their goods or services online or from effectively using one or more online advertising channels. This clear-cut definition eases businesses' assessment of their distribution network.

The draft Guidelines further clarify this restriction, following the case law of the Court of Justice of the EU in Pierre Fabre and Coty:

• Restricting the use of price comparison websites or paid referencing in search engines is not allowed and is a hardcore restriction. The ability to advertise allows a distributor to attract potential customers to its website, which is a prerequisite for being able to sell online.
• Offering different language options on websites in territories that normally do not use these languages is considered a form of active selling and can be restricted.
• Offering a website with a foreign domain extension different from the country in which the distributor is based also constitutes active selling and can thus be restricted.

Agency
Agency agreements remain outside the scope of Article 101 TFEU if it concerns genuine agency. However, the criteria for genuine agency are difficult to apply to e-platforms and this difficulty has resulted in divergent approaches and a corresponding legal uncertainty for businesses.

The draft Guidelines aim to clarify this as follows:

• Companies providing online intermediation services will be categorised as suppliers and therefore, they in principle cannot qualify as agents in the context of Article 101(1) TFEU.
• Providers of online intermediation services generally act as independent economic operators and not as part of the companies of the sellers to which they provide online intermediation services.

Other interesting points
Besides these above changes, the draft VBER and draft Guidelines contain aspects or modifications that may have practical significance:

• In contrast to the current VBER and VGL, the draft VBER and draft Guidelines cover non-compete obligations that are tacitly renewable beyond a period of five years and they are no longer deemed to have been agreed for an indefinite period. An effective change is considered possible after the expiry of the five-year period allowing the distributor to renegotiate or terminate the agreement with reasonable notice and at reasonable cost.
• The draft Guidelines assesses the effects of Resale Price Maintenance ("RPM") on competition. In particular, price monitoring, which is increasingly used in e-commerce, does not constitute RPM as such. Concerning RPM, the draft Guidelines propose that online intermediation services providers are prohibited to impose fixed or minimum sales prices for the transaction that they facilitate.

Conclusion and next steps
The draft VBER and draft Guidelines include no radical changes when assessing vertical restraints under Article 101(1) TFEU, even though the Commission proposes several changes and clarifications.

The draft VBER and draft Guidelines provide the much-awaited clarifications and legal certainty in e-commerce and online platforms. It remains, however, to be seen whether businesses are capable of interpreting and applying the new guidance in practice at a reasonable cost. At the same time, the EC's stricter approach in aspects such as dual distribution may lead to additional legal uncertainty.

The EC invites all interested parties to submit comments on the draft VBER and draft Guidelines by 17 September 2021. After the consultation is closed, the Commission will assess the evidence gathered from the impact assessment and the stakeholder comments and come to a final proposal. The final revised VBER and Guidelines will then enter into force on the day after the current VBER and Guidelines expire and be applicable from 1 June 2022 to 31 May 2034.