News Update Competition Litigation

24 November 2020

The European Commission (the "Commission") has recently taken a significant step towards revising the Vertical Block Exemption Regulation ("VBER"), which provides a safe harbour for specific types of vertical agreements by exempting those agreements from the cartel prohibition. The revised VBER is likely to have far-reaching implications for businesses from mid-2022, when it will enter into force. On 23 October 2020, the Commission published its 'Inception Impact Assessment' (the "IIA") providing its plans to reform the VBER together with the vertical guidelines to address the problems identified during the VBER evaluation, which was published on 8 September 2020.

Suggestions for new VBER rules

In the IIA, the Commission indicates that it aims to clarify and simplify the rules contained in the VBER, including incorporating recent case law and filling in gaps that presently create scope for divergent interpretations. More specifically, the Commission proposes changes to the current rules in relation to the following areas: (1) resale price maintenance (2) non-compete obligations (3) dual distribution (4) active sales restrictions (5) indirect measures restricting online sales and (6) parity obligations:

1. Resale price maintenance (RPM) (IIA, under A(B)(a))

Resale price maintenance ("RPM") – agreements or concerted practices that have as their direct or indirect object establishing a fixed or minimum resale price or price level – are practically by definition considered to be hardcore restricted under the current VBER.

The Commission proposes clarifying the treatment of possible efficiencies arising from RPM. This includes exploring the conditions under which efficiencies for RPM can be claimed and suppliers can establish a fixed or minimum resale price.

2. Non-compete obligations (IIA, under A(B)(b))

The Commission will also look at reducing costs and administrative constraints by allowing tacitly renewable non-compete obligations to the extent that the buyer is able to periodically terminate or renegotiate the agreement.

3. Dual distribution (IIA, under A(C)(a) and under (B)(a))

Dual distribution – a situation in which a supplier sells its goods or services directly to the end customers, therefore competing with its distributors at retail level – is currently covered by the VBER (which is an exception to the general rule that the VBER does not cover agreements between competitors). Due to the rise of online sales, dual distribution has increased significantly. There is a risk that vertical agreements are exempted, when horizontal concerns are no longer negligible.

For these potential issues, the Commission is considering new rules such as (1) limiting the scope of the exception to scenarios that are unlikely to raise horizontal concerns by introducing a threshold based on the parties' market shares in the downstream retail market or alternatively (2) extending the dual distribution exception to wholesalers and importers. The Commission indicated that both options may be introduced cumulatively. Lastly, the Commission is proposing a rather far-reaching option, namely removing the exception for dual distribution from the VBER entirely, so that an individual assessment would be required in all distribution cases.

4. Active sales restrictions (IIA, under A(C)(b) and under (B)(b)

Active sales restrictions are agreements that intend to restrict the territory into which or the customers to whom the buyer can resell its goods or services. These restrictions are only exempted under the current VBER where (1) a territory or customer group is exclusive allocated to only one distributor or (2) within a selective distribution system where sales to non-authorised distributors are restricted. The Commission identified various concerns regarding the complexity and scope of the current rules. The Commission is proposing two options (which may be combined) to clarify ambiguities and to fill in the gaps.

Firstly, the Commission is proposing to expand the exceptions for active sales restrictions to offer suppliers more flexibility to design their distribution systems according to their needs. Secondly, the Commission is considering allowing restrictions on sales from outside a selective distribution system's territory to unauthorised distributors inside that territory to more effectively protect selective distribution systems.

5. Indirect measures restricting online sales (IIA, under A (C)(c) and under B(c))

Currently, certain indirect measures that may make online sales in the context of selective distribution more difficult, are prohibited. The most prominent examples include (1) dual pricing (i.e. charging the same distributor a higher wholesale price for products intended to be sold online than products intended to be sold offline) and (2) imposing of criteria for online sales that are not entirely equivalent to those required for offline ("brick-and-mortar") sales.

During the VBER evaluation, the Commission identified that the current approach to these types of restrictive measures creates adverse effects in practice, as well as unclear provisions. One of the identified issues is that over the last decade, online sales have developed into well-functioning sales channels, while physical stores are experiencing more challenges as a consequence of this development. Suppliers and hybrid retailers believe that the prohibition on dual pricing has made it more difficult to stimulate associated investments in physical stores.

Additionally, the Commission noted that, given the inherent differences between online and "brick-and-mortar" sales, there is a lack of legal certainty in the assessment under what conditions the criteria for online sales are equivalent. In light of these identified problems, the Commission is currently considering allowing these types of restrictive measures to be defined in case law under certain conditions (safeguards).

6. Parity obligations (IIA, under A(C)(d) and under B(d))

Parity obligations (also known as MFN clauses) require a business to offer the same or better conditions to its counterparty as those offered on any other sales channel (the "wide" parity obligations), or on the supplier's direct sales channel (the "narrow" parity obligations). Parity obligations are currently exempted under the VBER. However, national competition authorities and courts have identified anti-competitive effects of wide parity obligations, especially given their increased use vis-à-vis digital platforms in recent years.

Therefore, the Commission is considering adding wide parity clauses to the list of excluded restrictions (Article 5 VBER), which would require an individual effects-based assessment of each of these obligations. Conversely, parity obligations relating to other types of sales channels – namely sales channels other than the channel of the counterparty – would continue to benefit from the block exemption, as they are likely to create efficiencies. Alternatively, the Commission is considering excluding all types of parity obligations from the benefit of the block exemption.

What's next?

The deadline for stakeholders to provide feedback on the IIA is 20 November 2020. At the end of 2020, an open public consultation and a targeted consultation of consumer organisations are scheduled. The Commission will then publish a draft version of the revised VBER and vertical guidelines in 2021, with a view to having the new rules in place by 31 May 2022.