15 July 2021

Revised EU rules for vertical agreements proposed to address changed market realities

Helen Gornall
Bart de Rijke
Stephanie The
+ 1 other expert

On 9 July 2021, the European Commission unveiled drafts of the revised vertical block exemption regulation (VBER) and the vertical guidelines (VGL). The current VBER and VGL expire on 31 May 2022. They were last updated in 2010, when the e-commerce sector and the digital platform economy were still in a nascent phase. However, over the past decade (and accelerated further by COVID-19), there has been a boom in online sales and a marked prevalence of online platforms. These market changes, resulting in more complex and hybrid distribution arrangements, have significantly influenced the Commission's ongoing review.

Key changes

In a nutshell, some of the most critical changes in the new proposals are:

The 30% safe harbour remains intact except for dual distribution, where the proposal suggests a 10% combined retail threshold which may stretch to 30%, subject to information exchange being reviewed under the horizontal guidelines. Hybrid platforms - that are themselves sellers as well as intermediaries - no longer fall within the benefit of the VBER.

Online intermediation service providers (platforms) fall within the definition of supplier and “wide” retail parity clauses agreed with these entities, are no longer covered by the VBER.

"Narrow" retail parity clauses continue to benefit from the VBER and there is also new guidance on these clauses. Wholesale parity clauses also continue to benefit.

Dual pricing systems for products to be sold online and offline are no longer a hard-core restriction and therefore can benefit from the VBER.

Online sales restrictions are permitted as long as the effect is not to "significantly diminish" sales through this channel. Market place bans may be acceptable while bans on price comparison sites may be cause for concern.

Selective Distribution Systems (SDSs) can still have both quantitative and qualitative criteria. Restrictions in sales channels are possible for luxury, complex and/or high tech products. More protections are afforded to prevent sales by unauthorised dealers.

Resale Price Maintenance (RPM) continues to be treated as a hardcore restriction subject to specific exemptions which have been broadened in the guidelines.

Certain tri-partite agreements (for example, where a customer and supplier appoint an intermediary to support the contractual relationship or where sub-contracting is required) are acceptable and will not lead to a finding of RPM.

The definition of exclusive distribution now extends to more than one distributor for a particular territory or customer group as long as this is proportionate to "preserve investment efforts". This means that active sales from outside such a territory or customer group can be prevented even when more than one distributor has been appointed.

The Vertical Context

Agreements between businesses operating at different stages of the supply chain are widespread in the EU single market. These concern the supply and distribution of goods and services and are commonly called vertical agreements. Vertical agreements, like horizontal agreements between competitors, may distort competition if they contain certain restraints, but these are generally considered less harmful than restraints in horizontal agreements.

The VBER operates as a "safe harbour" by declaring that if vertical agreements fulfil certain conditions, the prohibition of anti-competitive agreements under Article 101(1) of the Treaty on the Functioning of the European Union (TFEU) does not apply. Agreements exempt under the VBER are assumed to fulfil the requirements for individual exemption set forth in Article 101(3) TFEU. One key condition for the VBER to apply is that neither the supplier nor the buyer's market share exceed 30% in each of their supply and purchasing markets. The VBER differentiates "hardcore" restraints from "excluded" ones. Hardcore restraints remove the benefit of the VBER from the entire agreement. Excluded restraints remove the benefit of the VBER only for the clause in question, but this removal does not prevent the remaining agreement from being exempt. Such vertical restraints that do not fall within the scope of the VBER are not necessarily prohibited. They could fall outside Article 101(1) TFEU altogether or must be scrutinised against the criteria for individual exemption under Article 101(3) TFEU. Vertical guidelines (VGL) have been developed to help companies (and their legal counsel) self-assess whether this is the case.

Although these principles will remain unchanged following the revision, the Commission has proposed amendments aimed at readjusting the safe harbour provided by the VBER, providing up-to-date guidance on e-commerce, new or more complex distribution models, and reducing compliance costs for small and medium-sized businesses. The VBER is accompanied by the revised VGL, which provides guidance on how to apply the VBER, and on the self-assessment of vertical agreements not exempted by the VBER.

Platforms as suppliers

At the outset, the Commission has extended the definition of a supplier to cover "online intermediation service providers" which include online platforms. Online intermediation services denote services that allow undertakings to offer goods or services to other undertakings or to end-users to facilitate direct transactions between such undertakings or between such undertakings and end-users. The definition is in line with the P2B Regulation. This categorisation applies even when the provider of online intermediation services also provides multiple services or services at multiple levels in the distribution chain. The Commission has additionally made it clear that hybrid providers of online intermediation services, who also sell products in competition with undertakings to which they provide their services, will no longer benefit from the VBER. Part of the rationale for this is set out in the Commission's Explanatory Note, which links these hybrid platforms to the Digital Markets Act (DMA). In our view, this link is misguided since it cannot be assumed that all hybrid platforms will meet the criteria of the DMA and, if they do, their behaviour will be thoroughly reviewed and, where needed, regulated using this new legislative tool.

Change in VBER scope

Based on the evaluation phase of the ongoing review, the Commission has focused on four main areas for which the scope of the safe harbour provided by the VBER needs to be specifically readjusted. These areas relate to dual distribution, parity obligations, territorial active sales restrictions, and restrictions of online sales. For the Commission, dual distribution and parity obligations represent false positives and can no longer be readily assumed to meet the conditions for exemption laid down in Article 101(3) TFEU. In contrast, active and online sales restrictions, according to the Commission, represent false negatives and can now more easily be assumed to fulfil the requirements for an exemption, thus making them eligible to be covered by the revised VBER.

Dual distribution

In a dual distribution framework, a supplier sells goods and services directly to consumers at the retail level, in competition with its distributors. An increase in online sales has resulted in an increase in sales by suppliers directly through their web-shops or via online marketplaces. Some online platforms play three different roles: as supplier, retailer, and online intermediation services provider ("hybrid platforms").

So far, the VBER has applied to vertical agreements between suppliers and buyers who compete at the retail level if the buyer is not a competitor on upstream markets. Now, the revised VBER limits the safe harbour for dual distribution to cases where the parties combined market share in the retail market does not exceed 10%. (This 10% share is presented in square brackets in the draft and is likely to be given particular scrutiny during the consultation period.) If the parties' combined retail market shares are between 10-30%, the VBER continues to apply except for information exchanges between the parties, which need to be assessed under the horizontal rules for exchanges of competitively sensitive information. This could also have a significant impact on retailers who operate franchise concepts in combination with their own stores. The Horizontal Guidelines are also being reviewed and may in due course provide more guidance on horizontal and vertical exchanges of information in situations of dual distribution. Where a practice essentially has as its object the restriction of competition between a buyer and a competing supplier at the retail level, it will not be covered by the revised VBER irrespective of the combined shares of the parties.

Moreover, in addition to suppliers and distributors, the new rules expand the scope of the dual distribution exception to cover wholesalers and importers. Additionally, an online marketplace that operates as a hybrid platform is categorically made ineligible to benefit from the dual distribution exception. There seems to be very little room for platforms to impose restrictions on the resellers active on its platform.

Parity obligations

Parity or "most-favoured-nation" (MFN) clauses that require a business to offer the same or better conditions to its contracting party as those offered to other trading partners are referred to as "wide" parity clauses. When the business is required to offer the same price as it does through its own direct sales channels (for example, its own website), but is free to offer lower prices through different channels, it is called a "narrow" parity clause. In recent years, there has been considerable debate about both wide and narrow parity clauses. Some competition authorities believe that wide parity infringes competition law because these clauses limit price competition and make entry for new competitors difficult. For example, many competition authorities have required commitments from online travel agents (OTAs) to stop using wide parity clauses in their agreements with accommodation providers. In contrast, a number of competition authorities have found that narrow parity clauses do not raise competition concerns because, depending on specific market dynamics, they help to prevent free riding. However, other competition authorities (such as those in Germany, Austria and France) have taken steps to declare them illegal. In France, the "Macron Law" was introduced for this purpose. Recently, on 18 May 2021, Germany's Federal Court of Justice overruled a 2019 ruling of the Higher Regional Court and held that even "narrow best price clauses" are not compatible with antitrust law because – in the case of OTAs – the clauses reduce intra-brand competition and the free-riding risk is insufficient to off-set these anti-competitive effects. The approach has therefore been divergent and fragmented across Europe, with no legal certainty for businesses wanting to rely on these clauses.

The Commission seeks to provide clarity on the types of parity clauses that are allowed. Per the revised rules, any direct or indirect obligation causing a buyer of online intermediation services not to offer, sell or resell goods or services to end-users under more favourable conditions using competing online intermediation services, does not fall within the VBER's safe harbour. In other words, unless there is a clear basis for finding efficiencies under a self-assessment regime, sellers should be free to offer better prices on other platforms. The proposed Digital Markets Act (see our previous article) will in any case make wide parity clauses illegal for undertakings deemed to be gatekeeper platforms. "More favourable conditions" may also concern inventory, availability, or any other terms or conditions of offer or sale.

Narrow parity clauses under the new proposals

These clauses remain block exempted. Above the 30% safe harbour, careful scrutiny of market dynamics is required on a case-by-case basis.

For example, anti-competitive effects may arise where:

  • There is a degree of market power (with market power being a lower benchmark under the VGL than for abuse of dominance);
  • Suppliers have a similar business model;
  • Multiple suppliers use parity clauses ("cumulative effects");
  • Multi-homing exists on the buyer side, but single-home exists on the customer side;
  • The market is concentrated, brand loyalty is important and/or lock-in strategies are used;
  • Other mechanisms are used to prevent switching;
  • Parity is also used in relation to other terms and conditions.

In contrast, pro-competitive effects may arise where:

  • A considerable amount of the services or products are sold to end users directly creating substitutability of channels;
  • There is clear added value provided by the platform and parity has been put in place to prevent a "real and substantial" free-riding risk, and the scope of the parity clause is indispensable for objective benefits to be achieved;
  • The following factors indicate a competitive landscape:
    • share of sales through each channel;
    • costs of using each channel;
    • elasticity of demand;
    • services across different channels.

All other types of parity obligations (such as wholesale parity obligations) will be covered under the safe harbour as long as the market share of the supplier and the online intermediation services provider are both below 30%.

Active sales restrictions

Active sales restrictions can relate to a variety of limitations imposed on the buyer's ability to actively reach out to individual customers. The VBER allows suppliers to restrict active sales into territories where an exclusive distributor has been appointed or the supplier has reserved distribution for itself or to an exclusively allocated customer group. The current rules are somewhat unclear on what active sales mean, particularly in the online context. The revised VBER clarifies this by stating that active sales include:

  • using price comparison tools or advertising on search engines targeting customers in specific territories or customer groups;
  • offering language options on a website different from the ones commonly used in the territory in which the distributor is established; and
  • offering a website with a domain name corresponding to a territory other than the one in which the distributor is established.

This expands the possibilities for suppliers to impose active sales restrictions on their resellers beyond what certain national competition authorities have claimed to be acceptable in recent years.

Pass-on to customers

Furthermore, the supplier under an exclusive distribution relationship may require its distributors to pass active sales restrictions onto their customers (if a customer has concluded an agreement directly with a supplier, but where a distributor has a necessary role to play as an intermediary or the supplier has contracted away the distribution rights), provided that the parties' market shares do not exceed the 30% VBER threshold. This protection will also extend to commercial relationships where the supplier sub-contracts its responsibilities to a third party or where an agent is introduced into the relationship. Tri-partite agreements may be necessary, for example, in territories where the supplier has no logistics or service capabilities, but where the customer benefits from agreeing on prices directly with the supplier.

Shared exclusivity

The revised VBER clarifies and expands various issues concerning exclusive and selective distribution. It will now be possible to appoint more than one exclusive distributor in a territory or for a particular customer group demarcated as exclusive. This is a welcome departure from the previous "all or nothing approach" which led to suppliers setting up exclusive distribution with just one distributor. This, in turn, has led to inefficiencies, since customers may be better served by a few distributors. The new rules recognise that there may be a legitimate reason to prevent encroachment on those customers through active sales by distributors who have not been tasked to service them. Nevertheless such "shared exclusivity" does not mean that suppliers have a blank cheque to include as many distributors as they like in an exclusive territory, or to use this framework to partition the market. The revised VBER (and VGL) state that the number of appointed distributors must be proportionate to the allocated territory or customer group in a way that is sufficient to secure a certain volume of business that "preserves their investment efforts". If this is the case, the concept of exclusive distribution within the VBER will apply to these broader arrangements, and they will be block exempted. In addition, the rules relating to passive sales remain, to ensure that cross-border and cross-customer sales continue, with a view to upholding the integrity of the single market and to ensuring that online sales remain as an effective competitive constraint.

Integrity of selective distribution

The revised rules also reinforce selective distribution systems (SDSs), promising greater protection from unauthorised dealers. The revised VBER allows suppliers to prohibit exclusive distributors from selling (actively or passively) to unauthorised distributors in territories where an SDS applies or has been reserved for an SDS. This protection extends to the exclusive distributor's customers, on which the same prohibition can be imposed. Previously, the integrity of an SDS could not be protected unless the SDS applied in the entire EEA. The revised rules allow for greater flexibility in combining distribution systems, while making sure the integrity of the SDS remains intact.

Online sales restrictions – dual pricing and lack of equivalence

Internet sales are now a well-functioning sales channel and do not need special protection for their growth. As such, dual pricing or the imposing of a higher price on the same distributor for goods intended to be sold online, as compared to goods sold in brick-and-mortar shops, will no longer qualify as a hardcore restriction under the revised VBER. As a result, a supplier may set different wholesale prices for online and offline sales as long as the difference in pricing relates to different costs incurred for different sales channels and is meant to reward an appropriate level of investment.

Until now, the "equivalence" criteria required imposing criteria for online sales that were, overall, the same as those imposed on brick-and-mortar shops. The revised rules change this position for SDSs, where now the criteria imposed by suppliers for online sales need not be equivalent overall to the criteria imposed on brick-and-mortar shops. With the Coty case being upheld (outlining that it is permissible to restrict certain online sales channels within an SDS), the Commission has also confirmed that the prohibition of sales via online marketplaces falls within the VBER.

The revised VBER will only block exempt indirect measures that restrict online sales, such as dual pricing and the lack of equivalence, if such restrictions do not either directly or indirectly have the object of preventing buyers or their customers from using the internet to sell goods or services.

Severe internet sales restrictions

While certain online sales restrictions benefit from exemption under the revised VBER, the restrictions themselves cannot lead to the prevention of the effective use of the internet for online selling purposes or of the effective use of online advertising channels. These restrictions on internet sales will now be treated as hardcore restrictions, especially if they can significantly diminish the overall volume of online sales. Thus, preventing sales through online price comparison sites is, in principle, prohibited. However, restricting the use of price comparison sites where these would constitute active selling, and imposing quality standards for the use of such sites, is allowed. The differentiation between marketplaces and price comparison sites appears to be insufficiently justified in the guidance. Both might make cross-border sales to some extent more difficult, but restrictions may be legitimate and important to promote and preserve the quality of the brand.

Resale Price Maintenance

In line with the current VBER and guidelines, in standard market situations, RPM will continue to be a hardcore restriction. However, the Commission clearly indicates that RPM is not a per se restriction, meaning there are situations where it may have pro-competitive effects. The new VGL contains similar examples to the previous guidelines (relating to short-term promotions and to the launching of new products). In addition, the new VGL recognises that pro-competitive effects may arise where RPM is put in place to prevent free-riding in relation to experience or complex products and where strong inter-brand competition exists. It will be interesting to see how the various NCAs respond to this broadened guidance during the consultation, given that some authorities (for example, Germany and Austria) have taken a hard-line per se approach in this area, compared to the more nuanced approach by others. The imposition of maximum prices, as long as these are not fixed prices, and the issuing of recommended resale prices, continue to be allowed.

Franchising

The VGL also includes additional information on franchising concepts. These continue to be permitted, but with the clear indication that resale price maintenance as part of these systems is disallowed. The rules on dual distribution will also affect these frameworks (as outlined above).

Next Steps

All stakeholders active in the single market are now invited by the Commission to submit their comments on the draft rules by 17 September 2021. The Commission will then consolidate the input received, finalise the impact assessment and revise the drafts into a final proposal. The new rules will be applicable from 1 June 2022 and will expire on 31 May 2034.