The European Commission's draft revised rules applicable to vertical agreements have been published
On 9 July 2021, the European Commission launched a public consultation inviting interested parties to comment on a draft revised Vertical Block Exemption Regulation and Vertical Guidelines. The most important changes relate to dual distribution, Most Favoured Nation clauses ("MFNs"), dual pricing, modernisation of the rules restricting online sales and flexibility in relation to the operation of distribution systems.
Commission Regulation No 330/2010 of 20 April 2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices (the "VBER") expires on 31 May 2022.
The VBER reflects that certain types of vertical agreements, ie agreements entered into between undertakings operating at different levels of the production or distribution chain – usually a supplier or a distributor – entail efficiency-enhancing effects which justify that they are exempted from the prohibition of agreements restricting competition when they fulfil certain conditions.
In October 2018, the European Commission launched an evaluation and revision process in relation to both the VBER and the relating guidelines. As a result of this process, the Commission published on 9 July 2021 both a draft revised VBER and new guidelines and launched the consultation process. Interested parties can comment on the draft until 17 September 2021. The new set of rules is expected to enter into force on 1 June 2022.
The most important changes compared to the previous VBER are the following:
The European Commission proposes a more restrictive assessment of vertical agreements entered into between suppliers and distributors operating dual distribution (parallel distribution), ie the supplier resells their goods and/or services through their own distributors (for example, their own web shop) and through independent distributors.
The current VBER exempts agreements between manufacturers and their independent distributors who are competitors in the retail market, but also only in the retail market, when the general conditions of the VBER are fulfilled.
The European Commission now proposes the following changes:
- The exemption for dual distribution will no longer only apply to manufacturers operating dual distribution systems but also to wholesalers and importers operating this distribution form.
- Agreements entered into between dual distribution suppliers (including manufacturers, wholesalers and importers) and their independent distributors can only be exempted under the VBER if the parties' total market share in the relevant retail market does not exceed 10%.
- However, the exemption will apply in situations where the supplier's or the distributor's total market share exceeds 10% but the supplier's market share does not exceed 30% in the delivery market and the buyer's sales do not exceed 30% in the purchasing market, except for information exchanges between the parties which instead have to be assessed under the rules applicable to horizontal agreements, ie agreements between competitors.
- Agreements entered into between suppliers of online intermediation services and their buyers will not be comprised by the VBER when the supplier is selling goods or services in competition with buyers to whom they also provide online intermediation services.
- It is established that the exemption will not apply to vertical agreements between dual distribution suppliers and their independent distributors if the agreement, directly or indirectly, in isolation or combination with other facts controlled by either party, has as its object to restrict competition between the supplier and the distributor.
Most Favoured Nation clauses ("MFNs")
The European Commission proposes a more restrictive approach to the so-called parity obligations or Most-Favoured Nation clauses ("MFNs") causing a party not to offer the contract goods or services on better conditions through other distribution channels (for example, other online platforms). MFNs are in general exempted under the current VBER when the general conditions for exemption are fulfilled.
The European Commission proposes that MFNs which, directly or indirectly, cause a buyer of online intermediation services not to offer, sell or resell goods or services to end users on better conditions by using competing online intermediation services should be excluded from the scope of the VBER and instead be assessed individually.
If an agreement includes such an MFN, the exclusion of the VBER will only affect the MFN, whereas the remaining vertical agreement can still be exempted if the MFN can be separated from it.
Other types of MFNs may still be exempted under the VBER. Such clauses are, for example, MFNs at the retail level relating to direct sales by providers of goods or services or marketing channels and MFNs concerning the conditions on which goods or services are sold to parties other than end users.
The current vertical guidelines establish that in general an agreement that a distributor shall pay a higher price for products intended to be sold online than for products intended to be sold offline (a so-called double pricing system, or dual pricing) constitutes a hardcore restriction of buyers' online sales which cannot be exempted under the VBER, and which can only be exempted individually "in specific circumstances".
The European Commission proposes a modification of this approach. Under the draft revised vertical guidelines dual pricing may be subject to a safe harbour or the VBER in so far as it is intended incentivise or reward an appropriate level of investment in the online or offline activity respectively. Dual Pricing should be associated with differences in the retail distributors' costs for online and offline sales respectively.
Modernisation of the rules on online sales restrictions
The current vertical guidelines establish that a distributor's online sales are in principle regarded as passive sales, unless they are specifically targeted at a specific territory or a specific customer group. Restrictions of the distributor's passive sales are hardcore restrictions not covered by the VBER.
The European Commission proposes introducing definitions of "active sales" and "passive sales" in the VBER instead of in the guidelines. The rules on passive and active sales to a great extent correspond to that which applies under the current rules but include a modernisation which takes into account online advertising channels, including, for example, comparison shopping services and online search engines.
It is specified that actively targeting customers, both offline and online, for example through online media, comparison shopping services or search engine advertising targeted at customers in specific territories or customer groups, constitutes active sales. It will also normally constitute active sales if language options different from the ones commonly used in the territory where the distributor is established are offered on a website, or if it is possible to access a website with a domain name corresponding to a territory other than the one in which the distributor is established.
It will still be possible for a supplier to impose certain restrictions of active sales on their distributors. Accordingly, a supplier can impose restrictions on the preparation of personalised advertising targeted at customers in an exclusive territory or exclusive customer groups, or on the preparation of advertising for payment in an online search engine, comparison shopping service or online platform targeted at an exclusive territory or an exclusive customer group.
It will also still be possible for a supplier to impose certain quality standards on distributors with respect to online sales or advertising. It will be covered by the VBER if the supplier demands that the buyer's online advertisements must fulfil certain standards of quality or include specific elements or information, or that the buyer not use services provided by individual providers of online advertising, for example comparison shopping services, which do not fulfil certain quality standards.
On the other hand, it will still be a restriction of active or passive sales if a supplier imposes restrictions on a distributor which, directly or indirectly, in isolation or combination with other factors, have as their object to prevent buyers or their customers from effectively using the Internet for the purposes of selling their goods or services online or from effectively using one or more advertising channels.
Increased flexibility with respect to the application of distribution systems
The European Commission specifies in the draft VBER that a supplier may impose restrictions on its distributors in accordance with the VBER, depending on whether the supplier operates (i) an exclusive distribution system, (ii) a selective distribution system or (iii) free distribution (which means that neither an exclusive nor a selective distribution system has been established).
The European Commission proposes that it should be possible to operate an exclusive distribution system with a "limited number" of exclusive distributors in a specific territory or for a specific customer group. A supplier will thus not be confined to appointing one exclusive distributor per territory or customer group.
The European Commission also specifies that a supplier may use different distribution systems in different territories (or for different customer groups) but that exclusive and selective distribution can still not be combined within the same territory.
The draft proposes a more flexible approach to the various distribution systems which a supplier may wish to use in different geographical territories or for different customer groups.
Regardless of whether the supplier uses different distribution systems in different territories (or for different customer groups), the supplier may legally impose the following restrictions in relation to both offline sales and online sales:
- If a supplier operates exclusive distribution in a territory and has allocated the relevant territory to a single distributor, the supplier may still prevent other distributors from actively selling to the exclusively allocated territory (including the above-mentioned types of targeted and/or personalised online sales or advertising).
- If a supplier in a specific area operates selective distribution, the supplier may prohibit other authorised and non-authorised distributors from selling actively and passively to unauthorised distributors in the relevant territory.
- Regardless of whether a supplier operates exclusive, selective or free distribution, the supplier may impose the above-mentioned quality standards in relation to online sales or online advertising.
- A supplier may still limit the locality/localities from which buyers may sell the contract goods or services (for example to the effect that they can only be sold from a specific place of business, warehouse etc).
- If a supplier's distributor operates at the wholesale level, the supplier may still prevent the distributor from actively or passively selling to end users.
- If a supplier provides components for the purposes of incorporation, the supplier may still prevent buyers of the relevant components from actively or passively reselling the components to customers who intend to use them to produce the same type of goods as those of the supplier.