Vertical Block Exemption: the inception of next generation rules

Last week the European Commission (EC) released its high-level thinking on possible revisions to the Vertical Block Exemption Regulation (VBER). The much awaited inception impact assessment paper indicates the areas of focus for the revamp, as identified during the extensive evaluation phase of the VBER review process. Some of the proposed areas earmarked for revision will have far-reaching implications for businesses from 2022, when the updated VBER comes into force.

No major surprises

We have recently covered the main findings of the EC’s VBER evaluation phase in its staff working document (here), which flushed out a number of issues that will hold the EC’s attention when considering revisions for the next generation VBER. Many of these related to the e-commerce boom which has made the current vertical rules out of touch (especially those related online sales restrictions, dual distribution and dual pricing). As one might expect, therefore, the contents of the inception paper does not hold many surprises when it comes to the topics identified for possible amendment. But the EC appears to be open to persuasion as to the type of amendment on certain topics (such as parity clauses).

In particular, the EC identified three categories of expected revisions: general clarifications, specific clarifications and open issues.

General clarifications

The EC plans to implement clarifications and simplification of verticals rules by incorporating recent case law and filling gaps in the rules that can lead to divergence of interpretation, which was much criticised during the evaluation stage. In this category, the EC has singled out the use of price comparison websites, online advertising restrictions as well as the treatment of online platforms (including in the context of agency and dual distribution). The EC also mentions the European Green Deal without further explanation, which gives the impression that sustainability is a must have for the next generation rules, but that the EC is not yet clear on what this means in practice for verticals.

Aside from the above, it would be surprising if we do not also see clarification of the Coty judgment on online marketplace bans. It would also be interesting to see if the EC answers the call to clarify the distinction between “hardcore” and “by object” restrictions. However, the EC’s silence on the gateway 30% market share threshold is a clear indication that the EC will not engage on this key pillar of the VBER, which has been questioned by some respondents.

Specific clarifications

For specific clarifications, many respondents will be delighted to see that the EC has not ignored the pleas to give further consideration to resale price maintenance (RPM). This is especially so since the evaluation stage econometric study found higher consumer welfare as a result of RPM in the book sector (although the unique features of the sector may not be transposable). But the battle is not yet won as the EC is considering engagements with businesses to seek out concrete examples of RPM efficiencies and evidence required to justify an exemption. Some might regret this conservative stance but recent EC RPM decisions (see Asus, Denon, Philips and Pioneer, Guess) were a clear indication that the EC is not ready to drop enforcement in this field in Europe.

The second expected specific clarification relates to the exclusion of tacitly renewable non-compete obligations from VBER where the buyer can periodically terminate or renegotiate the agreement.

Open issues

There are four open issues the EC identified in respect of which it wants to assess certain policy options: dual distribution, active sales restrictions, indirect online sales restrictions and parity obligations. See a summary table below.

It is encouraging to see the EC acknowledging that the development of e-commerce as a separate sales channel requires rethinking the definition of “active” sales and the requirements around dual pricing. Selective distribution systems (SDS), which have become even more popular than exclusive networks, may also benefit from additional flexibility in terms of protections from sales to unauthorised distributors from outside the SDS network and may get some breathing room from the equivalence criteria for online/offline sales. SDS suppliers will no doubt also eagerly await some guidance on the ability to combine SDS and exclusivity, which was a key topic during the Commission’s workshop back in November 2019 (see a summary here). While this is mentioned in the inception paper as an area for consideration, it was omitted from the policy options.

The two areas that may be fighting for their “life” (i.e. the continued benefit of VBER) are the dual distribution exception and most favoured nation (MFN) clauses. The horizontal concerns around the dual distribution exception appear to be largely driven by platforms (such as Amazon) operating at the platform and seller level. The EC is toying with either narrowing the exception with a specific market share threshold or scrapping it wholesale. Similarly, in respect of MFNs, the EC is grappling with the choice of either doing away with the safe harbour completely or limiting it to narrow MFNs, in the face of at least one study showing that they are as problematic as wide MFNs (although, as with the RPM study, the hotel sector findings may be unique).

Next steps

Stakeholders will have an opportunity to provide feedback on the areas identified in the inception paper by 20 November 2020. And we’re looking forward to exploring the implications of the inception paper during our upcoming webinar on the VBER revisions on 12 November 2020 (register here).

Topic Policy options
(excluding base option of no revision to status quo)
Dual distribution
  • Align the supplier/distributor exception to the non-competitor requirement with horizontal rule requirements (e.g. by lowering market share thresholds) to limit horizontal concerns.*
  • Extend the supplier/distributor exception to wholesalers and importers.*
  • Remove the supplier/distributor exception.
Active sales restrictions
  • Expand exceptions for active sale restrictions to give suppliers more flexibility in designing distribution systems.*
  • Allow for protection of SDS from sales from outside the SDS territory to unauthorised distributors inside the SDS territory.*
Indirect online sales restrictions
  • Dual pricing not to be regarded as a hardcore restriction, with case law defined safeguards.*
  • Non-equivalent criteria for online/offline sales not to be regarded as a hardcore restriction in an SDS, with case law defined safeguards.*
Parity obligations / MFN clauses
  • Exclude certain parity obligations from having the benefit of VBER (e.g. wide MFNs).
  • Exclude all parity obligations from having the benefit of VBER.

* Options not mutually exclusive