Draft revised vertical regulation and guidelines
The European Commission takes a hard line against online platforms, dual distribution and MFNs
On 9 July 2021, the European Commission (“EC”) published its long-awaited and intensively debated draft Vertical Regulation and Guidelines. Stakeholders will have until September 2021 to comment on the proposed revisions, before the final revised rules come into force in the course of 2022.
While a comparison between the current rules and the proposed Vertical Regulation shows limited (albeit impactful) changes, the same does not apply to the Vertical Guidelines, where the EC has made a real effort to streamline the text, introducing significant changes.
We have set out below the main changes to the existing vertical rules and we will share additional thoughts in the coming weeks, starting with a webinar we are hosting with the EC, the German Bundeskartellamt and the French Competition Authority on 28 July 2021 (you can register here).
Hard stance against platforms, dual distribution, narrow MFNs
The first important change to the Vertical Regulation concerns providers of online intermediation services (“platforms”) which the EC categorises as suppliers in the revised rules - leaving them no room to escape the prohibition in Article 101 by claiming that they act as mere agents. Recital 12 of the proposed Vertical Regulation illustrates clearly the EC’s hard line toward platforms, excluding them from the benefit of the safe harbour as soon as they have a hybrid function i.e. where they sell goods or services in competition with companies to which they provide online intermediation services. This will most likely have the effect of removing the benefit of the safe harbour from all platforms whose business model is based on dual distribution (e.g. when the platform also acts as retailer).
The proposed Vertical Regulation also reveals a hard line on dual distribution and price parity clauses (MFNs) which the EC classifies as possible “false positive” restrictions.
In relation to dual distribution i.e. when the supplier directly competes with the buyer, the EC envisages following a more restrictive approach. Similar to the current rules, the block exemption will generally not apply to competing undertakings. An exemption for dual distribution remains available where buyer and seller only compete at the distribution level, but not upstream. But this exemption will become much more restrictive under the proposed Vertical Regulation. Dual distribution is now exempted under the following conditions:
- Full exemption where the parties’ aggregate market shares in the relevant market at retail level do not exceed 10%;
- Exemption for the vertical aspects of the arrangement where the aggregated market share at retail level is above 10% but does not exceed 30% (except for any exchange of information which must be assessed under the horizontal rules);
- No exemption for platforms if they have a hybrid function (i.e. where they sell goods or services in competition with the undertakings to which they provide online intermediation services).
As for MFNs – i.e. agreements that require a company to offer the same or better conditions to its contract partner as those offered via other sales/marketing channels (wide MFNs) or as those offered by the supplier’s direct sales channel (e.g. own website, narrow MFNs) – the EC’s position has evolved significantly compared to the current rules, in particular due to the objections raised by national competition authorities (“NCAs”) since the last revision. While all MFNs benefit from the block exemption under the current rules, the proposed Vertical Regulation removes the benefit of the safe harbour and adds wide MFNs to the list of excluded restrictions under Article 5. However, narrow MFNs will be block exempted provided the 30% market share threshold is not exceeded. Given that the EC also states that Article 4(a) of the Vertical Regulation (leaving resale price maintenance “RPM”, in the list of hardcore restrictions) fully applies to online platforms, the clear statement that narrow MFNs will be block exempted shows that narrow MFNs cannot be viewed as imposing a minimum sales price. The German Court of Justice has most recently taken a different view and considered narrow MFNs as hardcore restrictions similar to RPM. This is likely to give rise to some controversial discussions around this point with the German Bundeskartellamt.
Online restrictions – now officially hardcore
Online restrictions officially becoming hardcore restrictions will not come as a surprise. The EC now officially categorizes as hardcore any measures designed to prevent the effective use of the Internet. In particular, we note that restricting the use of price comparison tools or paid referencing search engines will be considered a hardcore restriction. Suppliers will need to be careful about advertising restrictions indirectly prohibiting the use of a specific online advertising channel, such as an obligation on the distributor not to use the suppliers’ trademarks or brand names for bidding to be referenced in search engines, or a restriction to provide price-related information to price comparison tools.
Interestingly, the EC has also clarified that certain restrictions are not dependent upon the operation of a selective distribution system. This includes marketplace bans, brick-and-mortar obligations or the requirement that a buyer sell a certain amount offline to benefit from the safe harbour irrespective of the distribution system used. This is a rebuff to certain NCAs that sought to interpret the ECJ’s Coty judgment very restrictively. A marketplace ban is, thus, not only not a hardcore restriction but can also be imposed outside a selective distribution system, provided that such a restriction does not prevent the effective use of the Internet.
Paradigm shift on dual-pricing and online equivalence principles
Also in the eCommerce space, in the EC’s view online sales are now well-established and no longer need the existing protections categorizing certain measures as hardcore. The two restrictions concerned by this paradigm shift are dual-pricing and the equivalence principle under a selective distribution system. Under the proposed rules, these two restrictions would no longer be hardcore.
- On dual pricing, this means in practice that suppliers would be allowed to charge different prices to the same distributor for products, depending on whether they were intended to be sold online or offline. Further, the EC clearly stated that dual pricing issues relate only to different prices for the “same” buyer for its online and offline sales, but it did not address different pricing between online and offline resellers.
- In relation to the equivalence principle, the criteria imposed by suppliers in relation to online sales no longer have to be equivalent overall to those imposed on brick-and-mortar shops.
These changes are subject to an important caveat: The safe harbour only applies to the extent that these measures do not, directly or indirectly, have as their object or effect the prevention of online sales. One can already imagine the upcoming battles between suppliers and retailers on this front.
Clarifications (and nascent flexibility) on RPM
While RPM remains in the hardcore category as envisaged in the inception impact assessment paper (see our previous article here), the EC has clarified a number of questions in the Guidelines, and also showed some unexpected flexibility on certain specific issues. For example, minimum advertised price policies prohibiting retailers from advertising prices below a certain minimum threshold are now expressly included in the Guidelines as restrictions capable of amounting to RPM. On the contrary, the EC takes the view that pricing monitoring software and fulfilment contracts, i.e. where the distributor executes a prior agreement between the supplier and a specific end user, do not qualify as RPM under certain circumstances, as clarified in the Guidelines (paras. 176 and 188).
Reshuffle for active and passive sales restrictions
As anticipated, customer and territorial restrictions also remain in the hardcore category, but the EC has shown some flexibility and has created three categories and multiple exceptions to the prohibition on active and passive sales restrictions which are now included in the Vertical Regulation.
The EC differentiated the approach toward active and passive sales restrictions according to the following three categories of distribution systems: (i) exclusive distribution; (ii) selective distribution; and (iii) newly introduced ‘free’ distribution system.
The latter category is interesting as it shows that the EC has taken on board certain comments made during the evaluation phase, asking for greater flexibility for suppliers operating a distribution system which is neither exclusive nor selective.
Among the changes which are worth flagging at first glance, we note that the EC:
- Paved the way towards shared exclusivities i.e. the possibility for a supplier to appoint more than one exclusive distributor in a particular territory or for a particular customer group, while preventing fragmentation of the single market by introducing a proportionality test;
- Allowed a restriction on an exclusive buyer from selling actively or passively to unauthorised distributors located in a territory where the supplier operates a selective distribution system – this is an outcome which was repeatedly urged by selective suppliers during the consultation phase.
- However, did not allow the combination of selective distribution with exclusive distribution within the same territory.
- Acknowledged the differences between online and offline sales by no longer requiring suppliers in selective distribution systems to impose the same criteria for online sales that they impose on brick-and-mortar retailers.
- Introduced flexibility for free distribution systems by allowing certain active but also passive sales restrictions e.g. preventing a distributor from actively selling into a territory or to a customer group exclusively allocated, or from actively or passively selling to an unauthorised distributor in a territory where the supplier operates a selective distribution system.
Beyond that, the Vertical Regulation and Guidelines do not contain major surprises.
- The exemption mechanism is maintained and 30% remains the main market share threshold.
- Non-compete obligations beyond five years or of indefinite duration remain excluded (save for cases where the distributor can reasonably renegotiate or exit the agreement as foreseen by the EC in its inception impact assessment paper).
- The privileged position enjoyed by agents remains in place. However, the EC has clarified a number of questions around the dual roles of the agent (e.g. independent distributor of some goods of the same supplier or another supplier). The EC also attempted to clarify the agency eligibility criteria in the Guidelines - but the conditions (and the guidelines) remain rather complex. Nonetheless, undertakings will welcome the introduction of flexibility around agents temporarily acquiring the property of the goods for a very brief period of time while selling them on behalf of the principal (see para. 31) which reflects an issue which had been flagged by some stakeholders during the consultation phase.
You will be able to read more in our next publication on the upcoming Vertical Regulation and Guidelines reforms, following the webinar referred to in the introduction to this note.