Vertical Block Exemption Regulation: Final text published and ready for launch on 1 June 2022
The European Commission adopted on 10 May 2022 the new Vertical Block Exemption Regulation (VBER) and Vertical Guidelines (Guidelines) which come into force on 1 June 2022. This marks the final stage of a four-year review and consultation process to revise VBER alongside the related Guidelines. Linklaters and other stakeholders submitted detailed comments at every stage of the consultation process (see for example our consultation response in May 2019, September 2021 and February 2022) some of which have been incorporated into the new VBER in a surprising twist in the last mile.
The current VBER and Guidelines, dating to 2010, have provided the most important guidance for day-to-day antitrust advice in Europe and elsewhere when it comes to the relationships between suppliers and resellers. They provide meaningful safe harbour and guidance for self-assessment, ensuring a more consistent application of competition rules throughout the EU – although the latter has not always been the case with divergent approaches being adopted by different European national agencies (for example towards parity clauses).
Developments in e-commerce, increased calls for protection of selective distribution systems and flexibility for offline sales have required significant adaptation of the rules, which will come into force on 1 June 2022. The new VBER provides for a one-year transitional period until 31 May 2023 for existing agreements to be aligned with the new rules. It is envisaged that the new VBER will expire in 12 years, although the review will likely kick off in eight years.
The new VBER narrows the scope of certain safe harbours, especially for online intermediation services (platforms), with a specific focus on dual distribution and parity obligations. However, the revised rules also introduce new flexibility for both exclusive and selective distribution systems and online sales restrictions.
In this note, we take a look at some of the key changes to the current rules, and where changes have narrowed or expanded the scope for safe harbours. We specifically cover (i) dual distribution, (ii) agency, (iii) online intermediation services, (iv) parity clauses, (v) online restrictions, (vi) additional flexibility for exclusive and selective distribution systems, and (vii) non-competes.
A high-level outline of these changes is captured in the below table.
Dual Pricing/Online Equivalence
Territorial and Customer Restrictions
No structural overhaul
Good news for those who are familiar with the current VBER structure is that the overall analytical framework remains the same. Specifically:
- Art. 2 of the new VBER provides for a general exemption for agreements between suppliers and buyers from the application of Art. 101 (1) TFEU.
- The 30% market share threshold also remains the same. In other words, the safe harbour continues to apply where the supplier and buyer’s respective market share do not exceed 30%.
- As under the current rules, the new VBER lists (i) the “hardcore” restrictions that will lead to the whole vertical agreement losing the benefit of the exemption (Art. 4) and (ii) “excluded” restrictions to which the exemption will not apply and which will require self-assessment (Art. 5).
The new VBER more clearly delineates the do’s and don’ts under three types of distribution systems, identified as exclusive distribution, selective distribution and “free” distribution (which is neither exclusive nor selective). Permitted restrictions are now allowed to be “passed on” to customers of the buyers.
In short, the overall structure of the new VBER appears very familiar. But the devil is in the detail and the revised rules do bring about some interesting changes.
As a recap, dual distribution covers situations where the supplier is active both upstream and downstream i.e., reaches consumers both directly and through resellers. In this scenario, the supplier competes with its independent resellers on the so-called downstream (distribution) market.
While generally distribution agreements between competitors are excluded from the safe harbour of the VBER, an exception applies where the supplier and the distributor compete only at the downstream level and but not at the upstream level (i.e. where the distributor buys the products from the supplier).
Extension of safe harbours to wholesalers and importers
The current provisions provide an exemption for non-reciprocal vertical agreements where the supplier is a manufacturer and a distributor, and the buyer is a distributor but not active on the manufacturing level. Art. 2(4) of the new VBER extends this to vertical agreements between manufacturer, importers or wholesalers (at the upstream level) and buyers who are importers, wholesalers or retailers at the downstream level – provided such agreements do not contain a hardcore restriction.
Unexpected (but welcome) clarification on information exchange
Dual distribution has been the most debated topic in relation to the new VBER and Guidelines, in particular with the Commission’s proposal to exempt information exchanges between suppliers and distributors in a dual distribution only up to a combined downstream market share of 10%. This was hotly contested by many consulted stakeholders and helpfully did not fall on deaf ears. In a last-minute manoeuvre, the Commission removed the threshold from the final version of the rules. However, the seemingly less complex approach to information exchange comes with other challenges.
Under the new VBER, information exchanges between the supplier and the buyer in a dual distribution scenario are generally exempted if they are: (i) directly related to the implementation of the vertical agreement AND (ii) necessary to improve the production or distribution of the contract goods or services. The Guidelines set out examples to illustrate the “white” list and “black” list types of information exchange, with the blacklisted types excluded from the safe harbour.
For companies, this new framework means that they will need to self-assess whenever any of the two conditions are not met, including where the planned information exchange falls in the “black” list.
The privileges applying to genuine agents remains in place. An agent is a legal or natural person entrusted with the power to negotiate and/or conclude contracts for another without taking the commercial risk of the sale. A genuine agency agreement will fall outside the scope of Art. 101 where the agent does not bear any significant financial or commercial risk in relation to the contracts.
Some added flexibility where agents only temporarily acquire title to products
The current Guidelines set out the types of agreements that will be categorised as agency agreements, falling outside the scope of Art. 101 TFEU. These remain largely unchanged in the new Guidelines, with the exception of one additional scenario where the agent only temporarily acquires the title in the goods for a very brief period while selling them on behalf of the principal. This change (which had been supported by Linklaters in its contributions) is most welcome as it will provide some flexibility for new and innovative distribution models.
Clarification on dual role agents
The new VBER also clarifies questions around dual role agents, i.e. agents acting as agent and independent distributor for a supplier within the same product market. The new Guidelines incorporate the February 2021 Working Paper on distributors that also act as agents for certain products for the same supplier, while providing additional concrete examples. In short, the Commission raises the risk that the obligations imposed on the agent in relation to its agency activity will influence its incentives and limit its decision-making independence when it sells products as an independent distributor (in particular the pricing policy). It also flags possible difficulties in distinguishing between investments and costs that relate to the agency function and those that relate solely to the independent distributor. The guidance therefore seeks to outline how suppliers should identify the common costs to be reimbursed when entering into an agency agreement when also acting as an independent distributor.
Online intermediation services
Online intermediation services allow business to offer goods or services to other businesses or final customers via their online platform. Examples include online e-commerce marketplaces, online software application services, such as application stores, and online social media services.
Carve-out of hybrid online intermediation services from the safe harbour
The Commission maintained its initial position concerning the carve-out of hybrid online intermediation services from the safe harbour, as proposed in July 2021. Under Art. 2(6) new VBER, the exemption will not apply to vertical agreements relating to the provision of online intermediation services where the provider of the online intermediation services also competes as a reseller on the relevant market for the sale of the intermediated goods or services. Compared to the initial proposal, this provision is, however, drafted more clearly by narrowing its application to the relevant product markets of the goods and services sold via and by the intermediary.
Online intermediation services clearly categorised
The new rules clarify that a provider of online intermediation services is categorised as supplier in respect of those services while a firm that offers or sells goods or services via online intermediation services is categorised as a buyer in respect of those online intermediation services. This does not depend on whether the latter pays for the use of the online intermediation services.
Further, the new VBER and Guidelines clarify that the online intermediation service provider would generally not be categorised as an agent that would be exempted from the applicability of Art. 101 (1) TFEU. As a consequence, the understanding is that the online intermediation service provider cannot impose hardcore restrictions (such as resale price restrictions, territorial and customer group restrictions) on the firms using the online intermediation service, but can still benefit from the new VBER in other cases.
Parity clauses, or most favoured nation (MFN) clauses, are contractual provisions requiring a seller of goods/services to offer these good/services to another party on no less favourable terms (price or non-price) than offered to another party. MFNs have previously been a fairly uncontroversial feature of supply relationships, and remain common, but the rise of online distribution platforms – particularly for services such as travel bookings – have recently led to a slew of antitrust investigations. Authorities have since distinguished between wide MFNs (which restrict suppliers from offering better terms on all of their sales channels and on competing online platforms) and narrow MFNs (which restrict suppliers from offering better terms on their own website, but allow them to offer better terms through other sales channels or on rival sites). Wide retail MFNs, more than narrow MFNs, have been the focus concern in past investigations.
Tightening of rules on across-platform retail MFNs
The new VBER reflects the concerns with wide retail MFNs. While all MFNs benefit from the current VBER, the new VBER excludes the application of the exemption for across-platform retail MFNs in Art. 5(d), i.e. retail parity obligations that prevent buyers of online intermediation services from offering, selling or reselling goods or services to end users under more favourable conditions via competing online intermediation services.
While the change on wide retail MFNs is largely in line with what was proposed in the draft VBER, the new VBER also contains a new Art. 6 which did not feature in the draft VBER. Under this new provision, the Commission has the power to withdraw the benefit of the exemption where it finds that a vertical agreement has effects which are incompatible with Art. 101(3) of the TFEU. While this provision does not relate solely to MFNs, it does allude to narrow MFNs, giving as an example the “cumulative effect of parallel networks of similar agreements that restrict buyers of online services” from reaching customers “under more favourable conditions on their direct sales channels”. This appears to be aimed at appeasing concerns raised by the Commission in its Report on Competition Policy for the Digital Era, where it noted that if competition between platforms is weak, then narrow MFNs could have the same anticompetitive effects as wide MFNs. Therefore, while narrow retail MFNs generally fall within the safe harbour, they are not risk free.
However, the new VBER confirms other types of parity clauses will continue to benefit from the exemption, including parity obligations relating to (i) conditions of sale not to end users and (ii) conditions of sale under which manufacturers, wholesalers or retailers purchase goods or services as inputs.
The current VBER did not contain any express provisions relating to restrictions of online sales. This was one of the criticisms raised by Margrethe Vestager in the EC Staff Working Document in September 2020.
Hardcore online restrictions
The new VBER addresses this concern with a new provision (Art. 4(e)) expressly providing that preventing “effective use of the internet” by the buyer, or its customers is a “hardcore restriction”.
Hardcore online restrictions include inter alia:
- The direct prohibition to use the internet to sell the contract goods or services;
- Requiring the buyer to prevent customers located in another territory from viewing its website or online store or re-routing customers to other sellers or the supplier;
- Requiring the buyer to terminate consumers’ online transactions where their credit card data reveals an address outside the buyer’s “territory”;
- Requiring the buyer to sell the contract goods or services only in a physical space or with physically present personnel;
- Requiring seeking supplier’s prior authorisation before making individual online sales;
- Prohibiting the buyer from using the supplier’s trademarks or brand names on its website or its online store;
- Prohibiting the buyer from establishing or operating one or more online stores; and
- Prohibiting the buyer from using an entire online advertising channel, e.g. search engines or price comparison services or indirectly preventing the use of an entire online advertising channel; however prohibiting the use of particular price comparison services or search engines is generally not a hardcore restriction, as the buyer my use other online advertising services.
Safe online restrictions
While there is a new hardcore restriction relating to the online space, the new Guidelines helpfully confirm the types of restrictions that are still covered by the safe harbour, including:
- Imposing online requirements (including on display of goods of services) to ensure quality or particular appearance of the online store;
- Direct or indirect marketplace bans (not limited to selective distribution or luxury goods);
- Requirement that the buyer operates at least one or more brick and mortar stores; and
- Requirement that the buyer sells a minimum absolute number of products offline.
Relaxing of rules on dual pricing
Dual pricing is where a supplier charges different prices to the same reseller for products intended to be resold online or offline. The new rules mark a significant paradigm shift in the Commission’s historic view, removing dual pricing from the list of hardcore restrictions.
The change means, in practice, that suppliers can charge the same buyer different wholesale prices for products sold online than for those sold offline. But the Commission did not leave the door wide open, cautioning the supplier not to (i) have the object of preventing the effective use of the internet or restricting cross-border sales, (ii) cap the amount of products sold online, and (iii) make online sales unprofitable or financially unsustainable.
Relaxing of rules on online equivalence
Suppliers operating selective distribution systems may select authorised distributors on the basis of qualitative and quantitative criteria. As a general rule, qualitative criteria have to be set for both online and offline channels – though in practice these may be different given the different needs of online and offline stores.
The current VBER treated criteria for online and offline which were not “overall equivalent” as a hardcore restriction to prevent online criteria limiting online distribution and prevent parallel imports.
The new VBER allows criteria for online and offline sales which are not “equivalent” as long as they do not have the object to “prevent the buyers or their customers from effectively using the internet”.
Additional flexibility for exclusive and selective distribution systems
Having received a lot of feedback from stakeholders on some of the shortcomings in the strict rules around establishing exclusive and selective distribution systems, the new VBER helpfully adds the following flexibility for these systems:
- Exclusive distribution: the new VBER provides for “shared exclusivity”, allowing suppliers to appoint up to five exclusive distributors for the same territory or customer group. Notably, the draft new VBER initially referred to “a limited number” of exclusive distributors while the specified number of distributors is meant to provide greater certainty.
- Selective distribution: the new VBER helpfully allows for greater protection of the selective distribution system by allowing suppliers to restrict their distributors outside the selective distribution system from actively / passively selling to unauthorised distributors within the territories where the supplier operates a selective system, which was previously not permitted under the current VBER.
Stakeholders submitted extensive input on the red tape faced as a result of the current VBER’s requirement that non-competes must not exceed a five-year period so not to be excluded from the VBER safe harbour. This often requires unnecessary negotiations that are both costly and time consuming. In response, the new VBER allows for the exemption to endure if the non-competes are tacitly renewable beyond a five-year period as long as the distributor can effectively give notice and terminate the distribution agreement.
What comes next? On 1 June 2022 the new VBER and related Guidelines will come into force with a transitional period of one year. There is a parallel reform of the UK VBER which will also come into force on 1 June 2022. Watch this space on the UK as its Guidelines are still unpublished.