VBER: The Commission adopts the new Vertical Block Exemption Regulation and The Vertical Guidelines

The new VBER concludes the reviewing process from the previous system in 2010. The New VBER originated from the staff working document adopted in September 2020,[3] which led to the draft VBER and New Guidelines after a public consultation that drew wide participation.[4]

While the New VBER and New Guidelines keep many of the changes from earlier drafts, they also provide further modifications that overturn some of the approaches initially adopted.

BACKGROUND

Art. 101(1) of the Treaty on the Functioning of the European Union (“TFEU”) prohibits agreements that prevent, restrict, or distort competition. However, agreements that create benefits sufficient to outweigh anticompetitive effects are exempted from this prohibition under Article 101(3) TFEU. In this regard, the VBER establishes a category of vertical agreements that the Commission has determined meet conditions for the exemption set forth in Art. 101(3) TFEU. Specifically, vertical agreements not containing hardcore restrictions (such as restrictions on resale prices or “passive” territorial and customer restrictions) may be presumed to fall under the exemption if neither party’s market share exceeds 30%. In a nutshell, the VBER provides a block exemption from Article 101(1) TFEU to vertical agreements that fulfill specific requirements. If the block-exemption does not apply to a vertical agreement, and provided that it does not involve hardcore restrictions, the agreement will not be presumed anti-competitive but an individual assessment of the compatibility of any restriction with the prohibition of Article 101(1) or with the conditions for exemptions under Article 101(3) will have to be carried out taking into account all the specific circumstances of the case.

Arriving more than ten years after EU Vertical Block Exemption Regulation No. 330/2010 (“Regulation”) entered into force, the New VBER and the New Guidelines “will provide companies with up-to-date guidance that is fit for an even more digitalized decade ahead,” according to Margrethe Vestager.[5]To achieve this goal, the new rules readjusted the safe harbor of the previous Regulation and updated the Vertical Guidelines and the Regulation to bring in line with the current market environment.

Below, we analyze the pivotal changes that differentiate the New VBER and the New Guidelines from the 2010 rules; those underlie the differences between the draft VBER and Guidelines and the final version as well.

DUAL DISTRIBUTION

Dual distribution describes scenarios where a supplier sells goods or services not only at the upstream level (e.g. manufacturing or wholesale) but also at the downstream level (e.g. wholesale or retail) in direct competition with their own distributors. The previous version of the VBER did not apply to agreements between competing undertakings, but dual distribution was generally covered under the VBER’s safe harbor if non-reciprocal (i.e. only one of the parties supplies products or services to the other party) and the parties were competing at the retail level and not upstream at the manufacturing or wholesale level of trade. The New VBER maintains this approach and clarifies that it extends  to scenarios where the two parties compete at any level of trade (including wholesale) except at the manufacturing level or at the level where the buyer purchases the products or services.

On the other hand, with the exponential growth of e-commerce, digital platforms and the use of data analytics and algorithms, some concerns are no longer negligible—in particular those related to information exchange in the context of dual distribution and to so called “hybrid” platforms. These are the providers of online intermediation services (like online marketplaces) which also compete with the intermediated undertakings (the third-party sellers that use the marketplace) on the relevant market for the direct sale of the intermediated goods or services (Amazon is the most popular example of hybrid platform).

As a result, under the New VBER the safe harbor for dual distribution is restricted accordingly. Article 2(5) of the New VBER provides that the block exemption does not apply to exchange of information between the parties when the “exchange of information [. . .] is either not directly related to the implementation of the vertical agreement or is not necessary to improve the production or distribution of the contract goods or services.” Thus, the parties to vertical agreements in dual distribution scenarios must be more cautious when requesting and transmitting information from and to their suppliers or buyers. Indeed, the Commission decided to narrow the block-exemption concerning the exchange of information due to the steady growth of multichannel distribution, which has made it harder to determine when the exchange of information may reduce strategic uncertainty on the commercial behavior of a trading partner which is also a competitor.

In addition, Article 2(6) of the New VBER excludes altogether from the block exemption vertical agreements relating to the provision of online intermediation services whenever the provider is a hybrid platform, i.e. it also sells goods or services in competition with the firms to which it provides intermediation services. Notably, the New Guidelines provide specific guidance on vertical agreements entered into via hybrid platforms.[6]

As an aside, it is worth mentioning that a previous draft of the New VBER provided a much stricter approach that was heavily criticized by stakeholders. Indeed, in the draft New VBER the block exemption to dual distribution applied only when the parties’ aggregated market share in the retail market would have not exceed 10%.

RESALE PRICE MAINTENANCE (RPM)

Restrictions to the distributor’s freedom to set the resale price is still deemed a hardcore restriction under the New VBER and Guidelines, without substantive changes. However, the New Guidelines provide additional guidance to assess what indirect restrictions can be deemed equivalent to RPM, as well as on cases where they are not considered RPM according to experience gathered in the last ten years. Further, the New Guidelines provide more helpful indications to assess possible efficiencies of RPM which, in individual cases, may fulfill all the conditions for exemption under Article 101(3).

ACROSS-PLATFORMS PARITY CLAUSES (Most Favored Nation)

Platforms often include parity clauses (known as Most Favored Nation clauses, or “MFNs”) in their contractual conditions for business users (third-party sellers or suppliers of products or services on their platforms) to ensure that such users do not offer their products or services to end users at lower prices or under better terms on other platforms or their own websites. In recent years, competition authorities have conducted a growing number of enforcement actions against such clauses, under the suspicion that their use by platforms with large user bases has exponentially restricted competition between platforms and between the platforms and the direct sales channel of business users.

Art. 5(d) of the New VBER explicitly addresses MFNs, excluding from the benefit of the block exemption retail MFNs aimed at limiting business users of a platform from selling goods or services under more favorable conditions via competing intermediation platforms (so called “wide” or “across-platforms” MFNs). Accordingly, this type of restriction must always be assessed individually under Article 101(3) TFEU, irrespective of markets shares.

Conversely, MFNs related only to direct channels managed by business users (called “narrow MFNs”) remain block exempted. Narrow MFNs, as well as wide parity obligations that apply to wholesale business users and “customer MFNs” (i.e. those imposed by customers to their suppliers), continue to benefit from the safe harbor as it was under the old Regulation (subject to the 30% market-share threshold). However, the New Guidelines warn undertakings about the use of Narrow MFNs in concentrated platform markets (which affect many users across the European market). If Narrow MFNs  are applied cumulatively by platforms covering a large share of the relevant markets and there is no evidence of pro-competitive effects, the benefit of the block exemption could be withdrawn by the Commission or national competition authorities.[7]

ACTIVE AND PASSIVE SALES RESTRICTIONS

The general rule under the old Regulation was very strict—while passive sales could almost never be limited (resulting in a hardcore restriction) active sales could be limited only in the case of exclusive distribution systems involving exclusive territories or group of customers allocated to other distributors or reserved for the supplier itself, or to unauthorized distributors in selective distribution systems (in the latter case even passive sales could be restricted and this is not changed). The information gathered by the Commission during the consultation process pointed out a lack of clarity about what may be deemed active or passive sales and revealed that the  type of exclusive distributions to which restrictions to active sales were block-exempted is not in line with new distribution systems and business needs. Therefore, the New VBER provides a more detailed definition of active and passive sales (under Article 1(1)(l) in conjunction with Article 1(1)(n)) and widens the types of exclusive agreements eligible for block-exemption.

More specifically, the New VBER provides new examples and clarifications of what is active selling online, including advertising on search engines targeting specific territories, offering website language options that are different from the ones commonly used in the assigned territory, or offering a website with a domain name that corresponds to a territory other than the one the distributor is assigned. However, the New VBER expressly provides that when the prevention of active (or passive) sales in any vertical agreement is designed to limit the distributor’s ability or its customers’ ability to use the Internet effectively, such restriction will in any case be deemed “hardcore”, meaning that the entire agreement cannot benefit from the block exemption and is unlikely to meet the conditions for individual exemption under Article 101(3).

The New VBER also extends the list of exceptions to hardcore restrictions to active and passive sales, irrespective of what distribution channel they refer to. In particular, Article 4(b) introduces the possibility of shared exclusivity. This allows a supplier to appoint up to a maximum of five distributors per exclusive territory or customer group.[8]Moreover, the New VBER allows the supplier to oblige its distributors to pass on restrictions on active sales to its customers.

Better coordination between exclusive and selective distribution is also introduced. Indeed, pursuant to article 4(b)(ii), the supplier is allowed to restrict active or passive sales by the exclusive distributor and its customers to unauthorized distributors located in a territory where the supplier operates a selective distribution system for the contract goods or services. Symmetrically, according to article 4(c)(i), it is possible for a supplier operating a selective distribution system to restrict active sales by the members of the selective distribution system and their direct customers to a territory or to a customer group reserved for the supplier or allocated by the supplier exclusively to a maximum of five exclusive distributors.

DUAL PRICING AND ONLINE SALES

The New VBER and Guidelines also revise the rules on “dual pricing” (i.e. applying different prices to distributors for online and offline sales) and the “equivalence” principle, which are strictly related to parallel networks of brick-and-mortar and online shops. Under the old Regulation, both dual pricing and the application of substantially different selection criteria between online and brick-and-mortar shops were deemed hardcore restrictions. Ten years later, the Commission believes that the e-commerce market and digital platforms no longer need such specific protection for online sales.

Accordingly, the New VBER exempts dual pricing strategies from the prohibition of Article 101 TFEU, as long as they reflect the differing levels of investments and costs incurred for each channel. However, the block exemption for dual pricing should not be designed to restrict cross-border sales or prevent the buyer’s effective use of the Internet, otherwise it would be deemed a hardcore restriction. Likewise, the equivalence principle will allow suppliers to apply different criteria to online distribution channels and brick-and-mortar shops, provided that they are not designed to limit customers’ online purchases.

Further, the New Guidelines also provide guidance on how to assess online restrictions by using the principles set out in landmark Court of Justice judgements issued after the old Regulation and Guidelines entered into force, namely Pierre Fabre[9] and Coty[10]. On the one hand, the New Guidelines now more explicitly indicate that some restrictions on sales on online marketplaces (known as “marketplace bans”) in vertical agreements may be block-exempted under the New VBER; for example, when they concern the layout of a buyer’s online store, the way products are displayed in the online store, or a direct or indirect ban on the use of online marketplaces [11]. On the other, the Vertical Guidelines provide an extensive list of obligations that, directly or indirectly, are designed to prevent distributors from effectively using the Internet to sell their goods or services online (thus representing hardcore restrictions). For example, paragraph 206 lists as hardcore restrictions the obligation for a distributor to prevent customers located in a territory other than the one the supplier has assigned to that distributor from viewing their website (“geoblocking”); requirements forcing them to sell only in physical spaces (absolute online bans) or with the physical presence of specialized personnel; and a ban on their using supplier trademarks online.

Notably, letter (g) of paragraph 206 of the New Guidelines is dedicated to direct and indirect bans on the use price comparison websites, search engines or entire online advertising channels that are equivalent to preventing the effective use of the internet and thus being hardcore restrictions. The New Guidelines state that restricting the use of particular search engines or price comparison tools is generally not a hardcore restriction if the buyer may use other online services to promote its sales activities. However, this may be the case if the remaining services in that advertising channel are, as a matter of fact, not capable of attracting customers to the buyer’s online store, thus being tantamount to a ban to the effective use of the internet.

ONLINE PLATFORMS

In considering the strategic distribution role of digital platforms, the New VBER also defines online intermediation service providers. Article 1(1)(d) of the New VBER makes it clear that intermediation service providers qualify as suppliers (as opposed to mere “agents” or intermediaries) under the VBER. As discussed in previous articles, this reflects the approach in what is known as the Platform-To-Business Regulation (read more about it in previous articles available here and here); moreover, the New Guidelines clarify they also cannot qualify as “genuine agents,” which would allow them to act on behalf of their principals without representing separate undertakings for the purpose of application of the VBER.[12]

The New Guidelines also distinguish marketplace platforms from pure price comparison websites and provide guidance to assess various restrictions on the use of both types of platforms that may be imposed on distributors in scenarios where the block-exemption does not apply.

SUSTAINABILITY

One of the main issues European legislators face is determining how European competition rules should deal with sustainability goals. Accordingly, the Commission recently launched a public consultation on the Horizontal Block Exemption Regulations on Research & Development and the related guidelines.[13]

The New VBER and the New Guidelines also deal with this issue and clarify that vertical agreements excluded from the safe harbor may nonetheless still qualify for an exemption under 101(3) TFEU if they meet sustainability objectives. In addition, the Commission will have to pay close attention to sustainability goals (e.g., climate change, environmental protection) when assessing selective distribution systems.[14]

[1]https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32022R0720&from=EN.

[2]https://ec.europa.eu/competition-policy/system/files/2022-05/20220510_guidelines_vertical_restraints_art101_TFEU_.pdf.

[3] https://ec.europa.eu/competition/consultations/2018_vber/staff_working_document.pdf.

[4] https://portolano.it/en/news/vber-the-european-commission-starts-a-consultation-on-the-revised-vertical-block-exemption-regulation-and-vertical-guidelines-#_ftn4.

[5] https://ec.europa.eu/commission/presscorner/detail/en/IP_22_2844.

[6] New Guidelines, section 4.4.4.

[7] New Guidelines, sections 6.2.4 and 8.2.5.

[8] Please note that the draft VBER initially referred to “a limited number” of exclusive distributors.

[9] Case C-439/09 Pierre Fabre Dermo-Cosmetique SAS v. Président de l’Autorité de la concurrence EU:C:2011:649.

[10] Case C-230/16 Coty Germany GmbH v Parfümerie Akzente GmbH EU:C:2017:941.

[11] New Guidelines, 6.1.2.1 (206).

[12] New Guidelines, section 3.2.3.

[13] https://ec.europa.eu/commission/presscorner/detail/en/ip_22_1371.

[14] New Guidelines, para. 8 and 316.