BACKGROUND:
Art. 101(1) of the Treaty on the Functioning of the European Union (“TFEU”) prohibits agreements that may prevent, restrict, or distort competition. However, agreements that create benefits sufficient to outweigh anti-competitive effects are exempted from this prohibition under Article 101(3) TFEU. In this regard, the VBER established a category of vertical agreements that the Commission regarded as satisfying the condition for an exemption set forth in Art. 101(3) TFEU. Specifically, vertical agreements not containing hardcore restrictions (i.e., 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 percent. In a nutshell, this regulation provides a block exemption from Article 101(1) TFEU to vertical agreements that fulfill certain requirements.
Arriving more than ten years after the former EU Vertical Block Exemption Regulation No. 330/2010 (“Regulation”) entered into force, the Draft VBER and the revised Vertical Guidelines have three main objectives: readjusting the safe harbor of the current Regulation, updating the Vertical Guidelines and the Regulation in line with the current market environment—with e-commerce and online platforms taken into account—and reducing companies’ compliance costs.
The most relevant changes proposed by the Commission are summarized below.
DUAL DISTRIBUTION:
Dual distribution describes situations where suppliers sell their goods or services not only through independent distributors but also directly to end customers, in direct competition with their own distributors. Generally, the VBER does not apply to agreements between competing undertakings, but dual distribution is covered by the VBER’s safe harbor. With the exponential growth of e-commerce and digital platforms, such concerns are no longer negligible.
As a result, according to Art. 2(4) of the Draft VBER, safe harbor will be significantly limited. It will apply only when the parties’ aggregated market share in the retail market does not exceed 10 percent. For dual distribution agreements where the aggregate market share of the parties at the retail level is above 10 percent and below 30 percent, a limited safe harbor will apply, covering all aspects of the agreement except for information exchanges between the parties.[4] Moreover, Art. 2(7) of the Draft VBER excludes hybrid online platforms (i.e., platforms that also sell goods or services in competition with their clients) from this exemption, irrespective of market share. On the other hand, Art. 4(4)(a) aims to expand the scope of the dual distribution safe harbor to include wholesalers and importers.
PRICE PARITY CLAUSES:
Platforms often include price 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 they do not offer their products or services at lower prices or under better terms on other platforms or their own websites. In recent years, competition authorities are increasingly likely to conduct enforcement actions against such clauses, as their use by platforms with large user bases has exponentially restricted competition in the relevant markets.
Art. 5(d) of the Draft VBER explicitly deals with parity clauses, excluding from the benefit of the block exemption clauses aimed at limiting business users of a platform from selling goods or services under more favorable conditions via competing intermediation platforms (called “wide MFNs”). Conversely, MFNs related only to direct channels managed by the business users (called “narrow MFNs”) remain block exempted.
ACTIVE SALES RESTRICTIONS:
The general rule under the current Regulation is that active sales can be limited in case of exclusive distribution systems entailing exclusive territories or customers allocated to other distributors or reserved for the supplier itself. The information gathered by the Commission pointed to a lack of clarity about how these restrictions work in practice and revealed that this type of constraint is not a good match for the new distribution systems and business needs in the current market reality.
To ameliorate the situation, the Commission is now providing a more detailed definition of active and passive sales and restrictions related thereto and simultaneously clarifying the scope of exemptions for sales restrictions, especially in the case of online sales. In this respect, the Draft VBER provides examples of active selling online, such as the use of advertising on search engines targeting specific territories, offering website language options that are different from the ones commonly used in the appointed territory, or offering a website with a domain name that corresponds to a territory other than the one the distributor is assigned. Where prevention of active (or passive) sales aims at limiting the distributor’s ability or its customers’ ability to use the Internet, such restriction will be deemed hardcore so that the entire agreement cannot benefit from the block exemption. As highlighted in the Vertical Guidelines, Article 4(b) to (d) VBER apply no matter which sales channel is used.
On the other hand, the Draft VBER allows suppliers to design distribution systems to meet their needs by introducing new forms of exclusivity, such as the one provided under Article 4(b) that allows a supplier to appoint more than one exclusive distributor in a particular territory or for a particular customer group (known as shared exclusivity). Nevertheless, the number of exclusive distributors must be assessed according to the structure of competition in the allocated territory or customer group to prevent excessive restriction of competition. Moreover, the Draft VBER introduces the possibility to “pass on” exclusive restriction to customers of the buyers in order to limit their sales as well. The current version of the VBER prohibits as hardcore restrictions any limitations imposed on sales of the customers of a buyer that is party to the agreement.
DUAL PRICING AND ONLINE SALES:
The Draft VBER also revises dual pricing and the “equivalence” principle, which are strictly related to parallel networks of brick-and-mortar and online shops. Under the current regime, 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 e-commerce market and digital platforms no longer need specific protection for online sales. Accordingly, the Draft VBER block exempts dual pricing strategies from the prohibition of Article 101, as long as they reflect different levels of investments and costs incurred for each channel. Furthermore, the equivalence principle will allow suppliers to apply different criteria to online distribution channels and brick-and-mortar shops, provided that they are not intended to limit customers’ online purchases.
Following the Coty[5] judgment, the Vertical Guidelines also provide that restrictions of sales on online marketplaces (so called “marketplace bans”) in vertical agreements are block exempted under the VBER, unless the individual market shares of the supplier and of the buyer exceed 30 percent. It also addresses vertical agreements exceeding 30 percent by clarifying that marketplace bans should be possible when the supplier has no contractual relationship with the marketplace operator and no hardcore restrictions are included, irrespective of whether the ban concerns luxury or other branded products. However, it may be appropriate to perform an assessment designed to evaluate whether brand protection and service quality can be achieved via less restrictive means.
In this regard, the current VBER and the Vertical Guidelines clarify that all vertical agreements that lead to a ban on online sales or prevent buyers or their customers from effectively using the Internet to sell their goods or services online constitute hardcore restrictions (and cannot be block exempted). Now, in a first, the Draft VBER and Vertical Guidelines provide guidance on how to assess online restrictions, implementing the related case law of the Court of Justice, namely Pierre Fabre[6] and Coty. In addition, the Vertical Guidelines provide an extensive list of obligations that, directly or indirectly, pursue the aim of preventing distributors from effectively using the Internet to sell their goods or services online (thus representing hardcore restrictions). By way of example, paragraph 192 lists as such hardcore restrictions the obligation for distributors to prevent customers located in a territory other than the one allocated by the supplier for that distributor from viewing their websites (geoblocking), sell only in physical spaces (absolute online bans), or not use supplier trademarks online.
Finally, a section of the draft Vertical Guidelines is dedicated to direct and indirect restrictions of price comparison platforms or tools as online advertising channels (called the “comparison tools ban”), which are deemed hardcore restrictions (different from marketplace bans). However, this should not prevent suppliers from imposing quality standards, according to the same draft Vertical Guidelines.
ONLINE PLATFORMS:
In considering the strategic distribution role of digital platforms, the Draft VBER also supplies a definition of online intermediation service providers. That definition makes it clear that intermediation service providers will qualify as suppliers (as opposed to mere “agents” or intermediaries) under the VBER. This means that a platform cannot circumvent its qualification as a supplier of the online intermediation services provided. This approach toward online intermediation services providers reflects the approach in what is known as the Platform-To-Business Regulation (read more about it in previous articles available here and here), and the Commission also considers it to be in line with the approach of the proposed Digital Market Act. Accordingly, intermediary platforms cannot benefit from the dual distribution exemption if they sell goods or services themselves (i.e., hybrid platforms), nor can they 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.
SIMPLIFICATION OF THE CURRENT RULES:
Finally, the Commission also welcomed stakeholders’ recommendations and simplified some of the existing provisions (while also providing useful examples for the undertakings concerned). The Explanatory Note to the Draft VBER and Vertical Guidelines lists three examples of such improvements.
First, the provisions on territorial and customer restrictions in Article 4(b) of the current VBER have been replaced with three distinct sets of provisions clarifying the scope of the prohibition for each of the main distribution systems, namely exclusive distribution, selective distribution, and “free distribution.” Second, section 4.6 of the draft Vertical Guidelines provides a detailed explanation of the characteristics of each of these distribution systems. More generally, the structure of the Draft VBER has been simplified to provide a clearer framework of analysis for vertical agreements.
PUBLIC CONSULTATION:
The Commission invites all interested parties to provide comments on the Draft VBER and the Related Vertical Guidelines by September.
[1] Commission Regulation (EU) 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, OJ L102, 23.4.2010, p. 1.
[2] Guidelines setting out the principles for the assessment of vertical agreements under Article 101 of the Treaty on the Functioning of the European Union OJ C 130, 19.5.2010, p. 1.
[3] Contributions can be submitted by following the instructions in this link: https://ec.europa.eu/competition-policy/public-consultations/2021-vber_en#view-the-consultation-document.
[4] In this regard, an agency official claimed that the Commission aims to provide guidance on information exchanges in dual distribution cases in its upcoming proposal for the horizontal guidelines.
[5] Case C-230/16 Coty Germany GmbH v Parfümerie Akzente GmbH EU:C:2017:941.
[6] Case C-439/09 Pierre Fabre Dermo-Cosmetique SAS v Président de l’Autorité de la concurrence EU:C:2011:649.
