Nearing the end of the supply chain – Commission launches policy proposals for new vertical rules

After almost two years since the European Commission (the Commission) launched its evaluation of its Vertical Block Exemption Regulation (VBER) – which exempts certain agreements between companies operating at a different level of the production or distribution chain from the application of EU competition law – and the accompanying guidelines (the Vertical Guidelines) in November 2018, the Commission has launched its second Inception Impact Assessment (the IIA), focusing on the various policy options now being considered by the Commission as part of its reform.

Reflecting the importance of the VBER and the Vertical Guidelines to all businesses distributing goods within the EU, the Commission has gathered a lot of evidence in the past two years as part of its VBER evaluation – from stakeholders, national competition authorities (NCAs) and experts – to assess the sufficiency of the current rules. This culminated in a 233-page Staff Working Document in which the Commission set out its findings and next steps (read more in this blog post). 

The launch of the IIA forms the first of those next steps as the Commission looks to update the VBER and Vertical Guidelines to be “future proof” to market developments – in particular, the continuing growth of online sales and online platforms.

What is the reformed VBER expected to address?

In a nutshell, the Commission concluded as part of its VBER evaluation that the VBER still serves a useful purpose (having legal certainty) to businesses which have to self-assess the legality of their distribution arrangements with EU competition law – but that certain areas needed to be clarified and updated.

The IIA sets out the specific issues the reformed VBER and Vertical Guidelines will seek to address.

Ensuring consistency across NCAs

The VBER and Vertical Guidelines are currently drafted in such a way that has allowed NCAs to take divergent approaches on new issues that have arisen in the context of online sales. For example, since the EU Court of Justice’s 2017 Coty/Akzente ruling, businesses seeking to implement bans on sales on online platforms have come up against the added complexity of NCAs interpreting the judgment, which ruled that in certain circumstances such bans are legal, in divergent ways (with the German Federal Cartel Office notably taking a narrow interpretation of the ruling).

The Commission is seeking to limit the scope for such divergent interpretations – which extends to areas such as restrictions on the use of price comparison websites, parity clauses and online advertising restrictions – by clarifying and simplifying the rules and filling any gaps in its regime.

As a new development, the IIA specifically makes reference to the Commission’s objectives in the European Green Deal, noting that the Commission will take these into account in its updated guidelines for agreements that pursue sustainability objectives.

Opening the door for Resale Price Maintenance (RPM) efficiency defences

Following recent European-level enforcement activity against RPM practices among a group of consumer electronics manufacturers, the Commission confirms its renewed focus on RPM – particularly with the development of algorithms which enable businesses to sustain and monitor an efficient RPM system. The Commission’s “hardcore” approach to RPM (i.e. treating such measures as presumptively anticompetitive) has stood in contrast to jurisdictions such as the US where RPM is generally viewed under the “rule of reason” standard (i.e. recognising such agreements can give rise to potential efficiencies). Further, record indicates that at least in certain Member States (i.e. Italy, Ireland) that a purely vertical RPM (i.e. with no connection to horizontal practices) is rarely considered an enforcement priority and in any case could be adequately addressed through the adoption of commitments.

The IIA notes that the Commission will explore the possibility of concrete instances and conditions under which efficiencies for RPM can be claimed, and the evidence that is required to justify such measures. For example, a number of suppliers told the Commission as part of its evaluation that RPM may be justifiable in the context of a selective distribution system where a supplier wishes to restrict the ability of distributors to sell their products too cheaply in order to preserve a “quality” brand image.

Wider safe harbour for non-compete obligations

The VBER currently excludes from the benefit of the block exemption non-compete obligations which exceed five years. As part of its evaluation, the Commission received feedback that this exclusion was not legally justified in circumstances where the obligation is tacitly renewable beyond a period of five years, in circumstances where the buyer is able to terminate or renegotiate the agreement with a reasonable notice period and at reasonable costs.

The IIA notes that the Commission will seek to address these circumstances as part of its assessment.

Revising the scope of the dual distribution exemption

As an exception to the general rule that agreements between competitors are not protected by the VBER, the VBER currently exempts arrangements in which a supplier sells goods or services directly to end customers, thereby competing with distributors at the retail level. With the growth of online sales, this practice has increased considerably such that the Commission has concerns this is now too wide an exemption (in particular in light of uncertainty around the legality of information sharing between distributors and the supplier in these circumstances). However, at the same time, the VBER is currently drafted narrowly in excluding from its protection certain vertical relationships, such as wholesalers and importers who are also active downstream.

The IIA sets out a number of policy options the Commission is assessing to address these concerns, including (a) limiting the protection to scenarios unlikely to raise horizontal concerns (i.e. relating to a supplier competing with its distributors at retail level) by e.g. introducing a threshold based on the parties’ market shares in the retail market; and (b) extending the protection to those vertical relationships not currently covered by the exemption (wholesalers and/or importers). These will be considered alongside options to maintain the current protection or remove it completely (requiring an individual assessment in all cases).

Clarity on the legality of active sale restrictions

Currently, the VBER permits restrictions on active sales (i.e. restrictions on a distributor actively seeking to make sales to a customer in another EU territory) in only limited circumstances (e.g. to protect investments by exclusive distributors). The VBER evaluation raised a number of concerns with the current rules (e.g. insufficient protection in selective distribution systems and the restriction on “shared exclusivity” arrangements).

In response, the IIA notes that the Commission will consider (a) expanding the circumstances in which such restrictions will be permitted to allow more flexibility; and (b) explicitly allowing restrictions on sales from outside a selective distribution territory to unauthorised distributors within that territory (due to some uncertainty as to whether such restrictions are exempted by the current VBER).

Extending the scope for applying different conditions to online and physical sales

Restrictions on online sales – whether directly or indirectly (such as measures which make online sales more difficult or expensive) – are currently considered “hardcore” restrictions and are thereby not exempted by the VBER. As part of its evaluation, the Commission heard that this has given rise to a number of difficulties, including in relation to businesses ensuring equivalence between online and offline sales conditions and restrictions on the ability for suppliers to incentivise investment in physical stores.

The IIA notes that the Commission is considering no longer treating as hardcore restrictions: (a) dual pricing (i.e. charging different wholesale prices depending on the intended sales channel); and (b) application of differing conditions for offline and online sales.

Greater legal certainty for parity clauses

 “Most favoured nation” or MFN clauses (requiring a business to offer the same or better conditions to its contracting party as those offered on any other sales channels) have become more frequent with the growth of online platforms, with a number of enforcement cases targeting the use of such clauses by online travel agencies in the hotel sector. Such clauses are currently exempted where other conditions of the VBER (such as the market share thresholds) are met – but the practical assessment of the scope of this protection, and self-assessment of MFN clauses that do not meet all the requirements of the VBER has proven to be difficult, with very limited discussion of these clauses in the current Vertical Guidelines and NCAs taking divergent enforcement approaches.

The Commission will now assess removing the benefit of the VBER for either: (a) all types of parity obligations; or (b) only those that require parity relative to specific types of sales channels (e.g. excluding the benefit for parity obligations that relate to indirect sales and marketing channels, including platforms).

When will a reformed VBER come into effect?

There is still more than a year to go before businesses will see a refomed VBER being brought into force to replace the current regulation, which expires in May 2022.

The IIA describes the steps that the Commission is expecting to take to reach its 2022 deadline:

• 20 November 2020: deadline for public comments on the IIA (relating to the objectives and policy options being considered)
• Q4 2020: the Commission will launch a public consultation to gather feedback on the policy options set out in the IIA and in parallel will engage with consumer organisations, national competition authorities and expert groups.
• 2021: the Commission will publish a draft of the revised VBER and Vertical Guidelines for stakeholders’ comments.
• Q4 2021: the Commission will finalise a draft of the VBER and submit this to the Commission’s Regulatory Scrutiny Board for approval.
• 31 May 2022: the current VBER will expire, at which point it is expected a new VBER to come into force.

Do get in touch with us if you have questions or concerns, or if you would like to discuss your own response to the policy proposals as part of the public consultation later this year.