EU’s updated distribution rules

On 10 May 2022, the European Commission published the updated Vertical Block Exemption Regulation (VBER) and Guidelines on Vertical Restraints (Guidelines) – the rules that apply to supply and distribution agreements. Both texts are available here.

The publication concludes the review process that the Commission started in 2018, in anticipation of the expiry of the current VBER in May 2022. We have covered the Commission’s major milestones in our earlier blog posts: the start of the revision process (here), results of the 2019 consultation (here), the Commission’s evaluation support study (here), and the first draft of the revised VBER and Guidelines (here).

In updating the VBER and Guidelines, a key aim has been to reflect the reality of today’s business environment where e-commerce has become a very significant route to market. The Commission has also more closely aligned both texts with the recent jurisprudence of the EU courts, as well as decisional practice related to online distribution. The new documents also reflect the EU’s digital and sustainability agendas.

The new VBER enters into force on 1 June 2022. There is a grace period until 31 May 2023 for any agreements already in force which benefitted from the previous VBER but would not satisfy the conditions for exemption in this updated version.

What’s not changing?

The framework for the assessment of vertical agreements under Article 101 TFEU generally remains the same. The VBER continues to block-exempt vertical arrangements from Article 101 TFEU, provided that (1) the parties are not competitors (with some important exceptions), (2) their market shares are below 30 per cent and (3) the agreement in question does not contain “hardcore” restrictions. However, the contours of that safe harbour have seen several shifts, some of them notable – more on that below.

The Commission has complemented the VBER with updated Guidelines. The Guidelines add useful context for the VBER (e.g., by providing classification of distribution systems or parity clauses), define some terms used in the VBER, and set out the analytical framework for the assessment of vertical restraints that fall outside the scope of the block exemption.

What’s new?

The Commission has introduced extensive revisions to both texts. We discuss below the changes that we found the most noteworthy.

Exclusive distribution: the VBER continues to set out specific rules for exclusive distribution systems, in particular, defining which restrictions a supplier can impose on distributors that have been granted exclusivity. The new VBER now allows exclusive distribution systems with limited “shared exclusivity” – a supplier can now appoint up to five distributors in each exclusive geography or customer group, without losing the benefit of the exemption for exclusive distribution. As before, the supplier may commit that it will not permit active sales by other distributors into a territory or to a customer group exclusively assigned to other distributors – albeit it remains a hardcore restriction to prevent passive sales. The block exemption now also allows suppliers to “pass on” the restrictions they impose on their distributors to the direct customers of those distributors. Finally, the new rules provide additional clarity on the distinction between “active” and “passive” sales. The VBER now defines both concepts and the Guidelines elaborate on that distinction in an online setting.

Selective distribution: the Commission has introduced additional flexibility for suppliers operating a selective distribution system. As with exclusive distribution, suppliers can now require distributors to “pass on” the restrictions. Moreover, “equivalence” between the online and offline criteria for selective distributors is no longer required – these criteria can now differ to some extent, as long as they do not prevent the effective use of the internet. Finally, the Commission has made it explicit that suppliers can combine selective and exclusive distribution systems across different territories.

Online marketplace and sale restrictions: the VBER and the Guidelines have significantly relaxed the Commission’s approach to restrictions on online sales. For example, they now allow suppliers to prohibit distribution of their products on specific online marketplaces, unless such a restriction functions as an outright ban on internet sales. The Guidelines also allow “dual pricing”, i.e. a supplier can charge different prices for the same product depending on whether it will be resold online or offline, provided that the price difference rewards the appropriate level of resellers’ investments and does not result in the effective restriction of online sales. Finally, the block exemption covers online advertising restrictions to the extent they do not prevent the effective use of an entire advertising channel (e.g., no general ban on the use of search engines or price comparison services).

Dual distribution: like the previous version, the VBER generally does not apply to agreements between competitors, except in relation to dual distribution. Dual distribution arises where a manufacturer sells its products both directly and through distributors and, therefore, competes with them downstream (but not in the upstream market). The new VBER extends this exception to cover wholesalers and importers.

The new VBER introduces an important caveat: the new VBER clarifies that it does not exempt information exchange between the parties unless it is “directly related to the implementation of the vertical agreement” and is “necessary to improve the production or distribution.” This clarification implies that an individual assessment of the purpose of such information exchange will be required to determine whether the block exemption applies. The Commission has also addressed the lack of guidance regarding such assessments – which we flagged in our response to the EC’s consultation – by adding a dedicated section to the Guidelines. This section, for example, provides an indicative list of information that the Commission considers to be directly related to the implementation of an agreement. It also acknowledges that internal information barriers can mitigate concerns around information sharing in situations where the block exemption does not apply. Implicitly, this indicates that internal information barriers are not required where the VBER does apply.

Those readers who have followed the progress of the Commission’s consultation may be relieved to learn that the Commission has dropped the controversial proposal to introduce a 10 per cent market share threshold for applicability of the VBER to dual distribution, which featured in the July 2021 draft.

Online intermediation services: the VBER and the Guidelines set out specific rules for providers of online intermediation services (OIS Providers), which reflect the Commission’s cautious approach to online platforms. First, OIS Providers do not benefit from the exemption in the dual distribution setting: if an online platform operates a marketplace for business users but also sells products in competition with those business users, its supply agreements will not be block-exempted. Second, the VBER and the Guidelines treat OIS Providers as sellers of intermediation services, rather than parties to the transaction facilitated by the platform. This means, for example, that whether an OIS Provider can benefit from the block exemption depends on its market share in online intermediation services, rather than in the product being sold on its platform. Third, the Guidelines clarify that OIS Providers typically do not fulfil the conditions to be categorised as agents under EU law – regardless of what the contract says – and, therefore, the restrictions imposed by OIS Providers do not fall outside the scope of Article 101 TFEU due to the “agency exemption” (where an agent is treated as part of the principal, and hence agreements between the two are not subject to Article 101 TFEU). As a result, pricing restrictions imposed by an OIS Provider on a supplier selling via the platform must comply with the provisions relating to resale price maintenance to benefit from the block exemption.

Resale price maintenance: although the wording of the relevant “hardcore” restriction in the VBER has not changed, the Guidelines clarify its application in specific situations. For example, the Guidelines treat a requirement for minimum advertised prices (MAPs) as an instance of indirect resale price maintenance, even where the supplier does not sanction the buyer for selling below the MAP. In addition, the Guidelines do not consider price restrictions related to “fulfilment” contracts (where a supplier contracts with a distributor to fulfil a supply obligation that has already been agreed with a third party) to be resale price maintenance, provided that the third party cannot select the undertaking that will fulfil the contract.

Parity (or most favoured nation) clauses: whereas the old VBER block-exempted all types of parity clauses, this is no longer the case. The new VBER treats wide retail parity clauses – whereby an online intermediation platform restricts a seller from offering its product on other retail platforms at a lower price – as an “excluded” restriction. As such, although the inclusion of a wide retail parity clause would not taint the legality of the entire agreement, the specific clause does not benefit from block exemption and will require individual assessment. It is therefore helpful that a new section in the Guidelines now provides a description of various parity clauses, which aggregates the decisional practice of the last decade (including that on wide and narrow retail parity clauses, and most favoured customer clauses). For each type of parity clause, the Guidelines set out key competition concerns and potential efficiency justifications.

The United Kingdom’s new vertical rules

In light of Brexit, the UK has also been consulting on changes to its rules on vertical restraints, given that the current VBER was retained in UK law and will expire at the end of May (see our previous blog here). The good news for businesses operating in both the EEA and the UK – who now need to comply with both sets of rules – is that the new UK Vertical Agreements Block Exemption Order (VABEO), which was published on the same day as the new VBER, is largely aligned with its European counterpart. For example, in relation to the clarification and assessment of territorial and customer restrictions, online and other marketplace restrictions. There are, however, some important areas of divergence. Notably, the UK VABEO is more restrictive when it comes to the treatment of parity clauses, electing to include wide retail parity clauses in its list of hardcore restrictions that are presumed to be illegal. In contrast, the UK rules are more permissive in relation to dual distribution in that they do not contain the same prohibition as regards OIS Providers as set out in the EU VBER.

If you have any questions about how the proposed changes in either the EU or UK could affect your business, don’t hesitate to contact us or your usual contact in our Antitrust, Competition and Trade team. You can also tune in to our accompanying podcast which discusses the implications for businesses as they look to ensure compliance with the new regimes and adapt their strategies to take advantage of some of the changes.

To read more about these and other antitrust developments, please refer to our Global antitrust in 2022: 10 key themes report.