Are your distribution contracts ready for the revised VBER?
On 9 July 2021, the Commission published its draft revised Vertical Block Exemption Regulation (VBER) and the accompanying Vertical Guidelines. One of the key points of the revision was to make the VBER fit for the digital age and adapt the rules to the strong growth of e-commerce.
The revised VBER is tough on agreements that can hamper online competition. Suppliers are not allowed to de facto restrict online sales or advertising. Price parity clauses will also partially lose their current ‘unproblematic’ status. The revised block exemption is narrower in scope when it comes to online intermediation services and other suppliers that compete with their contracting parties. On the other hand, dual pricing depending on online or offline sales is no longer included in the list of hardcore restrictions.
In any case, if this draft version of the VBER becomes final, vertical agreements containing clauses on online selling or advertising will deserve a fresh look.
Just like the current VBER and Vertical Guidelines, the revised VBER provides a safe harbour for vertical agreements that fall within the scope of Article 101 TFEU but that the Commission deems generally unproblematic. Vertical agreements that are not covered by the VBER can still be allowed but will require an individual legal assessment under Article 101 TFEU.
Exclusive and selective distribution systems
The revised VBER provides more guidance on the rules for exclusive and selective distribution systems. It also elaborates on the distinction between active and passive sales. This is relevant as, for instance, restrictions on active sales into a territory or to a customer group reserved under an exclusive distribution system are allowed under the VBER, whereas such restrictions on passive sales are not.
According to the revised VBER, targeted online advertising will constitute active selling. Also, offering an online shop with a domain name or language options which vary from those commonly used in the distributor’s trading area are a form of active selling into another territory. This differs from the current VBER, which treats the presence of different language options on a website as a form of passive selling.
Another noteworthy revision relating to exclusive distribution systems is that the revised VBER allows shared exclusivity. Under the revised VBER, suppliers that operate an exclusive distribution system can reserve a territory or customer group exclusively for one or a limited number of buyers.
Restrictions on online sales and advertising
Restrictions capable of significantly diminishing the overall amount of online sales constitute a hardcore restriction under the revised VBER. This does not mean that suppliers cannot give instructions or impose quality requirements on distributors. The revised VBER allows, for example, a ban on sales through online platforms that connect merchants and potential customers. This is in line with the Coty judgment, where the Court of Justice of the European Union ruled that an online platform ban within a selective distribution network, in principle, does not restrict competition (see our January 2018 Newsletter).
Meanwhile, a ban on price comparison tools and search engines is not allowed. Unlike online market places, price comparison tools and search engines are not distinct sales channels, but rather a form of online advertising. Whereas distributors may be prohibited from using one specific price comparison tool or search engine, a prohibition on using all the most widely used advertising services prevents distributors from effectively attracting customers online.
The current VBER covers all clauses that oblige suppliers to offer the same or better conditions to the contact party as those offered on any other direct or indirect sales channel (price parity clauses). However, under the revised VBER, clauses that restrict a buyer of an online intermediation service from offering more favourable conditions to end users via competing online intermediation services can no longer benefit from the VBER’s safe harbour. Such clauses will need to be assessed individually under Article 101 TFEU. The revised Vertical Guidelines provide specific guidance for the assessment of price parity obligations in individual cases.
All other types of parity clauses are still covered by the block exemption, provided that the market shares of the supplier and the buyer do not exceed 30%. This includes, for example, parity obligations imposed on the buyer of an online intermediation service relating to the conditions offered to end users via its direct sales channel (‘narrow’ parity) or relating to the conditions offered to undertakings that are not end users.
Sometimes suppliers compete with their distributors at the retail level; for example, when a supplier maintains a dual distribution system whereby it distributes its goods or services both directly and through distributors. Despite the horizontal relation between the contract parties, vertical agreements in a dual distribution system are generally covered by the current block exemption.
The revised VBER is stricter on dual distribution. If the supplier and the distributor have an aggregate market share at retail level that does not exceed 10%, the exemption continues to apply in full. If the aggregate market share is between 10-30%, the exemption applies but any exchanges of information have to be assessed separately under the Horizontal Guidelines.
Online intermediation services that sell goods or services in competition with their users (termed “hybrids”) cannot benefit from the dual distribution exemption. Vertical agreements with hybrid online intermediation services providers must be assessed on a case-by-case basis.
Whereas the current VBER does not allow dual pricing, the revised VBER is more lenient. A supplier can charge a higher price for products intended to be resold online than it charges for products intended to be resold offline. However, the price difference must be related to the required investments and cost differences per channel.
Under the revised VBER, non-compete obligations are still excluded from the scope of the VBER when their duration is indefinite or exceeds five years. However, in a change from the current VBER, tacit renewal after five years is now allowed.
Altogether, there are multiple good reasons to look out for the finalisation of the revised VBER next year. Currently, interested parties are invited to submit their comments on the draft VBER; the final revised VBER is planned to enter into force on 1 June 2022. Fortunately, the VBER includes a transitional period until 31 May 2023 for agreements already in force. In the meantime, it would not hurt to take another look at your distribution contracts.
This article was published in the Competition Newsletter of August 2021. Other articles in this newsletter:
Horizontal cooperation: from the dark side to the light?
ACM issues first excessive pricing fine in pharma
Court rules ACM can use accidental evidence found in dawn raids
Netherlands FDI regime protecting national security is getting closer
CJEU clarifies jurisdiction for follow-on damage claims
Amsterdam Court of Appeal rules on the applicable law to air freight
Court assesses threshold for substantiating cartel damage plausibility