EU and UK Unveil Proposed Antitrust Rules for Vertical Agreements to Address Rapid Evolution of E-commerce and Digital Markets
Mixed News for Suppliers and Traders of Consumer Products
In a much-anticipated development, the European Commission (“Commission”) published its new proposed Vertical Block Exemption Regulation (“Draft Revised VBER”) to replace the existing law which is due to expire in May 2022.1 The Draft Revised VBER, published on 9 July alongside a proposed update to the accompanying Vertical Guidelines (“Draft Revised Guidelines”), would represent a substantial change to the antitrust regulation of distribution arrangements in the EU. A significant number of the proposed changes reflect developments in e-commerce and are specifically intended to recalibrate the existing rules to reflect the realities of online sales, platforms and other e-commerce developments. The proposed new rules are therefore of particular relevant to consumer-facing industries, even if their scope is not limited to those sectors.
In a parallel development, the UK Competition and Markets Authority (“CMA”) recently announced a public consultation on proposals to introduce a new UK-specific equivalent to the VBER.2 Following the UK’s withdrawal from the European Union, the VBER had been retained as applicable under UK law pending a decision on its replacement; with some marked differences, the CMA’s proposals would see large parts of the existing VBER effectively incorporated into UK law.
As a result of the proposed changes in both the EU and UK, companies active in consumer-facing industries—particularly those in the FMCG sector—may face a clear and direct impact on their existing distribution arrangements. Indeed, in practice, many companies’ European distribution and other vertical agreements are modelled on the VBER safe harbor provisions and may require re-evaluation or modification, either at short notice or before the end of the transitional period on 31 May 2023.
The EU’s VBER has existed in various iterations for almost five decades and provides a safe harbor from EU antitrust rules for distribution agreements and other agreements between suppliers and distributors active at different levels of the supply chain (“vertical agreements”). Accordingly, agreements that meet the conditions of the VBER are in principle compatible with Article 101(1) TFEU—the EU antitrust provision which prohibits anticompetitive agreements. The safe harbor exemption is limited to agreements that involve no or little market power and does not apply if either a supplier’s or distributor’s market share reaches 30% or more - a market share threshold that remains unaltered in the Commission’s new proposed VBER - and exceptions apply whereby agreements containing “hardcore” restrictions—such as a supplier requiring a distributor to set a minimum resale price—are not exempt. Companies must self-assess their compliance with the EU regime and the accompanying Guidelines are intended to provide additional guidance for assessing whether their agreements fall within the scope of the VBER and, if not, whether they are on balance deemed anti-competitive under Article 101 TFEU.
The Commission has been reviewing the current VBER since 2018 with a view to determining whether the VBER should be renewed at the end of its term in May 2022, and whether changes were needed to reflect changes in the market, particularly the shift to e-commerce.
In publishing the draft revised VBER and Guidelines, the Commission has started a public consultation period running until 17 September, at which point the Commission will consider comments received and prepare to issue a finalized version of the VBER in time for enforcement from 1 June, 2022.
Key Proposed Changes – Mixed News for Suppliers and Traders of Consumer Products
The proposed changes involve a number of changes to the scope of the safe harbor. In some cases, for instance changes relating to online restrictions and dual distribution arrangements, these modifications result in more flexibility to structure distribution arrangements without losing the benefit of the VBER. In other respects, the Commission suggests significantly tightening the conditions for exemption or even elimination of that possibility altogether. Overall, the proposed changes result in a mixed picture for companies doing business in the EU and the UK.
Currently, the VBER safe harbor does not apply to agreements between competitors. However, Article 2(4) provides for an exception for “dual distribution” agreements, i.e. non-reciprocal vertical agreements between competitors where the buyer is not a competitor at the manufacturing level.3 In light of the growing trend towards online sales, omni-channel strategies and manufacturers’ greater involvement in direct distribution to customers, the Commission suggests the extension of the dual distribution exception to wholesalers and independent importers who are not also active in the downstream market. However, the Commission also proposes to limit the dual distribution safe harbor to scenarios involving a combined retail market share threshold of 10%; the VBER safe harbor may still apply in situations where combined retail market share is up to 30%, though in that case information exchange aspects would be subject to review under the Commission’s Horizontal Guidelines.4 Moreover, online marketplaces that operate as a hybrid platform are categorically ineligible to benefit from the dual distribution exception.5
Dual pricing systems
Until now, setting different prices for products sold online and offline has been off limits and is treated as a hardcore restriction of competition under the existing VBER. Under the Draft Revised VBER, charging different prices for online/offline sales—so-called “dual pricing” systems—would no longer be considered a hardcore restriction and would therefore benefit from the VBER safe harbor. The Commission’s logic behind this change is that online sales have developed into a well-functioning sales channel. As a result the Commission considers that there is no longer a need for special protection for online sales by qualifying dual pricing and other indirect measures restricting online sales as hardcore restrictions. This new rule applies unless such restrictions on online sales have the object of preventing buyers or their customers from using the internet to sell goods or services.
These changes widen the possibility of charging a distributor a higher wholesale price for products intended to be sold online than for products to be sold offline. Coupled with the option for sellers to impose criteria for online sales that are not overall equivalent to requirements imposed on brick-and-mortar shops, this change will provide suppliers of consumers goods and other products with significantly more flexibility to structure online distribution arrangements as they see fit.
Online sales restrictions
Under the Draft Revised VBER, restrictions on online sales would be permitted, provided that their effect is not to “significantly diminish” sales through online sales channels or to prevent buyers from “effectively using the internet” for the purposes of selling their goods or services, or from effectively using one or more online advertising channels.6 The Draft Revised Guidelines provide further guidance on the circumstances where such restrictions may be considered to be hardcore restraints.7 The Draft Revised Guidelines specifically mention restrictions on the use of price comparison websites and paid referencing in search engines as amounting to hardcore restrictions under the VBER.8 According to the Commission, this is because the ability to advertise allows a distributor to attract potential customers to its website, which is a prerequisite for being able to sell online. In contrast, online advertising restrictions that do not exclude specific online advertising channels will be covered by the Draft Revised VBER, for example if such restrictions are linked to the content of online advertising or set certain quality standards. In line with this approach, marketplace bans may be acceptable.9
The current VBER exempts both narrow and broad price parity or “most-favored-nation (“MFN”) clauses that require a company to offer the same conditions to trading partners. Typically, “narrow” parity obligations prevent suppliers (e.g. hotels and other service providers) from offering better terms on their own websites than they offer on online intermediation platforms. In contrast, “wide” parity clauses prohibit service providers from offering better terms on other platforms. By their nature, wide parity clauses are more likely to negatively affect inter-brand competition (i.e. competition between different platforms), while narrow parity clauses more directly affect intra-brand competition. Over the past few years, competition agencies in Europe have increasingly taken enforcement action against wide parity provisions. More recently however, narrow price parity clauses have also been found illegal. 10 In revising the rules applicable to parity clauses, the Commission seeks to bring a uniform approach in the divergent and fragmented approaches. Under the new rules narrow parity clauses will remain block-exempted. However, the future block exemption will not apply to wide parity clauses.11 In practical terms, this implies that those provisions will not benefit from automatic immunity but are in all cases subject to an individual assessment.12
Under the current rules, it is permissible to impose on distributors restrictions of “active sales” into the exclusive territory or to an exclusive customer group reserved to the supplier or allocated by the supplier to another buyer. 13 In practice, this led many suppliers to appoint exclusive distributors, even in situations where customers might be better served by more than just one distributor. The proposed rules provide that imposing active sales bans would also be possible where the supplier allocates a territory or customer group exclusively to a limited number of buyers.14 This new system of “shared exclusivity” will provide suppliers with more flexibility. However, the draft rules make clear that in such cases, the distributors should be “determined in proportion to the allocated territory or customer group in such a way as to secure a certain volume of business that preserves their investment efforts.” 15
Accordingly, suppliers should be prepared to demonstrate that the imposition of active sales bans on resellers outside exclusive territory is justified by efficiencies, in particular the need to avoid free-riding on the investments made by the (semi-)exclusive distributor(s).
Resale price maintenance and tri-partite agreements
Under the proposed new rules resale price maintenance continues to be treated as a hardcore restriction of competition. The Draft Revised Guidelines explicitly provide that minimum advertised price (“MAP”) policies may constitute resale price maintenance, thereby confirming the diverging approach with U.S. practice.16 They also warn against the use of price monitoring software used in e-commerce as a facilitating device for resale price maintenance and provide guidance on resale price maintenance in relation to providers of online intermediation services. 17 The Draft Revised Guidelines do not add any new bases for efficiency claims related to resale price maintenance, beyond the three existing grounds for “exemptions”: the launch of new products, short term price campaigns, and to combat free-riding.18
In addition, the draft Guidelines make clear that certain fulfilment contracts between a supplier and a buyer that execute a prior agreement between the supplier and a specific end user do not constitute resale price maintenance, provided the end user “waived its right to choose the entity that should execute the agreement.”19 This is a welcome clarification as it permits suppliers to appoint intermediaries to support the contractual relationship with buyers. For example, under the new proposed rules, sellers would be able to conclude framework agreements more easily with end users, under which the sellers’ resellers will supply end-users at specified conditions.
The proposed rules will permit additional restrictions to protect the integrity of selective distribution systems.20 In particular, the proposed rules allow suppliers to prohibit exclusive and non-exclusive distributors and their customers from actively or passively selling to unauthorized resellers located in territories where the supplier operates a selective distribution system.21
Providers of online intermediation services
Platform-based providers of online intermediation services are considered suppliers within the meaning of the new block exemption regulation. As such, restrictions included in their distribution agreements may theoretically benefit from the safe harbor offered by the proposed new rules, provided they do not involve market shares exceeding 30% or any hardcore restrictions. However, upon closer inspection, providers of online intermediation services are not treated favorably under the proposed rules. In particular, “hybrid” providers that sell goods or services in competition with companies to which they provide online intermediation services would not benefit from the block exemption,22 they do not qualify as agents for the purposes of Article 101 TFEU,23 and wide parity clauses will not benefit from the exemption.24
UK proposals and impact
The UK CMA’s proposed recommendation to the Secretary of State is to retain the basic structure of the current EU vertical restraint block exemption regulation, while incorporating a number of amendments. The proposed amendments overlap with a number of the amendments proposed by the Commission in relation to Regulation 330/2010, in particular in relation to the clarification of the boundaries between active and passive sales restrictions, the removal of the prohibition of dual pricing and the requirement for overall equivalence from the list of hardcore restrictions and maintaining resale price maintenance as a hardcore restriction.
The UK proposal also appears to take a similar view on the combination of exclusive and selective distribution in the same or different territories, “shared exclusivity” and greater protection for members of selective distribution systems. Significantly, however, the CMA proposal suggests a significantly stricter approach towards wide parity clauses, which it proposes should be placed on the list of hardcore restrictions.25
Following the initial public consultation on the proposed UK regulation, the CMA is preparing its final recommendations for the Secretary of State, while it is expected that the CMA will consult separately on new draft guidelines to accompany the new regulation, most likely towards the end of 2021 or start of 2022.
The UK proposals are less well advanced and it remains to be seen in which respects the UK and EU regimes for distribution and other vertical agreements will eventually diverge. It is likely, however, that companies doing business in the UK and the EU will have to assess whether it makes commercial sense to reflect those differences in their distributor agreements, or whether it is more efficient to have one set of (more restrictive) contracts that meets the requirements in both jurisdictions.
Conclusion on likely impact of changes
The proposed EU and UK changes to the safe harbor provisions for distribution and other vertical agreements present a mixed picture. On balance, the new rules, if adopted, are slightly more receptive to efficiencies that often come with the imposition of vertical restraints. Accordingly, they provide more scope to impose restrictions, both online and offline, seeking to protect the investments of resellers in the context of exclusive and selective distribution systems. On the other hand, operators in other sectors – for example platform-based companies providing online intermediation services – are treated unfavorably under the new proposed rules and can be expected to make their views known to the Commission as part of the ongoing consultation on the proposals.
Ultimately, regardless of determinations as to whether the revised VBER and Guidelines are “favorable” or unhelpful, companies active in the consumer goods space in particular will be keen to assess the impact of the proposed changes on their business models. Since many such companies have designed their existing distribution arrangements in part to comply specifically with the existing regulatory landscape in Europe, these proposed changes will inevitably prompt companies to re-assess compliance of their existing arrangements with the new rules.
1. Text of Draft Revised VBER and Draft Revised Guidelines available at 2021 vber (europa.eu); existing VBER and Guidelines: Commission Regulation 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 L 102, 23 April, 2010, 1-7, and 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 May, 2010, 1-46.
2. CMA consultation document available at Retained Vertical Agreements Block Exemption Regulation consultation - GOV.UK (www.gov.uk).
3. Article 2(4) of Regulation 330/2010 provides a similar exemption for vertical agreements involving services.
4. Communication from the Commission – Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements, Official Journal C11, 14 January, 2011, 1.
5. Article 2(7) of the revised VBER.
6. Paragraph 188 of the Draft Revised Guidelines.
7. Idem, Section 6.1.2.
8. Idem, Section 8.2.4.
9. Idem, paragraph 194.
10. In the German “Booking.com” case: Case KVR 54/20, German Federal Supreme Court decision of 18 May 2021, on appeal from Düsseldorf Higher Regional Court decision of 4 June 2019, VI-Kart-2/16 (V) WuW 2019, 386.
11. The Commission suggests adding wide parity provisions (“ any direct or indirect obligation causing a buyer of online intermediation services not to offer, sell or resell goods or services to end users under more favourable conditions using competing online intermediation services”) to the list of excluded restrictions of Article 5; see Section 8.2.5 of the Draft Revised Guidelines for guidance on conduct of individual assessment.
12. See Section 8.2.5 of the Draft Revised Guidelines; note that the UK CMA suggests a stricter approach towards wide parity clauses.
13. Article 4(b)i Regulation 330/2010. Active sales are defined as “ article 1(l) “ Paragraph 102 of the draft Guidelines makes clear that the number of exclusive distributors should be restricted to a “limited number” and that “exclusive distribution shall not be used to shield a large number of distributors from competition located outside the exclusive territory as this would lead to partition of the internal market.”
14. Pursuant to Article 4(b), the supplier under an exclusive distribution agreement may also require its distributors to pass active sales restrictions onto their customers.
15. See Article 1(g) of the Draft Revised VBER.
16. Paragraph 174 of the Draft Revised Guidelines.
17. See, respectively, paragraphs 175 and 179 Draft Revised Guidelines.
18. Paragraph 182 of the Draft Revised Guidelines.
19. Paragraph 178 of the Draft Revised Guidelines.
20. See, respectively, Articles 1(f), 4(b)(i) and 4(1)(c) of the Draft Revised VBER; the notion of selective distribution is specific to EU law—it is in some respects similar to limited distribution systems under U.S. antitrust law.
21. See Articles 4(b)(ii) and 4(d)(ii).
22. See Recital 12 and Article 2(7) of the Draft Revised VBER.
23. Paragraph 44 of the Draft Revised Guidelines.
24. Article 5(1)(d) of Draft Revised VBER.
25. Paragraphs 4.71 et seq.
ABOUT BAKER BOTTS L.L.P.
Baker Botts is an international law firm whose lawyers practice throughout a network of offices around the globe. Based on our experience and knowledge of our clients' industries, we are recognized as a leading firm in the energy, technology and life sciences sectors. Since 1840, we have provided creative and effective legal solutions for our clients while demonstrating an unrelenting commitment to excellence. For more information, please visit bakerbotts.com.