New Vertical Block Exemption Regulation (VBER) and guidelines: what’s changing for distribution relationships?

On September 20, 2022, Thomas De Meese and Marieke Van Nieuwenborgh presented a webinar on the new competition rules applicable to distribution relationships which entered into force on May 10, 2022. The webinar provided an overview of the rules and highlighted the novelties of the new regime. This new regime aims at adapting the legislation to current challenges brought about by the growth of e-commerce and online platforms. The new rules are also intended to provide more leeway to businesses distributing goods and services in the EU.

The Vertical Block Exemption Regulation (VBER) and its guidelines set out the conditions for the application of EU competition law to agreements relating to the purchase or sale of goods and services between companies, operating at a different level of the production or distribution chain. The old rules were deemed no longer to be adapted to the market developments of the last ten years, in particular the growth of online sales and the introduction of new market players such as online platforms.

To be covered by the VBER, both the supplier’s and the distributor’s market shares may not exceed 30% on the relevant markets and the agreement may not contain so-called hardcore restrictions. Above the market share thresholds, the parties will need to self-assess their agreement based on the guidelines. The VBER does not apply to vertical agreements between competitors (with an exception for dual distribution), nor to rental and lease agreements.

The most important changes in the new VBER can be summarized as follows:

• Exclusive and selective distribution systems

An exclusive distribution system is a distribution system where the supplier allocates a territory or group of customers exclusively to itself or to a distributor and restricts all its other distributors from actively selling into the exclusive territory or to the exclusive customer group. Under the new VBER, suppliers are now able to appoint up to five exclusive distributors in a particular territory or for a particular customer group. Active sales restrictions can be passed on to the distributor’s direct customers. Pass-on further down the distribution chain remains not exempted.

A selective distribution system is a distribution system where the supplier undertakes to sell only to distributors selected on the basis of specified criteria and where the distributors undertake not to sell to unauthorized distributors within the territory reserved by the supplier to operate a selective distribution system.  A supplier can prohibit distributors from selling to unauthorized distributors located in a territory where the supplier operates a selective distribution system, regardless of whether those distributors are themselves located inside or outside that territory. These restrictions can be further passed on to distributors’ direct and indirect customers under the new VBER.

• Online sales restrictions

A significant number of online sales restrictions are now permitted as long as they do not amount to a de facto prohibition of the use of the internet. Examples of the latter include requiring sales to be made only in physical stores, banning the use of the supplier’s brand on the website and a ban on the use of an entire online advertising channel (such as search engine advertising or price comparison websites). Conversely, quality requirements, requiring to operate a physical store and requirements to make a minimum absolute volume of sales offline are allowed.

Likewise, dual pricing (i.e., where the supplier charges the same distributor a higher wholesale price for products sold online than for products sold in brick-and-mortar shops) is from now on permitted. However, dual pricing may not have the object of preventing the effective use of the internet or restricting cross-border sales (e.g. by limiting the quantity of products that may be sold online or by making selling online unprofitable). The difference in the wholesale price charged must be related to differences in the investments made for online/offline sales.

The new VBER also contains new rules and guidance on the treatment of online platforms in the platform economy. The VBER defines a specific type of online platforms, namely providers of online intermediation services as platforms that allow companies to offer products to other companies or to end consumers, with a view to facilitating the initiation of direct transactions between the parties, irrespective of whether and where the transactions are ultimately concluded. Examples of these platforms include e-commerce marketplaces, app stores, price comparison tools and social media services. Providers of online intermediation services are categorized as suppliers under the new VBER. As a result, restrictions imposed by these platforms on merchants relating to the price at which, the territories in which, or the customers to whom the products may be sold, can constitute hardcore restrictions preventing the applicability of the VBER. Moreover, hybrid platforms (i.e., online platforms that offer products in competition with companies that use their platform to offer products) cannot benefit from the block exemption. Their vertical agreements will have to be assessed on a case-by-case basis.

• Resale price maintenance (RPM)

RPM is the practice by which a supplier, directly or indirectly, establishes a fixed or minimum resale price to be observed by the distributor. Such practice continues to be a hardcore restriction under the new VBER. The new Guidelines now explicitly state that imposing a Minimum Advertised Price (MAP), i.e. prohibiting the distributor from advertising below a price level set by the supplier, will be treated as a form of RPM. Both for RPM and MAP an efficiency justification can be provided. Examples of such a justification include (i) the introduction of a new product; (ii) a short-term low-price campaign; (iii) overcoming free riding on pre-sales services for complex products; and (iv) to prevent loss-leading promotions by a particular distributor.

• Dual distribution

Dual distribution corresponds to the situation in which a supplier sells goods or services not only at the upstream level but also at the downstream level, thereby competing with its independent distributors. The new VBER limits the applicability of the exemption to certain types of information exchange in the context of dual distribution.  Only information exchanges which are directly related to the implementation of the vertical agreement and are necessary to improve the production or distribution of the products will be exempted. Examples of such information exchange include technical information, logistical information, information relating to customer purchases, preferences and feedback provided it is not used to restrict the territory into which the distributor may sell as well as performance-related information including aggregated information relating to the marketing and sales activities of other buyers.

• Most Favored Nation (MFN)

Across-platform (or wide) retail parity obligations imposed by suppliers of online intermediation services are excluded from the benefit of the new VBER and will need to be assessed individually. Other types of parity obligations, such as narrow retail parity obligations, parity obligations relating to the conditions under which products are offered to companies that are not end users and ‘most favoured customer’ obligations, continue to benefit from the exemption.

• Agency agreements

The new rules clarify when an agent that also act as an independent distributor for the same supplier (i.e. dual role) qualifies as a genuine agent. This is the case when (i) the agency function is undertaken freely (not imposed by the supplier); and (ii) the supplier covers all market-specific risks and investments that would be necessary for an agent to start operating in the relevant market. Online platforms generally do not meet the conditions to qualify as genuine agents, as they deal with too many sellers and bear significant market-specific risks.

• Non-compete clauses

Non-compete obligations are excluded from the block exemption if their duration is indefinite or exceeds five years. An exception is granted for non-compete obligations which are tacitly renewable beyond a period of five years, provided the buyer can effectively renegotiate or terminate the agreement with a reasonable period of notice and at a reasonable cost. Post-term non-compete obligations can still benefit from the exemption if they are (i) indispensable to protect know-how transferred; (ii) limited to the point of sale from which the buyer has operated; and (iii) limited to a maximum period of one year.

The new rules have entered into force on June 1, 2022, and apply immediately to agreements concluded after May 31, 2022. Agreements already in force on May 31, 2022, benefit from a transition period until May 31, 2023, as long as they satisfy the conditions of the old VBER.