Competition Rules for Vertical Agreements under Review : What’s to come for distribution relationships in the digital age?

Businesses distributing goods and services in the EU rely heavily on the Vertical Block Exemption Regulation (VBER) for legal certainty. It sets out the conditions under which distribution agreements are presumed to comply with the European competition rules. However, certain of its provisions are no longer adapted to recent market developments, notably the growth of online sales and the increased importance of new market players, such as online platforms. Recently, the European Commission proposed a number of changes to the VBER which is currently under review.

After twenty years of virtually no enforcement action against distribution practices, the European Commission launched an inquiry into the e-commerce sector in 2015. The sector inquiry brought to light a range of potentially problematic strategies in online distribution. Since then, the Commission has imposed over 150 million euro in fines on Guess, Nike, Sanrio and many other suppliers, in connection with restrictions imposed on online resellers. Many national competition authorities have since followed suit with the UK’s authority vigorously pursuing the musical instruments industry for restricting online discounting.

Most recently, on 23 October 2020, the Commission published its plans for the reform of the Vertical Block Exemption Regulation (VBER) and the Vertical Guidelines. The Commission’s intention is to fill in the gaps that have emerged as a result of the changing market place, and address practices that have become more prevalent since the adoption of the current rules, such as restrictions on the use of price comparison websites and online advertising restrictions. A number of impactful changes to the current rules are envisaged in relation to online sales restrictions, active sales restrictions, dual distribution, and Most Favoured Nation clauses (MFNs).

Online Sales Restrictions

Restrictions preventing distributors from selling online are generally considered hardcore restrictions not exempted by the VBER. The current rules prevent suppliers from charging the same distributor a higher wholesale price for products intended to be sold online than for products sold offline (also referred to as “dual pricing”). The same applies to imposing criteria for online sales that are not overall equivalent to the criteria imposed in brick-and-mortar shops in the context of a selective distribution system. The Commission is now considering extending the VBER to allow these two currently illegal types of measures restricting online sales.

Active Sales Restrictions

While the current rules generally do not allow restrictions on online sales, they do allow restrictions on active sales in limited cases, notably to protect investments made by exclusive distributors. The Commission suggests expanding the exceptions for active sales restrictions to give suppliers more flexibility to design their distribution systems according to their needs. In addition, the Commission wants to allow restrictions on sales from outside a territory in which a selective distribution system is operated to unauthorised distributors inside that territory.

Dual Distribution

With the growth of online sales, the importance of dual distribution (i.e., situations in which a supplier sells its goods or services directly to end customers competing with its distributors at retail level) has increased significantly. Dual distribution is currently covered by the block exemption, but the Commission is wondering whether an exception still makes sense. Different options are being considered ranging from introducing a threshold based on the parties’ market shares in the retail market, to requiring an individual assessment of all dual distribution cases.

Most Favoured Nation Clauses

Another recent development is the increased use of Most Favoured Nation clauses (MFNs) across sectors, but most notably by online platforms, such as booking.com. MFNs require a business to offer the same or better conditions to its contracting party as those offered on any other sales channel, or on the company’s direct sales channels. MFNs are currently block exempted under the VBER. The Commission is considering lifting the exemption for MFNs thus requiring an individual effects-based assessment of these clauses. Alternatively, it could decide that only MFNs with regard to indirect sales and marketing channels, including platforms and other intermediaries, should be excluded from the benefit of the block exemption.

Finally, the Commission is also exploring the conditions under which efficiencies for resale price maintenance (RPM) can be claimed. RPM, the practice according to which suppliers establish a fixed or minimum resale price, is currently a hardcore restriction. The Commission is also contemplating allowing tacitly renewable non-compete obligations to the extent that the distributor can periodically terminate or renegotiate the agreement.

As the VBER will expire on 31 May 2022, the Commission is intending to propose the new text in the course of 2021. More information on the Commission’s review process can be found on https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12636-Revision-of-the-Vertical-Block-Exemption-Regulation .

Crowell & Moring LLP will cover this topic in its webinar “Distribution Relationships in the Digital Age” on 24 November 2020 for which you can register here.