EU consults on new Vertical Agreements Block Exemption regime

The draft new VABER sets out long-awaited amendments to existing EU competition law to bring it up to date with developments in the market, especially in relation to online selling. It also highlights certain limited areas of potential divergence between the EU competition law treatment of vertical agreements and the proposed approach under UK competition law following the recent proposals by the Competition and Markets Authority (CMA) for a new UK Vertical Agreements Block Exemption Order post-Brexit.

What is the VABER?

The VABER was developed by EU policymakers to provide an automatic exemption from EU competition law for restrictions of competition in vertical agreements so long as certain conditions were met. For the VABER to apply:

• the parties must enter into a vertical agreement – this includes distribution, franchising and supply between non-competitors;
• the market share of each of the parties to the agreement in their respective markets must not exceed 30%; and
• there must be no ‘hardcore restrictions’ in the agreement – these are terms that are highly likely to be anti-competitive, for example resale price maintenance.

With the existing VABER due to expire on 31 May 2022, the Commission recently opened a consultation on replacing and updating it, as well as on guidelines to assist with its interpretation. The Commission said that an evaluation of the existing framework “showed room for improvement, notably the need to adapt both texts to new market developments”. Its consultation on the new VABER and guidelines runs until 17 September 2021.

The draft provides for more than just minor reform. It contains new definitions of core concepts, such as active and passive sales and online intermediation services. It also introduces entirely new wording for the hardcore restrictions and modifies the widely discussed rules on dual distribution.

Changes proposed

Dual pricing

Dual pricing is the practice of suppliers setting different wholesale prices depending on whether a distributor resells the product online or offline. Under the existing rules, dual pricing is deemed to be a hardcore restriction of competition and is strictly prohibited. However, the Commission has proposed to remove dual pricing from the list of hardcore restrictions under the revised VABER. This would represent a significant benefit to suppliers, allowing them to properly incentivise investment by resellers in bricks and mortar premises. However, it remains the case that a total ban on online selling is prohibited, so it is clear that any such dual pricing must not have that effect.

The CMA has also made a similar proposal in relation to the UK, but is yet to provide updated guidance, in particular on how far suppliers can go before dual pricing would constitute an indirect ban on online sales. The Commission’s draft updated guidance, however, notes that differences in wholesale prices will be justified when this is intended to incentivise or reward an appropriate level of investments and relates to the costs incurred for each channel, provided that this does not make sales online “unprofitable or financially not sustainable”.

It will not be straightforward for suppliers to determine where the line is to be drawn between permissible price differentiation and an illegal online sales ban. It will be interesting to see if the CMA includes any further guidance along similar lines on this point later this year.

Dual distribution

The rules relating to dual distribution state that if a manufacturer operates both upstream, as a supplier, and downstream, as a retailer, and the distributor only operates at the retail level, then any agreement between them is still considered as vertical in nature even though they are competing at a retail level, and so can be covered by the VABER – subject to the usual rules regarding market shares and the prohibition on hardcore restrictions.

Both the CMA and the Commission have proposed to expand the concept of dual distribution to cover vertically integrated wholesalers and importers, as well as manufacturers. However, the Commission’s approach differs slightly to the UK by proposing that the dual distribution exception, insofar as it applies to the exchange of commercially sensitive information, will only apply to parties whose combined market shares do not exceed 10% at a retail level. Parties whose market shares exceed 10% but are below the 30% market share threshold in the VABER will continue to benefit from the VABER in all other respects.

These draft new rules provide useful legal comfort and certainty for vertically integrated suppliers as to the applicability of the block exemption to information exchanges between them and their distributors. However, for those parties that exceed the new combined 10% market share threshold, it poses some challenging issues on the amount of discussion that the parties can engage in relating to resale pricing, the amount of sales information which can be reported back to the supplier, and the need for information barriers within vertically integrated businesses.

In contrast, the CMA expressly decided not to introduce a further market share threshold for the application of the dual distribution rules. It has otherwise stated the information exchange issues can be dealt with through information barriers and should be left to self-assessment by businesses; however, the CMA may provide greater clarity in its guidance later this year.

Online intermediaries and marketplaces

The Commission has also confirmed that online intermediaries, such as marketplaces, platforms and price comparison sites, will not benefit from the dual distribution rules at all if they perform a ‘hybrid function’ – namely where they are also active in selling at a retail level, regardless of their market share. Therefore, any arrangement between an online intermediary active at a retail level and a retailer will be assessed as a horizontal arrangement.

The Commission also clarified that online intermediaries are ‘suppliers’ and therefore do not qualify as genuine agents. The impact of this is that their relationships with suppliers and restrictions on each other’s conduct are fully subject to competition law and will not benefit from the agency exception that can otherwise apply. The CMA has not published any proposals to follow suit, but further information could be contained within its own guidance once published later this year.

In addition, the Commission has also proposed that restrictions on reselling on online marketplaces will fall within the scope of the new VABER, subject to the 30% market share threshold, unless they constitute a de facto ban on online sales. Such a de facto ban may be deemed to arise, for example, where a retailer is otherwise almost solely reliant on online marketplaces to make online sales. This clarification follows the much-debated decision of the Court of Justice of the EU (CJEU) in the case of US beauty products manufacturer Coty, with the Commission taking the view that these rules apply regardless of whether the products are luxury or highly technical nature, and regardless of whether selective distribution is used or not.

In combination, the three proposed changes – those relating to dual distribution, the agency definition and online marketplace bans – indicate that the Commission is likely to take a less generous application of the VABER to the activities of online intermediaries.

Selective distribution

Suppliers will no longer have to apply the same or equivalent selection criteria for authorised retailers in relation to both online and offline sales under the Commission’s new proposals. The CMA is proposing to take the same approach in the UK.

The Commission has also proposed to enhance the protection available to suppliers and authorised distributors against sales by unauthorised distributors located within a selective distribution territory. Currently, it is difficult to prevent sales into a territory covered by selective distribution from elsewhere in the EU. This is due to the limitations on when suppliers can restrict sales by distributors. The proposals, if adopted, will allow suppliers to prevent active and passive sales to unauthorised distributors within a territory covered by a selective distribution network. This proposed change will provide a valuable tool to enhance the integrity of a selective distribution system.

The CMA’s proposals did not include any specific revision of the rules to reflect these points, but clarified that it will provide further detail in its guidance later this year to a similar effect.

Exclusive distribution

The Commission has proposed to permit suppliers to prevent active sales into a territory exclusively reserved for a ‘limited number’ of distributors, not just one distributor as is currently the case, as long as this does not lead to a fragmented single market. The Commission said that the limited number of appointed 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.

Another change regarding exclusive distribution concerns the possibility for the supplier to oblige its buyers to pass active sales restrictions to their customers. Currently, a supplier can only bind its direct customers, but this proposed change is designed to give greater protection to exclusive distributors from secondary sales.

Whilst the CMA has made the same recommendation in relation to allowing restrictions protecting multiple exclusive distributors within one territory, it did not address the latter point regarding the ability to pass on these restrictions to sub-dealers. It is possible that the CMA may provide further clarification on this in its guidance later this year.

Online sales

Like the CMA, the Commission has proposed to retain the hardcore restriction relating to absolute prohibitions of online sales. The Commission said that certain types of online sales restriction, such as restricting the use of price comparison websites, or paid referencing in search engines, constitute hardcore restrictions. To balance this, the Commission clarified that certain types of online advertising restriction do not constitute a hardcore restriction, and that not all online sales restrictions constitute a restriction on passive selling. For example, it said that where a retailer translates its website in a language not commonly used in the territory, this constitutes active selling.

Wide ‘most favoured nation’ clauses

The Commission has proposed that a wide ‘most favoured nation’ (MFN) clause used by online intermediaries, to prevent suppliers from offering better terms on other online intermediary sites, will be an ‘excluded restriction’ under the revised VABER. A stricter approach has been proposed by the CMA, which stated that wide MFNs will be considered as hardcore restrictions in the UK.

This is a significant difference – while ‘excluded restrictions’ would not benefit from the block exemption, they do not automatically infringe the prohibition on anti-competitive agreements under Article 101(1) of the Treaty on the Functioning of the EU or Chapter 1 of the UK’s Competition Act 1998. Instead, a competition authority would have to prove that the wide MFN clause was anti-competitive. In contrast, ‘hardcore restrictions’ are generally considered to restrict competition by object and therefore automatically infringe competition law. Both excluded restrictions and hardcore restrictions are nevertheless individually exemptible subject to certain conditions being met.

‘Narrow’ MFNs, impacting only on sales via a supplier’s own channel, will remain subject to the scope of the revised VABER. The same approach is also taken by the CMA in its proposals.

Market shares

The Commission has recommended that the 30% market share threshold is retained under the revised VABER, and the same approach is taken by the CMA in the UK proposals. However, the two-year grace period that applies to businesses whose market shares increase has been revised to enable businesses that grow their market share to more than the existing 35% maximum cap in that period to continue to benefit from the VABER.

Conclusions

In summary, the Commission’s proposals for change are likely to be welcomed by brand owners as they give more scope to influence resellers’ actions online and who and where they sell to. The CMA and Commission remain aligned in most areas but there appears to be some limited areas of potential divergence in relation to dual distribution, online intermediaries and wide MFNs. Nevertheless, further detailed guidance is still expected from the CMA and the final position at EU and UK level will also be subject to the outcomes of their respective consultation exercises.