Insight into vertical agreements block exemption refresh

Out-Law Analysis | 26 Nov 2019 | 1:51 pm | 3 min. read

A recent workshop held in Brussels has offered an early insight into the potential changes that could be made to EU competition laws impacting vertical agreements.

The workshop, organised by the European Commission, was focused on the EU's vertical agreements block exemption (VABE) and its potential refresh. The current VABE is due to expire in 2022.

Much of the focus of the workshop was on how to modernise the framework to address changing practices in e-commerce, particularly in relation to the role of online platforms.

Vertical agreements

A vertical agreement is an agreement entered into between two or more parties, each of which operates for the purposes of the agreement at a different level of the supply chain, where the primary purpose of the agreement is to purchase, sell or resell goods or services.

In the EU, any agreement between businesses that has as its object or effect the prevention, restriction or distortion of competition in the internal market is generally prohibited. That prohibition is set out in Article 101 of the Treaty on the Functioning of the EU (TFEU) and can be applied to vertical agreements.

However, Article 101 of the TFEU provides for certain agreements to be exempted from the prohibition on anti-competitive agreements. The VABE provides for one such exemption and sets out conditions that, if satisfied, provide vertical agreements with an automatic exemption from the prohibition. However, the exemption does not apply to companies with market shares above 30%.

The current VABE expires on 31 May 2022. Earlier this year the Commission opened a consultation to obtain stakeholders' views on the VABE to ensure that the rules remain relevant throughout the next decade. The consultation closed on 27 May, but the Commission invited consultation contributors to a two day workshop in Brussels earlier this month to further the conversation. It is the first workshop of its kind held by DG Competition, the Commission's competition unit.

The workshop

Attendees at the workshop included representatives from major multinational corporations, law firms, industry associations and consumer groups. The workshop was highly interactive and brought together often opposing viewpoints.

There was general consensus that a block exemption on vertical restraints remains necessary but that it must be updated for the digital era. Discussions focused on the need for clearer guidance which could be applied uniformly across the EU.

There was much discussion on the effect of the proliferation of e-commerce over the past decade, particularly regarding the role of online platforms in vertical arrangements. The most popular suggestion voted on by participants was for the VABE to include a specific chapter on online sales.

Some argued that the current regime is too focused on price as the sole indicator of consumer welfare, contending instead that consumer welfare should be defined by a multiplicity of factors such as service, safety, environmental concerns, access, quality, innovation and variety of choice.

In support of this argument they maintained that, taking a long term view, consumer choice will be depleted if bricks and mortar retail cannot compete with low prices online. Some used this to advocate dual pricing – allowing manufacturers to charge different wholesale prices depending on whether the product will be sold online or offline – or a relaxing of the rules prohibiting resale price maintenance. Others argued that the general prohibition on resale price maintenance must be retained to ensure competitive pricing for consumers and that the limited exceptions to the prohibition should be clarified.

Other issues discussed at the workshop included how to tackle ‘free-riding’. This is where an online retailer takes advantage of the offline investments made by the supplier and other authorised distributors to improve the quality and image of products.

The attendees also considered how the concept of ‘agency’ should be defined in a digital world, particularly in relation to the use of online third party platforms. The concept is important as agency agreements fall outside the scope of the Article 101 prohibition. Such agreements envisage a legal or physical person conducting negotiations or concluding contracts on behalf of a 'principal', either in their own name or in the name of the principal, for the purchase of goods or services by the principal, or the sale of goods or services supplied by the principal.

The need for clarity on situations in which suppliers may restrict sales through online platforms following a ruling of the Court of Justice of the EU (CJEU) in 2017 was also identified by attendees at the workshop.

While the Coty judgment confirmed that it is permissible for suppliers to prohibit members of a selective distribution system for luxury goods from using third parties’ websites to distribute the contract products, the limits of this judgment are not clear. The CJEU found that a prohibition on selected distributors of luxury goods using third party platforms was "appropriate to preserve the luxury image of the goods" and compatible with EU competition law, as long as the distributors are chosen by reference to objective criteria of a qualitative nature, and the distributors remain free to sell the products online through their own websites. 

The Commission plans to publish its own summary of the workshop. The outcomes from the discussion will feed into a staff working document which the Commission intends to publish around the middle of next year. That paper is likely to provide further insight into the potential scale and scope of the VABE refresh.

Hannah Furness is a competition law expert at Pinsent Masons, the law firm behind Out-Law.