New EU rules on vertical agreements 'provide clarity on selling via digital channels'

The European Commission has adopted a new vertical block exemption regulation (VBER) and new vertical guidelines. Both are designed to regulate arrangements between businesses at different levels of a supply chain - such as a manufacturer and a retailer. While such agreements - also called vertical agreements - often reduce transaction costs and promote beneficial investment, they can contravene competition law if they increase barriers to entry or otherwise reduce the potential for competition.

Article 101 of the Treaty on the Functioning of the European Union (TFEU) prohibits agreements restricting competition in the EU, but also provides for exemptions from this rule. Accordingly, agreements restricting competition can be compatible with EU law if they do not eliminate competition entirely, increase efficiency and share the benefits with consumers. The VBER and the vertical guidelines will help businesses to assess whether their distribution agreements are in line with EU competition law.

Dr Michael Reich, competition law expert at Pinsent Masons, said the VBER and the vertical guidelines now adopted by the European Commission afford businesses more flexibility in designing and implementing a range of distribution models. "They also provide much-needed clarity on selling via digital channels, including provisions allowing differential online and offline prices and where suppliers make direct retail sales alongside their distributors", Dr Reich said.

The VBER exempts agreements between businesses operating at different levels of the supply chain from the prohibition of agreements restricting competition, provided the agreement is concluded between non-competitors, does not contain so-called 'hardcore' restrictions and the market share of each business does not exceed 30%. Hardcore restrictions are serious restrictions of competition which should in most cases be prohibited because of the harm that they may cause to consumers. The VBER thus provides a safe harbour for certain forms of agreements, while the vertical guidelines provide guidance on how to interpret and apply the VBER and also on how to assess vertical agreements that are out of scope of the safe harbour.

The new VBER highlights the growing importance of e-commerce by including restrictions on online sales as a hardcore restriction if they "directly or indirectly […] have the object of preventing buyers or their customers from effectively using the internet to sell the contract goods or services".

The new rules will, among other things, allow businesses to set up two different wholesale prices for products sold online and offline by the same distributor. They can also set different criteria for online and offline sales in selective distribution systems. However, the new scheme will also narrow the scope of the safe harbour for certain forms of dual distribution.

The new VBER also excludes vertical agreements from the block exemption if they relate to the provision of online intermediation services and the digital platform provider has a "hybrid function" because it also sells goods or services in competition with the firms to which it provides the online intermediation services.

Additionally, the updated VBER provides new rules on parity obligations. Parity obligations require a seller to offer the same or better conditions to its counterparty as those offered on other sales channels. Under the old VBER, all types of parity clause were block-exempted. Under the new VBER, retail parity clauses imposed by platforms relating to the conditions offered on other platforms are no longer block-exempted, which means their compatibility with EU competition law must be assessed individually. However, the new VBER still block exempts all other types of parity obligation.

The new VBER also clarifies the rules on active and passive sales. According to the Commission, certain aspects of the rules on active sales restrictions were unclear, particularly in relation to sales via online channels. Revised VBER definitions now help clarify the meaning of "active" sales in the digital environment, and the new vertical guidelines contain updated and more detailed guidance concerning both active and passive sales.

Additionally, the new VBER allows more flexibility for configuring exclusive distribution systems, enabling an exclusively allocated territory or customer group to be shared between up to five buyers. Further, a supplier can now require buyers to pass on active sales restrictions to their direct customers, giving enhanced protection in respect of exclusively allocated customer groups or territories. 

The new rules also make it easier to protect exclusive and selective distribution systems from each other. For example, members of a selective distribution system and their direct customers can be restricted from actively selling to a distributor’s exclusively allocated customer group or into their territory. Likewise, members of an exclusive distribution system and their direct customers can be restricted from actively or passively selling to unauthorised distributors in the territory where the supplier operates a selective distribution system.

Another notable change now permits non-compete clauses that are tacitly renewable beyond a five-year period – also known as ‘evergreen’ non-complete clauses – to be exempted, provided the buyer can readily renegotiate or terminate such obligations with the supplier.

The new VBER and the vertical guidelines will come into force on 1 June 2022 and apply until 31 May 2034. "New vertical agreements implemented on or after this date must comply with the new rules from the outset," Dr Reich said. "However, a one-year transitional period until 1 June 2023 applies for existing vertical agreements that comply with the pre-exiting vertical agreements block exemptions."

Last week, the UK government also published the finalised UK Vertical Agreement Block Exemption Order 2022 (VABEO). VABEO is intended to replace the EU’s existing Vertical Block Exemption Regulation (VBER), which the UK retained in law after Brexit and which will expire on 31 May 2022. VABEO will also come into force on 1 June 2022, and a one-year transitional period will again apply.

Robert Vidal, competition law expert at Pinsent Masons, said: "The EU and UK regimes are largely similar, but there are some important differences, for example concerning wide retail parity clauses and ‘evergreen’ non-compete obligations".

Vidal said that businesses should already start reviewing their current vertical agreements and update them as needed before the transitional period expires, while new agreements implemented from 1 June 2022 must immediately comply with the revised rules. He added: "Businesses active in the UK and EU will need to ensure compliance with both regimes as appropriate."