Update to the Vertical Block Exemption Regulation

Dual distribution concerns situations where a supplier not only sells its goods or services through independent distributors but also sells directly to customers, thereby competing with its distributors at the downstream level.

The previous position

According to the previous VBER, dual distribution was generally covered by a block exemption. In recent years, with the growth of online sales, the use of dual distribution has increased in several sectors to better answer to the needs of the clients and market constraints. Hence concerns were raised that the previous VBER block exempted horizontal issues which require a closer competition law analysis namely with regard to information exchanges and the rise of hybrid platforms.

Where we stand now

To address the concerns, the VBER and the Vertical Guidelines have set out new rules regarding dual distribution. According to these new rules, dual distribution can be block-exempted pursuant to specific new conditions:

• Test:

  (1) the subject matter of the agreement does not fall within the scope of another block exemption;

  (2) the agreement is a non-reciprocal vertical agreement;

  (3) it covers two categories of situations where:

  a) the supplier is active at an upstream level of the market as either a manufacturer, wholesaler or importer and at a downstream level as an importer, wholesaler or retailer of the goods, whereas the buyer is only an importer, wholesaler or retailer at the downstream level that does not compete with the supplier or manufacturer on the upstream level where it buys the contract goods; or

  b) the supplier is a provider of services active at several levels of trade, whereas the buyer provides services at the retail level and is not a competing undertaking at the level of trade where it purchases the contract services.

  (4) the agreement does not contain any horizontal restrictions by object or a hardcore restriction as defined in the new VBER; and

  (5) the parties to the agreement do not exceed the general market share threshold of 30% of their relevant market.

• The information exchange between the supplier and buyer is covered by the block exemption in the context of dual distribution provided such exchange is directly related to the implementation of the vertical agreement or is necessary to improve the production or distribution of the contract goods or services.

• Suppliers of online intermediation services that have a hybrid function (ie they provide online intermediation services to companies and sell the same products/services as these companies) are not covered by VBER.

A specific market share threshold of 10% had been contemplated in this context but all stakeholders were critical of it and the EU Commission abandoned this plan. However, all stakeholders have asked for more guidance on the exchange of sensitive information in a dual distribution context.

In response, the final adopted version of the new VBER and new Vertical Guidelines published in May 2022 provide guidance on whether information exchange is necessary in the context of dual distribution by providing:

• a non-exhaustive list of information exchange that generally can be considered as benefitting from the block exemption (e.g. technical information relating to the contract goods and services, information relating to the supply of the contract goods or service, aggregated information relating to consumer purchases, prices at which the contract goods or services are sold by the supplier to the buyer, information relating to the suppliers’ recommended resales prices or maximum resale prices, etc.); and

• a non-exhaustive list of information exchange that generally can be considered as not necessary in the context of dual distribution (e.g. information on actual future prices at which the supplier or buyer will sell the contract goods or services downstream, customer-specific sales data including non-aggregated information on the value and volume or sales per customer, information relating to goods sold by a buyer on its own brand name, etc.).

What’s next?

Suppliers and distributors that have implemented dual distribution systems should be reviewing whether the information exchanged with their supplier or distributor is compliant with the new applicable legal framework.

This second section is dedicated to the assessment of parity obligations or so-called “most-favoured nation clauses”.

Pursuant to parity obligations, a business has to offer the same or better commercial conditions (eg price and non-price conditions), online to its contracting party as those offered on any other sales channel or to the company’s direct sales channels.

The previous position

According to the previous VBER, all types of parity obligations are currently block exempted.

In recent years, the use of parity obligations (alternatively named Most Favoured Nation clauses) have increased especially on online platforms and several national competition authorities and courts, for instance in the online hotel booking sector, have identified anticompetitive effects linked with parity obligations. In addition, national legislators have on a case by case basis prohibited parity obligations in specific sectors.

Where we stand now

To address the concerns, the new VBER and the new Vertical Guidelines, set out new rules regarding parity obligations. “across-platform retail parity obligations”, ie obligations which cause a buyer of online intermediation services not to offer, sell or resell goods or services to end user under more favourable conditions using competing online intermediation services, can no longer benefit from a block exemption and a case by case analysis of their conformity with competition law has to be conducted.

On this subject, reactions from stakeholders during the consultation phase where mixed. Some argued that the proposed changes were unnecessary and would only create legal uncertainty. In addition, other stakeholders advocated for the exclusion of all types of parity obligations from the scope of the VBER.

But the EU Commission did not change its position and all other types of parity obligations including so-called narrow parity obligations remain in the scope of the safe harbour provided by the VBER.

The new VBER and new Vertical Guidelines include, however, a warning on the use of narrow retail parity obligations in concentrated platform markets which may be excluded from the scope of the block exemption if the parity obligations cover a significant share of users and there is no evidence of efficiencies.

What’s next?

Businesses – in particular online intermediation services or platform operators – should be assessing whether their current parity clauses meet the requirements of VBER or require now an individual assessment if they fall outside the scope of the VBER. This analysis needs to be conducted on a country by country basis, since, at national level, for instance in France, there may already be rules prohibiting per se certain types of parity obligations.

We next look to the assessment of active and passive sales.

Active sales occur when the seller actively approach individual customers while passive sales occur when a seller answers unsolicited requests from individual customers.

The previous position

Under the previous VBER, restrictions imposed by a supplier on the buyer’s passive sales are not allowed, while restrictions of active sales are possible in limited circumstances when the seller sells to a territory or a customer group already allocated to another distributor or to the supplier himself.

Concerns were expressed as to the adequacy of the current legal framework, including on their complexity or on the effective protection of territory in selective distribution systems.

Where we stand now

The new VBER and the new Vertical Guidelines, clarify how to define active and passive sales and set out what is permissible under each category of different distribution networks. Notably:

• Definitions of active and passive sales in an online context have been completed with useful precisions, such as that offering a website with a domain name corresponding to a territory other than the one in which the distributor is established constitutes active selling.

• The possibility of shared exclusivity is introduced, allowing a supplier to appoint a maximum of five exclusive distributors in a particular territory or for a particular customer group.

• Under the new VBER it becomes possible to require distributors to pass on to their immediate customers restrictions on making active sales into territories or customer groups exclusively allocated to other distributors. A further pass-on in the distribution chain is, however, not block exempted.

• In addition, it is now possible to restrict in all distribution systems a buyer and its customers (under the current VBER it is not possible to impose any restriction upon the buyer’s customers) from actively or passively selling to a territory where the supplier operates a selective distribution system or which the supplier has reserved for the operation of such systems.

The new VBER and new Vertical Guidelines also have a new structure. The VBER now distinguishes between three forms of distribution systems, setting the rules on what restriction can be imposed to the buyers in each of them: selective distribution, exclusive distribution and the so-called new “free distribution system”. This is generally regarded by stakeholders as an improvement even though the distinction between exclusive distribution and free distribution seems to be artificially to some extent as there is little or no difference between the rules applicable to these two systems.

What’s next?

Businesses should be assessing how the changes may impact their business in particular as the new rules introduce some new principles such as shared exclusivity or pass-on of sales restrictions which can be desirable for suppliers but require preparation for proper introduction into a distribution system.

Several measures implemented by suppliers may directly or indirectly affect e-commerce. They include, notably:

• dual pricing practices (ie when the distributor is charged a higher wholesale price for products intended to be sold online than products sold offline);
• discriminatory practices in selective distribution system (eg when suppliers impose on their selective distributors criteria for online selling that are not equivalent to the criteria imposed for brick-and-mortar sales); and
• restrictions on the use of online marketplaces and online advertising restrictions (eg restrictions of use of price comparison tools and brand bidding).

The previous position

The previous VBER considered dual pricing practices as hardcore restrictions but provided no specific indication on several online practices which became increasingly common over the past decade, such as restrictions on the use of online marketplaces. It is the decisional practice and case law of EU and national competition authorities and courts that have shaped and clarified how to assess such practices, with still diverging views from one jurisdiction to another despite European case law.

Where we stand now

The new VBER and the new Vertical Guidelines, clarify the applicable legal framework and introduce significant changes compared to the current VBER. Notably:

• Dual pricing can now benefit from VBER insofar that the pricing policy has as its object to incentivise or reward the appropriate level of investments respectively made online and offline. While the new VBER allows for different wholesale prices for online and offline sales, the new VBER introduces some safeguards such as that the difference in the wholesale prices must be reasonably or the pricing system should not restrict cross-border sales or prevent the effective use of the internet as a sales channel.

• Restricting the use of online marketplaces can benefit from the block exemption irrespective of the distribution system used by the supplier provided that it does not prevent distributors or their customers from effectively using the internet. When the 30% market shares threshold is exceeded, it is necessary to examine whether the restriction on the use of marketplaces will restrict competition.

• Restricting the use of price comparison tools by buyers can lead to a hardcore restriction in the sense of the VBER if this prevents the buyer from using an entire online channel. At the same time, the new Vertical Guidelines show that certain limitations on the use of price comparison tools for example in the context of territorial restrictions or quality criteria for the use of price comparison tools can benefit from a block exemption. Hence, a case by case analysis on the type and scope of the limitation to the use of price comparison tools becomes necessary to determine whether implementing such restrictions is possible.

What’s next?

Businesses should be assessing how the changes may impact their business as they enable new strategies and allow for practices that were previously prohibited such as dual pricing. However businesses should not lose sight of the additional requirements put in place which still require an individual review.

The previous position

The previous VBER was retained in the UK through the European Union (Withdrawal) Act 2018, following the UK’s exit from the European Union. As in the EU, the retained VBER will expire on 31 May 2022. The UK’s Competition and Markets Authority (CMA) has recommended retaining a vertical block exemption regime – in the form of the Vertical Agreements Block Exemption Order (VABEO).

Where we stand now

The initial recommendation for the VABEO was made on 3 November 2021. Since then, the CMA has published consultation papers on the legislative text (closed on 16 March 2022) and the accompanying guidance (closed on 5 May 2022). Following the consultations, the final Competition Act 1998 (Vertical Agreements Block Exemption) Order 2022 came into force on 1 June 2022.

Although the final accompanying guidance has yet to be published, the final VABEO and draft guidance provide a clear picture of how the final VABEO will operate – including those areas where the VABEO takes a similar approach to the new EU VBER and areas where there will be divergence.

Some areas where a similar approach to the new EU VBER is adopted include:

• resale price maintenance: this will remain a hardcore restriction;
• dual pricing in online sales: suppliers charging different prices to online and offline resellers will no longer be a hardcore restriction;
• agency agreements: suppliers of online intermediation services (such as booking websites) are not considered agents; and
• customer / territorial restrictions: such restrictions will remain hardcore, subject to the exceptions noted above in the new EU VBER (shared exclusivity etc.).

Some areas where a divergent approach to the new EU VBER is adopted include:

• parity clauses: “wide” parity clauses – where a supplier must not offer better terms on any other platform – are a hardcore restriction in the UK’s VABEO, compared to their exclusion from the new EU VBER (which, as noted above, would require a case-by-case analysis); and
• dual distribution: dual distribution agreements will continue to be block exempted under the VABEO (subject to the general market share thresholds being met), without the introduction of the reduced (10%) market share threshold introduced by the new EU VBER.

What’s next?

It is expected that the accompanying VABEO guidance will be finalised in the next few months. Any changes made between now and then are unlikely to be major amendments.