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New EU rules on the horizon for distribution agreements: Have your say

  • Europe
  • Competition, EU and Trade

27-07-2021

A new Verticals Block Exemption Regulation fit for the digital economy? The Commission publishes its draft revised Regulation and Guidelines on vertical agreements

After various rounds of consultations, on 9 July 2021, the European Commission (“Commission”) published for public consultation the long-awaited draft revised Vertical Agreements Block Exemption Regulation (“draft VBER”) and accompanying draft revised Guidelines on Vertical Restraints (“draft Guidelines”) . Together, the two documents set out the framework for the assessment of ‘vertical’ agreements, i.e. agreements between parties operating at different levels of the supply chain. 

In this briefing, we highlight the key proposed changes made by the Commission in the draft VBER and draft Guidelines.

Background

Vertical agreements, such as distribution agreements, are ubiquitous across the EU economy. Currently, if such agreements meet certain conditions set out in the VBER, the prohibition in Article 101(1) of the Treaty on the Functioning of the European Union (“TFEU”) does not apply to them. However, the VBER expires in May 2022.

The Commission ran an initial evaluation of the current VBER and Guidelines, which concluded that both are still relevant for businesses. Nonetheless, respondents to the initial consultation highlighted the need for improvements, especially in light of the impact of e-commerce and digitalisation, the increase in direct sales by manufacturers, the wider use of retail price parity clauses, and the emergence of online platforms. Following a Staff Working Document, the Commission launched an impact assessment phase in October 2020 and a public consultation took place in early 2021. The UK Competition and Markets Authority is consulting separately on what should replace the retained VBER in the UK after it expires.

Main points to note

The main changes in the draft VBER and draft Guidelines are summarised below.

Agency

Agency agreements currently fall outside the scope of Article 101(1) TFEU, where the agent does not bear any, or only insignificant, financial or commercial risk associated with the contracts concluded or negotiated on behalf of the principal. This definition, while clear in theory, has proved quite complicated for businesses, in particular in situations of tripartite contracts or arrangements with online platforms. The draft Guidelines attempt to clarify the agency definition: an agency agreement requires that the agent bear no, or only insignificant, risks of three types:

  • contract-specific risks, directly related to the contracts concluded and/or negotiated by the agent on behalf of the principal, such as financing of stocks
  • risks related to market-specific investments, specifically required for the type of activity for which the agent has been appointed by the principal
  • risks related to other activities undertaken on the same product market, to the extent that the principal requires under the agency relationship that the agent undertakes such activities not as an agent on behalf of the principal, but at its own risk

By contrast, risks related to the activity of providing agency services in general, e.g. general investments in premises or personnel, are not material.

In a change of policy, the draft Guidelines recognise that an independent distributor may also act as an agent for other goods or service of that same supplier, provided that the activities and risks covered by the agency agreement can be effectively delineated.

The draft Guidelines also address the issue of “online intermediation services” (i.e. platforms). Providers of such services are categorised as ‘suppliers’ under the draft VBER and can, in principle, not qualify as agents. The Commission regards such providers as independent economic operators and independent from the seller. This conclusion is supported by the imbalance in bargaining power due to network effects and other features of the online platform economy, as well as the fact that such providers often serve a very large number of sellers in parallel and tend to make significant market-specific investments.

Dual distribution

Agreements between competitors are not covered by the block exemption. However, the current VBER provides an exception to this rule for “dual distribution”, namely the situation where a supplier sells its goods or services directly to end customers and competes with its distributors at the retail level. The growth of e-commerce means that an increasing number of suppliers are engaging in dual distribution, e.g. by operating their own branded website selling direct to consumers, while continuing to maintain a network of distributors selling to consumers – a situation strikingly different to the 2010 landscape, when the current VBER was adopted.

On this basis, the draft VBER proposes to:

  • expand the scope of the exception to cover not only manufacturers, but also wholesalers and importers
  • make the exception conditional on the parties aggregate market share in the relevant market at retail level not exceeding [10]%. Where the parties’ aggregate market share exceeds 10% but is not greater than the standard 30% share and thus falls within the VBER safe harbour, the dual distribution will be exempt, except in relation to information exchange between the parties, which will have to be assessed under the Commission’s horizontal guidelines

Both policy options had been proposed in the Commission’s consultation earlier this year. The expansion of the dual distribution exception to wholesalers and importers is a recognition that they are no different to manufacturers. At the same time, however, the Commission is aiming to seriously limit the scope of the exception to the smallest of players, where they consider that horizontal concerns are unlikely to arise, by introducing a new market share threshold. The precise market share is yet to be determined, but the proposed 10% market share is low and is likely to create significant uncertainty for businesses. This is an unwelcome change to the certainty of a true safe harbour under the VBER, and does not appear to be justified.

Note that dual distribution by online platforms will not be block exempted at all.

Territorial and customer restrictions

Article 4(b) to (d) VBER provides a list of hardcore restrictions that apply depending on the distribution system operated by the supplier: exclusive distribution, selective distribution or free/open distribution. The relevant restrictions will be caught irrespective of the sales channel used, i.e. will capture online sales. In fact, restrictions capable of significantly diminishing the overall amount of online sales in the market are seen as a hardcore restriction of active or passive sales. The inclusion of a hardcore restriction in a vertical agreement will remove the benefit of the block exemption for the agreement as a whole.

In cases of exclusive distribution, it is a hardcore restriction to restrict the territory into which, or the customer groups to whom, an exclusive distributor may actively or passively sell the contract goods or services. The draft VBER maintains some of the leeway currently provided, by allowing e.g. restrictions of active sales into a territory or to a customer group reserved to the supplier or allocated exclusively to one or a limited number of other buyers, or restrictions of sales to unauthorised distributors located in another territory where the supplier operates a selective distribution system.

It is noteworthy that suppliers will be able to appoint more than one exclusive distributor in a particular territory or for a particular customer group provided this does not result in a fragmented Single Market. Suppliers will also be able to require their distributors to pass-on restrictions to their customers to enhance the protection of the investment incentives of exclusive distributors. This is likely to be popular in practice with business.

The draft VBER also contains much more detailed provisions on selective distribution, setting out the following hardcore restrictions:

 

  • the restriction of the territory into which, or of the customer groups to whom, the members of the selective distribution system may actively or passively sell the contract goods or services, except for the restriction of:
    • active sales into another territory or to a customer group reserved to the supplier or allocated by the supplier exclusively to one or a limited number of buyers;
    • sales to unauthorised distributors located within the territory where the selective distribution system is operated, and
    • sales to end users by members of the selective distribution system operating at the wholesale level of trade;
  • the restriction of cross-supplies between the members of the selective distribution system operating at the same or different levels of trade; and
  • the restriction of sales to end users by members of the selective distribution system operating at the retail level of trade, except where the customers are allocated to the supplier/another distributor.

 

Overall, this section of the draft is likely to be positive news for business, who will be able to do somewhat more to protect their distributors in a distribution network where the suppliers operate different distribution systems in different territories.

The draft VBER also attempts to provide more guidance on the definitions of ‘active’ and ‘passive’ sales to capture scenarios of advertising by means of digital media, including online media, price comparison tools or advertising on search engines. In broad terms, the Commission differentiates between the following two broad categories:

 

Active sales will generally include:

  • offering on a website or online shop, language options different than the ones commonly used in the territory in which the distributor is established;
  • setting up a website or online shop with a domain name corresponding to a territory other than the one in which the distributor is established;
  • targeted online advertising or promotion, for instance personalised advertising, bidding for paid referencing on a search engine targeting an exclusive territory or customer group, or any other form of online advertising enabling the distributor to target or exclude certain customers.

Passive sales will, conversely, include:

  • selling to customers - who have not been actively targeted - by setting up a website or online shop. This is regardless of the fact that the use of a website may enable online purchases by customers located outside the territory of the distributor;
  • using search engine optimisation techniques to improve the ranking of a website on search engines;
  • online advertising or promotion meant to reach customers in a distributor’s own territory or customer group, which cannot be limited to that territory or customer group, to the extent that it is not designed to target customers across specific territories or customer groups. This covers, for instance, sponsored content on a website of a local or national newspaper that may be accessed by any visitor of that website, or the use of price comparison tools with generic and not country-specific domain names;
  • participating in public procurement or private tenders.

 

Excluded restrictions and parity obligations

Under the draft VBER, non-compete obligations, the duration of which is indefinite or exceeds five years, and post-termination non-competes will continue to be treated as excluded restrictions. Nonetheless, the draft Guidelines now provide that non-compete obligations that are tacitly renewable beyond a period of five years are covered by the block exemption, provided that the buyer can effectively renegotiate or terminate the vertical agreement containing the obligation with a reasonable notice period and at a reasonable cost.

The new list of excluded restrictions includes so-called “wide” price parity clauses, i.e., retail parity obligations imposed by suppliers of online intermediation services which cause buyers of those services not to offer, sell or resell goods or services to end users under more favourable conditions using competing online intermediation services. Parity obligations have been a focus for competition authorities over the past few years. The Commission proposes to treat wide parity clauses as excluded restrictions, meaning that they will need to be assessed on an individual basis under Article 101(3) TFEU. By contrast, narrow parity clauses (i.e., retail parity obligations relating to the direct sales or marketing channels of suppliers of goods or services only) will continue to be block exempted.

Online sales

The draft Vertical Guidelines no longer treat as hardcore restrictions:

  • dual pricing: suppliers will be able to set different wholesale prices for online and offline sales by the same distributor provided this is intended to incentivise or reward an appropriate level of investment and relates to the costs incurred for each sales channel
  • the equivalence principle: suppliers will be able to impose different criteria for online and offline sales in the context of a selective distribution system

Another issue addressed in the draft Guidelines are restrictions of sales on online marketplaces, which are increasingly common, particularly but not only in selective distribution systems. Such restrictions, including a total ban on the use of online marketplaces, are exempted by the VBER provided they meet the 30% market share threshold. The Commission’s rationale is that they concern the modalities of the buyer’s online sales and do not limit sales into a specific territory or to a specific customer group. This is consistent with their policy statements to date and is a welcome confirmation.

In relation to price comparison tools, restrictions on the use of a specific online advertising channel, such as price comparison tools or advertising on search engines will be treated as hardcore restrictions. However, online advertising restrictions that do not exclude specific online advertising channels will be block exempted.

Next steps and how Eversheds Sutherland can help

Parties interested in replying to the Commission’s consultation can do so by 17 September 2021. The next step will involve the Commission finalising the drafts on the basis of the evidence collected from stakeholders. The Commission intends for the revised VBER and Guidelines to be in place from 1 June 2022 until 31 May 2034. This is, therefore, the last chance to have your say before the new VBER and Guidelines are adopted.

The proposed changes are wide ranging, and are likely to have some impact on all businesses with supply and distribution networks in Europe. Eversheds Sutherland will respond to the consultation in due course. We are happy to discuss any points of concern for your business and to support you in developing your position on the Commission’s consultation.

A new Verticals Block Exemption Regulation fit for the digital economy? The Commission publishes its draft revised Regulation and Guidelines on vertical agreements

 

After various rounds of consultations, on 9 July 2021, the European Commission (“Commission”) published for public consultation the long-awaited draft revised Vertical Agreements Block Exemption Regulation (“draft VBER”)[1] and accompanying draft revised Guidelines on Vertical Restraints (“draft Guidelines”)[2]. Together, the two documents set out the framework for the assessment of ‘vertical’ agreements, i.e. agreements between parties operating at different levels of the supply chain.

 

In this briefing, we highlight the key proposed changes made by the Commission in the draft VBER and draft Guidelines.  

 

Background

 

Vertical agreements, such as distribution agreements, are ubiquitous across the EU economy. Currently, if such agreements meet certain conditions set out in the VBER, the prohibition in Article 101(1) of the Treaty on the Functioning of the European Union (“TFEU”) does not apply to them. However, the VBER expires in May 2022[3].

 

The Commission ran an initial evaluation of the current VBER and Guidelines, which concluded that both are still relevant for businesses. Nonetheless, respondents to the initial consultation highlighted the need for improvements, especially in light of the impact of e-commerce and digitalisation, the increase in direct sales by manufacturers, the wider use of retail price parity clauses, and the emergence of online platforms. Following a Staff Working Document[4], the Commission launched an impact assessment phase in October 2020 and a public consultation took place in early 2021.

Main points to note  

 

The main changes in the draft VBER and draft Guidelines are summarised below.

 

Agency

 

Agency agreements currently fall outside the scope of Article 101(1) TFEU, where the agent does not bear any, or only insignificant, financial or commercial risk associated with the contracts concluded or negotiated on behalf of the principal. This definition, while clear in theory, has proved quite complicated for businesses, in particular in situations of tripartite contracts or arrangements with online platforms. The draft Guidelines attempt to clarify the agency definition: an agency agreement requires that the agent bear no, or only insignificant, risks of three types:

 

·         contract-specific risks, directly related to the contracts concluded and/or negotiated by the agent on behalf of the principal, such as financing of stocks;

·         risks related to market-specific investments, specifically required for the type of activity for which the agent has been appointed by the principal;

·         risks related to other activities undertaken on the same product market, to the extent that the principal requires under the agency relationship that the agent undertakes such activities not as an agent on behalf of the principal, but at its own risk.

 

By contrast, risks related to the activity of providing agency services in general, e.g. general investments in premises or personnel, are not material.

 

In a change of policy, the draft Guidelines recognise that an independent distributor may also act as an agent for other goods or service of that same supplier, provided that the activities and risks covered by the agency agreement can be effectively delineated.

 

The draft Guidelines also address the issue of “online intermediation services” (i.e. platforms). Providers of such services are categorised as ‘suppliers’ under the draft VBER and can, in principle, not qualify as agents. The Commission regards such providers as independent economic operators and independent from the seller. This conclusion is supported by the imbalance in bargaining power due to network effects and other features of the online platform economy, as well as the fact that such providers often serve a very large number of sellers in parallel and tend to make significant market-specific investments.

 

Dual distribution

 

Agreements between competitors are not covered by the block exemption. However, the current VBER provides an exception to this rule for “dual distribution”, namely the situation where a supplier sells its goods or services directly to end customers and competes with its distributors at the retail level. The growth of e-commerce means that an increasing number of suppliers are engaging in dual distribution, e.g. by operating their own branded website selling direct to consumers, while continuing to maintain a network of distributors selling to consumers – a situation strikingly different to the 2010 landscape, when the current VBER was adopted.

 

On this basis, the draft VBER proposes to:

 

·         expand the scope of the exception to cover not only manufacturers, but also wholesalers and importers;

·         make the exception conditional on the parties aggregate market share in the relevant market at retail level not exceeding [10]%.  Where the parties’ aggregate market share exceeds 10% but is not greater than the standard 30% share and thus falls within the VBER safe harbour, the dual distribution will be exempt, except in relation to information exchange between the parties, which will have to be assessed under the Commission’s horizontal guidelines.

 

Both policy options had been proposed in the Commission’s consultation earlier this year. The expansion of the dual distribution exception to wholesalers and importers is a recognition that they are no different to manufacturers. At the same time, however, the Commission is aiming to seriously limit the scope of the exception to the smallest of players, where they consider that horizontal concerns are unlikely to arise, by introducing a new market share threshold. The precise market share is yet to be determined, but the proposed 10% market share is low and is likely to create significant uncertainty for businesses. This is an unwelcome change to the certainty of a true safe harbour under the VBER, and does not appear to be justified.

 

Note that dual distribution by online platforms will not be block exempted at all.

 

Territorial and customer restrictions

 

Article 4(b) to (d) VBER provides a list of hardcore restrictions that apply depending on the distribution system operated by the supplier: exclusive distribution, selective distribution or free/open distribution. The relevant restrictions will be caught irrespective of the sales channel used, i.e. will capture online sales. In fact, restrictions capable of significantly diminishing the overall amount of online sales in the market are seen as a hardcore restriction of active or passive sales. The inclusion of a hardcore restriction in a vertical agreement will remove the benefit of the block exemption for the agreement as a whole.

 

In cases of exclusive distribution, it is a hardcore restriction to restrict the territory into which, or the customer groups to whom, an exclusive distributor may actively or passively sell the contract goods or services. The draft VBER maintains some of the leeway currently provided, by allowing e.g. restrictions of active sales into a territory or to a customer group reserved to the supplier or allocated exclusively to one or a limited number of other buyers, or restrictions of sales to unauthorised distributors located in another territory where the supplier operates a selective distribution system.

 

It is noteworthy that suppliers will be able to appoint more than one exclusive distributor in a particular territory or for a particular customer group provided this does not result in a fragmented Single Market. Suppliers will also be able to require their distributors to pass-on restrictions to their customers to enhance the protection of the investment incentives of exclusive distributors.  This is likely to be popular in practice with business.

 

The draft VBER also contains much more detailed provisions on selective distribution, setting out the following hardcore restrictions:

 

·         the restriction of the territory into which, or of the customer groups to whom, the members of the selective distribution system may actively or passively sell the contract goods or services, except for the restriction of:

o    active sales into another territory or to a customer group reserved to the supplier or allocated by the supplier exclusively to one or a limited number of buyers;

o    sales to unauthorised distributors located within the territory where the selective distribution system is operated, and

o    sales to end users by members of the selective distribution system operating at the wholesale level of trade;

·         the restriction of cross-supplies between the members of the selective distribution system operating at the same or different levels of trade; and

·         the restriction of sales to end users by members of the selective distribution system operating at the retail level of trade, except where the customers are allocated to the supplier/another distributor.

 

Overall, this section of the draft is likely to be positive news for business, who will be able to do somewhat more to protect their distributors in a distribution network where the suppliers operate different distribution systems in different territories.

 

The draft VBER also attempts to provide more guidance on the definitions of ‘active’ and ‘passive’ sales to capture scenarios of advertising by means of digital media, including online media, price comparison tools or advertising on search engines. In broad terms, the Commission differentiates between the following two broad categories:

  

·         Active sales will generally include:

 

o    offering on a website or online shop, language options different than the ones commonly used in the territory in which the distributor is established;

o    setting up a website or online shop with a domain name corresponding to a territory other than the one in which the distributor is established;

o    targeted online advertising or promotion, for instance personalised advertising, bidding for paid referencing on a search engine targeting an exclusive territory or customer group, or any other form of online advertising enabling the distributor to target or exclude certain customers.

 

·         Passive sales will, conversely, include:

 

o    selling to customers - who have not been actively targeted - by setting up a website or online shop. This is regardless of the fact that the use of a website may enable online purchases by customers located outside the territory of the distributor;

o    using search engine optimisation techniques to improve the ranking of a website on search engines;

o    online advertising or promotion meant to reach customers in a distributor’s own territory or customer group, which cannot be limited to that territory or customer group, to the extent that it is not designed to target customers across specific territories or customer groups. This covers, for instance, sponsored content on a website of a local or national newspaper that may be accessed by any visitor of that website, or the use of price comparison tools with generic and not country-specific domain names;

o    participating in public procurement or private tenders.

 

Excluded restrictions and parity obligations

 

Under the draft VBER, non-compete obligations, the duration of which is indefinite or exceeds five years, and post-termination non-competes will continue to be treated as excluded restrictions. Nonetheless, the draft Guidelines now provide that non-compete obligations that are tacitly renewable beyond a period of five years are covered by the block exemption, provided that the buyer can effectively renegotiate or terminate the vertical agreement containing the obligation with a reasonable notice period and at a reasonable cost.

 

The new list of excluded restrictions includes so-called “wide” price parity clauses, i.e., retail parity obligations imposed by suppliers of online intermediation services which cause buyers of those services not to offer, sell or resell goods or services to end users under more favourable conditions using competing online intermediation services. Parity obligations have been a focus for competition authorities over the past few years. The Commission proposes to treat wide parity clauses as excluded restrictions, meaning that they will need to be assessed on an individual basis under Article 101(3) TFEU. By contrast, narrow parity clauses (i.e., retail parity obligations relating to the direct sales or marketing channels of suppliers of goods or services only) will continue to be block exempted.

 

Online sales

 

The draft Vertical Guidelines no longer treat as hardcore restrictions:

 

·         dual pricing: suppliers will be able to set different wholesale prices for online and offline sales by the same distributor provided this is intended to incentivise or reward an appropriate level of investment and relates to the costs incurred for each sales channel;

·         the equivalence principle: suppliers will be able to impose different criteria for online and offline sales in the context of a selective distribution system.

 

Another issue addressed in the draft Guidelines are restrictions of sales on online marketplaces, which are increasingly common, particularly but not only in selective distribution systems. Such restrictions, including a total ban on the use of online marketplaces, are exempted by the VBER provided they meet the 30% market share threshold. The Commission’s rationale is that they concern the modalities of the buyer’s online sales and do not limit sales into a specific territory or to a specific customer group.  This is consistent with their policy statements to date and is a welcome confirmation.

 

In relation to price comparison tools, restrictions on the use of a specific online advertising channel, such as price comparison tools or advertising on search engines will be treated as hardcore restrictions. However, online advertising restrictions that do not exclude specific online advertising channels will be block exempted.

 

Next steps and how Eversheds Sutherland can help

 

Parties interested in replying to the Commission’s consultation can do so by 17 September 2021. The next step will involve the Commission finalising the drafts on the basis of the evidence collected from stakeholders.  The Commission intends for the revised VBER and Guidelines to be in place from 1 June 2022 until 31 May 2034. This is, therefore, the last chance to have your say before the new VBER and Guidelines are adopted. 

 

The proposed changes are wide ranging, and are likely to have some impact on all businesses with supply and distribution networks in Europe.  Eversheds Sutherland will respond to the consultation in due course. We are happy to discuss any points of concern for your business and to support you in developing your position on the Commission’s consultation.



[1]                 Commission Regulation (EU) No 330/2010 of 20 April 2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices, OJ L 102, 23.4.2010, p. 1.

[2]                 Guidelines setting out the principles for the assessment of vertical agreements under Article 101 of the Treaty on the Functioning of the European Union OJ C 130, 19.5.2010, p. 1.

[3]                 Note that the UK Competition and Markets Authority is consulting separately on what should replace the retained VBER in the UK after it expires.  See our briefing here.

[4]                 Commission Staff Working Document, Evaluation of the Vertical Block Exemption Regulation, SWD(2020) 173 final, available at: https://ec.europa.eu/competition/consultations/2018_vber/staff_working_document.pdf