The growth of e-commerce over the last decade has had a significant impact on the market. Trends like the increased importance of online sales and the emergence of new market players such as online platforms significantly affected the distribution and pricing strategies of both manufacturers and retailers.
As followed from the E-Commerce Sector Inquiry of the European Commission ("Commission"), this translated into an increased presence of manufacturers at the retail level who for example opened their own online shops and an increased use of restraints in both agreements and concerted practices between manufacturers and retailers (‘vertical restraints’). This raises the question whether the current rules suffice to deal with these trends.
The currently ongoing public consultation on the Vertical Block Exemption Regulation ("VBER") presents an opportunity for all stakeholders to provide the Commission with the necessary views on the needs for changes. The public consultation runs until 27 May 2019 and companies are invited to share their comments and experiences under the current regime with the Commission.
In this article we discuss:
1. Background: current legal framework
2. Review VBER 2019: what are the milestones and what kind of information is the Commission looking for?
3. What to expect: will the VBER lapse, be prolonged or revised?
4. Next steps
1. Background: current legal framework
Article 101 of the Treaty on the Functioning of the European Union ("TFEU") prohibits agreements and concerted practices between undertakings that restrict competition unless, in short, the pro-competitive effects outweigh the anti-competitive effects in accordance with the cumulative criteria defined in Article 101(3) TFEU. The prohibition of Article 101 TFEU covers amongst others so-called vertical agreements, i.e. agreements between two or more undertakings operating at different levels of the production or distribution chain and relating to the conditions under which the parties may purchase, sell or resell certain goods or services.
By adopting the VBER, the Commission declared the prohibition of Article 101(1) TFEU not applicable to certain categories of vertical agreements for which it can be assumed with sufficient certainty that they satisfy the conditions of Article 101(3) TFEU. Thus agreements satisfying the criteria in the VBER are exempt from the prohibition of Article 101(1) TFEU. In order for the VBER to apply, generally, the parties must enter into a vertical agreement, the market share of each of the parties must not exceed 30% and the agreement should not contain any hardcore restrictions. Hardcore restrictions are included in Article 4 of the VBER and lead to the exclusion of the whole vertical agreement from the scope of application of the VBER. Examples are pricing restrictions like RPM, territorial restrictions, active and passive sales restrictions within a selective distribution system ("SDS"). Furthermore, the VBER does not apply to so-called excluded restrictions, like non-compete obligations, which are included in Article 5 of the VBER. These restrictions lead to the exclusion of that restriction from the coverage of the VBER, while the VBER continues to apply to the remaining part of the agreement.
The first VBER was adopted in 1999. It was replaced by the current VBER in 2010. The Commission also adopted Guidelines on Vertical Restraints ("Guidelines"). The VBER expires on 31 May 2022. Therefore, the Commission launched the evaluation of the VBER back in October 2018 to gather evidence on the functioning of the VBER, together with the Guidelines, that will allow the Commission to determine whether it should let the VBER lapse, prolong its duration or revise it.
2. Review VBER 2019
What are the relevant milestones of the review?
The review of the VBER is divided into two phases:
1. Evaluation phase (approx. 18 months, publication of Staff Working Document planned for Q2/2020)
2. Impact assessment (approx. 24 months, until expiry of the VBER)
The evaluation phase is aimed at gathering evidence on the functioning of the VBER together with the accompanying Guidelines.
The evaluation phase kicked off with the evaluation roadmap published on 8 November 2018, which offered the possibility to provide feedback for 4 weeks. This yielded feedback from 24 organisations, all of which are published. Currently, a public consultation is running, which started on 4 February 2019. Contributions can be submitted until 27 May 2019.
What kind of information is the Commission looking for?
In order to collect in-depth and high quality evidence on the key competition issues arising in vertical relationships the Commission has issued a questionnaire. The questionnaire relates to five evaluation criteria:
- Effectiveness: have the objectives of the VBER been met? I.e. the ability of the VBER to identify (i) exemptible agreements, i.e. vertical agreements for which it can be assumed with sufficient certainty that they satisfy the conditions of Article 101(3) TFEU, (ii) hardcore restrictions and (iii) excluded restrictions (see above for the difference between hardcore and excluded restrictions)
- Efficiency: were the costs involved proportionate to the benefits? I.e. the extent to which the VBER has contributed to reducing the overall costs of the self-assessment regime
- Relevance: relevance of the current scope of the VBER in light of new market developments. I.e. is EU action still necessary?
- Coherence: the extent to which the VBER is in line with the broader Commission's competition enforcement policy and practice
- EU added value: the extent to which the VBER has contributed to ensuring a consistent application of Article 101 TFEU by the national competition authorities and the courts of the Member States
The questions in the questionnaire are centred around these five criteria and include amongst others whether the VBER and the Guidelines have contributed to promote good market performance in the EU, a sufficient level of legal certainty, whether the conditions defined in the VBER lead to the exemptions of types of vertical agreements that do not generate efficiencies in line with Article 101(3) TFEU and/or whether vertical restrictions have been included as hardcore or excluded restrictions while it can be assumed with sufficient certainty that they generate efficiencies in line with Article 101(3) TFEU. Furthermore, the questionnaire contains questions about the costs of compliance and the expected effects in case the VBER were to be prolonged or would lapse.
The collected information will provide part of the evidence base for determining whether the Commission should let the VBER lapse, prolong its duration or revise it.
3. What to expect: will the VBER lapse, be prolonged or revised?
Main question from our point of view is what the Commission will do. Lapse, prolong or revise the VBER and the Guidelines?
Lapse or prolong?
If the VBER is not prolonged or revised, and would thus lapse, the vertical agreements currently covered by the VBER will no longer be block exempted. Undertakings will have to assess whether any vertical agreements that they enter into are compliant with Article 101 TFEU based on the remaining legal framework (the Article 101(3) Guidelines, the enforcement practice of the Commission and national competition authorities as well as relevant case-law at EU and national level). For existing contracts, however, it seems highly unlikely that the lapse of the VBER will result in violation of Article 101 TFEU.
A full switch to individual assessment would give parties the flexibility to shape their distribution systems in the most efficient manner, while leaving open the possibility of applying competition rules to all vertical agreements. However, it would also decrease legal certainty and increase compliance costs. In view of the overall positive experience with the application of the VBER, and taking into account further experience acquired since its adoption, it can reasonably be expected that a new block exemption regulation will be adopted or that the current one is prolonged.
Prolong or revise?
Next question is, of course, whether prolonging the current VBER (and Guidelines) suffices or revisions are necessary. In our opinion, the latter seems most appropriate given the technological developments, the dynamics and the changes in distribution relationships following the growing importance of e-commerce and online platforms. We flag a number of issues on the basis of our experience.
Dual role manufacturers and online platforms
The Commission will in any case need to take account of digital developments. As set out above, trends like the increased importance of online sales and the emergence of new market players such as online platforms, translated into an increased presence of manufacturers at the retail level who for example opened their own online shops, but it has also led to a tension between manufactures and online platforms, such as eBay and Amazon, as they generally also have a dual role.
These dual roles regularly raise concerns. Most regard the manner in which data is collected and analysed. For example, the exchange of competitively sensitive data, such as on prices and sold quantities, between marketplaces and third party sellers or manufacturers with own shops and retailers may lead to competition concerns where the same players are in direct competition for the sale of certain products or services. This dual role is already being considered in the Commission's Amazon probe and is at the core of Spotify's complaint against Apple's App Store. It will, therefore, likely play an important role in the discussions surrounding the VBER review.
RPM and dual pricing
These dual roles do not only lead to complaints about the use of data, however. A different – but related - issue is, for example, that the VBER does in principle not allow RPM towards independent distributors. However, RPM is possible towards own subsidiaries that compete with those independent distributors. Another concern is that in markets where consumer goods are distributed both through online channels and offline in (brick-and-mortar) shops, the downward pricing pressure by online reselling leads to marginal profits for more expensive offline sales and free-riding. Thereby the ability of physical retailers to compete with e-commerce rivals and of brands to encourage the sale of their goods in brick-and-mortar shops is limited. This has raised the question (again) whether there should be more possibilities to impose – indirect forms of – RPM.
The Commission could consider taking a more economic or less stringent approach. For example, by no longer qualifying RPM and dual pricing as a hardcore restriction (Article 4 VBER), but as an excluded restriction (Article 5 VBER). The Commission could, for instance, also include examples of situations in which RPM and/or dual pricing is allowed and explicitly allow exemptions on a case-by-case basis. The latter has been confirmed in the E-commerce sector inquiry report by the Commission anyway. Also, interestingly, as regards dual pricing the chairman of the Dutch ACM recently said that there maybe should indeed be "a more hands-off or liberal approach towards online-offline dual pricing" in order to protect the physical store infrastructure that many people appreciate.
As regards RPM, however, the increased enforcement actions by both the Commission and NCA's in recent years seems to indicate that it is not likely that they will easily adopt a different policy. Recent examples include the Commission's fines imposed on Asus, Denon & Marantz, Philips and Pioneer for restricting the ability of their online retailers to set their own retail prices for certain consumer electronics products and on Guess for not allowing its authorized distributor to independently decide upon their retail prices. As the E-Commerce sector inquiry showed, RPM is still the most used restraint (42%), and these fines might thus not be the latest ones. Even the Dutch ACM recently switched its position in this regard. The ACM had been arguing for years that pricing restraints did not have its priority because it would lack a theory of harm in most cases. Just recently (February '19), however, the ACM replaced its prioritization policy through "vertical guidelines", taking the same position as the Commission and other NCA's have been doing for years: qualifying RPM as a hardcore restraint. The ACM has also already put this changed position into practice by conducting dawn raids at manufacturers and (online) distributors of consumer goods for alleged minimum pricing arrangements.
In addition, novel areas such as bidding restrictions in online search advertising will also be a topic for discussion. The digital era has not only led to restrictions as regards direct online sales, but also for online advertising. The Commission has, for example, fined Guess not only for imposing pricing restraints, but also for restricting authorised retailers from using the Guess brand names and trademarks.
Another key focus area of the Commission is geo-blocking. The recent fines imposed by the Commission on Guess and Nike highlight the importance of the completion of the digital single market and the role of competition law. Nike, for example, was fined for banning traders from selling licensed merchandise to other countries within the EEA. And most recently, the Commission sent a statement of objections to Valve and five videogames publishers for preventing consumers from purchasing videogames cross-border from other Member States.
Competition law complements the Geo-Blocking Regulation, which came into force in December 2018. However, competition law allows geo-blocking in some (very limited) circumstances, while the Geo-Blocking Regulation prohibits all passive sales restrictions in the situations covered in the regulation. This seems to be incompatible with each other and the Commission should deal with this during the review of the VBER.
The above examples are just some of the issues that will definitely be part of the discussions in the ongoing review of the VBER. Other issues already flagged during the feedback on the evaluation roadmap are, for example, selective distribution (especially in the wake of the ECJ's Coty judgement and the restrictions relating to online market places), price comparison websites, the position of agents, post-term non-compete obligations in franchise relationships, revision of the market share threshold of 30%, dual pricing and the lack of consistency in the approach to the rules within the ECN.
On some of these topics, the Commission has already given some indication of the direction it will take in its E-commerce sector inquiry report. For example, the Commission has indicated that market place bans in selective distribution contracts cannot generally be considered hardcore restrictions. It also indicated that dual pricing for one and the same hybrid retailer is generally considered a hardcore restriction, while charging different prices to different retailers is allowed. The Commission will most likely also include these clarifications in its review.
Finally, the Commission may also want to consider shortening the duration of the VBER. Given the number of developments that have taken place since the review in 2010, a duration of 12 years might be a bit lengthy. Especially, since it is already foreseeable that ongoing and upcoming developments like the Internet of Things, block chain, artificial intelligence and algorithms will probably affect the markets even more, while the exact impact is still unpredictable.
4. Next steps
The public consultation runs until 27 May 2019. The Commission stressed that it is of paramount importance for them that stakeholders properly substantiate their (both positive and negative) claims and underpin them with supporting qualitative and quantitative information and concrete examples.
The evaluation support study will be launched before summer 2019. Furthermore, a dedicated stakeholder workshop will be planned for autumn 2019. As set out above, the publication of the SWD is planned for Q2/2020.
Please note that the Motor Vehicle Block Exemption Regulation is subject to a separate review, which expires in May 2023.