The current Vertical Agreement Block Exemption Regulation (‘VBER’), has been in force since 2010, a mere ten years. Yet it is hard to think of another decade in which the commercial landscape has changed as dramatically. The gradual shift away from the high street to online sales and the exponential growth of online market places have significantly affected the distribution and pricing strategies of both manufacturers and retailers. In addition, the COVID 19 pandemic has turbo-charged many inevitable changes in the way people buy and sell goods.
On the back of its final Report on e-commerce in 2017 (a summary of which you can find here), and a public consultation, the Commission published its evaluation of the VBER on 8 September 2020 (‘the Evaluation’). It will serve as a basis for its decision on whether the VBER will be dropped, renewed or updated in May 2022. In this article, we distil the Evaluation and look ahead at the changes to come.
Complementing this article, this month the rest of our Competitive Edge newsletter outlines the current state of play in key areas of vertical agreements.
What is the VBER?
Article 101(1) TFEU prohibits agreements which restrict competition. Article 101(3) TFEU sets out the exception to this prohibition for agreements, which contribute to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefits.
Agreements between entities active at different levels of the supply chain, (a manufacturer and distributor for example) are referred to as vertical agreements. Competition law has long established that vertical agreements may be able to benefit from the Article 101(3) exemption.
The VBER sets out a safe harbour for vertical agreements which comply with a set of criteria, namely:
- market share below 30%; and
- the agreement does not contain any of the hardcore restrictions (eg. fixing resale prices) which would bring the agreement outside the protection of the block exemption.
The VBER comes with detailed guidance which provides crucial insight into its interpretation in relation to the main types of vertical agreement and distribution structure. The current VBER will expire on 31 May 2022.
The Evaluation’s assessment
The Evaluation assessed the VBER and its accompanying guidelines against five criteria:
v) EU added value
The Evaluation concludes that the VBER remains an effective instrument, which increases legal certainty overall. However, it is no longer adapted to recent market developments, which has affected its relevance. This has led to diverging interpretations by national competition authorities impacting on legal certainty. In terms of efficiency, the Commission if of the view that there is room for simplification by reducing complexity of the wording and structure of the VBER. The Evaluation also concluded that the VBER is coherent with other Commission rules and guidance on the interpretation of Art 101 TFEU. Overall, it also provides EU added value.
Practices which have become more prevalent in the last few years
The Evaluation highlights the fact that new types of restrictions have become more prevalent in vertical agreements, including restrictions on using price comparison websites, restrictions on online advertising (in particular through Google AdWords) and also restrictions on using online marketplaces. The existing VBER does not provide much guidance on how to treat such restrictions. Case law, more specifically the Coty judgment which looked at online marketplace restriction and Guess, which looked at online advertising restrictions, provided some welcome guidance on how to assess those restrictions. Unfortunately, both decisions remained limited to their specific facts. Coty for example related to marketplace bans in the context of a selective distribution network. The Guess decision dealt with an online advertising ban. Such case-specific analyses have led to diverging interpretations by national competition authorities across the EU. In the case of Coty, the Commission published its interpretation of the case law to quell divergence in the interpretation of the judgment, notably by the German competition authority. We welcome the indication in the Evaluation that the updated VBER will provide thorough guidance on these issues.
E-commerce has also led to an increase in price transparency. Customers can now more easily find the best deal on price with a few clicks. However, this has also allowed some businesses to monitor more easily the prices at which their goods or services are distributed. In addition, automated pricing software can detect other retailers’ low price offers on the same goods in seconds, leading to automated price coordination amongst retailers.
Data-sharing has become another issue on which updated guidance would be widely welcomed, in particular in the context of dual distribution. Manufacturers are increasingly selling directly to customers alongside sales through distributors, consequently blurring the lines between vertical and horizontal relationships. There is insufficient clarity on the extent to which, and under which conditions, information exchanges in dual distribution scenarios are admissible or problematic. There is also a lack of clarity on the interplay between the VBER and the Commission's guidelines on horizontal agreements.
Manufacturers are increasingly using selective distribution systems, under which products and services can only be sold by pre-selected and explicitly authorised resellers. This has given manufacturers more control over their distribution networks, in particular in terms of quality of distribution. Exclusive distribution systems, on the other hand, have become less common.
The Changes to come
The evidence gathered suggested that the format of the VBER and its accompanying guidelines remains a useful tool to businesses and their advisers across the EU. However, the main concern arising from the Commission’s evaluation is that the VBER and its guidelines are no longer adapted to the market that they regulate. This seems to indicate that the VBER will be upgraded to reflect the changed commercial environment.
The lack of clarity in relation to price parity clauses in the existing VBER and accompanying guidelines has led to different approaches by Member States across the EU. Enforcement action at the EU level has resulted in commitment decisions, leaving national competition authorities with the freedom to develop their own jurisprudence on this issue. It is hoped that the updated VBER will tackle this divergence and establish a consistent EU wide approach on price parity clauses.
The Evaluation also notes that the 30% market share thresholds, below which the parties to an agreement must fall under in order to benefit from the Block Exemption, may no longer be well suited to determine relevant product and geographic markets in emerging online markets when online platforms are involved. The updated VBER may therefore adjust the current market share thresholds.
The Evaluation also point to a lack of clarity in the rules surrounding agency agreements, specifically the level and type of risks that are relevant to determine whether a vertical agreement can be considered a genuine agency agreement, generally falling outside competition law, and an agreement between independent businesses. It is undeniable that the criteria for defining an agent are difficult to apply to online platforms and that this difficulty has resulted in divergent approaches in member states and less legal certainty for businesses.
The UK will no longer be a member state of the EU by the time the updated VBER will come into force. The current VBER will be retained within UK law at the end of the transition period (currently set for January 2021) until its current expiry date of May 2022. Agreements which currently benefit from the VBER will continue to benefit from a retained exemption in the UK until then. It remains unclear, however, whether the UK will follow the EU’s lead and adopt an updated block exemption or whether we will see the beginning of divergence on how vertical agreements are regulated.
The updated VBER will aim to be as futureproof as possible. The Commission will look ahead for possible new types of vertical restrictions using the extensive analysis carried out in the Evaluation and the E-commerce sector enquiry. Whilst it is hard to predict future market developments, the updated VBER will most likely contain bright-line principles to cater for possible new types of vertical agreements and restrictions.
In terms of timeline, an impact assessment looking into the issues identified in the evaluation will be launched imminently. Stakeholders will be able to comment in the public consultation which will follow. The Commission will then publish a draft of the revised VBER for comments in the coming year before the entry into force of the updated VBER in May 2022.