The revised VBER – New competition rules for supply and distribution chains

On 10 May 2022, the European Commission ended a four-year review and consultation period with the adoption of the revised Vertical Block Exemption Regulation ("VBER")[1] and Guidelines on Vertical Restraints ("VGL")[2]. The new VBER and VGL will enter into force on 1 June 2022 and should remain in force for the next twelve years. Contracts already in force on 31 May 2022 will need to be brought into line with the new rules within a transitional period of one year. The VBER serves as important guidance for companies when performing self-assessment under Article 101(3) TFEU. It is directly applicable and provides meaningful safe harbours, since it creates a rebuttable presumption that the agreements are in compliance with the conditions laid down in Article 101(3) TFEU.

Executive Vice-President Margrethe Vestager, in charge of competition policy, commented: "The revised Vertical Block Exemption Regulation and Vertical Guidelines are the result of a thorough review process. The new rules will provide companies with up-to-date guidance that is fit for an even more digitalized decade ahead. The rules are important tools that will help all types of businesses, including small and medium enterprises, to assess their vertical agreements in their daily business".[3]

What remains the same?

As a result of the generally positive assessment of the functioning of the old VBER, the new VBER is more of an upgrade than an entirely new set of rules. Therefore, the overall structure of the new VBER remains very similar. More specifically:

• The new VBER continues to apply where the supplier and buyer’s respective market share do not exceed 30%.
• The general exemption for agreements between suppliers and buyers from the application of Article 101(1) TFEU remains anchored in Article 2 of the new VBER.
• The hardcore restrictions (Article 4) remain unchanged aside from the addition of a new hardcore restriction of preventing the effective use of the internet as discussed in more detail below.

What is new?

Overall, the newly introduced changes correspond to major market trends since the original VBER entered into force, i.e. a business environment reshaped by the growth of online sales and by new market players such as online platforms. Accordingly, the new rules seek in particular i) to narrow the scope of certain safe harbours, especially for online intermediation services (platforms), with a specific focus on dual distribution and parity obligations, and ii) to enhance protection as regards exclusive and selective distribution systems as well as certain practices relating to online sales. In the following section, we will therefore specifically cover some of the main changes.

The dual distribution exception is retained

Dual distribution covers situations where a supplier is active on both upstream and downstream markets, by selling its goods or services through independent distributors but also directly to end customers. In this scenario, the supplier competes with its independent resellers on the downstream market. 

The old VBER provided an exemption for non-reciprocal vertical agreements where the supplier is a manufacturer and a distributor, and the buyer is a distributor but not active at the manufacturing level. Article 2(4) of the new VBER extends this to vertical agreements between manufacturers, importers or wholesalers (at the upstream level) and buyers who are importers, wholesalers or retailers at the downstream level.

Importantly, the dual distribution exemption does not apply to vertical agreements relating to the provision of online intermediation services when the provider is also a competing undertaking for the sale of the intermediated goods or services ("hybrid function").[4] This does not mean that such agreements necessarily restrict competition under Article 101(1) TFEU, but require an individual assessment. Further, the Commission’s guidance in its VGL indicates that the Commission is unlikely to prioritise enforcement against vertical agreements of hybrid platforms where the agreement does not contain restrictions by object and the platform does not enjoy significant market power.[5]

With regard to information exchange in dual distribution, the exemption applies to the exchange of information between suppliers and buyers only if such exchange is i) directly related to implementation of a vertical agreement as well as ii) necessary to improve production or distribution of contract goods or services. The Commission followed the demand for more guidance by setting out examples to illustrate the "white"[6] and "black"[7] list types of information exchange, with the blacklisted types typically unlikely to meet the conditions of the safe harbour. Further, the controversial 10% downstream market share threshold that was included in the draft has ultimately been abandoned.

"Wide" retail parity obligations become hardcore restrictions

One typically distinguishes between wide or across-platform MFNs (typically restricting suppliers from offering better terms on all of their sales channels and on competing online platforms) and narrow MFNs (which restrict suppliers from offering better terms on their own website).

While under the old VBER all types of parity clause were block-exempted, the new VBER removes the benefit of the block exemption for wide / across-platform retail parity obligations. Conversely, the new VBER block exempts in principle all other types of parity obligation, including narrow parity clauses. The latter is, however, only true for markets where competition between platforms is sufficiently strong.The new Article 6,which does not relate solely to MFNs,explicitly sets out that the benefit of the VBER may be withdrawn in concentrated platform markets, where competition between the providers of such services is restricted by the cumulative use of narrow retail parity obligations. The imposition of narrow retail parity obligations is therefore not always risk-free.

More flexibility within distribution structures

Hardcore territorial/customer restrictions in Article 4 VBER are now organized by distribution model (i.e. exclusive distribution, selective distribution system, free distribution). Furthermore, the VBER now also explicitly defines active and passive sales.[8] While active sales constitute sales which actively target customers (e.g. by visits, letters, emails, online advertising, price comparison services or advertising on search engines targeting customers in particular territories or customer groups), passive sales on the other hand are sales made in response to unsolicited requests from individual customers, without the sale having been initiated by the seller actively targeting the particular customer, customer group or territory (including sales resulting from participation in public procurement or responding to private invitations to tender).

Exclusive distribution

The Commission has introduced the concept of shared exclusivity – meaning that suppliers will be able to appoint up to five exclusive distributors in a particular territory or for a particular customer group. Under the previous VBER, suppliers had to allocate each customer group or territory to a single buyer.

Under the previous VBER, suppliers could only require their direct buyers not to sell actively to exclusive customers or into exclusive territories. Under the new VBER, they can also require direct buyers to restrict their own direct customers (second level of trade) from actively selling into exclusive territories/customer groups ("pass on").

Selective distribution (SDS)

The VGL now expressly clarify that selective distribution systems are block-exempted irrespective of i) the nature of the product, ii) the nature of the selection criteria, and iii) whether the selection criteria are published.

Additionally,a selective supplier is no longer required to impose on its authorised distributors identical criteria for online and physical sales (equivalence principle), so long as the lack of equivalence does not have as its object the prevention of online sales.[9]

Furthermore, the new provisions explicitly allow a selective supplier to restrict its authorised distributors and their customers from making active or passive sales to unauthorised distributors located in any territory where the supplier operates a selective distribution system.[10] Importantly, this restriction may now also be extended to exclusive or free distributors (and their customers) outside the selective distribution system (in case a supplier operates, for instance, an exclusive distribution system in a certain territory and a selective distribution system in another territory).[11]

Free distribution

The supplier may also distribute its goods or services using neither selective distribution nor exclusive distribution. These other types of distribution are categorised as "free distribution systems".[12] Free distributors may, in particular, be restricted in their i) active sales into exclusive territories or to exclusive customer groups and ii) in their active and passive sales to unauthorised distributors located within selective distribution systems.[13]

Specific online restrictions

The block exemption will not apply to agreements if the object is to prevent the effective use of the internet. The VGL[14] explain what type of practices will typically be seen as problematic (apart from absolute internet bans). These include in particular restrictions whose objective is to significantly diminishthe possibility for end users to buy the contract goods or services online or agreements prohibiting the distributor from using the supplier's trademarks or brand name on its website or obligations not to process online consumer transactions where the credit card holder's address is not within the buyer's territory.[15] While prohibitions relating only to particular advertising channels, such as search engines or price comparison services, will generally not constitute a hardcore restriction, prohibiting the buyer from using an entire online advertising channel does, on the other hand, typically fall outside the safe harbour.[16] The VGL further set out, by way of example, which online advertising restrictions will typically benefit from the block exemption, namely, a requirement that:

• online advertising meets certain quality standards or includes specific content or information;
• the buyer does not use the services of particular online advertising providers that do not meet certain quality standards;
• the buyer does not use the brand name of the supplier in the domain name of its online store.

By and large, where the buyer remains generally free to operate its own online store and to advertise online, online sales restrictions are deemed not to prevent the effective use of the internet.

In addition, charging the same distributor a higher wholesale price for products sold online than for products sold in a brick-and-mortar shop (dual pricing) had been prohibited until recently. Under the new VBER, dual pricing is permitted so long as it does not have the object of preventing the effective use of the internet or restricting cross-border sales.

Resale price maintenance (RPM)

RPMs (i.e. where a supplier directly or indirectly establishes a fixed or minimum resale price to be observed by the distributor) remain hardcore restrictions. The VGL provide for further clarifications and examples of RPM and now explicitly state that imposing Minimum Advertised Prices (MAPs), which prohibit the distributor from advertising below a level set by the supplier, will be treated as a form of a RPM (despite the fact that, in principle, MAPs leave the distributor free to sell at a price that is lower than the advertised price).[17] Apart from some further considerations on RPM, the VGL also clarify that RPM may in exceptional cases (which need careful consideration) be exempted where the efficiencies outweigh the negative effects in specific cases, such as the introduction of a new product; short-term low-price campaigns; when avoiding free-riding on pre-sale services for complex products; and/or in order to prevent loss-leading promotions by a particular distributor.[18]

Non-compete obligations

In addition to the non-compete obligations with a duration of a maximum of five years, which were already block-exempted under the old VBER, the new VGL now set out that the non-competes that are tacitly renewable beyond a period of five years can also benefit from the block exemption, provided that the buyer can effectively give notice and terminate the distribution agreement.[19]

Sustainability and digital objectives

The new VBER recognises that sustainable development and digitalisation are priority objectives of the Union’s policies (e.g. addressing climate change, reducing waste, promoting animal welfare, etc.). Accordingly, the new VBER also applies to vertical agreements pursuing such objectives, provided that they meet the conditions set out in the VBER (e.g. a supplier requiring distributors to provide recharging services or recycling facilities in their outlets or to ensure that goods are delivered via sustainable means, such as cargo bike instead of motor vehicle as part of a qualitative criteria in a selective distribution system).[20] But even restrictions that go beyond the scope of the VBER may be pro-competitive and thereby fulfil the conditions of Article 101(3) of the Treaty (e.g. in cases where non-compete obligations exceeding the above mentioned five years are necessary to justify sustainable long-term investment).[21]

Conclusion

The new VBER has now been adapted to the changes in e-commerce in the digital sphere and has corrected certain "false positives" and "false negatives". Given that it will soon enter into force, companies will need to check closely which of the new rules will provide them with additional leeway or will restrict their established business practices in order for them to maintain compliance. Contracts already in force on 31 May 2022 will need to be brought into line with the new rules within a transitional period of one year.

[1] Commission Regulation (EU) 2022/720 of 10 May 2022 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.       

[2] Annex to the Communication from the Commission Approval of the content of a draft for a Communication from the Commission Notice. Guidelines on vertical restraints of 10 May 2022.

[3] The EC: https://ec.europa.eu/commission/presscorner/detail/en/IP_22_2844.

[4] Article 2(6) new VBER.

[5] Para 109 VGL.

[6] Para 99 VGL.

[7] Para 100 VGL.

[8] See Article 1(1)(l) and (m) VBER.

[9] Para 235 VGL.

[10] Article 4(c)(i)(2); VBER Para 230 VGL.

[11] Para 223 VGL.

[12] Para 116 VGL.

[13] Para 241 VGL.

[14] Para 203 VGL.

[15] For more examples, see para 206 VGL.

[16] Para 206 (g) VGL.

[17] Para 189 VGL.

[18] Para 197 VGL.

[19] Para 248 VGL.

[20] Para 144 VGL.

[21] Para 316 VGL.