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European Commission Publishes New Vertical Block Exemption Regulation and Guidelines

AUTHORs: Calum Warren, Kate McKenna co-author(s): Laura McDonnell Services: EU, Competition & Regulatory DATE: 24/05/2022

Introduction

On 10 May 2022, the European Commission adopted the new Vertical Block Exemption Regulation (“VBER”), along with the new Guidelines on Vertical Restraints (the “Guidelines”) following an evaluation and review of the current rules.  The expectation is that the Competition and Consumer Protection Commission (the "CCPC") will issue a new Declaration and Notice in relation to the treatment of vertical agreements which will largely mirror the rules contained in the new VBER and Guidelines.

A key takeaway is that the general exemption of the VBER and Guidelines will now cover additional levels of the supply chain besides manufacturers eg, importers and wholesalers whilst, conversely, others will now lose certain block exemption benefits eg, digital platforms. 

The new VBER will enter into force on 1 June 2022 and provides for a one-year transitional period until 31 May 2023 for existing agreements to be aligned with the new rules.

Current Legal Framework

The VBER and Guidelines have proved an invaluable self-assessment tool for manufacturers and retailers alike in assessing the competition compliance of so-called vertical agreements (ie, between companies operating at different levels of the production / supply chain).  

Vertical agreements may fall foul of the prohibitions set out in Section 4 of the Irish Competition Act 2002 (as amended) and Article 101(1) of the Treaty of the Functioning of the European Union (“TFEU”), where they are found to contain anti-competitive restrictions.  The VBER and Guidelines set out ‘safe harbour’ exemptions where vertical agreements are presumed to comply with the relevant competition rules.  The safe harbour continues to apply under the new VBER and Guidelines where the supplier and buyer’s respective market share does not exceed 30%. 

Overview

Prior to the adoption of the new VBER and Guidelines, the Commission had conducted a wholesale review of the previous guidance from 2010. 

The review was timely as an increasing shift to online business models (including eg, online platforms) had brought into sharp focus the gaps in the previous, decade old rules.  There was also a need to revise the current framework to improve guidance and legal certainty across various industries, in particular, the tech, financial services and fast-moving consumer goods markets.  

The new VBER and Guidelines are therefore intended to provide clear, modern and streamlined rules and guidance to businesses.  

What’s New?

The main changes to the old VBER and Guidelines focus on adjusting the safe harbour exemptions to ensure that it is neither too generous nor too narrow.  In particular, the new rules do the following:

1. Narrow the scope of the ‘safe harbour’ rules in relation to specific business models and contractual provisions:

(i) Dual Distribution

Dual distribution refers to a scenario where suppliers provide goods / services directly to the end customer in competition with its distributors.  These provisions were reviewed in light of the growth of online platform models, as it was noted that the previous guidelines may exempt vertical agreements where horizontal concerns are no longer negligible.  The new VBER excludes from the benefit of the exemption any exchange of information that is not directly related to the implementation of the vertical agreement or that is not necessary to improve the production or distribution of the contracted goods or services. 

(ii) Parity Obligations

These are also referred to as ‘most favoured nation’ (“MFN”) clauses and relate to obligations which require a seller to offer the same or better conditions to its counter-party as those offered on third-party sales channels eg, other platforms and / or on the seller's direct sales channels ie, its website.  Under the old VBER, all types of parity clauses were block-exempted, but in recent years the use of retail parity clauses (relating to the conditions under which products are offered to end users) has been the subject of frequent enforcement action. 

The new VBER removes the benefit of the block exemption for such ‘across-platform’ retail parity obligations.  Overall, this means that certain aspects of dual distribution and certain types of parity obligations will no longer be exempted under the new VBER and instead must be assessed on an individual basis under Article 101 TFEU.

2. Enlarging the scope of the ‘safe harbour’ in respect of other contractual provisions:

(i) Active Sales Restrictions:

Active sales restrictions concern limitations of the buyer’s ability to actively approach individual customers and they generally constitute hard-core restrictions.  The provisions of the old VBER and Guidelines were reviewed and it was noted that that certain aspects of the rules on active sales restrictions were both unclear and limited suppliers in designing their distribution systems according to their business needs.  In relation to selective distribution, the new VBER and Guidelines introduce the possibility of ‘shared exclusivity’, allowing a supplier to select up to five distributors in a given territory or for a particular group of consumers. 

The new VBER and Guidelines clarify that the block exemption also applies where a supplier requires its distributors to ‘pass on’ to their immediate customers restrictions on making active sales into territories or customer groups exclusively allocated to other distributors.  The new VBER also grants enhanced protection in relation to selective distribution, making it possible for suppliers to restrict sales outside the selective distributor's network to unauthorized distributors located in the territory of the selective distribution system.

(ii) Online Sales Restrictions:

The old VBER did not contain any express provisions relating to restrictions of online sales. The new VBER now expressly provides that preventing “effective use of the internet” by the buyer, or its customers, is a “hard-core restriction”.  Examples of such hard-core behaviour would include eg, requiring the buyer to prevent customers located in another territory from accessing its website or re-routing customers to other sellers / the supplier or including restrictions that have the object of preventing the use of one or more entire online advertising channels (eg, price comparison services or search engine advertising). 

Other practices relating to online sales, including eg, the ability to charge the same distributor different wholesale prices for products to be sold online and offline and the ability to impose different criteria for online and offline sales in selective distribution systems are now exempted under the new VBER, provided all other conditions for the exemption are met.

Comment

It is expected that the new VBER and Guidelines will provide stakeholders with simpler, clearer and up-to-date rules and guidance that can help businesses to self-assess the compliance of their vertical agreements with Article 101 of the TFEU in a business environment reshaped by the growth of online sales and by new market players such as online platforms, and ensure a more harmonised application of the vertical rules across the EU.

Additional detailed information on the main changes can be found in an explanatory note attached to the new rules.