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Vertical Agreements in the Digital Market - Is there a Regulatory Gap?

AUTHORs: Kate McKenna Services: Competition and Regulation DATE: 23/07/2019

With the Vertical Block Exemption Regulation (VBER) together with the accompanying Vertical Guidelines (the “Guidelines”) set to expire on 31 May 2022, the European Commission has already commenced its review of what should happen post-2022.  A crucial question companies and practitioners alike will be eager to find out is how the European Commission intends to address the perceived regulatory gap with respect to online sales platforms which sell on behalf of third parties while also selling their own products, leading to concerns about unfair competition advantage.

We discuss below the current legal framework for verticals restraints, recent enforcement at EU and national level and the perceived regulatory gap described above.

Current Legal Framework

The VBER and the Guidelines have proved an invaluable self-assessment tool for manufacturers and retailers alike in assessing the competition compliance of so-called vertical agreements (i.e. between companies operating at different levels of the production/supply chain).  Vertical agreements may fall foul of the prohibitions set out in Article 101(1) of the Treaty of the Functioning of the European Union (TFEU) where they are found to contain anticompetitive restrictions.  VBER / the Guidelines set out “safe harbour” exemptions where vertical agreements are presumed to comply with EU and Irish competition law where: (i)  each of the supplier’s and the buyer’s relevant market share does not exceed 30%, and; (ii) the agreements do not contain any restrictions on competition which are ‘hard-core’ (i.e. resale price maintenance, territorial restrictions, etc.) or ‘excluded’ (i.e. certain non-compete obligations).  Importantly, the prohibitions set out in Article 101(1) do not apply to vertical agreements between the supplier/principle and agent where they are so closely integrated that they are to be regarded as part of the same economic unit (i.e. the agent does not bear financial or commercial risks as part of the agreement).  This is known as “agency rule” or “single economic entity doctrine”.

Recent Enforcement of Vertical Restraints

The EU Commission context

EU competition enforcement has increasingly focused on vertical restraints, with the burgeoning digital market economy and following the European Commissions’ 2017 E-commerce Sector Inquiry finding that online distribution channels are frequently affected by vertical restraints.  Most notably regarding the dual role of online platforms, the European Commission recently opened an investigation of Amazon relating to the role of data as part of Amazon’s standard agreements with suppliers / retailers.

The European Commission has also issued its fourth fine for vertical restraints, since the publication of the E-Sector Inquiry, to Nike (€12.9 million), Guess (€39.8 million) and Sanrio (€6.2 million) for restrictions on cross-border sales and Anheuser-Busch InBev (€200 million) for restricting cheaper imports.  Further the Commission recently secured commitments to end certain geo-blocking practices from Disney, NBCUniversal, Sony Pictures, Warner Brothers, Paramount and Sky UK.  Prior to this, the Commission’s last penalty for vertical restraints dated back to 2003 for resale price maintenance to Yamaha

The Member State context

At the Member State level, some national authorities such as the German Federal Cartel Office and the Competition and Markets Authority (CMA) in the UK have been particularly proactive in enforcing against vertical restraints and developing new analytical tools to assess the digital market place (eg, the setting up of a “Task Force for Internet Platforms” in Germany and the launching of the CMA digital markets strategy in July 2019).

The Irish context

It will be expected that the Irish competition authority, the Competition and Consumer Protection Commission (CCPC) is likely to prolong the expiration of the Declaration in respect of Vertical Agreements and Concerted Practices (the “Declaration”) and Notice in respect of vertical agreements and concerted practices (the “Notice”), which is set to expire in December 2020, in order to take into account of any significant changes to VBER / Guidelines.  The Declaration / Notice largely mirrors VBER and the Guidelines, however one key difference is that the Irish documents do not recognise any de minimis exemption.

In terms of enforcement, the CCPC’s last enforcement decision against a vertical restraint was issued some five years ago to the Irish distributor of FitFlop shoes (E/13/001) and you can see our previous commentary in this regard here.

A new framework to plug an online / platform regulatory gap?

With competition authorities putting vertical restraints under increasing scrutiny, it is expected that a central focus for the European Commission’s review of VBER and the Guidelines will be addressing the enforcement challenges in rapidly changing digital markets, in particular the prominence of online platforms.

While online platforms provide suppliers and retailers with instantly greater access to a wider customer bases and therefore are inherently pro-competitive, a potential conflict of interest can be identified in particular where online platforms also operate as suppliers themselves.

The current VBER and Guidelines enable online platforms to take the view that they act as “genuine agents” in selling goods on behalf of third party suppliers, such that their relationship is not subject to the full competition law prohibition on anti-competitive vertical agreements. Some argue that this represents a regulatory gap which prevents effective enforcement against anti-competitive restrictions in agreements between online platforms and suppliers, although this perceived gap has not stopped many EU authorities taking cases against online platforms.  For example the CCPC obtained legally binding commitments from Bookings.com concerning restrictions preventing accommodation providers offering lower prices through different distribution channels.

The review of VBER and the Guidelines provides an important opportunity for the European Commission to consider this argument and to work towards developing a harmonised approach across the EU.  We will eagerly await its decision on whether the “genuine agency”, as currently conceived under VBER, is an appropriate analytical framework for assessing the online platform business model.

This article was co-written by EU Competition partner Kate McKenna and EU Competition senior associate Liam Heylin