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‘Vertical’ Agreements Still in the Spotlight – Recent Irish and EU Competition Law Developments

AUTHORs: Kate McKenna co-author(s): Calum Warren Services: EU, Competition & Regulatory DATE: 21/12/2020

Competition law scrutiny of both traditional and online distribution models – known as ‘vertical’ agreements in competition law jargon, as they are entered into by firms at different levels of the supply chain, eg suppliers and retailers – remains a top priority for both Irish and EU competition regulators. 

While continued enforcement is expected and the current rules will remain the same for the time being, the ever increasing switch to online business models has, however, brought into focus the urgent need for a revision to the current framework to improve guidance and legal certainty across industries, in particular tech, financial services and FMCG.  Accordingly, draft revisions to the EU rules are expected to be published in H1 2021 ahead of publication of the final revised guidance by May 2022, which will result in corresponding changes to the rules at the Member State level, including in Ireland. 

In the meantime, while the current rules will continue to apply in Ireland, after the CCPC obtains new civil enforcement powers in early 2021 following the implementation of the ECN+ Directive, competition scrutiny of vertical agreements will assume even greater significance given the CCPC’s ability to impose administrative fines and other civil sanctions directly for any agreements that are found to be anti-competitive.

Irish developments

Key recent developments include the extension by the Competition and Consumer Protection Commission (CCPC) on 30 October 2020 of its declaration in respect of vertical agreements and concerted practices (Decision No. D/10/001) (CCPC Verticals Declaration) until 1 December 2022. 

The extension of the CCPC Verticals Declaration – which mirrors the EU Verticals Block Exemption Regulation (VBER) (see below) and would have expired on 1 December 2020 – means that vertical agreements will continue to benefit from the current ‘safe harbour’ exemption from the application of the Irish/EU prohibition on anti-competitive agreements where certain conditions are met.  In broad terms, such supply and distribution agreements will continue to be exempted where:

  1. The firms’ individual market shares are below 30% at their respective level of the supply chain (noting, however, that the ‘markets’ in which firms are active can be defined very narrowly, so careful thought is required in estimating firms’ shares)
  2. The agreement does not contain any ‘hardcore’ restrictions (eg, fixed/minimum resale price restrictions, ‘passive’ (or unsolicited) sales restrictions)
  3. The agreement does not include any ‘excluded’ restrictions (eg, long-term non-compete provisions, ie greater than 5 years)

Supply and distribution agreements which fall outside the exemption are not necessarily deemed to be anti-competitive and subject to potential enforcement, but instead require a self-assessment by the firms involved, in accordance with the principles of the CCPC’s Notice in Respect of Vertical Agreements and Concerted Practices, which mirrors the European Commission’s Vertical Guidelines. 

Where potentially anticompetitive provisions of supply and distribution agreements do come to the CCPC’s attention (eg, following a customer complaint), the CCPC has taken enforcement steps in the past, noting its enforcement decision in 2013 against the Irish distributor of FitFlop shoes for implementing resale price maintenance (RPM) and passive sales restrictions against its retailers (see previous commentary here) and its investigation of Booking.com in 2015 (in cooperation with other EU national authorities) for the imposition of price parity or ‘most favoured nation’ (MFN) clauses which resulted in commitments by Booking.com (which were recently extended until 1 July 2023). 

In parallel, another key development at the Irish level is ECN+ – following the Irish Government’s expected implementation of the ECN+ Directive in early 2021, the CCPC will obtain new civil enforcement powers, and so the competition scrutiny of vertical agreements (along with other types of conduct) will assume even greater significance given the CCPC’s ability to impose administrative fines and other civil sanctions directly for any such agreements that are found to be anti-competitive.

EU Level Developments

At the EU level, it is well known that the European Commission (Commission) has increased its enforcement activities against vertical agreements in recent years, in particular following its scrutiny of online sales restrictions in the context of its e-commerce sector inquiry.  The full range of vertical restrictions have attracted scrutiny, including RPM (see eg its investigation against Asus, Denon & Marantz, Philips and Pioneer resulting in total fines of €111 million in 2018), selective distribution restrictions (see eg its investigation against Guess Jeans resulting in fines of €40 million in 2017), exclusivity provisions (see eg its review of exclusivity provisions between Amazon/Audible and Apple resulting in their removal) and price parity or ‘most favoured nation’ (MFN) clauses (see eg its Amazon e-books investigation resulting in commitments by Amazon).

Alongside its increased enforcement activities, the Commission is currently conducting a wholesale review of its VBER and Vertical Guidelines on which national rules are modelled and which will lead to corresponding changes at the national level, including Ireland.  The review is timely as the ever increasing shift to online business models including online platforms has brought into focus the gaps in the current rules, which are from 2010, and accordingly the pressing need to revise the current framework to improve guidance and legal certainty across industries, in particular tech, financial services and FMCG. 

Key recent developments in the Commission’s review include:

  • On 8 September 2020, following a two-year evaluation period including a public consultation in 2019, the Commission published a Staff Working Document that summarises the evaluation phase of its review.  The Working Document proposes updates to the VBER and Vertical Guidelines to reflect (i) the shift to an ever evolving, tech-based business environment, resulting in the increased use of online sales platforms (as discussed in our recent article here), (ii) the recent enforcement practice of the Commission and national authorities and the EU courts; and (iii) the need for clear-cut and comprehensive rules to ensure consistent interpretation both at EU and national level (noting diverging approaches with regard to certain types of restrictions, eg MFN clauses).
  • On 23 October 2020, the Commission also published an Inception Impact Assessment (the “Impact Assessment”) which it opened to public consultation (which closed  on 20 November 2020).  The Impact Assessment outlines the revisions that have been raised by stakeholders and are being considered in respect of the different types of restrictions:
    • RPM, eg clarifying the circumstances in which possible efficiencies may arise from the use of RPM.
    • Long-term non-compete clauses, eg considering the exemption of tacitly renewable non-compete clauses that extend the duration of such clauses beyond five years.
    • Dual distribution – eg clarifying the scope of the current exemption of ‘dual distribution’ models where suppliers provides goods/services directly to the end customer in competition with its distributors, in particular in light of the growth of online platform models.
    • Exclusive territorial restrictions – eg, providing clearer guidance on when exclusive territorial or ‘active sales’ restrictions can be used, including in conjunction with selective distribution models.
    • Online sales restrictions – eg clarifying when dual pricing models for online and offline sales may be permissible.
    • Price parity or MFN clauses – eg, clarifying when MFN clauses might produce anticompetitive effects.

The Commission intends to publish draft revised VBER and Vertical Guidelines for stakeholder comment by way of public consultation in H1 2021, ensuring that they are in place when the current rules expire on 31 May 2022.  

In short, given the ever increasing competition law scrutiny of distribution models at both the Irish and EU levels, firms considering restrictive provisions within new distribution models or revisiting restrictive provisions within existing distribution models as part of ongoing compliance reviews should remain vigilant to the heightened enforcement risk, which ultimately carries the possibility of civil sanctions, including financial penalties.   Early engagement with competition advisors is therefore often key.