On 10 May 2022, the European Commission (the “Commission”) adopted the final version of the new Vertical Block Exemption Regulation¹ (“VBER”), which will enter into force on 1 June 2022. The new VBER, which replaces Regulation No. 330/2010 of 20 April 2010, is accompanied by a new version of the Vertical Guidelines², a soft law instrument designed to help businesses conducting their own assessment of vertical agreements under EU competition rules. While overall the new VBER does not revolutionize the old rules, it includes some notable changes that may have far-reaching effects on relationships between suppliers and distributors. Dual distribution is one of them.

Key Takeaways

• The safe harbor provided by the VBER generally applies to situations of dual distribution, where the supplier competes with its distributor in the retail market, provided that (i) both parties’ market shares are below 30 percent of their respective markets and (ii) their vertical agreement does not contain any hardcore restriction. However, irrespective of the parties’ respective market shares, the exemption does not apply where the vertical agreement involves a hybrid platform (such as Amazon), which provides online intermediation services (marketplace), while at the same time competing with its customers for the sale of the intermediated goods or services.

• In situations of dual distribution, the exemption only covers information exchanges between the supplier and the distributor that are directly related to the implementation of the agreement and necessary to improve the production or distribution of the contract goods or services. If the information exchanges do not meet these two cumulative criteria, they must be assessed separately under Article 101 of the TFEU.

• Although the Vertical Guidelines provide examples of the type of information that would generally fulfill or not the above-mentioned criteria, in practice this leaves room for interpretation and, absent any precedent at this stage, undoubtedly creates uncertainty for businesses. In this context, companies are encouraged to engage in an in-depth review of their existing agreements and practices within the next months to adapt to the new legal framework.

• The new VBER applies directly to new agreements signed on or after 1 June 2022 and provides for a transitional period of one year (until 23 May 2023) in order to allow businesses to review and adapt their existing agreements to the new legal framework.

Legal background

Article 101§1 of the Treaty on the Functioning of the European Union (“TFEU”) prohibits agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the internal market.

However, the VBER automatically exempts from the above prohibition vertical agreements (i.e. agreements between companies operating at different levels of the distribution chain) which meet certain conditions and do not contain any so-called hardcore restrictions such as resale price maintenance or restriction of passive sales imposed by the supplier on its retailers. Vertical agreements that fall outside of the safe harbor provided by the VBER must be individually assessed under Article 101 of the TFEU.

Dual distribution still benefits from the vertical block exemption...

Dual distribution refers to the situation where a supplier sells its products or services both directly to end customers and indirectly through a network of distributors, meaning that, in practice, the supplier competes head-to-head with its retailers.

While, in general, agreements between competitors are not covered by the VBER, by exception, in situations of dual distribution, the vertical agreement between the supplier and the distributor will benefit from the block exemption on the condition that the market share of the supplier and the distributor on their respective markets (i.e., the market on which the products or services are sold, on the one hand, and the market on which the products or services are purchased, on the other hand) does not exceed 30 percent. The rationale behind this exception for dual distribution is that the potential positive impact of the vertical agreement on competition in general offsets its potential negative impact on the competitive relationship between the supplier and the distributor at the downstream level.

However, irrespective of the level of market shares, the exemption does not cover vertical agreements involving a hybrid platform which provides online intermediation services and at the same time competes with its customers on the market for the sale of the intermediated goods or services. This exception clearly targets the Amazon model, whereby Amazon and the like provide intermediation services to third-party sellers using the marketplace, while also selling competing products directly to consumers. The Commission indeed considers that such platforms may have an incentive to favor their own sales and the ability to influence the outcome of competition between companies that use its online intermediation services. Vertical agreements involving a hybrid platform must therefore be assessed individually in order to determine whether they restrict competition.

That being said, following strong pushback from commenters noting that many smaller retailers today open their websites to third-party sellers, the Commission has already indicated in its Vertical Guidelines that it does not intend to intervene where the hybrid platform does not enjoy significant market power and the agreement does not contain any restrictions by object (i.e. clauses that inherently hinder competition, which includes hardcore restrictions). In other words, the Commission’s intent was mostly to withdraw the benefit of the block exemption from major online platforms, including in particular those targeted by the Digital Market Act.

… but caution is now required on information exchanges between the supplier and its distributors

In the context of a vertical agreement, it is common for suppliers and distributors to exchange information on various aspects of their relationship, be it on the products or services at stake, inventory, stocks, customers, marketing but also, to some extent, prices. Under the old rules, insofar as they were deemed to contribute to the pro-competitive effects of the vertical agreement, such information exchanges were automatically exempted in situations of dual distribution and thus, practically never examined.

But while dual distribution models have always existed and were already quite wide-spread 15 years ago, when the old VBER was first revised, the rapid growth of e-commerce and the increasing use of the Internet since 2010 have had a considerable impact on consumers’ purchasing habits and have changed market dynamics. More particularly, where in the past dual distribution meant that the supplier operated a brick and mortar point of sale that often was not located in the same catchment area as its distributors’ points of sales, today suppliers often sell their products or services online, in direct competition with their distributors. This evolution in the competitive relationship between suppliers and distributors has led the Commission to reconsider its approach to information exchange in situations of dual distribution.

Hence, under the new VBER, the exemption no longer covers the exchange of information between a supplier and a distributor – irrespective of its form (in writing or orally) – that is either not directly related to the implementation of the vertical agreement or not necessary to improve the production or distribution of the products or services which are the subject of the agreement. In such cases, the information exchange is not necessarily anticompetitive but requires an individual assessment under Article 101 of the TFEU.

In order to help businesses conduct their self-assessment, the Commission provides further guidance in the Vertical Guidelines, which contain a non-exhaustive list of information that would generally be deemed directly related to the implementation of the agreement and necessary to improve the production or distribution of the contract goods or services (so-called “white clauses”). This may in particular be the case of (i) technical information relating to the products or services, (ii) logistical information, including information on production processes, inventory or stocks, (iii) customer information, for example in terms of preferences or feedback on the products, (iv) marketing and performance-related information but also (v) information on resale prices, provided however that such information is not used by the supplier to engage in resale price maintenance.

To the contrary, according to the Vertical Guidelines, information relating to future prices on the downstream market where the supplier and the distributor compete or concerning the identity of end-customers (save in exceptional circumstances, e.g. for the provision of after-sale services by the supplier directly to the end-user), are likely to fall outside the safe harbor (so-called “grey clauses”). Information relating to goods sold by a distributor under its own brand name exchanged between such distributor and a manufacturer of competing branded goods are also unlikely to benefit of the exemption, unless the manufacturer is also the producer of the distributor’s own-brand goods.

While this guidance from the Commission is obviously welcome, many challenges and questions still lie ahead for suppliers engaging in a dual distribution model. In practice, it may be difficult for undertakings to assess in such a situation what will be deemed an acceptable information exchange on prices offered to consumers, as opposed to monitoring of retail prices by the supplier. Similarly, it may not be straightforward for companies to determine whether information received on the categories of customers to which the retailer is selling are covered by the exemption or might be analyzed as a passive sales restriction.

Beyond the type of information that is being exchanged, whether an exchange of information is directly linked to the implementation of the vertical agreement and necessary will depend, in each individual situation, on many factors such as the type of products or services concerned, the functioning of the sector and the distribution model chosen by the supplier. The Commission itself underlines in the Vertical Guidelines that, depending on the distribution model (exclusive distribution, selective distribution, franchise agreements), different type of information may need to be exchanged between the supplier and its distributor for the network to operate efficiently.

The percentage of direct sales compared to sales via the distribution network in dual distribution scenarios may also play an important role in the assessment of the competitive relationship between the supplier and its distributors and the compatibility of certain information exchanges between the parties to the vertical agreement. In practice, it is likely that the more important the share of direct distribution, the more safeguards should be put into place and precautions taken in order to minimize the risk that information exchange between the supplier and its distributors be considered as anticompetitive.

Against this background, and given the level of uncertainty created by the new regime, companies are encouraged to use the one-year transitional period provided by the VBER (until 23 May 2023) to review their existing agreements and eventually adapt their past practices to the new legal framework.

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Footnotes

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 (VBER).

2) The final text of the Vertical Guidelines has been approved by the Commission on 10 May 2022 (see Approval of the content of a draft for a Communication from the Commission, Guidelines on vertical restraints, 10 May 2022, C(2022) 3006 final). However, the Vertical Guidelines are for the moment only available in English and will be published on the Official Journal when they have been translated in all languages.