Following the publication in early September of the European Commission (EC)’s Staff Working Document (summarizing the results of the evaluation of the Vertical Block Exemption Regulation (VBER)), the VBER inception impact assessment, also known as roadmap, was published on October 23. The release of this inception impact assessment marks a milestone in the ongoing review of the rules after a lengthy evaluation, which we previously reported on here
. This is the first glimpse of proposed solutions put forward by the EC, affecting the future benefit of legal safe harbors to supply and distribution agreements.
What is specifically discussed in the inception impact assessment?
The EC is asking for public input in four specific areas:
a) Dual distribution
Situations in which a supplier competes with its distributors at the retail level by selling directly its goods or services to the end customers are generally covered by the VBER, and constitute an exception to the general principle that agreements between competitors should be assessed horizontally. Noting the exponential development of internet sales and the prevalence of dual distribution scenarios since the last revision of the VBER in 2010, the EC considers that the current block exemption risks exempting vertical scenarios, where horizontal concerns are no longer negligible.
Four policy options are discussed: (1) the first option, no policy change, is unlikely since the inception impact assessment itself acknowledges a need for change; (2) the second option consists of limiting the scope of the exemption by introducing a threshold based on the parties’ market shares and aligning the coverage of the exception with what is considered exemptible under the horizontal rules; (3) the third option, which could be introduced simultaneously with the second option, floats the idea of an extension of the current framework to the agreements between independent importers and their distributors, a demand specifically put forward by the automotive sector during the initial stage of the consultation; (4) the fourth and last option would see the exemption entirely removed from the VBER, generating a risk of a chilling effect for companies forced to self-assess potential anti-competitive effects under Article 101 TFEU in the absence of clear guidelines.
The inception impact assessment does not make reference to the rules applicable to information exchange in a dual distribution context. However, clarification in this area is likely since the matter has been vividly debated by stakeholders following the opening public consultation. In addition, recent action by the Danish Competition and Consumer Authority, arising out of dual distribution concerns, found Hugo Boss to have exchanged sensitive information about prices, discounts and volumes with two of its very own retailers, highlighting the risks in such structures.
b) Active sales
The existing framework outlaws distribution agreements that restrict responses to unsolicited requests to individual customers (“passive sales”), with the significant exception within a selective distribution system of passive sales to unauthorized distributors. The current regulation allows more flexibility when it comes to preventing retailers from actively approaching individual customers (“active sales”).
Agreements aiming at restricting the territory that the buyer can target or the customers to whom it can sell have been flagged as difficult to apply during the stakeholders’ consultation.
In its inception impact assessment, the EC contemplates three different options, the last two of which could be introduced cumulatively: (1) maintaining the current state of affairs; (2) expanding the exceptions to give suppliers greater flexibility to design their distribution system. In particular, it is envisioned that an exemption could be granted in situations of “shared exclusivity” with two or more distributors within the same territory. This option responds to calls by the industry to be able to better combine exclusive and selective distributions systems. For instance, it has been argued that combining exclusive distribution at the wholesale level with selective distribution at the retail level could be an effective solution to prevent free riding and encourage investments, resulting in a better quality of services; (3) the third option would be to allow restrictions on sales from outside the territory in which a selective distribution is operated to unauthorized distributors inside that territory. Indeed, many, if not most, of the selective distribution systems are operated at a local, often national, level, due to legal and cultural habits and particularities. Keeping these selective distribution systems closed has proven particularly challenging with the development of internet shopping, which greatly facilitates cross-border sales.
c) Indirect measures restricting online sales
The current Vertical Guidelines permit a requirement for the operation of a brick and mortar shop by retailers, thereby excluding pure online players from a distribution network. In contrast, charging different wholesale prices for the same products to the same retailer depending on whether the products are intended to be sold online and offline is a hardcore restriction. Furthermore, in the context of selective distribution, brand owners operating selective distribution systems are under a general obligation to impose equivalent selective criteria to distributors operating online and offline (“equivalence principle”). Unsurprisingly, brand owners consider that by not allowing them to differentiate between each channel, the current rules prevent them from supporting a physical retail presence and from addressing free riding. This issue has no doubt been exacerbated by the dramatic impact of the COVID-19 pandemic. Previous discussions also revealed a lack of legal certainty in the application of the equivalence principle, as online and offline sales channels are inherently different.
Against this background, the inception impact assessment considers whether dual pricing or the imposition of terms encroaching on the equivalence principle should continue to be viewed as hardcore restrictions or whether they should only be subject to safeguards to be defined in accordance with case law.
The mere existence of this reflection very directly questions the necessity of the commitments that Lego gave in July to end a probe by the French Competition Authority to ensure that its pricing policy does not disadvantage online retailers, as well as prior German Federal Cartel Office decisions concerning Gardena, BSH and Lego between 2011 and 2016.
d) Parity obligations
Parity obligations, also known as 'most-favored nation clauses', usually relate to prices and require a company to offer terms as favorable, or no less favorable, to its contracting party as those offered on any other sales channel. With the rise of online platforms, parity obligations have become an increasingly 'grey' area due to diverging decisions of national competition authorities (NCA) and courts. This was highlighted in the online travel market, where parity provisions were used by online travel agents in their agreements with hotels to ensure that hotel chains did not sell rooms at lower prices through other online sellers, and/or on their own website. For example, NCAs in France, Italy and Sweden sought commitments from Booking.com to terminate 'wide' parity clauses and would only tolerate 'narrow' parity clauses i.e. clauses which prevented the hotel from selling at lower prices on its own website. Germany adopted a much stricter approach, also banning narrow parity provisions.
The EC in its inception impact assessment proposes two options for reform. One option is to place parity obligations under the 'grey-listed clauses' of excluded restrictions (current Article 5 VBER). However, parity obligations relating to other types of sales channels – including online marketplaces and intermediaries – would benefit from the block exemption, on the condition that they create efficiencies satisfying Article 101(3) TFEU. So, the 'narrow' parity clause of the Booking.com cases would be allowed under this option.
Alternatively, the EC proposes a complete removal of the exemption, adding all types of parity clauses to Article 5. This means that any parity obligation would require an individual effects-based assessment. Applying this to the above scenario, if brought into force, an online hotel-booking service could no longer assume that it can prevent a hotel from advertising lower priced rooms on its own website.
What is only mentioned or suggested in the inception impact assessment?
The inception impact assessment also considers filling the gaps in areas that would otherwise lead to diverging interpretation. These include restrictions on the use of price comparison websites and online advertising restrictions, following action such as that by the German Federal Cartel Office in its Asics decision, which found that prohibiting the use of price comparison websites by distributors constitutes a hardcore restriction, and the EC’s subsequent Guess decision, where Guess was fined for, inter alia, imposing a de facto prohibition for retailers in its selective distribution network on using the Guess trademark for online search advertising purposes.
The treatment of new market players that have emerged since 2010 should also be covered. In particular, the future VBER is expected to clarify, when dealing with agency agreements, if online platforms can qualify as genuine agents.
Interestingly, and in line with the Green Deal, the roadmap indicates that any issue arising from vertical agreements pursuing sustainability objectives will also be taken into account.
Furthermore, the EC officials intend to improve clarity in relation to the treatment of possible efficiencies resulting from resale price maintenance (“RPM”), which the VBER currently regards as a hardcore restriction. It remains to be seen whether this move will be sufficient for many stakeholders, who consider the current RPM regime excessively rigid compared to international standards.
Tacitly renewable non-compete obligations could also benefit from the future block exemption, to the extent that the buyer can periodically terminate or renegotiate the agreement.
What is not explicitly explained in the inception impact assessment but should be part of the new regulation?
There is no direct reference in the inception impact assessment to the Coty case, in which the Court of Justice of the EU (CJEU) confirmed the possibility for brand owners to restrict or prevent sales by distributors on discernible third-party marketplaces (also known as platform bans). The Coty case concerned the distribution of luxury goods, but left open questions on the potential benefit of the decision to non-luxury products.
However, it is expected that the EC will codify its position expressed in its competition policy brief published in April 2018 and extend Coty to non-luxury goods.
Stakeholders from the public and private sectors, including competition authorities and government bodies, academia, as well as legal and economic practitioners are invited to give their feedback on the inception impact assessment until November 20, 2020.
Is the deadline too short? You will have another opportunity to provide your views during a full public consultation, which should open before the end of the year. The EC also expects to publish a draft of the revised rules for comments in the course of next year, giving you a new opportunity to have your voice heard.
The impact assessment phase will ultimately lead to the adoption of the new VBER and accompanying guidelines by May 2022 at the latest (when the current version of the VBER is due to expire), so stay tuned for more developments.