Introduction
On 23 October 2020, the European Commission published an Impact Assessment for consultation which reviewed possible policy options for a revision of Regulation 330/2010, the Vertical Agreements Block Exemption regulation (“VABE”). This paper has been in preparation for the last 2 years as the Commission has taken into account the views of manufacturers, brand owners, platform owners, distributors as well as trade associations. The new revised VABE will be a key document as it will set out the type of distribution arrangements companies will be able to adopt in the next decade in the EU. It will also be highly persuasive on UK competition law post Brexit. The UK will have to decide upon the expiry in 2022 of the present VABE (which has been incorporated into UK law by the Withdrawal Acts) whether to adopt a block exemption regulation for vertical agreements and, if so, upon what terms.
Arguably the most important EU block exemption regulation, the VABE provides a legal safe harbour from the prohibition in Article 101(1) TFEU for a number of important vertical relationships (such as distribution agreements) that contain common restrictions of competition. Agreements which fall within its terms are fully legally enforceable notwithstanding the presence of restrictions of competition. Accordingly, the block exemption plays an important role in helping to promote the distribution of goods and services within the EU and provides reassurance to both suppliers and distributors that the provisions of their agreements are valid and fully enforceable.
Impact Assessment
The Commission has now published an impact assessment to look into the issues identified during its evaluation. The Impact Assessment assesses the policy options for a potential revision of the VBER and suggests possible alternatives. It has invited comments from stakeholders on its Impact Assessment by 20th November 2020. The Commission hopes to publish a draft of the proposed new VABE for comments later next year.
So, what will the Impact Assessment do? The initiative will seek to address the problems identified during the evaluation. It will do this by:
– Clarifying and Simplifying the rules: It will incorporate recent case law on the substantive conditions of Article 101(3) and fill in gaps in the rules which have resulted in divergent interpretations by national competition authorities and the courts. Recent examples of problem areas are restrictions on the use of price comparison websites, online advertising restrictions and the treatment of new market players, such as online platforms in certain areas of the rules (e.g. agency, dual distribution).
– Resale Price Maintenance: The Commission will improve clarity in relation to when resale price maintenance may be permissible on the grounds of possible efficiencies and what evidence is required to satisfy the conditions of Article 101(3) TFEU.
– Non-Compete Obligations: The Commission is proposing to simplify and reduce the administrative burden on business by allowing automatically renewable non-compete obligations to take advantage of the block exemption as long as the buyer can periodically terminate or renegotiate the agreement.
– Key Amendments: The Commission is proposing amendments to the current rules in the following areas:
(a) Dual distribution. Dual Distribution is where a supplier sells its goods or services directly to end customers and competes with its distributors at retail level. This is generally covered by the block exemption as it constitutes an exception to the general rule that agreements between competitors are not covered by the VABE, but by the horizontal rules. With the growth of online sales, dual distribution has increased significantly and there is a risk of exempting vertical agreements, where horizontal concerns are no longer negligible and the conditions of Article 101(3) TFEU are not satisfied. In relation to possible reform the Commission is looking at whether to limit to limit the scope of the exception to scenarios that are unlikely to raise horizontal concerns by for instance introducing a threshold based on the parties’ market shares in the retail market or other metrics. In addition, it is looking at extending the exception to dual distribution by wholesalers and/or importers. There is always the possibility that the present wording will be maintained, or alternatively dual distribution will be removed from the VABE altogether. However, this is unlikely
(b) Active sales restrictions. These types of restriction restrict the territory into which or the customers to whom the buyer can sell. They are considered hardcore restrictions not covered by the VABE. However, they are permissible in limited cases notably to protect investments by exclusive distributors and to prevent sales by unauthorised distributors located in a territory in which a supplier operates a selective distribution system. Following comments made during its initial consultation the Commission is reviewing whether active sales restrictions should be permitted in wider situations. The Commission is looking at whether it should expand the exceptions for active sales restrictions to give suppliers more flexibility to design their distribution systems according to their needs in line with Article 101 TFEU. Also, on the menu of possible alternatives are provisions to provide more effective protection of selective distribution systems by allowing restrictions on sales from outside the territory in which the selective distribution system is operated to unauthorised distributors inside that territory.
(c) Online Sales Restrictions. Online sales are generally considered a form of passive sales and restrictions preventing distributors from selling through the internet are considered hardcore restrictions not exempted by the VABE. The current rules apply the same approach to certain indirect measures that may make online sales more difficult, such as charging the same distributor a higher wholesale price for products intended to be sold online than for products sold offline (“dual pricing”). The same applies to imposing criteria for online sales that are not overall equivalent to the criteria imposed in brick-and-mortar shops in the context of selective distribution. The Commission is under pressure to allow suppliers to differentiate wholesale prices according to the costs of each channel. The Commission has outlined a number of alternatives for reform to the VABE in this area. It can keep things as they are ,declassify dual pricing as a hardcore restriction and permit it subject to certain safeguards and/or permit the setting of different criteria for online sales than for bricks and mortar dealers in selective distribution systems .
(d) Parity obligations. These clauses are sometimes known as most-favoured nation clauses. Parity obligations can be agreed at wholesale or retail level and can cover price or non-price conditions (e.g. inventory or availability of goods or services). All types of parity obligations are currently block exempted under the VBER. However there has been a substantial increase in these types of arrangement notably by online platforms. In addition, national competition authorities and the courts have identified anti-competitive effects of these types of clause. In terms of reform the Commission is likely to favour one of the following options. It could remove the benefit of the VBER and include such clauses in the list of excluded restrictions (Article 5 of the present VABE). Obligations to ensure such parity restrictions for certain types of channels would then be subject to an individual effects-based assessment under Article 101 TFEU. It would permit others to benefit from the block exemption. A more restrictive approach however would favour removing the benefit of the block exemption altogether for all types of parity obligations by including them in the list of excluded restrictions (Article 5 of the present VABE), thus requiring individual assessment under Article 101(1) TFEU.
