Vertical agreements: The European Commission opens the second review phase of the vertical block exemption regulation

Later this year, the European Commission (the “Commission”) is due to publish the revised draft of the Vertical Block Exemption Regulation (“VBER”), together with its accompanying guidelines, with the aim of revising the current rules due to expire on May 31, 2022. This year is therefore expected to be crucial in refining the future of the vertical agreements regime.

Given the drastic change in the business landscape over the last decade, several stakeholder groups have pointed out that there is a lack of clarity with regard to certain provisions, as well as gaps in the current rules that have led to divergent interpretations. Stakeholders claim there is a need to clarify the application of the VBER rules and guidelines, particularly in relation to the resale price maintenance, the combination of distribution models, the different uses of each distribution system, restrictions on online sales, as well as the distinction between active and passive sales.

The review process for the VBER and its guidelines has two phases: (i) evaluation and (ii) impact assessment. The first phase aims to assess whether the regulatory regime remains effective, efficient and relevant, as well as to provide updated rules in light of current business needs. The aim of the second phase is to inform and support the Commission’s decision on whether it should let the VBER and its guidelines expire, prolong their duration or revise it on the basis of the evidence gathered during the evaluation phase.

The most recent step in the review of the VBER was taken on December 18, 2020 with the launch of the public consultation (available here), which consists of seeking the opinion of stakeholders on the legislative alternatives and their impacts.

First phase: evaluation (October 2018 – September 2020)

On October 3, 2018, the Commission opened the first phase of evaluation. As part of this, in February 2019, it launched a public consultation calling for contributions from stakeholders (which we discussed here), to gather feedback on the functioning of the current rules.

At the end of this phase, on September 8, 2020, the Commission published a working paper assessing the results (available here). The paper concludes that the VBER and its guidelines are pertinent and useful for businesses but recognizes that the market has changed significantly since its adoption in 2010.

In particular, (i) the development of e-commerce; (ii) the digitalization of distribution strategies; (iii) competition in online prices; and (iv) changing consumer behavior have increased the use of vertical agreements and the need for a clear legal framework.

Current regime

Article 101(1) of the Treaty on the Functioning of the European Union (“TFEU”) prohibits agreements that restrict competition. Article 101(3) provides an exemption from this prohibition for any agreement “which contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit.”

Consequently, the VBER aims to exempt a block of vertical agreements if the criteria set out in Article 101(3) are fulfilled. Notably, agreements entered into by economic operators at different levels of the production or distribution chain will be exempt from the application of the European Union (“EU”) competition law if they meet a set of criteria, including that the market share of the supplier and the buyer are equal to or less than 30% and agreements do not contain any of the hardcore restrictions established in Article 4 of the VBER.

The current exemption regime is highly important in practice for businesses in all sectors, since it allows companies to perform an objective self-assessment, reduces legal and commercial uncertainty and encourages operators to engage in economic transactions with one another. Therefore, the Commission confirmed that it will not allow the current system to expire at the end of its term, although it suggested it will need updating.

Areas under review

The results of the evaluation phase, which ended in September 2020, show, among other matters, that (i) the rules on resale price maintenance and tacitly renewable non-competition clauses need to be simplified, and (ii) a more in-depth assessment is required in areas, including but not limited to, dual distribution, restriction on active sales, indirect restrictions on online sales, and parity clauses. Those changes are expected to appear in the VBER but above all in the guidelines for its proper interpretation and application.

(i)Aspects requiring clarification and simplification

• Resale price maintenance: in accordance with the VBER, resale price maintenance is a “hardcore” restriction that is presumed illegal and in practice very unlikely to be justified. However, the working paper of September 2020 concludes, on the basis of econometric analysis, that resale price maintenance can sometimes have positive effects on competition. As the current rules lack guidance on when this can happen, clarification of these rules is sought in the VBER, as well as in the guidelines.
• compete clauses: tacitly renewable non-compete clauses also benefit from the exemption if the buyer can terminate or regularly renegotiate them. A change in the approach of the Commission can therefore be expected.

(ii)Aspects subject to review

• Dual distribution: is an exemption established in the VBER but hardly addressed in the guidelines, for situations where a supplier sells goods or services directly to end customers and, in turn, competes with its distributors at a retail level. The analysis highlights that, with the growth of dual distribution, there is a greater risk of exempting these types of agreements where the horizontal concerns are no longer negligible and the criteria of Article 101(3) of the TFEU are not met. There is therefore a debate as to whether it is necessary to limit the scope of the exemption, extend it or remove it.
• Restrictions on active sales: these are considered “hardcore” restrictions since they allow suppliers to restrict sales into a territory or to a group of customers that has been already allocated to another buyer or reserved for the supplier itself. Suppliers consider that the current rules prevent distribution systems from being designed in accordance with their commercial needs (such as shared exclusivity) and that their application is particularly complex and obscure.
• Prohibition of passive sales: restrictions preventing distributors from selling via the internet or indirect measures that can hinder online sales are not exempted by the Regulation. However, suppliers consider that by not allowing them to differentiate wholesale prices according to the costs of each distribution channel, the rules prevent them from incentivizing associated investments, particularly in physical stores.
• these clauses require a supplier to offer better conditions (i) to a customer than to any other distribution channel (broad parity) or (ii) when selling directly through the supplier’s own website (narrow parity). Parity clauses have been widely debated, mainly because the legal analysis by national authorities (and in particular in the hotel sector) has varied substantially between Member States. Given that the use of retail parity clauses has increased considerably over the last ten years, clarifying the application of competition rules to these clauses in the guidelines is particularly important.

Second phase: impact assessment (October 2020 – present)

The initial impact assessment of the VBER was published on October 23, 2020, constituting the first step in the second review phase. The Commission opened the public consultation inviting stakeholders to submit their observations before March 26, 2021.

The aim of this second phase, which lasts around 24 months, is to verify the existence of any problems related to the current functioning of the regime identified during the evaluation phase, explore the underlying causes, assess whether the EU action is necessary and analyze the advantages and disadvantages of the solutions available.

In particular, the assessment seeks to comprehensively examine (i) dual distribution; (ii) restriction on active sales; (iii) indirect restrictions on online sales; and (iv) parity clauses, as envisaged in Section C of the initial impact assessment (available here).

Our upcoming blog posts will analyze in detail the rules and issues raised within each of the specific areas under review, as well as the outcome of the debate on the different problem areas identified during the evaluation phase.

In the fourth quarter of 2021, it is expected that the results of the entire review together with the draft rules will be presented to the Regulatory Scrutiny Board of the Commission, which will exercise a quality control function before the Commission forwards a final legislative proposal to the European Parliament and the Council of the EU for adoption.

You can follow the development of the phases here. We will keep you informed of any developments in this area.