The European Commission's Revised "Vertical Competition Rules" In A Nutshell

The new Vertical Block Exemption Regulation 2022/720 (VBER) and accompanying 2022 Vertical Guidelines (replacing the 2010 Vertical Guidelines) impact all types of distribution in and into the European Union, at all levels of the distribution chain.

The long-awaited revised VBER and Vertical Guidelines entered into force in June 2022. The VBER provides a competition law "safe harbor" for vertical agreements falling within its scope. If a vertical agreement is covered by the VBER, no further competition law analysis is required, and the agreement is enforceable throughout the European Union

If an agreement falls outside of the scope of the VBER, an individual assessment under Article 101 of the Treaty on the Functioning of the European Union (TFEU) is required to determine whether or not it may infringe Article 101(1) TFEU and, if so, whether or not it can be justified under Article 101(3) (the effciency defence). Infringing agreements are entirely or partially unenforceable, and may result in fines and damages claims.

THE "HARDCORE" RESTRICTIONS

Agreements that come under the restrictions listed in Article 4 VBER will result in the entire agreement losing the benefit of the safe harbor

Article 4 separately lists a number of exceptions, relating to exclusive distribution systems, selective distribution systems (SDS) and those that are neither selective nor exclusive ("free" distribution systems).

Of particular importance is that Article 4 codifies the case law of the Court of Justice of the European Union over recent years, stipulating that the prevention of the effective use of the internet by the buyer or its customers to sell the contract goods or services are hardcore restrictions. Online sales are an important area of focus and the 2022 Vertical Guidelines provide further guidance

THE "EXCLUDED" RESTRICTIONS

Elements of an agreement that trigger the restrictions listed in Article 5 VBER will no longer benefit from the safe harbor, but the remainder of the vertical agreement can continue to benefit from it, provided that the clause in question can be removed from the rest of the agreement.

The scope of certain restrictions is further refined by Article 5, but the main change again relates to online sales. For example, across-platform retail parity (APRP) obligations have been added to the list of exclusions

DISTRIBUTION SYSTEMS

The VBER always covered different types of distribution systems, but the scope of a number of distribution systems covered by the VBER has been widened, allowing for more agreements to benefit from the safe harbor, and allowing for different distribution systems to be combined more easily throughout the European Union

Exclusive Distribution

The VBER introduces the possibility of "shared exclusivity", where a supplier can appoint more than one distributor in a specific territory or for a particular customer group, limited to a maximum of five distributors per "exclusive" territory or customer group. Active sales restrictions may now be passed on to the exclusive distributor's immediate customers, resulting in a strengthening of exclusivity

Finally, the VBER allows for restrictions to be imposed on the exclusive distributor and its customers to prevent active and passive sales to unauthorised distributors located in another territory where the supplier operates or which has reserved for the operation of an SDS

Selective Distribution

The VBER provides for "enhanced protection" of the SDS, whereby suppliers are allowed to restrict active and passive sales by the SDS member and its customers to unauthorised distributors located within the territory where the SDS is operated, regardless of whether the SDS member and its customers are themselves located inside or outside that territory

Again, the VBER allows for the restriction of active sales by SDS members and their direct customers into a territory or to a customer group reserved to the supplier or allocated by the supplier exclusively, up to a maximum of five exclusive distributors.

DUAL DISTRIBUTION

A dual distribution system occurs where

• The supplier is either a manufacturer, wholesaler or importer upstream, and is also an importer, wholesaler, or retailer downstream; while the buyer is an importer, wholesaler, or retailer downstream, and does not compete at the upstream level where it buys the contract goods; or
• Where the supplier provides services at several levels of trade, while the buyer provides its services at the retail level and does not compete at the level of trade where it purchases the contract services

Thee main change relating to the dual distribution exemption (in Article 2(4) VBER) is that wholesalers and importers are now explicitly covered under the dual distribution definition.

Thee VBER has also introduced its own rules on information exchange within the context of dual distribution. Specifically, for the information exchange to benefit from the VBER exemption, the exchange between the supplier and buyer needs to be directly related to the implementation of the vertical agreement and necessary to improve the production or distribution of the contract goods or services. Although the 2022 Guidelines aim to provide more clarity, the fact remains that, ultimately, it will be up to the parties' own judgment to assess the risk of illegal information exchange

ONLINE INTERMEDIATION SERVICES

Much attention has been devoted to developing an analytical framework for all digital distribution. Online intermediation services (OIS), such as e-commerce marketplaces, app stores, price comparison tools, social media services, etc., are categorised as "suppliers" under the VBER, including where they are party to a transaction that they facilitate. Companies offering goods or services via OIS are categorised as buyers in respect of those OIS, irrespective of whether or not they pay for the OIS services.

Importantly, the VBER does not automatically exempt vertical agreements relating to the provision of OIS entered into by OIS providers with a hybrid function; these require individual assessment. Thee OIS provider is deemed to have a hybrid function when it sells goods and/or services in (potential) competition with undertakings to which they provide OIS

PARITY CLAUSES

Parity clauses, "most favoured nation" clauses, or "across platform parity" agreements are obligations that require an undertaking to offer the same or better conditions to its contract party as those offered on any other sales/marketing channel, e.g., other platforms, or on the company's direct sales channel, e.g., its own website(

With the exception of APRP obligations, all other types of parity obligations in vertical agreements may—assuming the conditions are met—benefit from the VBER exemption

APRP obligations are direct or indirect retail parity obligations (regarding price, inventory, terms and conditions, etc.) imposed by OIS suppliers, which cause buyers of those services not to offer, sell, or resell goods or services to end users under more favourable conditions using competing OIS. Such obligations are considered excluded restrictions and require individual assessment under the 2022 Guidelines

ONLINE SALES

In addition to online sales bans being enshrined in Article 4 VBER, in the SDS context, the criteria imposed by suppliers in relation to online sales no longer have to be "overall equivalent" to those imposed on bricks-and-mortar shops. Furthermore, a total ban on the use of online marketplaces by buyers, or imposing qualitative requirements that marketplaces must meet, are covered by the VBER, if all other conditions are met

Answering the call from businesses, dual-pricing, i.e., setting different wholesale prices for online/offine sales by the same distributor, is no longer considered a hardcore restriction unless its object is to prevent effective use of the internet to sell the contract goods or services

Finally, restrictions that ban the use of an entire online advertising channel are considered hardcore restrictions, whereas restrictions, rather than an overall ban, on the use of a specific price comparison tool or search engine, are permissible

NEXT STEPS

Thee changes brought about by the revised vertical rules are not superficial. Any company engaging in distribution in or into the European Union should use the transitional period, which runs until 31 May 2023, to assess its existing agreements and practices to align them with the new regulatory framework. Enforcement is expected to continue, and to pick up pace once the transitional period has ended.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.