On 5 February 2020 the European Commission ("EC") published a summary of the outcome of a recent workshop between trade associations, manufacturers and retailers, which will form the basis of a review of the Vertical Agreements Block Exemption Regulation ("VBER") and the accompanying guidelines ("Vertical Guidelines"). The current VBER expires on 31 May 2022, and the EC must now decide whether to maintain the block exemption, amend it, or scrap it altogether.
The summary of the VBER evaluation worskshop can be found here >
The workshop follows a public consultation in which stakeholders were invited to comment on the effectiveness and relevance of the VBER and the Vertical Guidelines. The main areas which were put forward by stakeholders for revisiting include resale price maintenance ("RPM"), online sales restrictions, best pricing clauses and dual distribution.
A summary of the main topics discussed at the workshop is set out below.
Legal background
Article 101 of the Treaty on the Functioning of the European Union ("TFEU") prohibits agreements and concerted practices between undertakings which may restrict competition between EU member states, and which have as their object the restriction or distortion of competition within the internal market. The Article 101 restriction applies to so-called vertical agreements - agreements between two or more undertakings operating at different levels of a production or distribution chain, such as a manufacturer and retailer or a distributor and wholesaler. The agreement or practice must include conditions setting out the circumstances in which the parties may purchase, sell, or resell goods or services. Such agreements therefore typically restrict the circumstances in which the parties may trade with other parties.
However, vertical agreements which satisfy the criteria of the VBER are automatically exempt from the Article 101 prohibition. The following conditions must be met:
- the parties must enter into a vertical agreement;
- the market share of each of the parties to the agreement must not exceed 30% in their respective markets (buying or selling); and
- the agreement must not contain any of the following "hardcore" restrictions:
- any obligation to adopt fixed or minimum resale prices;
- territorial or customer restrictions, unless certain exceptions apply i.e. the restriction relates to sales into an exclusive territory reserved to the buyer or to customers reserved to the buyer, or to sales to end users by a wholesale buyer;
- restrictions on sales to end-users by authorised retail distributors in a selective distribution system; or
- restrictions on the sale of components by the manufacturer of the component to end-users, independent repairers and service providers.
In addition, if the agreement contains any of the 'excluded restrictions' set out in the VBER, the block exemption will not apply to that particular restriction, but it may still apply to the agreement as a whole provided that the restriction can be severed from the rest of the agreement.
Workshop topics
During the workshop, two of the main topics that were discussed by stakeholders were the RPM provisions within the VBER, and online related issues.
1. Price related restrictions
Participants discussed the RPM provisions within the existing framework. The general consensus was that the current RPM restrictions are an important method of promoting effective pricing competition amongst retailers, who are generally seen as being better equipped to set resale prices than suppliers. However, participants also felt that the RPM provisions needed revisiting and clarifying in several areas. Issues raised include:
- A concern over the clarity of the limited exceptions currently contained within the Vertical Guidelines, i.e. the definition of a 'new' product;
- Concerns that the current approach to RPM is too rigid, and that a de minimis exemption for RPM clauses in agreements entered into by parties with a negligible market share should be considered;
- Concerns relating to aggressive price competition by low-cost online distributors who are seen as free-riding on investments made by manufacturers and "bricks and mortar" retailers. Participants expressed a desire to extend the circumstances in which RPM is permitted to include products requiring a high level of investment;
- Concerns that the VBER and Vertical Guidelines do not provide sufficient clarity on the circumstances in which resale price recommendations will be deemed compliant with Article 101 TFEU (eg. what force can a recommendation have before it is deemed an obligation); and
- Concerns that the current rules lack guidance on the circumstances in which maximum resale prices will be considered to constitute fixed prices.
In particular, participants noted that RPM can have important benefits for market functioning and can even help promote customer interests – for example, by acting as an indicator of the quality of goods in online purchasing environments, and argued that the VBER should be updated and modernised to reflect this
2. Online related issues
Participants agreed that the VBER and Vertical Guidelines need updating to reflect the rise of online sales, and many expressed a desire for a standalone chapter in the VBER dedicated to this topic. In particular, participants expressed a desire for clarity on the situations in which suppliers may restrict sales through online platforms, and some were concerned that the current rules do not provide sufficient guidance on the assessment of online sales restrictions, such as whether the restrictions on the use of search engines and price comparison tools are considered "hardcore" restrictions in accordance with the VBER. Participants also discussed whether the current regime sufficiently protects investments against free-riding by online distributors.
Finally, other topics discussed at the workshop include:
- the agency exception (ie. the notion that when a manufacturer sells via an agent rather than a distributor the competition rules on resale pricing do not apply, essentially because it is deemed not a resale but a sale of the primary manufacturer), and whether the current guidance provides enough clarity on the circumstances in which this applies;
- dual distribution agreements (i.e. the manufacturer of particular goods also acts as a distributor of the goods in competition with independent distributors of his goods), and the extent to which such arrangements are covered by the VBER;
- the market share threshold requirements (below which non-hardcore restrictions are allowed), including a discussion on whether an increase in the maximum threshold and likely corresponding increase in block-exempted agreements would lead to increased legal certainty for distributors and brand manufacturers;
- the rationale behind the 5-year limit for non-compete obligations on a buyer of goods (ie. not to purchase competing goods), and whether a longer time limit may benefit consumers by incentivising long-term investments and allowing for lower sales prices;
- issues relating to selective distribution (ie. a system based on qualitative or quantitative criteria not territories), and the interplay between exclusive and selective distribution in the current rules;
- franchising related issues; and
- whether the current rules enable fair third-party access to machine generated data.
What happens next?
Discussions from the workshop will form the basis of the EC's staff working paper, which is expected at the end of 2020. There are three options open to the EC – prolong the VBER, revise the VBER, or let it lapse entirely.
If the EC elected for the third option (which is surely most unlikely), vertical agreements falling foul of Article 101 TFEU would no longer be able to take advantage of the automatic exemption set out in the VBER and companies would have to assess the compliance of vertical agreements with Article 101 TFEU on a case by case basis, in accordance with Article 101(3) TFEU. Existing agreements would also need to be assessed against the Article 101(3) guidelines. Based on the outcome of the workshop and public consultation, it seems highly unlikely that the VBER will be scrapped altogether, with most participants in agreement that the VBER and Vertical Guidelines are on the whole a useful tool for assessing compliance with Article 101 TFEU.
It is therefore likely that VBER will be maintained, but with revisions to address the lack of clarity currently perceived by stakeholders. The biggest task facing the EC may be deciding how to adapt the current legislative framework to address the increasingly important role of online platforms, for which technology has moved on enormously since the last iteration of the VBER from 2010. This may well come in the form of a dedicated chapter to online sales, which many of the participants felt was desirable.
Greater clarity on which direction the EC will move in is therefore expected to emerge before the end of this year. The CMA in the UK will no doubt be watching the EC 's deliberations in this area closely and thereafter, in a post-Brexit era, taking an informed view as to whether it wishes to reform domestic UK Competition Law in a similar direction. For more details on Brexit and its impact on competition law please see here >
