New European Union rules on the exemption of vertical agreements will enter into force this Wednesday, June 1.
The current European Union rules on the exemption of vertical agreements expire on May 31.
They are replaced by a new Vertical Block Exemption Regulation (hereinafter "VBER") and new Vertical Guidelines (hereinafter "VGL") adopted on Tuesday, May 10, 2022 by the Commission and which enter into force on June 1, 2022.
According to the Commission, this reform has several objectives, namely to readjust the safe harbouŕ in order to eliminate "false positives" (i.e., cases where the exemption should not be granted) and reduce "false negatives" (i.e., cases where it should be granted but is not), to provide businesses with updated guidance that takes into account the growth of e-commerce and online platforms, and to reduce compliance costs for businesses by simplifying and streamlining the current guidance.
While this presentation is not exhaustive, the main developments contained in the VBER and the VGL are in substance the following:
Online intermediation services are defined by the VBER (Art. 1.1(e)) as information society services which allow undertakings to offer goods or services (i) to other undertakings, with a view to facilitating the initiating of direct transactions between those undertakings, or (ii) to final consumers, with a view to facilitating the initiating of direct transactions between those undertakings and final consumers, irrespective of whether and where the transactions are ultimately concluded.
The VBER also provides for a limited exemption from price parity clauses for providers of online intermediation services (such clauses could previously only be caught if one of the parties had a market share of more than 30% or even a dominant position, as in the Booking case).
Indeed, so-called "wide" parity clauses (clauses that prohibit buyers of online intermediation services from offering goods/services to end-users on more favourable terms by using competing online intermediation services) do not benefit from the block exemption (Art. 5.1 d) VBER). These clauses will now have to be assessed individually under Article 101 of the Treaty.
Another important clarification is that providers of online intermediation services with a hybrid function (i.e., they provide online intermediation services and sell goods or services in competition with the companies to which they provide such services) cannot benefit from the dual distribution exceptions (see below) (Art. 2.6 VBER).
Such platforms will therefore have to carry out a case-by-case analysis of their business model with respect to the competition rules concerning vertical restraints as well as those concerning horizontal agreements (in particular in terms of exchange of information) (see in this respect §§104 et seq. VGL).
Dual distribution refers to situations where the supplier distributes its products through its own distribution network on the one hand, and through independent distributors on the other hand, and thus acts as a competitor of the distributors on the downstream market.
Article 2.4 of the VBER extends the benefit of the exemption that was previously granted to certain types of non-reciprocal agreements between competitors to vertical agreements between manufacturers, importers or wholesalers (upstream) and buyers who are importers, wholesalers or retailers downstream - provided that these agreements do not contain hardcore restrictions.
Exchanges of information between the supplier and the buyer can only benefit from the exemption if (i) they are directly related to the implementation of the vertical agreement and (ii) they are necessary to improve the production or distribution of the contract goods or services.
The main innovation of the VBER with respect to exclusive distribution concerns the introduction of shared exclusive distribution.
In this regard, the possibility for a supplier to restrict active sales by its customers is expanded: Article 4 b) i) of the VBER introduces the possibility for a supplier to appoint a maximum of five distributors per exclusive territory or customer group.
The Commission further provides that some restrictions covered by the exemption can now be passed on to the buyer's customers.
Article 4(c) of the VBER grants selective distribution systems slightly enhanced protection against sales by unauthorized distributors located in the territory to which the selective distribution extends.
Furthermore, the VBER does not impose any equivalence requirement between online and offline trade: a supplier may impose criteria for online sales on its authorized distributors that are not identical to the criteria applicable to physical sales (§235 VGL).
However, the criteria imposed for online sales must not be intended to prevent buyers or their customers from actually using the Internet to sell their goods or services online.
While the principle remains that total bans on online distribution are prohibited, it is possible to simply limit the use of a particular online distribution channel (such as online marketplaces - §§332 et seq. VGL) or to set quality standards for online sales.
The Commission also clarified to what extent it is possible for a supplier to restrict the use of price comparison services (§§343 et seq. VGL): while such restrictions may not go so far as to directly or indirectly prevent their use, the definition of sales methods remains permissible (e.g., imposing that price comparison tools must meet certain quality standards).
Suppliers are allowed to set different wholesale prices for online and offline sales by the same buyer, as it may incentivise or reward an appropriate level of investments in online or offline sales channels, provided that it is not intended to restrict sales to particular territories or customers. However, where the difference in the wholesale price has the object of preventing the effective use of the internet by the buyer to sell the contract goods or services to particular territories or customers, it is a hardcore restriction (§209 VGL).
Non-compete obligations that are tacitly renewable beyond a period of five years are now covered by the block exemption, provided that the buyer can effectively renegotiate or terminate the vertical agreement containing the obligation with reasonable notice and at reasonable cost thus allowing the buyer to effectively switch its supplier after the expiry of the 5-year period (§248 VGL).
They are replaced by a new Vertical Block Exemption Regulation (hereinafter "VBER") and new Vertical Guidelines (hereinafter "VGL") adopted on Tuesday, May 10, 2022 by the Commission and which enter into force on June 1, 2022.
According to the Commission, this reform has several objectives, namely to readjust the safe harbouŕ in order to eliminate "false positives" (i.e., cases where the exemption should not be granted) and reduce "false negatives" (i.e., cases where it should be granted but is not), to provide businesses with updated guidance that takes into account the growth of e-commerce and online platforms, and to reduce compliance costs for businesses by simplifying and streamlining the current guidance.
While this presentation is not exhaustive, the main developments contained in the VBER and the VGL are in substance the following:
- Online platforms
Online intermediation services are defined by the VBER (Art. 1.1(e)) as information society services which allow undertakings to offer goods or services (i) to other undertakings, with a view to facilitating the initiating of direct transactions between those undertakings, or (ii) to final consumers, with a view to facilitating the initiating of direct transactions between those undertakings and final consumers, irrespective of whether and where the transactions are ultimately concluded.
The VBER also provides for a limited exemption from price parity clauses for providers of online intermediation services (such clauses could previously only be caught if one of the parties had a market share of more than 30% or even a dominant position, as in the Booking case).
Indeed, so-called "wide" parity clauses (clauses that prohibit buyers of online intermediation services from offering goods/services to end-users on more favourable terms by using competing online intermediation services) do not benefit from the block exemption (Art. 5.1 d) VBER). These clauses will now have to be assessed individually under Article 101 of the Treaty.
Another important clarification is that providers of online intermediation services with a hybrid function (i.e., they provide online intermediation services and sell goods or services in competition with the companies to which they provide such services) cannot benefit from the dual distribution exceptions (see below) (Art. 2.6 VBER).
Such platforms will therefore have to carry out a case-by-case analysis of their business model with respect to the competition rules concerning vertical restraints as well as those concerning horizontal agreements (in particular in terms of exchange of information) (see in this respect §§104 et seq. VGL).
- Dual distribution
Dual distribution refers to situations where the supplier distributes its products through its own distribution network on the one hand, and through independent distributors on the other hand, and thus acts as a competitor of the distributors on the downstream market.
Article 2.4 of the VBER extends the benefit of the exemption that was previously granted to certain types of non-reciprocal agreements between competitors to vertical agreements between manufacturers, importers or wholesalers (upstream) and buyers who are importers, wholesalers or retailers downstream - provided that these agreements do not contain hardcore restrictions.
Exchanges of information between the supplier and the buyer can only benefit from the exemption if (i) they are directly related to the implementation of the vertical agreement and (ii) they are necessary to improve the production or distribution of the contract goods or services.
- Exclusive distribution
The main innovation of the VBER with respect to exclusive distribution concerns the introduction of shared exclusive distribution.
In this regard, the possibility for a supplier to restrict active sales by its customers is expanded: Article 4 b) i) of the VBER introduces the possibility for a supplier to appoint a maximum of five distributors per exclusive territory or customer group.
The Commission further provides that some restrictions covered by the exemption can now be passed on to the buyer's customers.
- Selective Distribution
Article 4(c) of the VBER grants selective distribution systems slightly enhanced protection against sales by unauthorized distributors located in the territory to which the selective distribution extends.
Furthermore, the VBER does not impose any equivalence requirement between online and offline trade: a supplier may impose criteria for online sales on its authorized distributors that are not identical to the criteria applicable to physical sales (§235 VGL).
However, the criteria imposed for online sales must not be intended to prevent buyers or their customers from actually using the Internet to sell their goods or services online.
- Online distribution
While the principle remains that total bans on online distribution are prohibited, it is possible to simply limit the use of a particular online distribution channel (such as online marketplaces - §§332 et seq. VGL) or to set quality standards for online sales.
The Commission also clarified to what extent it is possible for a supplier to restrict the use of price comparison services (§§343 et seq. VGL): while such restrictions may not go so far as to directly or indirectly prevent their use, the definition of sales methods remains permissible (e.g., imposing that price comparison tools must meet certain quality standards).
Suppliers are allowed to set different wholesale prices for online and offline sales by the same buyer, as it may incentivise or reward an appropriate level of investments in online or offline sales channels, provided that it is not intended to restrict sales to particular territories or customers. However, where the difference in the wholesale price has the object of preventing the effective use of the internet by the buyer to sell the contract goods or services to particular territories or customers, it is a hardcore restriction (§209 VGL).
- Duration of non-compete obligations
Non-compete obligations that are tacitly renewable beyond a period of five years are now covered by the block exemption, provided that the buyer can effectively renegotiate or terminate the vertical agreement containing the obligation with reasonable notice and at reasonable cost thus allowing the buyer to effectively switch its supplier after the expiry of the 5-year period (§248 VGL).