Vertical Block Exemption Regulation and Guidelines: Overview of the European Commission’s drafts from 9 July 2021

A. Introduction

The prohibition of agreements and other practices that restrict competition under antitrust law (Article 101(1) TFEU / section 1 German Act against Restraints of Competition Gesetz gegen Wettbewerbsbeschrändungen - GWB) also applies in “vertical” relationships, i.e. the relationships between manufacturers and wholesalers as well as between wholesalers and retailers in regard to the purchase and resale of goods and services. To clarify in detail the prohibition on restrictive practices applicable to such vertical relationships, European legislators issued the Vertical Block Exemption Regulation (“VBER”). The VBER designates certain clauses that disqualify the entire agreement for exemption (“black-listed” clauses or “hardcore restrictions”) and other clauses that are themselves disqualified but not the rest of the agreement (“grey-listed” clauses). Thus, if a vertical agreement has no black-listed or grey-listed clauses, the contracting parties can be sure that the agreement is exempted from the prohibition on restrictive practices under the protection of the VBER. To provide further explanation of the provisions of the VBER, the European Commission (“Commission”) issued supplementary guidelines.

The VBER will be in effect until 31 May 2022. With this in mind, the Commission began as early as 2018 to evaluate the benefits of the VBER for the parties to which it applied and what problems or regulatory gaps had emerged since it entered into force in the year 2010. As a result of these studies and complementary public consultations, in early July 2021, the Commission published draft proposals for a new Vertical Block Exemption Regulation (“Draft VBER”) and new Guidelines (“Draft Vertical-GL”). The Commission’s intentions include in particular the adjustment of provisions governing vertical agreements to more recent market developments – focussing primarily (but not exclusively) on internet sales.

Undertakings, associations and other interested groups have until 17 September 2021 to state their positions on the drafts.

An overview of the significant changes can be found here.

B. Proposed changes

The number of substantive changes proposed by the VBER-Draft is rather moderate, but they are very significant in everyday practice. Particularly the proposed provisions regarding online marketplaces and dual-distribution sales give rise to discussion. The explanations in the Draft Vertical-GL have been supplemented and reworked on a large scale. Here as well, explanations regarding online sales predominate.

Below please find a brief outline of the most significant changes proposed.

I. Online marketplaces

The Draft VBER defines “online intermediation services” (such as online marketplaces) as services that allow undertakings to offer goods or services to other undertakings or to end users. Thus, their offer consists of facilitating direct transactions between such undertakings or between such undertakings and end users. In the future, online marketplaces are generally to be deemed suppliers, i.e. independent economic operators providing online intermediation services (Article 1(1) lit. d) Draft VBER). One consequence that is obviously intended by the Commission would be that the “agent privilege” would no longer be applicable to them (see Draft Vertical-GL, para. 44). Therefore, compliance with the Draft VBER will always be compulsory for distribution agreements with online marketplaces.

Up to now, “broad” most-favoured-nation clauses have been widely used. Under these clauses, undertakings agree with online marketplaces not to offer goods or services at more favourable conditions via other distribution channels (online or offline). In future, such clauses shall no longer qualify for a block exemption (Article 5(1) lit. d) Draft VBER). However, “strict” most-favoured-nation clauses, according to which an online marketplace can prohibit suppliers of goods and services from offering goods or services at more favourable conditions in (their own) direct distribution, can be permissible.

If the provider of online intermediation services itself sells goods or services as a retailer on its platform (so-called “hybrid” platforms), the benefits of the Draft VBER shall not apply to its business overall (Article 2(7) Draft VBER). Consequently, agreements between operators of hybrid platforms and unrelated undertakings would not be protected by the Draft VBER, but would have to be assessed solely on the basis of the requirements fo an individual exemption from the prohibition on restrictive practices.

II. Dual distribution

The VBER currently always applies to agreements between undertakings that not only are in a supply relationship with each other (e.g. manufacturer and distribution intermediary), but also compete with each other at retail level. Up to now, this has provided manufacturers and operators of franchise systems alike with the option of setting up and using “dual distribution systems” (distribution simultaneously via direct and intermediated sales) that are included under the block exemption provided under the VBER. Agreements and the exchange of information between manufacturers and distribution intermediaries are currently exempted under the standard requirements of the VBER (particularly market share of less than 30% and no hardcore restrictions).

In this context, the planned revision provides for wide-ranging, stricter rules for these types of distribution systems.

As regards dual distribution systems, a (block) exemption for the relationship between manufacturers and their sales intermediaries shall only remain possible pursuant to the Draft VBER if the aggregate market share of the manufacturer and the retailer does not amount to more than 10% at retail level (Article 2(4) Draft VBER). If their aggregate market share is between 10% and 30%, only a restricted exemption is to be granted in the future. Vertical clauses will no longer be subject to a block exemption but will require more detailed assessment according to the prohibition on restrictive practices, i.e. in particular with a view to whether these constitute an intended restriction of competition (see Article 2(5), (6), (7) Draft VBER; Draft Vertical-GL, para. 87). This is tantamount to watering down the “safe harbour” principle.

In this context, it is also to be mentioned and particularly notable that, in a dual distribution system, the exchange of information relevant to competition between manufacturers and distribution intermediaries – such as current total sales and sales volume – is expressly only to remain possible pursuant to the Draft VBER if the aggregate market share of the manufacturer and the retailer does not exceed the 10% threshold on the retail market (Article 2(5) Draft VBER). If the aggregate market share exceeds this threshold, the exchange of information would only be possible in compliance with the prohibition on restrictive practices and the Commission’s horizontal guidelines in this regard (Article 2(5) Draft VBER). This will probably result in significant difficulties in everyday practice and especially in a significant increase in costs and possibly in some legal uncertainty.

III. Non-compete obligations

According to the Draft VBER, it shall become easier to put non-compete obligations in place. In future, an agreement according to which a non-compete obligation is automatically extended after five years shall become permissible pursuant to the Draft VBER. The requirement for this is that the buyer can effectively renegotiate or terminate the vertical agreement containing the obligation with a reasonable notice period and at a reasonable cost. This means that a buyer is actually to have the option of switching suppliers after five years (see Article 5(1) Draft VBER; Draft Vertical-GL, para. 233 et seq.). Up to now, a block exemption has not been possible if after five years the non-compete obligation was automatically extended.

IV. Exclusive distribution

In the case of exclusive distribution, restrictions as to the territory where or groups of customers to which active or passive sales are permitted always constitute a hardcore restriction (Article 4 lit. c)(i) Draft VBER). However, as an exception, prohibiting active sales in exclusive territories or to certain groups of customers continues to be exempted. The Draft VBER also permits a prohibition of active and passive sales to unauthorised retailers in selective distribution territories and a prohibition of active and passive sales to end users by wholesalers.

It is no longer necessary in the future to allocate the exclusive distribution territory to only one retailer; on the contrary, in the future, an exclusive distribution territory will be permitted to be shared by more than one retailer (“one or a limited number of buyers”) (Article 4 lit. b) Draft VBER). A manufacturer is also to be permitted to require its exclusive distribution retailers to pass on the prohibition of active sales in other exclusive sales territories or areas with a selective distribution system (Article 4 lit. b)(i) and (ii) Draft VBER). Such a restriction on sales by parties buying from the exclusive distribution retailer are currently expressly prohibited (Article 4 lit. b)(i) Draft VBER).

V. Selective distribution

In selective distribution systems, restrictions on the territory into which, or the group of buyers to whom is it permissible to actively or passively sell likewise do not constitute a hardcore restriction (Article 4 lit. c)(i) Draft VBER). In the future, it is to become possible for certain restrictions to be exempted (Article 4 lit. c)(i) Draft VBER). These permitted exemptions include:

• prohibition of active distribution in exclusive territories;
• prohibition of active or passive distribution to unauthorised retailers in selective distribution territories; and
• restrictions on locations for retailers’ branch locations.

VI. Retail price maintenance (RPM)

The Draft VBER does not provide for any fundamental changes; in particular, fixed and minimum resale prices remain impermissible.

However, sales campaigns in which a manufacturer sets the price for its sales intermediary for a short period of time shall remain permissible (Draft Vertical-GL, para. 182 lit. b)). In addition, the draft new Guidelines include the helpful clarification that price monitoring software is not to be considered as a price fixing practice that would be prohibited per se, although such software can be aid enforcing prohibited RPM practices (Draft Vertical-GL, para. 175 et seq.). Fixed prices in fulfilment contracts, in which a retailer fulfils the previous agreement between a supplier and a certain end user, are likewise no longer to be deemed a form of RPM.

VII. Online sales

The Draft VBER introduces changes with significant practical impact for the organisation of online distribution channels. The draft Guidelines establish the principle that effective internet sales must always remain possible for retailers. Restrictions on the effective use of the internet (for sales purposes) by retailers or their customers are always deemed hardcore restrictions. However, in the future, dual pricing is no longer to be classified as a hardcore restriction. Manufacturers are to be permitted to set varying wholesale prices for online and offline sales by the same retailer in order to be able to compensate for the retailer’s varying investment levels in each distribution channel (Draft Vertical-GL, para. 195). In addition, it is to be permissible to force sales quantities for brick-and-mortar transactions (Draft Vertical-GL, para. 194).

Quality requirements for online shops are likewise to be permissible (Draft Vertical-GL, para. 193), such as the “look and feel” of the website. The criteria required by suppliers for online sales need no longer be equivalent to those for brick-and-mortar establishments (abandonment of the equivalence principle).

Requirements on internet advertising are generally to be permissible as long as the effective use of one or more particular internet advertising channels is not prevented.

In addition, the Draft VBER aims to clarify that platform prohibitions always qualify for a block exemption (cf. “Coty” judgment by the ECJ).

A general prohibition of using price comparison tools is not to be exempted under the Draft VBER. The same applies to a general prohibition of forwarding price information to price comparison tools (see Draft Vertical-GL, para. 192 et. seq.). However, prohibiting a particular price comparison tool can be exempted.

An overview of the significant changes can be downloaded using this link.