New EU regulation on vertical agreements: Changes to distribution rules | In Principle

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New EU regulation on vertical agreements: Changes to distribution rules

Since 1 June 2022, a new Vertical Block Exemption Regulation from the European Commission has been in force, setting out the rules for application of EU competition principles to cooperation between suppliers and buyers, in particular distribution. Some forms of vertical collaboration that were previously allowed are now banned. Others have been brought under the protection of the block exemption, meaning that they are now allowed. Some changes can be considered revolutionary.

On 10 May 2022, the European Commission announced the adoption of the new Vertical Block Exemption Regulation or VBER (Commission Regulation (EU) 2022/720 of 10 May 2022 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices). The regulation is accompanied by new Vertical Guidelines.

The VBER concerns vertical agreements, i.e., agreements relating to supply and distribution of goods and services. The ban set forth in Art. 101(1) TFEU (on restrictive agreements) does not apply to vertical agreements if they meet certain conditions, specifically those defined in the VBER. In turn, the Vertical Guidelines contain interpretive guidance on the VBER and guidance on assessment of vertical agreements not covered by the VBER under Art. 101 (1) and (3) TFEU (the latter provision sets out the general conditions for exempting agreements from the ban).

General discussion of changes

In particular, the aim of the Commission was to update the “safe harbour” for parties to vertical agreements. The Commission sought to clarify and adapt the rules and guidelines to reflect market conditions which have evolved, due among other things to the growth of multiple forms of online commerce. This is intended to facilitate undertakings’ self-assessment of the compatibility of their vertical agreements with Art. 101 TFEU in an environment changed by the growth of online sales and online platforms.

As a result, the scope of some safe harbours has been narrowed, while others have been expanded. Specifically, the changes address:

  • Dual distribution, i.e. situations where a supplier sells its goods or services to end users both via independent distributors and directly
  • Price parity obligations (most-favoured-nation clauses), i.e. the requirement that the terms a seller offers to its counterparties be the same or better than those offered through independent sales channels—here the scope of permissible agreements has been narrowed
  • Restrictions on active and passive selling
  • Certain practices relating to internet sales, i.e. the ability to set different wholesale prices for online and offline products for the same distributor, as well as the ability to apply different criteria in relation to online and offline sales in selective distribution systems—these restrictions may apply if other VBER conditions are met.

In particular, the extension of the admissibility of applying these restrictions by suppliers seems revolutionary in comparison to the previous practice over the years.

Below we discuss the most significant changes in detail.

Dual distribution

Dual distribution is a situation where a supplier (e.g. a manufacturer) sells its goods or services to end users through independent distributors and also directly, competing with distributors. The Commission concluded that the existing rules could exempt such vertical agreements from the ban of Art. 101(1) TFEU even though the existing horizontal problems were no longer immaterial under current market conditions. This is especially true for exchange of information between suppliers and distributors and hybrid platforms. Additionally, the Commission found it advisable to extend the application of the dual distribution exemption to cover wholesalers and importers. These amendments are reflected in Art. 2(4) VBER.

With respect to rules for exchange of information relating to dual distribution, Art. 2(5) VBER exempts the exchange of information not directly related to implementation of the vertical agreement or not necessary to improve the production or distribution of goods or services under a contract. In the Vertical Guidelines (4.4.3), the Commission further provided:

  • Examples of the types of exchange of information that may qualify for the exemption from the ban on competition-restricting agreements in the context of dual distribution
  • Examples that do not qualify for the exemption
  • Guidance on the legal consequences of exchanging information outside the scope of the exemption under the VBER.

Furthermore, under Art. 2(6) VBER, vertical agreements relating to the provision of online intermediation services (OIS) are not exempt from the ban on competition-restricting agreements. Thus, in principle, vertical restraints are banned in agreements pursuant to which the OIS provider (i.e. platform) also sells goods or services in competition with the undertakings to which it provides intermediation services (i.e. where it performs a hybrid function). In section 4.4.4, the new Vertical Guidelines present additional guidance, in particular on the precise scope of definition and legal consequences of the exclusion of vertical agreements entered into by “hybrid” platforms. The Vertical Guidelines indicate that the Commission is unlikely to prioritise enforcement against vertical agreements entered into by hybrid platforms if the agreement does not contain restrictions by object and the platform does not have a significant market position.

Most-favoured-nation clauses

A most-favoured-nation (MFN) clause is a commitment by an undertaking to offer the counterparty (distributor) the same or better conditions as those offered in other sales channels (e.g. on other platforms or in direct sales channels like the seller’s own website). As the Commission notes, under previous provisions such parity clauses were subject to the block exemption, but in recent years, their use in retail (in relation to the terms on which products or services are offered to end users) has often been the subject of intervention by antitrust bodies. The new VBER removes the benefits of the block exemption for cross-platform obligations to maintain retail parity (in terms of restricting the buyer of intermediary services from offering its own services directly to end users on more favourable terms than through an intermediary). This type of obligation has been removed from the list of block exemptions from the ban on competition-restricting agreements. Now, Art. 5(d) VBER expressly provides that “any direct or indirect obligation having the effect of preventing the buyer of an online intermediary service from offering, selling, or reselling goods or services to end users on more favourable terms using competing online intermediary services” (which brings to mind, for example, the case) does not benefit from the exemption.

However, the VBER continues to exempt from the ban all other types of MFN-style competition-restricting agreements, including retail parity commitments relating to direct sales channels (i.e. narrow parity). Such narrow retail parity commitments, as well as wholesale parity commitments, continue to benefit from a block exemption, provided that the general conditions for the application of the VBER, in particular the 30% market-share ceiling defined in Art. 3, are met. However, pursuant to the VBER and the Vertical Guidelines, MFN clauses should be treated with caution in terms of narrow retail parity in concentrated platform markets. If such commitments are to be employed by platforms covering a significant proportion of users (cumulative effect) and there is no evidence of efficiency gains, the privilege of the block exemption may be excluded (sections 6.2.4 and 8.2.5 of the Vertical Guidelines).

Restrictions on active and passive sales

The restrictions on active sales refer to restrictions on the buyer’s (distributor’s) right to actively target a particular group of customers. In principle, such restrictions constitute the most severe restrictions on competition, preventing the use of an exemption from the ban of competition-restricting agreements. To date, in this regard, exceptions to the ban have been framed very narrowly.

Now the Commission has chosen to define “active sales” as “actively targeting customers by visits, letters, emails, calls or other means of direct communication or through targeted advertising and promotion, offline or online, for instance by means of print or digital media, including online media, price comparison services or advertising on search engines targeting customers in particular territories or customer groups, operating a website with a top-level domain corresponding to particular territories, or offering on a website languages that are commonly used in particular territories, where such languages are different from the ones commonly used in the territory in which the buyer is established” (Art. 1(1)(l) VBER).

By contrast, “passive sales” are defined as “sales made in response to unsolicited requests from individual customers, including delivery of goods or services to the customer, without the sale having been initiated by actively targeting the particular customer, customer group or territory, and including sales resulting from participating in public procurement or responding to private invitations to tender” (Art. 1(1)(m) VBER).

The VBER includes changes to the rules regarding restrictions on active and passive sales. Art. 4(b)–(d) contains quite detailed rules on the permissibility of restricting active and passive sales in exclusive and selective distribution systems, as well as—the most significant new feature—outside those systems.

Art. 4(b) introduces the possibility of split exclusivity, allowing a supplier to allocate up to five distributors within an exclusive distribution system for an exclusive territory or customer group. Pursuant to the Vertical Guidelines, above this limit, there is a risk that exclusive distributors will leverage each other’s investments, eliminating each distributor’s incentive to invest, and thus the efficiencies that exclusive distribution is intended to achieve. Also, the supplier may require the distributors to transfer restrictions on active sales to their customers. The exemption from the ban on competition-restricting agreements also applies when a supplier requires its distributors to “transfer” to its direct customers the restrictions relating to active sales into territories or customer groups allocated exclusively to other distributors. However, such transfer of restrictions is not block-exempted further down the distribution chain.

Art. 4(c) increases the protection in selective distribution systems. Suppliers may ban buyers and their customers from selling to unauthorised distributors located in a territory where the supplier uses a selective distribution system, regardless of whether the buyers and customers are located within or outside that territory.

In turn, according to Art. 4(d), a supplier that does not maintain any of the above systems may restrict active and passive sales to buyers under similar rules as for exclusive and selective distribution.

Restrictions on internet sales

The VBER update is most pronounced in the context of restrictions on internet sales.

The changes apply to dual pricing (i.e. charging the same distributor a higher wholesale price for products intended for online sales than for products intended for offline sales) and the equivalence principle (i.e. applying to online sales criteria not generally equivalent to criteria imposed on sales in traditional stores). This is also a radical change from the previous rules. Indeed, the Commission concluded that online sales have become a well-functioning sales channel no longer requiring special protection. Therefore, the banned application of dual pricing or imposition of different criteria by suppliers for online and offline sales is no longer regarded as one of the most serious restrictions on competition.

It is explicitly stated in the Vertical Guidelines that suppliers may set different wholesale prices for online and offline sales by the same distributor, as this may constitute an incentive or reward for an adequate level of investment. However, the difference in wholesale prices must be reasonably related to differences in cost or investment between online and offline sales channels. Nonetheless, the parties do not need to perform complex cost calculations or share detailed cost information with their trading partners to demonstrate this.

But the dual pricing exemption from the ban on competition-restricting agreements is subject to certain safeguards. The difference in wholesale price should not be intended to restrict cross-border sales or prevent the buyer from using the internet effectively. Additionally, while the parties are free to establish a system allowing them to effectively apply dual pricing (e.g. they can monitor which products are actually sold online and which are sold offline for later billing purposes), such a system should not limit the quantity of products a buyer can sell online.

Moreover, in the context of a selective distribution system, the criteria imposed by suppliers for online sales no longer need to be generally equivalent to criteria imposed on brick-and-mortar shops, reflecting that the two channels are inherently different in nature. Also, the criteria specific to internet sales are subject to the same rules as restrictions on online sales. They should not be intended to prevent effective use of the internet by the buyer or its customers to sell the goods or services covered by the contract.

Expected amendments in Poland

The Polish equivalent of the VBER, the Regulation of the Council of Ministers of 30 March 2011 on Exclusion of Certain Types of Vertical Agreements from the Ban on Competition-Restricting Agreements, expires on 31 May 2023. Therefore, a draft of a new Polish regulation should be expected in the near future, and it may be assumed that it will reflect the changes discussed above. In addition to the upcoming changes related to implementation of the ECN+ Directive into Polish law (the draft is still being worked on within the government, even though the deadline for implementation has already expired), we may also face a revolution in the field of vertical restrictions.

Dr Marcin Kulesza, Competition & Consumer Protection practice, Wardyński & Partners