Vertical Agreements Block Exemption Regulation

Marc Picat
15 December 2021

The European Commission (the “Commission”) has recently published a draft revision of the Vertical Agreements Block Exemption Regulation (the “Regulation”) and its guidelines which provide guidance on how to interpret it to benefit from its protection in the light of the growth of e-commerce and recent EU case law.

The Regulation exempts vertical agreements which fulfil certain conditions from the sanctions provided for in Article 101(1) of the Treaty on the Functioning of the European Union (“TFEU”) where such agreements restrict competition between undertakings, thereby creating a safe harbour for such agreements.

In order to benefit from the safe harbour, the market share of neither party must exceed 30% and the agreement must not contain “hardcore restrictions” as defined by the Regulation.

In the UK, the CMA has sent a recommendation to the Secretary of State for Business in this respect which should be published early next year.

Reducing the safe harbour

The proposed changes alter the scope of the safe harbour in the Regulation. According to the Commission, the objective is twofold: first, to allow practices that generate sufficient efficiencies to outweigh any anti-competitive effects; second, and conversely, to exclude competitively problematic practices from the scope of the Regulation.

In this respect, the Commission’s proposals reflect a stricter stance on dual distribution, retail price parity clauses and online platforms.

Dual distribution concerns the contract whereby a supplier distributes its goods or services both directly to customers and through an independent third-party distributor (and thus competes with its distributor at the retail level). The supplier is therefore in direct competition with the buyer. Under existing EU law, dual distribution can benefit from the exemption regulation.

However, the Commission envisages a more restrictive approach as many suppliers compete with their distributors, notably through their own online sales channel.

The general exemption for dual distribution will become more restrictive and will be exempted under the following conditions:

  • Full exemption where the parties’ combined market shares on the relevant market at the retail level do not exceed 10%;
  • Exemption above the 10% threshold, if the parties’ combined market shares on the relevant market at the retail level do not exceed 30% (except for any exchange of information between competitors which could be prohibited and sanctioned by Article 101 TFEU); 
  • No exemption for online platforms if they have a hybrid function (i.e. where they sell goods or services in competition with the businesses to which they provide online intermediation services).

Price parity clauses (or most favoured nation (MFN) clauses) oblige a supplier to offer its goods or services on the same or better terms than it offers to other customers or sales channels. Although MFN clauses are currently exempted, the Commission proposes to:

  • Exclude from the safe harbour of the Regulation MFN clauses imposed by online intermediation service providers that prevent suppliers from offering better terms on other platforms (also known as “broad” parity clauses);
  • Exempting all other types of MFN clauses, including so-called “narrow” parity clauses which only affect the supplier’s direct sales or marketing channels; and
  • Provide guidance on the individual assessment of different types of MFN clauses where the parties’ market shares exceed certain thresholds.

Online intermediation service providers (“platforms”) are excluded from the safe harbour if they have a hybrid function, i.e. if they sell goods or services in competition with companies to which they provide online intermediation of services. 

Hardcore restrictions on online sales

Restrictions on online sales “which have the object of preventing buyers or their customers from effectively using the internet to sell their goods or services online” will be qualified as “hardcore restrictions” and therefore prohibited, reflecting the principles established by the case law of the Court of Justice of the European Union (“CJEU”) and the Member States.

In addition to the direct prohibition on using the Internet as a sales channel, suppliers will have to consider other prohibited restrictions, including:

  • The obligation to sell only in a physical space or in the physical presence of specialized personnel;
  • the obligation to seek prior authorization from a supplier to sell online
  • the direct or indirect prohibition of using a specific online advertising channel
  • the use of price comparison tools; or
  • the use of suppliers’ brand names and trademarks for paid search engine listings.

Furthermore, the Commission proposes to relax its approach to “dual pricing” which would no longer be a priori a “hardcore restriction” in the context of a selective distribution system.

From now on, suppliers would be allowed :

  • to charge different prices to the same distributor for products depending on whether they are sold online or offline. However, the supplier’s dual pricing must encourage or reward an appropriate level of investment and the price difference must be related to the costs incurred for each channel;
  • to impose conditions for online sales that are not identical to the conditions for sales in physical shops.

Expanding the safe harbour in exclusive distribution

Although customer and territory restrictions remain unconditional, the draft regulation gives suppliers more flexibility to design exclusive or selective distribution systems and provides for :

  • Shared exclusivity” will allow suppliers to appoint more than one exclusive distributor in a given territory or for a particular customer group. However, it should not be used to protect many distributors from competition outside the exclusive territory or to partition the internal market. Therefore, the number of designated distributors should be determined in proportion to the allocated territory or customer group, so as to ensure a certain volume of business that preserves their investment effort
  • The possibility for suppliers to restrict sales by customers of their exclusive or selective distributors to another exclusive territory or to unauthorized distributors, respectively.

Other clarifications

The Commission’s draft also attempts to increase legal certainty by simplifying and clarifying certain rules.:

  • General terms and conditions, even if imposed by one party and tacitly accepted by the other, constitute an agreement which may be subject to Article 101 TFEU and therefore sanctioned by competition law;
  • Agents still do not fall under the prohibition of Article 101(1) TFEU where they do not assume any financial or commercial risk in relation to their activities. However, an agent may, for a very short period of time, acquire ownership of the contract goods while selling them on behalf of his principal, provided that the agent does not incur any costs or risks associated with the transfer of ownership;
  • Resale price fixing is still a hardcore restriction and prohibited, as is price fixing between a manufacturer and a distributor to fix the price at which the distributor will resell the manufacturer’s products to retailers; and
  • Non-compete clauses of less than five years that are tacitly renewable beyond a five-year period are now exempted by the Regulation, provided that the distributor can effectively renegotiate or terminate the agreement within a reasonable time and at a reasonable cost.

If adopted according to the proposed timetable, the revised rules will enter into force on 1 June 2022, with a transition period until 31 May 2023, to adapt agreements already in place at the time of adoption.

Marc Picat
Partner – EU & Competition Law - Commercial
Marc Picat is a Partner Solicitor at Spencer West. He specialises in EU & competition law, commercial, supply chain contracts, regulatory, compliance.