Vertical agreements in EU competition law
Article 101(1) prohibits agreements that restrict competition unless they contribute to improving the production or distribution of goods or services or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefits, as set out in Article 101(3). Even if agreements can achieve these positive outcomes, they must impose only those restrictions which are indispensable to the attainment of these benefits.
The Article 101(1) prohibition covers (amongst others) agreements between undertakings operating at different levels of the production or distribution chain, and relating to the conditions under which the parties may purchase, sell or resell certain goods or services (so-called ‘vertical agreements’).
What is the Vertical Agreements Block Exemption?
The Vertical Agreements Block Exemption (‘VABE’) is one of a number of block exemptions adopted by the European Commission, which are designed to simplify the analysis required for assessing whether particular types of agreement fulfil the general exemption criteria in Article 101(3). The VABE came into force in 2010 and is due to expire on 31 May 2022. It provides a ‘safe harbour’ for vertical agreements that fulfil certain criteria:
- the agreement must not contain any ‘hardcore’ restrictions of competition (i.e. those which are deemed to be so restrictive of competition that they are unlikely to be justifiable); and
- the supplier’s market share must not exceed 30% of the relevant market on which it sells the contract goods, and the buyer’s market share must not exceed 30% of the relevant market on which it purchases the contract goods.
Vertical agreements falling outside this ‘safe harbour’ are not automatically unlawful, but will require further self-assessment with reference to case law and the Commission’s Vertical Guidelines.
The context for reform: e-commerce sector inquiry and recent cases
As the VABE is due to expire in around eighteen months, the Commission needed to consider whether to renew it in its current form, do away with it, or put in place a new regime. This probability that the Commission will take the third option is particularly affected by developments in the ways in which goods and services are distributed and by recent experience in particular sectors.
The Commission issued its final report on the e-commerce sector inquiry in May 2017, finding that e-commerce has grown substantially over the last decade along with online price transparency and price competition. This has had a significant impact on companies’ distribution strategies and consumer behaviour.
Following the e-commerce sector inquiry, there have been a significant number of decisions by the Commission to fine large companies for interference with parallel trade, whether through ‘geo-blocking’ or otherwise, and resale price maintenance (‘RPM’):
- NBCUniversal fined €14.3 million for anti-competitive licensing and distribution practices;
- Guess fined €40 million for RPM, blocking cross-border sales and imposing online advertising restrictions;
- Nike fined €12.5 million for restricting cross-border sales of merchandising products;
- Asus, Denon & Marantz, Philips and Pioneer fined over €111 million in total for RPM;
- Sanrio fined €6.2 million for restricting cross-border sales of merchandising products featuring Hello Kitty characters.
This experience was reflected in the UK in, for example, the Ping case and the RPM cases against a number of suppliers and retailers of, for example, musical instruments.
As online sales have grown over the last decade, so too have the range of distribution systems used by businesses to sell goods online. Selective distribution systems, in which goods (particularly those of a luxury or technical nature) are sold only by those distributors who meet specified criteria, have become increasingly popular. The European Court of Justice (CJEU) has been active in cases dealing with selective distribution (Pierre Fabre, Coty). This model of distribution has been considered at length in other European jurisdictions, with the French Competition Authority issuing a number of decisions relating to highly technical and high-quality products (Stihl, Bikeurope), and Germany taking a strict approach to the Coty ruling and limiting it to genuinely prestigious products.
Why is reform needed and what may change?
In 2018 the Commission launched its initiative to begin its consideration of whether it should let the current VABE lapse, prolong its duration or revise it. In February 2020 the Commission published its final report on support studies for the evaluation of the VABE, followed by publication of the Commission’s Staff Working Document in September 2020. The Commission has found that the VABE and accompanying Vertical Guidelines are effective overall, but that there is room for improvement and clarification in certain areas. It was particularly persuaded that the rules must be adapted to promote effective competition by taking into account the growth of digital markets.
In particular, the Commission recognises the need for:
- Avoiding divergent treatment of third-party platform bans and most-favoured-customer clauses;
- Further guidance on: when recommended and maximum prices amount to resale price maintenance; online advertising restrictions; and treatment of platforms with a ‘dual role’ as retailer and marketplace;
- Adjusted market share thresholds for ‘safe harbour’: national competition authorities believe the market share threshold of 30% may be too high where online platforms are concerned;
- Scope for amendment of type of agreements exempted: need for future-proof rules that can provide ‘safe harbour’ for new types of vertical agreements and restrictions.
On 23 October 2020 the Commission published its ‘inception impact assessment’, giving stakeholders an opportunity to comment on the Commission review. In particular, the inception impact assessment recognises the need to focus on the following areas in the revised VABE:
- Dual distribution
- Situations in which a supplier has a dual role as retailer and marketplace are exempted under the VABE, but as the prevalence of this distribution model grows, the Commission considers that it is necessary to limit the scope of, extend or remove the exception to limit horizontal competition concerns.
- Amazon operates as a dual role platform, and is currently under investigation by the Commission for its use of sensitive data of independent retailers who sell on its marketplace.
- Active sales restrictions
- Agreements aimed at restricting the territory into which or the customers to whom the buyer can sell are considered hardcore restrictions not covered by the VABE, and although restrictions of ‘active sales’ are allowed in limited cases, the Commission is looking at expanding the exceptions to give suppliers more flexibility to design their distribution systems.
- Stakeholders have found the application of these rules particularly complex, concluding that the current rules prevent effective protection of territory in selective distribution systems.
- Indirect measures restricting online sales
- Whilst measures restricting ‘passive sales’ are restricted under the VABE, the restriction on indirect measures make it difficult to incentivise sales in brick and mortar stores as online markets grow.
- There is currently a lack of legal certainty relating to such indirect measures. Suppliers consider that online and offline channels are inherently different, and that they should be allowed to differentiate prices based on the cost of each channel. it is argued that measures relating to dual pricing and the use of non-equivalent criteria for online/offline sales should not be considered hardcore restrictions.
- Parity obligations (most-favoured nation clauses)
- Clauses requiring a business to offer the same or better conditions to its contracting party as those offered on any other sales channel are currently block exempted by the VABE. The Commission suggests that these clauses may lose the benefit of the exemption and be added to a list of exclusions to be subject to an individual effects-based assessment.
- National competition authorities have taken a particular interest in restrictive parity obligations in the online hotel booking sector in recent years, requiring commitments that clauses of this type are excluded from contracts.
Stakeholders have an opportunity to provide feedback on the main issues identified by 20 November 2020. This consultation phase will provide a clearer indication of what the revised rules might look like, in advance of the Commission’s publication of draft revised rules for comments in 2021. Given the need for almost all businesses to find ways to purchase and sell (or lease) goods and services, the regime which affects vertical arrangements is one of the most relevant to all sectors of the economy and this consultation will be of interest to a very large number of undertakings.