The European Commission review of the Vertical Block Exemption Regulation
Article 101(1) of the Treaty on the Functioning of the European Union (TFEU) prohibits agreements between undertakings that restrict competition (unless they demonstrate "efficiencies" i.e. by improving the production or distribution of goods or services or promoting technical or economic progress, while allowing consumers a fair share of the resulting benefits (i.e. the exemption from the Article 101(1) TFEU prohibition under Article 101(3) TFEU)).
The Article 101(1) TFEU prohibition covers 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 goods or services (also known as vertical agreements and include distribution agreements, supply agreements and franchise agreements). Section 4(1) of the Competition Act 2002 (as amended) (Competition Act) applies to agreements that only have an effect on competition in Ireland and is the equivalent of Article 101(1) TFEU.
The Commission adopted Commission Regulation (EU) No 330/2010 of 20 April 2010 on the application of Article 101(3) TFEU to categories of vertical agreements and concerted practices (VBER) and which provides parameters for businesses entering into vertical agreements that are compatible with Article 101 TFEU. The Commission also adopted a Notice providing guidance on the interpretation of the VBER (Guidelines).
The VBER expires in May 2022. The Commission is reviewing the VBER to decide whether it should let the VBER lapse, prolong its duration or revise it, together with the Guidelines, in light of the new market developments since their adoption in 2010. In particular, the review is looking at the increased importance of online sales and the emergence of new market players such as online platforms.
The Commission intends to launch a public consultation towards the end of 2020. In 2021, the Commission will publish a draft of the revised VBER and Guidelines for stakeholders’ comments.
What is the current status of the Commission's evaluation of the VBER?
The results of the recent evaluation of the VBER, published on 8 September 2020, showed that while the rules are still relevant and useful to businesses, there are certain areas of the rules may need to be adapted. In particular, the review is looking at:
1.. Clarification and simplification of the rules (e.g. restrictions on the use of price comparison websites, online advertising restrictions) and the treatment of new market players, such as online platforms in certain areas of the rules (e.g. agency, dual distribution).
2. Addressing issues in the following areas:
(a) Resale price maintenance (RPM) (i.e. agreements between a seller and a buyer which establishes a fixed or minimum resale price (or price level) to be observed by the buyer – these are currently prohibited).The Commission will explore if certain RPM circumstances may meet the Article 101(3) TFEU efficiencies.
(b) Not excluding tacitly renewable non-compete obligations from the benefit of the VBER where the buyer can periodically terminate or renegotiate the agreement.
(c) a revision of the VBER rules in the following areas:
- Dual distribution (i.e. situations in which a supplier sells its goods or services directly to end customers, therefore competing with its distributors at retail level) - this is generally covered by the VBER. It constitutes an exception to the general rule that agreements between competitors are not covered by the VBER, but by the rules regarding competitors (i.e. the horizontal rules). With online sales, dual distribution has increased significantly and there is a risk of exempting vertical agreements where horizontal concerns are no longer negligible and the conditions of Article 101(3) TFEU are not satisfied.
- Active sales restrictions. Agreements aimed at restricting the territory into which or the customers to whom the buyer can sell are considered serious (i.e. hardcore) restrictions and are not exempted by the VBER. The buyer should generally be allowed to actively approach individual customers (“active sales”) and respond to unsolicited requests from individual customers (“passive sales”).
While the current rules generally do not allow restrictions of passive sales (with the exception e.g. of passive sales to unauthorised distributors within a selective distribution system), they do allow restrictions of active sales in limited cases, notably to protect investments by exclusive distributors and to prevent sales by unauthorised distributors located in a territory in which a supplier operates a selective distribution system. Suppliers consider these rules to be complex, unclear and preventing them from designing their distribution systems according to their commercial needs.
Stakeholders expressed the wish to establish “shared exclusivity” between two or more distributors in a particular territory, and to effectively combine exclusive and selective distribution in the same or different territories.
- Indirect measures restricting online sales. Online sales are generally considered a form of passive sales and restrictions preventing distributors from selling through the internet are considered hardcore restrictions which are not exempted by the VBER.
The current rules apply the same approach to certain indirect measures that may make online sales more difficult, such as charging the same distributor a higher wholesale price for products intended to be sold online than for products sold offline (“dual pricing”).
The same applies to imposing criteria for online sales that are not overall equivalent to the criteria imposed in brick-and-mortar shops (“equivalence principle”) in the context of selective distribution.
Suppliers consider that by not allowing them to differentiate wholesale prices based on the costs of each channel, the current rules prevent them from incentivising investments (particularly in physical stores). Stakeholders consider that there is a lack of legal certainty in the application of the equivalence principle, as online and offline sales channels are inherently different and it is difficult to assess when a divergence in the criteria used for each channel amounts to a hardcore restriction under the VBER.
- Parity obligations (i.e. "most-favoured nation" clauses) require a business to offer the same or better conditions to its contracting party as those offered on any other sales channel, or on the company’s direct sales channels.
Parity obligations can be agreed at wholesale or retail level, and can cover price or non-price conditions (e.g. inventory or availability of goods or services).
The evaluation showed an increase in the use of parity obligations across sectors, notably by online platforms. National competition authorities (such as the Competition and Consumer Protection Commission (CCPC) in Ireland) and courts have identified anti-competitive effects of obligations that require parity with other indirect sales or marketing channels (e.g. other platforms or other online or offline intermediaries).
A revised VBER would address the appropriate contours of parity obligations.
A number of options are being considered by the Commission to address these areas and which may be reflected in a revised VBER.
The current position under Irish competition law regarding vertical agreements
The CCPC investigates and enforces competition law in Ireland primarily under the Competition Act.
The CCPC extended the validity of its declaration (Declaration) in respect of vertical agreements on 30 October 2020 until 1 December 2022. The Declaration came into effect on 1 December 2010 and would have expired on 1 December 2020.
Vertical agreements which restrict competition are prohibited under Section 4 of the Competition Act 2002. The Declaration is the Irish competition law equivalent of the VBER.
The CCPC has stated that it will consider any potential changes to the VBER as a result of the review and will subsequently consult with stakeholders on potential revisions to the Declaration.
For more information on this topic please contact Alan McCarthy, Partner or any member of the EU, Competition & Procurement team.
Date published: 1 December 2020