New rules on vertical restraints come into force today – shaping the legal framework for distribution in the next 12 years
Today, 1 June 2022, the revised Regulation (EU) 2022/720 on the exemption of categories of vertical agreements (“Vertical Block Exemption Regulation” / “vBER”) and new Guidelines on Vertical Restraints (“Vertical Guidelines”) enter into force – let us therefore take a look at the most important changes that will determine the distribution environment across the EU for the next 12 years.
1. Entry into force and period of validity
The new EU antitrust framework for vertical (in particular distribution) agreements, which entered into force today, sets out the requirements vertical / distribution agreements will have to meet to be compliant with antitrust law until 31.05.2034: For the next twelve years, the new regulations will thus determine the distribution environment in the EU.
Vertical agreements already in force on 31 May 2022 and exempted under the predecessor Regulation (EU) 330/2010 will continue to be exempted for a one-year transitional period (until 31 May 2023); changes to existing distribution systems, on the other hand, must immediately comply with the new rules.
In view of the changes, manufacturers should promptly consider adapting their distribution contracts to the new rules and may want to consider reorganising their distribution in order to use new options in the legal framework for tailoring their distribution systems in a way that is both legally secure and meets their individual requirements.
2. Important changes
The basic structure of the block exemption remains unaltered: Vertical agreements – i.e. agreements between two or more undertakings operating at different levels of the production or distribution chain and concerning the conditions under which the participating undertakings may purchase, sell or resell goods or services – are by law exempted from the ban on cartels if the conditions of the vBER are fulfilled, in particular if the double market share threshold of 30% is not exceeded and the agreement does not contain hardcore restrictions.
a. New definitions
The new vBER contains a number of new definitions: Terms previously defined only in the guidelines, such as “active sales”, “passive sales” or “exclusive distribution systems” are legally defined for the first time, terms such as “supplier” or “online intermediary services” show the Commission’s focus on online platforms and online intermediary services.
b. Modified application to vertical agreements between competitors
Whilst in principle, an exemption for vertical agreements between competitors continues to be excluded, there are important changes in the details:
No exemption in case of a competitive relationship at the upstream market level
By now, an exemption was only excluded if a competitive relationship existed not only in distribution level but also explicitly at the manufacturer level; under the new vBER, an exemption will be excluded if a competitive relationship exists at the upstream market level – regardless of whether the companies involved are manufacturers, importers or wholesalers there.
More limited exemption of information exchange in dual distribution
Until now, the exchange of information between potentially competing suppliers and buyers at the distribution level was block exempted. Under the new vBER, the exemption will not apply if the exchange either does not directly concern the implementation of the vertical agreement or is not necessary to improve the production or distribution of the contract goods or services. This concerns in particular the highly relevant area of dual distribution, where a manufacturer sells its goods not only through distributors but also in competition with them (in particular directly to end customers). Whilst it is to be welcomed that the Commission has reacted to the considerable criticism and abandoned its original proposal of a further market share threshold for information exchanges of information, it remains to be seen to what extent the qualitative requirements now laid down in the new vBER instead will be applied and handled in practice.
Hybrid online platforms will not be block exempted anymore
An important change is that hybrid online platforms – where the marketplace operator is at the same time a competitor on the market for the sale of the intermediated goods or services – will not profit from the block exemption anymore: Platforms such as Amazon can therefore no longer rely on the exemption of their current business model under the new vBER.
c. Changes regarding hardcore restrictions
The list of hardcore restrictions – which when contained in a vertical agreement exclude said agreement from an exemption under the vBER altogether – has been completely restructured and differentiates between exclusive distribution, selective distribution and other distribution. In terms of content, however, the changes are less extensive than they may appear at first glance:
Prohibition of resale price maintenance
Resale Price Maintenance (RPM) remains prohibited under the new vBER and will henceforth also apply to online intermediary services (which are now also “suppliers” by definition), which are prohibited from setting fixed or minimum prices for the intermediated transactions.
A central change is the admissibility of dual pricing systems for products sold online and offline: In future, different purchase prices for goods sold online and for products sold offline will only constitute a hardcore restriction if they are aimed at preventing the effective use of the internet by the buyer – but not if they are intended to provide an incentive or reward for different investments by a buyer in online or offline sales channels.
The new vertical Guidelines also provide guidance on the assessment of other types of conduct, such as prohibitions on advertising prices below a certain threshold.
Changes with regard to territorial and customer restrictions
Restrictions on the territory into which, or of the customers to whom a distributor may actively or passively sell the contract goods or services continue to be treated as hardcore restrictions.
The exceptions in which the exemption applies now differ according to the distribution forms exclusive distribution, selective distribution and other distribution: Depending on the distribution system, (i) active sales by the buyer and its (direct) customers into exclusive territories / to exclusive customers (which may now be allocated not only to one but up to a maximum of five exclusive distributors jointly) may be prohibited; in addition, (ii) buyers may be prohibited from active and passive sales to non-authorised distributors in a territory where the supplier operates a selective distribution system for the contract goods – this prohibition may now also be extended to customers of the buyers.
New hardcore restriction: preventing the effective use of the internet for the sale of the contract goods or services by the buyer or its customers
Not only does the new vBER for the first time contain legal definition of “active sales” and “passive sales” and excludes hybrid online platforms from the block exemption, the new regulations bring further important changes to online distribution:
The new hardcore restriction in Art. 4 lit. e) of the Vertical Block Exemption Regulation prohibits the prevention of the effective use of the internet for the sale of the contract goods or services by the buyer or its customers, but does not exclude other restrictions on online sales or restrictions on online advertising from the exemption:
Accordingly, dual pricing systems – that provide for different purchase prices for contract products sold online than for those sold offline – will henceforth only constitute hardcore restrictions if they are aimed at preventing the effective use of the internet by the buyer.
The previous equivalence requirement is no longer applicable: Henceforth, suppliers may stipulate different criteria for online sales and for stationary sales – as long as these are not aimed at preventing authorised dealers from effectively selling the contract products online.
While the use of price comparison services may not be completely prohibited (hardcore restriction), a ban on the use of certain price comparison services or corresponding quality requirements may be exempted if this is not aimed at preventing the effective use of the internet by buyers and their customers.
d. Changes in excluded restrictions: Non-compete and parity clauses
Excluded restrictions – i.e. clauses that are not exempted but, unlike hardcore restrictions, do not prevent the exemption of the remaining agreement – undergo important changes:
Exemption of tacitly renewing non-competition clauses
Non-compete clauses are still not block exempted if they are agreed for more than five years. Unlike before, however, non-compete agreements that can be tacitly extended beyond a period of five years are covered by the new vBER, provided that the buyer can actually switch to a competing supplier, i.e. terminate the agreement with reasonable notice and at reasonable cost.
No block exemption for cross-platform parity clauses
A new addition to the list of non-exempted restrictions is the prohibition of obligations causing a buyer of online intermediation services not to offer, sell or resell goods or services to end users under more favourable conditions via competing online intermediation services: This means that cross-platform parity clauses (often also referred to as “best-price” or “most favoured nation (MFN)” clauses will no longer profit from a block exemption under the new vBER.
The new EU antitrust fromework for vertical agreements entails considerable changes that make it necessary to adapt existing distribution agreements. At the same time, new leeway is opening up, especially in the area of territorial and customer restrictions and with regard to the practically extremely relevant question of permissible specifications for internet distribution: Suppliers can use these and redesign or readjust their distribution systems. Notwithstanding the one-year transitional period, considerations regarding the adjustment of the respective distribution organisation will require thought and take time – and should therefore be addressed promptly in order to use the remaining time for a tailor-made realignment of the distribution activities fit for the next 12 years.