New draft VBER and Guidelines: the most important points at first glance

Introduction

On 9 July 2021, the European Commission (Commission) published the long-awaited drafts of the new Guidelines on Vertical Restraints (VBER) and the accompanying Guidelines on Vertical Restraints (Guidelines). These new drafts are the result of a review – that has been ongoing since 2018 – of the current VBER and Guidelines, which are set to expire on 31 May 2022. The published documents are only drafts and changes may still be made to both documents. Nevertheless, these drafts offer a helpful picture of the direction that the Commission wants to take with the assessment of vertical agreements under the EU cartel prohibition. Reason enough to discuss the most important developments and changes in comparison with the current VBER and Guidelines. In this overview, we discuss some points that stand out in the new draft VBER and Guidelines.

No radical change of direction, but important adjustments

In general, it is noteworthy that the Commission (as expected) does not aspire a radical change of course when it comes to the use of the VBER. This is in line with the  evaluation of the VBER, which showed that the vast majority of respondents were generally satisfied with the current VBER as well as the legal certainty that it provides.

Nevertheless, the draft VBER and Guidelines contain a number of important changes and additions compared to the current versions. It was inevitable that the new VBER and Guidelines would be adapted to better suit the rise of online sales and the new players / ecosystems that have emerged from this, such as online marketplaces, platforms and price comparison sites. The adjustments and additions in this area concern both the general applicability of the VBER to agreements with these new players and specific restrictions on online sales that are often included in vertical agreements. In addition, the Commission has tried to answer the call for more clarity regarding the distribution forms of exclusive and selective distribution by explicitly laying down a number of points on these distribution systems in the draft VBER and by including more guidance on these systems in the draft Guidelines. Below, we discuss these and other relevant developments in the draft VBER and Guidelines.

Agency

With regard to agency agreements, the draft Guidelines contain an important addition regarding so-called “flash title transfer” constructions, whereby the agent (for tax reasons) becomes the owner of the products for (a fraction of) a second. Under the current VBER and Guidelines, it is not entirely clear whether such constructions can fall under the definition of a genuine agency or whether, because of the momentary transfer of ownership to the agent, they should be assessed as distribution agreements. The draft Guidelines now clarify that this brief transfer of ownership does not preclude the agreement from being qualified as a genuine agency, provided of course that it does not create any risks for the agent.[1] We think that this is a welcome clarification, especially given the increased use of this model.

It is also noteworthy that the draft Guidelines contain explanations on how the principal can reimburse the costs and sunk investments of an agent[2] and how to deal with the situation that an agent acts as a distributor for other products.[3]

Definition of vertical agreement and scope of VBER

The main challenge for the Commission is to adapt the current VBER and Guidelines to the rise of online sales and the emergence of new players, such as e-commerce giants and platforms. As regards the scope of the VBER and the definition of “vertical agreement”, two important questions had to be dealt with by the Commission: (i) how the VBER should be applied to agreements with platforms and other online intermediaries and (ii) whether dual distribution should still be exempted under the VBER. We address these points below.

With regard to the services provided by platforms and other online intermediaries, the Commission has decided to classify these players as “suppliers” within the meaning of the VBER. To this end, the definition of supplier in Article 1(1)(d) of the draft VBER has been amended. This means that agreements with platforms and other online intermediaries fall within the scope of the VBER, provided of course that the other conditions for the application of the VBER are met. A somewhat more complex issue for the application of the VBER to agreements with platforms is the calculation of the market share of the parties involved. After all, the platform is not necessarily active on the market on which the transactions it facilitates take place. The Commission appears to look at both the online intermediary market on which the platform offers its services and the market on which the facilitated transaction takes place for the calculation of market shares (e.g. for the assessment of the 30% market share threshold). These markets are relevant to both the intermediation agreement and the agreement facilitated thereby.[4]

Dual distribution entails a supplier that uses distributors for the distribution of goods or services, but also uses its own distribution channel. On the downstream market, this supplier could thus be in competition with its distributors. With the rise of online sales, the use of dual distribution has become more prominent and the question came up whether this practice should continue to be exempted under the VBER. In the draft VBER, the Commission chooses to keep dual distribution within the scope of the VBER, but it does introduce some additional requirements that will not be welcomed by many companies (suppliers and platforms). From the new Article 2(4)(a) and (b) it follows that vertical agreements in a dual distribution system are still exempted under the VBER when the combined market share of the supplier and the distributor in the relevant market at retail level does not exceed 10%. That’s the good news. If this joint market share is more than 10% in the relevant market at retail level but the market share threshold of 30% is not exceeded, the exemption of the VBER still applies. However, the exchange of information between the supplier and the distributor must then be assessed as horizontal information exchange.[5] This is a controversial change to the Commission’s policy that will spark serious discussion, especially since it does not enhance the legal certainty that companies seek. Furthermore, the Commission seems to be creating a new hierarchy whereby in dual distribution relationships more importance is given to the qualification of conduct (e.g. information exchange) under the Horizontal Guidelines. The question is how this would work out in practice.

Moreover, Article 2(6) of the draft VBER stipulates that the exemption of the VBER does not apply to vertical agreements which, directly or indirectly, have as their object the restriction of competition between the competing supplier and distributor. As all competition lawyers know, analysing potential object restrictions can be quite burdensome. Hence, this provision – if included in the VBER – would create considerable legal uncertainty. Furthermore, this could be a seminal change in the system, because under the current version of the VBER there is no differentiation between object and effect restrictions and all object restrictions are covered by the exemption, at least if they do not qualify as hard-core restrictions.

Finally, another far-reaching exception to the dual distribution exemption is found in Article 2(7) of the draft VBER. It follows from this provision that the exemption does not apply to agreements with hybrid platforms. These are platforms, such as Amazon and Bol.com, that not only offer intermediary services, but also sell products and services in competition with the suppliers to which they offer their intermediary services. The Commission considers that the retail activities of such hybrid platforms give rise to significant horizontal risks.[6] Vertical agreements with such players should therefore (if the Commission has its way) always be assessed on an individual basis under Article 101 TFEU. This is a rather controversial decision that could have a chilling effect on the use of such business models, especially now that this form of distribution is growing and smaller hybrid platform are also being set up. It goes without saying that this change will face strong opposition in the consultation phase.

Exclusive and selective distribution

The distribution forms exclusive and selective distribution have been given a prominent place in the draft VBER and Guidelines. As indicated, the evaluation already showed that there was a need for more guidance on these forms of distribution.

In addition to the fact that the hardcore restrictions in Article 4 of the draft VBER are largely structured by form of distribution (more on this below), a number of things stand out in the draft VBER and Guidelines. First, the definition of “exclusive distribution” in Article 1(1)(g) of the draft VBER clarifies that this form of distribution does not necessarily involve a single distributor appointed for a particular territory or customer group. The situation where a limited number of distributors are appointed can also fall under this definition (so-called “shared exclusivity”). The draft Guidelines note in this respect that the number of distributors must be proportionate to the territory or customer group allocated to these distributors. [7]

The definition of selective distribution in the draft VBER has not been changed. In the Guidelines, however, more clarification is provided on the so-called Metro criteria, under which purely qualitative distribution systems are exempted from Article 101 TFEU. This is mainly in response to and based on the ruling of the European Court of Justice (ECJ) in Coty.[8] With reference to Coty, the Commission states, among other things, that a selective distribution system can be used for products of high-quality or of a high-tech nature and that the high quality can also result from the luxury image of the products concerned.[9] One way to look at this is that the Commission considers selective distribution to be permissible only for the distribution of luxury goods (or goods of a high-tech nature). However, in the draft Guidelines it is confirmed that qualitative and/or quantitative selective distribution systems that do not satisfy the Metro criteria (thus regardless of the nature of the products concerned) still fall under the exemption of the VBER if the 30% market share threshold is not exceeded. Therefore, we do not see a change of the Commission’s policy in the aforementioned considerations on the application of the Metro criteria.[10]

Finally, we note that in the draft VBER the Commission allows for the coexistence of selective distribution and exclusive or regular/free (i.e. not selective or exclusive) distribution systems. It follows from Article 4(b) and (d) of the draft VBER that exclusive and regular distributors may be prohibited from selling the contract products to unauthorised distributors in territories where those products are subject to a selective distribution system. By doing so, the Commission allows suppliers to protect their selective distribution system in certain territories (countries or regions) against sales to unauthorised distributors by outside distributors.

Hardcore restrictions

Article 4 of the draft VBER (which contains the hardcore restrictions) is structured differently from Article 4 of the current VBER. Whereas the current Article 4 is structured according to the type of restriction, the provisions concerning customer and territory restrictions in the new Article 4 are structured according to the various forms of distribution. In our opinion, this makes the new Article more well-defined than the current Article.

Resale price maintenance (RPM)

Unsurprisingly, RPM is still included as a hardcore restriction in Article 4(a) of the draft VBER. What is new, is that the Commission clarifies that minimum advertising prices can also be considered RPM.[11] The Commission also clarifies that (i) price monitoring and (ii) RPM in genuine fulfilment contracts between a supplier and a distributor where the end user has waived its rights to choose the undertaking that should execute the agreement, do not constitute RPM.[12]

As expected, the Commission does not opt for the removal of RPM from the list of hardcore restrictions, despite the fact that it recognises that RPM, especially when supplier-driven, can lead to efficiencies.[13] For this reason, the Commission has included three examples of situations in which the individual exemption of Article 101(3) TFEU can be successfully invoked. Finally, it is worth noting that the Commission considers that the prohibition on RPM also applies to platforms and other providers of online intermediary services. They are therefore not allowed to dictate a fixed or minimum price for the transaction they facilitate. [14]

Customer and territory restrictions

The provisions on customer and territory restrictions (Article 4, sub (b) to (d)) are, as already indicated, classified according to form of distribution in the draft VBER. In this way, for each of exclusive, selective and regular/free distribution it is explained which exceptions apply to the general principle that distributors may not be restricted in active and passive selling to certain customer groups or in certain territories. We note that these exceptions do not contain any real changes compared with the current VBER, except for the previously mentioned explicit possibility for suppliers to protect their selective distribution system against sales to unauthorised distributors by distributors from outside the selective distribution system.

Online sales

It was inevitable that the draft Guidelines would provide more guidance on online sales and the conditions and restrictions that can be imposed on them. Of course, the draft VBER and Guidelines still stipulate that distributors are free to sell online and restrictions that prohibit or unduly restrict the use of the Internet are therefore regarded as a restriction on active or passive selling within the meaning of Article 4 (b) to (d) of the draft VBER.[15]

However, the draft Guidelines make it explicitly clear that suppliers may impose quality requirements on the use of online sales and online advertising, regardless of the form of distribution used.[16] The same applies to restrictions on the use of certain online sales channels (such as marketplaces), as long as these do not entail a prohibition on the (effective) use of the Internet. In this respect the Commission inter alia makes a notable distinction based on the usage by the public of search engines. Prohibitions on the use of all most widely used advertising services (in the respective online advertising channel) could amount to a prevention of passive sales, which as a consequence could make it problematic for suppliers to impose AdWord restrictions on the use of Google, but not on the use of Bing. As a side-effect, this may further cement the dominant position of Google. Compared to the current Guidelines, the draft Guidelines also provide more guidance on the imposition of conditions on online sales by distributors.[17]

Another relevant development is that in the draft Guidelines, so-called dual pricing is not qualified as a per se restriction of online sales, as it is in the current Guidelines. This means that suppliers may apply a price difference between products intended for online sales and products intended for offline sales, as long as this difference is related to the investments that the distributor has to make for the different distribution channels. The Commission thus recognises that the emergence of online distribution must allow for the physical distribution channel to be protected in order to ensure that distributors continue to invest in physical shops. Naturally, dual pricing must not have the objective of hindering online sales.[18]

Finally, in the draft Guidelines, the Commission extensively discusses the distinction between active and passive sales, especially when it comes to online sales. Interesting in that respect is that offering different language options (except for English) on a website and using different domain extensions (.nl, .de, . fr etc.) are usually considered a form of active selling. [19]

Online marketplaces

Obviously, the Commission could not avoid including the ECJ’s considerations in Coty regarding online marketplaces in the new VBER. The draft Guidelines therefore confirm that a prohibition or restriction on the use of online marketplaces is not a hardcore restriction and is exempted under the VBER. [20]

Cases in which the 30% market share threshold is exceeded, will have to be assessed on a case-by-case basis under Article 101 TFEU.

Price comparison sites

Another much anticipated subject of discussion in this new draft VBER and Guidelines is the use of price comparison sites by distributors. Not to our surprise, the Commission considers that price comparison sites – unlike online marketplaces – are not a sales channel, but rather an advertising channel.[21] It follows from the draft VBER and Guidelines that a ban on the use of price comparison sites would constitute a hardcore restriction. An exception has been made however for the situation when the use of price comparison sites can be regarded as active sales which may be prevented to protect a system of exclusive distribution.[22] The imposition of certain quality requirements on price comparison sites also falls within the exemption of the VBER.[23]

Most Favoured Nation clauses

Under the current VBER, both broad and narrow Most Favoured Nation (MFN) clauses still fall under the exemption. However, in the draft VBER this exemption for so-called “broad” MFN clauses will come to an end (Article 5(1)(d) of the draft VBER). Broad MFN clauses are clauses whereby an online platform prohibits a contracting party from offering goods or services through other online platforms at a lower price or better conditions. On the other hand, so-called “narrow” MFN clauses would still fall within the scope of the draft VBER (obviously only if the other conditions for the application of the VBER are met). These are clauses by which an online platform prohibits a contracting party to offer goods or services via its own website at a lower price or better conditions. However, we believe that the Commission’s conclusion and explanation that that broad MFN clauses are likely to lead to negative effects on competition is ill-founded or at least unsubstantiated, especially in light of the recent Budapest Banks judgment of the ECJ.[24] This judgment teaches us, among other things, that agreements that may also generate positive effects on competition should not be superficially or easily qualified as a restriction of competition by object.

Conclusion

The draft VBER and Guidelines paint a good and colourful picture of the (preliminary) choices the Commission has made with regard to the assessment of vertical agreements under Article 101 TFEU. With these drafts, the Commission has not embarked on a completely different course and there are no radical policy changes in these documents. On a number of points, such as online sales and exclusive and selective distribution, the draft VBER and Guidelines offer more guidance than the current versions. This was badly needed and therefore unavoidable. However, we also see a few points, such as dual distribution, where the draft VBER and Guidelines could lead to legal uncertainty.

It is important to stress again that the draft VBER and Guidelines may still be changed. First of all, these drafts are now available for public consultation until 17 September 2021. Subsequently, the final new VBER and Guidelines will be adopted next year.

[1] Draft Guidelines, point 31, under (a).
[2] Draft Guidelines, point 33.
[3] Draft Guidelines, points 34 – 38.
[4] Draft Guidelines, point 58.
[5] Article 2(5) of the draft VBER.
[6] Draft Guidelines, point 91.
[7] Draft Guidelines, point 102.
[8] ECJ judgment, Case C-230/16, Coty Germany GmbH v Parfumerie Akzente GmbH, EU:C:2017:941.
[9]  Draft Guidelines, point 134.
[10] Draft Guidelines, point 136.
[11] Draft Guidelines, point 174.
[12] Draft Guidelines, points 176 and 178.
[13] Draft Guidelines, point 182.
[14] Draft Guidelines, point 179.
[15] Draft Guidelines, point 188.
[16] Draft Guidelines, points 193 and 196.
[17] Draft Guidelines, point 194.
[18] Draft Guidelines, point 195.
[19] Draft Guidelines, point199.
[20] Draft Guidelines, points 316 and 317.
[21] Draft Guidelines, point 324.
[22] Draft Guidelines, point 327.
[23] Draft Guidelines, point 328.
[24] See CJEU 2 April 2020, Case C-228/18, ECLI:EU:C:2020:265 (Gazdasági Versenyhivatal v Budapest Bank Nyrt. and Others)