Related People: Karl Hammarlund, Brussels
- The European Commission ("Commission") is reviewing the application of EU competition law to distribution, purchasing and other so-called 'vertical' agreements between parties at different levels in the supply chain. The current regime is due to expire in 2022.
- Distribution and other vertical agreements are amongst the most common forms of commercial arrangement to which EU competition law applies.
- The current regulatory regime provides such arrangements with a safe harbour from EU competition law, as long as they comply with the terms of the vertical block exemption regulation ("VBER") and its accompanying guidelines ("Vertical Guidelines"); this is of immense practical importance to businesses.
- The Commission's review, launched in 2018, began with an evaluation phase during which evidence on the functioning of the current VBER and the Vertical Guidelines was collected.
- Two key stages of the evaluation phase (a public consultation and an external evaluation support study) indicate that the Commission’s review will need to address new digital developments - in particular, online sales and online market platforms - as well as resale price maintenance ("RPM").
- This approach was recently reiterated in September 2020, when the Commission published a Staff Working Document evaluating the results of the evaluation phase: this confirmed that the Commission will not allow the current regime to lapse as it provides important legal certainty for businesses; however, it also acknowledged that certain rules may need to be updated to reflect the online environment better.
- The Commission will now launch an impact assessment phase which will consider the policy options for revision of the current rules.
- A public consultation will be held by the end of 2020 in relation to the impact assessment.
- The Commission’s draft text for a new VBER and Vertical Guidelines is expected in 2021 and will also be subject to public consultation.
The current VBER will expire on 31 May 2022. The VBER and the Vertical Guidelines are part of the EU legal framework that governs so-called 'vertical' agreements: these are entered into by companies at different levels of the supply chain and enable the parties to the agreement to secure a 'route to market' for goods and services. Vertical agreements form the cornerstone of EU distribution and purchasing arrangements and are among the most common commercial arrangements which need to comply with EU competition law. Accordingly, the VBER and the Vertical Guidelines have played a crucial role in providing businesses with an automatic antitrust clearance system for vertical arrangements, as long as these fall within the market share thresholds and comply with the other terms and guidance set out in the VBER and the Vertical Guidelines respectively.
The Commission is currently reviewing the VBER and the Vertical Guidelines to decide whether they are still fit for purpose, in the light of developments since the last revision in 2010.
The Commission's review started in late 2018 with an evaluation phase during which evidence was gathered on the functioning of the current VBER and Vertical Guidelines:
- At the end of 2018, the Commission undertook a high level roadmap evaluation of the VBER, in respect of which it received 24 responses.
- In Spring 2019, the Commission opened a public consultation in which it invited interested stakeholders to respond to an online questionnaire. The questionnaire sought views on the effectiveness, efficiency and relevance of the VBER / Vertical Guidelines. The Commission received 164 responses.
- In November 2019, the Commission organised a workshop evaluation of the VBER / Vertical Guidelines for stakeholders that had contributed to the public consultation.
- In May 2020, the Commission published an external evaluation support study, authored by a group of economic consultancies. The aim of the support study was to provide qualitative and quantitative evidence of the effectiveness, efficiency and relevance of the VBER / Vertical Guidelines.
- In September 2020, the Commission published a Staff Working Document containing a detailed analysis of the findings of the evaluation phase (but without committing the Commission to any formal position). The Staff Working Document confirmed that the current rules are still relevant but that the evaluation had identified a number of issues with regard to the functioning of the rules.
Looking forward, the VBER and the Vertical Guidelines will be subject to the following additional review stages:
- During Autumn 2020 the Commission will launch an impact assessment phase.
Stakeholders will be able to comment on the inception impact assessment which will provide a clearer insight into the direction of the Commission's review.
- Stakeholders will then be able to participate in a public consultation on the impact assessment phase (until the end of 2020).
- The Commission is expected to publish a revised draft text for the VBER and the Vertical Guidelines in the course of 2021. The Commission's proposals for a revised text will then be subject to further stakeholder consultation during 2021.
- Finally, the revised VBER and Vertical Guidelines must be adopted by 31 May 2022.
According to the public consultation in 2019, the VBER and the Vertical Guidelines have generally been found to enhance legal certainty in the area of distribution law (and other vertical arrangements) and to reduce the costs of competition law compliance. However, the 2019 consultation has also made clear that the current rules and guidance need to be updated to address commercial trends not present at the time of the adoption of the current regime in 2010, including the increasing importance of digital distribution models, in particular:
- online sales; and
- online market platforms.
The report of the support studies, published by the Commission on 26 May 2020, confirms the findings of the public consultation, in that the current rules fail to address sufficiently issues relating to online sales and online platforms. The report, which is over 700 pages long, additionally provides insight into the likely direction of the Commission's review of the VBER and the Vertical Guidelines.
In this regard, the report focuses on three key areas for change:
- Online sales restrictions: in the wake of the substantial growth of e-commerce, the report notes that consumer goods businesses increasingly impose online sales restrictions (such as internet sales bans, marketplace/platform sales bans, price comparison tool bans) in order to protect sales from distributors operating through physical outlets (so-called 'bricks and mortar' outlets). The results of the Commission's evaluation to date suggest that the review of the VBER (and guidelines) will clarify under what circumstances suppliers can impose online sales restrictions in their respective distribution arrangements, particularly given that these do not currently reflect recent decisional practice from the European courts.
- RPM: RPM refers to arrangements between suppliers and distributors establishing minimum or fixed prices at which the distributor must resell the goods. The report finds that the current RPM rules lack clarity and do not provide sufficient guidance on when RPM can be pro-competitive, and therefore acceptable from an antitrust perspective. The current VBER lists RPM as a so-called hardcore restriction, which in practice means that it amounts to a near automatic breach of antitrust law. The report refers to an econometric analysis of the impact of RPM on competition in the book sector, finding that RPM does not necessarily lead to higher prices or other anti-competitive effects in this sector (which exhibits distinct cultural features): indeed, this analysis lends support to the view that RPM can have pro-competitive effects (a point also supported by a review of the academic literature). RPM was a recurring issue raised by stakeholders during the 2019 public consultation: many responses criticised the current legal framework in the VBER and the Vertical Guidelines as overly rigid and outdated. Based on the evaluation phase, it is possible that the Commission will adopt a less rigid and more practical approach to RPM, more clearly recognising its potential pro-competitive effects.
- Most favoured nation clauses ("MFNs"): MFNs (also referred to as price parity clauses) broadly provide that a supplier/seller has to treat a customer as favourably as it treats its best customer. The report distinguishes between wholesale MFNs and retail MFNs. Wholesale MFNs are typically used by suppliers in price-driven markets where quality and reputational aspects play less important roles. The report notes that wholesale MFNs are typically present in 'mass markets' where goods are produced in large quantities and where MFNs allow retailers to avoid continuous price negotiations with manufacturers. These wholesale MFNs do not normally raise competition concerns according to the report. In contrast, retail MFNs - widely used by online platforms which impose price parity guarantees on suppliers selling on different platforms - may raise competition concerns. Such clauses may oblige the supplier to: i) charge prices on a certain platform no higher than those offered on its own website (so-called 'narrow' MFNs); or ii) charge prices on a certain platform no higher than those offered on any other online sales channel, including other platforms (so-called 'wide' MFNs). The report notes that retail MFNs have been subject to national antitrust scrutiny within the European Union, and that the national competition authorities' respective legal assessments of MFNs have varied materially across the EU Member States. This is particularly so in relation to MFNs in the hotel sector, where most EU national regulators have tended to consider narrow MFNs as less problematic than wide MFNs; however, certain other EU national regulators have considered that both wide and narrow MFNs could raise competition concerns. Given these divergent approaches at national level with the European Union, in combination with the lack of guidance on MFNs in the current VBER and Vertical Guidelines, the report suggests that the review should introduce new guidance on MFNs. The report also finds that the evidence collected in the support studies does not support general conclusions that MFN clauses are anti-competitive. The review of the academic literature in the report underlines the lack of consensus on whether wide and/or narrow MFNs raise competition concerns.
The Commission's Staff Working Document published in September 2020 further confirms the above (as well as other) themes, and expressly acknowledges that certain rules may need to be updated to address new market developments and provide greater legal certainty. For example, there is a perceived lack of clarity in relation to the circumstances under which RPM may result in efficiencies in the context of product launches and short-term price campaigns.
The Commission's evaluation of the VBER and the Vertical Guidelines strongly indicates that the Commission will not allow the current regime to lapse as it has been widely found to have contributed strongly to legal and business certainty in the area of distribution law and other vertical arrangements. However, the Commission's evaluation to date indicates that the current VBER and Vertical Guidelines do not sufficiently address important digital developments such as the rapid growth of online sales and the increased importance of online market platforms as a form of distribution. The Commission's impact assessment and public consultation questionnaire (expected by the end of 2020) will give a progressively clearer indication of the Commission's direction of travel, but it is anticipated that the above key themes will remain of central importance in ensuring that the regime remains fit for purpose.