The European Commission (Commission) is reviewing the Block Exemption Regulation for Vertical Agreements (VBER), which expires on 31 May 2010 The VBER provides the legal framework regulating vertical relationships. Under certain conditions, the VBER provides for a safe harbor or an automatic exemption for agreements between suppliers and distributors. The VBER also lists a number of so-called “black clauses” that, if included in a vertical agreement, can cause the loss of the automatic exemption benefit.
On 28 July 2009, the Commission launched a public consultation on a draft proposal for a new regulation (Draft Regulation) and its interpretive guidelines (Draft Guidelines) on vertical agreements.
According to the Commission the proposed regime does not intend to significantly alter the current regulation; rather, the Commission intends to update the legislation to reflect the most recent market developments. In particular, the draft amendments intend to address the evolution of Internet-based sales.
Of particular interest are the changes proposed in relation to the interaction between selective distribution and online commerce. This article summarizes the proposals made in this regard and comments briefly on their implications.
What is New: Critical Review
Territoriality and Selective Distribution
Article 1(d) of the current VBER defines selective distribution system as "a distribution system where the supplier undertakes to sell the contract goods or services, either directly or indirectly, only to distributors selected on the basis of specified criteria and where these distributors undertake not to sell such goods or services to unauthorised distributors." Article 1(1)(c) of the Draft Regulation does not change the definition.
Further, as currently stands, Article 4(b) third indent allows suppliers to restrict an appointed distributor in a selective distribution system from selling (actively or passively) at any level of trade to unauthorised distributors. However, the Draft Regulation adds that the exemption would apply if and when applied to selective distributors "in markets where such system is operated."
The novelty resides precisely in this last phrase. The questions are inevitable. What does it mean? What type of situations is meant to regulate? The answers are unclear.
First, the precise meaning of the phrase is quite obscure and could give rise to a number of different interpretations. On the one hand, the amendment could be interpreted as applying to situations where suppliers apply different distribution systems in various markets (presumably in antitrust markets). On the other hand, a literal reading of the amendment could suggest a different situation, whereby any sales made by authorized dealers to non-authorized distributors outside the markets where the selective distribution is operated would be presumed to be legitimate. Clearly, both interpretations could not be reconciled.
Second, read literally, the amendment would contradict the definition of selective distribution of Article 1(d) (Article 1(1)(c) of the Draft Regulation) as a network where sales can only take place among authorized dealers and between those dealers and end-consumers, which remains unchanged.
Finally, the amendment adds complexity, by requiring suppliers to define antitrust markets, and legal uncertainty. Both complexity and uncertainty are unwelcomed guests in the days of self-evaluation and online commerce. The Commission has thus generated a new grey area, which fertilizes the ground for more litigation.
Thus, it is clear that this amendment is a clear example of the Commission’s having missed the opportunity to introduce a clearer and more simple regulation of vertical agreements.
Favouring Online Commerce?
While maintaining the distinction between active and passive sales , arguably of obsolete and difficult application in the online world, in the Draft Guidelines, the Commission proposes to consider hardcore restrictions and therefore, to presume illegal as an infringement of Article 81(1) EC Treaty the following:
Paragraph (52) [...]
- requiring a (exclusive) distributor to prevent customers located in another (exclusive) territory from viewing its website or requiring the distributor to put on its website automatic re-routing of customers to the manufacturer's or other (exclusive) distributors' websites;
- requiring a (exclusive) distributor to terminate consumers' transactions over the internet once their credit card reveals an address that is not within the distributor's (exclusive) territory;
- requiring a distributor to limit the proportion of overall sales made over the Internet;29
- 29 This does not exclude the supplier requiring, without limiting the online sales of the distributor, that the buyer sells at least a certain absolute amount (in value or volume) of the products off-line to ensure an efficient operation of its brick and mortar shop, nor does it preclude the supplier from making sure that the online activity of the distributor remains consistent with the supplier's distribution model (see paragraphs 54 and 57). This absolute amount of required off-line sales can be the same for all buyers, or determined individually for each buyer on the basis of objective criteria, such as the buyer's size in the network or its geographic location.
- requiring a distributor to pay a higher price for products intended to be resold by the distributor online than for products intended to be resold off-line.30
- 30 This does not exclude the supplier offering the buyer a fixed fee to support its off-line or online sales efforts.
The debate on Internet commerce and certain distribution means was first opened by eBay's Call for Action, where certain restrictions to Internet commerce were considered to amount to barriers to the common market. To steer up the debate, Commissioner for Competition, Ms. Neelie Kroes, organized a roundtable on online commerce and published a consultation under the title "Opportunities in Online Goods and Services: Issues Paper."
The various contributions submitted to the Issue Paper demonstrate that the heart of the debate is enterprise freedom and consumer choice. In simple terms, the online champions (and the supporting platforms) argue that the Internet promotes consumer choice in terms of wider product range, lower prices, and 24/7 service, and that online window shopping exists as a matter of fact. Those advocating for selective distribution and the right to decide who can be a member of the network, claim that their products necessitate selective distribution and that online shops cannot always be right for all products, and that online retailing of such products necessitate that online shops guarantee compliance with a number of qualitative conditions for the sake of brand protection and customer care.
The preliminary result of the debate, as reproduced in paragraph 52 of the Draft Guidelines, suggest that online commerce may be being treated more favourably than traditional means of trade. The reason being that a number of practices are prohibited and therefore, presumed illegal, without explicit reasoning and without the support of empirical evidence. For a critical review, we analyse some of those provisions:
The first of the new presumptions of illegality affects restrictions to web rerouting. The prohibition of web re-routing prompts some questions. One of the main issues is that the Commission does not allow to exempt the practice under objective justifications. While objective justifications are not considered, there are a number of technical, commercial and even legal justifications for web rerouting practices. In particular, from a legal perspective, web re-routing may serve to address issues concerning disparate legislative systems (consumer protection, product liability, data protection, etc.) and trading conditions, as well as to minimize free-riding risks and to provide for adequate liability structures.
Limiting the Proportion of Offline and Online Sales
Under the new Draft Guidelines, any requirement imposed on a distributor to limit the proportion of overall sales made over the Internet would be presumed illegal. Simply put, suppliers would be banned from imposing resale restrictions over the Internet. Traditionally, the ability for suppliers to impose resale restrictions has been one of the major tools used to prevent free-riding issues. Hence, the new regime would prevent suppliers to regulate the risk of Internet free riding.
Moreover, the Commission also would presume illegal any suppliers' requirement obliging online distributors to pay a higher price for the products than those distributors with physical outlets.
This restriction steps directly into the unresolved issue of price discrimination. Price discrimination can be the result of multiple variables and in particular simply reflect different national market conditions (e.g., different costs structures, tax regimes, divergent national rules on consumer protection and product liability, specific responses to customer service, culture, taste and preferences, etc.). Arguably, restriction of competition is not the objective of the practice.
The new amendments would thus ban as hardcore restrictions, restraints to Internet commerce, even in the context of selective distribution, and would reverse the burden of proof under Article 81(3) EC Treaty to suppliers.
However, the development of online commerce is at the heart of a series of amendments proposed by the Commission as soft law, which has created much controversy. For some, the proposed regulation shifts the balance toward a more favoured treatment of Internet retailers (and intermediary auction platforms) and prevents suppliers from protecting their brick and mortar selective distributors from free-riding behaviours. Online traders claim that in the name of consumer choice no restrictions can be imposed to online commerce. Their positions seem difficult to reconcile.
A critical review of the proposed amendments poses a number of questions. First, although the Commission may have well-founded reasons and empirical evidence to support such new presumptions of illegal practices, the proposed drafts do not provide any reasoning.
Second, the consideration of certain practices (as per paragraph 52 of the Draft Guidelines) as hardcore restrictions of passive sales without at least room for objective justification have stern legal consequences. As stated in paragraph 47 of the Draft Guidelines: "Including such a hardcore restriction in an agreement gives rise to the presumption that the agreement falls within Article 81(1). It also gives rise to the presumption that the agreement is unlikely to fulfil the conditions of Article 81(3), for which reason the block exemption does not apply."
Finally, far from the touted objectives of better regulation and simplification, some of the amendments are purported to boost legal uncertainty and as a result, increase the risk of litigation in a market where a large proportion of the players are small businesses.