As the EU Commission’s review of the Vertical Block Exemption Regulation draws to a close, we will share a series of alerts dedicated to a specific area of change and the main business sector affected by the upcoming rules, focusing on potential practical consequences for companies.
The main legal framework in the European Union governing distribution agreements (Vertical Block Exemption Regulation “VBER”) expires end of May 2022. The European Commission (“EC”) has published the revised draft VBER as well as a revised draft of its accompanying guidelines (“Guidelines”) in July 20211. The EC has suggested significant changes in the revised version of the VBER and its Guidelines. Some of the changes can offer more flexibility to suppliers/brand owners and retailers, but in some instances the changes may lead to stricter rules. The EC grants a transition period to any agreements which are in place before 01 June 2022 (when the new rules enter into force), however, such agreements need to be compliant with the new rules by end of May 2023.
Under the revised version of the VBER and Guidelines, distribution agreements concluded between suppliers and so-called “hybrid platforms” would in future be excluded from the scope of the exemption.
What is the issue?
The draft VBER acknowledges that the online platform economy has enabled new ways of doing business, some of which are not easy to categorize using the concepts traditionally associated with vertical relationships.
Hybrid platforms are B2B or B2C platforms operating in parallel under two different business models:
- -on the one hand these platforms purchase and resell goods, acting as independent resellers and,
- -on the other hand, they provide the same or some other suppliers with online intermediation services facilitating direct transactions between these suppliers and customers.
Many pure player platforms have been created using the intermediation model, but there are also platforms where the two approaches (i.e. acting as both reseller and intermediary) have been combined from the outset. Recently, a number of “click and mortar” retailers offering their products online have developed marketplaces selling their own products as well as granting access to other suppliers.
What are the risks?
Issues may first arise on the advantages that hybrid platforms have from acting in a dual role both as distributors/resellers and as online intermediation service providers vis-à-vis third party suppliers, where access to information on platform user sales (volumes, customer information etc.) may be used for the platform’s own strategic behavior and/or to favor the platform’s own offer2. Ultimately, two parallel business models may also lead to horizontal coordination, and possibly reduce price competition with third party suppliers.
Some have also suggested to reconsider whether and to what extent competition rules should apply at all to the intermediation model. Indeed, contracts are generally based on the agency or commissioner model, which means that the supplier sets the price and other trading terms vis-à-vis the end-customer. Such a role does not create a risk of resale price maintenance if the agreement is a genuine agency agreement (meaning that the agent does not bear any, or only insignificant, risks) because Article 101 TFEU does not apply in the relationship between a supplier and its genuine agent. However, the inapplicability of competition rules results from the fact that a genuine agent cannot be considered as autonomous from its principal, whereas online platforms sometimes enjoy very significant bargaining power towards suppliers.
Distribution agreements between hybrid platforms and their suppliers can benefit from the block exemption and are protected from challenge under Article 101 TFEU if they fulfil the conditions laid down in the VBER. Indeed, a supplier selling directly to customers in addition to distributing through its independent network (so-called “dual distribution” - see our previous alert on dual distribution3) still enjoys the safe harbor created by the existing VBER. It is only where the two parties also compete at the level of production that their distribution agreement falls outside the scope of the VBER.
In addition, the intermediation relationship between a supplier and a hybrid platform benefits from agency rules if the hybrid platform is a genuine agent as defined above (an agent not bearing any, or only insignificant, risks in relation to the contracts concluded on behalf of the principal), and the existing provisions do not question the specific situation of intermediaries acting both as an agent and as a distributor.
The New VBER
Under the proposed new approach, hybrid platforms will be considered as “suppliers” within the meaning of the VBER, which produces two main consequences.
- First, distribution agreements concluded by hybrid platforms with suppliers fall outside of the safe harbour of the revised VBER and need to be assessed on a case-by-case basis under Article 101 (3) TFEU.
This is in line with the overall new approach to reduce the scope of the revised VBER safe harbor in relation to dual distribution situations (where there is a vertical and a horizontal relationship between the parties to the agreement, see our previous alert on dual distribution4). However, the new rules go further in the sense that (i) the relationships with any hybrid platform are excluded without any minimum market share threshold and (ii) the exemption is excluded as a whole, whereas only information exchanges are carved out of the exemption in the dual distribution scenario.
- Second, the revised Guidelines express doubts on the ability of parties to rely on agency rules for intermediation agreements with hybrid platforms.
The revised Guidelines stress that because hybrid platforms are categorized as suppliers, they therefore cannot qualify “in principle” as agents for the purpose of applying Article 101 TFEU5 and add a number of other elements for assessment, such as the independence and bargaining power they generally enjoy and the significant market-specific investments they typically make, which may reduce further the chances to qualify as agents.
This is consistent with the stricter approach proposed in relation to distributors that also act as agents for certain products of the same supplier6. The EC is aware that the various agency models are being used to a wide extent by suppliers and intermediaries to combine the ability of suppliers to freely set and adapt consumer prices using the marketing force developed by some of these intermediaries.
Practical consequences & recommendations
Suppliers would be well advised to review their existing agreements with (hybrid) platforms and with retailers operating marketplaces in the light of the new provisions, as soon as they are published, in order to check that they still will benefit of safe harbors:
- Increased scrutiny can be expected from Competition authorities in relation to the use of agency agreements between suppliers and platforms: they will carefully monitor the development of what they perceive as a recent trend and are likely to take action if the artificial use of agency and/or its combination with distribution agreements raises competition concerns.
The new texts will notably refine the conditions under which a platform can genuinely be considered as an agent and this should be reviewed closely in existing contracts considering the resale price maintenance risk.
- Distributing through hybrid platforms (rather than non-hybrid ones) involves higher risks of falling outside of the exemption, noting that the inapplicability of the exemption does not mean that distribution agreements with hybrid platforms will necessarily be per se illegal but they require a case by case assessment of all potential restrictive effects.
With the ongoing revision of the Horizontal Guidelines7, the extent to which they could raise concern is however still very unclear, which is also recognized by the EC.
- Where a supplier uses the same platform both as a distributor and as an agent, the risk of falling outside the safe harbors is increased further and suppliers and retailers may likely no longer enjoy the minimum level of legal certainty to continue operating the two relationships in parallel.
The EC stressed that the guidance provided is based on its experience so far and it is still in the process of assessing the risks raised by platforms. It will continue to monitor things closely and is likely to amend the guidance further as investigations progress.
In the meantime, guidance to ensure compliance with the new regime remains limited. Hopefully, additional clarifications will be added in the final texts to be published shortly and in any event the transition period will be more than necessary to refine the best approach to existing contractual agreements.
If you would like any further information, please do not hesitate to get in touch.
2 The EC is presently investigating the use by Amazon of data obtained as a marketplace service provider on third-party sellers operating on its platform IP20/2077.
5 Draft Guidelines, para. 44.