The European Commission has published the new Vertical Block Exemption Regulation and the accompanying Vertical Guidelines on 10 May 2022, both of which introduce many changes to the existing regime. We will share a series of alerts, each 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”) will expire end of May 2022. The European Commission (’Commission’) has just published the revised VBER as well as the revised accompanying guidelines (‘Guidelines’) which will enter into force on 1 June 20221. The Commission 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 resellers though there remain still open questions, and in some instances the changes may lead to stricter rules. The Commission grants a transition period to any agreements that are in place before 1 June 2022, however, such agreements need to be compliant with the new rules by end of May 2023.
The new VBER and Guidelines provide clarity on the scope of exempted online sales restrictions such as marketplace bans and include detailed guidance assessing such restrictions.
What is the issue?
Online sales are, more than ever, an important channel for many brand owners, wholesalers and resellers. Most market players follow a multi-channel approach, which requires the online environment to fit into the overall look and feel of the distribution of goods and services. In addition, the online environment functions as a material advertising outlet – either via reseller’s online shops or via marketplaces.
While the online environment creates ample opportunities, it is important that brand owners can influence the way their products are sold online, and at the same time, resellers need to be protected from restrictions that limit the efficient use of the online channel. The current VBER and its Guidelines do not offer extensive guidance on the legal framework of online sales. National authorities and courts have therefore interpreted the legal framework with wide discretion, which has led to contradictory and inconsistent enforcement practice. Consistent clarity on the rules was consequently very much needed.
What are the risks?
Given the current lack of clarity, brand owners are reluctant to impose satisfying online criteria, and at the same time resellers were not able to forcefully push back on restrictions that limit online sales significantly. For instance, in relation to the prohibition of marketplace sales, while the European Court of Justice (“ECJ”) has ruled in the Coty judgment (C-230/16 - Coty Germany, 6 December 2017) that it is permissible to restrict resellers’ sales via marketplaces, the German Competition Authority (Bundeskartellamt) has claimed that the Coty judgment can only apply to selective distribution systems implemented for the distribution of luxury goods.
The existing VBER does not mention online sales explicitly. There is high-level guidance on the legal assessment of online sales restrictions in the existing Guidelines. The main principle under the VBER is that the prohibition of online sales is a hardcore restriction of competition as it is a passive sales restriction. Any practice that leads to a de facto ban of online sales is considered a hardcore restriction. However, under specific circumstances online sales restrictions can be block exempted by the VBER if they restrict active sales only (and not also passive sales), e.g. where a distributor is prohibited to actively advertise in a certain territory. The existing Guidelines have introduced the so-called “logo clause” as an example for legitimate qualitative criteria: the supplier may require certain quality standards for the online shop, or may require that customers do not visit the distributor’s website through a third-party site carrying the name or logo of that third-party.
The New VBER
In the new VBER, the Commission has added a new category of defined hardcore restrictions with regard to online sales restrictions. The prevention of the effective use of the internet by the buyer or its customers to sell the contract goods is considered to be a hardcore restriction. A permissible exemption to this hardcore restriction are other restrictions of online sales or restrictions of online advertising that do not prevent the use of an entire online advertising channel. In short, resellers must not be banned from using the internet as a sales or advertising channel. But, not every restriction amounts to a ban and therefore a hardcore restriction. Arguably, the hardcore restriction as defined by the new VBER leaves room for interpretation given the use of the word “effective” and therefore creates legal uncertainty. It will be decisive how authorities and courts will in practice interpret the effective use of the internet. Helpfully, the Commission has provided a number of examples of prohibited and permissible online restrictions in the new Guidelines.
The new Guidelines include detailed guidance and examples for qualitative online restrictions that benefit from the block exemption. Particularly noteworthy are the following examples reflecting recent case law:
- The possibility to ban sales on online marketplaces:
The prohibition on selling via marketplaces is a qualitative online restriction and can be imposed regardless of the distribution system operated. It is not required that the supplier operates a selective distribution system in order to impose qualitative online criteria. Under certain circumstances2, qualitative online restriction (including the ban of marketplaces) may not be considered as a restriction of competition law, and therefore, regardless of market shares, the restriction is permissible. If market shares of both the supplier and the reseller are below 30%, the prohibition to sell via a marketplace is block exempted. However, the Commission stresses that online sales restrictions are only permissible if the restriction has not the object to prevent the effective use of the internet. While this caveat opens again room for interpretation, the Commission at least adds that the block exemption should not be at danger if the reseller remains free to sell via its own online store and to advertise online.
The Commission also provides guidance for the case-by-case assessment of online restrictions, where the block exemption is not available to the parties of an agreement, for instance, because the market shares exceed the safe harbour.
Interestingly, the Commission states that where the block exemption is not available, the supplier cannot discriminate resellers in relation to marketplace sales: if the supplier has accepted such marketplace as part of the distribution network, the supplier has to allow sales via such marketplace by the resellers. One could draw the conclusion that where market shares are below 30% such discrimination is block exempted, which would be in line with the requirements developed by the ECJ.
- The possibility to set different online and offline prices for distributors or resellers:
What was previously considered to be a hardcore restriction, is now acceptable under the new regime to the extent that the different prices aim at incentivising or regarding a certain level of investment made online and offline and reflect the costs incurred. This shift in the Commission’s view of limiting dual pricing will provide suppliers and distributors, which were previously concerned about free riding issues and the inability to recoup costs incurred for maintaining a brick and mortar store, with more flexibility. The Commission helpfully suggests how to implement such different pricing in practice: for example by ex post balancing of accounts on the basis of actual sales.
- Clarification of restrictions such as prohibiting online advertisement including the use of price comparison tools and online search engines:
The new Guidelines state that price comparison tools are not considered to be an online sales channel, as they merely re-direct customers to certain online shops rather than offering a sale and purchase function. Price comparison tools are considered as an online advertising channel. As such, a total ban cannot be seen as a qualitative criterion in view of how products are sold, and is therefore a hardcore restriction to ban all price comparison machines. Similarly, any other direct or indirect prohibition to use an entire online advertising channel, such as search engines, or the obligation not to use the supplier’s trademarks or brand names for bidding, is considered as hardcore restriction.
However, a selective prohibition, i.e. not to use a specific price comparison machine or a specific search engine could be permissible (unless those are the most popular ones which are mainly used by end-customers and the resellers online store cannot attract customers without their use). Further, it is permissible to require that online advertising meets certain quality standards or includes specific content or information or that the brand name is not used in the domain name of the reseller.
- Elimination of the equivalence requirement for qualitative online criteria:
Under the existing VBER, qualitative criteria applying to the online environment are required to be equivalent to the criteria imposed in the physical brick and mortar environment. The new Guidelines clarify that criteria for online and offline may not be equivalent given that each channel as specific characteristics. This is helpful, as often criteria that are important in one of the channels, cannot be transferred into the other respective channel.
Practical consequences & recommendations
Although the new VBER and Guidelines provide more flexibility and legal safety in relation to some questions, they still leave some room for uncertainty and in particular the new online hardcore restriction can be interpreted differently by national enforcers and courts.
The Guidelines are “soft law”, and therefore, national authorities and courts could take a stricter stance than the views expressed by the Commission. The German Bundeskartellamt has indicated in its submission to the Commission that the revised guidance for online restrictions provides brand owners with too much flexibility, and the authority emphasized that it welcomes the general statement that practices preventing the effective use of the internet are considered hardcore restrictions.
Subject to that caveat, the new Guidelines offer some very helpful and practical examples on how distribution agreements can be shaped, and therefore, brand owners have the opportunity to revise online sales criteria in a way to make most efficient and brand enhancing use of the online environment.
If you would like any further information, please do not hesitate to get in touch.
2 This is the case if it meets the „Metro“ criteria: i.e. (1) it is appropriate, (2) does not go beyond the necessary to preserve the quality and ensure the proper use of the contract goods or services, and (3) is applied in a coherent and non-discriminatory manner.