European Commission adopts new Vertical Block Exemption Regulation and guidelines

On 10 May 2022, the European Commission adopted the new Vertical Block Exemption Regulation (VBER) accompanied by new Vertical Guidelines, reviewing the 2010 VBER and Vertical Guidelines that will expire on 31 May 2022. (See press release)

The VBER exempts agreements between companies that are active at different levels of the production or distribution chain (for example, manufacturers and distributors of a certain product), subject to conditions, from the prohibition laid out in Article 101(1) of the Treaty on the Functioning of the European Union (TFEU). The VBER thus provides for a “safe harbour”, exempting in block agreements that meet certain conditions. The Vertical Guidelines provide guidance on how to interpret and apply the VBER and how to assess vertical agreements falling outside the safe harbour of the VBER.

Background on the review process

The new VBER and Vertical Guidelines are based on evidence gathered by the European Commission, including the responses to the public consultations launched in July 2021 and February 2022 concerning the draft revised VBER and Guidelines texts and information exchange in the context of dual distribution, respectively.

These consultations followed the publication of a Staff Working Document in September 2020, setting out the results of the evaluation of the 2010 VBER and Vertical Guidelines.

The main changes in the revised rules derive from two objectives. The first, to re-adjust the safe harbour offered by the VBER, and the second, to provide stakeholders with up-to-date rules and guidance, taking into account in particular the growth of online sales and the emergence of online platforms.

Safe harbour

Experience has shown that the 2010 VBER does not grant the safe harbour of an exemption for certain practices that would warrant exemption (false negatives) and, conversely, it exempts certain practices for which the European Commission realised that a block exemption is not warranted (false positives). To that end, the European Commission has introduced the following main changes:

Elimination of false positives: this refers to vertical agreements and restrictions that are covered by the safe harbour of the block exemption but for which it cannot be assumed with sufficient certainty that they are generally on balance efficiency-enhancing and, thus, fulfil the conditions of the exception provided by Article 101(3) of the TFEU. These include:

• Dual distribution: This is when a supplier sells its goods or services at an upstream level (that is, as manufacturer, importer or wholesaler) to independent distributors and also at a downstream level (as an importer, wholesaler or retailer) thereby competing with its independent distributors at the downstream level (for example, clothes suppliers selling their garments through other clothes shops as well as directly through their own shops).
  
  
  
  The exchange of information in dual distribution systems is only block-exempted if it is directly related to the implementation of the vertical agreement and  is necessary to improve the production or distribution of the contract goods or services. Otherwise, it must instead be assessed individually under Article 101(3) TFEU and the guidance for the horizontal exchange of information between competitors.
  
  
  
  If one of the conditions of the new VBER is not, or is uncertain to be, fulfilled and therefore the exchange of information cannot benefit from the block exemption, companies will want to take further precautionary measures (such as firewalls, ringfencing measures) to minimise the competition law risks. 
  
  
  
  The new rules have dropped the proposal to limit the safe harbour to dual distribution systems at the retail level and the exchange of information in dual distribution systems where the aggregated market share of the parties at the retail level is below 10%. (This had been proposed in the draft VBER and Vertical Guidelines published on 9 July 2021.)
• Parity obligations: These are obligations that require companies to offer the same or better conditions to their counter-party as those offered on other third-party sales/marketing channels, such as other platforms and/or the company’s direct sales channels. These are the types of clauses used most often by hotel booking websites.
  
  
  
  Pursuant to the new rules, retail parity clauses imposed by suppliers of online intermediation services relating to the conditions offered via competing online intermediation services are no longer block-exempted. Such “cross-platform retail parity obligations” must now be assessed individually under Article 101(3) TFEU.

Reduction of false negatives: This refers to vertical agreements and restrictions that are not block-exempted but for which it can be assumed with sufficient certainty that they generally fulfil the conditions of Article 101(3) TFEU:

Active sales restrictions: These impose limitations of the buyer's ability to actively approach individual customers. The new VBER:

• provides a definition of active sales restrictions (including operating a website with a top-level domain corresponding to particular territories, or offering languages on a website that are not commonly used in particular territories); 
• allows suppliers to appoint up to a maximum of five distributors per exclusive territory or customer group;
• allows suppliers to reserve a particular territory and/or customer group for itself, which the supplier is not required to supply (in)to;
• allows suppliers to pass on to their distributors restrictions of active sales to their immediate customers only;
• suppliers can now prohibit buyers and their customers from selling to unauthorised distributors located in a territory where the supplier operates a selective distribution system, regardless of whether those buyers and customers are themselves located inside or outside that territory.

Restrictions of online sales:

• suppliers may now charge the same distributor a higher wholesale price for products intended to be sold online than for products to be sold “offline” in brick-and-mortar shops (so-called “dual-pricing”). The block exemption of dual pricing is subject to certain safeguards: the price difference (i) must be reasonably related to differences in costs or investments between the online and offline sales channels and incentivise or reward an appropriate level of investment in online or offline sales channels, and (ii) should not have the object of restricting cross-border sales or of preventing the effective use of the internet by the buyer.
• the criteria imposed by suppliers in relation to online sales no longer have to be overall equivalent to those imposed on brick-and-mortar shops. However, these specific criteria should not have the object of preventing the effective use of the internet.

Updating rules and guidance

In line with the second objective of providing stakeholders with up-to-date rules and guidance, taking into account in particular the growth of online sales and the emergence of online platforms, the VBER rules have been updated as regards the assessment of, among others areas:

• online sales restrictions, which are now inherently illegal when they, directly or indirectly, have the object of preventing buyers or customers from effectively using the internet to sell the contracted goods or services.
• vertical agreements in the platform economy: the new VBER clarifies the nature of providers of online inter mediation services, which now explicitly qualify as suppliers, and provides a definition of online intermediation services.

Vertical agreements relating to the provision of online intermediation services by platforms where the online platform has a hybrid function, that is where the online platform also sells goods or services in competition with the company to which it provides intermediation services, can no longer be block-exempted but must be assessed individually under Article 101(3) TFEU.

In addition, the Vertical Guidelines provide detailed guidance on a number of topics, such as sustainability objectives of agreements, selective and exclusive distribution and agency agreements.

Applicability of the rules

The revised VBER and Vertical Guidelines will enter into force on 1 June 2022.

However, for agreements already in force on 31 May 2022 which do not satisfy the conditions for exemption provided for in the new VBER but which, on 31 May 2022, satisfied the conditions for exemption provided for in the 2010 VBER, a transitional period of one year will apply (that is, until 31 May 2023).

Osborne Clarke comment

Companies operating in the EU will have to take these new rules into account in their day-to-day business immediately.

Although agreements which are already in force on 31 May 2022 (and which benefit from the exemption provided for in the 2010 VBER) can benefit from the short transitional period, such agreements will nevertheless have to be brought in line with the new VBER rules by 31 May 2023.

This transitional period, however, does not apply to agreements concluded after 31 May 2022, which will have to comply with the new rules from 1 June 2022 in order to benefit from the block exemption.

If you would be interested in learning more about these changes and how they may affect your business, please get in touch with one of our experts listed  below, or your usual Osborne Clarke contact.