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06-08-2022Article

Update Antitrust June 8, 2022

New Vertical Block Exemption Regulation and Vertical Guidelines: What remains the same, what will be changing?

Regulation (EU) 2022/720, the new “VBER,” entered into force on June 1, 2022. Its adoption was preceded by long and intensive consultations of the European Commission with companies, associations, and other stakeholders. The Vertical Block Exemption Regulation in force at any given time is the “basic law” governing the collaboration between manufacturers and distributors and between other suppliers and buyers. One thing is certain: The new Regulation and the new Vertical Guidelines that were published at the same time are set to shape the distribution landscape well into the 2030s.

The basic principle remains the same!

As previously, “vertical agreements” are exempt from the scope of application of the prohibition of cartels (“block exemption”), provided that

Double market share threshold of 30 percent
  • neither the supplier’s market share on its sales market nor the customer’s market share on its demand market exceeds the 30 percent threshold,
Hardcore restrictions 
  • no “hardcore restrictions” pursuant to Article 4 Vertical Block Exemption Regulation (in particular: restrictions to determine sales prices, restrictions of territories or customers in the resale of the goods or services) are agreed upon and 
"Grey” clauses
  • no “grey” clauses pursuant to Article 5 Vertical Block Exemption Regulation are included. While the inclusion of such clauses in the contract does not render the block exemption inapplicable as a whole, they cannot in themselves benefit from the block exemption (such as overly long periods of non-compete obligations). 

Dual distribution (Article 2(4))

As previously, however, companies that are in actual or potential competition with each other shall generally not benefit from the block exemption. In the event of “dual distribution”, however, in which the contracting parties compete at the downstream market level (such as distribution of the contract goods to end users), but not at the upstream market level (such as manufacture of the contract goods), the new Vertical Block Exemption Regulation – just like the previous Block Exemption Regulation – provides for an exception. Unlike in the past, however, such constellations will also be block exempted in the future in which no “manufacturers,” but companies at the various trade levels (importers, wholesalers, and retailers) are involved. On the other hand, the Commission excludes block exemption where a provider of online intermediation services competes with the users of its service for the sale of the intermediated goods or services, for example, where an online platform operator for shoes also offers shoes itself (Article 2(6)).

Exchange of information in dual distribution (Article 2(5))

In the end, however, the Commission only agreed to a narrowly defined exemption for the exchange of information between the parties to a dual distribution agreement. It only applies where the exchange of information directly relates to the implementation of the vertical agreement and where it is necessary to improve the production or distribution of the contract goods or services. It remains to be seen in practice whether these complex exemption requirements will be made somewhat easier to apply by the clarifications contained in para. 99 of the new Vertical Guidelines.

Reform of exclusive distribution (Article 4(b)(i))

With respect to the structuring of distribution systems, the basic distinction between exclusive and selective distribution systems remains in place, which – as previously – cannot be combined within one and the same territory. In exclusive distribution, however, it will no longer be necessary to assign active sales in an exclusive distribution territory exclusively to a single distributor in the future. Instead, the supplier will be able to allocate an exclusive sales territory exclusively to himself or to a maximum of five other exclusive distributors – as previously, for active sales only. In addition, a supplier can require its exclusive distributors to pass on the restriction of active sales to other exclusive sales territories to their “direct customers.” Such “second-tier” restrictions had been strictly prohibited under the previous Regulation. 

No vertical price fixing for fulfilment contracts (Ver-tical Guidelines, para. 193)

As regards vertical price maintenance, the new Vertical Guidelines also lead to a key change in cases of price specifications in “fulfilment contracts,” which is important for international sales practice: In the case of a fulfilment contract, the supplier agrees with the final consumer on a price for the contract goods or services; the buyer in the value chain between the supplier and the final consumer (in practice, for example, the authorized distributor) merely executes this prior agreement. In the future, the Commission will no longer consider the prohibition of vertical price maintenance to be violated where the supplier selects the company that provides the fulfilment services. By contrast, where the company that will provide the fulfilment services is selected by the customer, the imposition of a resale price by the supplier may restrict competition for the provision of the fulfilment services.

Prohibition of blocking internet sales / admissibility of platform bans (Article 4(e)) 

A new explicit hardcore restriction has been introduced by the Commission for “the prevention of the effective use of the internet by the buyer or its customers to sell the contract goods or services.” In practice, however, this will change little: The total restriction on internet sales has also been considered a hardcore restriction in the past, although the legal basis for it was fairly questionable. In contrast, other restrictions on online sales or on online advertising that are not aimed at preventing the use of an entire online advertising channel are subject to block exemption. This includes the supplier’s prohibition to its customers to resell the contract goods via online platforms. 

Non-compete obligations/brand obligation (Article 5(1)(a))

The Commission made a small but in practice significant course correction by considering evergreen clauses, according to which a fixed-term non-compete obligation is automatically renewed upon its expiry, to be harmless, provided that the agreement can be terminated at a reasonable notice period or can be effectively renegotiated at reasonable cost. This does not change the fact, however, that non-compete obligations must be limited to a maximum of five years – same as previously – to be block exempted.

No block exemption for “broad” most-favored-nation clauses (Article 5(1)(d)) 

A new “grey” clause concerns the “broad” most-favoured-nation clause, according to which a buyer of online intermediation services (such as a hotel operator) is prohibited by the provider of these intermediation services from offering its goods or services more favourably to end users via competing online intermediary services (i.e., on another hotel booking platform, for example). “Narrow” most-favoured-nation clauses, according to which only the posting of more favourable offers in one’s own distribution (for example, via one’s own website) is prohibited, continue to be block exempted, provided that the other exemption requirements are met, i.e., in particular that the double market share threshold is not exceeded.

Conclusion

The 2022 Vertical Block Exemption Regulation will shape the distribution antitrust landscape until 2034. In terms of content, the Commission is responding to various discussions on the application of the 2010 Vertical Block Exemption Regulation and is clearly endeavouring to find appropriate and practicable solutions. In view of ever shorter innovation cycles and the unbroken triumph of e-commerce, the question will be whether and how the new “Basic Law of Distribution Systems” will manage to provide a suitable framework for current distribution arrangements over such a long period of time.

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