The new EU rules on distribution agreements enter into force

In May 2022 the Commission adopted the revised Vertical Block Exemption Regulation (“VBER”) and its accompanying Guidelines. The new rules are a revision of the 2010 Regulation and Guidelines that took four years to conclude and produced hundreds of pages of evaluations and expert reports (see the Commission’s website). Today, on 1 June 2022, the revised EU distribution rules enter into force. A transitional period of one year follows, which means that businesses have up until 31 May 2023 to ensure that their vertical agreements (i.e. agreements between parties at a different level of the supply chain) comply with the new rules.

The VBER provides vertical agreements a safe harbour from the application of Article 101(1) of the Treaty on the Functioning of the European Union. For the VBER to apply, the parties’ market share must be below 30% and may not contain any so-called hardcore restrictions, such as retail price maintenance.

The new vertical rules provide legal certainty and are an important tool for businesses in the self-assessment of their distribution agreements. In the past few years, national competition authorities have taken divergent views regarding certain vertical agreements, such as agreements containing parity obligations. The old VBER had difficulties when it came to tackling novel issues caused by the increase of e-commerce and novel distribution models, creating uncertainty within the EU.

The main changes relate to clarifications regarding the treatment of online restrictions and the platform economy, active sales restrictions in distribution systems and dual distribution.

Online restrictions and platform economies

Article 4 contains restrictions, that if present, remove the benefit of the block exemption for the entire agreement. The new VBER introduces a hardcore online restriction, which concerns agreements that prevent the “effective use” of the internet. The Guidelines provide examples to businesses as to what does, and does not, constitute as online restrictions. For instance, certain geo-blocking measures are considered as hardcore online restrictions while online marketplace bans are not. This reflects the general approach of the VBER that restricting the manner in which goods or services are sold may benefit from the regulation, while restrictions on the territory or customer may not.

In this context, the new rules provide clarification on marketplaces and price comparison services. While marketplaces are a distinct sales channel, price comparison services amount to an online advertising channel. Vertical restraints that prevent the use of an entire advertising channel, such as price comparison services, are hardcore online restrictions. However, restricting the use of a specific price comparison service (and not all price comparison services) may benefit from the safe harbour.

In dual pricing, suppliers charge different wholesale prices depending on whether the products are sold online or offline. Under the old regime, dual pricing was considered a hardcore restriction of passive selling. Dual pricing is no longer a hardcore restriction. However, it may not be used to prevent the effective use of the internet by restricting sales to particular territories or customers. The difference in the wholesale price must reasonably relate to the differences in investments and costs incurred by the buyers to make sales in each channel. Parties may agree on appropriate ways to implement dual pricing, such as an ex post balancing of accounts on the basis of actual sales.

The revised Guidelines also provide a welcome clarification to agency and its relationship to the online platform economy. The Guidelines state that undertakings active in the online platform economy generally do not meet the conditions to be categorised as agents but rather as independent economic actors. The Regulation categorises providers of “online intermediation services” (i.e. e-commerce marketplaces, app stores, price comparison tools) as suppliers. Since under the new rules businesses active in the online platform economy are usually not considered as agents, they are more likely to fall within the ambit of Article 101(1) prohibition.

Furthermore, the new rules demonstrate a narrower approach towards parity obligations. Across-platform retail parity obligations (so-called wide parity clauses) fall under excluded restrictions under the new rules. This means that obligations imposed by suppliers of online intermediation services, which cause buyers of such services not to offer, sell or resell goods or services to end users under more favourable conditions via competing intermediation services, are not exempt under the VBER.

So-called narrow parity clauses remain within the scope of the VBER. However, the new Article 6 introduces the Commission’s withdrawal right of the benefit of the VBER in individual cases. Article 6 refers to narrow parity clauses, indicating that the Commission might assess the effects of narrow parity clauses more closely and intervene in their application by invoking its withdrawal right. Therefore, narrow parity clauses may also fall outside the scope of the VBER in individual cases.

Active sales restrictions

The revised rules contain new definitions of active and passive sales. This is a welcome addition as the distinction between active and passive sales is especially relevant in, for instance, the application of the hardcore restrictions in Article 4. In relation to this, the Guidelines provide clarifications for the use of domains, price comparison services and language options in online stores. For instance, while the use of search engine optimisation tools is a form of passive selling, establishing an online store with a country-specific domain corresponding to a different territory where the supplier is established, is active selling.

The amended Article 4 distinguishes between selective, exclusive and free distribution systems and the restrictions therein apply depending on the distribution type and provides clarity on how exclusive and selective distribution agreements are assessed under the VBER.

The new rules provide suppliers with more flexibility to organize their distribution systems as now suppliers are permitted to appoint five exclusive distributors to the same territory or customer group. Furthermore, suppliers are allowed to require their other buyers to restrict their direct customers from actively selling into territories or customer groups that the suppliers have exclusively allocated to other distributors or reserved for themselves.

Since the revision, selective distribution systems enjoy enhanced protection. Suppliers are now allowed to restrict their distributors from active and passive selling to a territory where it operates a selective distribution system, regardless of whether those buyers and customers are themselves located inside or outside that territory. The equivalence principle is also removed and now, in a selective distribution system, the criteria imposed by suppliers in relation to online sales do not have to match the criteria imposed on offline sales.

Dual distribution

In dual distribution, in addition to appointing distributors, manufacturers also distribute their products themselves, therefore competing with the distributors of their goods. Under the new rules, dual distribution still enjoys the safe harbour provided by the VBER, although its scope is amended. The provision applies now also to manufacturers and wholesalers, however, so-called hybrid platforms (i.e. platforms that both provide online intermediary services and sell competing products on their platforms) do not benefit of the dual distribution exemption.

In addition, the rules regarding information exchange when manufacturers compete with their own distributors, have been amended and tightened. Information exchange in dual distribution is covered by the VBER if: (i) it is directly related to the implementation of the vertical agreement, and (ii) necessary to improve the production or distribution of the contract goods or services. The Guidelines provide examples when information exchange in dual distribution is covered by the VBER. It should be noted however that these are merely examples and do not automatically render information exchange to fall within, or outside, the scope of the VBER.

What’s next?

The analytical framework of the VBER, its basic principles and market share threshold have not changed. While the structure and spirit of the Regulation remains the same, the revised rules contain a number of amendments specifically related to online sales and new market players such as online platforms. Businesses especially active in the platform economy and online sales should be attentive and review their existing distribution agreements in order to place them in compliance with the new rules. Businesses have up until 31 May 2023 to ensure that their distribution agreements comply with the new rules.