Antitrust Law and Merger Control09.06.2022 Newsletter
The EU has fundamentally reformed the rules of antitrust law regarding distribution: After a heated debate, the new Block Exemption Regulation (Vertical-BER) entered into force on June 1, 2022. Since then, the new Vertical Guidelines of the EU Commission also apply. Companies have time until May 31, 2023 to review their distribution agreements in light of the new rules and adapt them if necessary.
The new regulations apply to agreements between suppliers and buyers. These have always been the focus of antitrust law, especially when they impose sales restrictions/criteria on distributors. The Vertical BER grants companies a "safe harbor" and exempts restrictive agreements from the antitrust prohibition under certain conditions (e.g. a 30% market share threshold).
We have summarized for you the seven most important changes below:
1: Better protection of the distribution system
The new Vertical BER adapts to the needs of distribution systems today. Among other things, important clarifications are included to protect against gray imports: Suppliers/vendors can protect their exclusive distribution territories against active sales by distributors from other distribution territories. Selective distribution systems, on the other hand, can be protected against active and passive sales by distributors from other sales territories. In its Guidelines, the EU Commission also clarifies the definitions of active and passive sales, including the meaning of active sales in e-commerce: for example, the use of a top-level domain corresponding to a specific territory or the offer of a language option on the distributor's website that differs from the usual language at the distributor's place of establishment is sufficient for an active sale.
Another new provision is that the provider may now appoint up to five distributors per exclusive sales territory or customer group without these territories/customer groups losing their "exclusive" status and thus their protection against active sales. Until now, a supplier was allowed to assign each territory or customer group exclusively to only one buyer. In addition, the supplier can now not only prohibit its direct buyers from active selling into exclusive territories or exclusively allocated customer groups, but can also require its buyer in return to prohibit its direct customers (2nd level of distribution) from active selling into exclusive territories and to exclusively allocated customer groups.
2: New regulations for e-commerce
Agreements that aim to prevent the actual use of the Internet for sales, or that completely prevent the use of online advertising channels, are defined as an inadmissible "no go" (so-called hardcore restriction). However, a ban on online marketplaces (platform ban) may now be exempt from this hardcore restriction under the new Vertical BER. This is an important clarification, as this issue has been controversial for a long time. However, the buyer must still be able to manage its own online store and advertise online.
In contrast, the use of price comparison services may not be prohibited. At most, the provider can demand certain quality standards from its customers when using price comparison services. However, these quality requirements must not lead to a de facto exclusion per se of the use of price comparison services.
In addition, suppliers are now allowed to use dual pricing systems and thus set different wholesale prices for online and offline sales of the same retailer. However, the price difference must be in reasonable proportion to the different costs or investments between the online and offline sales channels.
Finally, the EU Commission has also moved away from the principle of equivalence: sales criteria for online sales no longer have to be equivalent to criteria that apply to offline sales. Suppliers can therefore impose different quality criteria on authorized distributors for online and offline sales in the future as part of a selective distribution system. However, the criteria for online sales must not result in online sales becoming completely unattractive and thus in an inadmissible restriction of Internet sales "by the back door".
3: Clearer conditions for online platform services
Online intermediation services are now regularly regarded as suppliers within the meaning of the Vertical BER. Therefore contracts between providers of online intermediation services and their buyers/users will in principle fall within the scope of application of the Vertical BER in the future. This means on the one hand that (sales) restrictions in these contracts can in principle benefit from the exempting effect of the Regulation, but on the other hand that they are also bound by its rules.
This has practical consequences above all in the area of so-called parity obligations (also known as best price clauses/most favored nation clauses (MFN)), which are often found in user agreements for online intermediation services. The new Vertical BER distinguishes between "wide" and "narrow" parity obligations. Broad parity obligations are not exempt from antitrust prohibition. The buyer of online agency services can therefore not be prohibited from offering or selling goods or services via competing online platforms on more advantageous terms. In contrast, "narrow" parity obligations are exemptible. Accordingly, an online intermediation service can prohibit its users from offering the service or goods in (their own) direct sales at a lower price than on the platform.
Important to know: "Hybrid" platforms such as Amazon or Zalando, which compete with their users of intermediation services in the sale of the agency goods or services, are not subject to the scope of application of the new Vertical BER. Their contracts for online intermediation services therefore in principle do not benefit from the exempting effect of the Vertical BER.
4: Dual distribution
Contrary to earlier considerations of the EU Commission, the "safe harbor" provisions of the Vertical BER remain applicable also in situations of dual distribution. Suppliers who are in direct competition with their customers at the distribution level because they are active both at the upstream market level (e.g. as a manufacturer) and at the downstream distribution level (e.g. as a retailer) can therefore continue to set up and operate dual distribution systems without losing the chance of an exemption under the Vertical BER. This also applies in principle to importers and wholesalers.
However, caution is still required in the exchange of information between supplier and buyer. Only the exchange of information that is directly related to and necessary for the implementation of the distribution agreement is exempt from the antitrust prohibition. This in return depends on the type of distribution system. For example, in a selective distribution system, it may be necessary for distributors and manufacturers to exchange information on compliance with the authorization criteria. In return, in an exclusive distribution system, the exchange of information about sales activities in certain exclusive territories may be required.
The new Guidelines of the EU Commission provide assistance: they now list specific examples of admissible and inadmissible information exchange (Guidelines, para. 99 f.). According to these Guidelines, information about technical or logistical data (e.g., returns, registration of products, etc.) is generally unproblematic. In contrast, an exchange about future sales prices or specific customer data, among other things, is problematic.
5: Important clarifications regarding Resale Price Maintenance
Resale Price Maintenance (RPM) remains prohibited. The supplier may therefore not oblige the buyer to sell above a minimum price. The new EU Commission Guidelines also provide for a number of clarifications. Of particular importance is the EU Commission's position on so-called minimum advertised prices, which prohibit retailers from advertising prices below an amount set by the supplier. In principle, the EU Commission classifies these as prohibited indirect RPM.
However, price monitoring and price reporting measures are not classified per se as inadmissible RPM. The EU Commission also clarifies that price maintenance for a limited period of time for the introduction of a new product onto the market can promote competition and thus be admissible. The Commission also takes a positive view of RPM if it is used to counteract the use of a product as a "loss leader". This is because regular sales below wholesale price by a distributor can cause lasting damage to the brand image of the product and minimize the supplier's incentive to invest. In this case, targeted price maintenance measures against the retailer concerned may be exceptionally justified. However, vertical price maintenance measures should always be subject to a sound legal examination.
6: Non-compete obligation
Non-compete obligations that are tacitly extended beyond a period of five years will be exemptible under the Vertical BER in the future. However, the buyer must be able to terminate the agreement or renegotiate it with reasonable notice and at reasonable cost. This is intended to ensure that the buyer can actually change the supplier after five years.
7: Sustainability and distribution
In its new Guidelines, the EU Commission emphasizes that sustainability is a priority objective of EU policy. A vertical agreement which is not exempted by the Vertical BER but which pursues sustainability objectives may therefore meet the conditions for an individual exemption under Article 101 (3) TFEU. Sustainability objectives can in particular be imposed as qualitative criteria in the context of a selective distribution system. However, the new Vertical Guidelines lack a detailed discussion of the area of tension between antitrust law and sustainability, as can be found in the draft of the new Horizontal Guidelines 2022 (cf. our article on this subject).
Conclusion and To Dos
With the new Vertical BER and the new Vertical Guidelines, the Commission has fundamentally adapted the "safe harbor" regulations in many areas. On the one hand, the new legal framework offers new perspectives and opportunities, but on the other hand, it also excludes certain regulations from the possibility of a block exemption. Overall, however, the new Vertical BER offers companies - and brand manufacturers in particular - more opportunities. Companies should take advantage of this and adapt their distribution structures where necessary. It should be noted that the rules of the old Vertical BER will only continue to apply until May 31, 2023. After that date, distribution agreements must comply with the new legal situation. Existing contracts should therefore be reviewed as soon as possible to ensure they are compatible with the new EU antitrust law regarding distribution.