Legal development

New rules on vertical arrangements in the EU and UK

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    On 1 June 2022, the revised EU Vertical Block Exemption Regulation, Regulation 2022/720, ("VBER") and Vertical Guidelines entered into force. On the same day, the UK Vertical Agreement Block Exemption Order ("VABEO") entered into force. Both the VBER and VABEO provide for a one year transitional period (ending 1 June 2023) for existing vertical agreements which met the conditions for exemption under the previous rules. 

    The block exemptions provide widely-applicable safe harbours for vertical agreements from the EU and UK prohibitions on anticompetitive agreements, provided the parties have market shares of less than 30% on their respective markets and the agreement does not contain any "hardcore" restrictions of competition. If an agreement does not benefit from a block exemption then the agreement will need to be assessed individually for compliance with competition law.  

    Importantly, the EU and UK have separate regimes governing vertical agreements. The UK approach is predominantly based on an earlier draft of the VBER and Vertical Guidelines, however, there are a number of areas where the EU and UK approaches diverge. Notably, the UK has taken a more restrictive approach to wide retail parity obligations and, as a result, any agreements containing wide retail parity clauses will need to be assessed individually for compliance with UK competition law. 

    Key takeaways
    • As of 1 June 2022, the EU and UK have separate rules governing vertical agreements which means businesses will need to ensure compliance with both regimes. While the two regimes are mostly consistent, there are notable differences: for example, the UK takes a stricter approach to wide retail parity obligations.
    • Greater flexibility for active sales restrictions in exclusive distribution arrangements and for selective distribution arrangements. For example, the new Vertical Guidelines contain a concept of "shared exclusivity", the ability to impose active sales restrictions on direct customers of the distributor and permit selective distribution for all types of products and services.
    • Suppliers can now apply different prices for online and offline sales provided the difference in pricing reflects the difference in investments and costs of each distribution channel. However, a total ban on using online marketplaces or price comparison tools is now categorised as a hardcore restriction.
    • Agency agreements to which Article 101(1) of the Treaty on the Functioning of the European Union ("TFEU") does not apply are defined restrictively. For example, online agents and agents who act for several principals are unlikely to be classified as genuine agents. In addition, the Vertical Guidelines confirm a restrictive approach to situations in which the agent also acts as a distributor for the same goods or services: in such cases, the principal must reimburse the agent for all its market specific investments for the distribution of the relevant products or services.

    Background to the revised VBER and VABEO

    Since the previous VBER (Regulation 330/2010) and accompanying guidelines were adopted in 2010, the growth of e-commerce and online platforms has transformed the way in which businesses operate. To reflect these and other market developments, the revised VBER extends the benefit of the block exemption to certain restrictions (such as dual (offline / online) pricing) which were previously excluded while removing the benefit of the exemption from certain restrictions which were previously covered (for example, prohibitions on using price-comparison sites). 

    Following Brexit, the revised VBER will not apply in the UK and the UK has adopted an Order exempting certain vertical agreements from the application of the Chapter I Prohibition of the Competition Act 1998. In many respects, the VABEO mirrors the revised VBER; however, there are a number of important differences based in part on previous enforcement experience of the Competition and Markets Authority ("CMA"). 

    This briefing provides an overview of the key changes introduced by the revised VBER and highlights areas of similarity and difference between the EU and UK approaches. Businesses which operate in both the EU and the UK will need to be mindful of areas where the two regimes diverge. 

    Additional guidance in relation to the application of Article 101(1) TFEU to agents 

    Under the new rules, genuine agency agreements (i.e. where the agent does not bear any significant financial or commercial risk) continue to fall outside the scope of Article 101 TFEU. Section 3.2.1 of the new Vertical Guidelines introduces a new category of agency agreement which falls outside the scope of Article 101 TFEU: agents who temporarily, "for a very brief period of time", acquire the property in the goods while selling them on behalf of the principal. Such arrangements will fall outside Article 101(1) TFEU, provided the agent does not incur in any costs or risks in relation to the transfer of property.

    The Vertical Guidelines also clarify that agreements with an agent who acts on behalf of a large number of principals are unlikely to be categorised as falling outside Article 101(1) TFEU, referring to case law that sets out that agents acting for multiple principals are not an "auxiliary organ forming an integral part" of the principal's undertaking. 

    In addition, the new Vertical Guidelines provide further clarification on dual role agents (i.e., an independent distributor who also acts as an agent for the same supplier). The existence of a genuine agency agreement is not per se incompatible with the agent also acting as an independent distributor within the same product market, provided that the principal fully reimburses the agent for the activities in which it contractually requires the agent to engage. To that end, the new Vertical Guidelines clarify that the principal should reimburse the agent's market-specific investments for the distribution of the products/services concerned (excluding investments for the independent distribution of differentiated products, even if in the same product market). 

    Finally, the Vertical Guidelines clarify that agreements involving undertakings active in the online platform economy will generally not be categorised as agency agreements. The rationale of the European Commission ("Commission") is that undertakings active in the online platform economy generally act as independent economic operators and are therefore not part of the undertakings to which they provide services. 

    A somewhat stricter approach to dual distribution and information exchange between suppliers and (competing) distributors

    Dual distribution refers to situations where a supplier sells its goods or services directly to end-consumers, as well as through independent distributors. As a result, the supplier is in direct competition with its distributors. Over the last ten years, suppliers have increasingly opted to sell their products to end-consumers directly through online sales channels. 

    Under the previous VBER, dual distribution agreements were covered and exempted from the application of Article 101(1) TFEU, provided the supplier was a manufacturer and the distributor was not. The revised VBER extends the exemption to cover suppliers who are wholesalers and importers as well as manufacturers. 

    As suppliers and distributors compete under dual distribution models, Article 2(5) of the new VBER sets out when information exchange between suppliers and distributors will be covered by the exemption. To benefit from the exemption, the information exchange must be: 

    • directly related to the implementation of the vertical agreement; and
    • necessary to improve the production or distribution of the contract goods or services.

    Paragraphs 99 and 100 of the new Vertical Guidelines provide non-exhaustive lists of the types of information that are likely to fall within (e.g., technical information relating to the contract goods or services) or outside (e.g., future price information) the block exemption in the context of dual distribution. 

    The VABEO does not impose conditions for the exchange of information between dual distributors to benefit from the block exemption. According to the draft UK guidance, information exchange will be exempted provided it does not restrict competition by object and is "genuinely vertical" (i.e., it is required to implement the vertical agreement). 

    A more refined list of hardcore restrictions

    Article 4 of the VBER sets out the so-called "hardcore" restrictions. These are restrictions which the Commission considers to be particularly egregious and which, if included in a vertical agreement, prevent the agreement from benefiting from the block exemption. While the revised VBER largely follows the principles set out in the previous VBER, there are some notable changes.  

    Resale price maintenance ("RPM") 

    While RPM is still a hardcore restriction under the revised VBER, the revised Vertical Guidelines provide important additional guidance: 

    • Minimum advertised price ("MAP") provisions, which prohibit distributors from advertising prices below an amount set by the supplier, are assimilated to RPM. However, in the Vertical Guidelines the Commission suggests that MAPs may nonetheless meet the conditions of Article 101(3) TFEU, where they are used to prevent a particular distributor from using the product of a supplier as a loss leader.
    • While the use of price monitoring software will increase market transparency, it does not on its own constitute RPM.
    • It is clarified that imposing prices in the context of a fulfilment contract (i.e., an agreement between a supplier and a buyer where the buyer is executing an agreement previously concluded between the supplier and an end-customer) is not considered RPM where the supplier selects the undertaking that will provide the fulfilment services.
    • While RPM is a hardcore restriction and has been found to be an object restriction of competition law by the European Court of Justice, the Commission notes that this does not mean it is a "per se" infringement of Article 101 TFEU. It may therefore be possible on a case by case basis to justify RPM under Article 101(3) TFEU if it gives rise to efficiencies, such as the imposition of fixed resale prices to organise a short-term low-price campaign.

    Territorial and customer restrictions 

    The general principle that suppliers can in certain situations prevent their distributors from actively selling to customers in territories and/or customer groups allocated to other distributors but generally cannot prevent passive selling (i.e. responding to an unsolicited request) remains unchanged. 

    In the revised Vertical Guidelines, the Commission provides separate guidance on territorial and customer group restrictions for each distribution model (i.e. exclusive, selective and "free").

    Exclusive distribution

    Under the previous rules, a supplier could impose an obligation on its direct counterparties not to "actively" resell the supplied goods or services in territories where an exclusive distributor had been appointed (or that the supplier had reserved for itself). There was no concept of "shared exclusivity", i.e. the exemption was only available if one distributor had been appointed in the territory concerned. The revised VBER provides for a more flexible approach by allowing shared exclusive distribution to benefit from the exemption provided that the territory/customer group is shared by a maximum of five exclusive distributors. While the VABEO does not prescribe a maximum number of exclusive distributors, it requires the number to be "determined in proportion to the territory/customer group in such a way as to secure a certain volume of business that preserves their investment efforts". 

    Under the revised VBER, suppliers may also require distributors to impose exempted restrictions on their own customers. In the UK, suppliers may only require distributors to "pass on" restrictions to its customers if the customer has either entered into a distribution agreement with the supplier or with a party given distribution rights by the supplier. While this is a relevant difference, it is unclear whether it will result in a significant difference in practice.

    Where a supplier combines exclusive and selective distribution models in the same EU territory, this will not benefit from the block exemption whereas the combination in distinct territories will be covered by the exemption. Under the VABEO, it is permissible to combine exclusive and selective distribution arrangements in the same territory provided that they are established at different levels in the supply chain (for example, exclusive distribution at the wholesale level may be combined with selective distribution at the retail level). 

    Selective distribution 

    The Vertical Guidelines expand the scope of products and services for which suppliers may use selective distribution: selective distribution may now be used for all products and services. In contrast to the previous guidelines, the revised Vertical Guidelines state that the block exemption applies regardless of the nature of selection criteria (i.e. quantitative or qualitative) and there is no requirement for the supplier to publish its selection criteria. 

    Where a selective distribution model is used, the supplier may restrict active or passive sales by exclusive and free distributors and their customers to unauthorised resellers located in the territory where the selective distribution model applies, even where the distributors or their customers are located outside the territory. 

    Free distribution

    Where a supplier does not operate an exclusive or selective distribution system, the Commission categorises the distribution model as "free" distribution. In such cases, the supplier may restrict:

    • Active sales by buyers and their direct customers into a territory/customer group which has been exclusively allocated (including where there is shared exclusivity).
    • Active and passive sales by buyers and their customers to unauthorised distributors in a territory where a selective distribution model is in place.
    • The buyer's place of establishment.

    Definitions of active and passive sales

    The Vertical Guidelines clarify that participation in public or private tender processes is a form of passive selling, meaning that a vertical agreement that restricts a buyer's ability to participate in tender processes will not benefit from the block exemption. This is quite an important development.

    The Commission has also provided guidance on how the concepts of active and passive sales apply in an online context. For example, setting up an online store will generally be considered to be a form of passive selling while setting up an online store with a country-specific top-level domain corresponding to a country other than the seller's home country will be considered to be a form of active selling. Similarly, offering a website in a language that is not commonly used in the distributor's home country (noting that the Commission considers English to be commonly used in all EU Member States) constitutes a form of active selling. 

    A more relaxed approach to non-compete obligations by the EU

    Under the revised VBER, non-compete obligations which are tacitly renewable beyond five years are no longer considered to be "evergreen" and can therefore benefit from the exemption, provided the contract can effectively be renegotiated or terminated with a reasonable notice period and at a reasonable cost. The UK has not adopted this change therefore non-compete obligations which are tacitly renewable beyond five years are excluded from the block exemption and will still need to be assessed on a case by case basis. 

    Specific rules for the use of the Internet as a distribution channel

    A new hardcore restriction: effective use of the Internet

    The revised VBER continues to protect buyers from prohibitions on the use of the Internet and a new hardcore restriction has been added to exclude agreements which prevent the effective use of the Internet from the block exemption. Restrictions on the use of the Internet which do not prevent effective use of the Internet are not considered to be a hardcore restriction. These are considered below. This reflects market developments since the previous VBER was adopted. 

    The new hardcore restriction covers not only a total ban on online sales but also, for example, restrictions which indirectly have the object of preventing the effective use of the internet, including restrictions which prohibit the buyer from using an entire online advertising channel (such as search engines or price comparison services). The rationale for this addition is that preventing the effective use of the Internet inevitably restricts the territory into which or the customers to whom the distributor may sell the goods or services. The Commission considers that prohibiting the use of "particular" price comparison services is generally not a hardcore restriction, however, it may amount to one where the prohibition applies to the most widely used advertising services in the particular online advertising channel. 

    Greater flexibility for online sales restrictions

    While the VBER continues to limit restrictions on the use of the Internet, the block exemption does apply to agreements which include restrictions on online sales channels (i.e., the way in which online sales may be carried out), provided that they do not prevent buyers from selling online. For example, restrictions setting quality standards for selling online can benefit from the block exemption. Limitations on online selling which may offer protection to offline sales and which benefit from the exemption include:

    • A direct or indirect ban on selling through online marketplaces because the supplier, for example, wishes to protect the image and positioning of their brand. In this context, online services that do not offer direct purchasing functionality are considered to be advertising services and not online marketplaces.
    • A requirement that the buyer operates one or more brick and mortar shops or showrooms.
    • A requirement that the buyer sells a minimum amount of the contract goods or services offline, provided that amount is an absolute value or volume (not a percentage of its total sales).
    • A requirement that the buyer pays a different wholesale price for products to be resold online (dual pricing), provided the difference in price does not have the aim of preventing the effective use of the Internet (e.g., by making selling online unprofitable or financially unsustainable). Dual pricing was previously considered to be a hardcore restriction.
    • The revised VBER and Vertical Guidelines no longer require compliance with the equivalence principle: suppliers operating a selective distribution system may now impose different criteria for online and offline sales to the extent those channels have different characteristics.

    A new regime for the providers of online intermediation services ("OIS") 

    Article 1(1)(e) of the VBER provides a definition of OIS: "information society services… which allow undertakings to offer goods or services: (i) to other undertakings, with a view of facilitating the initiating of direct transactions between those undertakings, or (ii) to final consumers, with a view to facilitating the initiating of direct transactions between those undertakings and final consumers, irrespective of whether and where the transactions are ultimately concluded". The Vertical Guidelines provide the following examples of OIS: e-commerce marketplaces, app stores, price comparison tools and social media services used by undertakings. Importantly, providers of OIS are specified as being suppliers for the purposes of the VBER. 

    The Vertical Guidelines provide further details on the application of the revised VBER to providers of OIS: 

    • Market shares for OIS providers should be calculated on the relevant market for the supply of those services, which may include online and offline intermediation services depending on the facts of the specific case.
    • Agreements involving OIS providers which contain hardcore restrictions will not benefit from the VBER. Providers of OIS will therefore need to ensure that restrictions relating to price, territories/customer groups to whom the intermediated goods/services may be sold and online selling comply with Article 4 of the VBER. For example, restrictions which set a fixed or minimum price for the transaction facilitated by the OIS provider will amount to RPM and therefore be considered to be a hardcore restriction.
    • Providers of OIS may not impose cross-platform retail parity obligations on buyers of those services.
    • Article 2(6) of the VBER provides that agreements relating to the provision of OIS will not benefit from the block exemption where the OIS provider also sells goods or services in competition with the firms to which it provides such services (i.e., where it has a hybrid function). In paragraph 109 of the Vertical Guidelines, the Commission notes that it is unlikely to prioritise enforcement action in respect of vertical agreements relating to the provision of OIS by hybrid platforms where the agreement does not contain by object restrictions and the platform does not enjoy significant market power. Conversely, the exemption provided by the VABEO in the UK covers OIS providers irrespective of whether they have a hybrid function.

    Approach to parity clauses – a major discrepancy between the EU and UK approaches

    There are two types of parity clauses (also known as most-favoured nation clauses or MFNs):

    • Narrow parity clauses impose restrictions on the offer of better terms on direct sales channels only.
    • Wide parity clauses impose restrictions on the offer of better terms on any other sales channel.

    The revised VBER removes the benefit of the block exemption for wide parity clauses at retail level (i.e., regarding sales conditions to end-customers) when these clauses are imposed by providers of OIS. As a result of such clauses being categorised as "excluded restrictions", it is only the specific clause which will not benefit from the block exemption and which need to be assessed individually: the rest of the agreement may benefit from the block exemption. Other parity clauses will continue to benefit from the exemption under the revised VBER. 

    This is important area of divergence between the EU and the UK, with the UK taking a stricter approach in two respects:

    • The VABEO categorises wide retail parity clauses as hardcore restrictions, meaning it is likely that agreements containing such clauses will be considered to infringe competition law in the UK. This contrasts to the VBER where, as noted above, wide retail parity clauses are excluded restrictions.
    • While the EU rules only exclude wide retail parity clauses imposed by OIS providers, all wide parity clauses (whether online or offline) regardless of the type of company that imposes the restriction are classified as a hardcore restriction under the VABEO.

    In its recommendation for a vertical block exemption, the CMA commented that, based on its previous enforcement experience, wide retail parity obligations reduce competitors' incentives to compete on price, to innovate and to enter markets. 

    Importantly, in both the EU and the UK, the block exemption will be available for parity obligations relating to the conditions under which goods or services are offered to undertakings that are not end-users, i.e. "non-retail" parity obligations which relate to the conditions under which manufacturers, wholesalers or retailers purchase goods or services as inputs (so-called 'most favoured customer obligations').

    Comparing the EU and UK approaches

    The table below highlights some of the areas of divergence between the EU and UK approaches. 

     EU positionuk position
    Parity obligations Wide retail parity obligations for OIS are excluded restrictions. All other types of MFNs imposed by suppliers of online intermediation services are covered by the block exemption. Online and offline wide retail parity obligations imposed by any type of company are hardcore restrictions.
    Non-compete obligations The exemption applies to non-compete obligations which are tacitly renewable beyond five years.Non-compete obligations which are tacitly renewable beyond five years are excluded and therefore need to be assessed individually.
    Selective distributionCombining selective distribution and exclusive distribution in the same EU territory will not benefit from the block exemption.Selective distribution may be combined with exclusive distribution in the same territory, provided the two operate at different levels of the supply chain.
    Agreements which subsequently exceed market share threshold If a market share rises above 30% then the agreement will continue to benefit from the exemption for two calendar years after the year in which the market share threshold is exceeded.If the market share rises above 30% then the agreement will continue to benefit from the exemption for two calendar years after the year in which the market share threshold is exceeded unless the market share exceeds 35% in which case the exemption will only apply for one year after the threshold is exceeded.
    Duration  12 years: expires 31 May 2034. 6 years: expires 1 June 2028.
     
     
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