New competition law rules for distribution agreements - the new Vertical Block Exemption Regulation

Introduction

After a long consultation period, the European Commission recently published the new Block Exemption Regulation for Vertical Agreements (Regulation (EU) 2022/720 "VBER"). The regulation will enter into force on 1 June 2022. New Guidelines on vertical restraints  ("Guidelines") will accompany the new VBER. Both replace the previous set of rules from 2010. Agreements which comply with the old VBER will benefit from a transitional period until 31 May 2023 before compliance with the new VBER becomes mandatory in order to benefit from the exemption.

The Commission's aim in revising the rules was to bring them in line with new market developments, especially in the digital economy. Although the number of changes is limited, they have great practical relevance especially (but not only) for online and dual distribution.

Much remains unchanged

Like its predecessors, the VBER 2022 applies to vertical agreements. An agreement is vertical if, for the purposes of the agreement, the parties operate at different levels of the production or distribution chain and it concerns the conditions under which the parties purchase, sell or resell goods or services. In addition to distribution, authorised dealer and franchise agreements, this also includes, inter alia, purchase and supply agreements. Commercial agency contracts are also included, unless they are already exempt from the prohibition of anticompetitive agreements based on the exception for commercial agents.

The market share limit for the exemption also remains unchanged. As under the VBER 2010, the exemption is subject to the requirement that neither the market share of the supplier nor the share of demand of the buyer exceeds 30%. During the consultation phase, the Commission had considered introducing an additional combined market share threshold of 10% on the retail market for dual distribution settings. This additional threshold was widely criticised and ultimately did not become part of the new rules.

The general structure of the VBER also remains unchanged. Hardcore restrictions (also called "black clauses"), which lead to the agreement losing the benefit of the exemption, are listed in Art 4. As before, they include resale price maintenance, territorial and customer restrictions and restrictions on the sale of spare parts to independent repair or service companies. Art 5 VBER continues to list the so-called "grey clauses", including in particular non-competition obligations. Although grey clauses are not exempted, the exemption continues to apply to the rest of the contract. The new VBER brings about changes and clarifications to both black and grey clauses.

 Significant changes brought about by the VBER 2022

3.1. Changes regarding dual distribution

While, contrary to the Commission's original proposal, no additional market share threshold was ultimately introduced (cf. 2 above), the new VBER nevertheless contains substantial changes for dual distribution:

3.2. Changes to black clauses

3.2.1. Territory and customer restrictions

The rules on the exemption of restrictions of the distributor's right to sell the contract goods or services into certain territories or to certain customers have been completely revised. The changes increase the freedom to design distribution systems in conformity with the VBER.

Previously, restrictions of active (but not passive) sales by distributors into territories or to customers were exempted if the supplier had reserved these territories or customers for itself or allocated them to another dealer. The VBER 2022 extends the scope of to restrict the sales of distributors, in particular as follows:

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The rules regarding selective distribution systems have been reworded, but largely correspond to prior law. As before, active and passive grey market sales, i.e. sales to unauthorised distributors in the selective distribution area, may be prohibited. In return, cross-supplies among selective distributors may not be restricted (with the exception of sales by members at the wholesale level to final consumers).

One important clarification brought about by the VBER 2022 is that suppliers may restrict active sales by members of a selective distribution system to exclusively allocated territories or customer groups. While such restrictions were already permissible under the VBER 2010, this was not readily apparent from the text of previous regulation.

For the first time, the VBER 2022 provides for rules for restrictions on buyers who are neither exclusive nor selective distributors (Art 4 lit d). Such buyers may be subject to restrictions of their

3.2.2. Online sales

The VBER 2022 contains explicit rules regarding restrictions of online sales, which previously had to be inferred from case law and guidelines. Pursuant to Art 4 lit e VBER 2022, restrictions of the effective use of the internet for the sale of contract goods and services are now considered hardcore restrictions. This essentially corresponds to existing case law, pursuant to which restrictions which de facto amount to a prohibition of online sales do not benefit from exemption (ECJ Case C-439/09 Pierre Fabre).

In contrast, restrictions on online advertising which are not aimed at preventing the use of an entire online advertising channel, as well as other restrictions on online sales, may benefit from exemption. The Guidelines provide a number of clarifications:

3.2.3. Clarifications regarding resale price maintenance

Pursuant to Art 4 lit a VBER 2022, resale price maintenance ("RPM") remains a hardcore restriction. This does not extend to the imposition of maximum sale prices and (non-binding) recommended prices, which continue to be exempted. The new Guidelines however provide some clarifications that are relevant for the application of the prohibition of RPM:

In exceptional cases, RPM may be justified by efficiencies. In addition to the examples already contained in the old Guidelines (product launch, coordination of advertising campaigns, enabling additional customer service), RPM may also be justified in order to prevent individual distributors from using the product for loss-leading offers which are detrimental to the brand. However, the burden of proof for demonstrating that the criteria individual exemption are met rests with the supplier. These criteria have been proven difficult to prove in practice.

 Changes to grey clauses

3.3.1. More flexibility for the duration of non-competition clauses

Among the VBER's most important rules in practice is the grey clause of Art 5(1)(a). Pursuant to this provision, non-compete obligations (i.e., exclusivity in favour of the supplier) only benefit from exemption if are limited to a maximum duration of five years.

According to the new Guidelines, tacit extensions of non-compete obligations beyond five years may benefit from exemption if the buyer can effectively terminate or renegotiate the contract after five years. The notice periods granted for and the costs associated with termination must be reasonable and allow for an effective change of supplier.

3.3.2. No exemption for wide price parity clauses employed by online platforms

Price parity clauses imposed by online platform were generally regarded as benefiting from exemption under the VBER 2010. The VBER 2022 now exclude so-called "wide" price parity clauses, i.e. clauses which induce users which offer their services on the platform not to sell at more favourable conditions on other platforms, from exemption. In contrast, "narrow" price parity clauses, which prevent users from offering more favourable conditions for direct sales of their goods or services, continue to benefit from exemption.

Outlook

The VBER 2022 increases the scope for structuring distribution relationships. In particular, it provides additional flexibility for agreements on territorial and customer restrictions and non-competition clauses. The new VBER however provides for stricter rules than its predecessor the area of online sales, and in particular for online marketplaces - an area which has been in the focus of the competition authorities for a long time.

Manufacturers and buyers along the supply chain are in any case well advised to review their existing contracts for future legal compliance and at the same time evaluate whether the VBER 2022 can open up advantages for their own distribution model.

03 June 2023