The clock is ticking on getting compliant with the new competition rules on vertical agreements

A new Vertical Block Exemption Regulation[1] (the “New VBER”) and related guidelines[2] (the “New Guidelines”) have entered into force on 1 June 2022, replacing the Vertical Block Exemption Regulation and Guidelines, which dated from 2010 (the “Former VBER”)[3].

The New VBER (similarly to the Former VBER) concerns vertical agreements, namely agreements concluded between undertakings activating at different levels of the goods and services supply and distribution chain, such as suppliers and distributors. The New VBER and the New Guidelines regulate the block exemption from the interdiction provided under Article 101(1) of the Treaty on the Functioning of the European Union (the “TFEU”) and under art. 5 of the Romanian Competition Law no. 21/1996 (the “Competition Law”) with respect to such vertical agreements having as object or effect the prevention, restriction or distortion of competition, if they meet certain conditions. The New VBER also provides guidance for the self-assessment of the compliance with the provisions of the TFEU and of the Competition Law regarding individual exemption of the agreements that do not meet the conditions for block exemption.

However, the New VBER does not apply, during the period from 1 June 2022 to 31 May 2023, in respect of agreements already in force on 31 May 2022, which do not satisfy the conditions for exemption provided for in the New VBER, but which, on 31 May 2022, benefited from exemption under the Former VBER, allowing the parties to adapt the provisions of such agreements to the revised requirements under the New VBER and to get compliant until 31 May 2023.

Thus, as of 31 May 2023, the New VBER will be applicable not only with respect to agreements concluded after its entering into force on 1 June 2022, but also to agreements concluded before the aforementioned date.

The main novelties in the New VBER concern introduction of specific rules on online sales, including on online platforms, dual distribution, dual pricing, achievement of sustainability as efficiency, but also important changes regarding the exclusive and selective distribution systems, most favored nation (MFN) or parity clauses, non-compete clauses and resale price maintenance, as follows:

▸ Online restrictions

The new VBER provides that restrictions on online sales are hardcore when they directly or indirectly, in isolation or in combination with other factors, have the object of preventing buyers or their customers from effectively using the internet to sell the contract goods or services, including restrictions that have the object of preventing the use of one or more online advertising channels in their entirety. Nevertheless, restrictions on marketplace sales are not hardcore restrictions as long as they only limit the manner in which the buyer may sell online.

Further guidance on whether a vertical agreement constitutes a permissible limitation or whether it amounts to a hardcore restriction are provided in the New Guidelines. The New Guidelines provide examples for hardcore online restrictions, such as: the requirement that a buyer prevents customers located in another territory from viewing its website or online store or re-routes its customers to the online store of the manufacturer or another seller; the requirement for the buyer to terminate consumers’ online transactions where their credit card data reveal an address that is not within the buyer’s territory; the requirement for the buyer to sell the contract goods or services only in a physical space or in the physical presence of specialized personnel; the requirement for the buyer to seek the supplier’s prior authorization before making individual online sales; prohibiting the buyer from using the supplier’s trademarks or brand names on its website or online store; prohibiting the buyer from establishing or operating one or more online stores; prohibiting the buyer from using an entire online advertising channel, e.g., search engines or price comparison services (but a prohibition on the use of particular price comparison services or search engines is generally not a hardcore restriction, if, for example, are linked to the content of the online advertising or set certain quality standards).

On the other hand, the New Guidelines also confirm that the following practices, inter alia, could benefit from an exemption: requirements intended to ensure the quality or a particular appearance of the buyer’s online store; requirements regarding the display of the contract goods or services in the online store (such as the minimum number of items displayed, or the way the supplier’s trademarks or brands are displayed); a direct or indirect ban on the use of online marketplaces; a requirement that the buyer operates one or more brick-and-mortar shops or showrooms, for instance, as a condition for becoming a member of the supplier’s selective distribution system; a requirement that the buyer sells a minimum absolute amount of the contract goods or services offline (in value or volume, but not as a proportion of its total sales) to ensure the efficient operation of its brick-and-mortar shop.

▸ Dual Distribution

Dual distribution refers to situations where the supplier is active both upstream and downstream and thus competes with its independent distributors in the downstream market. Although the dual distribution remains exempt under the New VBER (namely exemption for non-reciprocal vertical agreements where the supplier is a producer and a distributor, and the buyer is a distributor, but not active on the production level), certain amendments concerning the scope of dual distribution for which exemptions are available have been implemented. The New VBER extends the exemption to vertical agreements with importers or wholesalers (at the upstream level) and buyers who are importers, wholesalers or retailers (at the downstream level).

However, the dual distribution exemption does not apply to the provision of online intermediation services (“OIS”) when the OIS provider is also a competing undertaking for the sale of the intermediated goods or services. In addition, the New VBER clarifies that information exchange between the supplier and the buyer in a dual distribution situation remains generally exempt, but only if the information exchange is both directly related to the implementation of the vertical agreement and necessary to improve the production or distribution of the contract goods or services. According to the New Guidelines, for example, information relating to the future prices at which the supplier or buyer intends to sell the contract goods or services downstream or information relating to goods sold by a buyer under its own brand name exchanged between the buyer and a manufacturer of competing branded goods (unless the manufacturer is also the producer of those own brand goods) generally is unlikely to fulfil the two conditions set out above.

▸ Online Platforms

Important clarifications with respect to the OIS provided by online platforms have been brought by the New VBER. The New VBER clarifies that a provider of OIS (such as e-commerce marketplaces, or online software application services, e.g. online social media services) is treated as a “supplier” with respect to the OIS, while the undertaking that offers or sells goods or services via OIS is categorised as a “buyer” in respect of those OIS, irrespective of whether it pays to use the OIS. But the New VBER excludes from the block exemption vertical agreements relating to the provision of OIS where the provider of the OIS is a competing undertaking in the relevant market for the sale of the intermediated goods or services (so-called “Hybrid OIS”). Moreover, the New Guidelines clarify that vertical agreements entered into by undertakings active in the online platform economy generally do not qualify as genuine agency agreements that are exempt from the application of the interdictions under the competition law.

▸ Dual pricing and the equivalence principle

Dual pricing allows the supplier to charge different wholesale prices to the same reseller for products intended to be resold online or offline. Although, under the Former VBER rules, dual pricing constituted a hardcore restriction, as per the new VBER, dual pricing is block-exempted, as it is deemed that it may incentivize, or reward an appropriate level of investment. The primary purpose of this adjustment of the rules was to address the concern of free-riding, e.g. when customers visit a brick-and-mortar shop to test goods or services or to obtain other information on which they base their purchase decision, but afterwards they order the product online from a different distributor. Thus, this new exemption is also subject to certain safeguards. For example, in order for the exemption to be applicable, the difference in the wholesale price for online and offline sales must be reasonably related to differences in cost or investments between the two sales channels and should not have the object of restricting cross-border sales or of preventing the effective use of the internet by the buyer. Moreover, if the parties implement a system to monitor which products or services are sold online or offline, such system should not lead to limitation of the quantity of products the buyer can sell online.

In the context of a selective distribution system, the criteria imposed by the suppliers with respect to online sales does not have to be equivalent with the criteria imposed on brick-and-mortar shops, considering the different nature of the two sales channels. However, the criteria specific to online sale should not have the object of preventing the effective use of the internet by the buyer or its customers to sell the goods or services.

▸ Exclusive and selective distribution system

The New VBER includes important new provisions and clarifications on active sales that might trigger the necessity or opportunity of restructuring the distribution systems of the producers.

Active sales restrictions in exclusive distribution systems concern limitations of the buyer’s ability to approach individual customers or customers located in certain territories actively and generally constitute hardcore restrictions. The New VBER extends the block exemption related to such restrictions (compared to the one in the Former VBER) to shared exclusivity, which allows a supplier to appoint up to a maximum of five distributors per exclusive territory or for a particular customer group. Furthermore, the New VBER allow suppliers to obligate their distributors to pass on restrictions on active sales to their customers. The New Guidelines clarify that the block exemption also applies where a supplier requires its distributors to restrict their direct customers from actively selling into territories or to customer groups that the supplier has allocated to other distributors, or reserved to itself, on an exclusive basis. However, these pass-ons are not block-exempted further down the distribution chain.

As regards the selective distribution systems, the New VBER allows suppliers to prohibit buyers and their customers from actively or passively selling to unauthorized distributors located in any territory where the supplier operates a selective distribution system, regardless of whether the buyers and customers are themselves located inside or outside that territory.

▸ Most favoured nation (MFN) clauses or parity clauses

MFN clauses or parity clauses are contractual provisions that require a counterparty to offer its goods or services under the same or more favorable conditions as those offered on other sales or marketing channels, such as other platforms (including its website).

Recently the retail MFN clauses have been under scrutiny by various competition authorities, which have distinguished between two types of MFN clauses: (1) wide MFN clauses or so-called “across-platform retail parity obligations”, that restrict a counterparty from offering better terms on all of its sales channels and via competing online platforms, and (2) narrow MFN or parity clauses, which only restrict a counterparty from offering better terms on its own website, but allow the counterparty to offer better terms on competitors’ sites.

The New VBER excludes the application of the exemption for wide MFNs or across-platform retail parity obligations, i.e., obligations that prevent buyers of OIS from offering, selling or reselling goods or services to end users under more favorable conditions via competing OIS. On the other hand, the New VBER confirms that other types of parity clauses (i.e. narrow parity clauses and wholesale parity clauses) will continue to benefit from the exemption. However, the exemption with regard to the latter may be withdrawn, in particular in highly concentrated platform markets, where the competition between OIS suppliers is restricted by the cumulative effect of parallel networks of similar agreements restricting buyers of OIS from selling goods or services to end users under more favorable conditions on their direct sales channels.

▸ Non-compete clauses

As a rule (under the Former and the New VBER), non-compete clauses that exceed a five-year period cannot benefit from the block exemption. However, under the New Guidelines, non-compete obligations that are tacitly renewable beyond a period of five years can benefit from the block exemption, provided that the buyer can effectively renegotiate or terminate the vertical agreement containing the obligation with a reasonable period of notice and at a reasonable cost, thus allowing the buyer to effectively switch its supplier after the expiry of the 5-year period.

▸ Resale price maintenance

The New Guidelines clarify that that the imposition of minimum advertised prices, which prohibit the distributor from advertising prices below a level set by the supplier, is deemed as an indirect form of resale price maintenance, which constitutes a hardcore restriction under the competition law.

▸ Sustainability

Sustainability has become a priority objective for the EU and has been considered also in the New Guidelines related to the New VBER. The New Guidelines clarify that sustainability agreements are not a distinct category of agreement under EU competition law. However, according to the New Guidelines, the achievement of sustainability objectives is capable of constituting an efficiency to be taken into account for self-assessment performed by an undertaking regarding individual exemption from the application of competition law with respect to vertical agreements. For example, imposition of exclusivity obligations to incentivize investments in green energy plant could be deemed such an efficiency. Also, the New Guidelines also explain that sustainability criteria, such as climate change, protection of the environment or limiting the use of natural resources, qualify as valid qualitative criteria for purposes of selective distribution systems.

Consequently, the New VBER brought important changes and clarifications in the approach of the vertical agreements from a competition law perspective, including with respect to online sales and OIS. This leads to the necessity of review of the distribution models and of the agreements concluded by the undertakings with counterparties from the upstream or the downstream markets in order to check if they are in line with the new legal provisions or whether new business opportunities can be explored in view of the new rules.

As of 31 May 2023, the provisions of the New VBER and of the New Guidelines will be applicable not only to the new agreements, but also to the existing agreements concluded before the entrance into force of the New VBER. Therefore, the latter agreements have to be revised in order to get compliant with the new rules until the aforementioned date.

[1] Commission Regulation (EU) 2022/720 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices.

[2] Guidelines on vertical restraints (2022/C 248/01).

[3] Commission Regulation (EU) No. 330/2010 of 20 April 2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices.