On 25 May 2020, the European Commission (“Commission”) has published its Final Report of the support studies for the evaluation of its Vertical Block Exemption Regulation (“VBER”) and the accompanying Guidelines on Vertical Restraints (the “Final Report”). The Final Report was published following a public consultation from 4 February to 27 May 2019 to gather views on the VBER’s functioning in the digital age. This was inspired by the growing importance of e-commerce and the interest in various online companies. This evolution has affected distribution and pricing strategies for both manufacturers and retailers, which the Commission decided warranted an evaluation of some of the current rules.
The purpose of the evaluation
The VBER and its accompanying Guidelines exempt certain vertical agreements from the prohibition under Article 101(1) TFEU and contains certain “hardcore” restrictions against certain vertical conduct.
As reflected by the Final Report, online trade has expanded rapidly over the past decade, both on a business-to-business and on a business-to-customer level, and distribution models have changed to cater to new trends and market realities, leading to changing customer behaviour. E-commerce and online platforms have made searching for information easier and cheaper for consumers, increasing transparency thus making it easier for customers to compare prices and for suppliers to monitor competitors’ prices. This has led to intensified competition and enabled undertakings to reach a wider set of customers.
In response to these digital changes, companies have also used vertical agreements differently over time. Although the essence of the agreements covered by the VBER and the Guidelines has remained the same, certain agreements – such as online sales restrictions and most-favoured nation (“MFN”) clauses – have become more widespread. As a result, the Commission considers that the VBER and the Guidelines might no longer sufficiently cover the latest developments. The Final Report stated that National Competition Authorities (“NCAs”) and national courts identified vertical restraints most frequently in relation to price restrictions, selective distribution, exclusive distribution and MFN or parity clauses over the past decade. This highlights some of the areas within the current framework the Commission may be considering for potential revision.
Findings from the Final Report
Selective distribution agreements are popular in a wide range of sectors, especially in relation to cosmetics, sports goods and household appliances. The restraints most commonly reported by NCAs in this context include restrictions on internet sales, sales on marketplaces/platforms, price comparison tools, keyword bidding, dual pricing, sales to retailers, and cross-selling. The public consultation found that stakeholders generally think selective distribution agreements should continue to be block-exempted, as these agreements protect brand value, stakeholder investments, and the development of additional sales services.
Most-favoured nation clauses
The consultation distinguished between wholesale MFNs – most common in the ‘mass market’ segment – and retail MFNs – most prevalent in the online world. The responses received by the Commission identified reduction of frequent price negotiations between manufacturers and suppliers as one of main benefits of block-exempting MFN clauses. In the context of retail MFNs, some stakeholders expressed concern about the use of MFNs by travel agencies in the hotel sector. The Commission expressed that view that, based on the information collected during the evaluation, both narrow MFNs (i.e. where better terms cannot be offered via certain channels or to certain parties) and wide MFNs (i.e. where better terms cannot be offered to any channel or party) have generated anticompetitive effects in the hotel booking sector.
More generally, the report observed that determining the effects of MFN clauses requires a case-by-case analysis that looks to the specific facts and that, outside the hotel sector, the information collected in the study did not indicate that either narrow or wide MFN clauses have produced any widespread anti-competitive effects.
Resale price restrictions
Resale price maintenance (“RPM”) is considered as a hardcore restriction under the VBER, so it is illegal unless the party employing it can establish an adequate efficiency justification. As a result, stakeholders confirmed that the use of RPM has decreased over the past decade, but minimum resale prices and minimum advertised prices are still used to an extent. The consultation found that the Guidelines are not sufficiently clear on the rules surrounding RPM. As it is a mechanism to prevent price competition on the intra-brand level, RPM can be used both to strengthen brands and promote competition as well as to support anti-competitive practices. The theoretical and empirical literature, as well as the Commission’s consultation, also suggest that RPM can have both pro- and anti-competitive effects.
The report indicates that recommended resale prices, which are not deemed to be hard-core restrictions by the VBER, are fairly widespread and do not seem problematic. Therefore, most complaints before NCAs were dismissed due to insufficient evidence, which means those recommended resale prices did not operate as fixed or minimum prices. Finally, the Final Report found that maximum resale price restrictions, which also are not hard-core restrictions under the VBER and which are often used to keep consumer prices lower to allow manufacturers’ brand labels to compete with private labels, are less common.
Cumulative effects of vertical restrictions
Cumulative effects refer to situations in which access to a market is significantly restricted by the cumulative effect of parallel networks of similar vertical agreements used by competitors. The literature reviewed during the course of the Commission’s consultation suggests that the cumulative effects of vertical restraints could harm competition more than their isolated use by individual players.
The Final Report concludes that, without the existence of the VBER and the Guidelines, the legal costs for undertakings would be much higher, and legal certainty relating to the assessment of vertical agreements would be reduced. However, some stakeholders have indicated that the current VBER increases compliance costs for certain undertakings as they do not sufficiently reflect the growth of digital commerce over the past decade.
Until fairly recently, the vast majority of case law related to vertical restrictions was at the level of the NCAs and national courts. The Commission’s final report on the e-commerce sector inquiry represented a turning point. Since its publication in May 2017 the Commission has showed renewed interest in vertical restrictions and fined several undertakings for RPM and cross-sales restrictions in 2018. It fined Nike and Guess for restricting cross-border sales in 2019. The Coty judgment of the European Court of Justice (“ECJ”) also brought the question of online marketplace sales to the forefront, as the ECJ ruled that a platform ban within a selective distribution system is permissible under certain circumstances. These recent decisions demonstrate that vertical agreements are likely to remain a topic of interest, including at the level of the EU authorities. Therefore, the current evaluation on the effectiveness, efficiency and relevance of the VBER and its Guidelines is important in light of the digital developments affecting vertical relations. Although the Final Report provides a first glance of likely focus, the Commission still has to carry out a detailed impact assessment, which means that no new rules are to be expected before the expiry of the VBER in May 2022.
The authors would like to thank Dora Pap, trainee solicitor in the Brussels office, for her support in drafting this post.