Overview
On June 1, 2022, both the EU and UK introduced new regulations providing a safe harbour (“Block Exemption”) for certain classes of restrictions in vertical distribution agreements. These changes would replace expiring old regulations. New Vertical Guidelines have also been issued by the European Commission, which is intended to be read alongside VBER to provide further guidance and clarity to businesses. In the UK, the CMA is planning to do the same for VBEO. The CMA and the EU Commission have worked independently but collaboratively in the development of the two sets of vertical safe harbours although, post-Brexit, there are differences between the two. With the UK now outside the EU, businesses must pay attention to each set of safe harbours where they trade in the two markets.
We have produced an alert on each of the two sets of block exemptions (see HERE and HERE). This alert addresses a number of the key differences between them.
One point that emerges from the new regulations is the opportunity and also advisability of undertaking an economic analysis of certain aspects of distribution strategies to provide an ex-ante economic justification for restrictions that may seek to be included in distribution systems. This would include, for example:
- market share assessment at all levels of the vertical chain (30% market cap)
- tensions in information exchanges
- dual pricing
- efficiency arguments for online and offline restrictions and pricing
RPM and MAP
There is little to distinguish between the two approaches to vertical price controls. RPMs are hardcore restrictions in both safe harbours, although the Commission acknowledges that there can be efficiencies and the guidelines offer some scenarios where this might take place. The Commission is more forthcoming on MAPs which are treated as a form of RPM but that the guidelines suggest may, in individual cases, meet the A.101(3) criteria for exemption outside of VBER. An example offered is where it is used to prevent loss-leading promotions by a particular distributor.
Active Sales Restrictions
The structure in both regulations is to characterize active sales restrictions as hardcore, subject to certain limited exceptions. The permitted exceptions are largely the same, with the UK’s offering a specific exception for restrictions on sales of components to customers who manufacture products that compete with those of the supplier. We do not yet have the CMA’s guidelines in this area, but the Commission recognized that there were pro-competitive benefits from some active sales restrictions and provided additional guidance in the guidelines, especially with online sales practices and territorial/customer restrictions now organized by distribution mode: exclusive, selective, free.
Passive Sales Restrictions
In both regimes, passive sales restrictions are hardcore and both have the same two limited exceptions: (i) to prevent wholesalers from selling to end-users and (ii) to prevent sales to unauthorised dealers in territories where the supplier operates or has reserved the territory for, a selective distribution system.
Sharing Information and Monitoring the Dealer Network
This is often the trickiest area for suppliers to feel confident in their actions. Suppliers routinely harvest data from their distributors and customers (where they can) to better understand the markets for their products, the trends, and direction of travel for their business, and what their rivals are up to. From a period of uncertainty, it is now clear that both systems block exempt dual distribution systems under which the supplier may supply distributors and also supply customers directly. In this context, there was a concern that asymmetrical information sharing could be problematic and lead to horizontal information exchanges between competitors, but under the VBER it is now clear that information exchange is block exempted where (i) it is directly related to the implementation of a vertical agreement and (ii) it is necessary (as opposed to desirable) to improve production or distribution of contract goods or services. One point of difference is that the VBEO extends dual distribution to embrace agreements between wholesalers and importers.
Differential Treatment of MFN Clauses
Under the VBEO, wide MFNs are treated as hardcore restrictions and even narrow ones may be subject to review by the CMA. Wide MFNs are typically retail parity provisions under which the product or service may not be offered on better terms on any other channel. By contrast, under VBER, such wide parity clauses are not classified as hardcore restrictions, but require individual assessment under A.101(3). Although narrow MFNs continue to be block-exempted, the Commission has noted that the benefit of the block exemption could be withdrawn if the market is deemed to be too concentrated.
Treatment of Online Marketplaces
The exponential growth of the internet and online sales has been recognized by both the CMA and the Commission as justifying adjustments to the safe harbour qualifications, to permit differential or “dual” pricing and to now permit differential qualification criteria for online and bricks-and-mortar distributors in selective distribution systems – the former so-called “equivalence” test. Higher prices may now be set for products intended to be sold online than for offline sales by the same distributor (to reflect the need to incentivize the higher investments required by a bricks-and-mortar distributor). The central key is that such restrictions should not be used, directly or indirectly, as a means to prevent resellers or their customers from using the internet as an effective means of selling their goods or services.
Exclusive and Selective Distribution Systems
Both new regimes give suppliers greater flexibility in designing their distribution strategies. Dual distribution is permitted; exclusive and selective distribution is permitted, including within the same geographic territory. Shared exclusivity is also permitted in both, with multiple “exclusive” distributors in the same territory and for the same customer group.
Sustainability
There are no specific exemptions for suppliers seeking to address sustainability goals. The CMA is expected to issue guidelines on environment sustainability and the Commission has indicated that suppliers may include such objectives in qualitative criteria. In addition, the Commission has included a dedicated chapter (Chapter 9) in its Horizontal Guidelines.
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Steptoe’s antitrust team, including our in-house economic support, would be happy to support you in any assessment of your distribution networks and answer any specific questions you may have on the new guidelines.
