This summer, the European Commission released a draft version of the European Union Vertical Agreements Block Exemption Regulation (“VBER”) along with draft revised guidelines on vertical restraints to supplant the existing guidance on vertical agreements (i.e., agreements entered into between businesses operating at different levels of the supply chain). With the current rules having been in place for over a decade and set to expire on May 31, 2022, one of the key components of the new VBER draft and corresponding guidelines on vertical restraints is a focus on e-commerce, including sales on marketplace sites, which makes for potentially significant impacts on brands when the revisions to the longstanding guidelines come into play.
VBER has been in place in order to provide companies that maintain vertical agreements with greater certainty about the compatibility of their agreements with Article 101(1) of the Treaty on the Functioning of the European Union (“TFEU”) – which prohibits agreements that may affect trade between EU countries, including by preventing, restricting or distorting competition – by creating a safe harbor exemption. In a nutshell: If neither of the parties’ market share exceeds 30 percent, vertical agreements that do not contain any so-called “hardcore restrictions,” such as resale price maintenance restrictions, for instance, can be presumed to benefit from an exemption. (Agreements that do not satisfy the VBER conditions do not necessarily run afoul of Article 101(1) TFEU. However, they require individual assessments.)
In terms of the contracting parties, “The most obvious examples may occur in retail,” says Beale & Co.’s Paul Henty, who points to “the supplier of luxury fashion items and its authorized suppliers,” for instance. “But the concept goes wider,” he notes, as “vertical arrangements also include an agreement between a manufacturer of materials and its wholesaler or between a supplier of raw materials and a manufacturer which integrates those into its own goods.”
Among the potential violations of TFEU: Companies are prohibited from imposing resale prices on distributors and restraining them completely from selling online, and also from restricting authorized wholesalers from selling outside their allocated territories, from making cross-border sales to end users, or from cross-selling to other members of the selective distribution network within the EEA. While Henty states that “most vertical relationships however do not give rise to competition concerns,” brands, such as Nike, Guess, and Hello Kitty-maker Sanrio, among others, have, nonetheless, come under fire in connection with their utilization of such restrictions on trade.
VBER: Positive Reforms
Given brands’ enduring attempts to exert greater control over the distribution of their products, including the conditions in which their products are offered up and sold, it should not be surprising that “many leading manufacturers and brand owners have been lobbying for positive reforms in this area,” per Osborne Clarke attorneys Marc Shrimpling, Valeria Veneziano, Rebecca Malone, Sebastian Hack, Cecilia Sbrolli and Alexandre Glatz. They assert that from the perspective of manufacturers and brand owners operating in the EU and the United Kingdom (although the UK has left the EU, VBER is one example of retained legislation), there are both benefits and drawbacks to the proposed reforms that come by way of the VBER draft. They highlight the following “positive aspects of the proposed reforms for manufacturers and brand owners.”
Dual pricing will be permitted – Under the present VBER, it is illegal to set different wholesale prices depending on whether the products in question will be resold online or in a physical store. Earlier this year in France, for instance, Lego was forced to amend its discount policy to remove aspects of support to physical retailers that amounted to de facto dual pricing. Under the new regulations, in both the UK and EU, at least some degree of dual pricing will be permitted in order to offer positive support and incentives to bricks-and-mortar retailers.
Extra protection and flexibility for selective distribution models – Both the UK and EU appear to have recognized the value of selective distribution (“SD”) to brand owners as a way to ensure consistent and effective execution of their retail strategies. The proposals will give manufacturers greater powers to enforce their SD systems by preventing all sales into the SD territory by unauthorized distributors. The proposals also offer manufacturers more flexibility in setting the SD selection criteria so that they will not have an obligation to set equivalent criteria for online and offline sales.
Express freedom to restrict reselling on online marketplaces – As an express confirmation of the Court of Justice for the European Union’s seminal judgment in the Coty case back in 2017, in which the court held that “a supplier of luxury goods can prohibit its authorized distributors from selling those goods on a third-party internet platform such as Amazon” in order “to preserve the luxury image of the goods,” the new proposals will make it clear that manufacturers are free to restrict retailers’ ability to resell on online marketplaces, regardless of whether the products in question are luxury goods or highly technical offerings.
Ability to “share” exclusivity between selected retail partners – Under the current VBER, the legal protections afforded to an exclusive distribution partner are only valid if the manufacturer selects just one partner per territory. Under the proposed reforms, it will now be possible to allocate a particular territory or customer group to a number of partners without sacrificing any legal protections.
Areas of Concern
Even with the foregoing gains in mind, the proposed new VBER, the initial consultation period for which closed last month and which is now subject to a final round of stakeholder input, there are a number of areas that Shrimpling, Veneziano, Malone, Hack, Sbrolli and Glatz characterize as “areas of concern for manufacturers and brand owners,” such as …
Resale price maintenance remains a “hardcore” prohibition – Despite lobbying efforts from certain sectors, the EU and UK competition regulators do not allow manufacturers to set “minimum advertised prices,” although this is permitted in certain other jurisdictions, most notably the USA. Therefore, retailers must still remain free to determine their resale prices, subject only to legitimate maximum price instructions and/or price recommendations from the manufacturer.
Additional restrictions on online advertising now expressly blacklisted – In addition to an outright prohibition on preventing online sales by retailers, the EU has made clear that preventing a retailer from advertising online, including through the use of price comparison websites and purchasing search engine preferencing, will amount to illegal conduct.
Dual distribution under the spotlight, particularly where the manufacturer has a significant direct-to-consumer presence – There is increased focus on the need for manufacturers to ensure that they have effective internal information barriers in place to ensure that any data and insights that they receive from their third-party retail partners do not unduly influence their own independent direct-to-consumer retail operations.
Continued uncertainty around the use of agency agreements, most favored nation clauses and online intermediaries – Although the EU and UK regulators have recognized the importance of fulfilment partners and other intermediaries that are crucial to the execution of a successful e-commerce business, there is still considerable uncertainty about how manufacturers can use these intermediaries without creating a material competition law risk.
Hints of divergence between EU and UK competition regimes – At this stage, the differences between EU and UK regulation of supply and distribution agreements appear relatively minor. But manufacturers and brand owners may start to see the regulatory landscapes diverging, which may create additional compliance challenges in the longer term, compared to the uniformity and stability of the VBER, which still applies equally in both regions until May 31, 2022.