The Vertical Block Exemption Regulation1 (VBER)—the antitrust legislation governing most vertical arrangements in Europe2—entered into force on June 1, 2010. Among other things, it creates a safe harbor for vertical agreements which meet certain conditions, shielding them practically from the application of Article 101 of the Treaty on the Functioning of the European Union (TFEU). Guided by the VBER and the Vertical Guidelines3 published by the European Commission (EC), the onus is on companies to self-assess their vertical agreements.
As the VBER will expire on May 31, 2022, the EC has recently undertaken an evaluation of the VBER and the Vertical Guidelines to determine whether the EC should let the VBER lapse, renew it, or revise it. The EC published on September 8, 2020 a Staff Working Document4 on the results of this evaluation and while the Staff Working Document does not reflect a formal or final position of the EC, it gives an indication of staff’s current thinking on this topic.
Of major significance to the EC’s evaluation are market developments, and in particular the growth of online sales and online platforms, which have changed the nature of how many companies supply and distribute goods and services. This gear-change towards a digital economy has led to several issues with the functioning of the VBER and has made it increasingly difficult for companies to self-assess their vertical agreements with confidence. Executive Vice President Margrethe Vestager, in charge of competition policy, acknowledged that the rules will need to be adapted in a way that ensures they remain appropriate in a rapidly changing digital world,5 and this is sure to be a challenge the EC faces when revising the rules.
This piece highlights some of the key issues the EC has identified during this preliminary evaluation exercise, to give companies a sense of the changes to the law that the EC will likely seek to bring forward.
Market Developments and the Ripple Effects
The Staff Working Document stresses that search engines, online marketplaces and price comparison sites are particularly important for consumers who purchase online. It touts the fact that price transparency and price competition have increased with online trade, as consumers can obtain and compare information on-the-spot, and switch with ease between different purchasing channels. It acknowledges that the emergence of alternative online distribution models has made it easier for retailers (including smaller retailers) to access customers.
Commenting on the behavior of businesses, the EC finds:
- Many businesses seek to create a smooth omnichannel experiences for their consumers.
- Suppliers in certain sectors are making less use of exclusive distribution networks as territorial sales restrictions are harder to enforce.
- Some manufacturers have sought greater control over their distribution networks, with a view to better controlling price and quality. For example, some manufacturers have started to sell their products directly to consumers online; manufacturers are increasingly using selective distribution systems; and manufacturers have made increasing use of contractual restrictions.
- Retail parity clauses (not analyzed in detail in the current legislation) have become common in agreements involving online travel agencies and hotels, and such clauses may be imposed by the platform or be requested by retailers in certain contexts.
Key Issues Identified
An overarching problem, say EC staff, is that the VBER and Vertical Guidelines do not properly cater for many of these market developments, limiting the effectiveness, efficiency, and coherence of the rules. Some of the issues identified in the Staff Working Document are:
- Certain provisions lack clarity, are difficult to apply, or are not adapted to the online environment.
- There is no existing guidance on the treatment of certain practices and restrictions that have become more prevalent in recent years, such as online platform bans and restrictions on the use of price comparison websites. There is a dispute among stakeholders as to whether retail parity clauses, online platform bans, and some restrictions on online advertising should be qualified as hardcore restrictions. The Staff Working Document floats the idea that some might be classified as hardcore restrictions.
- Some stakeholders have argued that the application of a market share threshold (currently 30 percent) to online intermediaries may lead to false positives (i.e., exempting agreements which cannot be assumed with sufficient certainty to satisfy the conditions for safe harbor protection).
- Others have questioned the level of the market share threshold, and for example, whether it may be too high or whether it is an appropriate indicator of market power for vertical agreements in digital technology sectors at all.
- There have been divergent approaches between national competition authorities and national courts, including with regard to the treatment of bans on sales through online marketplaces, which diminishes the effectiveness of the rules.
Next Steps
The EC will now launch an impact assessment of possible revisions to the VBER. Stakeholders will be afforded further opportunities to provide input by commenting on the impact assessment, making submissions during a public consultation, and filing remarks on a draft of the revised rules, which the EC aims to publish during the course of next year.
U.S.-based companies doing business in Europe should be particularly attentive to changes that add to the list of hardcore or “by object” restrictions, as such clauses may prove to be difficult to enforce in Europe, notwithstanding the fact that they are presumptively valid in the U.S.
ENDNOTES
[1] Commission Regulation (EU) No 330/2010 of April 20, 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, OJ L 102, Apr. 23, 2010, p. 1.
[2] Vertical agreements between competitors are subject to a closer level of scrutiny. See Regulation 330/2010, Art.2(4).
[3] Guidelines on Vertical Restraints, OJ C 130, May 19, 2010, p. 1.
[4] Commission Staff Working Document of the Vertical Block Exemption Regulation, available at: This link will open a PDF document that may not be accessiblehttps://ec.europa.eu/competition/consultations/2018_vber/staff_working_document.pdf.
[5] “Antitrust: Commission publishes findings of the evaluation of the Vertical Block Exemption Regulation”, EC press release (Sept. 8, 2020), available at: https://ec.europa.eu/commission/presscorner/detail/en/IP_20_1564.
This post comes to us from Wilson Sonsini Goodrich & Rosati. It is based on the firm’s memorandum, “The European Commission Re-Evaluates the Rules Governing Vertical Agreements: The Impact of Growth in Online Sales and Online Platforms,” dated September 15, 2020, and available here.