The European Commission’s evaluation of the antitrust rules on vertical agreements: where are we heading?

Background

On 8 September 2020, the European Commission (Commission) published a Staff Working Document that summarises the findings of its evaluation of the Vertical Block Exemption Regulation (VBER)¹, together with the Guidelines on Vertical Restraints (Vertical Guidelines)². The evaluation represents the first phase in the Commission’s ongoing review of the VBER ahead of its expiry on 31 May 2022. It was aimed at gathering evidence on the functioning of the VBER, together with the Vertical Guidelines, in order to decide whether it should lapse, be renewed in its current form, or be revised.

The VBER defines those categories of vertical agreements that are exempted from the prohibition on anti-competitive agreements (Article 101 TFEU), on the basis that their restrictive effects are counterbalanced by pro-competitive effects (in accordance with Article 101(3) TFEU). It is intended to provide legal certainty to stakeholders as to which vertical agreements can be considered compliant with Article 101 TFEU based on a simpler set of rules, and which agreements require an extended individual assessment. It also aims to serve as a common framework of assessment for national competition authorities (NCAs) and national courts, in order to ensure consistency in the application of the relevant rules and, therefore, a level playing field for businesses operating across the EU.

The evaluation has shown that the VBER and the Vertical Guidelines are still relevant. There is consensus that they are useful tools that greatly facilitate the self-assessment of vertical agreements and therefore help reduce compliance costs for businesses entering into such agreements.

At the same time, the evaluation has identified a number of issues with regard to the functioning of the rules. But there is no suggestion that the regime will be fundamentally overhauled. Rather, the current direction of travel appears to be to hone and modernise the rules. In this alert, we pick out the key areas where we can expect to see changes.

Adapting the rules to the changed market landscape

A key concern that arises from the evaluation is the fact that the current rules are not well adapted to market developments that have taken place since the adoption of the rules.

In particular, over the past ten years, online sales have grown considerably, and certain online business models, such as platforms or price comparison websites, have gained in importance. The emergence of the digital economy, arguably the most significant market development since the current rules were adopted, can be expected to have a significant impact on the Commission’s review of the VBER and the Vertical Guidelines. The evaluation highlights that, with the growth of e-commerce, new types of restriction have become prevalent, such as restrictions on using online marketplaces and price comparison websites, and restrictions on online advertising or retail parity clauses. We therefore expect the Commission to focus much of its efforts on providing new guidance on these issues. The evaluation also indicates that, in other areas already covered by the rules (such as resale price maintenance (RPM), territorial and customer allocation, selective distribution agreements and agency agreements), the VBER and the Vertical Guidelines should be updated to reflect the e-commerce environment. So we can expect some tweaks here as well.

Addressing gaps in the rules

The evaluation identifies a number of other areas on which the rules do not provide effective guidance.

Data sharing is a good example. Data has become an increasingly important market input and many businesses depend on timely access to it. Yet the Vertical Guidelines do not provide any guidance on information flows between various levels of the distribution chain. For example, commodity producers typically need to collect sales volume forecasts from their distributors, so that they can optimise their production planning. Such producers may also regularly need to inform their distributors in advance about scheduled plant maintenance, to allow distributors and their customers to arrange for alternative sources of supply, as needed. However, sometimes, the same producers also directly sell their products to customers, in competition with their distributors (so-called dual distribution). Information exchange is equally relevant in relation to collection of information from downstream parties, eg retailers. The need for guidance therefore seems clear. It will be important for the Commission, when crafting these new sections, to ensure that its position is consistent with any changes it plans to make to its guidelines on horizontal cooperation agreements and related block exemptions, on which it is carrying out a similar evaluation.

The evaluation also points to the fact that, since the VBER was adopted, the case law and enforcement practice with regard to certain vertical agreements and related restrictions has developed significantly. We can expect that the VBER and Vertical Guidelines will be updated to reflect relevant EU case law. In the context of selective distribution agreements, for example, a number of important judgments have been issued, including:

• Outright internet sales bans: The 2011 European Court of Justice (ECJ) judgment in Pierre Fabre³ confirmed that an outright internet sales ban imposed on distributors in a selective distribution system constitutes a restriction of competition by object as well as a hardcore restriction for the purposes of the previous block exemption regulation governing vertical agreements. This means that it can never be block exempted under that regulation.
• Marketplace/platform bans: The 2017 ECJ ruling in Coty⁴ (a preliminary reference by a German court) confirmed that platform bans do not constitute hardcore restrictions for the purposes of the VBER. It further clarified that a supplier of certain luxury goods running a selective distribution network can lawfully prohibit agreed distributors from selling the products on a third-party internet platform, such as Amazon or eBay.

However, the evaluation also highlights that there is still some uncertainty as to the general applicability of certain recent rulings. For instance, it remains unclear to what extent the permissibility of marketplace bans is limited to specific types of products. And whether the extent to which other forms of online retailing are alternatives for affected retailers, such as sales via the authorised distributors’ own websites, is relevant. We hope that, in reflecting this case law in the rules, the Commission will be willing to provide guidance on these areas of uncertainty.

Resolving divergences in assessment across member states

The evaluation has also shown that the benefit of providing a common framework of assessment has been undermined by the fact that NCAs and courts have taken divergent approaches in some areas.

Retail parity clauses or most favoured nation (MFN) clauses, which have become more common over time, are a good illustration. While retail parity clauses are covered by the VBER, neither it nor the Vertical Guidelines provide any specific guidance on them. In this area, all enforcement has been resolved by the Commission accepting commitments from the firms involved, meaning no infringement decision and, as a result, no conclusive legal assessment of the relevant restrictions. NCAs have been active enforcers in this area, but have taken inconsistent approaches, attaching varying degrees of risk to parity clauses. Several NCAs have abstained from taking any action against such clauses, which they consider to have no or only a low negative impact on competition. Other NCAs have been more interventionist, reporting to have reviewed over the last decade a total of 20 cases involving parity clauses. These NCAs make a distinction between wide (ie requiring the contracting party to offer the same or better prices and conditions as those offered on any other sales channel) or narrow (ie imposing restrictions only on the contracting party’s direct sales channel) parity clauses. They take the view that, depending on market circumstances, narrow retail parity clauses are generally more likely to be justified than the wide variety. One of them, the German competition authority, has taken an even stricter stance in at least one case, where it concluded that even a narrow retail parity clause was illegal. Finally, some Member States, notably France, Italy, Austria and Belgium, have decided to introduce legislation prohibiting the use of parity clauses by online travel agencies in the hotel sector, rather than relying on a case-by-case analysis of the NCAs.

An external evaluation study commissioned by the Commission for the purposes of the VBER review does not help to promote clarity: it identifies mixed evidence as regards the effects of retail parity clauses, depending on the nature of the clause and the specific market context. Given these divergences, we can expect that the Commission, in the revised VBER or Vertical Guidelines, will seek to iron out inconsistencies in this area. The fact that the Commission has recently published a call for proposals for training national judges in EU competition law confirms its concern with improving the consistency of enforcement at national level.

Updating existing rules

Not all issues identified in the evaluation are necessarily linked to new market developments. Some stakeholders have called for clarification and, in some cases, even policy change in respect to areas already covered by the rules.

One example is RPM, an area that is certainly not new to controversy. The evaluation confirms that opinions on RPM remain deeply divided. On the one hand, a number of stakeholders, and even certain NCAs, questioned whether it is correct to attach to RPM a presumption of illegality, given its welfare-enhancing effects in certain situations. This view is supported by the evaluation study, which, for a reference market (books), modelled prices in several EU member states between 1996 and 2018, and concluded that fixed book prices led to “a higher output and slightly lower prices. As a result, consumer welfare would seem to have been higher in the presence of these RPM agreements”. On the other hand, the Commission notes that the findings in the book sector cannot be directly transposed to other sectors. Besides, a number of NCAs continue to hold the view that RPM is a serious violation of antitrust rules, which would explain why, out of 391 vertical cases dealt with by NCAs over the past ten years, as many as 210 (that is, more than half) concerned RPM.

Given the attention RPM has attracted during the evaluation, we can expect that the Commission will give careful consideration to its guidance on this issue in the revised VBER or the Vertical Guidelines. Whilst any significant policy change may be unlikely, the Commission might be willing to address certain less fundamental issues identified in the evaluation, such as whether and in what circumstances recommended prices combined with price monitoring can amount to RPM, and how RPM can be used to support product launches and short-term price campaigns.

Ensuring the rules can accommodate future market developments

Finally, the evaluation highlights the concern that the rules should not only address known issues but also cater for possible new types of vertical agreements and restrictions, which are all the more likely to emerge given the accelerated evolution in market conditions in recent years. Future market developments are, of course, hard to predict. The Commission suggests that, in order to make the rules as far as possible “future-proof”, there is a need for the rules to contain bright-line principles alongside the more specific guidance in relation to commonly encountered restrictions.

Next steps

Based on the findings of the evaluation, the Commission will now launch an impact assessment to look into the policy options for a revision of the rules in order to address the issues identified during the evaluation.

The expected next steps are as follows:

• “Inception impact assessment” (October-December 2020): the Commission is expected to collect comments on the roadmap that will lead to the adoption of the new VBER and Vertical Guidelines
• Publication of the draft text of the legislation and the guidelines (sometime in 2021)
• Consultation on the draft text and guidelines (also in 2021) and
• Adoption and entry into force of the new rules (May 2022).

_{¹ 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, OJ L 102, 23.4.2010, p. 1-7.}

_{² Guidelines on Vertical Restraints, OJ C 130, 19.5.2010, p. 1-46.}

_{³ Case C-439/09 Pierre Fabre Dermo-Cosmétique SAS v Président de l’Autorité de la concurrence and Ministre de l’Économie, de l’Industrie et de l’Emploi [2011] ECLI:EU:C:2011:649.}

_{⁴ Case C-230/16 Coty Germany GmbH v Parfümerie Akzente GmbH [2017] ECLI:EU:C:2017:603.}