On May 10, 2022, the European Commission (EC) adopted new regulations, updating the Vertical Block Exemption Regulation (VBER) and the EC's Vertical Guidelines (VGL) to make them "fit for an even more digitalized decade ahead."1 The updated regulations will cover broadly all vertical agreements (i.e., agreements between companies at different levels of the supply chain) including distribution agreements for anyone selling goods or services to EU customers through resellers or other intermediaries.
The new rules will come into force starting on June 1, 2022 and apply to all vertical agreements concluded on or after that day. Earlier vertical agreements satisfying the criteria of the "old" VBER will only be judged against stricter provisions of the updated rules as of June 1, 2023.
The EC's update is important because it determines which vertical agreements benefit from a legal "safe harbor" against challenges under EU competition law and EU Member States' national competition laws. Although agreements that fall outside the VBER safe harbor are not illegal, such agreements must be considered on a case-by case-basis and this can open the door for conflicting interpretations by national regulators. The vertical rules also determine which restraints are considered "hardcore infringements" that typically harm consumers (and violate Article 101 of the Treaty on the Functioning of the European Union).
Whether the updated rules reflect a tightening or a relaxation of the current approach depends on where a company sits in the supply chain. Following the EC's increased scrutiny of online platforms in other areas, providers of online intermediation services with market shares below 30 percent will lose some of the benefits of the "old" VBER (providers with higher market shares never enjoyed those benefits).
- Specifically, online marketplaces that also compete with third-party vendors selling on their marketplaces will see stricter standards applied to their access to data of third-party vendors.
- The VBER also excludes certain price parity (or MFN) clauses from the safe harbor for some online platforms.
In contrast, the vertical rules will be relaxed for other companies active in online distribution:
- While internet sales bans imposed on distributors are prohibited hardcore infringements, the new rules will permit other online sales restrictions such as different online/offline sales conditions, including dual pricing, and online marketplace bans.
- Some restrictions of online advertising will be permissible, e.g., requirements as to ad quality standards or prohibiting the use of suppliers' brand names in the domain of the distributor's online store. Other practices remain prohibited, such as preventing a distributor from bidding on supplier's trademarks or brand names in search advertising keyword auctions.
- Further, the new rules permit stronger protection of exclusive distributors from other traders (or their direct customers) making online offerings of the same products targeted at the exclusive territories. The latter goes hand in hand with a broadening of the EC's interpretation of "exclusive" distribution, allowing the protection of up to five "exclusive" distribution arrangements per territory or customer group.
While these changes largely follow an earlier draft published by the EC in July 2021, the biggest "last-minute" change concerns the safe harbor for information exchanges in dual distribution relationships. While the EC removes a previously envisaged comprehensive safe harbor for smaller companies, the new VBER clarifies that certain types of information exchanges will be block exempted for all companies with market shares not exceeding 30 percent (unless they are providers of online intermediation services, see above).
Specifically, the new VBER clarifies that information exchanges will be block exempted if they prove to be "directly related to the implementation" of the agreement or "necessary to improve the production or distribution of the contract goods or services." This will significantly enhance companies' ability to tailor information obligations in dual distribution agreements to the respective commercial relationship and better control the related antitrust risk (providing valuable guidance even for dual distributors that do not fall within the VBER's 30 percent market share safe harbor).
Companies that sell in Europe as well as the UK should be aware that the updated VBER will apply in EU Member States only. Starting from June 1, 2022, the UK will replace the EU vertical rules, which it has continued to apply post-Brexit, with its own Vertical Agreement Block Exemption Order (VABEO). While the VABEO closely mirrors the EU's new rules and follows the CMA's express intent not to create a broad gap between the EU and UK rules which might endanger trade with the continent, the two sets of rules are not identical.
The CMA has repeatedly stated that where "the EU's approach doesn't work for UK markets, we will take a different view."2 Companies need to be most mindful where the VABEO may be more restrictive than the VBER, for example with respect to price parity/MFN clauses. Further gaps may develop between the EU and UK approaches to vertical agreements in the form of diverging enforcement patterns and case law, even in the case of language that appears similar.
For more information on the implications of the EU's and UK's new vertical rules, please contact Beau Buffier or Deirdre Carroll in Wilson Sonsini's antitrust and competition practice.
[1] Commissioner Vestager as quoted by European Commission, Press Release, May 10, 2022, IP/22/2844.
[2] See, e.g., Michael Grenfell (Executive Director of Enforcement): The CMA in turbulent times—where we are and where we're going; speech published on May 11, 2022; available at: https://www.gov.uk/government/speeches/michael-grenfell-the-cma-in-turbulent-times-where-we-are-and-where-were-going.