On 1 June 2022, the European Commission’s newly revised Vertical Block Exemption Regulation and accompanying Vertical Guidelines entered into force. The new rules contain several important changes to the legal regime governing distribution of goods and services, and are stricter in some regards (in relation to dual distribution and so-called parity obligations), but on the other hand provide greater flexibility for suppliers to impose certain restrictions on their distributors’ active and online sales.
Many distribution arrangements currently in place will be affected. For existing agreements, the Vertical Block Exemption Regulation allows for a one-year transitional period ending 31 May 2023. In light of the significant changes introduced, companies should immediately initiate a review of their existing vertical agreements in order to align them with the new rules.
Below, we set out some of the main changes to consider.
Dual distributionDual distribution refers to situations where a supplier sells its goods or services both through independent distributors and directly to end customers in competition with those distributors.
Information exchange
Previous rules
Under the old rules, exchange of potentially sensitive information between supplier and distributor in the context of dual distribution could generally benefit from the safe harbour under the Vertical Block Exemption Regulation, provided that certain other requirements were fulfilled.
Revised rules
With the new rules, the European Commission aims to regulate dual distribution more strictly, and thereby narrow the scope of permissible information exchange in this context. Information exchange between supplier and distributor now only falls within the safe harbour if it:
(i) directly relates to the implementation of the distribution agreement; and
(ii) is necessary to improve the production and distribution of the contract goods or services.
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Online intermediation services (“OIS”) allow companies to offer their goods or services to other companies or final customers via the OIS provider’s online platform (e.g., Amazon and other online marketplaces, price-comparison services and app stores).
Previous rules
The old rules did not contain any specific provisions regulating OIS.
Revised rules
Under the revised regime, vertical agreements with OIS providers do not benefit from the safe harbour if the OIS provider has a hybrid function, i.e. if it also sells goods or services in competition with the firms using the OIS.
It has also been clarified that an OIS provider will now be considered a supplier and will generally not qualify as an “agent” (which would be exempt from the EU competition rules).
Parity clausesParity clauses, sometimes referred to as most favoured nation (“MFN”) clauses, are provisions which require a party to offer the other party the same, or better, terms than those offered to third parties. |
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Previous rules
Under the old rules, all forms of parity clauses could benefit from the safe harbour.
Revised rules
Under the revised rules, parity obligations that prevent buyers of OIS from offering goods or services to end-users under more favourable conditions via competing OIS do not benefit from the safe harbour, e.g. Amazon may not prevent a company selling goods on Amazon from selling cheaper on a competing platform.
Other forms of parity obligations may still benefit from the safe harbour.
Active salesActive sales refers to sales made by actively targeting customers through direct sales promotion such as visits, emails, or advertising (as opposed to passive sales, which is selling to a customer who has not been targeted in any kind of campaign or advertising).
Previous rules
Under the old rules, suppliers had less flexibility when establishing exclusive and selective distribution systems. For example, the safe harbour concerning the possibility for a supplier to limit active sales only covered agreements concerning territories or customer groups for which the supplier had appointed one single exclusive distributor.
There was also some uncertainty as to when online sales qualified as active sales, e.g., with regard to whether the use of a top domain and/or language used on a distributor’s website could imply active sales (i.e., “.com”, “.se” etc).
Revised rules
For exclusive distribution systems, the revised regime provides for a new concept of “shared exclusivity” whereby a supplier can appoint up to five exclusive distributors within a certain territory or customer group and still apply active sales restrictions towards that territory or customer group. It also allows a supplier to require that exclusivity is passed on to the buyer’s own customers.
For selective distribution systems, the revised rules allow suppliers to prohibit all its distributors from selling to unauthorised distributors in the territory where the selective distribution system is used. It also allows a supplier to require that the prohibition of such sales is passed on to the buyer’s customers.
Further, it has been clarified that targeted online advertising and different language options/domain names for websites qualify as active sales.
Non-compete clauses Non-compete clauses are provisions which oblige the buyer not to buy or sell competing goods or services, or which oblige the buyer to purchase more than 80% of their demand from the supplier.
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The old rules excluded non-compete obligations from the safe harbour where their duration exceeded, or was tacitly renewable beyond, five years.
Revised rules
While the revised regime retains the above exclusion, the new Vertical Guidelines clarify that a non-compete clause which is tacitly renewable beyond five years can still benefit from the safe harbour provided that the buyer is able to effectively renegotiate or terminate the agreement with a reasonable notice period and at a reasonable cost.
Restrictions of online salesPrevious rules
The old rules did not contain any express provisions relating to restrictions of online sales. However, when the old rules were adopted, e-commerce and online sales were considered in need of special protection relative to brick-and-mortar offline sales channels, and the accompanying guidelines took the view that restrictions on distributors’ online sales to a large extent should be seen as restrictions of passive sales outside the distributors’ “home” territory. Therefore, most types of restrictions of online sales were not deemed to benefit from the safe harbour.
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Revised rules
Times change and the European Commission now considers online sales to be a well-functioning sales channel, meaning that this special protection is no longer necessary. Thus, restrictions on online sales are now generally accepted, unless they go so far that they “prevent the effective use of the internet” as a sales channel.
The new Vertical Guidelines also clarify, however, that criteria for online sales, such as product display, may differ due to the specific characteristics of each channel.
Practical implications for your businessRecommended action
The revised rules introduce significant changes that warrant a review of your new and existing vertical agreements. The revised regime applies immediately to all agreements entered into after 1 June 2022 and these must therefore be compliant from the outset. Existing agreements that were already in force on 31 May 2022 are subject to a one year transitional period, and should therefore be reviewed and made compliant before 1 June 2023. To ensure compliance (as well as to benefit from the new flexibilities introduced) we recommend that businesses take the following steps:- Train legal, compliance, sales and sourcing employees on the revised rules
- Map all existing agreements affected by the revised regime, and make a risk assessment of all such agreements, including any practices not explicitly reflected in the agreements
- Consider new business opportunities and routes to market in light of the revised rules, e.g., opportunities to utilise shared exclusivity and to impose online sales restrictions
- Consider risks and routes to market in relation to dual distribution – do they necessitate changes to current commercial arrangements / set-ups?
- Make sure that all new agreements comply
- Update all relevant templates
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Agreements which do not follow the new regime may be in violation of, EU competition law. While agreements with hardcore restrictions fall outside of the safe harbour in their entirety, agreements with excluded restrictions may still benefit from the safe harbour as only the specific excluded restriction falls outside of the safe harbour.
The key risks are:- Fines – up to 10 per cent of the group companies’ worldwide turnover
- Potential damages claims for example by competitors or affected customers
- Invalidity of anti-competitive restrictions in the agreements
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Who to contact?Please contact our experts in the EU & Competition practice group for more information and support in guiding your organisation through the review process.
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