Time for an upgrade? Review of EU competition rules on vertical arrangements

The Verticals Block Exemption Regulation and the accompanying Vertical Guidelines together form an important toolkit for companies when self-assessing the compatibility of their vertical arrangements with EU competition law. The rules are due to expire in May 2022 and so a consultation by the European Commission on what to do next was expected. However, in the light of market developments since their adoption in 2010, the EC has started early having already consulted stakeholders on the future. The most significant and impactful market development since 2010 is, of course, the explosive growth of e-commerce.

The consultation process is an important development to track, especially for businesses active in online markets. Linklaters responded to the EC’s consultation (available here), advocating for a less theoretical and more pragmatic approach. 

Background

For competition law purposes, vertical agreements are agreements between parties active at different levels in the economic supply chain. It is generally accepted that vertical restraints tend to be less harmful to competition than horizontal restraints (agreements between competitors operating at the same level).

The purpose of the VBER is to exempt from the prohibition contained in Article 101(1) TFEU those vertical agreements which can be assumed to satisfy the conditions of Article 101(3) in that they do not harm competition. The Vertical Guidelines provide guidance on the interpretation of the VBER and Article 101. The general principle (with some limited exceptions) is that an agreement will fall within the VBER safe harbour, provided it does not contain “hardcore” restrictions and provided both manufacturer and distributor do not have more than a 30% market share. The system is designed to provide legal certainty and to promote efficiency.

The EC shares the task of investigating commercial agreements and practices under the EU competition rules with national competition authorities (NCAs). If companies get the assessment of their vertical arrangements wrong or fail to assess, they may face an antitrust investigation and ultimately a fine for a breach of EU competition law either by the EC or NCAs.

A hot topic at EU level 

Until recently, it has been NCAs who were active in pursing antitrust investigations into vertical restrictions. For the EC, these types of investigations have been on the back burner. Prior to 2018, the last fining decision by the EC relating to vertical restrictions dates back to 2003 (Yamaha). The adoption of the EC’s final report on the e-commerce sector inquiry in May 2017 was a turning point. Since then the EC has adopted six infringement decisions concerning vertical restrictions: Nike and Guess were fined in 2019 for restrictions on cross border sales while Asus, Denon & Marantz, Philips and Pioneer were fined in 2018 for resale price maintenance and cross sales restrictions.  We expect more to come.

Online marketplace bans were a central topic both at EU and national level with the landmark Coty judgment of the European Court of Justice. In this case, the CJEU ruled that a supplier of luxury goods can prohibit members on a selective distribution agreement from selling on online marketplaces in certain circumstances.

Understanding digital markets in the broader sense is at the core of the EC’s current competition enforcement policy, most recently evidenced by the commissioned Report on Competition Policy for the Digital Era.

Consultation and response

A revision of the VBER and Guidelines is important because it is essential that the competition landscape evolves to take into account significant market changes in the online sector. These changes have impacted commercial relations and will continue to do so in the coming years. 
In addition, a side effect of significant enforcement by NCAs rather than the EC in this area has been the non-uniform application of the rules at national level, decreasing some of the potential for legal certainty. There is a need for harmonisation.

Finally, the EC’s consultation is a good opportunity to clarify some grey areas in the current VBER and Guidelines. 

In our response to the consultation, we advocated for an approach more responsive to business needs. The main focus of our response was:  

  • Working toward a more harmonised approach of vertical restraints within the EU.
  • Codifying the recent ECJ judgment concerning online marketplace bans.
  • Extending the categories of arrangements falling outside the scope of Article 101 (1) to consider the distribution set up of certain key sectors.
  • Clarifying the approach to dual distribution schemes with suppliers and distributors increasingly being both in a vertical and horizontal relationship.
  • Revisiting the European approach of price restrictions (resale price maintenance as well as dual pricing). 
Next steps 

The EC will publish results of the consultation in the form of a Staff Working document and summary of responses during the first half of 2020. Following this, the EC will carry out an impact assessment.  We do not expect any new rules to enter into force before the expiry of the current VBER and Guidelines at the end of May 2022.