Modifications to the block exemption: is the agreement with your distributor still valid after 1 June 2022?

1. What is the Vertical Block Exemption Regulation?

The Vertical Block Exemption Regulation (VBER) creates an exception to the principles of the  cartel prohibition for certain vertical agreements.

A vertical agreement is an agreement (or concerted practices) between two or more undertakings operating at a different level of the production or distribution chain, and relating to the conditions under which the parties may purchase, sell or resell certain goods or services. Classically, this refers to the relationship between manufacturer and the distributor (distribution agreement) or wholesaler and the retailer (purchasing agreement).

Vertical agreements between undertakings are only valid if they meet the conditions set out in the VBER. If this is not the case, they are prohibited and thus not enforceable. Such agreements (or behaviours) may even result in fines.

2. Purpose of the changes?

The current revision is mainly due to the growing digitalisation of the economy, the unstoppable growth of online sales along with the expansion of large e-commerce companies and platforms.

The European Commission had also already noticed that certain matters wrongly fell outside or within the block exemption, so that in certain cases the rules appeared to be either too strict or not strict enough.

The European Commission therefore wanted, on the one hand, to adapt the existing VBER to this new reality and, on the other hand, to further harmonise the implementation of the VBER in the European Union so that undertakings could market their goods and services across the continent as easily as possible.

The three main objectives with the current review of the Commission are:

• to eliminate rules that are unfair outside or within the block exemption. As a result, the block exemption has become stricter for certain types of agreements but more flexible for others;
• to modernise the guidelines in response to the growth of e-commerce and online platforms and to ensure a more harmonised implementation of the rules throughout the European Union;
• to reduce compliance costs for businesses by simplifying complex parts of the current rules and streamlining the existing guidelines.

3. What are the proposed changes?

As already stated, the European Commission is proposing both stricter requirements and a number of relaxations taking into account the digitisation of many aspects of the economy.

We will take a closer look at some of the important changes below.

3.1 Dual Distribution Agreements

Dual distribution agreements fall under the VBER. Under a dual distribution agreement, a supplier distributes its goods or services not only through independent distributors but also directly to end users. As a result, this supplier competes directly with its own independent distributors, which may be a competition problem.

Dual distribution has increased with the digitalisation of the market as it has become much easier for manufacturers and suppliers to reach end users directly through their own online shops or through online marketplaces (such as Amazon.com or Bol.com).

The European Commission is also aware that dual distribution has become increasingly common and that direct sales by suppliers through their own online shops or online marketplaces are a reality.

However, the Commission is concerned about the fact that suppliers and distributors (who are in principle competitors for their end users) may exchange business-sensitive information, such as information about prices, promotions or customers, and thus coordinate their pricing.

Therefore, it was decided to set stricter rules with regard to the exchange of information between manufacturers and distributors/retailers. In the future, exchange of information between manufacturers and intermediaries will no longer be allowed.

Please note that the market share of the manufacturer and the retailer at retail level will always be taken into account. It is only if the market share exceeds 10% that the exchange of information between manufacturer and retailer will not be permitted.

3.2 Most-favoured-nation clauses

With a most-favoured-nation (MFN) clause, also referred to as a parity clause, an undertaking undertakes to offer its contracting party the same or better conditions as those offered on another sales channel. In other words, it concerns arrangements by which it is agreed that goods or services will not be offered cheaper anywhere else.

These MFN clauses are block exempted under the current rules. Hence, it is currently permitted to agree on such clauses.   

However, research and evaluation by the European Commission has shown that the use of MFN clauses is increasing in all sectors, and certainly in relation to online platforms (e.g. booking.com).

The European Commission now intends to abolish the exemption for such MFN clauses. This means that in the future such MFN clauses are prohibited.

3.3 Selective and exclusive distribution

Under the current VBER, it is possible, under certain conditions, to entrust the sale of  products to only a limited number of distributors, which by definition restricts the competition to some extent. This is possible through either the system of selective distribution or the system of exclusive distribution.

Under the new VBER, these rules  are broadened by also providing an exemption for so-called shared exclusive distribution.

Let us first briefly explain selective and exclusive distribution before moving on to the new system of shared exclusivity.

a. Selective distribution

A selective distribution system means a distribution system whereby:

• the supplier undertakes to sell contract goods or services, either directly or indirectly, only to distributors selected on the basis of specified criteria, and whereby
• those distributors undertake not to sell such goods or services to unauthorised distributors within the territory reserved by the supplier to operate that system.

b. Exclusive distribution

Exclusive distribution means that the supplier allocates a territory or customer group exclusively to itself or to one or a limited number of buyers. It also restricts other buyers from actively selling into the exclusive territory or to the exclusive customer group.

c. Shared exclusivity in the revised version of the Block Exemption

Under "shared exclusivity", the supplier can appoint more than one buyer as exclusive distributor in a particular territory or for a particular customer group or use a combination of exclusive and selective distribution.

Exclusive distribution may not, however, be used to protect the shared exclusive distributors from competition from outside the exclusive territory as this would lead to a partitioning of the single market (which is prohibited). The revised guidelines stipulate that the number of distributors must be proportionate to the size of the territory.

3.4 Online sales

Whereas with the current block exemption the European Commission wanted to encourage and protect online sales, this is no longer necessary and the rules are adjusted accordingly.

The decisive question will therefore be what exactly means the term 'actual use of the Internet for sales or advertising'.

However, this does not mean that it is totally impossible to set restrictions in connection with online sales, for example, to ensure that sufficient sales are still made in a physical shop.

3.5 Dual pricing

With the so-called 'dual pricing', the distributor is obliged to pay a different price for products sold online than for products sold off-line.

Until now, dual pricing was seen as a hardcore restriction and therefore prohibited, but the European Commission has decided to relax its strict view on the matter. The situation regarding online sales has changed to such an extent that it is now wished to protect the physical shops and encourage offline sales.

However, there is a condition: the relaxation only applies if the dual pricing is intended to encourage or reward an appropriate level of investment in relation to the costs incurred for each sales channel.

In the context of a selective distribution system, suppliers will no longer have to impose the same qualitative criteria for both online distribution and distribution through physical shops. After all, both channels are different in nature and the European Commission is finally taking this into account in the revised Vertical Block Exemption Regulation.

4. Consequences and conclusion

In principle, the above changes will enter into force on 1 June 2022 and may have far-reaching consequences for your company. 

If you would like more information on this subject or would like to be assisted, please do not hesitate to contact our specialists via info@seeds.law or +32 (0)2 747 40 07.