What is in the vertical block exemption regulation?

by | Jan 23, 2023 | Antitrust

The EU Commission’s new vertical block exemption regulation, which became effective on 1 June 2022, governs the distribution of goods throughout Europe. The European Commission recently updated the vertical block exemption regulation as part of the EU Commission’s efforts to ensure that competition law regulates online sales appropriately.

The block exemption does just what it says, it grants an exemption. It conclusively finds that certain terms of distribution agreements do not violate competition law. On the other hand, the vertical guidelines will also ban a very harmful restriction, which it calls a hardcore restriction, finding that such a term of a vertical agreement always violates Article 101 TFEU.

The most important change the European Commission included in the revised rules of the vertical guidelines is to treat online sales as just another distribution channel. For example, the new block exemption regulation, applying the standard selective distribution rules to online marketplaces, allows a distributor to entirely forbid online sales.

A selective distribution system is one which only allows an exclusive distributor, or distributors, to sell a good in a territory or to a particular customer group. In many ways the new vertical block exemption regulation increases the ability of independent distributor to use such a system. For example, the new vertical guidelines permit a restriction in an exclusive distribution agreement which would stop an exclusive distributor, who is not part of the selective distribution system, to make not only active sales but also passive sales in the territory in which the selective distribution system operates.

Another example showing how the block exemption affects online platforms are the revised rules regarding dual distribution. Dual distribution arises when a manufacture sells its own product while also allowing a distributor to do so. Many manufactures now offer online sales of their own products, and the new block exemption regulation expands the exemption which allows these competitors to work together, including allowing an appropriate information exchange. The new, wider, exemption, to pick one example, will now also cover a distributor who is a wholesaler or importer.

Also showing its focus on online intermediation services, the revised vber narrowed the exemption for MFN clauses. The exemption no longer applies to online intermediation services, which can no longer prohibs a distributor from offering better terms on other online platforms. Distributors can still use the exemption for other MFN clauses, or parity obligations, as the competition act refers to such clauses. For example, a clause in a vertical agreement prohibiting a supplier from offering better terms on its website is one of many parity obligations which still benefit from the exemption.

The new vertical guidelines also update the rules regarding online advertising. A manufacture may include in an agreement a restriction on online advertising which requires the online advertising to contain certain information. But these restrictions may not, in effect, stop a distributor from using online intermediation services, or the internet generally, to sell.

The European Commission has also implemented a new rule regarding dual distribution. The new vertical guidelines no longer say that vertical agreements may forbid a distributor from charging a different price for an an online sale and an offline sale. The guidelines allow such dual pricing if the different prices reflect different levels of cost and investment.

In sum, the new rules now treat online platforms as a fully developed distribution system. For parties entering into a vertical agreement, if there combined market share is below 30%, and their agreement, in particular an exclusive distribution agreement, does not contain a hardcore restriction, they can rest assured they are most probably not violating the new vertical guidelines.