The European Commission adopted in May 2022 a new Vertical Block Exemption Regulation (VBER) and new Vertical Guidelines (Guidelines), effective as of 1 June 2022 and valid until 31 May 2034. The new VBER applies to all agreements concluded on or after 1 June 2022. The agreements which were in force as of 31 May 2022 and enjoyed under old VBER an exemption from the prohibition which is no longer available under the new VBER, will continue to be covered by the exemption until 31 May 2023.
VBER provides a safe harbour for agreements between suppliers and customers which do not have the potential to significantly prevent, restrict or distort competition on the market, while providing meaningful efficiencies to companies and resulting benefits to consumers. The Guidelines instruct on how to interpret and apply VBER and how to assess and self-assess vertical agreements that fall outside the VBER. Twelve years of experience with the 2010 VBER, as well as in the developments in e-commerce and online sales sphere called for new solutions and clarifications.
Serbia and Montenegro, as candidates for EU membership, undertook in their respective stabilisation and association agreements to harmonise their competition laws with the EU competition acquis and interpret them on the basis of the criteria arising from the application of the competition rules applicable in the EU, including any interpretative instruments adopted by the EU institutions. Accordingly, Serbia and Montenegro will have to amend their national vertical block exemption regulations to align with the new VBER, although there is no deadline for such alignment. Meanwhile, the national competition authorities in these two countries should interpret their existing VBERs in line with the new VBER and Guidelines whenever this does not run counter the text of the existing national VBERs.
General overview of the new VBER
The 30% market share threshold for the application of the safe harbour continues to apply. The types of restrictions that are carved-out from the safe harbour are still divided to “hardcore” restrictions, which remove the benefit of the block exemption from the entire agreement containing the restrictions, and “excluded” restrictions, to which the block exemption does not apply although the remainder of the agreement remains valid if separable.
The new VBER tightens the treatment of certain vertical restrictions, especially those that involve online intermediation platforms, while loosening the treatment of certain other restrictions which have proven to crate efficiencies, such as exclusive and selective distribution. We outline below the most important changes brought about by the new rules.
The exemption for dual distribution extended, but not for hybrid online platforms
Dual distribution exists when a supplier sells its goods or services both through third party distributors and through its own distribution network, thus competing with the independent distributors. The old VBER provided in Article 2(4) for a safe harbour for vertical restraints in dual distribution agreements (non-reciprocal agreements between competitors). However, the exemption applied only to situations where the supplier is a manufacturer and a distributor of goods, while the buyer is a distributor and not a competing undertaking at the manufacturing level.
The new VBER extends the dual distribution exemption to importers and wholesalers as either supplier or buyer in a vertical agreement, irrespective of whether any of them is a manufacturer of the contract goods. On the other hand, the benefit of the exemption is not available to vertical agreements between online intermediation platforms and their customers, where the online intermediation platform at the same time provides intermediation services to third party suppliers and competes with them (“hybrid platforms”). A provider of online intermediation services is considered “hybrid” and thus a potential competitor of the supplier if it is likely, within a short period of time (normally not longer than one year), to make additional necessary investments or incur other necessary costs to enter the relevant market for the sale of the contract goods or services.
One of the main concerns related to vertical agreements between competitors is the exchange of sensitive commercial information. That issue was not addressed in the old VBER. Article 2(5) of the new VBER excludes from the exemption information exchange that is neither directly related to the implementation of the vertical agreement nor necessary to improve the production or distribution of the contract goods or services. The Guidelines clarify in paragraphs 96 to 103 what constitutes information exchange, and what type of information is typically directly related or necessary for the implementation of an agreement, depending on the type of agreement.
How does this affect Serbia and Montenegro?
Serbian and Montenegrin regulations on group exemption of vertical agreements from prohibition contain the general exemption of vertical agreements. The difference compared to Article 2(4) of VBER is, as far as Serbia is concerned, in that the market share threshold for the exemption is set at 25% rather than 30%, and, as far as Montenegro is concerned, in that the 30% threshold requirement is coupled with additional requirement that the turnover of the buyer did not exceed EUR 500,000 in the year preceding the agreement. The two national VBERs remain stricter than the new VBER in that the exemption for non-reciprocal agreements between competitors remains limited to those agreements in which the supplier is at the same time the manufacturer of the contract goods. At the same time, the exemption is more liberal than the one under the new VBER because it does not exclude from its coverage the agreements with a hybrid platform. Finally, the Serbian VBER and the Montenegrin VBER do not specifically address the issue of information exchange between the competitors under an exempted non-reciprocal vertical agreement. Accordingly, any exchange of commercially sensitive information in the context of vertical agreement is assessed on the basis of the general provisions on restrictive agreements. The national authorities should make such assessment taking into account clarifications provided by the new VBER and new Guidelines.
Parity obligations finally clarified
Parity obligations, also known as the most favoured nation (MFN) clauses, have been one of the most divisive topics in the context of the application of competition law to vertical agreements by the national competition authorities in the EU. MFN clauses are contractual provisions requiring suppliers to offer their good/services to the buyer on commercial terms no less favourable than those offered to another buyer. In the context of online intermediation platforms, wide MFNs typically require retailers to offer to the online intermediary commercial terms at least as favourable those offered in any other sales channel, while narrow MFNs typically require retailers to offer to the online intermediary commercial terms which are at least as favourable as those offered on the retailer’s own website. Wide MFNs were found by several NCAs to be likely anticompetitive and thus not covered by the block exemption. In contrast, narrow MFNs have been so far regarded by the national competition authorities as allowed.
The new VBER treats MFNs in a uniform manner. It excludes the across-platform wide MFNs from the coverage of the block exemption, with the aim of protecting competition between suppliers of online intermediation services. In addition, Article 6 allows the Commission to withdraw the benefit of the block exemption from other types of MFNs, including narrow ones, if it finds in a particular case that a vertical agreement nevertheless has effects which are incompatible with Article 101(3) of the Treaty, for example if the relevant market for the supply of online intermediation services is highly concentrated and competition between the providers of such services is restricted by the cumulative effect of parallel networks of similar agreements that restrict buyers of the online intermediation services from offering, selling or reselling goods or services to end users under more favourable conditions on their direct sales channels.
When retailers impose price parity obligations on their suppliers when the latter are dealing with the competing retailers, they generally require the suppliers not to sell goods or services to competing retailers below certain minimum price. This would constitute RPM which would not benefit from the block exemption.
How does this affect Serbia and Montenegro?
The issue of MFNs has not so far arisen before the competition authorities in Serbia and Montenegro. The existing VBERs in Serbia and Montenegro, respectively, are broad enough to allow for an interpretation of their existing texts that would be in line with the new VBER and Guidelines as far as the permissibility of MFN clauses is concerned.
Relaxation of the treatment of active and passive sales restrictions
Active sales restrictions are contractual provisions preventing the buyer from actively approaching a particular group of customers or customers in general in a specific territory. In contrast, passive sales restrictions refer to sales made in response to unsolicited requests from individual customers.
The old VBER treated both active and passive sale restrictions as prohibited in principle. It contained narrow exceptions from the prohibition of active sales restrictions. The new VBER now provides that, regardless of whether the supplier operates an exclusive, selective, or free distribution system, it may impose on the buyer a restriction of active sales into a territory or to a customer group reserved for the supplier itself or allocated to a maximum of five other exclusive distributors in the same territory.
Another notable change is that the suppliers operating selective distribution systems are now allowed to impose both active and passive sales restrictions on the members of the selective distribution system regarding distributors outside the selective network within the selective territory.
New VBER also allows imposition of active and passive sales restrictions not only on the buyer directly but on the buyer’s customers as well
How does this affect Serbia and Montenegro?
The national VBERs allow only limited exceptions to the prohibition of hardcore territorial and customer sales restrictions. Accordingly, the more relaxed approach of the new VBER towards active sales restrictions and partly passive sales restrictions, described above, would not be applicable in Serbia or Montenegro for as long as the national VBERs are not aligned with the new VBER.
Rules on online sales restrictions relaxed
The new VBER allows more of the online sales restrictions, as it was concluded during the review that online sales have developed into a well-functioning sales channel that no longer needs special protection. Under the new VBER, agreements may benefit from group exemption even if they contain dual pricing provisions or are contrary to the online equivalence principle.
Dual pricing means that a supplier may charge the same distributor a different wholesale price for the products that are intended to be sold online and offline, as long as the difference in price reflects the different level of investments by the distributor to sell those products through two (or a combination of the two) channels.
The Guidelines refer to the Coty precedent according to which banning sales though online marketplace is not a hardcore restriction of competition. The Guidelines also clarify that a supplier may impose different (i.e. non-equivalent) criteria for online and offline sales in a selective distribution system, provided that the online sales criteria do not have the object of preventing the effective use of the internet. Suppliers may impose other restrictions on online sales, as well as restrictions on online advertising, as long as the restrictions are not aimed at preventing the use of an entire online advertising channel or the effective use of internet by the buyer or its customer to sell the contract goods or services in a particular territory or to a particular customer group. The Guidelines contain a useful list of examples of the obligations that indirectly have the object of preventing the effective use of the internet by the buyer. Particularly, this would be the case where the difference in the wholesale price makes online sales unprofitable or financially unsustainable, or where dual pricing is used to limit the quantity of products made available to the buyer for sale online.
How does this affect Serbia and Montenegro?
Relaxation of the treatment of online sales restrictions can be effectively applied by the national competition authorities in Serbia and Montenegro, as the provisions of the national VBERs are not contrary to the new VBER or new Guidelines in this respect. In that sense, the new VBER and the new Guidelines can inform the interpretation of the existing rules of the national VBERs when those are applied to restrictions in the online sales space.
Agency agreements
Genuine agency agreements, i.e. those where the agent does not bear any significant financial or commercial risk in relation to the contracts, continue to fall outside Article 101 (1) TFEU. However, the new Guidelines provide additional clarifications as to what is considered genuine agency. In general, the agent does not acquire the ownership in the goods it sells or buys pursuant to the agency agreement and it does not itself supply the services. The fact that the agent may temporarily, for a very brief period of time, acquire the ownership of the contract goods while selling them on behalf of the principal, does not affect the genuineness of the agency agreement, provided that the agent does not incur any costs or risks in relation to the transfer of ownership.
Another clarification concerns dual role agents, i.e. independent distributors that also act as agents for the supplier in the same product market. For such agency agreements to benefit from the block exemption, in addition to the general rule that all relevant risks linked to the transaction covered by the agency agreement must be borne by the principal, the independent distributor must also be genuinely free to enter into both the agency agreement and the distribution agreement (for example, the agency relationship must not be de facto imposed by the principal through a threat to terminate or worsen the terms of the distribution relationship). The distribution activity must be fully reimbursed to the agent.
The Guidelines clarify that agreements entered into by undertakings active in the online platform economy generally do not meet the conditions to be categorised as agency agreements falling outside the scope of Article 101(1) of the Treaty. The rationale is that such undertakings generally act as independent economic operators and not as part of the undertakings for which they provide services, and that the market position and features of the online platform economy can contribute to a significant imbalance in the size and bargaining power of the contracting parties, leading to a situation where the platform determines the terms of transactions in which it acts as an agent. In addition, companies active in the online platform economy typically make significant market-specific investments, so it cannot be lightly said that they do not bear financial and commercial risk associated with the transactions they intermediate.
How does this affect Serbia and Montenegro?
While the Montenegrin competition authority has not officially expressed any views on the application of the decree on vertical block exemption to agency agreements, the Serbian authority has clarified in an opinion under which conditions agency is not a restrictive vertical agreement. The new VBER and the Guidelines can inform the national authorities in Serbia and Montenegro when those are called to apply national VBERs to various forms of agency.
RPM – still bad
RPM remains a hardcore restriction not benefiting from the block exemption. The new Guidelines, however, provide a considerably clearer and more detailed guidance as to what constitutes a direct or indirect RPM. Minimum advertised prices (MAPs) which prohibit the distributor from advertising prices below a level set by the supplier, have found their way onto a non-exhaustive list of indirect RPM tools. While the distributor formally remains free to sell the advertised price, it does not have incentive to do so as its ability to inform potential customers about available discounts is restricted.
It is now clarified that imposition by the supplier of a resale price on the buyer does not constitute RPM if the RPM is a part of a fulfilment contract by virtue of which the supplier undertakes to its buyer to perform the buyer’s obligation from a supply agreement concluded with the buyer’s customer.
How does this affect Serbia and Montenegro?
RPM are the most common vertical infringement scrutinised by the national competition authorities in Serbia and Montenegro, and it is expected that they will from now on assess any such restrictions in line with the new Guidelines.
Non-compete obligations may be tacitly renewable beyond five years
Non-compete obligation is an obligation on the buyer not to manufacture, purchase or sell goods that compete with the contract goods, or to purchase from the supplier more than 80% of the buyer’s total requirements for the contract goods. Under the old VBER, non-compete obligations could not benefit from the exemption if their duration exceeded five years. This limitation remains in place, however, under the new VBER non-competes that are tacitly renewable beyond the initial period which does not exceed five years can benefit from the exemption if the buyer can effectively renegotiate or terminate the non-compete following its renewal, meaning that the termination notice period and cost of termination on the buyer are reasonable.
How does this affect Serbia and Montenegro?
Both the Serbian and the Montenegrin vertical block exemption regulation provide that block exemption does not apply to a non-compete which is agreed upon to be renewed so to last for an indefinite period or for a total period of more than five years. Until the national regulations are aligned with the new VBER on the issue of non-competes, non-compete undertakings that last longer than five years will be valid only subject to obtaining an individual exemption from the prohibition from the national authority.
