Competition rules for vertical agreements to be enforced for a new decade
Suppliers, distributors, agents, franchisees, online retailers, online intermediary service providers, do you already know what kind of agreements on the sale of goods or the provision of services you can agree after 1 June 2022 without risking fines of up to 10% of your annual turnover for infringements of competition rules?
On 1 June 2022, a new block exemption regulation for vertical agreements – Commission Regulation (EU) 2022/720 – will apply, which will set the competition rules for vertical agreements (i.e. agreements between undertakings at different levels of the production or distribution chain on the terms and conditions of sale of goods or services) in the EU for the next decade. The Regulation will also apply mutatis mutandis to vertical agreements whose object or effect is limited to the territory of Slovenia, in accordance with Article 8 of the Prevention of Restriction of Competition Act (“ZPOmK-1”). These are therefore rules which in addition to the prohibition of cartels between competitors are the key competition law rules for undertakings with regard to restrictive agreements.
The rules of Regulation 2022/720 are not radically new. On the contrary, they are an evolution of the EU rules as last regulated by Regulation 330/2010, taking into account the evolution of the market (in particular online trade and digital services) and the practical experience of the last 10 years.
The key framework for assessing vertical agreements therefore remains the same after 1 June 2022:
- certain categories of vertical agreements are exempted from the prohibition of restrictive agreements under Article 101(1) of the Treaty on the Functioning of the EU (“TFEU”) under certain conditions (Article 2 of the Regulation 2022/720);
- the key condition for this block exemption or the so-called safe harbour of the Regulation remains a threshold market share below 30% on the relevant market – both for the supplier on the downstream side of the relevant market and for the buyer/distributor on the upstream side of the relevant market (Article 3 of the Regulation 2022/720);
- the vertical agreement for the benefit of the safe harbour must not contain any so-called hardcore restrictions of competition (Article 4 of the Regulation 2022/720);
- the existence of certain obligations in vertical agreements requires in any event an individual assessment and these obligations are excluded from the safe harbour (Article 5 of the Regulation 2022/720 – excluded restrictions).
Despite the same basic framework, the new Regulation also introduces a number of new features, notably with regard to online sales, dual distribution, online intermediary services, parity provisions, and wider possibilities to restrict active sales. Such provisions are also further clarified in the new Commission Guidelines on Vertical Restraints (the “Guidelines”), which are also extended with respect to some of the rules already established in Regulation 330/2010. The new Guidelines will thus certainly be an indispensable source for the interpretation of the rules of Regulation 2022/720 in the future.
So how should companies navigate the rapids of vertical agreements in the future? More on each of these risks below and in our next posts.
What about pricing to the buyer?
a) Resale price maintenance
Despite many calls for a more lenient approach to the maintenance of (re)selling prices to the buyer (distributor), the new Regulation maintains a strict approach – directly or indirectly restricting the buyer’s ability to set its own resale price remains an impermissible restriction of competition. While this does not constitute an infringement per se, it gives rise to a presumption that there is an infringement of Article 101(1) of the TFEU (which prohibits restrictive agreements) and also that the conditions of Article 101(3) of the TFEU (i.e. that there are dominant pro-competitive effects of the restriction of competition) are unlikely to be satisfied. Resale price maintenance to the buyer remains a risk that should be avoided at all cost.
Attention should be given to the following:
- the contractual provisions on the price at which the buyer is obliged to sell to its customers,
- the provisions which allow the supplier to set the resale prices to the buyer,
- the provisions prohibiting the buyer from selling below a certain selling price.
Less obvious risks include:
- setting the distribution margin,
- setting the maximum discount a distributor can give in relation to the price level,
- making the supplier’s rebate or reimbursement of promotional costs conditional on the customer’s compliance with a certain price level,
- setting minimum advertised prices which prohibit the distributor from advertising below a certain price level,
- tying a particular resale price of the distributor to the resale prices of competitors,
- threats, intimidation, warnings, penalties, delays or interruptions of deliveries or termination of contracts by the supplier in relation to compliance by the customer with a prescribed price level.
Setting maximum selling prices or recommending selling prices to the buyer remains permissible in principle, but only if this, together with incentives or disincentives, does not actually have the same effect as setting fixed or minimum resale prices. The use of online price monitoring software and sales price reporting does not in itself constitute prohibited price fixing.
Caution should also be exercised in the case where an online intermediary service provider, i.e. the operator of online platforms for offering goods or services that facilitate direct business-to-business or business-to-consumer transactions (e.g. online marketplaces or price comparators), wishes to fix prices. The aforementioned prohibition on fixing the selling price to the buyer also applies when it is fixed by the online intermediary service provider.
Can it nevertheless be justified to fix the selling price to the buyer in certain circumstances?
The new Guidelines give some more maneuvering room to the buyer to justify the setting of selling prices:
- during the initial period of the introduction of a new product on the market – setting (minimum) selling prices may be considered useful in these circumstances as it may encourage distributors to take better account of the manufacturer’s interest in promoting the product and to increase the overall demand for the product. This may lead to a more successful launch of the product on the market.
- in the case of a short-term (mostly 2-6 weeks) price reduction, especially in a single distribution system, e.g. a franchise system.
- when an individual distributor regularly sells below cost price, which can damage the brand of the products and consequently, over time, reduce demand for the products and the supplier’s incentive to invest in quality and brand.
- where there is a need to provide additional margin to distributors to incentivise them to provide pre-sales services; this is particularly the case for the sale of more complex products, in particular those requiring pre-sales services, where there is a risk of profiteering by some distributors at the expense of others (at the expense of those who would not provide pre-sales services), and where this risk of profiteering cannot realistically be prevented in a less restrictive way.
- in the case of so-called performance agreements, where the party to perform the agreement is determined by the supplier – where the supplier has already agreed with a particular party to supply products under certain conditions, and the supplier then performs this through a third party, the fixing of the selling price to the third party for the sale of products to that party does not constitute prohibited price fixing to the customer.
b) Negotiating parity or most-favoured-nation (MFN) provisions
In recent years, competition authorities have assessed a number of so-called parity provisions, known in particular in the context of sales via various online platforms (e.g. proceedings against Amazon, Booking, Expedia). Parity provisions require the seller (who is also the buyer of online intermediary services) not to offer or sell products or services to others on terms which are more favourable than those offered on a particular platform and/or in certain sales channels. The so-called narrow parity provisions concern the prohibition to offer products on more favourable terms (only) in the seller’s direct sales, while the so-called broad parity also applies to sales through other channels (e.g. other online platforms).
Proceedings before various authorities have sometimes led to different conclusions on the compatibility of such agreements with competition rules – will the restrictions be clearer now?
In principle, the new guidelines only provide for so-called broad parity agreed with an online intermediary service provider for the retail market as an excluded restriction, i.e. with regard to restrictions on offering products or services to end-users via competing online platforms on more favourable terms. Therefore, if the seller and the online intermediary service provider agree on restrictions or a prohibition to sell to end-users on more favourable terms via other online platforms, such a provision will not be able to benefit from the block exemption under Regulation 2022/720 and an individual assessment of compliance with the competition rules will have to be carried out. The new guidelines also set out the criteria relevant for the assessment in such a case (e.g. the market position of the online intermediary service provider; the proportion of its customers with whom parity obligations are agreed; the use of competing online intermediary services; entry barriers to offering online intermediary services; the importance of direct sales channels and the actual ability to remove sales via online intermediary services).
In all other cases of parity (narrow parity, wholesale market parity), undertakings may continue to benefit from the block exemption under the general conditions of Regulation 2022/720. The Guidelines now also provide more clarification on the competition law assessment if the threshold market share condition is not met and the provision does not fall within the so-called safe harbour of the Regulation.
The rules on parity will therefore certainly be clearer after the entry into force of Regulation 2022/720 and companies will have more legal certainty when they agree parity obligations.
c) Dual pricing – separately for the online sales channel and for the physical sales channel
Last but not least, as regards the pricing conditions of vertical agreements, the dual pricing system should be mentioned, i.e. a system whereby a distributor pays a higher price for products they intend to resell online than for products they intend to resell in a traditional (physical) channel.
Dual pricing has so far been an impermissible restriction, as it has in principle been considered as a restriction on online sales and thus an impermissible restriction on passive sales to the customer or distributor. However, in view of the new Regulation’s tendency to slightly reduce the protection of online sales, this is no longer an impermissible restriction. Such a practice is therefore now in principle permissible under the general conditions for block exemptions under Regulation 2022/720. Nevertheless, caution should be exercised in the case of dual pricing (i) which is precisely aimed at preventing the effective use of the internet for sales to certain customer groups or in certain territories, or (ii) where the dual pricing is set to limit the quantities of products available to the customer for online sales, or (iii) which has the effect of making online sales unprofitable or financially unsustainable for the distributor. In these circumstances, the effect may be to prevent the buyer from effectively using the internet, which remains an impermissible restriction under the new Regulation (Article 4(e) of the Regulation 2022/720).
So much for the pricing pitfalls, more next time on the rules for the different distribution systems (exclusive, selective, free distribution).