European Union: What Are The Hot Topics For The Future Of Distribution In The European Union?

VBER public consultation feedback is out

Just in time for the summer holidays, on July 24, 2019, the European Commission (EC) published stakeholders' contributions to the consultation on the review of Regulation 330/2010 (better known as the Vertical Block Exemption Regulation or VBER) and its accompanying guidelines (the Vertical Guidelines).

The publication of stakeholder contributions is a significant step in the ongoing review, as it provides an overview of the topics that will be at the heart of the debate on the review of the VBER and, more broadly, on the future of distribution in the European Union (EU). Unsurprisingly, the top three topics covered in the contributions relate to the level of control that manufacturers can exert over their distribution networks via online sales restraints, selective distribution and resale price maintenance (RPM). In this note, we take a closer look at the stakeholders' contributions, as well as their implications for the review of the VBER and the Vertical Guidelines.

Background

The VBER lays down the foundation of EU competition law rules under which a supply or distribution agreement can benefit from a legal safe harbour.

The last revision of the VBER dates from 2010. With the VBER's expiry date of 31 May 2022 in sight, the EC announced, at the end of 2018, the launch of a review process aimed at assessing whether to let the VBER lapse, to prolong or to revise it. The stakeholders' consultation constitutes an important phase in the evaluation process.

Calls emerging from stakeholders in a wide variety of industries show that it is certainly high time to review the VBER. In fact, e-commerce was still in its infancy when the regulation and the accompanying Vertical Guidelines (which elaborate on the rules and provide guidance to businesses and their advisors) were last revised in 2010. Ten years on, online shopping has grown exponentially and the expansion of global platforms, price comparison engines and pure online players have profoundly disrupted the way in which brand owners interact with their distributors and with their customers. In its recent e-commerce sector inquiry, the EC found that the growth of e-commerce caused, inter alia:

• increased price transparency, as customers are now able to instantaneously obtain and compare prices online;
• increased price competition, sometimes to the detriment of quality, brand and innovation;
• free-riding behaviour by customers, who can use pre-sale services of brick and mortar shops before purchasing the product online at a lower cost.

The EC further noted that manufacturers reacted to these market trends by seeking greater control over their distribution network, in particular with regard to price and quality. This search for greater control has led to hard-fought legal battles (such as in the Pierre Fabre and Coty cases) and, on some occasions, to major disagreements, not only between brand owners and internet players, but also between national competition authorities (e.g. the Booking.com saga on the assessment of most-favoured nation clauses). As such, it comes as no surprise that the manufacturers' search for greater control and certainty is also at the core of the stakeholders' consultation on the review of the VBER.

#1 Topic: Need for more guidance on online sales restrictions

While brand owners typically view online sales restrictions as indispensable to maintain some form of control over their distribution network and customer experience, internet players consider that such restrictions may hinder the development of e-commerce and innovative retail business models. As such, online sales restrictions will undoubtedly continue to be a key battleground in the review, as stakeholders are asking the EC to provide more bright lines.

• Platform bans: the debate continues

In its landmark judgment of 6 December 2017, in the Coty case, the Court of Justice of the EU (CJEU) confirmed the possibility for brand owners to restrict or prevent sales by distributors on discernible third party marketplaces (also known as platform bans) in the context of the distribution of luxury goods. This ruling came as a surprise to a number of commentators and put a hard stop to a line of national cases, including those of the French and the German competition authorities, which had taken strong positions against platform bans. However, Coty also left a number of open questions, in particular concerning the scope of the judgment: was it limited to luxury goods or could it be extended to other types of products?

Eighteen months later, even though the Coty judgment largely clarified the situation, the debate has still not been entirely settled, and stakeholders continue to face legal uncertainty as a result. While the head of the German Federal Cartel Office (FCO) initially commented that manufacturers had not received "carte blanche to impose blanket bans on selling via platforms", especially outside the luxury industries, a number of competition authorities and jurisdictions have, since then, largely allowed platforms bans (notably in the chainsaw, non-luxury cosmetics and food supplement sectors). Similarly, in a competition policy brief published in April 2018, the EC expressed the view that a prohibition on sales of non-luxury goods through online marketplaces would also not infringe Article 101(1) TFEU, provided that the so-called Metro criteria are satisfied. In a nutshell, the Metro criteria established in the CJEU's case law exempt selective distribution systems from Article 101(1) TFEU provided that resellers are chosen (i) on the basis of objective criteria of a qualitative nature; (ii) laid down uniformly for all potential resellers and not applied in a discriminatory fashion; (iii) that the characteristics of the product in question necessitate such a network in order to preserve its quality and ensure its proper use; (iv) and that the criteria laid down do not go beyond what is necessary.

Against this background, most stakeholders are now asking the EC to provide more clarity on this issue. As for brands, most of them call for a codification of Coty and, in some cases, for an explicit extension of Coty to non-luxury products. On the platform side, some stakeholders seem to call for a reversal of Coty, by extending the list of the VBER's hardcore or excluded restrictions (presumably to include platform bans) or suggest that local market conditions should play a role in the assessment of the legality of a platform ban. One noted that "for many SME sellers, online marketplaces are the most effective online sales channel, particularly for those who trade cross-border in the EU. It remains incomprehensible that the current framework is currently interpreted in a way that supposedly allows suppliers to cut off such an important online sales channel independently of whether or not legitimate distribution criteria can be fulfilled by sellers on online marketplaces".

• Advertising restrictions: brands suggest reversing the Asics line of cases

In the Asics case, Germany's FCO found that prohibiting the use of price comparison websites by distributors constitutes a hardcore restriction under EU competition law, as it deprives them of an opportunity to advertise and sell online effectively.

The FCO also took issue with a prohibition on using the Asics trademark for online search advertising purposes, i.e. on Google Ads (formerly Google AdWords) – a hard stance which was later confirmed in the EC's Guess decision, where Guess was fined €40 million for, inter alia, imposing a de facto prohibition for retailers in its selective distribution network on using the Guess trademark for online search advertising purposes. The EC's view in Guess that AdWord restrictions violate competition law "by object" created uncertainty on how far pro-competitive justifications for Adword restrictions could successfully be invoked by brand owners under different circumstances. Also, Guess being a settlement decision, there might be a feeling that this issue has not been fully analysed and tested and that the outcome of this decision may need to be nuanced.

In their responses to the consultation, a number of stakeholders are challenging this line of case law and calling for a more flexible approach. Specifically, some respondents suggest extending the Coty reasoning to the assessment of restrictions on the use of price comparison websites. As for restrictions on the use of the brand owner trademark for advertising purposes, brands are asking the EC to allow for some level of restriction to the use of the trademark for advertising purposes (e.g. restrictions on bidding for a particular positioning in the list of results of search engines as opposed to a blanket ban on bidding). On the other side of the debate, some platforms refer to the final report of the e-commerce sector inquiry and indicate they would welcome guidance by the EC on restrictions on the use of price comparison sites and on the use of trademarks for search advertising.

• On ways to support offline sales and avoid free-riding: dual pricing and brick and mortar requirements

In its final report on the e-commerce sector inquiry, the EC flagged a number of tools that brand owners use to support physical sales and address free riding. These include (i) dual pricing, i.e. charging different wholesale prices for the same products to the same retailer depending on whether the products are intended to be sold online and offline, a practice that the EC frowns upon and (ii) requiring the operation of a brick and mortar shop by retailers, thereby excluding pure online players from the distribution of the products, which is currently allowed under the VBER.

Unsurprisingly, brand owners and platforms have diverging views on whether these tools are procompetitive or not. Specifically:

#2 Topic: Adapting selective distribution to the digital age

Many respondents to the consultation point to the need to clarify certain rules relating to selective distribution, due to the growing prevalence of this distribution model in the EU. This is consistent with the e-commerce sector inquiry, in which the EC found that, in reaction to the growth of e-commerce, manufacturers increasingly use selective distribution because it allows them to better control their distribution networks, in particular in terms of the quality of distribution but also price.

Proposed modifications of the rules on selective distribution include:

• The clarification of the scope of selective distribution: luxury vs. non-luxury

In Coty, the CJEU confirmed that Coty's restriction to sell via third party online market places is compatible with EU competition law provided the Metro criteria are satisfied and on the basis of the luxury-nature of the products.

Against this background, many respondents urge the EC to state explicitly that selective distribution is also appropriate for the distribution of non-luxury products. A number of brand owners advocate in favour of a clearer recognition that selective distribution is acceptable for the sale of non-luxury products, on the grounds that the growth of e-commerce forces brand owners to invest in the brand and consumer experience, "whether the products are high tech or not. Limiting the benefit of selective distribution only to the "traditional" categories is archaic and unjustifiable; branded products in the non-traditional categories face increasing risk of online brand erosion, lifecycle disruption and free-riding as a result of high volume, low price online selling". On the other side of the spectrum, a platform respondent complained about the excessive use of selective distribution by suppliers, even for non-luxury, non-high-tech or non-hazardous products. It is clear from the various contributions that clarification from the EC is much needed on this point.

• Contrasting views on the principle of equivalence

Under the current Vertical Guidelines, brand owners operating selective distribution systems are under a general obligation to impose equivalent selective criteria to distributors operating offline and online. Criteria are deemed equivalent when they pursue the same objectives and achieve comparable results, with any difference between online and offline being justified by the different nature of the two distribution modes.

Based on the responses to the consultation, it appears that both sides of the debate are strongly against the principle of equivalence. A number of brand owners call for a relaxation of this principle, with one respondent noting that "this equivalence test has led to overly strict enforcement by some NCAs who have used this as a straitjacket on brand owners [...] the [Vertical Guidelines] should recognise that the online and offline retail spaces and that the set of criteria needs to reflect that distinction." Platforms, on the other end, report that brands often breach the principle of equivalence, e.g. by imposing marketplace bans for online sales while simultaneously allowing offline retailers to sell in non-branded sections of offline stores. To remedy this situation, they suggest providing further guidance and practical examples on the principle of equivalence.

#3 Topic: To extend or not to extend exceptions to RPM?

Last – but not least – on the podium of most debated vertical topics: resale price maintenance. Both the VBER and the Vertical Guidelines regard RPM as a hardcore restriction. Competition regulators regularly enforce this prohibition and typically impose high fines on businesses that infringe their distributors' freedom to set their resale prices. In the course of the last review of the VBER in 2010, the EC introduced narrow exceptions to this principle, in recognition of the evolution of the predominant economic theory on RPM. These exceptions are the following: (i) the launch of a new product; (ii) a short-term promotional campaign in a franchise system or similar distribution system; and (iii) pre-sale services to be provided by retailers and funded through RPM, which could be impaired by free-riding. To date, the introduction of these exceptions does not seem to have allowed for a significant opening in favour of legitimate resale price maintenance.

Based on the responses to the consultation, many stakeholders appear unsatisfied with the current RPM regime, which they consider excessively rigid by most international standards. They suggest that the EC should take into account the latest economic theories on RPM, which establish that RPM may generate efficiencies, notably where the parties have limited market shares and operate in markets with strong inter-brand competition and short innovation cycles. In this regard, one respondent noted that "RPM can provide efficiencies by helping to avoid aggressive pricing, especially during sales periods, which are already restricted by national laws in terms of timing, which damages brands, retailers and consumers, prevents effective competition, entails free-riding, leads to unsustainable product lifecycles, and tarnishes a luxury brand's image." On that basis, the respondent recommended removing RPM from the list of hardcore restrictions and to adopt a by-effect approach, similar to the US.

Some other stakeholders raise concerns regarding what they see as a negative perception on the part of certain authorities on the monitoring of resale prices by manufacturers. They argue that manufacturers need access to resale data, e.g. to better position their products in the market and to inform their future strategy. On a related topic, a number of respondents also note that "the appropriate use of algorithm price monitoring may generate efficiencies" – an issue of relevance after the EC adopted the Asus, Denon & Marantz, Philips and Pioneer decisions, which found that the effect of RPM agreements had been magnified by the industry-wide use of pricing algorithms which automatically adapted retail prices to those of competitors, including competitors engaged in RPM practices.

Next steps and how you can contribute going forward

Adding to the above topics, contributors raised a host of other interesting issues. Though not on the podium, the following are equally hot topics for the future of distribution in Europe: the extension of the scope of the exception rules on agency; a clarification on the rules applying to vertical agreements between competing undertakings, in particular concerning information exchange in these scenarios; and a review of the market share thresholds under which parties can benefit from the VBER safe harbour.

All these topics are expected to remain under evaluation by the EC until Q2 2020, when the EC will publish a staff working document. This will mark the opening of the second phase of the review, namely the impact assessment phase, which will ultimately lead to the adoption of the new VBER and accompanying guidelines by May 2022 at the latest (when the current version of the VBER is due to expire).

Feel like you have missed an opportunity to have your voice heard? Other opportunities to weigh in the debate are coming up. The EC has already announced that the evaluation phase will continue with a public stakeholder workshop in the last quarter of 2019. Then, during the impact assessment, the EC's proposals will be submitted in due course to further stakeholder consultation. In sum, more to come soon – so stay tuned for new developments on the topic in the coming months.

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