Platforms, parity and price maintenance – New EU rules for three distribution essentials

On 1 June 2022, the European Commission’s revised Vertical Block Exemption Regulation (“VBER”) and the accompanying Guidelines on Vertical Restraints entered into force. Adding to our article on the highly controversial issue of dual distribution, this post focuses on three other essential aspects: (1) platform bans in online distribution, (2) parity clauses (also called MFN or most-favored-nation clauses) and (3) resale price maintenance. In the following, we set out the revised rules and provide a first overview of their practical consequences.

“I don’t like the places you hang out!” – Platform Bans get the All-clear

  • The question of whether platform bans can be exempted by the VBER used to be a contentious topic in national and European competition law. In its landmark Coty” decision in 2017, the European Court of Justice (“ECJ”) decided that platform bans according to which manufacturers prohibit their distributors from selling via third-party online platforms do not constitute a hardcore restriction of competition law. It is neither a restriction of the territory into which nor of the customers to whom the distributors may sell the products and therefore can be block exempted under the VBER. The ECJ explained that such prohibition does not completely preclude distributors from using the internet, but only from a certain type of online sales. Distributors could, for instance, still sell the products via their own websites.

  • This long-awaited clarification has now been fully reflected in the revised Guidelines on Vertical Restraints (the “Guidelines”). In line with the ECJ, the European Commission (“Commission”) states that restrictions relating to the use of particular online sales channels, such as online marketplaces, or the implementation of quality standards for online sales can generally benefit from the VBER provided that they do not indirectly have the object of preventing the effective use of the internet by the buyer to sell the products to particular territories or customers (see Article 4(e) VBER). Online sales restrictions do not have such an object where the buyer remains free to operate its own online store and to advertise online (para. 150 of the Guidelines).

  • It is notable that the Commission’s assertions in that regard are rather broad. While it was an oft-debated question following the Coty decision whether that judgment was limited to the distribution of luxury products, the Guidelines do not apply any distinction based on product type. In other words: The application of the VBER on platform bans does not necessarily require the protection of certain quality criteria, product characteristics or brand image. Instead, a platform ban is generally possible, provided that the distributor can still otherwise use the internet effectively to sell the products. In that regard, distributors may – among other things – not be prohibited from (i) using the supplier’s trademarks or brand names on their websites or in their online stores, (ii) establishing or operating one or more online stores or (iii) from using an entire online advertising channel, such as search engines or price comparison services (see para. 206 of the Guidelines). The latter includes the obligation not to use the suppliers’ trademarks or brand names which indirectly prohibits the use of such services and limits the visibility of the distributor’s own online store(s).

  • Through all these rules, the Commission seeks to strike a balance between the sometimes varying interests of suppliers (and their offline distributors) on the one hand and online distributors on the other. In practice, one may – despite the helpful guidance offered by the Commission in its extensive Guidelines – expect that the definition of “effective use” of the internet will become a hot topic where different views collide. What is “effective” after all? To the extent platform bans are concerned, however, the Commission’s view is set and considering the authoritative force of the Guidelines, there is virtually no leeway left for national competition authorities, specifically the German Bundeskartellamt, to take a more critical stance in view of this issue (as it has done in the past).

“As good as it gets” – Parity Clauses

  • The new VBER and Guidelines also come with clarifications as regards parity clauses, including banning a certain type of parity clause.

  • Parity clauses (also known as “most-favored nation” or just MFN clauses) refer to obligations which require one party to offer conditions to the counter-party (i.e. the one imposing the clauses) that are at least identical to, if not better than, those conditions offered on other sales channels the committing party uses, such as third-party platforms, and/or its direct sales channels (in particular its website).

  • As was previously the case, parity obligations can generally benefit from the exemption provided by the VEBR. However, Article 5(1)(d) VBER states now that such exemption shall not apply to parity clauses which concern cross-platform retail parity obligations imposed by suppliers of online intermediation services, namely direct or indirect obligations which cause buyers of such services not to offer, sell or resell goods or services to end-users under more favorable conditions via any competing online intermediation services. These clauses are also commonly referred to as “wide” (retail) parity clauses.

  • Such conditions may concern prices, inventory, availability or any other terms or conditions of offer or sale. Notably, such retail parity obligation may also result from a contractual clause or from other direct or indirect measures, including the use of differential pricing or incentives if their application depends on the conditions under which the buyer of the online intermediation services offers goods or services to end-users via competing online intermediation services. For example, where the provider of online intermediation services (such as a hotel booking platform) makes the offering of better visibility for the buyer’s goods or services on the provider’s website or the application of a lower commission rate dependent on the buyer of the services (say, a hotel) granting it parity of conditions relative to competing booking platforms, this can be considered a non-exempted cross-platform retail parity obligation.

  • Even if an agreement includes such non-exempted parity clause, however, the exclusion of the VBER will only affect this specific clause, whereas the remaining vertical agreement can still be exempted if the clause can be separated from it. Furthermore, all other types of parity clauses can benefit from the exemption provided by Article 2(1) VBER. This includes, according to para. 254 of the Guidelines, (i) retail parity obligations relating only to the direct sales channels of buyers of online intermediation services (also referred to as “narrow” retail parity obligations); (ii) parity obligations relating to the conditions under which goods or services are offered to undertakings that are not end-users and also (iii) parity obligations relating to the conditions under which manufacturers, wholesalers or retailers purchase goods or services as inputs (so-called “most-favored customer” obligations).

  • It will be interesting to see to what extent this will – or will not – affect the decisional practice of the national competition authorities and national courts, in particular in France, Germany and Italy. France and Italy even have discrete national legislation which bans these kinds of parity clauses at the national level. In Germany, the Federal Supreme Court decided that a narrow retail parity obligation in the hotel booking sector was not exempted from Article 101(1) TFEU and thus violated competition laws. While this primarily hinged on the company in question exceeding the 30% market share threshold of Article 3(1) VBER, the Federal Supreme Court made it clear that it takes a critical view of these provisions and that at least the individual clause relevant to the case did not meet the requirements for an individual exemption pursuant to Article 101(3) TFEU.

  • While “pure” national cases can be generally decided on different legal grounds and would leave room for results that deviate from the Commission’s stance, EU law leaves no room for a diverging application of the EU competition rules and, usually, the Commission would treat “online cases” – which by their nature contain either a cross-border element or at least cover the entirety of a Member State’s territory – not as purely national cases but as EU cases. Consequently, and to the chagrin of the Bundeskartellamt, Germany’s very strict view on narrow retail parity obligations may not prevail in practice.

“Name your Price” – Clarifications for Resale Price Maintenance (RPM)

  • For all its tweaks and changes, importantly, one thing has been left unchanged in the new VBER: The strict approach to resale price maintenance (RPM). Traditionally subject to a diverging approach in the (more flexible) US and the (rather rigid) EU, the latter has maintained course and still denies RPM measures the benefits of the block exemption.

  • More specifically, RPM remains a hardcore restriction pursuant to Article 4(a) VBER, meaning that e.g. for distribution contracts in which the supplier of, say, branded sneakers imposes a specific sales price (or, for that matter, maximum discounts or minimum prices) on its reselling distribution partners (e.g. retail stores), the entire distribution contract – and not just to the specific RPM clause – cannot be block exempted anymore. Instead, the contract parties would have to assess the possibility of an individual exemption under Article 101(3) TFEU – and for all vertical agreements in their contract which potentially restrict competition. Para. 197 of the Guidelines gives expanded guidance on scenarios in which RPM may, by way of exception, meet the requirements of Article 101(3) TFEU, i.e. (i) to introduce a new product to the market; (ii) to organize a coordinated short-term low price campaign of two to six weeks; (iii) to prevent brand damage through loss leading strategies by individual distributors (see also below), or (iv) to provide the distributor with an extra margin necessary to provide additional pre-sales services to customers.

  • However, such individual assessment can be a painful exercise with significantly reduced legal certainty – including for all other vertical provisions in the contract which, as mentioned, would also have to undergo such assessment. Aside from those uncertainties companies remain well-advised to steer clear of RPM for a second reason: it usually results in heavy fines. In fact, around a third of all antitrust fines in the world’s major jurisdictions stem from vertical infringements – and among those RPM is, alongside certain customer and territory allocations, usually the most strictly enforced. For instance, the Bundeskartellamt has recently imposed RPM fines on an audio equipment producer (EUR 7 million), a school bag manufacturer (EUR 2 million) and a manufacturer and two retailers of musical instruments (EUR 21 million in total) – and those are just the cases since August last year. Similar investigations have been run in Austria and the rest of the EU, from Portugal to the Czech Republic.

  • Contrary to the interpretation – or perhaps hopes – of manufacturers across industries, this strict view will continue to apply also to minimum advertised prices (MAP). MAP refers to a practice by which suppliers of branded goods do not meddle with their distribution partners’ actual pricing decisions (they remain free to sell the goods at whichever price they choose) but instead rein in their advertising efforts by prohibiting them from advertising prices below a level set by the supplier. During the consultation phase, an earlier draft of the Guidelines was perceived by some as indicating that the Commission would be aiming for a more lenient view on such measures. In the final Guidelines, however, the Commission has underscored quite emphatically that it considers MAP just another (indirect) form of RPM. Any MAP, in the Commission’s view, creates a disincentive to deviate from the (supplier-imposed) advertised price (para. 187(d) of the Guidelines). To quote the Guidelines,

“[a]lthough in principle MAPs leave the distributor free to sell at a price that is lower than the advertised price, they disincentivise the distributor from setting a lower sale price by restricting its ability to inform potential customers about available discounts. A key parameter for price competition between retailers is thereby removed.”

  • There is, notably, an important exception from this strict view which can allow suppliers to protect their brand image by limiting below-wholesale price sales of their distribution partners. This concerns loss leading strategies by which retailers or other distributors (often those with considerable market strength) sell a branded product below cost. This “loss lead item” then effectively serves as a vehicle to attract customer traffic and demand for subsequent sales of other services or products. This can, in the Commission’s words, “damage the brand image of the product and, over time, reduce overall demand for the product and undermine the supplier’s incentives to invest in quality and brand image” (para. 197(c)). In that case, imposing a MAP (or, for that matter, even a minimum resale price) can be a legitimate form of “self-defense” by the supplier and, by way of exception “may be considered on balance pro-competitive” and thus be exempted under Article 101(3) TFEU. That said, the Commission sees this as a very narrow exception to the rule. For it to apply, the MAP must be “targeted”, i.e. tailored to the “particular” distributor who is applying the loss leader strategy and even then, a “one-off” loss lead campaign will not justify the imposition of a MAP. Instead, it can only be exempted if a distributor “regularly engages in that kind of practice.
  • While this approach will have a number of suppliers grind their teeth, the Commission also provides some much-anticipated flexibility for price agreements across distribution chain levels. In a number of industries with multi-layered distribution networks, the desire for – in the Guidelines lingo – “fulfilment contracts” arises. Under such agreements, the supplier of a product (e.g. of roofing tiles) enters into a vertical agreement with a buyer (e.g. one of the supplier’s regional distributors) for the purpose of executing a supply agreement concluded previously between the supplier and a specific customer (e.g. a building company involved in a large construction project). This can happen, for instance, if the customer is under the impression that dealing directly with the supplier (rather than the distributor) will ultimately give him a better deal. Another example mentioned by the Commission is customers purchasing goods from an undertaking active in the online platform economy which is operated by a group of independent retailers under a common brand and that undertaking then determining the price for the sale of the goods and forwarding orders to the retailers for fulfilment.

  • In practice, however, this sometimes caused uncertainty, as proper execution of these agreements would also have to include a price pre-agreed between the supplier and the customer – and adhered to also by the (independent) distributor acting as the “middle man”. A boon to companies, para. 193 of the Guidelines now clarifies that such indirect imposition of a resale price on the distributor is not RPM if the supplier selects the undertaking (distributor) who just “fulfils” the supply agreement between the supplier and the (end) customer. In that case, the resale price imposed “does not restrict competition for the supply of the goods or services to the customer or competition for the supply of the fulfilment services”.

  • Notably, this assessment takes a U-turn if the undertaking providing the fulfilment services is selected by the customer. In that case, “the imposition of a resale price by the supplier may restrict competition for the provision of the fulfilment services” which “may amount to RPM”. It is striking that no reasoning for that distinction is given. While selection by the supplier will likely be the more prevalent case in practice, it is not clear why selection by the customer should be treated differently. In both scenarios, there is an agreement between the customer and the supplier, skipping the distribution level, and the customer has made it clear that the purchase will only materialize at a specific price point he or she considers fair under the circumstances – meaning the “middle man” will have to accept it too. Regardless of who chooses the company effecting the actual distribution of the product, distributors, therefore, face a “done deal” which does not allow for price competition between distributors to begin with – meaning that there is nothing for the RPM prohibition to protect.

What’s next?

  • As of 1 June 2022 the new rules – including all those described here and in our previous post – apply across the EU and suppliers and distributors alike will have to adjust their practices accordingly, implementing the (in part) substantial changes to the old framework. This will likely cause some growing pains: While the concept of the VBER and many of its broader guardrails are tried and tested, it has been in force for twelve years – a long time which has resulted in a number of “market standard” best practices and compliance efforts. Rethinking well-accustomed rules and habits can be a challenge and it is in particular in the next couple of years that we would expect European enforcers to be on high alert regarding vertical restraints, bolstering their enforcement efforts to make sure companies in all industries abide by the new rules.

  • Companies are therefore well-advised to make good use of the one year transition period which the VBER provides – making sure that as of 1 June 2023, they have revised their business practices and contracts to match the requirements of the “new vertical world”.

  • Notably, the Commission has decided to have the new VBER apply for another twelve years. While this may seem questionable from a policy perspective (considering the fast-paced development in particular of online distribution), it gives companies considerable respite after the initial “What’s new?” dust has settled, avoiding the costs that would have come with a more limited VBER shelf life. It is, therefore, safe to say that abiding by the new rules really is, once again, a truly valuable long-term investment.

 

 

 

Authored by Florian von Schreitter, Philipp Heuser, and Jan Philipp Sparenberg.

 

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