Controversy surrounds the new Vertical Agreements Block Exemption Regulation. As the new rules come into force, how will luxury brand owners, online retailers and advertisers adapt, and who will be most discontented by their impact? Zoe Hare takes us round the anti trust block.
Topic: Competition
Who: European Commission
When: 20 April 2010
Where: EU
Law stated as at: 25 May 2010
What happened:
On 20 April 2010, the European Commission ("Commission") adopted its new vertical agreements block exemption regulation ("VBER") and Guidelines on Vertical Restraints ("Guidelines"). The new VBER came into force on 1 June 2010, replacing the old block exemption regulation.
What is the VBER?
Under Article 101(1), an agreement between undertakings which may affect trade between Member States and which has the object or effect of restricting competition in the internal EU market is deemed anti-competitive and, therefore, unlawful.
The VBER establishes a safe harbour for agreements between undertakings at different levels of the supply chain (most commonly, supply/purchase and distribution agreements). It exempts qualifying agreements from the usual rules of competition law and takes them outside the remit of Article 101(1).
New VBER
Given that the current regulation has been in place since 1 June 2000, in drafting the text of the new VBER and Guidelines the Commission was compelled to acknowledge a number of developments over the last decade, including:
1. an increase in the countervailing market power of buyers; and
2. an increased significance of internet sales.
In recognition of (1) above, the Commission has extended the safe harbour threshold to take into account the market share of the buyer. In the new VBER, agreements will only benefit from the block exemption where the market share of both the supplier and the buyer is below 30%. In such cases, it is presumed that the undertakings have no market power and the vertical agreements will not distort competition in the internal market.
However, the most controversial element of the VBER is contained in the Guidelines and relates to the restrictions which can and cannot be imposed on internet selling. As explained below, the new Guidelines protect luxury brand owners to some extent, but also create problems.
Protecting premium brands
Although the VBER recognises the increased significance of the internet as a means of selling to consumers, the regulation nevertheless provides certain protections for luxury brand owners and other manufacturers. Indeed, aside from the restrictions which are prohibited (set out below under "Giving online retailers a chance"), the Guidelines provide examples of the types of online selling restrictions that premium brand owners are able to apply and include in their distribution agreements.
First, where a brand owner operates a selective distribution system, the brand owner is permitted to require that its distributors have at least one "bricks and mortar" shop before they engage in online sales. While this has caused consternation for online-only retailers such as Net-a-Porter and Amazon, it recognises that luxury brand owners have a legitimate interest in ensuring that distributors of their products meet their specific standards. On the other hand, the brand owner must ensure that any restrictions imposed on distributors do not dissuade or prevent them from using the internet (which would constitute a hardcore restriction on trade).
Secondly, brand owners are permitted to require that a distributor's internet site meets certain quality standards before they agree to supply their products, mirroring how brand owners are able to stipulate quality standards for a shop, catalogue or promotional/advertising material.
Thirdly, brand owners are able to require that a distributor sells a minimum value or number of products through its offline stores. However, it is not permitted to cap the level or proportion of products sold online.
Giving online retailers a chance
In the new Guidelines, the Commission has recognised that the number of online sales has increased dramatically over the last decade. Accordingly, although this has not stopped online-only retailers from criticising the Guidelines, the Commission has sought to protect the right of retailers and distributors to use the internet to advertise and sell goods and services as far as possible, while balancing their interests with those of the manufacturers.
Under the new VBER:
- active sales restrictions (whereby the distributor/retailer actively approaches customers by, for example, sending unsolicited emails) are only permissible to prevent active selling into other distributors' exclusive territories or customer groups; and
- passive sales restrictions (whereby the distributor/retailer is approached by the customer) should not be permitted, except in very limited circumstances.
Vitally for online retailers, the Commission considers that general internet advertising is a means of passive selling. Similarly, where an order is received following a customer's visit to the website or where the customer opts to be kept informed by the distributor, which then leads to a sale, both are also considered to be forms of passive selling. A luxury brand owner cannot, therefore, restrict this type of internet advertising or selling in its agreements with distributors/retailers.
Further benefits for online retailers are found in the "hardcore" restrictions of passive selling, described in the Guidelines. The Commission has detailed certain examples of passive selling which a luxury brand owner must avoid restricting in its distribution agreements. Indeed, the Commission considers that the following restrictions are not possible to justify, even where there are objective reasons. These include:
1. requiring the distributor to prevent customers in a different territory from viewing its website, or automatically re-routing them to the website of the manufacturer or distributor;
2. requiring the distributor to terminate transactions made by credit cards registered in another territory;
3. requiring the distributor to limit the proportion of sales made over the internet; and
4. charging the distributor a higher price for products intended to be sold over the internet.
Why this matters:
The new VBER and its accompanying Guidelines may create issues for advertisers, given the new restrictions impose on internet selling.
The internet has already proved itself to be an extraordinarily powerful and accessible platform, on which distributors and advertisers can target an increased, and geographically dispersed, pool of customers, both in the EU and around the world.
While it is not possible to restrict distributors from selling products on the internet, it is possible to require distributors to have at least one offline "bricks and mortar" shop and to ensure that their website meets the manufacturer's quality standards. This clearly has the potential to create significant problems for online-only retailers. On the other hand, it will provide comfort to luxury brand owners who wish to ensure that their products are sold in an environment that suits their brand and that, for example with perfume, they can be sold with suitably trained staff.
As regards online advertising, this cannot generally be restricted as it is a form of passive selling. Even within a selective distribution system, online advertising which induces customers from outside the territory to contract the distributor is permissible; the manufacturer cannot restrict a distributor from selling to customers outside its territory where the customers have contacted them on their own initiative.
In summary, the new VBER reflects the Commission's efforts to balance the interests of both the manufacturer and the distributor. However, as is often the case, it is rarely possible to keep all sides happy. While luxury brand owners must accept the idea that their products may be sold online, online-only retailers will need to consider how to handle a requirement to operate a "bricks and mortar" shop, should a manufacturer demand this.
Zoë Hare
Trainee Solicitor
Osborne Clarke, London
zoe.hare@osborneclarke.com
