New competition law rules for suppliers and distributors: more clarity or risk for businesses?

Laura Ryzgelytė, COBALT Senior Lawyer

European Commission 10 May has adopted new rules for vertical agreements, which will replace the previous regulation, which has been in force for 12 years. The amendments are relevant to all suppliers and distributors when assessing the compatibility of their agreements with competition law. Although part of the previous regulation has not changed, some of the new rules will oblige businesses not only to adjust their contracts, but also to change their business practices.

The new Block Exemption Regulation on Vertical Agreements (“the DSB”) and the new Vertical Guidelines will enter into force in 2022. June 1

Agreements between undertakings operating at different levels of the supply chain, such as an agreement between a supplier and a distributor, also known as vertical agreements, are prohibited under Article 101 (1) of the Treaty on the Functioning of the European Union (TFEU) if they have the object or effect of hindering, restricting or distorting trade in the common market and may affect trade between Member States.

The SSIA provides for exemptions from the general prohibition of vertical agreements, thus giving the parties to the vertical agreements greater certainty as to the conduct of their business practices and the compliance of the agreements with the rules of competition law. Agreements that do not fulfill the conditions of the SSGI may still be compatible with Article 101 (1) TFEU, but such agreements must be assessed individually.

The main changes to the previous rules relate to the dual distribution business model, ie where a supplier sells his goods or services through independent distributors but also directly to end-users, restrictions on active sales, most-favored-nation arrangements, selective and exclusive distribution agreements, etc. . Accordingly, businesses should pay attention to the nature of the vertical agreement applied in their practice and assess the impact of the changes that are relevant to them and the necessary changes to existing and future agreements.

  • Dual distribution: more risks and requirements for suppliers operating in the retail market as well

A dual distribution system, where a supplier sells his goods or services not only through independent distributors but also directly to end customers in competition with his distributors, is now a common business practice. With the rapid development of direct online sales, such a business model is becoming more and more noticeable among Lithuanian companies as well. In this context, the restrictions on dual distribution, which will take effect from 2022, June 1, will affect many brands and suppliers operating in Lithuania.

Under the current regulations, vertical (non-reciprocal) agreements in dual-distribution systems were exempted from the VSBIR without any specific restrictions. This means that a supplier could sell its goods or services through independent distributors and directly to end customers if the market share of either country did not exceed 30%. and such vertical agreements did not have the so-calledhardcore“ restrictions (such as resale price fixing, territorial / customer restriction, etc.).

The new SSGI stipulates that the dual distribution system does not exempt exchanges of information between a supplier and a buyer which are not directly related to the performance of the agreement or which are not necessary to improve the production or distribution of the contract goods or services.

The new Vertical Guidelines provide a non-exhaustive list of examples of information that are likely to be considered necessary for the performance of the contract and, conversely, will not fall within the scope of the SSGI. Such a list provides more clarity on the exchange of information in a dual-distribution business relationship, but does not guarantee the absence of a possible infringement of competition law. In all cases, business will need to assess the potential effects of the exchange of specific information on competition, depending on current business practices.

The block exemption for dual distribution will also not apply to vertical agreements relating to the provision of online brokering services. This restriction applies to online marketplaces, other online distribution platforms for goods or services that also sell goods and services in competition with the buyer of brokering services. Such online brokering agreements will not be subject to the SSGI and their compliance with competition law rules will have to be assessed on an individual basis.

  • More flexibility for suppliers to organize their online distribution systems for goods or services

The current revision of the rules for vertical agreements has been largely driven by the growing digitalisation of the economy, the unstoppable growth of online sales and the development of large e-commerce companies and platforms. Against this background, the new rules provide more clarity on online commerce and possible restrictions on the distribution of goods and / or services online.

The new SSGI stipulates that the block exemption does not apply to vertical agreements which have as their object the effective access by the buyer or its customers to the sale of the goods or services specified in the contract. This does not preclude the imposition of other restrictions on online shopping or online advertising vis-à-vis the purchaser, so that, for example, bans or quality criteria from individual service providers may apply as long as they do not impede effective online sales.

The decision as to whether a particular internet-related restriction is block exempted or whether it nevertheless falls within the scope of the prohibited restrictions will depend on both the nature of the restriction and the intensity of the restriction. Thus, while the new SSGI gives suppliers more flexibility to organize their online distribution systems for goods or services, suppliers will not avoid the risks involved, as neither the SSGI nor the new Vertical Guidelines make an objective and clear distinction between permissible and severe restrictions on online trade.

In view of the changing market and the growth of online sales, the VSBIR has lifted the ban on different pricing or different criteria for suppliers selling online and in contact shops. The new Vertical Guidelines make it clear that suppliers may set different wholesale prices for online and offline sales by the same distributor, as this may encourage or reward certain necessary investments.

While the difference in wholesale prices must be reasonably related to the difference in cost or investment between online and offline sales, the parties to the contract are not required to perform complex cost calculations or share detailed cost information to demonstrate this. Nevertheless, certain safeguards also apply in the case of the dual pricing block exemption. Accordingly, the difference between wholesale and offline wholesale prices should not be intended to restrict cross-border sales or to impede the efficient use of the internet by the buyer.

Furthermore, while parties are free to set up a system that allows them to effectively implement dual pricing (for example, to monitor which goods are actually sold online or offline for billing purposes), any such system should not determine the amount of products a buyer can sell. the Internet.

The VSBIR provides for a transitional period of one year for the new rules. This means that although the new rules will enter into force on 1 June, agreements concluded before 1 June and complying with the previous VSBIR rules, the new rules will not necessarily apply. However, the transitional period will not apply to newly concluded agreements, so businesses will have to follow the new VSBIR rules when concluding new vertical agreements from 1 June. Against this background, undertakings involved in vertical agreements should without delay review the provisions of existing agreements and adapt them to changed regulations and assess the risks of possible infringements of competition law.

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