By: Emily Balzano
Since its establishment, the European Union (“EU”), has attempted to harmonize its vertical supply chain processes through various regulations. With the current regulations set to expire in early 2022, new proposals have been drafted which seem to narrow the safeguards more than the current guidelines.
Currently, Article 101(1) of the Treaty in the Functioning of the European Union (“TFEU”), prohibits agreements between companies that restrict competition. Further, Article 101(3), also known as the Vertical Block Exemption Regulation (“VBER”), provides a “safe harbor” from antitrust challenges for vertical agreements which are agreements between businesses within the same supply chain. The VBER serves as a guideline for EU business members to ensure they are in compliance with the EU’s supply chain regulations, by outlining the legal requirements of vertical agreements. Recently, the European Commission disclosed proposed revisions to the VBER currently in effect, which is set to expire May 31, 2022. In order to qualify for this new VBER safe harbor from antitrust challenges, neither party may have a market share that exceeds 30% and the agreement may not contain any “hardcore restriction”.
The current VBER was put in place to ensure compliance with Article 101(1) of the TFEU, by creating the safe harbor exemption. Some of the more prominent changes proposed in the new VBER include permitting dual pricing, introducing more flexibility for selective distribution (“SD”) models, and expressing freedom to restrict reselling on online marketplaces.
Beginning with the permittance of dual pricing, under the present VBER it is illegal for a company to set different wholesale prices based on if its products will be resold online or in a physical store. In the proposed VBER, some dual pricing will be permitted only if it positively impacts physical retailers.
Moving to more flexibility for SD models, the new proposals will give manufacturers even more power to enforce their SD models. SD allows for manufacturers to have complete control over who is distributing their products. The proposals will prevent all sales into the SD territory by all distributors not authorized by the manufacturers. The proposals also offer manufacturers more flexibility in SD selection, so they will not have to set equivalent criteria for both online and offline sales.
As e-commerce continues to rise, the freedom of manufacturers to control where their goods may be resold by retailers becomes increasingly prominent. The new proposals will expressly state that suppliers and manufacturers of luxury goods, or highly technical offerings, are free to restrict retailers’ ability to resell on online marketplaces. This will allow manufacturers to preserve the image of their “luxury” goods by limiting where those goods are sold.
Some of the new proposals will inevitably narrow the scope of the VBER safe harbor. There are two predominant ways this will happen, beginning with the VBER’s stricter stance towards dual distribution. Dual distribution is when a supplier distributes its goods both directly to consumers, and through a third-party distributor, therefore, competing with its distributor directly at a retail level. Because the European Commission has seen an increase in suppliers utilizing dual distribution, the proposal will narrow this safe harbor. The VBER’s proposals would only fully exempt vertical agreements between competitors at the retail level when both the supplier’s and distributor’s aggregate share in the retail market does not exceed 10%. This attempts to narrow the exemption threshold of dual distribution.
The second way the new VBER will narrow the safe harbor is by the most favored nation (“MFN”), clause. The MFN clauses state that there is an obligation for EU companies to offer the same or better conditions to a contracting party, as those offered to a similarly situated party through any other sales channel. In contrast, the proposed amendments to the VBER will instead assess the offers to a contracting party on a case-by-case basis.
Before the enactment of the revised VBER, interested parties have the ability to submit their comments on the draft. Barring unforeseen circumstances, the new VBER will become effective on June 1, 2022. The proposals seek to adapt to the “e-commerce” world as the predominant way of selling and buying goods. It will provide more clarification and guidance for countries within the EU and positively impact the region overall.
Student Bio: Emily Balzano is a second-year law student at Suffolk University Law School. She is a staffer on the Journal of High Technology Law and a member of the Business Law Association and the Women’s Law Association. Emily received a Bachelor of Science in Business Administration with a dual-major degree in Finance and Operations and Supply Chain from the University of South Carolina.
Disclaimer: The views expressed in this blog are the views of the author alone and do not represent the views of JHTL or Suffolk University Law School.
