What?
Vertical agreements often contain a large number of provisions regulating different aspects of a vertical relationship. However, EU competition rules provide that certain provisions cannot be included in distribution agreements because they hinder competition to a level that cannot be permitted. These are called"hardcore restrictions." Hardcore restrictions can be imposed either directly or indirectly. In the latter case, the assessment is slightly more complex, but the outcome is the same.
The consequence of including a hardcore restriction in a vertical agreement is that the block exemption no longer applies to the entire agreement. In this case, the agreement may still qualify for an individual exemption under Article 101(3) TFEU. However, hardcore restrictions are subject to a rebuttable presumption that they do not meet the conditions set out in this article. Obtaining an individual exemption is therefore particularly challenging and only occurs in exceptional circumstances. It is therefore very important that lawyers have a clear understanding of what these hardcore restraints entail so that they can avoid them when drafting vertical agreements.
Now?
Under the current FCC regime, five types of restrictions are considered hardcore restraints that invalidate the block exemption. These are contained in Article 4 of the current CSR.
First, Article 4(a) VBER prohibits the restriction of the buyer's ability to set its own sale price, known as"resale price maintenance ("RPM")." This includes both the imposition of a fixed or minimum resale price and the maintenance of a fixed or minimum margin.
Second, Section 4(b) VBER prohibits territorial or customer restrictions (with certain exceptions). Because the Internet enables a distributor to reach a greater number and variety of customers than through more traditional sales methods, the European Commission considers a number of restrictions on the use of Internet sales restrictions and, in certain cases, even hardcore restrictions (see paragraph 52 Vertical Guidelines). An example of such a hardcore restriction is dual pricing, an agreement stating that the distributor must pay a higher price for products intended to be resold online compared to products intended to be resold offline.
Third, Section 4(c) VBER prohibits the restriction of active or passive sales to end users by members of a selective distribution system. Again, with respect to Internet sales, the European Commission has stated (see paragraph 56 Vertical Guidelines) that any obligations that discourage members of a selective distribution system from using the Internet by imposing criteria on online sales that are not broadly equivalent to those imposed on offline sales are hardcore restrictions.
Fourth, Section 4(d) VBER prohibits the restriction of cross-supplies between distributors within a selective distribution system.
Finally, Section 4(e) VBER prohibits the restriction on the supplier's ability to sell components as spare parts to end-users or repairers or other service providers who have not been entrusted by the buyer to repair or maintain its goods.
The future as of June 1, 2022?
First, the current proposals for the new VGVO and the Vertical Guidelines contain certain changes to the regime, but from a general perspective, the list of hardcore restrictions in Article 4 remains largely unchanged.
Article 4(a) draft CSR will remain. As a result, the basic rules on RPM will continue to apply. Nonetheless, the proposals for the new Vertical Guidelines introduce changes regarding price monitoring, fulfillment contracts and minimum advertised price policies. Be sure to read DLC Countdown No. 9 if you want to know what is likely to change in the new VGVO regime.
With increasingly important online sales, the European Commission continues to pay attention to the online environment and is making certain changes to the current regime to make this sales channel even more accessible. The current proposals for the new Vertical Guidelines provide an interesting change of approach to dual pricing. The European Commission argues that dual pricing can benefit from the safe harbor of the FCC in certain circumstances. Be sure not to miss DLC countdown No. 10 if you want to learn more. Also in relation to the equivalence principle, the European Commission seems to be moving in a new direction by focusing on the actual restriction of Internet use. In the current proposals for the Vertical Guidelines, the equivalence test for hybrid distribution scenarios is eliminated. DLC Countdown No. 11 will discuss this issue in more detail.
The conditions for imposing territorial or customer restrictions in an exclusive distribution agreement (see Article 4(b)(i) draft CSR) have been upgraded to make this exception more attractive and easier to apply in practice. The changes include the possibility of shared exclusivity, the possible elimination of the parallel requirement and the possibility of transferring the active sales restrictions to the buyer's customers. This is all very technical and the exact changes will be outlined in DLC countdowns No. 12, 13 and 14. Take a look at these DLC countdowns if the topic is of interest to you.
In practice?
A clear distinction can be made between two sets of topics, those where the existing regime remains largely in place and those where the new rules are likely to cause changes.
The main topics in the first category are RPM and selective distribution.
The second category includes the regime applicable to online sales and the protection of exclusive distributors from active selling.
Assessment?
The degree of legal certainty created by the proposed new rules is not so clear. This is partly due to the fact that the definition of certain hardcore restrictions in the draft regulation is not always fully consistent with the language of the draft guidelines. As you will see, the devil is often in the details. DLC countdowns Nos. 9 - 14 will discuss the practical implications of the likely changes in more detail and outline areas of uncertainty.
Want to know more? Stay tuned...
With the countdown to June 1, 2022, we aim to bring you regular updates and the legal know-how you need to fully prepare your business for the future. Also check out the Distribution Law Center platform and our LinkedIn page for much more information on the laws applicable to vertical agreements, both competition and commercial. 27 specialized teams from across the EEA are working hard to transform the platform into your favorite source of guidance and information.
A translation of this Countdown newsletter is available in the following languages: Portuguese.
Read the available DLC Countdown newsletters on expected changes here.
