Thursday, November 21, 2019
In 2010 the Commission abolished the sector specific (vertical distribution in the motor vehicle sector) MVBER 1400/2002 and adopted the Vertical Block Exemption Regulation 330/2010 (VBER), which defines vertical agreements for which it can be assumed with sufficient certainty that they satisfy the conditions of Article 101(3) of the EU Treaty and thus are pro-competitive. Along with VBER, the Commission issued also its Guidelines on Vertical Restraints (VGL), which provide guidance in relation to the practical application of VBER. Finally, regarding vertical distribution in motor vehicle aftermarket, the Commission adopted the sector specific Regulation 461/2010.
In light of the upcoming date of expiry of VBER on 31st May 2022, the Commission has launched a two-phase review (evaluation phase followed by an impact assessment phase) in order to determine whether it should be prolonged, revised or allowed to lapse. Based on the outcome of the public consultation for VBER, we provide below an overview of the main topics, which currently present challenges to the competitive assessment of vertical agreements, with a particular focus on the motor vehicle sector.
Vertical agreements relating to the purchase, sale or resale of new motor vehicles are governed by VBER. During the public consultation period for the review of VBER, feedback has been provided by several respondents (including both car manufacturers and car dealers associations) and the following elements have been outlined:
In general, the VBER has been found to enhance legal certainty and to reduce costs required for compliance, while most participants suggested that if VBER was not prolonged, negative effects are expected. However, despite the overall positive evaluation of the effectiveness of VBER, several topics have been raised as requiring further clarification:
1. Selective Distribution
Selective distribution constitutes the predominant form of distribution for a wide range of products, among which motor vehicles are also included.
a. Direct Sales
Manufacturers impose on their distributors the requirement to make significant investments, as a condition to gain access to their selective distribution network. At the same time, however, certain manufacturers apply more and more a dual distribution model, where they sell their products through a distribution network and simultaneously supply goods to their customers directly. This dual role of manufacturers as distributor and competing seller results in increased competition between brand owners and distributors at the retail level. By competing against their own network, suppliers may significantly affect the viability of investments required from dealers belonging to a selective distribution network.
Reflecting to that concern, it has been suggested by retail associations that VGL should include a limitation on the suppliers’ ability to enter into direct sales when combined with selective distribution. CECRA (the European vehicle dealers and repairers association) has suggested that specific automotive clauses must address that issue.
b. Quantitative Nature
In view of the ECJ’s judgement on Case C‑158/11 (Auto24 SARL), the VGL ought to clearly provide that it is not necessary for a quantitative selective distribution system to be based on criteria that are objectively justified and applied in a uniform and non-differentiated manner in respect of all applicants for authorisation. Until Auto24 SARL it has been assumed based on ECJ’s jurisprudence that all selective distribution systems, whether quantitative or qualitative, must be justified by the nature of the goods and that induction criteria must be necessary - required for the sale/marketing of the goods in question. The ambiguity also exists in VGL which does not name these requirements.
2. Digital Market
One of the most prominent topics on which the VBER and/or the VGL need to provide better and clearer guidance is the rise of e-commerce and its effect on distribution. The digital era affects most industry sectors in the way they operate and the motor vehicle sector is no exception to that development. It seems that the prevailing opinion is that such matters would be better addressed through the revision of VGL, rather than VBER.
a. Dual Pricing
A matter which has given rise to vigorous debate is whether dual pricing should be allowed or not. “Dual pricing” refers to the practice where the price of a product differs depending on whether it is sold online or offline. Currently, the Commission considers dual pricing as a hardcore restriction of passive selling (see VGL point 52d). Similarly, in its Final report on the E-commerce Sector Inquiry (2017) the Commission explained that: “charging different (wholesale) prices to different retailers is generally considered a normal part of the competitive process. Dual pricing for one and the same (hybrid) retailer is generally considered as a hardcore restriction under the VBER.” (point 37).
The Commission’s view has been severely criticized for lack of an economic justification. A differentiated remuneration can be economically justified in order to reflect the different conditions existing in online and offline retail channel. Services such as demonstration rooms for products, physical stores maintained in or close to city centres, employing dedicated and specialised staff to promote the brand's products imply high costs to offline retailers compared to online retailers. It has therefore been suggested that treatment of dual pricing as a hardcore restriction is not justified and should be abandoned, as it is an efficient and often pro-competitive way to compensate for investments in brick-and-mortar outlets.
b. Brick & Mortar Shops
Another relevant matter is whether suppliers can impose on candidates for online distribution the obligation that they operate at least one brick-and-mortar outlet. According to the Commission’s view (see Final report on the E-commerce Sector Inquiry, point 27) “while acknowledging that brick and mortar requirements are generally covered by the VBER, certain requirements to operate at least one brick and mortar shop without any apparent link to distribution quality and/or other potential efficiencies may require further scrutiny in individual cases.”
The Commission’s approach has been criticized by respondents to the public consultation as preventing suppliers from deciding freely on the form of distribution they desire. According to this opinion, competition law should not intervene to regulate how the market operates and the option to require a brick & mortar outlet should be left open to market players. Respondents also suggested that the requirement of a brick & mortar outlet could be limited to certain categories of goods only, while others have suggested that this would lead to legal uncertainty. The issue is closely linked to whether all or only certain goods qualify for selective distribution and what criteria are appropriate for induction.
c. Online Sales Restrictions
Restrictions related to online sales can take many forms (e.g. prohibition to use third-party platforms or price comparison tools, restrictions on keyword bidding such as Google’s Adwords, making online sales dependent on authorization without clear criteria or processes, territorial restrictions etc.) and range from absolute bans to the application of certain quality criteria on which they are made dependent. The main difficulty in assessing such practices is clarifying whether and when they fall within the scope of Article 4 VBER (hardcore restrictions) and if not, then how it could be justified that they constitute vertical restraints capable of removing the benefit provided by VBER.
Different assessment approach has been applied so far depending on the form of online restrictions. In Guess, the Commission concluded that keyword bidding ban constitutes a “by object” restriction of competition. In Coty, the ECJ held that a prohibition imposed to distributors in a selective distribution system to use third-party platforms does not constitute a hardcore restriction of VBER when applied to preserve the luxury image of goods. VGL need therefore to clarify how each type of online restriction is assessed, in order to enhance legal certainty.
Several respondents have stressed the importance of clarifying in VGL whether ECJ’s judgment in Coty applies only to luxury goods or also to other products, with many favoring the second approach. In case, however, the Commission decides to adopt such a distinction between luxury and other goods, it should provide in VGL concrete criteria capable to allow for self-assessment in relation to the characterisation of a product as luxury product. Similarly, it remains yet unclear whether ECJ’s view in Coty that when customers are usually able to find the online offer of authorised distributors by using online search engines, restrictions of a specific kind of internet sale do not amount to a hardcore restriction within the meaning of Article 4 of VBER, can be regarded as the limit to lawful online restrictions.
d. Active & Passive Sales Definition
The distinction between active and passive sales, as provided in point 51 VGL, must be further clarified, especially as regards its relation and liking to online advertising (general or targeted). In addition, restrictions regarding the distributor’s ability to enter into passive sales must also be assessed under the Geo-Blocking Regulation (GBR). Even when agreements restricting passive sales satisfy the conditions required to benefit from the exemption provided by VBER, they must also abstain from violating any of the prohibitions laid down in Articles 3, 4 and 5 of GBR, otherwise they are automatically void.
3. Market Share Thresholds & Market Definition
The main prerequisite from benefiting from the exemption provided by VBER is that the market share held by the supplier and the buyer each does not exceed 30% of the relevant market. Taking into account the tendency towards concentration in the automotive sector and the many collaborative projects, as well as the tendency of competition authorities to adopt very narrow market definitions (primary v. aftermarket), it has been proposed to raise the threshold of the VBER from 30% to 40%, in order to counterbalance the reduced legal certainty that emerges from the limited range of agreements to which VBER applies. In relation to quantitative selective distribution specifically, requests have been submitted by retailers’ associations to reduce the suppliers’ market share threshold from 30% to 20%. A change of the Commission’s view that in principal the motor vehicle market is clearly distinguished between primary and aftermarket (and thus not systemic) and that aftermarket is “brand-specific” is unlikely to change.
4. Agency Agreements
Clarification is also needed in VGL (points 12-21) in relation to the definition of an agency agreement as regards the interpretation of the criterion related to the allocation of financial or commercial risk and the consequent characterisation of “genuine” and “non-genuine” agency. In particular, it still remains unclear to what extent risks can, within the concept of a “genuine” agency, be allocated contractually between the principal and the intermediary (e.g. whether the intermediary can provide a salesroom and sales staff, whose costs are covered by a sales-related commission).
The feedback provided during the public consultation for the evaluation of VBER has shown that VBER has been effective and should therefore be maintained either with minor adjustments or in its current form. Most participants agreed that more extensive changes are needed in VGL rather than VBER in order to adapt to the current market conditions. In particular, VGL must provide guidance and clarification regarding the assessment of practices that have emerged in recent years, primarily due to the rise of digital market. Finally, it has been noted that both VBER and VGL should abstain from imposing any obligation in relation to contract law provisions, since the protection of the legitimate interests of weaker contracting parties falls within the remit of national laws and shall remain therefore within the competence of Member States.
With the steps related to Feedback (Q4 2018), Public Consultation (Q2 2019) and Evaluation Workshop (Q4 2019) having already been completed, the Commission is now heading towards the adoption of its Staff working document in Q2 2020, which will bring the end of the evaluation phase. From then on, the impact assessment phase will follow, which will last for a period of approximately 24 months until the 31st of May 2022, when VBER expires.
Athens, November 21, 2019
This e-mail is only informative and not intended to provide legal advice. Please contact your preferred legal consultants for advice on the matters discussed in this letter. The information in this document is intended only as a general update and should not be taken as the sole foundation for decision making.