New Vertical Block Exemption Regulation 2022/720 in effect from 1 June 2022

A new Vertical Block Exemption Regulation 2022/720 (“VBER”) entered into effect on 1 June 2022. It replaced Regulation 330/2010 which applied until 31 May 2022. The new VBER sets out amended rules for block exemption of certain vertical agreements from the prohibitions of Article 101 TFEU aimed at protection of competition in the EU market.

Existing contracts already in force before entering into effect of the new Regulation should be aligned with the requirements of the new VBER until 31 May 2023.

The new VBER introduces several important changes:

1. Dual distribution

Dual distribution is in place where the supplier sells its good or services both through independent distributors and directly to end customers, thus competing with its distributors. Dual distribution was previously generally exempted from the prohibitions of Article 101 TFEU under the old VBER. However, due to the increased use of dual distribution in recent times, certain horizontal concerns needed to be addressed in the new VBER.

1.1.Restrictions on information exchange

In the context of dual distribution, the new VBER exempts the exchange of information if it is either directly related to the implementation of the vertical agreement between the supplier and the buyer or is necessary to improve the production or distribution of the contract goods or services.

All means for information exchange are covered by this restriction – oral, written, formal, informal, agreed in the vertical agreement or not, communicated by one party only or by both. The Guidelines to the new VBER provide a non-exhaustive list of information which can be exchanged in the situation of a dual distribution.

The following types of information are expressly noted in the Guidelines as restricted for exchange in the situation of dual distribution:

  • information relating to the future prices at which the supplier or buyer intend to sell the contract goods or services on the downstream market;
  • information relating to identified end users of the contract goods or services, unless the exchange of such information is necessary (a) to enable the supplier or buyer to satisfy the requirements of a particular end user, to grant the end user special conditions (incl. under a customer loyalty scheme) or to provide pre- or after-sales services (incl. guarantee services) or (b) to implement or monitor compliance with a selective distribution agreement or an exclusive distribution agreement under which particular end users are allocated to the supplier or buyer;
  • information relating to goods sold by a buyer under its own brand name exchanged between the buyer and a manufacturer of competing branded goods, unless the manufacturer is also the producer of those own-brand goods (e.g. in the context of private labels of retail chains).

Since the Guidelines do not provide exhaustive description of all situations in which information exchange in dual distribution is restricted or permitted, assessment of the relations under the particular vertical agreement is advisable in each case. Standard precautions that may minimize the risks associated with information exchange are also applicable but do not provide exemption per se (e.g. exchange of aggregated and/ or historical information and use of firewalls between relevant employees).

1.2.Restriction of dual distribution by online intermediation service providers

The new VBER does not exempt dual distribution by online intermediation service platforms where the provider of the online intermediation service is also competing with the buyers of this service by selling to end customers on the relevant market (i.e. the so-called “hybrid platforms”). As noted in the Guidelines, such hybrid platforms may have an incentive to favour their own sales and the ability to influence the outcome of competition between undertakings that use their online intermediation services, which raises competition concerns.

Still, in the Guidelines to the new VBER it is noted that in the absence of restrictions by object or significant market power of the online intermediation service provider, it is unlikely that the Commission will prioritise enforcement action in respect of vertical agreements entered by hybrid platforms.

2.Most Favoured Nation Clauses (“MFNs”)

MFNs or “parity obligations” require from an undertaking to offer the same or better conditions to its counterparty as those offered on other sales channels. Under the old VBER, such parity obligations were exempted. However, in recent years retail parity clauses causing buyers of online intermediation services not to offer, sell or resell under more favourable conditions via competing platforms have raised competition concerns investigated by the competition authorities in the Member States. This type of parity obligations is, therefore, added to the list of excluded restrictions under Article 5 of the new VBER and does not benefit from the block exemption from the prohibitions of Article 101 TFEU.

All other types of parity obligation can benefit from the exemption under the new VBER, including:

  • ‘narrow’ retail parity obligations: i.e. the retail parity obligations relating to the direct sales channels of buyers of online intermediation services;

NB: The exemption for ‘narrow’ retail parity obligations is likely to be withdrawn in highly concentrated online intermediary service markets and where competition between the providers of such services is restricted by the cumulative effect of parallel networks of similar agreements restricting buyers of the online intermediation services from offering, selling or reselling goods or services to end users under more favourable conditions on their direct sales channels.

  • wholesale parity obligations: i.e. parity obligations relating to the conditions under which goods or services are offered to undertakings that are not end users;
  • ‘most favoured customer’ obligations: i.e. parity obligations relating to the conditions under which manufacturers, wholesalers or retailers purchase goods or services as inputs from suppliers.

3.Exclusive and selective distribution

The new VBER introduces the concept of shared exclusivity by allowing a supplier to appoint up to 5 distributors per exclusive territory or customer group. Another change is the possibility for the supplier to require from the exclusive distributors to pass on to their customers restrictions of active sales outside the exclusive territory.

Suppliers operating a selective distribution system are allowed under the new VBER to prohibit buyers and their customers from selling to unauthorized distributors located in a territory where the supplier operates such system, regardless whether those buyers and customers are themselves located inside the same territory.

The terms “active sales” and “passive sales” are specifically defined in the new VBER providing better clarity on the permissive active sales restrictions and are further elaborated particularly both for the cases of exclusive distribution and for selective distribution.

4.Restrictions of online sales

According to the Guidelines to the new VBER, suppliers may lawfully set different wholesale prices for online and offline sales with respect to the same distributor (i.e. dual pricing), provided that this does not have the object of restricting sales to particular territories or customers but is undertaken as a measure to incentivize or reward an appropriate level of investments in online or offline sales channels. Dual pricing would be considered as a hardcore restriction of sales to particular territories or customers in the case where the difference in the wholesale price makes selling online unprofitable or financially unsustainable, or where dual pricing is used to limit the quantity of products made available to the buyer for sale online.

Restrictions of the buyers to use online marketplaces, which are often used in the case of selective distribution systems, are also exempted under the new VBER, if they do not have the object of preventing the use of an entire advertising channel by the buyer.

Online advertising restrictions, including restriction of the use of price comparison services, can benefit from the block exemption under the new VBER, provided that they do not have the object of preventing the use of an entire advertising channel by the buyer. Examples of online advertising restrictions that can benefit from the exemption include requirements that are related to ensuring certain quality standards with respect to the content and advertising service providers or restrictions of the use of the brand name of the supplier in the domain name of the online store.

The new VBER has a direct effect in Bulgaria, as an EU Member State. Thus, all Bulgarian companies are already bound by the amended rules for exemption of vertical agreements from the prohibitions of Article 101 TFEU. Compliance of all contracts which entered into effect before 1 June 2022, should be ensured until 31 May 2023.

Legal Disclaimer: The material contained in this alert is provided for general information purposes only and does not contain a comprehensive analysis of each item described. Before taking (or not taking) any action readers should seek professional advice specific to their situation. No liability is accepted for acts or omissions taken in reliance upon the contents of this alert.

For further information contact:
Iva Georgieva, Senior Associate
iva.georgieva@kdp-law.com