Revival of enforcement against vertical relationships may call for a rethink of distribution practices

A €40 million fine was imposed on a clothing company for a new type of competition law infringement as well as behaviour long recognized to constitute a hardcore infringement. The European Commission's Guess decision reflects the current renewed interest in taking enforcement action against vertical agreements and in adapting the competition rules to new business practices.

Revival of enforcement against vertical relationships may call for a rethink of distribution practices

By Evi Mattioli, Senior Associate at NautaDutilh

A €40 million fine was imposed on a clothing company for a new type of competition law infringement as well as behaviour long recognized to constitute a hardcore infringement. The European Commission's Guess decision reflects the current renewed interest in taking enforcement action against vertical agreements and in adapting the competition rules to new business practices.

1.  A changing environment

The rapid development of online commerce, changes in consumer behaviour and new means of distribution have indelibly altered the environment in which business is conducted. In order to keep pace with these developments, undertakings have had to change the way in which they construct vertical agreements, i.e. agreements between undertakings active at different levels of the supply chain. In this regard, it should be noted that, until a few years ago, enforcement action against vertical agreements liable to restrict competition was confined mostly to the national level and almost non-existent at the EU level.

However, when practices change, so does the interest in and intensity of enforcement. For undertakings active in the production or distribution of goods and services in Belgium, two recent developments are relevant:

(i) the revision by the Commission of its policy on vertical restrictions; and

(ii) the new Belgian rules on abuse of economic dependence in vertical relationships.

2.  Revision of the competition rules applicable to vertical agreements

a.  Final report on the support studies for the evaluation of the Vertical Block Exemption Regulation

On 25 May 2020, the European Commission ("Commission") published its final report on the support studies for the evaluation of the Vertical Block Exemption Regulation ("VBER") and its accompanying guidelines. The VBER exempts certain vertical agreements from the prohibition found in Article 101 TFEU and provides a list of so-called hardcore restrictions that cannot be exempted under the VBER. The VBER is set to expire in May 2022. Consequently, the Commission is evaluating whether the regulation is still "effective, efficient and relevant" and if it should be extended and/or revised.

The report is a lengthy document of over 500 pages. It evaluates the most relevant EU and national competition cases, reviews the relevant legal and economic literature on pro- and anti-competitive effects of vertical restrictions, provides a number of case studies and the results of stakeholder input and includes a detail assessment on consumer purchasing behaviour. The report focuses on vertical restrictions that are already covered by the VBER as well as other type of vertical restrictions. As regards to selective distribution systems and resale price maintenance, for example, the findings were as follows:

  • In selective distribution systems, the most common competition restrictions found by national competition authorities ("NCAs") are internet sales bans, platform and price comparison tool bans, restrictions on keyword bidding, dual pricing, exclusion of online retailers, and cross-selling restrictions. Following most investigations by NCAs, undertakings are required to modify certain terms of their selective distribution agreements or to remove specific clauses rather than cease their chosen distribution system altogether.
  • Resale price restrictions are, in principle, hardcore restrictions and consequently unlawful unless the parties can establish that use of the restriction leads to efficiency. In practice, it appears that resale price restrictions are still used to a certain extent, for example as a means of strengthening a brand's reputation. Decisional practice by NCAs shows that the assessment of resale price restrictions is a complex exercise. The report points out that clarity as to the balancing of the pro- and anti-competitive effects of such restrictions is still lacking. Recommended resale prices are fairly common, and the standard of proof that they in fact function as minimum resale prices is high. Maximum resale prices are less common but are, in principle, considered lawful as they serve to keep consumer prices down.

b.  Recent Commission decisions

Since 2018, after almost 20 years of little to no enforcement action against vertical agreements, the Commission issued several fining decisions. The Commission has imposed a fine:

  • totalling over €111 million on consumer electronics manufacturers Asus, Denon & Marantz, Philips and Pioneer for imposing fixed or minimum resale prices on their online retailers;
  • of €40 million on Guess for certain distribution practices, including restrictions on use of the Guess brand name in online search advertising, a general prohibition on online sales without prior authorization, obligations to comply with minimum prices (resale price maintenance) and restrictions on cross-border sales between EU countries;
  • of €12.5 million on Nike for restricting cross-border sales of merchandising items;
  • of €6.2 million on Sanrio for restricting cross-border sales of merchandising items by banning traders from selling these items to other countries within the EEA; and
  • of €6.7 million on Spanish hotel group Meliá for including restrictive clauses in its agreements with tour operators. These clauses discriminate consumers within the European Economic Area (EEA) based on their place of residence.

These investigations followed from the Commission's e-commerce sector inquiry, the results of which were published in 2017. Based on this inquiry, the Commission identified a number of potential issues in online distribution, such as cross-border sales and advertising restrictions, restrictions on online pricing, the use of selective distribution systems to limit online commerce and restrictions on the use of online marketplaces. Other investigations arising out of the sector inquiry are still ongoing.

3.  Abuse of economic dependence

In 2019, the Belgian legislature introduced a new type of infringement under Belgian competition law, the abuse of economic dependence. The reason for this new provision is that the classic prohibition on abuse of a dominant position often falls short. In practice, a company rarely holds a dominant position over all stakeholders, only in relation to some.

For example, a car manufacturer may have a strong position vis-à-vis a parts supplier, accounting for 80% of its sales, but may face competition from a larger competitor. In such cases, the prohibition on abuse of dominance is not applicable, and the supplier may lack proper redress in the event of abuse by the manufacturer. The new legislation intends to address these types of situations.

While the prohibition applies to all sectors, the preparatory works refer specifically to the consumer goods (e.g. food) and automotive sectors as well as supermarket chains. The new provision targets all types of vertical relationships, such as distribution, production and service contracts as well as franchise and subcontracting agreements. A broad range of situations may be covered, involving both SMEs and large companies. A company may occupy a position of economic dependence in one situation and enjoy a strong position in another.

For example, a large supermarket chain may be able to impose unreasonable contractual obligations on certain suppliers whose goods it distributes but be in a position of economic dependence vis-à-vis its own logistics suppliers.

Abusive contractual obligations may include directly or indirectly imposing prices or other inequitable terms, applying different terms for similar performances, limiting supply, the number of customers or technical developments at the expense of users, and refusing sales, purchases or other transaction terms.

4.  What to expect next?

The legal environment applicable to vertical agreements between undertakings is becoming increasingly complex, as are the consequences for undertakings in the event of non-compliance with the rules.

The new rules on abuse of economic dependence, although originally foreseen to enter into force by 1 June 2020, will be applicable by 1 December 2020. Violation of this prohibition may result in the imposition of a fine by the Belgian competition authority of up to 2% of gross annual turnover or periodic penalties of up to 2% of daily turnover. There is also a risk of the imposition of interim measures and follow-up claims for damages before the civil courts.

However, actual enforcement of the new rules by the Competition Authority could be limited due to insufficient resources. Various stakeholders as well as members of the Competition Authority expect the probability of civil proceedings, such as actions for injunctive relief, to be higher.

The VBER will expire in May 2022. The next step for the Commission is to conduct an impact assessment to determine whether it should let the VBER lapse or extend or revise it based on the results of the assessment.

The fact that the Commission in its Final report (i) considers the latest developments in business, such as the increased use of online sales and platforms, not sufficiently covered by the VBER, but at the same time (ii) finds that the VBER does provide benefits such as legal certainty, may be a strong indication that the Commission will update the VBER in 2022.

5.  Conclusion

The way in which undertakings have constructed their vertical relationships is under scrutiny – be it by competition authorities, competitors or consumers. In the light of the recent Commission decisional practice and the new Belgian law on abuse of economic dependence it may therefore be a good time for undertakings to determine whether their existing clauses or practices, as well as future distribution strategies, will (still) pass the test.

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