On 1 June 2022 new rules on vertical agreements entered into force and brought some regulation changes which are relevant to all participants of the distribution chain, including suppliers and distributors on both wholesale and retail levels.
GENERAL RESTRICTIONS OF ONLINE SALES
Let’s start with the standard restriction of online sales imposed by suppliers on its distributors. Such restriction is not by itself breaching competition laws. However, a general rule is that distributors should be entitled to online sales.
"The new vertical guidelines establish a so-called “effective use of the internet” test. This test means that the restriction may benefit from the block exemption and may be lawful, as long as it does not indirectly prevent the effective use of the internet by the authorized distributor to sell the goods to particular territories or customers," says Augustė Linauskaitė, Associate at TGS Baltic.
Therefore, the legitimacy assessment of every restriction of online sales should start with this test. The new rules do not provide very detailed guidelines based on what criteria such test should be applicable, thus, in the beginning, the parties might feel a bit lost when trying to assess their vertical agreements.
THIRD-PARTY MARKETPLACE BANS
Restricting the use of third-party marketplaces (e.g. Amazon) for distribution does not by itself infringe competition laws. New vertical guidelines highlight the existing case law and establish that such restriction may benefit from the block exemption and may be legitimate due to certain quality criteria, especially in the case of a selective distribution system applicable to luxury goods.
However, a third-party marketplace ban will not be justified if it de facto restricts all online sales. Such restriction will also not be justified when it applies not to all distributors, the supplier itself sells via third-party marketplaces or the marketplace operator is a member of the respective selective distribution system.
PRICE COMPARISON TOOLS
Sometimes suppliers have the need to restrict the distributors from using price comparison services as an advertising tool. Such restriction does not by itself infringe competition laws. It may be legitimate due to certain quality criteria, e.g. to protect the brand, especially in the case of a selective distribution system, or when the quality is more important than the price.
The restriction may be justified in case of the legitimate restriction of active sales because price comparison services are considered to be a type of advertising. However, prohibiting the use of the most widely used price comparison services may not be justified if the remaining advertising services are de facto not capable of attracting customers. In any case, the restriction shall be appropriate, and proportionate, and the restrictive effect shall be assessed.
Dual pricing is well-known in the e-commerce sector. It is a pricing system applied by a manufacturer or a wholesaler when a wholesale price differs depending on whether a retail distribution will be online or in physical stores. Cases when the wholesale price for online sales was higher than for offline used to be considered a hardcore restriction because it was considered as a restriction of passive sales. However, after the new rules entered into force this year, dual pricing may be legitimate as it may incentivize or reward an appropriate level of investments in online or offline sales channels. Nevertheless, dual pricing will still be considered a hardcore restriction if it has the object of restricting sales to particular territories or customers.
Non-compete restrictions are very often found in distribution agreements. Non-compete obligation by itself does not infringe the competition laws. However, to be legitimate such an obligation must meet certain criteria, and the main one is a 5-year limit. Under previous rules, non-compete obligations which were valid for more than 5 years were not legitimate. The new rules establish a possibility to agree on non-compete conditions even after 5 years. Under the new rules, the main 5-year limit remains. However, there is a possibility to renew the non-compete restriction beyond 5 years if, after this period, the distributor can effectively renegotiate or terminate the vertical agreement i. e. with reasonable notice and at a reasonable cost, being able to switch to a competing supplier.
Dual distribution regulation is one of the main topics of the new vertical agreement rules. Dual distribution is when a supplier sells its products both directly to consumers and indirectly through its distributors. In such case, the supplier finds himself in a position where it competes with its own distributors. Due to such relation, the information exchange rules between the supplier and the distributor are very important because there is a thin line between discussing legitimate distribution-related matters and prohibited information exchange between competitors. The new vertical guidelines set out certain rules on how to distinguish legitimate and not legitimate information exchange in such cases.
IMPORTANT TO DISTINGUISH THE DEFINITIONS OF ACTIVE AND PASSIVE SALES
While the supplier may be able, under certain conditions, to impose active sales restrictions on its distributors, restrictions on passive sales are strictly prohibited and may result in significant fines. The new rules provide more clarity in distinguishing active and passive sales by providing some examples. Owning an online store is a passive sale, however, if the language of the e-store refers to a certain territory, it means active sales to the respective territory. The same applies in respect of the domain of the e-store. Some regular examples of active sales include visits, letters, emails, calls, and targeted advertising. Contrarily, non-targeted advertising and participation in public procurement are passive sales. Note that restrictions on active sales are not always legitimate and can only be imposed under certain circumstances.
ONLINE INTERMEDIATION SERVICES ARE NOW SUBJECT TO STRICTER RULES
Before the new guidelines entered into force, mainly only major worldwide online intermediation service providers (e.g. Amazon, Booking) were strictly monitored by competition authorities. However, the new guidelines establish rules which are relevant to all online intermediation service providers (online services facilitating the transaction between two other undertakings or an undertaking and the final consumer). Special attention should be given in case the provider of such services is also a competing undertaking with the user of its services. For example, the undertaking which manages the third-party marketplace also sells goods on its marketplace by itself and therefore competes with other sellers on the platform. In such cases, the agreements between such service provider and its user as well as the information exchange will be subject to stricter assessment.
RESALE PRICE MAINTENANCE - IS THERE SOMETHING NEW? YES AND NO.
Resale price maintenance (RPM) is probably the most known and often competition law infringement in vertical agreements. While the main rules on RPM in the new guidelines remain unchanged, the rules provide some additional clarifications: (i) imposition by the provider of online intermediation services of a fixed or minimum sale price for the transactions that it intermediates is a hardcore restriction, (ii) price monitoring systems are not by itself considered to be a RPM; however price monitoring systems in combination with other direct or indirect means may result with risks related to RPM, (iii) imposition of a resale price in the fulfilment contract could be considered as RPM where the undertaking that will provide the fulfilment services is selected by the customer (fulfilment contract – contract between the supplier and the buyer for the purpose of executing a supply agreement concluded previously between the supplier and a specific customer).