Reg. EU 2022/720 – a.k.a. VBER, Vertical Block Exemption Regulation, effective 1.6.22 – updates the framework of exemptions to vertical restraints to competition (1,2).
The new regulation of vertical agreements, to which the European Commission has devoted
appropriate Guidelines, also deserves attention within the agribusiness supply chain. ABC to follow.
1) Background. Vertical restraints on competition, TFEU
The Treaty on the Functioning of the European Union, TFEU, establishes general principles to guarantee free competition in the internal market. For this purpose, special prohibitions-which result in the nullity of agreements between operators-and certain exemptions are defined.
1.1) Prohibitions
‘They are incompatible with the internal market and prohibited all agreements between undertakings, all decisions by associations of undertakings and all concerted practices which may affect trade between member states and which have as their object or effect the prevention, restriction or distortion of competition within the internal market and in particular those consisting of:
(a) directly or indirectly fix purchase or sale prices or other transaction conditions,
(b) restrict or control production, outlets, technical development or investment,
(c) allocate markets or sources of supply,
(d) apply dissimilar conditions for equivalent services in business dealings with other contractors, so as to result in a competitive disadvantage for the latter,
(e) make the conclusion of contracts subject to the acceptance by the other contractors of additional services, which, by their nature or according to commercial usage, have no connection with the subject matter of the contracts’ (TFEU, Article 101.1).
1.2) Exemptions
‘Agreements or decisions, prohibited under this article, are null and void as of right.
3. However, the provisions of paragraph 1 may be declared inapplicable:
– To any agreement or category of agreements between enterprises,
– to any decision or category of decisions of business associations, and
– To any agreed practice or category of agreed practices,
that contribute to improving the production or distribution of products or to promoting technical or economic progress, while reserving for users a fair share of the resulting profit, and avoiding
(a) impose restrictions on the enterprises concerned that are not indispensable to achieve these objectives;
(b) give such enterprises the opportunity to eliminate competition for a substantial part of the productsin question’ (TFEU, 101.3).
2) Reg. EU 2022/720
2.1) Scope of application
Regulation (EU) 2022/720:
– prohibits certain restrictive practices of competition, from a buyer protection perspective that the UTPs(Unfair Trading Practices Directive, EU dir. 2019/633) only partially considers (3,4),
– updates the regime of exemptions to prohibitions on restrictive agreements between operators operating in different parts of the supply chain, whose individual share of the relevant market does not exceed 30 percent.
The discipline also applies to agreements between competing companies if, in the individual contract, they operate in a supplier-purchaser relationship (e.g., sale of dairy products from one producer to another).
2.2) General and individual exemptions
VBER(Vertical Block Exemption Regulation) defines two types of exemptions from the ban on restrictive agreements established in the TFEU:
– a general exemption, so-called safe harbor, for all vertical agreements that meet the requirements of reg. EU 2022/720,
– an ad hoc, so-called ‘individual exemption,’ which may instead apply as a result of case-by-case assessment (TFEU, Art. 101.3).
2.3) Black list
The safe harbor strictly excludes a number of contractual clauses, which result in the nullity of the entire agreement, shown in the blacklist below:
– resale price restrictions(resaleprice maintanance, RPM). Imposing a fixed or minimum resale price on the distributor/reseller is prohibited. Instead, it is possible to impose a price ceiling, that is, to recommend-without ever mandating-retail price lists,
– restrictions on the resale territory or the clientele to whom the products are allowed to be resold. Subject to a number of exceptions (related to exclusive, selective, and territorial distribution relationships) that effectively nullify the ban (EU Reg. 2022/720, Article 4.1.b,c,d),
– ‘prevent the effective use of the Internet by the buyer or its customers to sell the contracted goods or services, as this practice limits the territory in which, or the customers to whom, the contracted goods or services can be sold.’
– The restriction of the ability to sell spare parts to end users, repairers, wholesalers or other service providers.
2.4) Grey list
The grey list includes certain practices that may be exempted from the ban on restrictive agreements, under certain conditions, or result in only partial nullity of the agreement. We refer first to non-competition or exclusive agreements imposed on the distributor or retailer, which are permissible as long as they are of defined duration and not exceeding 5 years. Made safe:
– The longer duration of contracts that include the buyer’s use of premises,
– restrictions, allowed ad libitum, on the use and dissemination of know-how that is not in the public domain (Article 5).
3) EC Guidelines
The European Commission-in its Guidelines, albeit without formal legal value (5)-clarifies its views on the application of the VBER (EU Reg. 2022/720).
3.1) Price restrictions
The so-called fulfillment agreements – i.e., agreements under which the supplier appoints a distributor to perform supply already agreed upon with a customer–should not be understood to be subject to the prohibition on resale price fixing, in the Commission’s view.
Different is the case when it was the customer who approached the distributor. In this case, the supplier is prohibited from imposing the resale price, as this may restrict competition among distributors of the same product or service.
3.2) Territorial and customer restrictions, active and passive sales
Territorial and customer restrictions , as mentioned above(see supra, section 2.3, second bullet), can be restricted de facto when it comes to active sales and not even in cases of passive sales (except to wholesalers and members of selective distribution systems).
Active sales ‘is defined asactively contacting and targeting customers through visits, letters, e-mails, phone calls or other means of direct communication or through targeted advertising and promotion actions, offline or online […]‘.
Passive sales, on the other hand, are those ‘made in response to spontaneous requests from individual customers, including the delivery of goods or the provision of services to the customer, without the sale being initiated by actively soliciting particular customers, customer groups, or territories, including sales resulting from participation in public tenders or response to private tenders‘ (EU reg. 2022/720, art.1.1.l,m).
3.3) Restrictions on online sales
The black list, as noted (see supra, para. 2.3, first bullet) includes the supplier’s prohibition against preventing distributors from making ‘effective use of the Internet.’ However, this prohibition is subject to certain exceptions as the cases of:
– online marketplace ban, which is the ban imposed by the supplier on the distributor from selling products through so-called online marketplaces (e.g., Amazon, eBay),
– dual pricing, that is, charging the distributor different prices for products for sale online and in physical stores,
– parity clause, that is, the supplier’s prohibition to the buyer from offering the same products on competing platforms or sites at cheaper prices.
3.4) Limitations on the use of online sales platforms.
Prohibitions by the supplier to the distributor to make sales through online marketplacesare permissible, according to the Commission, ‘as long as they are not indirectly intended to prevent the buyer’s effective use of the Internet to sell the contracted goods or services in certain territories or to certain customers.’
‘Restrictions on online sales generally serve no such purpose if the buyer remains free to operate his or her own online store and advertise online. In these cases, the buyer is not prevented from making effective use of the Internet to sell the contracted goods or services‘.
3.5) Online marketplaces, critical issues
The interpretation offered by the Commission, on closer inspection, does not consider the operating conditions of SMEs. Many of which, as a result of lockdowns and consumers’ increased aptitude for online shopping, have managed to survive through the use of various marketplaces. However, without having adequate resources to organize and index their own online sales channel on the web or otherwise to find an alternative.
The possible legitimacy of bans on performance platforms such as Amazon, in the cases described above, results in a true Internet Ban. Therefore, close supervision by national competition and market authorities (Antitrust) is expected on this aspect. Indeed, it is essential to test, on a case-by-case basis, the impact of supplier bans on sales through online platforms on the economics of retailers. And if appropriate, declare it null and void.
3.6) Dual pricing
Dual pricing has seen a real turnaround. This practice, in the previous version of the Guidelines, was classified as restrictive (subject to double pricing agreed between the supplier and its distributors, given the higher logistics costs for direct shipments from the supplier to end customers). Instead, dual pricing is now welcomed under the exemption regime because it can incentivize or reward an appropriate level of investment in online or offline sales channels, provided it is not intended to limit sales to particular territories or customers.
Differential prices, according to the Commission, benefit from the exemption to the ban when reasonably related to differences in investments and costs incurred by the buyer to make sales in different channels. Conversely, they are not allowed when they hinder the buyer’s effective use of the Internet to sell the goods or services on certain territories or customers. That is, when wholesale pricing makes online sales unprofitable or financially unsustainable, or when dual pricing limits the quantities of products available to the buyer for online sales.
3.7) Dual pricing, criticality
The reform of dual pricing thus replaced the ‘equivalence test’ – under which prices imposed by the supplier for online sales had to be overall equivalent to those imposed for sales offline – with the test ‘On the actual use of the Internet‘ as a basic condition for the legitimacy of the practice.
The most obvious critical issue relates to the burden of proof. Indeed, it would need to be clarified what criteria and parameters can be adopted by distributors (and/or supervisors) to prove that the higher price for products to be resold online prevents the effective use of the Internet, without getting lost in complex economic analysis.
3.8) Parity clause
The parity clause means that online brokerage platforms (as the provider of related services) are prohibited from forcing the buyer not to offer better prices on other brokerage platforms.
This practice, now grey-listed (see Sec. 2.4), is allowed only when the intermediary merely prohibits the distributor from so-called free riding. That is, charging lower prices, to the same products, on their direct sales channels.
4) Vertical restraints and unfair trade practices in the food supply chain
More clarification on the interaction between reg. EU 2022/2161 and EU dir. 2019/633, on unfair trade practices in the agrifood supply chain, would be very helpful. All the more so when one considers the recent intervention of the Competition and Market Authority (AGCM, so-called Antitrust Authority) on milk pricing (6) and the uncertain enforcement of the ban on below-cost sales, which is entrusted to a different body, among others (ICQRF. See footnote 7).
4.1) Industry Peculiarities
The agribusiness sector remains dominated by lobbies so powerful that they have already achieved special exemptions from the competition rules set out in the TFEU. As seen, for example, in the cases of production quotas-or rather, position rents-on PDO aged cheeses. Where the Commission and member states persist in tolerating the systematic application of exemptions instead constrained to crisis contexts. (8)
Moreover, the principle of specialty entails the application of the prohibitions and conditions set forth in theUnfair Trading Practices (UTPs) directive, in relation to the supply of agricultural and food products. When even the business practices applied are found to be compatible with the regulation under consideration. Which, moreover, retains effectiveness, even in the agribusiness sector, outside of only cases of apparent conflict of rules with the aforementioned directive.
Maria Rosaria Raspanti and Dario Dongo
Notes
(1) reg. EU 2022/720, on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices . On Europa-Lex, https://bit.ly/3NvpmSI
(2) The reg. EU 2022/720 repeals reg. EU 330/2010 on the application of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices. https://bit.ly/3wLoHWx. See also https://bit.ly/39Jn7w9, https://bit.ly/3ahciC0
(3) Dario Dongo. Unfair commercial practices, the EU directive 2019/633. GIFT (Great Italian Food Trade). 4.5.19, https://www.greatitalianfoodtrade.it/mercati/pratiche-commerciali-sleali-la-direttiva-ue-2019-633
(4) Dario Dongo. Unfair trade practices in the agribusiness supply chain, Legislative Decree. 198/2021. ABC. GIFT (Great Italian Food Trade). 26.2.22, https://www.greatitalianfoodtrade.it/mercati/pratiche-commerciali-sleali-nella-filiera-agroalimentare-d-lgs-198-2021-l-abc
(5) European Commission. Communication on informal guidance for new or unresolved questions relating to Articles 101 and 102 of the Treaty on the Functioning of the European Union raised by individual cases (guidance letters). Draft for consultation, published 24.05.22 https://ec.europa.eu/competition-policy/public-consultations/2022-informal-guidance-notice_en
(6) AGCM, opinion 22.12.21. AS1815 – Memorandum of Understanding of the National Dairy Supply Chain to Safeguard Italian Dairy Farms, available at https://www.agcm.it/competenze/tutela-della-concorrenza/attivita-di-segnalazione/lista-segnalazioni-e-pareri
(7) Dario Dongo. Promotional sales, poor protection of producers and consumers. GIFT(Great Italian Food Trade). 5/24/22, https://www.greatitalianfoodtrade.it/vendite-promozionali-scarsa-tutela-di-produttori-e-consumatori
(8) Dario Dongo. Parmesan cheese, Grana Padano cheese and production quotas. #CleanSpades GIFT (Great Italian Food Trade). 5.2.22, https://www.greatitalianfoodtrade.it/idee/parmigiano-reggiano-grana-padano-e-quote-di-produzione-vanghepulite
AGCM, measure 12.11.2019 no. 27991, AL22 – Marketing of Senatore Cappelli Wheat, as well as AL15E – AUCHAN-GDO/Breadmakers, available at https://www.agcm.it/competenze/tutela-della-concorrenza/delibere/
Victoria Daskalova. The New Directive on Unfair Trading Practices in Food and EU Competition Law: Complementary or Divergent Normative Frameworks? (Journal of European Competition Law and Practice). 24.8.19
Dario Dongo, lawyer and journalist, PhD in international food law, founder of WIISE (FARE - GIFT - Food Times) and Égalité.
