On 2 February 2022, PubAffairs Bruxelles hosted an afternoon discussion on whether the revision of the Block Exemption Regulation for Vertical Agreements (VBER) will be a revolution for e-commerce and the future of retail. Participating in the discussion were Dr Christian Stempel, Head of Unit, German and European Antitrust Law, German Federal Cartel Office; Dr Johannes Holzwarth, Case Officer, Directorate-General (DG) Competition, European Commission; Dr Gregor Schroll, Senior Legal Counsel, Antitrust and Distribution Law, Zalando and Ms Alien Mulyk, Public Affairs Manager, Europe & International, bevh.
The event was moderated by Dr Axel Kallmayer, consultant and expert in German and EU competition law, Kapellmann LLP.
DISCLAIMER: As the moderator emphasised at the beginning of the event, the following contributions to the discussion by the participants represent only their personal views and are by no means official positions of their employers.
NOTE: This version of the event highlights is a translation to English of the original in German for information purposes only. In case of a discrepancy, the German original text will prevail.
Dr Axel Kallmayer introduced the topic with a quote from Ludwig Erhard, who described competition law as the basic law of the social market economy. As an analogy to this, the presenter described the VBER as the basic law of distribution and trade. Dr Kallmayer continued with a brief presentation of the topic of competition law, highlighting the similarities between EU and German competition law. He also emphasised the importance of the Regulation in light of the digitalisation of trade. Finally, Dr Kallmayer directed his opening question to Dr Johannes Holzwarth on the topic of how the privileges of dual distribution will change under the VBER.
Dr Johannes Holzwarth began his response with an overview of the public consultation conducted in advance of the publication of the draft VBER revision in July 2021, which received over 150 comments on the proposed changes [Article 2(4), (5), (6) and (7)]. According to the speaker, most of these comments were on dual distribution. The speaker then referred to Article 2(4) [exemption between competitors in dual distribution], where there had been (a) a change to the personal scope and (b) a substantive change. Compared to the previous Vertical Block Exemption Regulation, there was an extension of the personal scope to include the next higher level of wholesalers or importers. In addition, the material scope has been changed. In this context, Dr Holzwarth emphasised the principle underlying the dual distribution exemption, namely that, exceptionally, vertical agreements between competitors are exempt because the efficiencies created by a vertical agreement outweigh the horizontal concerns. The material scope of the exemption was, however, limited with regard to the exchange of information, as the evaluation had shown that the aforementioned principle might no longer apply with regard to the exchange of information. Dr Holzwarth emphasised that the public consultation and feedback from stakeholders were extremely important for the revision of the VBER. In this regard, he also considered the possibility of making changes to the Vertical Guidelines (Vertical GL), also with a view to assessing information exchange in dual distribution. The speaker referred to the feedback that an assessment based on the Horizontal Guidelines was not appropriate. Finally, Dr Holzwarth referred to the proposed provision on the treatment of vertical agreements with hybrid platforms (Article 2(7) VBER), which is also an innovation. In doing so, he emphasised that when the conditions of the proposed provision are met, a case-by-case assessment must take place. He noted that within the framework of a theory of harm, the market conditions and market power of the companies involved would also have to be taken into account. On the issue of the impact of theoretically eliminating the dual distribution exemptions, the panellist said that various options were proposed and tested in the initial phase of the impact assessment. If the block exemption for dual distribution was removed, it would come down to a case-by-case assessment.
The moderator turned to Ms. Mulyk, as an expert in e-commerce, with the question of which developments in e-commerce are crucial for the revision of VBER.
Ms Alien Mulyk opened her answer with an insight into the market development of e-commerce in Germany, which held a market share of about 6.3% in 2010 and 14.3% in 2021 of retail sales. In addition, an increasing merging of sales channels, so-called omnichannels, could be observed, which was well accepted by customers, she said. She pointed out that during the pandemic many retailers were looking to enter the online business. In addition, Ms Mulyk referred to the growth in sales in the direct distribution sector, which amounted to 25% last year. In addition, the discussant addressed the great importance of online platforms in Germany where 51% of e-commerce sales are generated. In this context, she mentioned that larger retailers were increasingly considering converting into platforms. Ms Mulyk noted that these developments were not sufficiently considered in VBER. Since the new VBER is to apply for 12 years, the speaker believed that these developments were not taken into account. Instead, according to her, the draft VBER artificially separates the sales channels and there is a de facto tendency to privilege brick-and-mortar sales. Furthermore, the new regulations would give manufacturers more control over pricing in online sales, while at the same time being in competition with online retailers. According to the panellist, in the process, manufacturers would increasingly become competitors of online retailers.
Following Ms Mulyk’s introduction on the development of the German e-commerce market, the moderator addressed the issue of equivalence criteria. These permit restrictions on e-commerce, provided they are also imposed on brick-and-mortar retailers. He followed up with the question of what Ms Mulyk thought of the planned easing in the area of equivalence criteria.
Ms Mulyk saw this easing as a risk that manufacturers could impose more or stricter requirements on online retailers, thus damaging the attractiveness of the online sales channel for retailers. The speaker therefore advocated for retaining the wording of the current guidelines. Ms Mulyk expressed her wish that the criteria should not be identical, but that in the current guidelines the focus is adapted to the sales channel and is based on the fact that equivalent goals are pursued, the same results are achieved, and the difference in the criteria is justified in the different nature of the channels. The panellist wanted equivalent criteria for the new guidelines as well.
The moderator then referred to Article 2(7), where the exception to the exemption from hybrid platform contracts was met with incomprehension by e-commerce entrepreneurs, according to the moderator. He asked the panel for the backgrounds and implications of this provision for hybrid platforms.
Dr Holzwarth began his remarks by referring to the legal basis of the 1965 Block Exemption Regulation, which provides for exemption only of those vertical agreements for which there is reasonable certainty that they meet the four conditions of Article 101(3) TFEU. In the case of vertical agreements, it has been assumed since the adoption of the Vertical Block Exemption Regulation of 1999 that, in the absence of market power of the undertakings participating in the vertical agreement, the positive effects of inter-brand competition at least outweigh the negative effects of a restriction of intra-brand competition. The speaker went on to say that vertical agreements involving hybrid platforms also had horizontal elements and that the principle underlying the exception applicable to dual distribution therefore did not necessarily apply. Dr Holzwarth then explained possible differences between distribution models traditionally associated with dual distribution and the model of hybrid platforms.
On the topic of Article 2(7), Dr Christian Stempel declared his full support to the Commission and pointed out that platforms have not been explicitly mentioned in the current VBER so far. The spokesman welcomed that with the new Regulation there will be a legal framework for platforms that clarifies some of the previously open questions about their classification in the VBER, such as the debate about their classification as so-called ‘fictitious commercial agents’ and thus as buyers. However, he also pointed out that, in his view, platforms would not fully fit into the model of a distribution chain on which the VBER is based and that it would therefore have been preferable to classify platforms as a separate category. Dr Stempel noted that it follows, for example, from Article 4(a) of the proposal in connection with paragraph 179 of the Vertical GL, as well as from Article 5(1d), conversely that platforms will have possibilities to enforce restrictions with effects in the intermediated business. The scope of the exemption of such restrictions would have to be precisely defined. In this context, the spokesperson pointed out that VBER is an exemption. According to the enabling Regulation and the recitals of VBER, a ‘sufficient certainty’ is required that the conditions of Article 101(3) TFEU are met in order to justify an exemption. In this context, Dr Stempel questioned whether there is already sufficient experience in the area of platforms based on individual decisions to make such an assessment. This applies even more in the case of hybrid platforms, where, in addition to these uncertainties, the logic underlying the fundamental exemption of dual distribution does not apply.
Ms Mulyk extended the debate to platform bans for distributors, which would possibly be a consequence of the new regulation. The speaker emphasised that platforms in Germany offered an important infrastructure and provided visibility and easier market entry for small and medium-sized enterprises (SMEs), especially in the cross-border area. Customers also appreciated the better product overview offered by platforms, according to Ms Mulyk. She stressed the importance of online marketplaces as advertising channels, as a presence on these marketplaces meant efficient use of the Internet for retailers and preventing them from doing so was a hardcore restriction. She highlighted that platforms were not generally bad for the brand image but allowed to tap into specific market areas and provided customers with a fully comprehensive support system. For this reason, she would be against a blanket ban by the manufacturer. This should not mean, however, that brands should have no say in how their products are sold but they should only make qualitative demands on the sales channel and not be allowed to issue a blanket ban on marketplaces.
Dr Gregor Schroll began his remarks with an insight into Zalando’s business model, which operates both as a retailer and as a platform. As the latter, Zalando offers retailers the opportunity to generate a large reach in additional European markets. Zalando currently sells around 4,500 brands via retail and platform sales. In addition, there are around 6,000 brick-and-mortar stores that can also sell products via Zalando’s platform using the retail program. After the remarks on the business model, he emphasised that he saw the issue of the blanket exemption differently and hoped that the strictness would be reconsidered. He differentiated between the legal and practical dimensions. In this context, Dr Schroll raised the issue of the potential for harm of platforms. He disagreed with Dr Holzwarth’s assumption that hybrid platforms per se have an increased potential for harm, for which, in his opinion, there is no empirical evidence. He also agreed that the VBER is primarily aimed at vertical relationships and that horizontal elements are therefore fundamentally alien to its nature. However, the dual distribution model shows that the VBER also affects horizontal models. This is also addressed in the current VBER and will also be the subject of the new VBER – at least with regard to companies that are below the now lowered market share threshold. Against this background, in his opinion, a differentiation according to quantitative aspects is necessary in order to adequately take into account the actual potential for harm. In this regard, the speaker drew a comparison with the provisions of Section 19a of the Act against Restraints of Competition (GWB) [abusive conduct of undertakings of paramount significance for competition across markets] and the draft of the Digital Markets Act, both of which differentiate the potential for harm on the basis of certain size criteria. The VBER also provides for such a differentiation element in the form of the market share thresholds, but this will no longer be considered for hybrid platforms in the future if they are excluded per se from the scope of VBER, regardless of their actual market significance. In addition, Dr Schroll pointed out that, against this background, not only GAFAs (Google, Amazon, Facebook, Apple) would be affected by the regulation, but also smaller platform companies and not least their contractual partners. For them, too, the safe harbour privilege would no longer apply in the future. A case-by-case examination of all the usual vertical agreements, such as those relating to information exchange, exclusivity arrangements or selective distribution, etc., would hardly be viable for smaller hybrid platforms in terms of capacity and finances. Finally, the speaker expressed his doubts as to whether these measures could achieve greater clarity and legal certainty, which are the stated goals of the Regulation. The discussant emphasised that the assumed potential for harm must be linked to criteria that actually depict it. According to Dr Schroll, there was nothing to be said against not excluding hybrid platforms per se, but also applying the element of the market share threshold. In order to maintain coherence in the sense of the new VBER, one could also consider linking it to the new threshold for dual distribution and selecting the lowered 10% threshold.
After the panel’s remarks on hybrid platforms, the moderator addressed the rules on resale price maintenance (RPM), which according to him was strictly managed under EU law. He drew a comparison to the US system of Minimum Advertised Prices (MAPs), which impose a minimum advertising price on traders. As some stakeholders also interpreted a similar arrangement in the new Vertical Guidelines, the moderator asked Dr Holzwarth whether these minimum advertised prices were permissible.
Dr Holzwarth noted that the German language version of the draft Vertical Guidelines refers to ‘advertised minimum prices’, which was misleading. It allowed the interpretation that minimum prices were now generally possible. However, he explained, there were no new findings as to why RPM should be made exempt. The evaluation had also not produced any such findings. Accordingly, a reorientation in this area had not been the subject of options in the impact assessment. The panellist agreed that the issue of MAPs had been raised by stakeholders and required clarification.
Subsequently, Dr Kallmayer turned to the case of ‘dual agents’, a situation in which a sales agent is both a retailer and assumes the tasks of a commercial agent. As this was not previously provided for, the moderator asked Dr Holzwarth whether this was possible under the new Vertical Guidelines.
Dr Holzwarth began his explanations by noting that there was a tendency towards the agent model. Accordingly, it was important that the model continued to be discussed in the Vertical Guidelines. He emphasised that this was, however, an exception and interpretation of Article 101(1) TFEU, which ultimately had to be compatible with the jurisprudence of the Court of Justice of the European Union (CJEU). This suggested a restrictive approach, also in the case of dual agents. The question of how the principal itself would enter a market was, in his opinion, an appropriate approach, but this did not preclude the Vertical Guidelines from being tightened up.
Dr Kallmayer then addressed the panel with regard to dual pricing. He explained that so far, different prices for brick-and-mortar and online sales had been ineligible, but that this was not explicitly excluded in the new Guidelines. The moderator asked Dr Holzwarth specifically about the background to this decision by the European Commission.
Dr Holzwarth again referred to the results of the evaluation, which had shown that online distribution had developed to such an extent that it no longer required special protection and it had to be established whether the previous regulation was still appropriate. For this reason, the Commission had decided to no longer consider dual pricing systems as a hardcore restriction under certain conditions. The idea behind this step was to offer companies more options. However, a detailed specification in the area of pricing policy would not be expedient and the exact design would be left to the undertakings. The speaker argued that under the current rules, manufacturers could differentiate prices between pure offline retailers (‘brick-and-mortar’) and pure online retailers, which is why the classification of dual pricing as a core restriction currently only affected hybrid retailers. According to Dr Holzwarth, the change of this classification is intended to provide incentives for investments in brick-and-mortar trade in order to ultimately secure consumer choice. In this context, Dr Holzwarth mentioned the basic principle proposed for online restrictions (‘safety net’), according to which a hardcore restriction exists in any case if the effective use of the Internet is prevented.
Dr Stempel agreed with Dr Holzwarth’s argument that a special need for protection of online trade no longer existed. He also noted that in practice the possibility to agree on a fixed remuneration for offline or online sales efforts had rarely been used. However, the speaker also pointed out that competition authorities must retain the possibility to intervene if dual pricing systems did not fulfil the purpose of the new exemption, i.e. the link to the cost differences in the two distribution channels. In addition, it would have to be further specified in the Vertical Guidelines when, in the case of dual pricing systems, a hardcore restriction in the form of the prevention of effective use of the Internet would exist. The current wording of the Vertical Guidelines should be reviewed to see whether the current threshold was not too high.
According to Ms Mulyk, dual pricing systems were supposed to create incentives for investments in stationary trade, but instead made online trade less attractive. According to the speaker, this was done in an economic and an administrative way. Economically, the profit margins for omnichannel retailers would drop when they resell a product online, which is a hurdle for SMEs in particular. The administrative complications would arise from the necessary separation of stocks which would become necessary due to different prices for online and brick-and-mortar sales. According to Ms Mulyk, there is a risk that in certain situations, for example when ordering from the manufacturer, the retailer would have to predict which goods and how much of them will be sold through which channel. Alternatively, it could become necessary to install an expensive tracking system. From a competition perspective, Ms Mulyk also saw potential problems, as manufacturers could potentially try to reserve the online channel for themselves by setting higher prices for competitors in online sales. She argued that dual pricing systems, which aimed at compensating for higher costs of one channel, could lead to an obligation for the retailer to disclose sensitive operational data, such as disclosing their investments. According to the panellist, this would harm the company’s competitive position. On the topic of omnichannel retailers, the speaker suggested that problems could arise in attributing investments to a channel. As an example, she cited advertising costs, since, on the one hand, online advertising attracts stationary customers and, on the other hand, stationary advertising attracts online customers.
Ms Mulyk’s objection that the EU Commission was privileging brick-and-mortar retail was not shared by Dr Holzwarth in this form. He stressed that the EU Commission was neutral towards the distribution channels and did not want to impose an obligation for dual pricing. The Commission was only providing an option to apply dual pricing systems and was now applying the otherwise applicable rules to online trading. Dr Holzwarth again emphasised that the VBER was based on the general assumption that without market power of the companies involved in the vertical agreement, the positive effects of inter-brand competition would outweigh possible negative effects of the restrictions of intra-brand competition. According to him, this would also apply to the case of dual pricing systems or the equivalence principle. He again referred to the basic principle proposed for online restrictions, according to which a hardcore restriction exists if the effective use of the Internet is prevented. This basic principle, he said, presents an essential safety net. With regard to the higher costs that Ms Mulyk and Dr Stempel warned of in a dual pricing model, Dr Holzwarth referred to the argument that a dual pricing system was not obligatory but could be applied voluntarily by the manufacturer if it brought economic advantages for him. The Guidelines would also not impose the obligation to exchange confidential operational data. He highlighted the growing mixing of channels and the fact that the current VBER and the Vertical Guidelines still differ in this respect. The speaker also pointed out that the Vertical Guidelines were an attempt to create a legal framework for the next few years, for which the digital development was not yet foreseeable. Dr Holzwarth expressed his understanding for the desire of legal certainty by setting a market share threshold. However, he emphasised the difficulty of its calculation. This element and the exchange of information in the case of dual price systems made additional conditions, such as cost differences, impracticable or problematic from a competition point of view.
In response to Dr Holzwarth’s comments, Ms Mulyk stressed that it was not her intention to imply that the Commission was discriminating against the online channel. However, the speaker drew on two examples from 2013, Gardena and Siemens Hausgeräte, which in her opinion showed that manufacturers tended to de facto promote the stationary distribution channel. In both cases, the Federal Cartel Office (Bundeskartellamt) had ruled in favour of online trade, as it saw it at a disadvantage due to lower prices in the brick-and-mortar trade. According to Ms Mulyk, these cases show that manufacturers tend to promote the brick-and-mortar distribution channel. Additionally, by discriminating against online trade, brick-and-mortar traders would also be disadvantaged, as it would be more difficult for them to enter the digital market.
Dr Holzwarth reminded the audience that securing the brick-and-mortar trade was certainly desirable in order to offer consumers choice. However, the Vertical Block Exemption Regulation and the Vertical Guidelines are ultimately neutral about the distribution of products to consumers.
Ms Mulyk emphasised that securing online trade would also secure the future of brick-and-mortar trade, as many companies could only grow by taking their businesses online.
Dr Stempel agreed with Ms Mulyk and stressed that dual pricing should not be used to prevent price pressure in online trading, which is unpopular with manufacturers, nor to hinder market entry into online trade for small companies.
Subsequently, the moderator addressed the possibility for traders to increase reach online (e.g. by cooperating with a larger search engine, such as a comparison or hybrid platform) and asked Dr Stempel how the Federal Cartel Office views the more manufacturer-friendly development of European jurisprudence and of the Commission.
Dr Stempel again welcomed the Commission’s proposed standard of effective use of the Internet for the online sale of goods or services. However, he pointed out that, for example, the restriction of sales on online marketplaces was in principle permissible under the Vertical Guidelines. In Germany, sales via this type of platform played a very important role for traders, so that online marketplace bans could constitute an obstacle to the effective use of the Internet. However, regarding the stricter requirements of the Vertical Guidelines for the restriction of the use of online advertising channels, it had to be ensured that the remaining advertising channels could allow for the effective use of the Internet for the individual trader. In this regard, the speaker still saw the opportunity for reviewing the wording of the Vertical Guidelines to ensure that the threshold for effective use of the internet is not set too high in practice.
In this regard, Dr Schroll said that, in his view, brand protection could be a valid reason for excluding certain platforms as a distribution channel. If a brand owner does not want to sell their products on a certain platform because it does not do justice to the brand image, this could certainly be a justified consideration. However, he stressed the importance of differentiation according to actual qualitative considerations. Moreover, he feared that this would be an instrument that suppliers could use to exclude platforms and online trade via platforms across the board. He therefore expressed his desire for a clearer design. In his opinion, the implementation is unclear because it is a broad regulation that requires an effort of justification and case-by-case consideration. These circumstances would probably be to the detriment of the traders concerned.
The moderator asked the panel whether certain critical issues should be regulated in the VBER instead of the Vertical Guidelines.
Dr Holzwarth said in this context that so far the interaction of the Guidelines and the VBER has worked well, and that the Guidelines are also taken into account by national competition authorities and courts. He clarified that the Guidelines were only legally binding for the Commission. According to Dr Holzwarth, the fact that critical issues such as dual pricing were either regulated in the VBER or in the Guidelines would not prevent the Commission from continuing to discuss these issues with the national competition authorities in the European Competition Network (ECN) in the future.
Dr Stempel stressed the importance of a uniform interpretation of the Guidelines. Even without a formal binding effect, the Member State competition authorities endeavoured to take the Guidelines into account as much as possible in order to ensure a uniform interpretation of EU competition law. For this reason, the Federal Cartel Office (Bundeskartellamt) is actively involved in the revision process.
The moderator asked Dr Schroll about the competitiveness of European e-commerce in view of the new VBER.
In his answer, Dr Schroll emphasised that he was well aware of the challenges posed by the Commission and that he was far from rejecting all of the Commission’s proposals. However, he explained that as an employee of a hybrid company, he naturally had a biased view of certain regulatory proposals and in this respect, he considered the VBER in part – namely regarding the new Article 2(7) – not appropriate. He emphasised that different stakeholders have different interests. According to the speaker, there are many positive approaches in the new VBER. In connection with the per se exemption of hybrid platforms and the lowering of market share thresholds in dual distribution, he pointed out that many providers use this model, and that online trade is a significant channel in practice, which changed business models in the past years. According to the panellist, this point deserves more attention.
At the end of the discussion, Dr Kallmayer posed the final question to the panel as to whether VBER would be a ‘game changer’.
Due to dual pricing, the potential platform ban and the flexibility of the equivalence principle, Ms Mulyk believed that online distribution would become more expensive and that this would burden SMEs and consumers in particular. The speaker pointed out that there is a risk that manufacturers would secure a dominant position in the use of the online channel. Ultimately, this would also disadvantage the brick-and-mortar trade because it would be more difficult for these traders to enter the online trade.
Dr Stempel noted that a ‘game changer’ may not be necessary and that it would be more appropriate to call it an evolution rather than a revolution. He said it was important to clarify the classification and role of platforms and not to make the exemption of the restrictions they induce too broad. Otherwise, he said, there is a risk that the practical development of new platform-induced restrictions will formally fall under an unjustified exemption and a ‘game changer’ may develop in the unintended sense. He added that the Commission was planning to adopt the new VBER for a period of 12 years and that perhaps an evaluation after 6 years would be appropriate at least with regard to certain aspects, such as the rules for platforms.
Dr Schroll noted that the current wording of Article 2(7) would certainly be a game changer for platforms and would create legal uncertainty. He pointed out the difficulty of estimating future developments in digital trade and therefore wished for a more flexible formulation of the rules.
Finally, Dr Holzwarth presented the further roadmap of the VBER. He confirmed that the new VBER should be adopted by the end of May 2022 and then enter into force when the old rule expires. Until then, there would still be various internal processes, such as the exact translation of the Regulation into all EU languages. The speaker stressed that the Commission had already held several consultations in order to consider as many stakeholders as possible. However, he did not exclude a further consultation on a specific topic [note: in the meantime, a smaller consultation took place on the exchange of information in dual distribution].
The remaining part of the discussion and the Q&A session dealt with the following topics: consequences of a complete abolition of the VBER, promotion of brick-and-mortar retail without disadvantaging online retail, impact of EU case law on the development of the VBER, location of critical issues in the VBER instead of the Vertical Guidelines and the impact of the VBER on the competitiveness of European e-commerce.
Want to know more about the issues discussed in this debate? Then take a look at the selected sources provided below.
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Summary of the replies of the national competition authorities of the European Competition Network provided during the targeted consultation for the impact assessment of the review of Regulation (EU) No 330/2010, European Commission
Verordnung Nr. 19/65/EWG des Rates vom 2. März 1965 über die Anwendung von Artikel 85 Absatz (3) des Vertrages auf Gruppen von Vereinbarungen und aufeinander abgestimmten Verhaltensweisen, Council of the European Unio
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