The EU’s Vertical Block Exemption Regulation (VBER) lays down the rules concerning agreements between companies operating at different levels in the supply chain.
On 9 July the EU published its proposals for a revised VBER and its accompanying Vertical Guidelines. The proposed changes seek to adjust the rules to the current market realities and ease companies’ self-assessment. Our blog on the proposed changes is available here.
How does the VBER work?
Vertical agreements are agreements between companies operating on different levels in the supply chain. Classic examples of vertical agreements are distribution and franchising agreements. Vertical agreements can help a manufacturer penetrate a market or avoid “free riding” on another distributor’s promotional efforts. They may also help to enhance or protect a brand image. Such goals often imply that suppliers and buyers will agree on certain sales restrictions.
This is however not always allowed, as Article 101(1) TFEU prohibits agreements between companies that may prevent, restrict or distort competition. Article 101(3) TFEU however exempts certain agreements as their benefits outweigh their anticompetitive effects. The VBER provides a (general) block exemption for vertical agreements, such as those described above, provided they fulfill certain requirements.
To benefit from the safe harbor created by the VBER, vertical agreements must not contain any hardcore restrictions and the parties’ individual market share must not exceed 30%. If these conditions are not met, then the agreement must be assessed individually under article 101(3) TFEU.
The VBER also lists a number of excluded restrictions that cannot benefit from the VBER. If the agreement contains any of these restrictions then the restrictions have to be assessed individually under article 101(3) TFEU. However, unlike with hardcore restrictions, the remainder of the agreement may still benefit from the VBER, provided the other conditions are fulfilled.
Hard-core restrictions and excluded restrictions
Article 4 of the VBER lists the so-called hardcore restrictions that vertical agreements must not contain in order to benefit from the safe harbor. These restrictions lead to a presumption that the agreement is prohibited under Article 101(1) TFEU and is unlikely to be exempt under Article 101(3) TFEU.
Resale price maintenance: Suppliers may recommend prices or set maximum prices, but it is not permitted for a supplier to determine the distributor’s resale price, whether directly or indirectly.
Territorial and customer restrictions: Restrictions on the territory or the customer groups to which the distributor may sell are considered hardcore restrictions. There are however a few exceptions, including restricting active sales in a territory or to customer groups allocated exclusively for the supplier or other distributors.
End-user sale restrictions in a selective distribution system: It is a hardcore restriction if distributors in a selective distribution system are restricted in their active and passive sales to end users at the retail level. Suppliers may however restrict selected distributors from active sales to end users in a territory or customer group exclusively allocated to another distributor.
Cross-supplies restrictions in a selective distribution system: Restricting distributors in a selective distribution system from selling to other distributors in the same system constitutes a hardcore restriction.
Restrictions on supply of components to third parties : It is a hard-core restriction if an agreement between a supplier of components and a buyer, who incorporates the components into its own products, prohibits the supplier from also selling the components to end-users or repairers/service providers. The buyer may however require that repairers and service providers within the buyer’s system only purchase the components from the buyer.
The VBER also lists several so-called “excluded restrictions”. In this case, there is no presumption that the entire agreement is void (such as with the hardcore restrictions mentioned above). but instead only the restriction itself. The exemption under the VBER may therefore still apply to the rest of the agreement, provided the market share threshold is not exceeded and the agreement does not contain any hardcore restrictions.
The excluded restrictions include are non-compete obligations for an indefinite period, a period exceeding 5 years and post-term non-compete obligations. Two important exceptions to this are non-compete obligations for a period of one year, if the non-compete obligation is indispensable for the protection of know-how and indefinite restriction on the use and disclosure of know-how, which has not entered the public domain. Another excluded restriction is prohibiting distributors in a selective distribution system from selling the brands of a specific competing supplier.
The safe harbor provided by the VBER offers an important security for parties to vertical agreements. It is therefore crucial that parties ensure that their agreements meet the conditions and do not contain clauses that fall under the hard-core or excluded restrictions.
The upcoming revision of the VBER and its Guidelines offer a great opportunity for parties to review their vertical agreements and prepare them for the upcoming changes.
This article was written by Esther van Aalst and co-author Sahra Ahrif.
If you wish to hear how the proposed changes may affect your vertical agreements, feel free to contact us.