Chillin'Competition

[We are happy to publish a guest post from Stephen Kinsella touching on the VBER reform. We hope it will trigger a discussion; as always, we would be happy to hear different views]

Some time next month the Commission is due to adopt a revised version of the regulation that governs how the competition rules are applied to online sales in Europe. The Vertical Block Exemption Regulation (VBER) is set to run until 2034 and will have a major impact on the relationship between brand owners, retailers and consumers. It also risks causing harm to the European economy and creating considerable legal uncertainty because of the way in which the Commission has approached the renewal process.

The Commission does not have unlimited discretion when it passes laws in this area. It is bound by a Council Regulation dating from 1965 that only allows it to create a safe harbour for “vertical agreements” (agreements between parties at different levels in the supply chain) where it is clear that they are no more restrictive than necessary and will benefit consumers. In order to make sure that is the case, the Commission is supposed to carry out a rigorous assessment of the impact of its proposal on competition. Unfortunately in this instance, it failed to undertake that analysis. As a result the regulation it proposes goes beyond the powers it was granted back in 1965, and even beyond Treaty rules on competition, meaning its new regulation will be open to legal challenge. A regulation that is supposed to create legal certainty will instead generate considerable uncertainty.

A concrete example is the proposal relating to dual pricing. Under the existing regulation, when a brand supplies its goods to a retailer who then resells them both online and in its high street store, the brand owner has to offer a single wholesale price to the retailer. If the brand owner wants to encourage the retailer to invest in point of sale efforts, it can offer financial assistance. But it cannot “penalise” the retailer for reselling any of its stock online.

Under the new proposals, a brand owner will be able to say: here is a consignment of goods but for those you eventually sell in the store the wholesale price is X but for those you ultimately sell online the price will be Y. Meaning that it will only be apparent after a good has been sold to a consumer what will be the wholesale price that is retrospectively applied to that item.

So far so simple, one might say. But so many questions arise. Is the retailer to keep distinct consignments of stock, separating those to be sold online from those sold in-store? What if a customer comes into the store to view the goods but then places an order via the retailer’s website – is that an online or offline purchase? Conversely, if the customer orders online but for a click-and-collect purchase, how does one categorise that sale?

These issues and others could have been tested in a rigorous market study. After all, the process of renewing the regulation was launched over three years ago. But these dual pricing provisions (and a number of other changes) that were only proposed last summer, were never subjected to proper evaluation of their effects on the European economy, and there has been no attempt to explain what their impact will be. In particular, there has been no serious evaluation of what the impact of dual pricing could be when combined with other proposals, such as allowing brands to ban their retailers from selling via online marketplaces and allowing them to discriminate against online sales channels in general. Would not one outcome be that the majority of online sales are effectively reserved to suppliers via their own website? And is it not inevitable that measures that deter or make online sales more expensive are bound to lead to higher prices, undermining the Commission’s focus on controlling inflation?

The Commission itself recognises that the powers it was granted in 1965 are limited. A recital in the draft states that the benefit of the exemption “should be limited to vertical agreements for which it can be assumed with sufficient certainty” (my emphasis) that they satisfy the conditions for exemption laid down by the EU Treaty. Another provision goes on to say that the regulation “should not exempt vertical agreements containing restrictions which are likely to restrict competition and harm consumers or which are not indispensable to the attainment of the efficiency-enhancing effects”. Put simply, the Commission has the obligation to show that its proposals meet these tests.

The criticism of the approach adopted for this renewal, and the inexplicable failure to conduct a genuine impact assessment, is growing. BEUC, the pan European consumer body, expressed its concerns last year: “the Commission must be wary of unsubstantiated efficiencies. Any relaxation of the rules applicable to vertical agreements is likely to impact consumers.” Even national competition authorities, who take the vast majority of antitrust decisions regarding vertical / distribution agreements, do not seem convinced by the proposed relaxation regarding dual pricing. A senior French competition official recently described the proposal as “neither proportionate nor necessary”.

What can be done this late in the day? Many organisations who have contributed during the renewal process (and seen much of their evidence ignored) are weary of it, and it could be that the Commission is counting on that fatigue. But it may be that the only pragmatic solution would be to prolong the existing regulation for one year, to allow time for the objective empirical evaluation of effects that has been lacking to date. Otherwise we will find ourselves with a seriously defective regulation set to govern the digital space for the next 12 years, which is far too long when you consider how often the Commission talks about “future proofing” its legislation. By way of comparison, the parallel regulation that the UK intends to adopt will have a lifespan of 6 years.

If the Commission does not even now rethink its approach, the new regulation will certainly be open to legal challenge. That could arise in a number of ways, but will most likely come out of a dispute in a national court, where the question of validity will need to be referred to the European Court for an answer. In addition the national competition enforcers of the Member States will be asked to use their own powers to withdraw the benefit of the VBER because it will be permitting anticompetitive practices on a scale that threatens consumer interests. In short, we will be faced with an entirely avoidable mess.