Chillin'Competition

Relaxing whilst doing Competition Law is not an Oxymoron

Are there any restraints on vertical block exemptions (by Stephen Kinsella)

with 18 comments

[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.

Written by Alfonso Lamadrid

21 April 2022 at 12:39 pm

Posted in Uncategorized

18 Responses

Subscribe to comments with RSS.

  1. A characteristically thoughtful contribution from Stephen. Ultimately, it seems that the Commission made a political/policy decision in the new VBER to move away from favouring online retail towards favouring brands and brick and mortar retail and changes like this one flow from that. The boundary of a block exemption will always be contested but there is a particular tension in the VBER between providing legal certainty and allowing flexibility. What is clear is that the new VBER looks set to decrease legal certainty, especially with respect to any interaction with hybrid platforms. I’m intrigued by the prospect of a legal challenge. Now that really would set the cat among the pigeons.

    Becket McGrath

    21 April 2022 at 12:48 pm

    • Thanks Becket.
      I agree entirely that has been the policy shift.
      But in process terms the difference is that in the past it could be argued by some that the regulation was too strict and denied a block exemption to certain restrictions that in individual cases could be benign (though individual exemption remained possible for those). To my mind that is quite different from bouncing in the other direction and granting an exemption to provisions whose effects have not been evaluated and where it can’t be said with confidence that they will normally meet the criteria. One could be described as timidity, but the other is an overreach.

      Stephen Kinsella

      21 April 2022 at 1:04 pm

  2. Looking forward to reactions. I should add that though I very much value my colleagues at Flint, this is purely a personal view on an issue that has concerned me for some time.

    Stephen Kinsella

    21 April 2022 at 12:48 pm

  3. Interesting remarks thank you. A few comments on this.
    I’ve always seen dual pricing as a form of selective RPM for online sales. Indeed, the effect is pretty equivalent. This considered, a common criticism to the way RPM is treated in EU competition law is that it is deemed a hardcore, by-object restriction of competition (as such “unlikely” to benefit of a – theoretically possible – individual exemption) rather than a by-effect restriction subject to a rule of reason (or effects analysis) like in US federal competition law after Leegin. The argument goes that RPM may be efficient in many ways and instances, e.g. to avoid free-riding over investments in brick-and-mortar sales and in-person services. I see this change as going in the direction of treating RPM moderately more flexibly in certain situations and in recognizing that selling online and offline is not “equivalent” (e.g., re selective distribution criteria), which may be welcome. Considering the different cost structure of operating sales online vs offline and that online shopping is now widespread across the EU and no longer needs to be encouraged (or not hampered), it may make sense that dual pricing between online and offline sales is no longer considered a hardcore restriction of competition – not even with respect to the market integration objective. In any case, Para. 195 of the new draft guidelines clarify that “where the wholesale price difference has as its object to prevent the effective use of the internet for the purposes of selling online it amounts to a hardcore restriction, as set out in paragraph (188) of these Guidelines. This would, in particular, be the case where the price difference makes the effective use of the internet for the purposes of selling online unprofitable or financially not sustainable”. The possibility to deem dual pricing a hardcore or by-object restriction in individual cases is therefore still in place, if the objective is only to discourage ad disadvantage online sales. However, true that this brings new challenges as to how to organize stocks and consignments. The overall and practical outcome of this change will probably be that it will become more difficult – except for clear-cut cases – to contest dual pricing as hardcore restriction and I think it is a positive development considering all the pretestuose and opportunistic RPM claims that I’ve seen in my experience. Conversely, I see the stance taken on dual-distribution and information exchange in this context as the more problematic in terms of decreased certainty and increased compliance costs for businesses, with no clear gain in terms of efficiencies or protection of competition.

    Enzo Marasà

    21 April 2022 at 4:44 pm

    • Thanks Enzo.
      I largely agree with your comments, in that it should be possible to justify greater pricing controls in some circumstances. But I believe a problem arose some years ago in this debate with a confusion between black list and hard core. It seems to me uncontroversial that any provision such as dual pricing that smacks of RPM should be blacklisted, meaning simply that an agreement containing it cannot benefit from the block exemption. That doesn’t mean I think it has to automatically be treated as “hard core” when it is subject to individual examination – I am not a big fan of presumptions of that nature in something as fact specific as competition law analysis. For the same reason I don’t like the “by object” approach.
      The block exemption is a huge privilege. It absolves parties from having to prove that agreements that are restrictive do indeed meet the criteria of Article 101(3). But for that very reason it should be drawn narrowly. Agreements which fall outside are no worse off than they were prior to the block exemption and I would very much like to see someone finally bring forward all those arguments (that seem to find support in some of the academic literature but nowhere else) that RPM can bring about efficiencies which genuinely benefit consumers and are proportionate. We have had years for someone to try that under EU law, but no takers yet.

      Stephen Kinsella

      21 April 2022 at 7:52 pm

      • Thanks Stephen.
        I guess you refer to the confusion between by-object and hardcore restrictions? I usually consider hardcore equivalent to black-listed under Article 4 VBER and by-object (not black-listed but) good candidate for revocation of the block-exemption by NCAs in specific cases (whilst a national court should not be able to revoke the exemption).
        Dual-pricing is described in para. 52(d) of the actual VGs as “hardcore” because presumed (indeed – I see you point) equivalent to passive sales restriction (or RPM, I would add). This consideration brings me to a further thought: the rationale to block-exempt dual-pricing may also be in line with the additional nuances in the new draft VGs about criteria to distinguish passive and active sales online, which soften the hard presumption that online sales are always passive sales, except where clearly targeted.
        As to efficiencies arguments for RPM: I agree that so far they have not been used except, in my personal experience, in private litigation cases in the context distribution disputes, where such arguments may be more often substantiated and adequate to reject opportunistic claims. However, when you have to advise an undertaking in a compliance perspective, and unless the RPM conduct falls comfortably in one of the safe-harbored exceptions, it is usually unpractical to elaborate and investigate such arguments to rebut the presumption of illegality. That would require economic analysis, which is often disproportionate with respect to the needs and expectations of the client. But if the new VGs allow for more space to do that with a more favorable approach (or “light” presumptions), I think we will see more of that.

        Enzo Marasà

        22 April 2022 at 3:21 pm

  4. With all due respect, I could not disagree more. In my view, the general principle is that of the freedom of companies to decide their distribution strategy. Therefore, what the Commission is obliged to do is to justify any restriction of this freedom. Not the other way round as, I understand, the author proposes. The ban on dual pricing was based on the need to protect internet sales. Well, I think it is clear today that online does not need any extra protection. Consequently, restrictions on the freedom of business are no longer justified (if they ever were). Let the market (and not regulation) tell us which distribution models are the most appropriate for the years to come.

    DC

    21 April 2022 at 7:58 pm

    • That would just possibly be a valid viewpoint if we didn’t have antitrust law.
      The block exemption actually protects “restrictions on the freedoms of business” from some fundamental prohibitions that are embedded in the Treaty.
      That is the hierarchy.
      Your disagreement isn’t really with me, but with the Treaty.

      Stephen Kinsella

      21 April 2022 at 9:19 pm

      • Interesting point and I wonder what you think the UK will do now that it is not subject to the same Treaty? The ultimate debate here seems to me to revolve around whether the regulator or the market is better placed in terms of error costs. An assumption in the EU model may well be that regulators get things right on average more than the market. So it isn’t just a freedom argument – it’s also one about who decides.

        Stephen Dnes

        25 April 2022 at 10:21 pm

  5. Thanks, Stephen, for the very interesting post. Reading the guidelines there seems to be a (slight?) deprioritisation of online commerce which is at odds with the past policies of the Commission (even beyond COMP) to boost cross-border e-commerce at almost any cost. There might be some legitimate reasons to create incentives for brick and mortar shops (e.g. protect investments) but I wonder if a more flexible regime for dual pricing would lead to the expected outcomes. This is an empirical question but from a consumer policy perspective, the Commission is taking a risk here. As we stressed in our contribution to the public consultation it is important to be mindful of the fact that if dual pricing is allowed, it could have an effect similar to a total online sales ban if manufacturers would charge very high wholesale prices to online retailers and it would not be economically attractive for retailers to offer products online. Let’s also not forget that manufacturers are increasingly selling their products directly online to consumers and therefore they might have incentives to keep wholesale prices for online retailers higher rather than discounting prices for brick-and-mortar shops, which could lead to an increase of prices. The big question is whether effectively pure online sellers will be able to discipline the hybrid shops, but, again, this must be considered against the fact that manufacturers are increasingly selling directly online.

    Agustin Reyna

    22 April 2022 at 11:48 am

  6. Thanks Agustin. I couldn’t agree more.
    As you saw, I was pointing out that if the Commission wants to block exempt a restrictive practice that it has previously established is prima facie anticompetitive, it is incumbent on it to show that it meets the criteria for exemption. It could have tried to answer that question empirically, through a rigorous market study, but if it did so I haven’t seen it.
    I believe that a number of officials in DG Comp follow the excellent Chilling blog. Replies are open, as they say.

    Stephen Kinsella

    22 April 2022 at 4:45 pm

  7. Since the biggest selling items on line are fashion ( clothes and shoes) it always struck me as important that things like returns policies and speed of delivery are now as important than the price of goods – how is that addressed?

    Tim Cowen

    22 April 2022 at 4:55 pm

    • In the previous regulation it was addressed by providing that one could have different terms for online and offline resellers as long as the provisions were “overall equivalent”. In other words it was recognised that the channels are in some respects different and therefore could be treated differently (but fairly), as long as that was objectively justified.
      That principle is explicitly abandoned in the proposed draft without any reasoned explanation. As far as I am aware, and I am happy to be corrected, this will be the first block exemption that expressly approves discrimination by category without objective justification. Which for a competition instrument is, to say the least, novel.

      Stephen Kinsella

      23 April 2022 at 12:55 am

      • Stephen,

        Thanks for this. It is clearly contrary to the underlying law, as you say where there is no evidence provides as a basis for the changes, and to make changes to laws where there is no reason to do so appears irrational. Lack of evidence and lack of reasons then raises the question : why have these changes been made?

        As a practical matter is the business issue then the lack of clarity, certainty and validity of agreements?

        Since so many businesses will be affected is there a mechanism through which a representative action can be brought in the courts to challenge the position and obtain greater certainty? Maybe a combination of representative business bodies ?

        Tim cowen

        23 April 2022 at 7:05 pm

  8. Coming back to Enzo’s latest comment, again I think we largely agree on the substance. I suppose my objection is more about process and sequencing. If we had seen examination of a few individual cases where dual pricing was shown to be legitimate and on balance pro-competitive, I could then see the argument for extending the block exemption. But the current approach of flying blind, dramatically widening the safe harbour and then crossing our fingers, seems reckless. What happened to evidence-based policy-making?

    Stephen Kinsella

    23 April 2022 at 2:00 pm

  9. The site doesn’t always allow me to reply to each comment, but to Tim’s latest question, I don’t know – that isn’t (more precisely wasn’t) my area of expertise. Direct challenges to regulations are extremely difficult for private parties, whether individual or representative, though probably easier for a Member State if there is a NCA that recognises the land-grab occurring here. As I said, it seems far more likely it will arise via an indirect challenge. I have some ideas how one could provoke that.

    Stephen Kinsella

    24 April 2022 at 1:04 am

  10. Very interesting piece; thank you. Sense of grandmothers and eggs in leaving a comment here but I wanted to share a few thoughts out of interest in what you make of them.

    A mystery here is why in practice EU regulators never let through even quite helpful restraints (Ping)). Some of these are quite helpful to small businesses, e.g. on the high street, who can compete chiefly on quality and may be impeded in doing so (though not prohibited) by the vertical restraints regime.

    For me that raises a question: Would a regulator tasked with regulating really do an impact assessment saying it doesn’t need to regulate? Seen in this way is the impact assessment point a bit of a legalistic technicality? It seems moot unless there is material cost or benefit from the rule change which takes us back to… the rule change. The fundamental question is then what the evidence base for the rule change is – agreed.

    But is that a legal question? The Commission has made clear that it has done weighing and it is entitled to factual determinations. What is the evidence that the EC *hasn’t* done this? That is the legal standard – to the extent that a deferential judicial review applies.

    To me this debate is all about whether the online sales differentiation is justified in an age of intense online retailing and low barriers to entry. The old regime is based on the relatively higher costs of brick and mortar business, and assumes online as a small part of a primarily physical sales system in which intervention probably lowered costs on average at the margin (though to your empirical point, was there ever clear evidence to that effect?). In any event, the world has moved on from 2000, and the sensible debate seems to be how the new regime should capture this (as opposed to what 1960s regulations said). I don’t think one can fault the Commission for trying to cater to it by allowing some differences to emerge between online and offline channels when they may be competing over different things.

    There is always the comparator here across the pond: no serious regulation of vertical restraints, but good consumer outcomes. Possibly better, especially online – though many factors drive that. It is hard to isolate hemming in antitrust from a wider post-70s rejection of several features of “Rhineland” capitalism in the USA.

    The Lingerie litigation in the UK will be interesting to watch, as it tries to run the quality argument before the CAT after Brexit. The classic case is the US one – Leegin – why regulate belt sales? There is a lot of competition all around when it comes to belts… In this sense companies should not have to justify themselves unless there is evidence against them, and the old VBER seems a bit narrow minded seen in this way.

    So I think we are looking at an evolution here that isn’t unmerited and probably tacks to the centre. But the reason for writing some comments is primarily to be educated about their lacunae…

    Stephen Dnes

    25 April 2022 at 10:49 pm

    • Some good points there, thanks Stephen. I will respond to just a couple.
      You are right, it is just possible that the Commission carried out that evaluation but decided not to share it with us. Should someone really need to go to Court to find out?
      And yes, the 1960s are a long time ago for some (though not for me, who was born in 1960). But for now that regulation is the legal base for any block exemption. If it is now too narrow, one could ask the Council to relax it. But the Commission doesn’t have the power to do that itself.

      Stephen Kinsella

      26 April 2022 at 11:14 am


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: