Vertical reality: Key changes under the EU and UK VBER reviews
Global | Video | October 2021 | 13:21
Video Details
| Wilko van Weert | Ok, Richard. Thank you very much for joining us today, and I will be very interested to hear your views today on the developments in vertical restraints. As you know, the European Commission is working its way through all the submissions it has received in the consultation on the Vertical Block Exemption Regulation and Guidelines, to come to a conclusion by early 2022. I noticed that this time there is slightly less, sort of, excitement around this whole project than there was at previous consultations. But nevertheless there are some interesting concepts that have come up, notably due to the developments in ecommerce. One of these is dual distribution. That has created some buzz. In my thinking dual distribution, which basically refers to the situation where a supplier supplies goods both directly to customers online and also through regular distribution agreements, that concept doesn’t seem to be entirely new. It’s always existed that suppliers used, in certain cases at least, competitors to handle their distribution. I wonder what your thoughts are about these proposed rules on dual distribution that tend to create an additional layer of regulation with regard notably to the exchange of information? |
| Richard Whish QC |
Well, yes, it’s very interesting isn’t it, what they are suggesting for dual distribution? I mean, my starting point here would be that this is to replace Regulation 330/2010, but let’s not forget that Regulation 330/2010 is more or less the same as Regulation 2790/1999. So, in other words, the existing Block Exemption goes back 22 years and the world was a very different place 22 years ago, and it certainly was a “bricks and mortar” world where you often had very simple distribution chains – where you had a producer, you had a wholesaler, you had a retailer, you had the consumer – and the Block Exemption was looking at these vertical relationships. Yes, there was something on dual distribution because a petrol company might distribute its petrol through third party independent stations, but it might also sell petrol at its own vertically-integrated service stations, so you could then have a horizontal relationship at retail level even though the agreement technically is vertical. So there were some specific rules there. Fast forward to 2021 and the world is profoundly different, because apart from anything, a very large number of manufacturers have their own retail website where they can deal directly with the public, so obviously you’ve got many a situation where the supplier does have traditional distributors but is also present on the retail market itself, hence there is a much greater incidence of dual distribution than there used to be. And I think it’s quite interesting reading Recital 10 of the draft Block Exemption: “undertakings active in the online platform economy enable new ways of doing business, some of which are not easy to categorise using the concepts traditionally associated with vertical relationships between suppliers and distributors in the brick and mortar environment”. So the old days of a simple straightforward vertical line, they’re different. So what does the Commission propose for dual distribution? It’s dealt with in Articles 2(4), 2(5) and 2(7) of the draft Regulation. Basically, there will continue to be permission, exemption for non-reciprocal, vertical agreements between horizontal competitors. But you get a little twist to it, which is the Commission’s anxiety that you have a horizontal relationship, obviously between the retail site of the producer and the distributor, and the Commission has a concern that you might then get a horizontal flow of information between actual competitors. And so what the Commission does is to propose block exemption for these kind of agreements where the market shares are below 30 per cent, but in relation to the flow of information, then the market share threshold is 10 per cent. Now that I can see could give rise to some level of complexity, but that is the basic rule that is being proposed. Also, the Commission is proposing that where a platform is itself a retailer in the market, that in those circumstances, the Block Exemption would not be applicable. |
| Wilko van Weert | Yes, it is an interesting development and, of course, much depends now on what the Commission is going to do with respect to the Horizontal Guidelines on the exchange of information. Now, moving from that also on the… staying on ecommerce actually, the Commission has taken into account some developments there. It flipped, for example, the use of languages that are not commonly used in a distribution territory, as qualifying it from passive to active sales, it allows now differential pricing between brick and mortar and online sales which it was vehemently opposed against, it also created some new hard-core restrictions, notably limitations on price comparison sites or price-paid referencing on search engines. Now, what we’ve seen with the European Commission is that, in the past, and some of these developments could already have been foreseen at the time when the previous consultation came out, that the Commission is often, sort of, running behind the facts and technological developments. And I am wondering, to what extent, you know, what your view is with regard to the Commission being really up to date or whether you think that they are already behind? |
| Richard Whish QC | Well, it’s a fact of life that markets change and evolve all the time. I mean, that’s unstoppable, but my feeling about that is – I can understand while this process is happening and while the consultation is taking place, I can see how and why individual stakeholders would have concerns about x, y and z. But what I would say is, having witnessed the drafting of the Guidelines back in 1999 and then again in 2010, when lots of anxieties were expressed about being behind the times etc., what has surprised me actually has been the extent to which the system seems to have worked very well. You know, there haven’t been lots of cases exploring around the edges whether the Regulation did or didn’t apply. Most firms, it seems to me have been able to apply the Guidelines reasonably successfully so I’m actually quietly optimistic that the generality of firms will find that they can live with it. I have no doubt that some will be uncomfortable, but this is intended to provide legal certainty to as many people as possible and I suspect it will work. And remember if you are outside the Regulation or if you are not fully covered by the Guidelines, that’s not a killer. That just means that the case requires more individual assessment. |
| Wilko van Weert | Absolutely, and with regard to individual assessment, the Commission has indicated that, as it has done before, that RPM generally considered sort of… well, generally considered a hard-core restraint, but also like almost a per se prohibition could still generate efficiencies. It hasn’t provided any further details over and above what it did last time. Do you feel that’s sort of a missed opportunity? |
| Richard Whish QC | No I don’t – emphatically. I find the RPM story a really intriguing one and, of course, I inhabit the competition law village, and I participate in conferences and seminars and webinars all the time. And I hear from economists, especially, the virtues of resale price maintenance and the Commission has always been under pressure to adopt a more liberal attitude towards the practice and, of course, the last iteration of the Guidelines did acknowledge that there could be particular cases where RPM might be justifiable. But I have spoken to people at the Commission about this and they told me nobody has ever gone to them with a case saying, “here you are, these are my widgets, these are the economics, this is why I need RPM”. They have never been presented with a case. They have never been asked for informal guidance. How can the Commission give more positive messages about this practice unless they have been given some material to experiment upon? So, as it is, I am fairly sympathetic with the current position and I would add, if you look around the national competition authorities and the CMA which, of course, is no longer a national competition authority, there have been large numbers of RPM cases all across the EU over several recent years. It was open to economists in those cases to advance their economic efficiency justification. I’m not aware that they did, and certainly none of them ever actually prevailed. |
| Wilko van Weert | No, that’s correct. You mentioned the CMA. There is a feeling that the CMA, which is also engaged in consultations on the verticals, on its own new version post-Brexit of its verticals… on what points do you consider that the CMA is living up to its reputation of being slightly less dogmatic than the European Commission and perhaps a little bit more pragmatic? |
| Richard Whish QC | Well, of course, I simply do not know the answer to your question because we are still in the middle of the review, the legal point being that, at the moment, the EU Block Exemption is still applicable in the United Kingdom but that will cease to be the case on 31 May 2022, so then the UK can go off in its own direction and it is consulting. Might it take a different stance from the EU? I do not know, but let me just say, firstly, the CMA has been extremely tough on RPM numerous times in recent years, so there’s nothing there to suggest to me that they’re going to strike out in a different direction. Secondly, they have just fined one company, BGL, that runs the Compare the Market website, they have been fined £17.9 million for parity clauses which were held to restrict competition “by effect”. Well, that’s pretty tough and it’s tougher than the European Commission has ever been on parity clauses. And another intriguing thing is that we could, if we wish to do so in the UK, ditch all the law about export bans because that’s a, kind of, a single market imperative consideration of EU law. But now in the United Kingdom we have the Internal Market Act, which is intended to ensure that there’s a single market as between Northern Ireland, Scotland, Wales and England. So query, I have no idea where this is going, but might we decide in the UK that that bit of EU jurisprudence about export bans, query is it worth carrying it over into the new world of the UK internal market? I have no idea, I have not discussed this with anyone, but it’s a fascinating thing which we will watch for in the months ahead. |
| Wilko van Weert | Fascinating indeed. Thank you very much, Richard, for your thoughts – much appreciated. |
| Richard Whish QC | Pleasure. |