Introduction
Background
Review of VBER and vertical guidelines
MAPs
Turnaround in European Commission's legal practice?
Comment
According to the European Commission's drafts for reforming EU rules on vertical agreements, the entity may be prepared to change its policy and to allow manufacturers to agree with distributors on binding Minimum Advertised Prices (MAPs). This would mark an important turnaround in the Commission's policy and legal practice. Until now, the Commission has always classified MAPs as illegal vertical price agreements. This could change in June 2022 with the new Vertical Block Exemption Regulation and the associated Guidelines on Vertical Restraints, and thus radically alter price competition in the retail sector in the future. This would bring EU competition law closer to the US law. In the United States, for example, MAPs have been evaluated under the rule of reason since (and even before) 2007, when the Supreme Court of the United States' decision in Leegin switched the presumption for Resale Price Maintenance (RPM) from per se illegality to a "rule of reason" approach.
The European Union's Vertical Block Exemption Regulation (VBER – Commission Regulation 330/2010 of 20 April 2010) exempts agreements between manufacturers and distributors provided their agreements do not contain price-fixing and other hardcore restrictions and both do not have a market share exceeding 30%.
The VBER lays down certain conditions under which vertical agreements are exempted from article 101(1) of the Treaty on the Functioning of the European Union (TFEU). It specifies the general conditions of article 101(3) of the TFEU, under which an agreement or practice restricting competition is exempt from the general prohibition.
The VBER is, therefore, a relevant block exemption regulation for the Commission and an integral part of European competition law. By establishing rules for agreements where the pro-competitive effects typically outweigh the anti-competitive effects, such block exemption regulations create certainty for companies. Within the scope of application of the VBER, restrictions of competition in vertical supply relationships are in principle exempted from the ban on cartels, unless they belong to the particularly severe restrictions enumerated in the regulation.
Review of VBER and vertical guidelines
On 9 July 2021, the European Commission published drafts of its revised VBER and Vertical Guidelines for stakeholder comments. Since the launch of the impact assessment in October 2020, the European Commission has gathered further evidence on possible changes of the current rules, which was considered in the preparation of the latest drafts. The revisions are important since vertical agreements, especially between suppliers of branded goods and services and their distributors, are omnipresent in all sectors of the economy. In addition, there is a need for action, as the currently applicable VBER and Vertical Guidelines expire on 31 May 2022. The purpose of the review is to allow the Commission to determine whether it should let the regulations lapse, prolong their duration or revise them. As the Commission has to act, a set of new rules would need to come into force by 1 June 2022.
The aim of the revision is to adapt the rules to market developments and the new digital age, which have changed the way the global economy operates over the past decade. As a result, the drafts focus heavily on the digital economy and on advancing the modernisation of EU competition law. The highly anticipated draft is largely based on the publication of the Commission's evaluation results in October 2020.
MAPs are a type of vertical restraint between a manufacturer and a retailer, which ensures that prices advertised by a retailer are above a contractually determined level. MAPs do not constrain the actual retail price set in the store and are, therefore, fundamentally different from resale price maintenance (RPM) and warrants a different treatment under competition law.
Regulations in the European Union and the United States, but also case law, diverge in their treatment of MAPs.
In the United States, for example, MAPs have been evaluated under the rule of reason, even before the 2007 Supreme Court decision in Leegin switched the presumption for RPM from per se illegality to a "rule of reason approach". In the European Union and the United Kingdom, case law treats MAPs as a form of RPM. The current VBER makes no distinction between the two. But treating MAPs as a form of RPM is far from obvious – both as an appropriate legal policy and from an economic perspective.
Turnaround in European Commission's legal practice?
Under the current EU competition rules, retailers must generally be free to determine their resale prices. If suppliers oblige retailers to sell their products for a fixed or a minimum price, such a practice is considered to be restrictive of competition within the meaning of article 101(1) of the TFEU. As such, it amounts to a hardcore restriction contrary to article 4(a) of the VBER.
Conversely, price recommendations are permissible if they are truly non-binding and if there is no pressure, threat or economic incentive to actually charge the recommended price. Where an agreement includes RPM provisions, it is presumed to restrict competition within the meaning of article 101(1) of the TFEU. While there remains a possibility for companies to plead an efficiency defence under article 101(3) of the TFEU to justify their agreements, the arguments put forward need to be convincing, as there is a presumption that the conditions of article 101(3) are not fulfilled for such restrictions.
The reform project could change the current view. The prevailing power here lies in paragraph 174 of the new draft guidelines on vertical restraints dated 9 July 2021. This draft proposes to allow brand manufacturers to agree with retailers on minimum prices for advertising their products. According to recital 174:
minimum advertised price polices ("MAPs"), which prohibit retailers from advertising prices below a certain amount set by the supplier, may also amount to RPM for instance in cases where the supplier sanction retailers for ultimately selling below the respective MAPs, require them not to offer discounts or prevent them from communicating that the final price could differ from the respective MAP.
With this wording and the "may", it would also be possible in the future for brand manufacturers to set a mandatory MAP in addition to setting a recommended retail price (RRP).
MAPs force retailers to advertise at prices above the minimum level set by the product manufacturer. Until now, the European Commission has always regarded such MAPs as prohibited vertical price maintenance. If recital 174 were to be included in the new VBER, MAPs would gain access to the European market and permanently change the relationship between brand manufacturers and retailers.
So far, case law and regulations in the European Union and the United States diverge in their treatment of MAPs. Binding minimum advertising prices have long been established in the United States in the form of MAPs, so the resulting opportunities and challenges for European brand manufacturers can be predicted.
Because MAPs apply only to advertising but do not impose restrictions on in-store pricing as such, they have different implications than RPM. Therefore, it could be argued that MAPs deserve their own legal treatment.
If MAPs are introduced in the European Union, they would be set by the manufacturer of goods or provider of services. Retailers must not advertise these products or services at a lower price. MAPs could, therefore, be a tool to limit the extent to which retailers use low advertised prices for their products to lure customers to their market to sell unrelated products. They could correct distortions of brand competition and preserve incentives for manufacturers to invest in their product quality. If a retailer advertises a product at a very low price, consumer willingness to pay for the product may fall for various reasons: first, due to the consumers feeling that they are treated unfairly when they are offered a higher price later. Second, the consumers fear to regret when they purchase at a higher price than previously seen, because they think they may have missed out on a better deal elsewhere. Such motivation will reduce the consumer's willingness to pay for a product and, therefore, reduce demand. As a result, the willingness and incentives for manufacturers to invest in the quality of their product may decline.
MAPs appear to be an instrument to limit the degree to which retailers use low advertised prices to attract customers to their shop to sell unrelated products with higher margins. They can correct distortions of inter-brand competition and maintain incentives for manufacturers to invest in their product quality, preserve the incentives for inter-brand competition within the store, and allow brand manufacturers to prevent an externality imposed on them by the retailer's efforts to enhance the demand for unrelated goods sold at high margins. For such reasons, MAPs should not be treated as an equivalent to RPM.
For further information on this topic please contact Sebastian Jungermann at Arnecke Sibeth Dabelstein by telephone (+49 40 31 779 70) or email ([email protected]). The Arnecke Sibeth Dabelstein website can be accessed at www.asd-law.com.
Noreen Tiemeyer, attorney-at-law, assisted in the preparation of this article.