The EU and UK competition regulators are consulting on changes that would, if adopted, affect e-commerce in a number of ways including:

  • making it easier for brands to use differential wholesale pricing to incentivise their bricks-and-mortar retailers;
  • raising new uncertainties about the operation of dual distribution (a brand’s own D2C sales alongside sales through its retailer network); and
  • limiting the use of most-favoured-nation clauses by online platforms.

Accordingly, this article pulls out some key themes of interest to e-commerce after detailing the current landscape, but with the caveat that any changes will not come into force for some time.

Current competition rules

Brands will be familiar with the fact that competition law is not limited to agreements between competitors but can impact ‘vertical’ agreements that span different levels of the supply chain. For example, resale price maintenance (RPM), under which the brand controls its dealers’ resale price, is often sanctioned by competition regulators, and territorial restrictions on dealers’ sales can also raise competition issues.

Because of the inherent uncertainty of self-assessing whether restrictions on competition may yet be lawful due to their countervailing benefits, most distribution networks are structured to fall within the Vertical Agreements Block Exemption[1] (VABE), which provides that vertical agreements that comply with its criteria are compliant with competition law. An equivalent regime applies in the UK. The current VABE dates from 2010 and expires at the end of May 2022, and both the European Commission (EC) and the UK Competition and Markets Authority (CMA) have been consulting on its respective replacements.

In particular, the intervening years have seen a huge expansion of e-commerce, both of online sales and online marketplaces. This has not always sat easily with the current VABE, which did not expressly address e-commerce (although the EC’s guidelines that accompany VABE did contain some discussion of online issues).

The EC has now published a draft replacement VABE and guidelines, although these are not in final form and may change as a result of the EC’s consultation process that has just ended. Similarly, the CMA has indicated its intentions for the revised UK version, although again we may see some changes before these become law.

Bricks-and-mortar vs online

The current regime treats ‘dual pricing’ (selling product at different wholesale prices to the same distributor or retailer according to whether it is destined for in-store or online resale) as a ‘hardcore’ restriction. This means the arrangement would lose the benefit of the block exemption and would almost certainly be treated as an infringement. That has been problematic for brands looking to support dealers in developing and maintaining the more costly bricks-and-mortar channel.

The new draft VABE would permit such dual pricing “in so far as it has as its object to incentivise or reward the appropriate level of investments respectively made online and offline”, but not “where the wholesale price difference has as its object to prevent the effective use of the internet for the purposes of selling online”.

We expect this development to be of interest to many brands. The CMA similarly proposes a more lenient approach to dual pricing.

Uncertainty ahead for brands that also operate a D2C channel?

Many brands not only sell through a dealer network, but also direct, especially online. This is called ‘dual distribution’. There is therefore a degree of competition at the retail level between the brand itself and its dealer network.

Notwithstanding that, the current VABE treats dual distribution as essentially a vertical relationship, rather than a relationship between competitors. It exempts dual distribution equally where the supplier is a manufacturer and the distributors are not its competitors at the manufacturing level.

The new VABE proposes some significant changes:

  • it will apply fully only where the brand’s ‘retail footprint’ (i.e., the share of the downstream market occupied by its products, whether sold direct or via dealers) does not exceed 10 per cent. That is a low threshold and will raise unwelcome complications about exactly how a product market is defined for the purposes of market share. VABE otherwise operates up to a market share threshold of 30 per cent;
  • above that 10 per cent share (but still within the 30 per cent threshold) VABE will apply but it will not provide a safe harbour for information exchange between the brand and its network, “which will be assessed as a competitor-to-competitor information exchange”;
  • arrangements between online platforms that also sell direct (in competition with businesses that sell via the platform) will not be covered by the block exemption. Accordingly, any restrictions of competition in those arrangements will need to be assessed under general competition law principles;
  • to , an agreement must not include any ‘horizontal’ (competitor-to-competitor) restrictions by object; and
  • in a slight relaxation, VABE will also now apply where the supplier is an importer or wholesaler (previously, it just applied where the supplier was itself the manufacturer).

The exclusion of information exchange from the VABE safe harbour has potential to disrupt many existing distribution arrangements. A brand will typically require regular reports from its distributors that are not typically considered problematic (unless, for example, the information is used to co-ordinate pricing between distributors).

There is as yet no guidance on how such information flows would be assessed in the context of dual distributionBrands may be caught in the invidious position of either restricting what was hitherto considered perfectly routine and legitimate dealer reporting or risking the considerable competition law risk associated with competitor-to-competitor information exchanges.

Further guidance is also required as to what type of ‘horizontal’ restrictions in the context of dual distribution would be considered ‘hardcore’. For example, would the common requirement that a distributor should not actively sell into a neighbouring territory exclusively reserved for the supplier be considered horizonal market-sharing?

This revised stance on dual distribution is already raising concerns. For example, the European Brands Association (AIM) has published a well-argued response to the consultation arguing against these changes. Future EC guidance may provide clarity and reassurance on this point, and the EC may yet modify the draft VABE. The CMA does not intend to follow this approach in its proposed revision of the UK equivalent exemption but intends to treat dual distribution on its current basis.

Platform parity clauses

The current VABE does not expressly address ‘most favoured nation’ (MFN) provisions, which (in the context of online platforms) have become the subject of much competition law scrutiny in recent years, and so currently these are block-exempted.

The question centres on the degree to which a platform can require businesses that sell through it to offer their best deal to that platform’s users, or whether a business should be free to offer the same goods or service more cheaply itself or via other platforms. A provision under which a platform requires the business not to offer a better price (or other preferential conditions) through its own direct sales channels has been termed a ‘narrow MFN’. A provision that also requires that the business does not offer preferential terms through other platforms is a ‘wide MFN’.

Under the new draft VABE, narrow MFNs remain block-exempted, whereas wide MFNs covering sales to end-users – think a hotel booking site, for example – would be excluded from the benefit of the exemption. These will require case-by-case assessment.

Fulfilment contracts and logistics arrangements

Under the current regime, the assessment of arrangements whereby ownership of goods (‘title’) passes only momentarily to an intermediary before sale to the end customer (‘flash title’) has been problematic. Parties may be concerned that these might be assessed as RPM (control by a supplier of its dealer’s resale pricing), even though the intermediary was not active on the market in its own right for the sale in question. It was difficult to bring these within the definition of ‘agency’ for competition law purposes, since title for the product would pass to the intermediary and the contract of sale would be between the customer and the intermediary, rather than with the supplier.

The new guidelines contain a welcome statement that these arrangements (‘fulfilment contracts’) will not be treated as RPM if the intermediary is carrying out a prior agreement between the supplier and the end customer, and where the customer has waived its right to choose which entity would fulfil the agreement. That appears to describe arrangements where there is an overarching agreement between a supplier and the customer under which the supplier either has appointed, or is able to appoint, a third party to fulfil the contract at an already agreed price.

That might be the case where, for example, a brand entrusts the operation of its e-commerce site to a third party that not only provides the e-commerce platform but also makes the actual sale to consumers on the brand’s behalf (with ownership of product passing momentarily via the third party). A second example is where (in industrial contexts) a manufacturer agrees to provide equipment to its customer at a negotiated price but, for logistical reasons, specifies that the plant will be provided by its nominated distributor or importer in a local territory.

The treatment of this topic in the guidelines is rather brief, and it is to be hoped that the final guidelines will contain a bit more detail about this development.

Opening the door to a MAP?

A minimum advertised price (MAP) policy is one where a supplier requires its resellers not to advertise a product below a certain price point even if, upon an approach by a customer, the reseller might actually sell at a lower price. Although treated more permissively in some other jurisdictions, MAPs have historically been viewed in the UK and EU as restrictive of competition, by preventing resellers from using lower prices as a key advertising lever and so in effect a form of RPM.

MAPs are now considered in the revised guidelines. These state that MAPs “may also amount to RPM” where a supplier sanctions its retailer for ultimately selling below the MAP price, requires it not to offer discounts or prevents it from communicating that the final price could differ from the MAP price. That appears to imply that a MAP where those factors are not present (i.e., where the retailer could advertise the MAP alongside a ‘call for best price’ offer and then actually offer a discount without issue from its supplier) would not be viewed as RPM and so would in principle be permissible.

If correct, that would be a significant divergence from the generally understood position under EU law. The CMA’s parallel consultation does not refer to this more lenient treatment of MAPs, and the CMA has previously found against MAPs on the basis (inter alia) that the advertised price will tend to be the de facto selling price[3] and thus constitute resale price maintenance.

Brands may well conclude that more certainty is required before rolling out a MAP to their dealer networks in either the EU or the UK.

Next steps

This article highlights some proposed features of the new VABE that are relevant to e-commerce, although there are some other changes in the draft VABE that will also need to be considered in due course. It would be premature for brands to change their existing arrangements at this point, since the proposals are still in draft form, but they may wish to monitor the progress of these reforms in both the EU and the UK, and to begin to plan whether distribution channels should be reformed once the new regulations are finalised.