It may be often be true that "It's better the devil you know"… but it isn't always the case.
Manufacturers and brand owners across the UK and EU should be aware that significant changes to the existing regulation of their supply and distribution agreements will kick in from 31 May 2022 when the EU Vertical Agreements Block Exemption Regulation (VABER) is replaced.
For over a year, the EU and UK have, separately, been consulting on the regulations that should replace the VABER in their respective jurisdictions. Both sets of proposals are now in near-final form and so we now know what the regulatory landscape will look like from 1 June 2022 onwards in this important area of competition law compliance. This will also mark the point at which the UK rules split, post-Brexit, from the EU regime.
Many leading manufacturers and brand owners have been lobbying for positive reforms in this area so that they can take more control over how their brands are sold and presented by retailers, particularly via e-commerce. There have also been calls to enable more support to be given to bricks-and-mortar retailers, who have been struggling for many years to compete against pure-play online resellers.
So, are the proposed reforms going to improve the regulatory landscape, or would we be better off with the existing VABER as the devil we know? From the perspective of manufacturers and brand owners operating in the EU and the UK, there are both benefits and drawbacks to the proposed reforms.
Positive aspects of the proposed reforms for manufacturers and brand owners
- Dual pricing will be permitted – under the present VABER, it is illegal to set different wholesale prices depending on whether the products in question will be resold online or in a physical store. Earlier this year in France, Lego was forced to amend its discount policy to remove aspects of support to physical retailers that amounted to de facto dual pricing. Under the new regulations, in both the UK and EU, at least some degree of dual pricing will be permitted in order to offer positive support and incentives to bricks-and-mortar retailers.
- Extra protection and flexibility for selective distribution models – both the UK and EU appear to have recognised the value of selective distribution (SD) to brand owners as a way to ensure consistent and effective execution of their retail strategies. The proposals will give manufacturers greater powers to enforce their SD systems by preventing all sales into the SD territory by unauthorised distributors. The proposals also offer manufacturers more flexibility in setting the SD selection criteria so that they will not have an obligation to set equivalent criteria for online and offline sales.
- Express freedom to restrict reselling on online marketplaces – as an express confirmation of the European Court of Justice's seminal judgment in the Coty case back in 2017 (and as we reported at the time), the new proposals will make it clear that manufacturers are free to restrict retailers' ability to resell on online marketplaces, regardless of whether the products in question are luxury or highly technical.
- Ability to "share" exclusivity between selected retail partners – under the current VABER, the legal protections afforded to an exclusive distribution partner are only valid if the manufacturer selects just one partner per territory. Under the proposed reforms, it will now be possible to allocated a particular territory or customer group to a number of partners without sacrificing any legal protections.
Remaining areas of concern for manufacturers and brand owners
- Resale price maintenance remains a "hardcore" prohibition – despite lobbying efforts from certain sectors, the EU and UK competition regulators are not minded to allow manufacturers to set "minimum advertised prices" (MAP), although this is permitted in certain other jurisdictions, most notably the USA. Therefore, retailers must still remain free to determine their resale prices, subject only to legitimate maximum price instructions and/or price recommendations from the manufacturer.
- Additional restrictions on online advertising now expressly blacklisted – in addition to an outright prohibition on preventing online sales by retailers, the EU has made clear that preventing a retailer from advertising online, including through the use of price comparison websites and purchasing search engine preferencing, will amount to illegal conduct.
- Dual distribution under the spotlight, particularly where the manufacturer has a significant D2C presence – there is increased focus on the need for manufacturers to ensure that they have effective internal information barriers in place to ensure that any data and insights that they receive from their third-party retail partners do not unduly influence their own independent direct-to-consumer (D2C) retail operations.
- Continued uncertainty around the use of agency agreements, most favoured nation clauses (MFNs) and online intermediaries – although the EU and UK regulators have recognised the importance of fulfilment partners and other intermediaries that are crucial to the execution of a successful e-commerce business, there is still considerable uncertainty about how manufacturers can use these intermediaries without creating a material competition law risk.
- Hints of divergence between EU and UK competition regimes – at this stage, the differences between EU and UK regulation of supply and distribution agreements appear relatively minor. But manufacturers and brand owners may start to see the regulatory landscapes diverging, which may create additional compliance challenges in the longer term, compared to the uniformity and stability of the VABER (which still applies equally in both regions until 31 May 2022).
Osborne Clarke comment
Based on the proposed reforms in their present form, on balance the package is positive from the perspective of manufacturers and brand owners. They will have more ability to control their brands, including when they are re-sold online, and particularly if they choose to establish selective distribution networks to hand-pick their preferred retail partners.
Therefore, with all due respect to Kylie, our view is that these are positive reforms and we have much to gain from moving away from the existing VABER that we have become so familiar with over the previous decade.
If you would be interested in learning more about these proposed reforms and how they may affect your business, please register your interest for a forthcoming webinar on this subject which will take place in early 2022.