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From Farm to Table: Takeaways from Recent Global Developments in the Enforcement of Vertical Agreements

Stephanie Cheng

From Farm to Table: Takeaways from Recent Global Developments in the Enforcement of Vertical Agreements
naphtalina via Getty Image

The ABA Antitrust Section’s 2024 Spring Meeting panel “From Farm to Table: Dealing with Distributors” discussed global changes in the enforcement of vertical agreements and what companies that enter into distributor agreements should consider to remain in line with current antitrust law.

The topic is of renewed interest considering the European Commission’s new Vertical Block Exemption Regulation (VBER) and guidelines on vertical restraints (Vertical Guidelines), which were recently published on May 10, 2022. The guidelines entered into force on June 1, 2022 and are valid for 12 years (until 2034). Under the new policy, companies with less than 30% market share that enter into agreements without any “hardcore restrictions” presumed to harm competition (e.g. imposing on a distributor a de facto ban of certain sales) automatically benefit from an exemption under the VBER. However, agreements that do not satisfy the VBER conditions may still be compatible but require more individualized assessment under EU competition law Article 101 TFEU.

Strati Sakellariou-Witt of White & Case LLP, Brussels kicked off the session with a summary of these new regulations. She highlighted three main objectives the guidelines sought to address:

  • More individualized assessments for exemptions to reduce the likelihood of mis-categorizing agreements as pro-competitive (“false positives”) or anti-competitive (“false negatives”)
  • Codify experience over the past decade to address the emergence of online platforms
  • Align vertical guidelines with other regulations for greater consistency

Ms. Sakellariou-Witt noted that the marketplace has changed substantially over the last decade, especially with the post-pandemic growth of online platforms. Recognizing the inherent differences between online and offline channels, the new Vertical Guidelines have relaxed restrictions on “dual pricing”—or charging the same distributor a different wholesale price for products intended to be sold online vs. offline. However, in the case of “dual distribution”—or situations where a supplier is active both upstream and downstream—the guidelines now exclude online intermediation services from the benefits of safe harbor. The Vertical Guidelines also highlight a “need to know” principle, providing “white” and “black” lists of examples for information exchange that may be considered likely or unlikely to benefit from the block exemption.

Angélique de Brousse of Johnson & Johnson, Brussels offered an in-house counsel perspective on how companies are responding to these new regulations.  Ms. de Brousse noted that the changes introduced on dual pricing are very welcome, as they allow smaller businesses to remain competitive even when buying lower volume and can compensate brick-and-mortar stores for their physical services. Concerning dual distribution, while at first glance, the new guidelines may seem like a “tougher approach,” Ms. de Brousse commented that companies may find that the clarifications—particularly around information sharing—are useful for companies to know where the enforcement line is drawn. Ms. de Brousse also welcomed further clarification introduced by the new EU rules on agency agreements (incl. hybrid agency/distribution model) and fulfilment agreements as they bring some more flexibility to suppliers in the way they can distribute their products through intermediaries while keeping some control over pricing and specific terms and conditions.

The panelists also discussed the changing assessment of restrictions on pricing. They focused on the treatment of two pricing mechanisms:

  • “Retail price maintenance” (RPM): Manufacturers require distributors to sell products at certain prices
  • “Most favorable nation clauses” (MFNs): Suppliers are required to offer their contracting parties the same or better conditions as on other outlets

Daniel Culley of Cleary Gottlieb Steen & Hamilton LLP explained the logic behind using RPM. Because a distributor doesn’t internalize the manufacturer’s margin, it will tend to underprovide effort in reselling goods if it is not sufficiently profitable in the market. Manufacturers can offer certain mechanisms to increase distributors’ share of total producer profits, such as offering an RPM to ensure that distributors receive a higher margin. While this could decrease price competition, it can lead to greater non-price competition by encouraging more reselling effort in the downstream market.

However, in other circumstances, RPM can instead lead to anticompetitive effects. For example, where a manufacturer has substantial market power and there is relatively weak inter-brand competition, RPM may be used to reduce competition between distributors and allow the manufacturer to share in the gains from doing so by extracting a higher wholesale price.

Similarly, MFNs are typically used for two reasons: (1) to establish long-term relationships with distributors when market conditions may frequently change, or (2) to avoid free-riding.

  • In the first, the distributor or supplier may need to make relationship-specific investments to best serve end customers but worry about the risk of mis-pricing as conditions change. The MFN allows the supplier and distributor to benchmark against ongoing market transactions. 
  • In the second, the distributor may be concerned that if the supplier makes lower prices available to other distributors, then customers will use the distributor’s value-added services to find the product that they are looking for, but then purchase it from another distributor (“showrooming”).

However, in other circumstances, MFNs can have anticompetitive effects. Under an MFN, manufacturers may not be able to offer better terms to a new entrant—which may have the potential to expand the market—without offering the same terms to an incumbent, which could increase barriers to entry.  Either suppliers or distributors may use MFNs to the other party as a commitment device to avoid discounting. For example, if a supplier enters an MFN with most of its distributors and one of the remaining distributors seeks a discount, the supplier can credibly point to the MFNs as magnifying the cost of the discount not only to the profit margin for the supplier’s sales through the distributor but also to its profit margin on all of the sales to distributors who have MFNs and will benefit from the same lower price.

Under the new VBER restrictions, RPMs remain a hardcore restriction but are allowed some flexibility to provide potential efficiency justifications. However, MFNs are no longer fully block-exempted. Instead, the new VBER makes a distinction between parity observations that are across-platforms (“wide”) and within direct sales or marketing channels (“narrow”, e.g. a supplier’s own website):

  • Wide MFNs are regarded as anti-competitive as they soften competition between platforms and impede innovation. They must be individually assessed under Article 101 TFEU.
  • Narrow MFNs tend to increase transparency and reduce platform costs, which can lead to economic efficiencies. They are generally exempt, but there are certain cases where platforms covering a significant share of users may have the block exemption withdrawn.

By allowing for more flexibility in evaluating RPMs and MFNs, enforcers can better account for nuances within each case—a change that is playing out in the Courts today. The panelists point to the recent 2023 Super Book judgment, in which the European Court of Justice confirmed that RPMs must be assessed under case-specific circumstances to determine whether they constitute anticompetitive behavior.

While the 2022 VBER and Vertical Guidelines were updated to address market changes over the past decade, new technologies will continue to evolve the Courts’ understanding of vertical restraints.  Victor Oliveira Fernandes of CADE, Brasilia noted that with the greater reliance on artificial intelligence (AI), manufacturers may be able to track resell prices and intervene on deviations more quickly than before. Enforcers may also have more difficulty detecting pricing restrictions such as RPM if algorithms can learn to coordinate prices without direct manufacturer interference. Pointing to a recent CADE ruling, Mr. Oliveira Fernandes stated that these types of pricing mechanisms are already being brought to the Courts today. As technologies and markets continue to evolve, case-specific details will become increasingly important in evaluating the pro- and anti- competitive effects of vertical agreements.