The European Commission is renewing vertical group exemption regulation to meet the requirements of online retail. The reform opens the possibility to reshape distribution strategy.

The vertical group exemption regulation is undergoing revision this spring. The current group exemption regulation expires at the end of May, and the new regulation should enter into force in June.

There are several competition regulations at the EU level that are all from the time when online retail was only evolving. Now the Commission is updating these regulations to the digital age.

After the new vertical group exemption regulation enters into force, companies have a one-year transition period during which existing contracts must be terminated or amended if they do not correspond to the new legislation.

“Contracts should be evaluated with care, as some terms might become serious restrictions of competition after the transition period. Such restriction could lead to a fine equivalent of up to ten percent of the company´s turnover”, says Lotta Uusitalo, partner at Procopé & Hornborg Attorneys Ltd, who specializes in competition law.

Blocking the effective use of internet is a serious competition restriction

The vertical group exemption regulation creates a safe harbor for supply and distribution agreements. The exemptions are made for situations that increase competition for the benefit of both consumers and companies. Terms that substantially restrict competition will continue to be forbidden.

Serious restriction of competition in the new regulation will especially be actual blocking of effective use of internet in online retail or online advertising. This may, among other means, happen by geo-blocking which blocks customers from purchasing products for example from a website that operates in another country.

“When a distributor must ask a permission from its principal for online retail, that is also considered blocking the effective use of internet”, says Uusitalo.

Its is also forbidden to prohibit the distributor from using certain online marketing tools, such as price comparisons and search engine advertising.

Dual distribution and transferring of information

Approach to dual distribution is interesting in the new regulation. Dual distribution means that the principal sells to end customers itself but also manages a network of individual resellers. In these situations, the principal in fact competes with its resellers network. This makes the situation sensitive from a competition law perspective, especially considering the information management of the network. If the market power is low, the new regulation allows certain type of exchange of information.

Different prices for online retail and brick and mortar?

The new regulation gives the principal a chance to practice dual pricing in certain situations. For example, the distributor could pay a higher price for products meant to be sold online than corresponding products to be sold in brick and mortar

“The purpose of this kind of pricing could be to encourage distributors to invest in other elements than online retail. The price difference must be based on the costs actually arising from the retail supply though”, says Uusitalo.

However, the price difference must not block the effective use of internet. Otherwise it could constitute a serious restriction of competition.

The supplier may also set specific quality requirements for online retail, such as implementing an after-sales web support service and use of secured payment systems.

“Existing contracts should be evaluated, on the one hand, in terms of their legality, but also in terms of whether the new regulation allows new kind of strategic choices”, says Uusitalo.

This article is based on the Commission´s regulation draft which is still subject to changes.