Following a thorough evaluation and review of the 2010 rules regarding vertical agreements and concerted practices, the European Commission adopted the Vertical Block Exemption Regulation (“VBER”), which entered into force on 1 June 2022, accompanied by revised Guidelines on Vertical Restraints. It is assumed that the latest alterations and their potential effects on the commercial ecosystem will slowly find their place in Turkish competition legislation and practice.
The VBER is crucial in terms of offering a safe harbour for vertical agreements (i.e., agreements between two undertakings operating at different levels of the supply chain). Under the VBER, if the market shares of a supplier and a buyer (i.e., reseller) do not exceed 30% of the relevant product market and the agreement between them does not contain any “hardcore restrictions” (including, for example, resale price maintenance or certain territorial/customer restrictions) and all other criteria stipulated in the VBER are met, the agreement can automatically benefit from the block exemption.
Among the changes brought by the revised VBER, two points regarding the aforementioned safe harbour draw attention, which can be summarised as follows:
(i) The scope of the safe harbour offered to dual distribution agreements and parity obligations has been narrowed down. Correspondingly, certain aspects of dual distribution and certain types of parity obligations will no longer be exempted under the revised VBER but must instead be subject to an individual exemption under Article 101(3) of the Treaty on the Functioning of the European Union (“TFEU”).
(ii) The scope of the safe harbour has been expanded regarding a reseller’s ability to actively approach customers (i.e., active sales), its ability to charge the same reseller different wholesale prices for products to be sold online and offline, and its ability to impose different criteria for online and offline sales in selective distribution systems. Accordingly, these restrictions will no longer be assessed individually and will be block exempted, provided that the conditions of the VBER are met.
The revised VBER, while updating the scope of the provided safe harbour, also introduces new provisions in an attempt to adjust the vertical block exemption rules in parallel with the changing commercial needs of the ever-growing e-commerce and platform economy.
In line with these significant features, below we provide a comparison between the newly introduced rules of the VBER and Turkey’s Vertical Block Exemption Communiqué No. 2002/2 (“Communiqué No. 2002/2”) and the accompanying Guidelines on Vertical Agreements.
1. Dual Distribution
Dual distribution refers to a system where the supplier of a product or service sells both directly (on the downstream market) and through independent resellers (on the upstream market), thereby competing with its independent resellers. In this regard, an e-commerce platform that sells goods or services that compete with the undertakings operating on its platform (i.e., business users) can be cited as an example of dual distribution systems.
The safe harbour provided to dual distribution agreements still remains within the scope of the new VBER. However, with the growth of digitalisation and online sales, the exemption provided to vertical agreements has been narrowed down with respect to the following two particular subjects:
a. Information exchange between the parties to such agreements will be scrutinised individually under Article 101(3) of the TFEU. However, in cases where such information exchange is (i) directly related to the implementation of the vertical agreement or (ii) necessary to improve the production or distribution of the goods/services by the parties, it will be considered within the scope of the block exemption provided by the revised VBER. For example, any information regarding the logistics of a product shared between Amazon and a business user may benefit from the VBER. On the other hand, information exchange concerning the prices to be applied by a business user cannot be block exempted.
b. Safe harbour exclusive to dual distribution agreements cannot be applied to online intermediation service providers that have a hybrid function (i.e., the providers of online intermediation services that also compete for the sale of the intermediated goods/services). Therefore, distribution agreements concluded with such suppliers need to be assessed on a case-by-case basis under Article 101(3) of the TFEU.
Under the Turkish competition law, Communiqué No. 2002/2 stipulates an exception concerning the vertical agreements that involve suppliers operating both as a reseller and a manufacturer. According to this, an agreement of such supplier with another reseller will be considered as vertical and may benefit from the block exemption, provided that legal conditions stipulating block exemptions are met.
2. Parity Obligations
Parity obligations usually refer to requiring a company to offer terms as favourable, or no less favourable, to its contracting party as those offered on any other sales channel. Following the growth of online platforms, parity obligations have gained increasing importance in competition regulations. In line with this, the revised VBER introduces new rules to regulate the stated obligations and stipulates that the clauses that directly or indirectly restrict a business user from offering more favourable conditions to end-users compared to competing online intermediation services (i.e., wide parity clauses) are to be evaluated on a case-by-case basis.
For example, Amazon’s agreements involving clauses that forbid resellers to trade their goods at lower prices on rival e-commerce platforms cannot benefit from the exemption under VBER and must be examined under individual exemption. In contrast, Turkish competition law states that an agreement that includes a generic most-favoured-customer (MFC) clause as a parity obligation can still benefit from the block exemption, provided that the market share of the party granted MFC status does not exceed 30% on the relevant market and the agreement in question fulfils the criteria stated in Communiqué No. 2002/2.
Alongside the distinction regarding the wide parity clauses mentioned above, the Guidelines on Vertical Restraints delivers a side note for narrow parity clauses, which demonstrates the Commission’s close watch on concentrations on platform markets. Accordingly, agreements that involve a most favourite customer clause as a narrow parity can benefit from the block exemption under the revised VBER. However, the Commission may withdraw this exemption in the cases where such parity obligations lead to a cumulative effect on concentrated platform markets and if the parity clauses in question do not produce efficiencies. To this day, Turkish competition law indicates no rule that is specific to the narrow parity clauses to be applied in concentrated platform markets. However, the Board’s approach on narrow parity clauses suggests that such clauses do not generally raise competitive concerns, may serve the preservation of economic value, and may produce efficiencies in the market. On the other hand, the Board has indicated that the interpretation of parity clauses in general is not independent from the conditions of the relevant market, and therefore it must be noted that the Board may deem such clauses uncompetitive depending on the concentration level of the market. In one of its recent decisions, the Board indicated that the narrow parity clauses in question may generate barriers to market entry for rival e-commerce platforms.
3. Active/Passive Sales and Distribution Systems
The new VBER clarifies the definitions of active sales and passive sales, introduces a novel approach to distribution systems, and refines the scope of active sales restrictions. These newly introduced changes are summarised as follows:
- Under the new VBER, it is possible to establish a distribution system of “shared exclusivity”, namely a system where the supplier is allowed to appoint up to five resellers for each exclusive territory or customer group. In contrast, under Communiqué No. 2002/2, it is not permissible to establish an exclusive territory with multiple resellers.
- Much like Turkish legislation, under the revised VBER it is possible for a supplier to assign an exclusive territory for itself. In addition, the revised VBER does not even oblige the supplier to make active sales within this assigned territory. Turkish competition rules take an opposing approach in this matter. According to the Turkish Competition Authority’s Guidelines on Vertical Agreements, there is no exclusive territory without active sales performed either by the reseller or the supplier itself.
- Under VBER, a supplier may restrict the active sales of a reseller operating within the exclusive territory, as well as the sales of the customers of such resellers. Under Communiqué No. 2002/2, a supplier’s restriction of a reseller that is assigned to an exclusive territory or customer group from making active sales can benefit from the block exemption.
- Irrespective of distribution systems, the new VBER enables suppliers to restrict a reseller’s sales on e-commerce channels under certain conditions. However, the Turkish Competition Board takes generally a rather strict approach when it comes to online sales restrictions.
- According to the Commission’s Guidelines on Vertical Restraints, suppliers can only operate through one particular distribution system in the cases where the supplier establishes a system of exclusive or selective distribution. In this regard, suppliers cannot apply both selective and exclusive distribution for the same territory. On the other hand, in Turkey, the distribution system through which the supplier applies both of the distribution systems can benefit from the safe harbour provided by block exemption, on the condition that the supplier does not prohibit the active sales of the reseller.
- As an adjustment, the revised VBER outlines a third distribution system, namely the system of free distribution. According to the Guidelines on Vertical Restraints, free distribution refers to a system where the supplier chooses to distribute its goods or services using neither selective distribution nor exclusive distribution. Under Turkish competition law, there is no specific term for the distribution system that is neither categorised as selective or exclusive, although the Guidelines on Vertical Agreements uses the term of “free area” for the territories in which two or more than two resellers operate.
- Furthermore, the revised VBER provides an additional adjustment to passive sales: The activities of a reseller on websites are still considered within the scope of passive sales. However, such activity will be regarded as active selling if a website (i) has a top-level domain corresponding to the particular territories, or (ii) offers languages that are not commonly used in the territory, where such languages are different from the ones commonly used in the territory in which the reseller is established.
4. Online Sales
The revised VBER and the rules applicable for vertical agreements in Turkey are quite different with regard to online sales. It is unknown whether or when the changes in the VBER will be implemented in Turkish legislation. Nevertheless, any changes that will be carried by e-commerce platforms in Turkey to prevent the risks that the new VBER might pose are essential for the future well-being of these platforms.
The revised VBER introduces definite concepts for the e-commerce platforms and business users that are parties of online sales transactions. In this regard, undertakings that offer online intermediary services are defined as “suppliers”, while business users that sell goods/services through e-commerce platforms are referred to as “buyers”. For example, as an online intermediary service provider, Amazon is considered as a “supplier”, while a business user that sells on Amazon is considered as a “buyer” according to the definitions outlined by the new VBER. In contrast, there are no such precise definitions regarding the concepts of “supplier” and “buyer” in Turkish competition law with respect to online intermediary services. However, the classifications introduced by the Turkish Competition Board’s Trendyol Interim Measures decision are quite similar to the definitions included in the VBER, although they are not precisely clarified.
One of the eye-catching novelties indicated by the Guidelines on the Vertical Restraints is that, under the new VBER, suppliers may offer different prices in accordance with the sales channel on which the relevant products will be offered for sale. In this direction, such difference in prices should be reasonably related to the differences in costs and investments that arise from the dissimilar nature of the two different sales channels. On the other hand, pursuant to the Guidelines on Vertical Agreements, an agreement that conditions the reseller to pay a higher amount to the supplier for the products that will be sold on online stores cannot benefit from block exemption under the Turkish competition law.
In this context, the difference between Turkish and EU competition law for online sales is far-reaching. The first major difference is that e-commerce platforms that operate as both buyers and suppliers (i.e., with a hybrid function) are excluded from the safe harbour of the new VBER. For example, the e-commerce platform Amazon selling a particular product of its own brand on its own platform among other business users that also sell the exact product denotes a situation where Amazon cannot benefit from the safe harbour provided by the VBER, on the grounds that Amazon is the supplier, as an online intermediary service provider, but also a business user competing with other business users on the platform that sells the relevant product. On the other hand, under Turkish competition rules, there is no prohibition specifically preventing such online intermediary service providers from benefiting from the block exemption.
Furthermore, the VBER provides that a digital platform cannot restrict a business user from offering more advantageous terms to end-users on a competing e-commerce platform where such user also trades its products. To illustrate: an obligation imposed by the e-commerce platform Alibaba prohibiting a business user from selling a particular product at a lower price on a different e-commerce platform cannot be considered within the block exemption under the new VBER. However, this obligation may still benefit from block exemption in Turkey.
In accordance with the EU’s revised Guidelines on Vertical Restraints, resellers may be restricted from trading on online channels irrespective of the distribution system, provided that the restrictions imposed by the supplier do not carry the object of preventing a reseller’s effective use of the Internet. However, for such a restriction to benefit from the block exemption, the Guidelines on Vertical Restraints specifies several examples, such as (i) the requirements intended to ensure the quality or a particular appearance of the reseller’s online store; (ii) requirements regarding the display of the contract goods or services in the online store; and (iii) a direct or indirect ban on the use of online marketplaces under certain conditions. In contrast, under Turkish competition rules online sales are considered as a passive sales restriction and are therefore deemed as a hard-core violation of competition law, albeit several exemptions are granted to selective distribution systems under certain conditions.
Another one of the significant features involves the “principle of equivalence”. As per this principle, the criteria to be applied by a supplier (i) should serve the same purpose, (ii) must provide comparable results, and (iii) must be reasonably related to the inherent differences between two channels. In this regard, the Commission adopts a lighter approach in terms of the sales made in a selective distribution system. According to the Guidelines on Vertical Restraints, suppliers no longer need to apply equivalent criteria for the sales made online and offline in a selective distribution system, provided that such criteria do not prohibit the reseller’s effective use of the Internet. On the other hand, suppliers may not offer the identical terms for online and offline sales in Turkey. However, the Guidelines on Vertical Agreements indicates that an imposition that does not fulfil the conditions of principle of equivalence and that impels resellers from using the Internet as a sales channel may be categorised as a serious violation of Turkish competition law.
Furthermore, the new VBER allows the supplier to determine a minimum absolute amount of the products/services that the reseller can sell in its physical store by specifying the value or volume. However, this obligation cannot be implemented by means of determining a certain ratio for the online sales of the reseller. In this regard, Turkish competition law follows a similar approach, albeit with a different methodology. Pursuant to Communiqué No. 2002/2, suppliers may oblige resellers to commit a certain ratio of sales to physical stores without prohibiting the online sales of the reseller. Additionally, suppliers are permitted to stipulate conditions so as to ensure the compatibility of online sales to the general distribution system. However, it must be noted that obligations involving the restriction of the ratio of online sales to total sales are still regarded as a restriction of passive sales in Turkey, and thus prohibited.
5. Resale Price Maintenance
Similar to the previous version of the VBER, resale price maintenance (“RPM”) is regarded as a hardcore restriction under the new VBER. The VBER clearly states that any vertical agreement containing restrictions stipulating minimum or fixed resale-prices is excluded from the block exemption provided by it.
Alongside the accustomed rules concerning RPM, for the first time the concept of “minimum advertised pricing”—the lowest price that a retailer can advertise a product for sale—is included in the rules governing vertical agreements in the EU. As per the Commission’s Guidelines on Vertical Restraints adopted alongside the new VBER, requiring a reseller to advertise at a minimum price constitutes an indirect form of resale price maintenance. Therefore, any imposition made by a supplier with regards to the minimum price of advertising will be treated as a hardcore restriction.
In addition to the explanations stated above, there is flexibility specified in the Commission’s Guidelines on Vertical Restraints concerning the activities that essentially may constitute RPM. Examples of exemptions that may apply under the new VBER, even in cases of RPM, are as follows: (i) to increase product recognition for the launch of a new product, (ii) to implement a short-term low-price campaign, (iii) to help provide pre-sales services, and (iv) to save brand image against a dealer who constantly sells at a loss. In Turkish competition law, no exemption is specifically given for the four listed occasions.
Quite similar to the approach in the EU, the Turkish Competition Authority takes a firm stance against activities involving RPM and has adopted the approach of “by object violation” in its recent decisions. In other words, it is widely accepted that the activities constituting RPM have the potential to restrict competition by their very nature. Thus, such practices cannot benefit from the block exemption and in principle cannot be granted an individual exemption under Turkish competition law. However, the “efficiency” based approach that is adopted in the EU shows itself in the decisions of the Board occasionally.
6. Non-Compete Obligations
The revised VBER and Guidelines on Vertical Restraints liberalise the rules regarding non-compete obligations imposed on resellers by a supplier. First of all, the general rule that any non-compete obligation that has an indefinite duration or that has a term exceeding five years is excluded from the block exemption remains applicable under the new VBER. However, as a novelty, non-compete obligations that are tacitly renewable beyond five years can in fact benefit from the block exemption, on the condition that the reseller is able to renegotiate or terminate the vertical agreement containing such obligation with a reasonable period of notice and at a reasonable cost.
Even though the concepts of “reasonable period of notice” and “reasonable cost” are not specified, it is assumed that any clause included to vertical agreements with a tacitly renewable non-compete obligation should not hinder a reseller’s capability to effectively change its supplier after the expiration of the five-year period. For example, a vertical agreement where the supplier provides a loan to a reseller would benefit from the block exemption under the VBER, if the repayment of such a loan would not prevent the reseller from terminating the non-compete obligation that is tacitly renewable beyond five years.
Similar to the general rule applied in the EU, non-compete obligations of indefinite duration or exceeding five years cannot benefit from the block exemption within the scope of Turkish competition law. In addition, any non-compete obligation that can be renewed tacitly to cover a period exceeding five years will be regarded as having an indefinite duration and therefore will be outside the scope of the block exemption in Turkey. Nevertheless, it should be noted that non-compete obligations with a term beyond five years can benefit from the block exemption provided that (i) the parties have explicitly agreed upon each extension of time that causes a duration exceeding five years, and (ii) there is no condition that impedes the reseller from terminating the non-compete obligation after the term of five years.
In line with the explanations above, the contrast between European and Turkish competition rules in terms of the non-compete obligations asserts itself in tacitly renewable non-compete obligations. According to the new VBER, it is possible that the non-compete obligations can benefit from the block exemption even though there is no explicit consent between the parties. On the contrary, under Turkish competition law, a non-compete obligation with a duration beyond five years can benefit from the block exemption only on the condition that such duration is explicitly agreed upon by the parties.
The EU’s novel approach might be followed by the Turkish Competition Authority and take its place in Turkish competition law. However, in the meantime, undertakings must be prudent when applying non-compete obligations exceeding five years in order to benefit from the block exemption in Turkey and should keep in mind that any such obligation that does not fall within the exception explained in the second paragraph of this subtopic must be assessed individually in order to avoid any competition law violation.
The new VBER and Communiqué No. 2002/2 have some differences, especially in the areas covered by this article. Because of this, vertical agreements prepared in line with the new rules of EU may not be directly implemented in Turkey, as was the case before. Therefore, it is beneficial for all undertakings that carry out business activities in both Turkey and the EU to keep a close eye on developments in both jurisdictions and prepare their vertical agreements in alignment with these divergences.
By Bulut Girgin, Counsel, Simru Tayfun, Associate, Merve Zeynep Aydas, Associate, Efe Utku Cal, Student Intern, Gen & Temizer Ozer