The Transatlantic Divide on Verticals—The Underlying Reasons and the Way Forward

Date01 June 2017
Published date01 June 2017
ABX708364 294..312 Article
The Antitrust Bulletin
2017, Vol. 62(2) 294-312
The Transatlantic Divide on
ª The Author(s) 2017
Reprints and permission:
Verticals—The Underlying
DOI: 10.1177/0003603X17708364
Reasons and the Way Forward
Katarzyna Czapracka*
While the U.S. Supreme Court decision in Sylvania put an end to the debate on the treatment of
vertical territorial restraints under the U.S. antitrust rules forty years ago, the debate continues in the
EU. EU applies a broad presumption that such restrictions are anticompetitive. The EU schism on
verticals is becoming more and more relevant for multinationals, as the European Commission has
recently started a number of investigations targeting restrictions in online distribution. This article
shows that the EU policy on vertical restraints is driven predominantly by the perceived need to use
the competition rules to further the integration of the EU internal market. A more teleological
interpretation of that objective would allow for a more flexible, effects-based analysis of vertical
agreements under the EU competition rules.
vertical restrictions, per se rules, rule of reason
One area of competition law of the European Union (EU) that remains starkly different from the U.S.
antitrust law is the treatment of territorial restrictions in vertical arrangements. The U.S. rules are now
broadly aligned with the modern industrial economic theory, based on which market and customer
allocation in the context of vertical agreements are typically harmless and often have procompetitive
justifications.1 In the past, the U.S. rules have been stricter and the per se rule applied to certain types
of vertical restraints. But the rigid per se approach has been quickly abandoned in response to the
criticism from the law and economics movement. Accordingly, in the U.S., most nonprice restrictions
are now not considered problematic, and suppliers are largely free to organize their distribution net-
works as they see fit.
Tirole, The Logic of Vertical Restraints, 76 AM. ECON. REV. 921 (1986); JEAN TIROLE, THE THEORY OF INDUSTRIAL ORGANIZATION
186 (1990).
*White & Case LLP, Brussels, Belgium
Corresponding Author:
Katarzyna Czapracka, White & Case LLP, Brussels 1040, Belgium.

By contrast, EU rules on territorial vertical restraints are still at odds with the modern economic theory,
and their application is mostly form-based. For years, EU competition policy on vertical restraints has been
criticized as inefficient and illogical, but so far to no avail: the rules have only become stricter and more
pervasive. The European Commission (Commission), which is the main enforcer of the EU competition
rules, has now focused on online distribution and plans various actions meant to eliminate the perceived
private barriers to cross-border e-commerce in the EU. As explained below, the Commission has broadly
accepted modern economic theory and acknowledged the procompetitive benefits of territorial vertical
restraints. Indeed, it is not possible to back up the EU policy on vertical restraints by mainstream economic
theory. The EU schism on vertical nonprice restraints does not appear to be driven by the need to protect
intrabrand competition, but rather by the perceived need to shore up the integration of the EU internal
market (and, nowadays, the creation of a “Digital Single Market” within the EU). Although that objective
is also of an economic nature (competition and market integration serve the same end of an efficient
allocation of resources throughout the EU for the benefit of consumers),2 so far it has been interpreted in a
very strict, word-for-word manner. This article shows that, from a practical perspective, the current
framework makes an effects-based analysis challenging in Europe and does not promote economic
efficiency or market integration. There is also at least anecdotal evidence that it leads suppliers to organize
their distribution networks in a less-than-most-efficient manner, fitting them in the straightjacket of the EU
competition rules. A better policy choice would be an overhaul of the current rules in favor of a more
teleological interpretation of the market integration objective and a flexible, effects-based analysis.
1. Vertical Agreements and EU Competition Law “Labels”
As this article focuses on the area of EU competition law that may seem exotic to U.S. lawyers, it is
helpful to start with the description of the EU regulatory framework and the key concepts and notions
that are used in the EU in the assessment of vertical agreements.
Similarly to Section 1 of the Sherman Act, Article 101 of the Treaty on the Functioning of the
European Union (TFEU) provides for a broad prohibition of anti-competitive agreements that may affect
trade between EU Member States. That prohibition applies both to agreements between competitors (or
so-called “horizontal agreements”) and to agreements between companies operating on different levels
of production and distribution of the same product or service (so-called “vertical agreements”). The
notion of “vertical agreement” covers broadly agreements whereby one party purchases an input (product
or service) from a manufacturer or a wholesaler for further processing or resale. As will be explained in
more detailed below, the Commission has developed detailed rules under which some types of vertical
agreements benefit from a presumption of legality, whereas other are presumed to be restrictive of
competition. These rules are adopted in the form of binding regulations, which establish safe harbors
for some type of agreements and list standard restrictions that are presumed to be anticompetitive. The
Commission has also adopted numerous soft laws: guidelines, notices, guidance papers, which set out in
detail the Commission’s approach to the assessment of typical agreements and restrictions included in
such agreements. Although these soft laws in principle do not have any binding force,3 they are followed
by the Commission and by national courts and competition authorities in the EU.4
2. This is something the Commission itself notes. See Commission Notice; Guidelines on the Application of Article 81(3) of the
Treaty, OJ C 101, 27.4.2004, p. 97, at paragraph 13; Commission Notice; Guidelines on Vertical Restraints, OJ C 130,
19.5.2010, p. 1 (Vertical Guidelines of 2010), at para. 7.
3. In line with Article 288 TFEU, “[r]ecommendations and opinions [issued by the Commission or other EU bodies] shall have
no binding force.”
4. In Case C-322/88, Salvatore Grimaldi v Fonds des maladies professionnelles, ECLI: EU: C:1989:646, the European Court of
Justice (EU’s highest court) has held that national courts are obliged to take the EU soft laws into consideration when they
apply the EU rules (at para. 18).

The Antitrust Bulletin 62(2)
The key EU rules on vertical agreements are included in the Block Exemption Regulation on
Vertical Restraints (VBER)5 and in the accompanying Commission’s Guidelines on Vertical
Restraints.6 The VBER establishes a safe harbor for certain types of vertical agreements (in essence
agreements between parties whose market shares do not exceed 30% in any upstream or downstream
markets). However, the VBER is not applicable to agreements that include any of the so-called
hardcore restrictions listed in the VBER. Moreover, an agreement including one of the hardcore
restraints is presumed to restrict competition and to be illegal.
The list of hardcore restraints included in the VBER includes resale price maintenance and, subject
to limited exceptions, restrictions on territory into which or customers to whom the buyer in a vertical
agreement may sell contract products.7 The VBER and the Guidelines on Vertical Restraints contain a
set of very complex rules relating to the types of territorial and customer restrictions that could be
imposed on the buyer party in a vertical agreement. In exclusive distribution agreements,8 whereby the
seller party appoints only one distributor in a given territory (i.e., guarantees to the distributor that it
would not appoint another company a distributor), it is possible to restrict “active” sales into territories
or to customer groups reserved for the supplier or to another distributor. The notion of “active” sales
relates to actively pursuing a customer in a specific territory. But if the distributor is not exclusive in a
given territory, it is not possible to prevent other distributors from selling into that territory (and it is
also not possible to prevent that distributor from selling into other territories, even if such territories are
reserved to another distributor). Further, “passive” selling, which refers to sales made in response to
unsolicited requests from customers, cannot be obstructed. The Commission generally views online
sales as passive selling and therefore treats as a hardcore restraint any restriction on sales to customers
within the EU via the Internet. Moreover, practices broadly referred to as “geo-blocking,” whereby
retailers prevent online shoppers from purchasing if the shopper’s location or country of residence9 are
also considered hardcore restrictions. Other restrictions, such as exclusive supply arrangements (i.e.,
obliging the buyer to source contract products only from the supplier) and noncompetes are not

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