The EU Commission Regulation (EU) 2022/720, also known as the Vertical Block Exemption Regulation (VBER), is intended to provide legal certainty. In principle, companies engaged in vertical arrangements, such as distribution agreements, selective distribution systems, or exclusive supply contracts, can rely on a clear safe harbour: If their market share remains below 30% and they avoid the so-called “hardcore” restrictions listed in Article 4 VBER, their agreements are exempted from the EU’s cartel prohibition of Article 101(1) TFEU. While this appears straightforward, in practice it is sometimes not. Applying the 30% market share threshold can be challenging for companies and lawyers alike. Defining the relevant market is often complex and reliable market share data is difficult to obtain (and the associated effort seems excessive to the business for some contracts). Thus, in this post, I will once again deal with a vertical topic (as I have done here and here), outline some general considerations and offer practical guidance regarding the said threshold.
A threshold born of compromise
It is worth remembering that the 30% figure was never a precise scientific conclusion. It was a compromise, a deliberately simplified approximation of the conditions under which an exemption from the cartel prohibition under Article 101(3) TFEU is likely to be satisfied. At 30% market share, the European Commission essentially says: We are confident that the benefits of the vertical arrangement outweigh the competitive risks. Where the threshold is exceeded, that confidence is already wavering, even if the competitive reality has not changed overnight.
The double threshold problem
Since the 2010 VBER, the 30% threshold applies not only to the supplier’s market share but to the buyer’s as well, assessed on the purchasing market on which the buyer sources the contractual products or services. The introduction of this “double threshold” reflects legitimate concerns about buyer power; however, it has also been criticised for creating practical difficulties in application.
For example, a restriction on active sales by the buyer into territories that the supplier has reserved for itself would not be exempted where the buyer’s market share exceeds 30% on the purchasing market, even if the supplier’s market share remains well below that level. This raises the question of whether the 30% threshold serves its intended purpose in such cases. However, given that the thresholds are fixed, any resulting imbalance can only be addressed through an individual exemption under Article 101(3) TFEU.
Defining the market: Easier said than done
Before calculating market shares, it is necessary to first define the relevant markets. For the supplier, this is the market level at which it offers the contractual products or services. For the buyer, the relevant market level is the one at which it procures the contractual products or services. For the market definition, the general principles of EU competition law apply: Demand-side substitutability serves as the primary criterion, while supply-side substitutability plays a complementary role. In the context of vertical agreements, the following issues are particularly relevant in practice:
- Portfolio markets: Where a supplier distributes an entire range of products through the same distribution agreement, the relevant market may be the range as a whole rather than individual product categories within it. The 2022 Vertical Guidelines acknowledge that “in sectors where suppliers generally sell a portfolio of goods or services, the entire portfolio may determine the market definition, if the portfolios, and not the individual goods or services contained in the portfolio, are regarded as substitutes by the buyer” (para. 172 of the Vertical Guidelines). This may matter in practice: A supplier may exceed 30% for an individual product within its range but remain comfortably below that threshold when the portfolio as a whole is considered as relevant for the market definition.
- Wholesale and retail markets: A further relevant question is whether wholesale and retail markets constitute distinct markets for the purposes of assessing the 30% threshold. If treated as separate markets, a supplier operating exclusively at the wholesale level would hold a higher market share than it would if both levels were considered a single, unified market. In my view, there are good arguments to the effect that a distinction between wholesale and retail markets can only be drawn where no substitution relationships exist between the two levels.
- Spare parts: A further difficulty arises in relation to aftermarket spare parts. A manufacturer may hold 100% of the market for spare parts that are exclusively compatible with its own primary products, and yet those spare parts are frequently distributed through the same vertical agreement as the primary goods. There are good arguments in favour of assessing the manufacturer’s market share by reference to the primary product in question rather than the isolated spare parts aftermarket. Any other approach would mean that every manufacturer of technical equipment with proprietary spare parts would automatically fall outside the scope of the VBER – an outcome that can hardly have been intended.
- Geographic market definition: The manner in which the relevant geographic market is defined can have a significant bearing on whether the 30% market share threshold is reached. A supplier that sits comfortably below 30% at the European level may nonetheless exceed that threshold in one or more individual Member States. It is therefore necessary to assess carefully whether the relevant markets are national in scope (or potentially even narrower) or whether they are at least EU/EEA-wide.
Calculating the market shares: Estimates are permitted (and necessary) but it is the group as a whole that counts
The VBER and its Guidelines do not require companies to determine their market share with mathematical precision. Where exact calculation is not possible, properly substantiated estimates are explicitly permitted (see paragraph 175 of the Vertical Guidelines). Contrary to what some people might suggest, companies should not approach competitors in order to assess their own market shares. This would raise serious concerns under competition law in its own right…
This carries an important procedural implication: Where a company, applying a sound and substantiated methodology, estimates its market share to be below 30%, such an estimate should, in principle, shield the company from retrospective liability, even if the Commission subsequently arrives at a higher figure by exercising its investigative powers and gathering additional data from competitors and customers. A carefully and properly prepared estimate should not be called into question merely because more granular data comes to light at a later stage. That said, once more accurate data becomes available – whether through a Commission investigation or otherwise – the parties would be expected to rely on that data going forward.
It must be noted, however, that the calculation must encompass all goods and services sold by the supplier and its group companies on the relevant market and not only those covered by the specific agreement under consideration.
What happens above 30%?
Where the threshold is exceeded, the block exemption is unavailable. Exceeding the threshold does not, however, give rise to a presumption of illegality. This is a fundamental distinction from the treatment of hardcore restrictions under Article 4 VBER, which trigger a presumption that the conditions of Article 101(3) TFEU are not satisfied.
Above 30%, the parties are required to conduct an individual assessment under Article 101(3) TFEU. The Commission’s Guidelines make clear that this assessment is sensitive to the degree by which the market shares exceed the threshold: A share of 35% is not to be equated with a share of 85%, even though the formal legal position – that is, the respective agreement falling outside the block exemption – is identical in both cases.
It is also worth noting, not least because it is a question frequently raised in practice, that to date no case seems to be publicly known in which the Commission has imposed a fine for an infringement of Article 101 TFEU in a vertical context unless the infringement concerned a hardcore restriction within the meaning of Article 4 VBER.
Finally, the two-year transitional period provided for under Article 8(d) VBER constitutes a valuable practical tool for agreements that find themselves above the threshold during the term of the agreement. It affords a window of continued block exemption treatment, thereby softening the cliff-edge effect that would otherwise result from a sudden increase in market share.
The bottom line
The 30% market share threshold is at once the VBER’s greatest strength and its principal source of practical difficulty. For the vast majority of companies that fall clearly and comfortably below the threshold, it delivers precisely what it promises: Legal certainty without the need for complex individual analysis. For those operating in the grey zone, however, the challenges of market definition and market shares combine to make compliance a genuinely demanding exercise.
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