UK Vertical Agreements Block Exemption: consultation hints at some change

The CMA is consulting on a new UK Vertical Agreements Block Exemption Order (VABEO) which would update and replace the EU Vertical Agreements Block Exemption Regulation (VABER) that was retained in UK law following Brexit. The VABEO would remain in place for six years.

Many of the CMA’s proposals seek to replicate existing provisions under the VABER, but some proposed changes would give manufacturers and brand owners greater control over their distribution networks and the terms on which they do business with distributors and retailers in the UK.

The Vertical Agreements Block Exemption in brief

Chapter 1 of the UK’s Competition Act 1998, and Article 101 of the Treaty on the Functioning of the EU, place a general ban on agreements that are anti-competitive. However, both texts provide for exemptions.

The VABER was developed by EU policymakers to apply an automatic exemption to restrictions of competition in vertical agreements so long as certain conditions were met. For the VABER to apply:

• the parties must enter into a vertical agreement – this includes distribution, franchising and supply between non-competitors;
• the market share of each of the parties to the agreement must not exceed 30%; and
• there must be no ‘hardcore restrictions’ in the agreement – these are terms that are highly likely to be anti-competitive.

The VABER applied directly in UK law until Brexit, at which point the rules were carried over into UK law like thousands of other pieces of EU legislation. The CMA’s consultation on a new VABEO reflects the fact that the VABER is due to expire on 31 May 2022 and that, post-Brexit, UK legislators and regulators now have freedom to diverge from EU law. The European Commission has also been consulting on replacing and updating the VABER, though formal proposals are still awaited.

Changes proposed

Online sales restrictions

An outright restriction on online sales will continue to be treated as a hardcore restriction of competition, in line with the CMA’s decision in the case of golf equipment manufacturer Ping. However, the CMA intends to de-list the following as hardcore restrictions:

• dual pricing, i.e. charging a distributor a higher cost price for products they sell online versus offline; and
• imposing criteria for online sales that are not overall equivalent to the criteria imposed on brick-and-mortar shops in a selective distribution system.

These restrictions will now be covered by the block exemption, subject to the usual 30% market share thresholds being met. These proposed amendments represent a significant change for brand owners as to the degree of control they can exert over their distribution network and online selling. However, there is a degree of uncertainty in relation to the dual pricing proposals as to how significant a price differential can be imposed without otherwise constituting an indirect online sales ban.

Territorial and customer restrictions

The CMA will retain the distinction between active and passive sales for the time being, with online sales deemed to be passive sales, as has been the case under EU competition law. The CMA recognises that that position may evolve as many online sales and marketing practices are often not passive in nature.

There will be an expansion of the circumstances in which it is permitted to restrict resellers from selling to certain customer groups or territories within the UK.  For example, the VABER currently only permits ‘active’ sales restrictions where the customer group, or territory, has been exclusively reserved for the supplier or one distributor. The CMA proposes extending this to allow for exclusivity to be shared between multiple distributors.

The CMA’s proposals are silent, however, on the important question of whether an agreement outside the UK to restrict active or passive sales into the UK, or restrictions on UK distributors from selling outside the UK, would breach UK competition law. In previous guidance, however, the CMA has made clear that “passive sales bans affecting sales to a UK market or UK customer are capable of falling within the scope of the Chapter 1 prohibition” but added that “they may not satisfy the requirements of the Retained Vertical Agreements Block Exemption Regulation and may be treated as hardcore restrictions of competition”.

Wide ‘most favoured nation’ clauses

The CMA proposes making ‘wide’ most favoured nation (MFN) clauses, or ‘indirect sales channel parity obligations’, a hardcore restriction. These restrictions prevent suppliers from offering a product or service on better terms on any other sales channel whether it be the supplier’s direct sales channel or an intermediary channel.

The CMA recently reviewed such a restriction in its Comparethemarket case regarding home insurance. The CMA distinguishes this from ‘narrow’ or ‘direct sales channel obligations’ i.e. restrictions related to the supplier’s own channel only, which the CMA states will not be considered to be hardcore restrictions, but will need to be assessed individually on a case by case basis.

Dual distribution

The CMA proposes extending the concept that non-reciprocal vertical agreements between competing suppliers can benefit from exemption where only one of the parties also operates upstream as a manufacturer – i.e. is vertically integrated. The VABEO will extend this principle to where that party operates upstream as a wholesaler and/or an importer. The CMA is also considering whether to provide more guidance on information exchange within vertical integrated businesses.

Areas of no change to current position

Market share thresholds

The CMA proposes to retain the 30% market share threshold for the VABEO to apply, meaning that only agreements between parties with 30% market shares or less, in their respective markets, will be able to benefit from automatic exemption.

Resale price maintenance

The CMA considers that resale price maintenance (RPM) should remain a ‘hardcore’ restriction of competition and will therefore constitute a serious infringement of competition law in most cases. This is consistent with a long line of UK RPM enforcement cases in recent years. The CMA intends to publish further clarifications as to when RPM could be exemptible.

Non-compete clauses

The CMA will retain the rule that non-compete restrictions on the buyer – i.e. exclusive purchasing obligations which prevent the distributor from selling competing products – in excess of five years, or for an indefinite period, are excluded from the VABEO.  However, longer periods of restriction may be individually exemptible but would need to be individually assessed on a case by case basis to determine if they are lawful and enforceable.

Agency

The CMA proposes that the tests to determine when a reseller qualifies as an ‘agent’, in which case competition law would not apply to its agreement with the supplier, rather than an ‘independent distributor’, to which competition law would apply, should be retained, but further guidance from the CMA regarding online platforms, fulfilment contracts and dual-role agents is expected to be given.

Sustainability

The VABEO will not contain any specific environmental sustainability exemptions, but further guidance, in particular in relation to its use as a criterion for selective distribution, will be considered by the CMA.

Next steps and guidance on the way

The CMA’s consultation is a significant statement of intent from the CMA as to the future direction of how the competition rules on vertical agreements will be enforced going forward. Suppliers and brand owners will welcome the retention of a block exemption under UK competition law in the interests of legal certainty. However, the possibility of some divergence from EU rules could make the application of the rules across the UK and EU more complex.

The CMA has expressly recognised that divergence could lead to increased cost to business and will include a one-year transitional period for businesses to adapt their practices as necessary. In order to understand the full picture, the European Commission’s proposals for amending the VABER are also awaited. Some of the changes proposed by the CMA consultation may also be reflected in the EU’s reform proposals.

The CMA’s consultation is open to feedback until 22 July 2021.

The CMA has confirmed that it intends to publish guidance to accompany the VABEO, to replace the existing EU VABER guidance, and will consult on this later in the year or early next year, with both the VABEO and the VABEO guidance then being formally adopted by 31 May 2022.