The UK Competition and Markets Authority ("CMA") has published its recommendation to the Secretary of State to replace the EU Vertical Agreements Block Exemption Regulation ("VBER") with a new, UK-specific, Vertical Agreements Block Exemption Order ("VBEO"). The VBER is due to expire on 31 May 2022, and the EU is also looking at how it will replace it.
In this article, we examine the key differences between the recommended VBEO and the VBER and the potential areas of divergence between UK and EU competition law.
Background
'Vertical agreements' are agreements made between parties at different levels of the supply/distribution chain (for example, distribution agreements between manufacturers and retailers, or franchise agreements between franchisors and franchisees).
EU and UK competition law prohibit agreements between parties that prevent, restrict or distort competition, including vertical agreements. Having said that, there is a general acceptance that vertical agreements are less likely to harm competition than agreements between direct competitors (eg. between manufacturers, or between retailers). As a result, since 2010, the VBER has exempted vertical agreements from this prohibition where certain criteria are met.
The VBER is due to expire on 31 May 2022. The UK retained a tweaked version of the VBER post-Brexit, and this retained VBER expires on the same date. Earlier this year the CMA consulted on the necessity and contents of any replacement for the VBER (which we reported on here). The CMA has now reviewed the responses to its consultation and published its recommendation to the Secretary of State, calling for the introduction of the VBEO (an entirely UK-originated replacement to the VBER).
Key recommendations
Set out below are the most notable of the CMA's recommendations.
We have focused in particular on the types of contractual restrictions that the CMA proposes to treat as 'hardcore' under the VBEO. Hardcore restrictions are those that, by their nature, are inherently expected to restrict competition. The inclusion of a hardcore restriction in an agreement removes the benefit of the block exemption, potentially exposing the parties to competition law issues
Resale Price Maintenance
The CMA has recommended that 'resale price maintenance' ("RPM") provisions remain a hardcore restriction. RPM provisions are terms under which the upstream supplier dictates the minimum price at which the downstream re-seller/distributor can sell the contract goods/services.
The CMA has acknowledged, however, that further guidance is needed on whether there are any situations in which RPM provisions can in fact lead to efficiencies in the relevant market(s), and so should be permitted.
Territorial / Customer Restrictions
The CMA has proposed that restrictions on the territories and customers to which resellers/distributors can sell should continue to be treated as hardcore restrictions.
The CMA also suggested that the general exceptions to this rule (regarding exclusive and selective distribution networks) should also remain in place. However, the CMA also wishes to revise the scope of these exceptions, so as to permit:
- the combination of exclusive and selective distribution networks in the same or different territories;
- the allocation of 'shared' exclusivity for a particular territory or customer group (e.g. allowing the allocation of one territory to more than one 'exclusive' reseller/distributor); and
- greater protection for members of a selective distribution system from sales made outside of their territory to unauthorised resellers/distributors in their territory.
The CMA has also recommended that further clarity is given on the distinction between what are known as 'active' and 'passive' sales. Active sales are where a reseller/distributor deliberately targets a particular territory or customer. Bans on these types of sales can be permitted through the above exceptions. Restrictions on passive sales, on the other hand, where the customer approaches the reseller/distributor unsolicited, are always viewed as hardcore.
The CMA has explained that, in practice, this distinction is not always easy to apply – in particular when it comes to online sales. The CMA has therefore recommended that definitions of 'active' and 'passive' sales be included in the VBEO, with further guidance on their interpretation to be published separately (the CMA plans to consult with the market on these issues separately in due course).
Online sales
Under the VBER, any restrictions that are deemed to be restrictions on online sales are considered hardcore, even where they are indirect restrictions. The general principle is that imposing criteria for online sales that are not equivalent to those imposed on sales in physical stores (and would therefore indirectly restrict such online sales) is prohibited. Therefore, for example, dual pricing, whereby a supplier charges higher prices for goods intended to be sold online than those intended to be sold in physical stores, is currently viewed as a hardcore restriction.
In an important change in policy, the CMA has recommended that:
- dual pricing no longer be regarded as a hardcore restriction; and
- the equivalence principle no longer apply to selective distribution systems.
More generally, the CMA has also recommended that the role of online platforms should be clarified, so that it is clear that they should be treated as suppliers for the purposes of the VBEO.
Parity clauses
'Parity' clauses (restrictions on resellers/distributors offering better terms on some sales channels than others) are not covered by the list of hardcore restrictions in the VBER. However, 'wide' parity clauses that restrict the offering of better terms on any sales channel have been the subject of multiple investigations in recent years, and are now generally viewed as anti-competitive. 'Narrow' parity clauses (where the restriction only applies to the reseller's/distributor's own sales channel), by contrast, have faced less scrutiny.
In light of this, the CMA has recommended that wide parity clauses be treated as hardcore restrictions under the VBEO. Importantly, however, this will not apply in business-to-business markets. This differs from the draft position set out by the European Commission for their replacement to the VBER. The Commission has proposed that such clauses be categorised as 'excluded' restrictions (meaning that while these clauses themselves cannot benefit from the block exemption, their inclusion would not prevent the rest of an agreement from being exempted).
In addition, it is proposed that this hardcore restriction should apply to both online and offline distribution channels – a further difference in approach from the EU, who have proposed revising the VBER to include wide party clauses for online sales only.
Dual-distribution
The VBER does not apply to agreements between competitors. However, the VBER does include an exception for ‘dual distribution’ agreements (e.g. where the supplier is both a manufacturer and retailer and the other party a retailer that does not compete at the manufacturing level).
The CMA has recommended that the VBEO retain this exception, but that it be extended to capture dual distribution agreements between wholesalers and importers. This is another example of potential divergence from the EU, which has suggested introducing a new market share cap for businesses seeking to benefit from this exception (ie. narrowing its scope rather than widening it).
Non-compete clauses
The current VBER excludes from its scope any non-compete clauses that are indefinite or exceed five years. A non-compete obligation which is tacitly renewable beyond a period of five years is deemed to have been concluded for an indefinite duration for these purposes.
The CMA has recommended that this approach to non-compete clauses remain unchanged. This is another example of potential divergence with the European Commission, which has proposed to remove the strict approach to tacit renewal.
Sustainability guidance
The CMA has recommended that no amendments be made to provide more lenient treatment to agreements that seek to promote sustainability.
In the CMA's view, the way in which such agreements should be analysed raises questions of broader competition policy. The CMA has, however, indicated that it is open to providing further guidance to its treatment of sustainability issues in the context of vertical agreements.
Next steps
Although the retained VBER is due to expire in the UK on 31 May 2022, the CMA has recommended a transitional period of one year to allow businesses to adapt their practices. This means that for one year from the date the VBEO is introduced, agreements already in force on that date and which satisfy the conditions for an exemption under the VBER will not fall foul of competition law.
Across the channel, the European Commission is currently reviewing responses to its consultation on its proposed replacement for the VBER. Businesses that operate in both jurisdictions are therefore advised to continue to monitor developments, with any divergence liable to create both compliance risk but also potential opportunities when it comes to certain distribution channels.
More generally, despite the transitional period, businesses may wish to start factoring in the upcoming changes as contracts come up for renewal.