Changes to the vertical agreements block exemption in the UK
On 31st May 2022, the Retained Vertical Agreements Block Exemption Regulation (‘VABER’) expired and was replaced with the Vertical Agreements Block Exemption Order (‘VABEO’). To accompany the VABEO, the Competition and Markets Authority (‘CMA’) has issued new guidance on the application of UK competition law to vertical agreements.
The VABEO introduces some important changes to the competition law regime applicable to vertical agreements in the UK and it is important that businesses acquaint themselves with the new rules.
In the UK, Chapter I of the Competition Act 1998 (‘CA’) prohibits agreements between legal entities which have as their object or effect the restriction, distortion or prevention of competition within the UK and which may affect trade in the UK. The wording of Chapter I mirrors the equivalent prohibition that applies in the EU, save that the EU legislation refers to competition and trade in the EU rather than the UK.
Section 9 of the CA sets out an exemption to the Chapter I prohibition in relation to agreements which contribute to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefits. It has long been accepted that vertical agreements (i.e. agreements between legal entities which are active at different levels of the supply chain) can benefit from the section 9 CA exemption.
The EU VABER (on which the UK VABER was based) was introduced to give businesses entering into vertical agreements certainty as to the circumstances in which the EU equivalent of the section 9 exemption would apply. It did this by providing automatic exemption (known as a ‘safe harbour’) to vertical agreements which complied with a certain set of criteria. Essentially, the criteria were that:
- the parties each have a market share below 30%;
- the buyer does not compete with the supplier at the manufacturing or production level; and
- the agreement does not contain any ‘hardcore restrictions’ (such as minimum resale prices).
What are the key changes introduced by the VABEO?
Unlike the VABER, the VABEO will apply where there is competition between the supplier and buyer at the wholesale, import or retail level, not just at the retail level. In other words, the VABEO will apply to a wider range of dual distribution scenarios than the VABER.
However, there are restrictions on the application of the VABEO in a dual distribution scenario if the arrangement involves the exchange of information.
Territorial and customer restrictions
The starting point under the VABEO (as under the VABER) is that the supplier must permit the buyer to decide to whom and in which territories it wishes to sell the contract goods or services. Restrictions on this freedom will prevent the VABEO from applying.
However, there are 4 exceptions:
- The restriction of active sales to an exclusive territory or customer group;
- The restriction of active or passive sales by wholesalers to end users;
- The restriction within a selective distribution system of active and passive sales to unauthorised distributors; and
- The restriction of an authorised buyer of components by a supplier from reselling them to competitors who would use them to manufacture the same type of goods as those produced by the supplier.
The VABEO adds to those exceptions by permitting suppliers to appoint more than one exclusive distributor to the same territory or customer group (known as ‘shared exclusivity’). It also permits exclusive and selective distribution networks to be combined in the same or different geographical areas.
Use of internet as a sales channel
Under the VABEO, restrictions which prevent the effective use of the internet as a sales channel are deemed hardcore restrictions (meaning that the VABEO will not apply). This would include indirect restrictions such as a prohibition on a distributor using a supplier trademark or brand name on its website.
However, the VABEO does permit suppliers to give instructions to their distributors on how their products should be sold, so long as the requirements do not have as their object the prevention of the use of the internet as an effective sales channel.
Also, the guidance to the VABEO confirms that a direct or indirect ban on sales through online marketplaces is covered by the block exemption.
Requiring a distributor to pay a different price for products which are to be resold online to those which will be sold offline was a hardcore restriction under VABER. This is not the case under the VABEO. The change takes into account the challenges faced by ‘bricks and mortar’ retailers over the past decade and the fact that maintaining a physical store requires more investment than setting up an online-only presence.
Active and passive sales
The VABEO and the related guidance provide additional clarification relating to the difference between active and passive sales. In particular, there is clarification that general advertising that reaches customers in territories reserved to other distributors and which is a reasonable way to reach customers outside those reserved territories, will constitute passive selling rather than active selling.
Wide retail parity obligations
Wide retail parity obligations (or obligations which have the same effect) are classed as hardcore restrictions under VABEO.
The VABEO defines a “wide retail parity obligation” as a restriction which ensures that the prices (or other terms and conditions) at which a supplier’s goods or services are offered to end users on a sales channel (whether an online or offline sales channel) are no worse than those offered by the supplier on another sales channel. Business to business platforms are outside the scope of the hardcore restriction.
“Narrow” retail parity obligations, on the other hand, are covered by the block exemption. A narrow retail parity obligation is one which applies to the supplier’s direct sales channels only (e.g. the supplier’s website).
The VABEO applies to vertical agreements entered into after 31st May 2022.
However, there is a one year transition period in respect of existing vertical agreements, provided these fell within the VABER safe harbour.
WHAT ABOUT THE EU?
The ‘old’ EU vertical agreements block exemption expired at the same time and was replaced by a new vertical agreements block exemption. The new EU VABER differs from the VABEO in a number of respects, so businesses operating in both the UK and EU will now have to become familiar with two different sets of rules. Like the VABEO, the new EU VABER benefits from a transitional period.
If you would like more information about the above changes, please contact a member of our Commercial Team.