The EU Vertical Agreements Block Exemption Regulation (VABER), which was retained in UK law following the end of the Brexit transition period, will expire on 31 May 2022, following which it may either lapse, be renewed or (most likely) revised.
The VABER is currently being reviewed by the European Commission. In parallel with that consultation, the CMA has launched a consultation regarding its recommendations to replace VABER in the UK with a UK Vertical Agreements Block Exemption Order (UK VABEO), which closed in July 2021. The CMA issued its Final Recommendation on 3 October 2021 which largely mirrored its original consultation document.
Given the fact most businesses will be a party to a vertical agreement, it is important to understand the proposed changes to the law, as you are likely to be affected.
What are vertical agreements?
Vertical agreements are agreements for the sale and purchase of goods or services between two or more businesses which operate, for the purposes of the agreement, at different levels of the supply chain (for example, distribution agreements between a manufacturer and distributor).
CMA recommendations
It is likely that the UK VABEO will be substantially similar to VABER, with the CMA considering it “not appropriate” to make large-scale and fundamental changes. The CMA thus recommends maintaining a significant number of VABER provisions, including:
- the market share thresholds for companies to benefit from the block exemption – i.e. that the block exemption would only apply where the market share of the supplier and the buyer each does not exceed 30% of the relevant market; and
- that non-compete obligations with an indefinite duration or exceeding five years should remain excluded, i.e. not benefiting from the block exemption (albeit not regarded as "hardcore" – where restrictions are regarded as hardcore, the entire agreement is considered void and unenforceable).
Resale price maintenance
Resale price maintenance (RPM) is a hardcore restriction under VABER. As is the case currently under VABER, this would mean that agreements that restrict the buyer’s ability to determine its sale price cannot benefit from the "safe harbour" offered by the retained VABER. However, the CMA states that it remains open to carefully and objectively considering any efficiency arguments to justify an RPM, although we expect it will prove challenging to successfully demonstrate such efficiencies in most cases.
Territorial and customer restrictions
Whilst restrictions of active sales to certain territories or customers in an exclusive distribution agreement can benefit from the VABER, restrictions of passive sales (i.e. unsolicited sales, such as most online sales) are generally regarded as hardcore restrictions. Although the CMA notes that the treatment of territorial/customer restrictions has been partly driven by the EU single market imperative, it considers such restrictions can prevent intra-brand competition and consumer choice – i.e. if distributors are restricted from selling to certain territories/customer groups, consumers will be restricted in the choice of sellers, leading to weakening competitive pressures; and the CMA wants to avoid inadvertently compromising the integrity of the UK internal market.
The CMA therefore recommends the position on these types of restrictions is largely transposed to the UK VABEO, with the distinction between active and passive sales also still being relevant. However, CMA recommends clarifying where the boundary between active and passive sales should be, particularly in the light of market developments such as the growth of online sales; and that CMA VABEO Guidance will explain in more detail how these terms should be interpreted in practice. Such Guidance will also hopefully shed more light on how the CMA might approach restrictions on active/passive sales in cross-border UK/EU agreements.
Interestingly, however, the CMA also recommends giving businesses more flexibility in designing distribution systems, proposing that exceptions to the hardcore restriction should be revised in the UK VABEO (and clarified in the CMA VABEO Guidance) to permit the following:
- the combination of exclusive and selective distribution in the same or different territories;
- "shared exclusivity" in a territory or for a customer group by allowing the allocation of a territory to more than one "exclusive" distributor; and
- the provision of greater protection for members of selective distribution systems against sales from outside the territory to unauthorised distributors inside that territory.
Online sales restrictions
Online sales restrictions are mostly treated as passive sales restrictions. However, in recognition of e.g. an evolving e-commerce landscape and increasing pressure on brick-and-mortar retailers, the CMA recommended that the following no longer will be regarded as hardcore restrictions:
- dual pricing – charging a distributor more for products that will be sold online than products that will be sold offline; and
- the imposition of criteria for online sales that are not overall equivalent to the criteria imposed on brick-and-mortar shops.
CMA also proposes to revisit the treatment of certain online sales as "passive sales" in Guidance to provide further clarity on situations where online sales should fall into the "active sales" category.
Parity obligations (sometimes referred to as "Most Favoured Nation", MFN, clauses)
To date, the CMA has generally considered that:
- restrictions by a supplier stipulating that prices of its goods in one sales channel are no worse than those offered on any indirect sales channel, e.g. online platforms or other intermediaries (so-called "wide MFNs") are more serious restrictions that normally infringe competition law; but
- restrictions by a supplier stipulating that prices of its goods in one sales channel are no worse than those offered on any of its direct sales channels (so-called "narrow MFNs") are less serious restrictions that more rarely infringe competition law.
In recognition of this and the current lack of detail on "MFNs" in the VABER, the CMA proposes that under the UK VABEO, it will be clarified that:
- "wide MFNs", which in the UK VABEO will be referred to as “indirect sales channel parity obligations”, will be regarded as a hardcore restriction, i.e. resulting in the entire agreement being void and unenforceable – this was not regulated by VABER and will be a new restriction under the UK VABEO; and
- "narrow MFNs", which in the UK VABEO will be referred to as “direct sales channel parity obligations”, would not be regarded as hardcore or excluded restrictions, i.e. including them to benefit from the block exemption – however, the CMA may still decide to investigate concerns relating to such obligations if their use replicates the effects of “indirect sales channel parity obligations”.
However, the "wide MFN" will only be regarded as "hardcore" if it is a wide retail parity obligation - i.e. B2B markets should not be within the scope of the hardcore restriction - but the hardcore restriction should apply to both online and offline intermediation services. In the CMA’s view, the overall competitive harm and direct effect on consumers from a "wide MFN" is less clear in B2B markets and will depend on the complexity of the vertical supply chain and the strength of competition downstream.
Agency and environmental sustainability
Agency and environmental sustainability were not addressed fully in the CMA’s consultation but the CMA proposed addressing the issues in the UK VABEO Guidance, which is expected to be consulted on in early 2022.
Dual distribution
CMA recommends that the UK VABEO should include an exception for dual distribution in the same form as in the retained VABER, but which also applies to dual distribution by wholesalers and by importers.
As regards the period of validity, the CMA noted the fast evolution of certain markets and proposed the UK VABEO should be valid for an initial period of six years and would then be reviewed. MA also proposes that the UK VABEO should provide for a transitional period of one year from the date on which the UK VABEO comes into effect. This means agreements that meet the current VABER but not the UK VABEO would still be regarded as exempt for that additional year.
If you have any questions in relation to the above, or related competition law issues please do not hesitate to get in touch.
Gustaf Duhs