On 3 November, the UK’s Competition and Markets Authority (“CMA”) issued a recommendation to the Secretary of State for Business, Energy and Industrial Strategy to replace the EU Vertical Agreements Block Exemption Regulation or ” VABER” with a UK Vertical Agreements Block Exemption Order (“UK Order”) when the VABER expires on 31 May 2022. The VABER (which provides a safe harbour from the prohibition against anti-competitive agreements for vertical agreements that meet the applicable requirements) formed part of retained EU law following Brexit, but its upcoming expiry triggers the need for a UK Order to be issued in its place.
The CMA’s recommendations follow a four month public consultation process, the result of which is not materially different to the provisional recommendation issued by the CMA in June 2021 (which is discussed in more detail here):
- The CMA has recommended the UK Order lasts six years. A transitional period of one year will mean the Chapter I prohibition on anti-competitive agreements under the Competition Act 1998 will not apply to agreements which benefitted from exemption under the VABER.
- The CMA proposes that resale price maintenance and territorial restrictions will remain hardcore restrictions, but with some additional flexibility in the latter category. In line with its provisional recommendation, the CMA has recommended that suppliers should be able to: (i) combine exclusive and selective distribution in the same or different territories; (ii) allocate a territory to more than one so-called exclusive distributor (“shared exclusivity”); and (iii) impose measures to provide greater protection for members of selective distribution systems against sales from outside the territory to unauthorised distributors inside that same territory.
- Dual pricing and the requirement for overall equivalence are recommended for removal from the list of hardcore restrictions. These restrictions had supported the growth of online sales since the introduction of the VABER in 2010. In view of the “exponential growth” of online sales and the retention of safeguards such as the prohibition on outright online sales bans, the CMA considers that online distributors no longer require special protections from a competition perspective.
- Wide retail parity clauses will be added to the list of hardcore restrictions. “Wide” retail parity clauses specify that a product or service may not be offered on better terms on any other channel (e.g., the supplier’s own website or other intermediaries, such as online platforms). “Narrow” retail parity obligations — i.e. where the supplier agrees not to offer better terms on its direct sales channel, without setting out conditions for sales on other channels — will remain block exempted, but the benefit of the UK Order may be withdrawn should their use replicate the effect of a wide retail parity clause. Importantly, the CMA has clarified in its recommendation that only retail parity obligations will be a hardcore restriction – business to business markets are not in scope – and that notwithstanding its historic focus on enforcement on online platforms, the hardcore restriction should also apply to offline intermediation services. The CMA has also dropped its original proposal to rename such clauses “direct and indirect sales channel parity obligations”.
- The CMA does not propose to change any “excluded” restrictions. Where an agreement contains an “excluded” restriction, that individual provision will not benefit from the safe harbour, but the remainder of the agreement is likely to remain enforceable. This means that non-compete restrictions that last longer than 5 years or are indefinite remain “excluded” — i.e. these obligations need to be individually assessed for compliance with competition law. This diverges from the European Commission’s proposals to block exempt longer non-compete obligations if the buyer party can effectively renegotiate or terminate the agreement with a reasonable notice period and at a reasonable cost.
- The CMA recommends extending the UK Order to suppliers that are wholesalers and to independent importers active in the downstream market. It also recommends extending the UK Order to associations of undertakings and its members where its members are retailers that sell goods to final customers and no individual member of the association has a total annual turnover exceeding £44 million.
- Withdrawal: The CMA proposes a wide ability to withdraw the benefit of the block exemption in cases where it decides that a particular agreement does not meet individual exemption requirements.
The CMA’s recommendation is broadly in line with accepted approaches to vertical agreements under EU law. The UK Order also appears unlikely to depart significantly from the new EU Vertical Block Exemption Regulation, which will replace the current VABER in the EU from 1 June 2022. This should help to minimise compliance costs for businesses active in both territories. However, the proposed duration of the UK Order is only half that of the proposed new VABER, which leaves the door open for the CMA to reform the law in the not-too-distant future, to reflect relevant market developments.
However, there remains a lack of clarity in some key areas. Notably, the CMA has not sought to clarify the position as regards the enforceability of territorial and customer restrictions between the EU and the UK. Rather, the CMA restates that UK competition law only applies to the extent that such restrictions affect trade within the UK and are, or are intended to be, implemented in the UK. This leaves the CMA wide discretion as to what it considers to “affect trade within the UK”.
The CMA proposes to provide further clarity on other areas in guidance to accompany the new UK Order. Consultation on the guidance is expected to begin later this year or in early 2022 and will include:
- Clarification on the interpretation of active and passive sales, to take into account developments in e-commerce;
- Examples of when the CMA may consider resale price maintenance to result in efficiencies (and so potentially benefit from an individual exemption from the Chapter I prohibition);
- Guidance on various issues relating to agency agreements, to help businesses assess whether they have a genuine agency falling outside the scope of the Chapter I prohibition;
- Further guidance on environmental sustainability issues in the context of vertical agreements, relating to the criteria for admission to selective distribution systems in line with the CMA’s broader policy work on how competition and consumer regimes can better support the UK’s net zero and environmental sustainability goals; and
- Clarification on how the CMA is likely to use its power to withdraw the benefit of the block exemption in cases where it decides that a particular agreement does not meet individual exemption requirements. The CMA has already confirmed that this withdrawal right will only be used in exceptional circumstances. However, given the proposed ability to withdraw the block exemption appears to be wider than under the VABER, such guidance will be important to ensure that the UK Order provides sufficient legal certainty to businesses.