The Competition and Markets Authority (“CMA”) is consulting on its proposed recommendation to the Secretary of State for Business, Energy and Industrial Strategy to replace the retained Vertical Agreements Block Exemption Regulation (“retained VABER”) with a new UK Vertical Agreements Block Exemption Order (“VABEO”).
The retained VABER is the European Commission Regulation No 330/2010, which was incorporated into UK law when the UK left the EU. The retained VABER currently provides a safe harbour for a wide range of vertical agreements, subject to certain thresholds being met. It expires on 31 May 2022 and is under review for replacement by the European Commission. Following Brexit, businesses will not benefit from any replacement to the VABER at EU level in relation to their UK activities. The CMA has therefore consulted with businesses, industry associations and professional advisers to consider whether a UK-specific equivalent is required. Following this initial consultation process, the CMA recommends introducing a UK-specific equivalent VABEO from 1 June 2022.
Which parts of the retained VABER does the CMA plan to include in the VABEO?
The CMA received feedback that divergence from the EU regime may result in increased compliance costs for businesses in some instances. Accordingly, the CMA’s proposals would see the VABEO retain most of the provisions of the retained VABER. In particular:
- Like the retained VABER, the VABEO would block exempt agreements which do not contain hardcore restrictions, if the market shares of the parties to the agreement do not exceed 30% as well as to associations of retailers where no individual member’s turnover exceeds £44m. The CMA is consulting on whether the turnover threshold of £44 million is appropriate for the UK market, taking into account market developments, growth and inflation.
- Resale price maintenance (“RPM”) is likely to remain a hardcore restriction. A number of participants in the roundtables questioned the basis on which RPM is a hardcore restriction, especially in situations where the parties lack market power and there is adequate inter-brand competition. Nonetheless, the CMA has issued a number of infringement decisions concerning RPM in recent years, finding that RPM is a serious restriction of competition by object. In the absence of strong evidence that RPM can give rise to efficiencies outweighing serious harm to competition, the CMA proposes to retain RPM as a hardcore restriction in the VABEO.
- Restrictions on the territory into which or customers to whom buyer parties can sell are also likely to remain hardcore restrictions, but the CMA proposes to retain the exceptions in the retained VABER which permit restrictions on active sales in certain circumstances. Although the purpose of making territorial restrictions hardcore restrictions in the retained VABER may originally have intended (at least in part) to protect the EU’s single market strategy, the CMA believes there are compelling reasons that such restrictions should remain hardcore restrictions, particularly as it is not yet clear how distribution will need to adapt to reflect the Northern Ireland Protocol and its integration with the single market. The CMA proposes to maintain the exceptions in the retained VABER which permit restrictions of active sales in certain circumstances, but intends to add three further exceptions and define “active sales” and “passive sales” in the VABEO, as discussed further below.
- The CMA does not propose any changes to the list of non-exempted restrictions. In the retained VABER, non-compete obligations which are indefinite or exceed five years in duration, obligations causing the buyer not to manufacture, purchase, sell or resell goods or services post-termination, and obligations causing the members of a selective distribution system not to sell competing brands do not benefit from the block exemption and must be assessed on an individual basis for compliance with competition law. The CMA plans to retain all three exclusions, although it notes that any fixed time limit on non-compete obligations would be somewhat arbitrary.
What does the CMA propose to change?
The CMA proposes to reflect changes in distribution practices since the retained VABER first came into force in the VABEO:
- The CMA proposes that the VABEO will apply to dual distribution by wholesalers and importers. The retained VABER only applies to dual distribution arrangements (i.e. non-reciprocal vertical agreements between competitors active at different levels of the supply chain) if (i) the supplier is a manufacturer and distributor, but the buyer does not compete at the manufacturing level, or (ii) the supplier provides services at various levels of trade, but the buyer only provides goods or services at the retail level and does not compete with the supplier at the level of trade from which the buyer purchases the contract services. Currently, wholesalers and importers do not benefit from the dual-distribution exception, as they are considered to be buyer parties active downstream, rather than upstream suppliers in the way that manufacturers are. However, following feedback that dual distribution scenarios involving wholesalers and importers would not be materially different from dual distribution by a manufacturer, the CMA proposes to retain the current approach to dual-distribution (without reducing the market share threshold as some consultees had recommended) and also to extend this to dual distribution by wholesalers and importers.
- Three new exceptions which permit restrictions on active sales are likely to be added. The CMA plans to (i) allow suppliers to combine exclusive and selective distribution systems (which are defined types of distribution systems under EU and UK competition law) in the same or different territories, which is currently not permitted by the European Commission’s Vertical Guidelines; (ii) allow “shared” exclusivity of a single territory, so that the supplier can appoint more than one distributor in a single territory or to a particular customer group and prohibit other distributors from making active sales into that territory; and (iii) provide greater protection to members of selective distribution systems against sales from outside the territory to unauthorised distributors in the territory – although the precise nature of this exception is not clear from the CMA’s consultation document.
- Dual pricing and the requirement for overall equivalence may be removed from the list of hardcore restrictions. Dual pricing refers to a supplier’s ability to charge the same distributor a higher price for products intended to be resold online than for products intended to be sold offline, while the principle of equivalence requires suppliers to ensure that the selective distribution criteria they impose on online sales are equivalent to those on offline sales. When the European Commission published its Vertical Guidelines in 2010, e-commerce was considerably less developed and prohibitions on dual pricing and overall equivalence were necessary to protect online sales channels. The CMA now considers that case law provides sufficient safeguards against outright online sales bans and online distribution has become sufficiently established that it no longer requires these special protections.
- Wide parity clauses will be added as a hardcore restriction, so that they cannot be block exempted. The retained VABER is silent on parity clauses (also known as most favoured nation, or “MFN”, clauses), and competition authorities across the EU have taken different approaches to the enforcement of parity clauses. The CMA has consistently found that ‘wide’ parity clauses, requiring a supplier not to supply a product or service on better terms on any other channels (such as the supplier’s own website or a third party platform) may have the effect of restricting competition. The CMA plans to rebrand wide parity clauses to “indirect sales channel parity obligations” and treat them as a hardcore restriction under the VABEO. This will extend to measures that the CMA believes can have the same effects (for example, making position in rankings on a comparison website conditional on parity with indirect sales channels). ‘Narrow’ parity clauses (or “direct sales channel parity obligations”) will benefit from the VABEO safe harbour in principle, although the CMA cautions that it may investigate such provisions if their use replicates the effects of indirect sales channel parity obligations and may consider cancelling the benefit of the VABEO in such circumstances.
- The CMA’s ability to withdraw the block exemption may be wider than under the retained VABER. Under the retained VABER, the CMA can withdraw the benefit of the block exemption if parallel networks of similar vertical restraints cover more than 50% of a relevant market. This provision is likely to be retained (although the consultation is not clear on whether the 50% threshold will be amended). In addition, the CMA proposes to exercise its powers under section 6 of the Competition Act 1998 to enable the CMA to cancel the benefit of the VABEO if the CMA considers a particular agreement is not exempt from the Chapter I prohibition on anti-competitive agreements. The CMA envisages that this power would only be used in exceptional circumstances, following written notice to the parties and after considering any representations to the CMA. While the consultation is silent on the point, it is likely that any such cancellation would be prospective rather than retrospective, in line with the existing approach under the retained VABER. The CMA also proposes to add a provision specifying that the VABEO is subject to an obligation for parties seeking to rely on the VABEO to provide information to the CMA on request, to ensure that the CMA can assess whether the agreement satisfies the conditions for exemption. Failure to comply with an obligation imposed by the VABEO would also result in the withdrawal of the block exemption.
The CMA has also proposed a transitional period of one year, during which the Chapter I prohibition on anti-competitive agreements under the Competition Act 1998 will not apply to agreements which benefitted from exemption under the retained VABER but which do not meet the VABEO criteria, to enable businesses to review and amend their agreements.
Will the CMA issue accompanying guidance?
Yes. The CMA intends to consult on guidance separately, but anticipates that, in addition to providing general guidance on the specific provisions of the VABEO, the guidance will contain clarifications on several particular issues which raise frequent questions when businesses assess their vertical agreements for compliance with the VABEO:
- Agency agreements: Agency agreements fall outside the Chapter I prohibition on anti-competitive agreements if an agent and principal act as a single economic unit, so that the agent does not assume significant financial or commercial risk in respect of market-specific investments. A number of participants at the roundtables requested guidance on the extent to which agency principles apply to arrangements with online platforms and the application of the agency rules to ‘dual role’ agents acting as resellers and agents for the same supplier (which is also the subject of a European Commission working paper).
- Sustainability: Considerations relating to environmental sustainability are often unclear in their application to the competition law assessment of vertical agreements, in particular because sustainability outcomes can be difficult to quantify and are likely to give rise to out of market efficiencies, rather than within the relevant market. The CMA recognises the benefit of providing greater clarity in respect of sustainability objectives and the application of competition law. While the CMA considers that environmental benefits need to be considered in a broader context, as such issues are not specific to vertical agreements, it does plan to provide guidance on how sustainability issues may form part of the criteria for admission to a selective distribution system.
- Active and passive sales: As well as defining these terms in the VABEO, the CMA intends to provide guidance on the interpretation of ‘active’ and ‘passive’ sales in order to reflect market developments in the e-commerce sector since the European Commission published the Vertical Guidelines in 2010. Participants in the CMA’s roundtables suggested that the CMA’s guidelines should reflect recent case law, such as the European Court of Justice’s judgment in Coty and the European Commission’s decision in Guess, to improve legal certainty and avoid inconsistent treatment by different competition authorities.
Additionally, the CMA is considering whether to provide more guidance on the extent to which information exchange may benefit from block exemption in the context of dual distribution and the assessment of non-compete obligations in the context of franchise agreements.
How long will the VABEO be in force?
The CMA proposes that the VABEO should expire after six years. While this period is relatively short, the CMA considers it appropriate to review the market in light of factors such as the growth in online sales, the UK’s withdrawal from the EU, and the impact of the Covid-19 pandemic.
Businesses currently relying on the retained VABER for agreements affecting the UK market will benefit from a consistency of approach under the proposals. The CMA’s acknowledgement that too much divergence from EU law will result in an increased compliance burden is likely to be welcome, although the extent to which the VABEO will align with the European Commission’s replacement VABER remains to be seen, pending publication of the latter.
Interested parties have until 22 July to respond to the CMA’s consultation. The CMA will then prepare its final recommendation on the VABEO to the Secretary of State. A separate consultation on the proposed guidance will follow later this year or in early 2022.