The draft UK Vertical Agreements Block Exemption Order has been published: Have your say

• United Kingdom

• Competition, EU and Trade
• Consumer
• Retail

24-02-2022

On 21 February 2022, the Department for Business, Energy & Industrial Strategy (“BEIS”) published its long awaited draft Vertical Agreements Block Exemption Order (“draft VABEO”).

The draft VABEO will replace retained EU law – the retained Vertical Agreements Block Exemption Regulation (“retained VABER”) -  when it expires on 31 May 2022.

This follows on from the Competition and Markets Authority’s (“CMA”) recommendation to BEIS in November 2021 that the retained VABER should be replaced with a UK specific Order. BEIS is running a technical consultation on the draft VABEO, which will be open until 16 March 2022.

Read our previous briefings on the proposed changes to rules concerning distribution agreements in the UK and EU:

•  The CMA’s recommendation for a UK-specific Vertical Agreements Block Exemption shows signs of divergence from the EU regime
•  What should a UK- specific Vertical Agreements Block Exemption contain? Have your say
•  New EU rules on the horizon for distribution agreements: Have your say

Background

Under competition law, agreements which prevent, restrict or distort competition are prohibited.  Agreements may be exempt from the prohibition where they produce benefits that outweigh any restrictive effects on competition.  A “block exemption” provides an exemption from the prohibition for a whole category of agreements, provided the conditions set out in the block exemption are met.

“Vertical agreements” are agreements between parties at different levels of the supply chain, which relate to the conditions under which the parties can purchase, sell or resell goods and services.  These types of agreements, such as distribution or franchise agreements, are ubiquitous across the UK economy and represent a fundamental route for businesses to reach consumers.

Vertical agreements in the UK are currently subject to the retained VABER, which reflects the EU Vertical Agreements Block Exemption Regulation. The retained VABER provides a ‘safe harbour’ from the prohibition for vertical agreements where certain conditions are met – in particular that the parties’ market shares do not exceed 30% and the agreement contains no “hardcore” restrictions of competition.

As the retained VABER will expire on 31 May 2022, the CMA ran a consultation on whether a UK-specific regime on vertical agreements is required, which resulted in its recommendation to BEIS in November 2021.  The European Commission has also been consulting on the EU Vertical Agreements Block Exemption Regulation, which also expires on 31 May 2022.

BEIS has now published its draft VABEO for technical consultation. The stated purpose of the draft VABEO is to ensure that businesses are not prevented or disincentivised from entering into agreements that the CMA considers to be beneficial and not anticompetitive.  

How is the draft VABEO different from the Retained VABER?

In accordance with the CMA’s recommendation to BEIS, the draft VABEO in large part preserves the existing approach to vertical agreements under the retained VABER. However, there are a few key changes:

• “Wide retail parity obligations” to be treated as hardcore restrictions – Wide retail parity obligations typically specify that a product or service may not be offered on better terms on any other sales channels, including both the supplier’s own website and any other, indirect, channels, such as other distributors or online platforms.

These clauses are permitted under the retained VABER, but the CMA has previously taken a strict approach towards them, by fining ComparetheMarket £17 million for the use of wide parity clauses. In line with the CMA’s decisional practice and its recommendation to BEIS, the draft VABEO will treat wide retail parity obligations as hardcore restrictions, meaning that agreements which contain such a restriction will not be block exempted. “Narrow” parity obligations (those which specify only that better terms will not be offered on the supplier’s own website) and wide or narrow parity obligations that apply to business-to-business markets will, however, remain block exempted.

• Creating a level-playing field for brick-and-mortar retailers – Online distribution channels are effective in reaching a greater number and variety of customers than traditional distribution channels, and the retained VABER provided preferential treatment for online sales.

However, recognising the exponential growth of online sales and the increased challenges faced by brick-and-mortar retailers, the draft VABEO seeks to level the playing field between online and high street sales:

• dual pricing will no longer be regarded as a hardcore restriction, so suppliers will be able to set a higher price for products intended to be resold online than for products intended to be sold offline by the same distributor;
• the equivalence principle: imposing different criteria for online and offline sales in the context of a selective distribution system will no longer be a hardcore restriction.

• Creating more flexible distribution systems – The draft VABEO allows businesses to combine distribution systems, to use multiple retailers in one geographical area whilst having an exclusive arrangement with another retailer in another area. There will be a new list of exceptions to permit the following:
  • combining exclusive and selective distribution in the same or different geographical areas;
  • ‘shared exclusivity’ in a geographical area or for a customer group by allowing its allocation to more than one distributor; and
  • protecting members of selective distribution systems from sales from outside their geographical area to unauthorised distributors inside that geographical area.

What is the difference between the draft VABEO and the proposed changes to EU regime?

 The draft VABEO shows some signs of divergence from the proposed regime that will replace the EU Verticals Agreements Block Exemption. The main points to note are the following:

• Rules on dual distribution may be more permissive in the UK – “Dual distribution” covers situations where a supplier not only sells its goods or services through distributors but also directly sells to end customers itself, e.g. on its website. This model has become increasingly common for businesses, in particular as online sales are becoming more prevalent. While agreements between competitors are generally not covered by the block exemption, both the current EU regime and the retained VABER exceptionally applies to dual distribution by manufacturers where certain conditions are met.

In line with the CMA’s recommendation, the draft VABEO extends the dual distribution exception  by applying it equally to manufacturers, wholesalers and importers.

By contrast, the European Commission’s approach appears at this stage to be stricter.  They propose introducing a lower market threshold (10%) for dual distribution agreements to be entirely block exempted.  UK businesses engaging in dual distribution in the EU — or with effects in the EU — will need to carefully conduct business moving forward.

A point which remains unaddressed in the draft VABEO is the treatment of information exchanges in the context of dual distribution. This is a particularly critical issue for businesses and more guidance would be welcome. The BEIS Explanatory Memorandum accompanying the draft VABEO notes that the CMA will publish further guidance on the draft VABEO “shortly” and it is expected that information exchanges will be addressed in this guidance. The European Commission has recently run its own consultation on a specific draft section in relation to information exchanges in dual distribution.

• … while wide retail parity obligations are treated more strictly in the UK - In the draft EU verticals block exemption, wide retail parity clauses are treated as “excluded restrictions” which will mean that the relevant clauses will not be block exempted, but the agreement containing them may remain valid as a whole, depending on its content. By contrast, BEIS has taken a stricter approach, treating wide retail parity clauses as hardcore restrictions. This is a key difference in approach, as a hardcore restriction will have the effect of automatically removing the entire agreement from the scope of the block exemption.  

Next steps and how Eversheds Sutherland can help

The draft VABEO reflects the CMA’s recommendations to BEIS, and is positive news for businesses that have relied on the safe harbour offered by the current rules for their supply and distribution agreements over the past 10 years since the current regime came into effect.

The proposed changes in the draft VABEO reflect significant market changes including the exponential growth of online sales and increased direct-to-customer sales over that time, whilst not departing wholesale from the existing, familiar rules.

The draft VABEO also signals the departure of the UK from the Single Market imperative, which had guided, and continues to guide, the drafting of the current EU regime and its draft revised version. The draft VABEO remains largely consistent with the EU approach, but does show some signs of divergence, recognising that the EU approach does not necessarily reflect the specific characteristics of the UK market any more. As a general observation, the UK Government appears to want to give itself a little more time to develop its approach, in particular by limiting the duration of the draft VABEO to six years, presumably with a view to possibly introducing more significant departures from the EU system at that time.

The CMA will publish and consult on further guidance to accompany the draft VABEO shortly. It is expected that this guidance will cover in particular agency, and information exchanges in the context of dual distribution.

Parties interested in replying to the technical consultation on the drafting of the draft VABEO can do so by 16 March 2022. We are preparing a response to the consultation and are happy to discuss any points of concern for your business, or support you in developing your own position and response to BEIS’ consultation.

For more guidance or information on vertical agreements and how this might impact your business, please get in touch: