UK CMA publishes draft guidance on vertical agreements

• United Kingdom

• Competition, EU and Trade

05-05-2022

On 31 March 2022, the UK Competition and Markets Authority (“CMA”) launched a consultation on its new draft guidance which will accompany the new Vertical Agreements Block Exemption Order (“draft VABEO” and “draft CMA Guidance” respectively).

This follows on from the publication by the Department for Business, Energy & Industrial Strategy (“BEIS”) of the draft VABEO, which reflects the CMA’s final recommendation to BEIS made in November 2021. The draft VABEO is intended to replace a piece of retained EU legislation, the retained Vertical Agreements Block Exemption Regulation (“retained VABER”), when it expires on 31 May 2022. Similarly, the draft CMA Guidance will replace the EU Guidelines on Vertical Restraints (2010) and corresponding national guidance.

This legislation and guidance is applicable to “vertical agreements”, i.e. agreements between parties at different levels of the supply chain, such as distribution agreements as so is of central importance for a large part of UK economy, as these kinds of agreement represent an integral part of businesses’ routes to market.

Read our previous briefings on the background to these proposed changes to the 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
• The draft UK Vertical Agreements Block Exemption Order has been published: Have your say

What are the key issues in the draft CMA Guidance?

To be or not to be (an agent)?

Agency agreements cover the situation where an agent negotiates and/or concludes contracts on behalf of a principal. The extent to which agency agreements are caught by the prohibition on anti-competitive agreements has long been a complex one. The Commission’s approach, reflected in its Guidelines on Vertical Restraints (2010), and retained in its draft new guidelines, and in the draft CMA Guidance, is to focus on the “risks” the agent takes on.  Where the agent bears no, or only insignificant risk, the agent is considered to no longer be an independent operator and the agency agreement will fall outside the scope of Article 101 and the Chapter I Prohibition.

The draft CMA Guidance retains the position that in order for an agent to be considered an agent for the purposes of the application of competition law, the agent must bear no, or only insignificant, risks in relation to the following three types of risk:

• contract-specific risks which are directly related to the contracts concluded and/or negotiated by the agent on behalf of the principal;

• risks related to market-specific investments, i.e. investments specifically required for the type of activity for which the agent has been appointed and which are necessary to enable the agent to conclude and/or negotiate the particular type of contract; and

• risks related to other activities undertaken on the same product market by the agent, to the extent that the principal requires these activities to be taken as part of the agency relationship by the agent at its own risk, and not on behalf of the principal.

Like the draft EU guidelines, the draft CMA Guidance provides some examples of features of agency agreements.

It is important to note that it is still possible to enter into an agency agreement (i.e. an agreement under which the agent sells on behalf of the principal) which does not meet the requirements set out above because the agent bears some risk.  These agreements have often been referred to as “non-genuine” agency agreements.  In such cases, the principal may set the sale price of the goods, but the agent must be free to share its commission with the customer, in order to compete on price with other agents.  This position is retained in the draft CMA Guidance.

However, overall, the section on “agency agreements” in the draft CMA Guidance would benefit from greater clarity as to whether it is intended to apply only to “genuine” agency agreements (i.e. those where the agent bears no or only insignificant risks) or also includes “non-genuine” agency agreements.

Greater clarity on this point would be helpful, as the new draft CMA Guidance also provides some much anticipated new content on how the agency concept will apply to so-called “dual role” agents: where independent distributors of some products of a supplier also act as agents for other products of that supplier.  This has become increasingly common.  The draft CMA Guidance again mirrors the Commission on this point and states that such dual role agents may be considered as agents for other products of the same supplier, provided that the activities and risks covered by the agency agreement can be effectively delineated.  This should be clarified to make clear that such delineation is only necessary if the dual role agent is a “genuine” agent, so that the products for which it bears risk and those for which it bears no risk are clearly separated.  If the dual role agent is “non-genuine” because it bears some risk in respect of the agency products, delineation of the products should not be necessary, as it will also be bearing risk in respect of the distributed products.

The draft CMA Guidance also includes new content on online intermediation services: there is explicit confirmation that, in principle, suppliers of online intermediation services will not qualify as agents.  This mirrors the approach taken by the Commission. This is because such online intermediation service providers (i.e. platforms) generally act as independent economic operators, serving multiple sellers, and often benefit from strong network effects and significant imbalance in size and bargaining power compared to their counterparties.   

Assessing information exchange in dual distribution

“Dual distribution” covers situations where a supplier sells its goods or services both through distributors and directly to end customers, e.g. on its website or its own retail outlets, in competition with its distributors. While agreements between competitors are generally not covered by the block exemption, the retained VABER exceptionally applies to dual distribution by manufacturers where certain conditions are met.

The draft VABEO extends this exception to wholesalers and importers. However, the draft VABEO itself does not address the question of information exchanges in dual distribution scenarios. Normally, the exchange of competition sensitive information between competitors would cause competition concerns, and the issue of how to deal with this is a dual distribution relationship has  been one of the hot topics in both the Commission’s and the CMA’s consultations. 

The draft CMA Guidance clarifies that the benefit of the block exemption extends to information exchange in dual distribution relationships only to the extent that:

• it does not restrict competition by object, i.e. it does not by its very nature have the potential to restrict competition; and

• it is genuinely vertical, i.e. required to implement the vertical agreement. This will depend on the particular distribution model (e.g. franchise, exclusive distribution).

The draft CMA Guidance provides a non-exhaustive “white” list of information that can generally be considered unlikely to constitute a restriction by object and are likely to be genuinely vertical (e.g. technical information on the contract products, information on stocks, inventory and production, customer feedback, marketing, performance, prices at which the contract products are sold by the supplier to the buyer). The draft CMA guidance also includes a “black” list of information which is generally likely to either restrict competition by object or would be unlikely to be genuinely vertical (e.g. information on actual future prices at which the supplier or buyer will sell the contract products downstream, customer-specific sales data). Both lists are almost identical to the corresponding lists provided by the Commission in its draft section in relation to information exchanges in dual distribution.

Further clarity on RPM efficiencies?

Resale Price Maintenance is a hardcore restriction of competition and any agreement that contains an obligation on the buyer to adhere to a minimum or fixed price is automatically out of the “safe harbour” of the block exemption. Despite a perception that RPM may be able to generate efficiencies, the strictness of the current regime and the risk of serious fines is a discouraging factor for businesses that may want to engage in this kind of pricing model in the short term, potentially for the benefit of consumers. The draft CMA Guidance now provides some additional guidance.

• The fixing of the resale price in a fulfilment contract (i.e. a vertical agreement between a supplier and a buyer that executes a prior agreement between the supplier and a specific end user) does not constitute RPM where the end user has waived its right to choose the undertaking that should execute the agreement;

• When a manufacturer introduces a new product, RPM may be an efficient means to induce distributors to consider the manufacturer’s interest to promote this product and to increase sales efforts. Generally, this requires that less restrictive means do not exist; suppliers will need to demonstrate that it is not feasible in practice to impose on all buyers effective promotion requirements by contract, in order to justify fixed or minimum retail prices for a limited period of time, that does not go beyond what is strictly necessary in order to facilitate the introduction of a new product.

• Fixed resale prices may be necessary to organise a coordinated short-term low-price campaign (of two to six weeks in most cases).

It is noteworthy that the examples provided by the CMA are broadly similar to those in the Commission’s draft guidelines; with the exception of RPM’s role in incentivising additional pre-sales services, which is missing from the CMA’s draft guidance. It remains to be seen if this is intentional. Whilst the clarity on fulfilment contracts is a welcome practical step, it is not clear if draft guidance goes far enough to give businesses the comfort they may need to engage in short term RPM.

Territorial and customer restrictions: Brexit does not necessarily mean radically new rules

The key thing to note is that the draft CMA Guidance makes it clear that the VABEO will not apply to territorial/customer restrictions in agreements implemented, or intended to be implemented, outside the UK. This should mean that an agreement with European distributors that they will not export to the UK would not be caught by the UK VABEO.  This policy option will definitely create some interesting dynamics in relation to vertical agreements implemented both within and outside the UK.

That aside, however, the new rules do not depart from the current EU-based regime. The general rule remains that a distributor should be allowed to respond to unsolicited requests from individual customers (‘passive’ sales), although a supplier can impose restrictions on the retailer approaching individual customers actively (‘active’ sales).

• Selling online: In this context, bans on online sales, or restrictions that de facto ban or limit online sales to the extent that they prevent buyers and their customers from effectively using the internet to sell their products, are generally considered as having the object to prevent the buyers or their customers from effectively using the internet to sell their goods or services online. This could include e.g. automatically re-routing customers to the manufacturer's or other distributors' websites, or requiring the distributor to seek the supplier’s prior authorisation for selling online.

By contrast, other types of restrictions may in principle be acceptable, e.g.:

• bans on sales on online marketplaces (confirming the EU position on this point);
• requiring the retailer to operate one or more brick and mortar shops or showrooms or sell at least a certain absolute amount (in value or volume, but not in proportion of its total sales) of the contract goods or services offline;
• “dual pricing”, i.e. requiring the retailer to pay a different price for products intended to be resold online than for products intended to be resold offline, in so far as it has as its object to incentivise or reward the appropriate level of investments made and the price difference is related to the differences in the costs incurred in each channel.

• Active or passive sales? Closely following the Commission’s approach, the draft CMA Guidance includes a list of examples of active and passive sales. This is intended to help businesses determine what restrictions they can impose within their distribution networks. Active sales includes actively targeting customers by for instance calls, e-mails, letters, visits or other direct means of communication; targeted advertising (e.g. by means of price comparison tools or advertising on search engines); offering on a website language options different to the ones commonly used in the geographical area in which the distributor is established. By contrast, passive sales are generally in response to unsolicited requests from individual customers; this also includes general advertising which would reasonably reach customers outside the allocated geographical areas or customer groups (e.g. sponsored content on a website of a national newspaper), or setting up a website or online shop.

“Wide retail parity obligations” 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. The draft VABEO treats such restrictions as hardcore, in accordance with the CMA’s previous decisional practice.

The draft CMA Guidance makes it clear that the hardcore treatment will apply both to online and offline sales channels, e.g. price comparison websites, online marketplaces or traditional brokers. The CMA’s main concern is that wide retail parity obligations restrict competition between horizontal competitors, both at supplier and intermediary level, by reducing their incentives to compete on price, to innovate, and to enter markets or expand.   This is a key point of difference with the Commission’s approach, where wide retail parity obligations are treated as “excluded restrictions” and including such a clause in an agreement will not cause the benefit of the VABER to be lost for the whole agreement.

Next steps

The draft CMA Guidance does provide some welcome clarification to businesses, in particular, on issues such as information exchange in dual distribution and agency. Largely, it does not depart from the Commission’s draft guidelines, except in some very limited ways.  

With the expiry of the retained VABER fast-approaching, the CMA will have a short-window to consider the responses to its consultation and make any final amendments to its Guidance.

For more information on vertical agreements or any of the above, please get in touch with your usual Eversheds Sutherland contact or the contacts the below: