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The CMA’s recommendation for a UK-specific Vertical Agreements Block Exemption shows signs of divergence from the EU regime

  • United Kingdom
  • Competition, EU and Trade
  • Consumer
  • Food and drink
  • Retail

09-11-2021

 

On 3 November 2021, the UK Competition and Markets Authority (“CMA”) published its long-awaited recommendation to the Secretary of State for Business, Energy and Industrial Strategy on whether the retained Vertical Agreements Block Exemption Regulation (“retained VABER”) should be replaced, when it expires on 31 May 2022, with a UK-specific Vertical Agreements Block Exemption Order (“VABEO”). The retained VABER is one of the ‘retained exemptions’ created by a combination of the operation of the European Union (Withdrawal) Act 2018 and the Competition (Amendment etc.) (EU Exit) Regulations 2019 (as amended by the Competition (Amendment etc.) (EU Exit) Regulations 2020). This follows the CMA’s consultation, which was launched in June this year. The CMA has recommended that the retained VABER should be replaced with a UK-specific VABEO, which does not make fundamental changes from the current regime, but does introduce some important amendments.

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

-       What should a UK-specific Vertical Agreements Block Exemption Regulation contain? Have your say

-       New EU rules on the horizon for distribution agreements: Have your say

Background

The retained VABER currently provides the framework for reviewing so-called “vertical” agreements (i.e. between parties at different levels of the supply chain, such as a distribution agreement) under UK competition law.  At the EU level, vertical agreements are subject to the EU Vertical Block Exemption Regulation (“VBER”), which was retained by the UK, when it left the EU.

However, given that the VBER/retained VABER will expire on 31 May 2022, both the UK and the European Commission (“Commission”) are currently reviewing this regulatory framework to ensure that it is still fit-for-purpose and reflects market developments, such as the growth of e-commerce or sustainability concerns. In July 2021, the Commission published drafts of its revised Vertical Block Exemption and Vertical Guidelines for stakeholder comments. In parallel, the CMA has been running its own consultation on the retained VABER, which has resulted in this recommendation.

What is the CMA’s approach on the key verticals themes?

The CMA’s recommendation is that the VABER be replaced with a UK-specific VABEO which will have a duration of six years.  This represents a much shorter duration for the new regime compared to the Commission’s proposal for a twelve-year duration of the revised VBER. A six-year duration will provide the UK legislature with more flexibility and the ability to adapt relatively faster to market developments.

As well as duration, the two keys points of difference in the CMA’s approach compared to the Commission are in the treatment of “dual distribution” and parity clauses.  These are summarised below, along with the other main issues addressed in the CMA’s consultation.

Dual distribution

A “dual distribution” situation arises where a supplier is engaged in direct sales to consumers, e.g. on its website, while also maintaining a network of distributors/retailers selling to consumers. This essentially means that the supplier operates in competition with its own distributors at the retail level. With the expansion of digital sales, dual distribution is becoming more prevalent. While agreements between competitors are generally not covered by the block exemption, the current VBER (exceptionally) applies to dual distribution by manufacturers where certain conditions are met.

The CMA’s recommendation is for the exception to also apply to dual distribution by wholesalers and importers. This is also the policy option put forward by the Commission in its draft revised VBER. However, contrary to the Commission’s stricter approach of proposing a lower market share threshold for dual distribution to be covered by the VBER, the CMA does not recommend limiting the scope of the exception. This is a welcome development for UK businesses, that will not have to undertake a strenuous market definition exercise to ensure their agreements fall within the scope of the VABEO. The CMA is also considering providing more guidance on information exchanges in the context of dual distribution; this is a point of particular concern for businesses and further guidance would be welcome.

Parity obligations

Parity obligations have been on the frontline of competition law enforcement in recent years. In line with its case law - for example, in November 2020, the CMA fined ComparetheMarket £17 million for breaching competition law through wide MFN clauses - the CMA recommends that wide retail parity obligations should be treated as a hardcore restriction, meaning that agreements which contain such a restriction will not be block exempted. The hardcore restriction should apply to both online and offline intermediation services. By contrast, narrow parity obligations and wide parity obligations that apply to business-to-business markets should remain block exempted. The CMA’s recommendation is different to the position adopted by the Commission, which is minded to treat wide parity clauses as excluded restrictions, meaning that they will need to be assessed on an individual basis.

Resale Price Maintenance (“RPM”)

The CMA recommends that RPM remain a hardcore restriction under the VABEO; in its view, the consultation has not provided sufficient evidence that any efficiencies arising from RPM are such that justify removing RPM from the category of hardcore restrictions. However, the CMA intends to clarify in guidance to be published (“CMA Verticals Guidance”) that it remains open to considering, carefully and objectively, any efficiency arguments made. 

Territorial and customer restrictions

The CMA notes that the treatment of territorial and customer restrictions under the VBER was historically driven, at least in part, by the EU Single Market imperative.  With this imperative no longer applicable to the UK post-Brexit, the CMA has considered whether territorial restrictions should continue to be treated as ‘hardcore’ restrictions of competition.  In the CMA’s view, the need to preserve intra-brand competition and consumer choice are significant factors which justify continuing to treat territorial restrictions as ‘hardcore’. In reaching this conclusion, the CMA has taken into account the size of the UK market as well as the implications of the Northern Ireland Protocol.

In a similar vein, the CMA considers that the distinction between active and passive sales is still fit-for-purpose. However, in light of the significant development of e-commerce, the boundary between the two will need to be re-drawn, and the CMA proposes to consult on updated guidance about the treatment of different online sales strategies as either passive or active selling in due course. It will be interesting to see whether the approach that will be taken by the CMA will be similar to the Commission’s approach.

Finally, the CMA is minded to provide more flexibility to UK businesses, by allowing the combination of exclusive and selective distribution in the same or different territories, ‘shared exclusivity’ in a territory or for a customer group, and the provision of greater protection for members of selective distribution systems against sales from outside the territory to unauthorised distributors inside that territory.

An issue of particular importance for businesses with activities in both the UK and EU is how territorial and customer restrictions between the UK and the EU will be treated. However, the CMA, in its recommendation, merely reiterates that the VABEO would only apply to agreements implemented in the UK. This falls short of providing explicit assurance to businesses, perhaps in the form of guidance.

Online sales

Similar to the position adopted by the Commission, the CMA’s recommendation is that: 

  • dual pricing: it will no longer be a hardcore restriction for suppliers to set different wholesale prices for online and offline sales by the same distributor provided this is intended to incentivise or reward an appropriate level of investment and relates to the costs incurred for each sales channel;
  • the equivalence principle: it will no longer be a hardcore restriction for suppliers to impose different criteria for online and offline sales in the context of a selective distribution system.

However, the CMA will clarify in the CMA Verticals Guidance that the benefit of the block exemption will not apply to any practices which amount to restrictions of competition by object.

Excluded restrictions

The CMA is minded to maintain the five-year limit for non-compete obligations, it is however open to arguments justifying an individual exemption.

Agency

Respondents to the CMA’s consultation requested more clarity on the definition of agency, which is currently based on the allocation of risk. This is not particularly helpful in situations of dual role agents, fulfilment contracts, or arrangements with online platforms. The CMA proposes to deal with this issue in the Verticals Guidance.

Next steps and how Eversheds Sutherland can help

A summary of the responses received will be published on the CMA’s website in due course. The CMA will also aim to consult on a draft proposal for the CMA Verticals Guidance later in 2021 or early in 2022.

The proposed new VABEO is the first autonomous UK piece of legislation in relation to agreements between businesses and Eversheds Sutherland has been actively engaged in the consultation process. We are happy to discuss any points of concern for your business arising from the envisaged new regime on vertical agreements.

For more information, please get in touch: