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Competition and Markets Authority consults on rules for distribution and supply agreements

Posted on 28 June 2021

Many companies are parties to "vertical agreements": agreements for the sale or purchase of goods or services between businesses operating at different levels of the production or distribution chain. Examples of such agreements include franchise, distribution and agency agreements, and agreements between manufacturers and wholesalers/retailers.

UK (and EU) competition law (specifically Chapter I of the Competition Act 1998) prohibits these agreements where they prevent, restrict or distort competition within the UK and may affect trade within the UK. However, the Act also provides an individual exemption for agreements which meet certain conditions, and "block exemptions" from the Chapter I prohibition also exist for specific categories of agreement – one of which is for certain vertical agreements.

Prior to the end of the Brexit transition period the UK Government had introduced legislation to retain the application of the EU Vertical Agreements Block Exemption Regulation ("VABER") in the UK. VABER sets out a "block exemption" from the prohibition for vertical agreements provided that certain conditions are met. The key criteria are that both parties to the agreement have a 30% or less share of the relevant market, and that the agreement does not contain price fixing or export ban provisions. Agreements that meet these conditions are automatically exempt from the Chapter I prohibition.

The VABER, and the retained version applying in the UK post-Brexit, both expire on 31 May 2022.

The Competition and Markets Authority (CMA) is now considering what amendments should be made to VABER if and when it is renewed and has issued a consultation, seeking views by 22 July 2021 on a proposed UK Vertical Agreements Block Exemption Order (VABEO). This consultation is running in parallel with the European Commission's own review of the VABER. Whatever form it takes, the EU's "new VABER" will not apply automatically in the UK. The Government is therefore considering whether to "re-adopt" the VABER in the UK, in the form of the VABEO, and if so, on what terms. 

The CMA, as the UK's principal competition regulator, will play a key role in advising the Government on this issue. It is likely to recommend that the benefits to business of VABER justify its continued application to the UK.

Certain amendments are, however, being proposed. If adopted, there could be a different approach taken to the application of competition law to vertical agreements in the UK and the EU.

The CMA's Draft Recommendations

The CMA is currently recommending that the current rules in the VABER remain appropriate and fit for purpose to be applied in the proposed VABEO, except for the following:

  • Territorial and customer restrictions – the CMA identifies a need for clarification on the boundary between active and passive sales, especially in light of the growth of online sales.
  • Indirect measures restricting online sales – the CMA recommends removing the prohibition on dual pricing and the requirement for overall equivalence.
  • Parity obligations (or ‘most favoured nation’ clauses) should be added to the list of unacceptable provisions according to the CMA.
  • The UK's adoption of the new VABEO should expire after a period of 6 years with a transitional period of one year from the current VABER.
  • Further guidance should be provided on (i) agency agreements (including issues relating to online platforms, fulfilment contracts and dual role agents); and (ii) considerations relating to environmental sustainability.

The CMA is now inviting responses from business and professional advisers on a list of the specific questions relating to each of its recommendations.

The CMA's consultation document (see Consultation: The retained Vertical Agreements Block Exemption Regulation (publishing.service.gov.uk)) is 97 pages long and provides those with an interest in vertical agreements with a detailed description of the relevant law as well as the key issues being determined under the consultation.

The consultation will run until 5:00 p.m. on 22 July 2021 and we would be happy to discuss the issues and the contents of any response to the CMA.

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