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The new UK competition law rules for supply and distribution agreements - a limited departure from the previous EU approach

Posted on 15 June 2022

competition-law-rules

Vertical agreements - such as supply and distribution agreements - have for many years benefitted from a legal regime, which exempts the vast majority of such agreements from the competition law prohibition on anti-competitive agreements.  This regime was known as the Vertical Agreements Block Exemption Regulation 330/2010 ("EU VBER"), which was a piece of EU legislation that applied until very recently in the EU and UK. The EU VBER and its guidelines ("Guidelines") expired in both the European Union ("EU") and the United Kingdom ("UK") on 31 May 2022, and new rules apply from 1 June 2022. The new rules are contained in the Vertical Agreements Block Exemption Order 2022 ("UK VBEO"), and in the new EU Vertical Agreements Block Exemption ("New EU VBER") and its guidelines ("New Guidelines"). Significantly, the EU and the UK rules will now diverge, somewhat, for the first time in over 20 years.

Post-Brexit Status of EU block exemptions

On 31 January 2020, the UK left the EU. Most EU law was adopted by the UK, in some cases with minor amendments, so as to avoid a legal vacuum post-Brexit. This included the EU VBER.

Notwithstanding the UK's departure from the EU, EU competition law continues to apply to agreements or the conduct of UK companies where it has an effect on competition and on trade between Member States.

The idea behind the EU VBER was to exempt certain categories of agreement from the prohibition in Article 101(1) of the Treaty on the Functioning of the European Union ("TFEU") (which is equivalent to the Chapter I prohibition in UK law). The intention was to provide legal certainty to stakeholders as to which vertical agreements could be considered compliant with EU competition law, and which agreements would require an extended individual assessment.

Background to the New EU VBER and UK VBEO

A vertical agreement is one that is entered into between two or more businesses that operate at different levels of the production or distribution chain, such as agreements between a manufacturer and a wholesaler, or between a distributor and a retailer.

UK VBEO

On 1 June 2022, the UK VBEO replaced the EU VBER.  

The UK VBEO follows on from the Competition and Markets Authority's ("CMA") recommendation (in November 2021, which we reported on here) that the EU VBER should be replaced with a new UK order tailored to the needs of UK businesses and consumers. The purpose of the UK VBEO is to ensure that businesses are not prevented or disincentivised from entering into agreements that the CMA considers to be beneficial and not anticompetitive.  

Now that the UK VBEO is in force, UK businesses have a clear legal framework to work within for distributing and selling their products and/or services on the UK market while remaining compliant with competition law. The CMA intends shortly to publish guidance to accompany the UK VBEO to provide additional clarity as to its interpretation. The UK VBEO will be in force for six years, which is a shorter period than the New EU VBER, which is due to expire on 31 May 2034.

The UK VBEO provides a block exemption for vertical agreements that meet the specified conditions. The conditions largely follow the approach in the EU VBER, with a few limited changes, which we address below.

New EU VBER

The EU VBER applied to vertical agreements, provided the agreement did not contain hardcore restrictions (i.e. provisions that are considered to be serious "by object" restrictions of competition such as price-fixing), and that both undertakings did not have more than a 30% share of their respective markets.

Following a comprehensive consultation process, the European Commission published its final version of the New EU VBER. Like the UK VBEO, it came into force on 1 June 2022 and provides for a one-year transitional period during which agreements that were block exempted under the EU VBER retain the benefit of the prior exemption. 

The expired EU VBER did not expressly address online sales, as this was still a relatively new and growing area of commerce when the EU VBER was adopted in 2010. One of the main aims of the European Commission in revising the EU VBER was to deal with the growth in online sales, which has led to new types of vertical agreements, and the use of online platforms. 

The New EU VBER closely mirrors the UK VBEO, notably in relation to:

  1. the removal of block exemptions for wide parity clauses;
  2. the introduction of exceptions for shared exclusivity, along with greater protection for members of selective distribution systems against sales by unauthorised distributors located within the selective distribution network; and
  3. the removal of dual pricing and lack of equivalence criteria imposed on online sales and brick-and-mortar stores as hardcore restrictions.

Similarities and Differences between the EU VBER, UK VBEO and New EU VBER

We explore the similarities and limited differences between the EU VBER, the New EU VBER and the UK VBEO below.

  1. Market share thresholds
    • The EU VBER provided that vertical agreements will only be capable of block-exemption if the parties' respective market shares are 30% or less. A 30% market share has long been regarded as a threshold under which agreements are unlikely to have harmful effects on competition. The UK VBEO and the New EU VBER both retain this market share threshold. Vertical agreements above the market share threshold require individual assessment.
  2. Resale price maintenance ("RPM")

    • RPM entails agreements that directly or indirectly restrict a distributor or retailer’s ability to determine its resale price as a result of a fixed or minimum price being imposed by the supplier. In Europe, RPM has long been treated as a restriction of competition ‘by object’ for several reasons, including that it restricts competition both among distributors/retailers and between manufacturers and distributors/retailers, and it tends to increase the prices paid by consumers for products and services. This has been a significant area of CMA antitrust enforcement, with several recent cases across a range of industries resulting not only in financial penalties for the parties involved, but also in warning letters to other industry participants. It is therefore unsurprising that both the UK VBEO and New EU VBER retain RPM as a hardcore restriction. The EU Guidelines and draft UK Guidance provide further detail on circumstances that may amount to RPM. For example, minimum advertised price policies (which prohibit retailers from advertising below a certain price) will generally amount to RPM, whereas price monitoring and fulfilment contracts (fixing of the resale price in a vertical agreement between a supplier and a buyer that executes a prior agreement between the supplier and a specific end user) will generally not amount to RPM.

  3. Non-compete clauses

    • The New EU VBER and Guidelines broadly keep the existing rules applicable to non-compete obligations (i.e., where a buyer is prevented from purchasing competing goods or services or that such purchases are limited to less than 20% of its total purchases). As was the position under the EU VBER, non-compete obligations are precluded from the benefit of the block exemption if they are of indefinite duration or exceed five years. However, in a change from the EU VBER, the New Guidelines state that if an agreement is tacitly renewable beyond a period of five years it can benefit from the block exemption, provided that there is nothing which “locks-in” the buyer for a longer duration.

    • The UK VBEO provides that non-compete obligations of indefinite duration (which includes those which are renewable beyond a period of five years) or that exceed five years, remain excluded from the block exemption. Parties are not precluded from agreeing to non-compete obligations lasting more than five years, but an individual assessment will be required to determine whether such obligations infringe competition law. The UK VBEO does not change the treatment of post-contractual term non-compete obligations (which are currently excluded from the block exemption).

  4. Wide Retail Parity Obligations

    • Parity obligations, also called "Most Favoured Nation" (MFN) clauses, are restrictions that require one party to an agreement to offer the other party goods or services on terms that are no worse than those offered to its own customers or to third parties. Wide retail parity obligations are clauses that specify a product or service may not be offered on better terms if purchased via a supplier's indirect sales channels, e.g., on other online platforms. A narrow retail parity clause is one in which a product or service may not be offered on better terms if purchased via a supplier's direct sales channels, e.g., on its own website. In the EU VBER, both wide and narrow parity clauses were afforded the safe harbour of the block exemption. These were not considered a hardcore restriction.

    • The New EU VBER has brought in some changes given increased recognition of the potential anti-competitive effects stemming from wide parity clauses. It now excludes across-platform retail parity obligations from the block exemption. By way of example, where an online platform restricts a seller on that marketplace from offering its products at a lower or better price through another online marketplace, this will not benefit from the block exemption.

    • In the UK VBEO, wide parity obligations are to be treated as hardcore restrictions, meaning any agreement containing such a restriction will not benefit from the block exemption.

  5. Online sales restrictions, including online advertising

    • The EU VBER provided protection for online sales, as different treatment to 'bricks-and-mortar' sales was considered a hardcore restriction. This reflected the fact that online sales were not at an equivalent level to offline sales at the time the EU VBER came into force in 2010.

    • The New VBER provides that restrictions having as their 'object' the prevention of buyers or their customers from effectively using the internet to sell their products online constitutes a hardcore restriction. This relates to both direct and indirect restrictions, as well as restrictions relating to online sales channels and online advertising channels, for example, Google. However, both the European Commission and the CMA clarify that some partial restrictions may be permitted. For example, it could be possible to place restrictions on specific internet search providers while retaining the benefit of the block exemption, provided there are sufficient other internet search providers available to enable effective online sales.

    • Due to the increase in online sales in the period since the EU VBER came into force, the UK VBEO recognises and ends some of the preferential treatment online sales have previously received, by:

      • Allowing suppliers to dual price, by setting a higher price for products intended to be resold online than for products intended to be sold offline by the same distributor; and

      • Allowing different criteria to be set for online and offline sales in the context of a selective distribution system.

  6. Territorial and customer restrictions

    • Under the EU VBER, restrictions on sales into other Member States or to specific customer groups were hardcore restrictions and therefore not allowed, unless in the context of an exclusive or selective distribution network.

    • The New EU VBER reflects the evidence gathered in the review of the EU VBER, which indicated that certain aspects of the rules on active sales restrictions were unclear and limited suppliers in designing their distribution systems according to their own business needs. In answer to this, the New EU VBER provides a definition of active sales restrictions and includes changes to the rules on active sales restrictions. The possibility of shared exclusivity has been introduced, allowing a supplier to appoint up to a maximum of five exclusive distributors per exclusive territory or customer group.

    • In the UK VBEO, the list of exceptions to the hardcore restrictions permit the following provisions:

      • The combination of 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

      • Greater protection for members of selective distribution systems against sales made from outside the geographical area to unauthorised distributors inside that territory.

        This will provide greater flexibility to businesses in designing and implementing their distribution systems.

  7. Dual distribution

    • Dual distribution covers instances where a supplier is active on both the upstream and downstream markets and competes at the downstream level with the parties it supplies to, for example, selling to retailers as well as to consumers. Under the EU VBER, dual distribution arrangements were exempted, despite the fact that the supplier and the independent distributors were technically competitors at the retail level.

    • Dual distribution has increased with the rise in online sales. Under the New EU VBER it remains block exempted. The exemption has expanded to cover wholesalers and importers. However, online intermediation services, such as apps and social media services, which also sell goods and services in competition with the businesses to which they provide intermediation services, are excluded from the benefits of the block exemption. Information exchange in the context of dual distribution is exempted only when it is: (i) directly related to the implementation of the vertical agreement and (ii) necessary to improve the production or distribution of the contract goods or services.

    • The UK VBEO adopts a similar approach to the New EU VBER.  However, the treatment of information exchanges in the context of dual distribution is not addressed directly within the UK VBEO. It is addressed in the draft guidance to the UK VBEO which will shortly be finalised by the CMA.

  8. Cancellation in individual cases

    • The EU VBER allowed the block exemption to be withdrawn in parallel networks if similar vertical restraints covered more than 50% of the relevant market.

    • Under the New EU VBER, the European Commission has the power to withdraw the block exemption for any particular case where a vertical agreement has effects which are incompatible with Article 101(3) of the TFEU.

    • The UK VBEO has widened the CMA's powers so that it may cancel the block exemption for any agreement it considers not to be exempt. While it is currently stated that this will only be used in exceptional circumstances, it may introduce scope for legal uncertainty.

  9. Obligation to provide information

    • The obligation to provide information to regulators is not addressed in the EU VBER or New EU VBER.

    • However, the UK VBEO imposes an obligation on parties to vertical agreements to provide the CMA with information within 10 working days of being requested to do so. Failure to provide this information without reasonable excuse may result in cancellation of the block exemption for the agreement(s) in question. This power allows the CMA to double check the parties’ self-assessment, potentially adding to the legal uncertainty that would be created by the possibility of withdrawing the block exemption in individual cases. This power is a new addition to the CMA’s wide-ranging information-gathering powers, which have been used extensively.

  10. Agency

    • As with the previous EU VBER, both the New EU VBER and UK VBEO have enabled the privileges granted to "genuine agents" to remain in place. An agent is a legal or natural person entrusted with the power to negotiate and/or conclude contracts for another (i.e., the principal) without taking any significant financial or commercial risk of the sale. This latter point is particularly important for an agency agreement to be considered genuine.

    • Both the New EU VBER Guidelines and the CMA's draft Guidance clarify how the agency concept should be applied to digital markets. In particular, both sets of Guidance note that undertakings active in the online economy cannot in principle be categorised as agents since they: (i) usually act as independent economic operators and not part of the undertakings for their provided services; (ii) often hold significant market power which controls the commercial decision-making in their relationship with sellers; and (iii) typically make large market-specific investments, which indicates that they bear significant financial and/or commercial risks associated with the transactions for which they act as an intermediary.

What does this mean for businesses?

Despite the New EU VBER and the UK VBEO being aligned in many ways, the small differences between them need to be noted, as they have the potential to present some difficulties for suppliers who want to operate a consistent pan-European distribution policy. The CMA is yet to publish its final Guidance on the UK VBEO, which will assist businesses in complying with it.

Given the divergences between the UK and the EU vertical agreements rules, UK businesses entering into agreements with an EU-based party, or agreements that will have an effect within the EU, will need to consider the changes made in the New EU VBER. They can utilise the New EU VBER's transitional period of one year (expiring on 31 May 2023) to ensure their arrangements are in order. For companies that are currently relying on block exemptions under the EU VBER, it is important to assess whether any amendments will be needed to these agreements affecting the EU or the UK to ensure compliance with the applicable rules beyond the end of the transition period. Equally, any vertical agreements coming into force from 1 June 2022 need to take the new rules into account.

Companies operating in the EU should also be aware that, ultimately, enforcement of the New EU VBER will be carried out through the EU's decentralised competition enforcement system by the European Commission, as well as by national competition authorities. This will inevitably lead to some national differences in the application of the rules as well as in enforcement priorities.

It is important that UK businesses conducting trade in the EU not only consider the UK VBEO, but also the New EU VBER.

What next?

We are still waiting for the finalised UK VBEO Guidance to be published to see how certain issues will to be addressed.

The retained EU VBER relating specifically to vertical agreements was the first of a set of retained EU block exemption regulations to expire. The other retained block exemptions are to be reviewed in due course.

Finally, the European Commission's review of its vertical agreement rules is not fully complete, as it has indicated that it will soon open its stakeholder consultation on the Motor Vehicle Block Exemption Regulations and accompanying guidance. We will be watching out for this and will report how this affects the sales of motor vehicles and access to spare parts and repair information within the EU.

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