On 21 February 2022, the Department for Business, Energy & Industrial Strategy ("BEIS") published its proposed draft Vertical Agreements Block Exemption Order 2022 ("VBEO") for consultation. This is intended to replace the current EU Vertical Agreements Block Exemption Regulation 330/2010 ("VBER"), which was retained under UK domestic law following the UK's exit from the EU. The current VBER is due to expire on 31 May 2022, and is itself currently subject to a European Commission consultation.
The draft follows the Competition and Markets Authority's ("CMA") recommendation (in November 2021, which we reported on here) that the current VBER should be replaced with a new UK order, with the duration of six years, tailored to the needs of UK businesses and consumers. The purpose of the draft VBEO is to ensure that businesses are not prevented or disincentivised from entering into agreements that the CMA consider to be beneficial and not anticompetitive.
Once the draft VBEO is enforced, UK businesses will have a clear legal framework for distributing and selling their products and/or services on the UK market, without infringing competition law.
As per the CMA's recommendations, the draft VBEO largely mirrors the existing approach to vertical agreements under the current VBER. There are, however, a few important differences designed to ensure the new rules align with the needs of UK businesses and consumers.
- Wide parity obligations to be treated as hardcore. Party obligations (namely clauses specifying that a product or service may not be offered on better terms if purchased via one route rather than another) are not considered hardcore restrictions under the VBER.
However, these types of clauses have been the subject of multiple investigations in recent years, and are generally viewed as anticompetitive. As a result, under the draft VBEO, 'wide' parity clauses (clauses which restrict the offering of better terms on any sales channel) are to be treated as hardcore restrictions. This would mean that agreements containing such a restriction would not benefit from the block exemption.
This will not apply to 'narrow' parity obligations (clauses which only apply to the reseller's/distributor's own sales channel), or wide parity obligations on B2B markets. These will continue to benefit from the exemption.
- Online sales restrictions. During recent years there has been an exponential growth of online distribution channels. This in turn has increased the challenges faced by high street retailers. As a result, the draft VBEO seeks to recognise this change by proposing to end some of the preferential treatment online sales have previously received. Under the VBEO, the following will no longer be considered hardcore restrictions;
- dual pricing – this will enable suppliers to set a higher price for products intended to be resold online than for products intended to be sold offline by the same distributor; and
- provisions contrary to the equivalence principle – this will allow different criteria to be set for online and offline sales in the context of a selective distribution system.
- Territorial and customer restrictions. The draft VBEO will provide greater flexibility to businesses in designing their distribution systems, by permitting:
- 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.
- Dual distribution. While currently the EU's position is not clear, the draft VBEO retains an exception for "dual distribution" agreements that would continue to grant protection to non-reciprocal agreements between competitors. An example of such an agreement would be where the supplier is a manufacturer and distributor of goods, while the buyer is a distributor and not a competing manufacturer. The exception is extended under the draft VBEO to capture dual distribution agreements between wholesalers and importers, in addition to manufacturers.
Given that this is a potential area of divergence between the UK and the EU, businesses which plan to enter into dual distribution agreements in the EU, or with effects in the EU, will need to proceed carefully moving forward.
BEIS is inviting responses on the draft VBEO by 16 March 2022, and the CMA is expected to publish and consult on further guidance to accompany the draft VBEO shortly.
There will be a transitional period of one year to allow businesses to adapt their practices, meaning, in effect, that agreements already in force on the expiry of the current VBER on 31 May 2022 will not fall foul of competition law. However, despite this transition period, many businesses may wish to begin factoring in proposed changes as contracts approach renewal or termination.