On 17 June 2021 the CMA published a consultation on its proposed recommendations to the Secretary of State on the future of the retained vertical agreements block exemption Regulation (VBER). At the end of the Brexit transition period the EU VBER became retained EU law in the UK, until its expiry on 31 May 2022. After that date, it is up to the Secretary of State, in consultation with the CMA, to decide whether to extend, vary or revoke the retained VBER. The CMA’s proposed recommendation is to replace the retained VBER with a UK Vertical Agreements Block Exemption Order (UK VABEO), tailored to the needs of businesses operating in the UK and to the needs of UK consumers. The CMA has decided that large-scale and fundamental changes to the current exemption are not appropriate as this would create additional compliance costs for businesses, but it is nevertheless proposing a number of important amendments to reflect current market conditions.
In putting together its proposals the CMA has drawn on relevant evidence from the EU VBER review as well as evidence gathered during its roundtables and bilateral meetings with interested parties. It is interesting that the CMA has decided not to wait for the publication of the EU proposals before consulting on its own proposals and it is therefore not clear at this stage how much divergence there could potentially be between the UK and EU regimes.
The CMA proposes for the UK VABEO to expire after a relatively short period of 6 years, on the basis that recent market developments such as growth in online sales, the UK’s withdrawal from the EU and the impact of Covid-19 are ongoing and fast moving, and that this will allow a more thorough review in the context of UK markets at that time.
More detailed VABEO Guidance to accompany the UK VABEO will be available for consultation later this year or early next year, with the aim to have both measures in place by 31 May 2022.
We have set out below a summary of the CMA’s proposed recommendations. The consultation is open until 22 July 2021.
Scope of the proposed UK VABEO
The CMA proposes to maintain the current market share thresholds for the application of the retained VBER, under which the exemption applies to an agreement on condition that the market share of the supplier and that of the buyer does not exceed 30% of the relevant market.
Currently the block exemption does not apply to vertical agreements between competing undertakings, but there is an exception for non-reciprocal vertical agreements where the supplier is a manufacturer as well as a distributor of the goods or services. The CMA is proposing to extend this dual distribution exception also to wholesalers and importers. It is also considering including more detailed guidance on information exchange in the context of dual distribution in its VABEO Guidance.
Resale price maintenance
In line with its current enforcement policy on RPM, with a number of infringement decisions adopted by the CMA in recent years in which it held that RPM is a ‘by object’ restriction, the CMA proposes that RPM remains a hardcore restriction under the UK VABEO as is currently the case under the retained VBER. The CMA intends to clarify in the VABEO Guidance when RPM may be exempt under section 9 of the Competition Act 1998 (UK equivalent of Article 101(3) TFEU).
Territorial and customer restrictions
The CMA notes that the treatment of territorial and customer restrictions at EU level has been driven by the EU single market imperative, but also in the interest of preserving intra-brand competition and consumer choice. It considers there are compelling reasons for retaining the current approach of treating these restrictions as hardcore restrictions:
- In order to support consumer choice and promote intra-brand competition
- The implications of Brexit, including the Northern Ireland Protocol, and linked market developments are not yet fully understood and the CMA is keen to avoid inadvertently compromising the integrity of the UK internal market
- The exceptions set out in Article 4(b) of the retained VBER in any case ensure that the block exemption is available where territorial and customer restrictions are likely to bring about efficiencies
The CMA considers that the active/passive sales distinction is a useful distinction as far as exclusive distribution is concerned and proposes to recommend that the current exception allowing for the restriction of active but not passive sales is maintained. It proposes to add definitions of these concepts in the UK VABEO and further guidance on how these terms are to be interpreted in practice in the VABEO Guidance.
Exceptions to the hardcore restrictions in Article 4(b) retained VBER
The CMA proposes to revise and clarify the list of exceptions to the hardcore restrictions set out in Article 4(b) of the retained VBER, in order to give businesses more flexibility in designing their distribution systems, and permit:
- A combination of exclusive and selective distribution for the same or for different territories
- Shared exclusivity in a territory or for a customer group by allowing the allocation of a territory to more than one ‘exclusive’ distributor
- Greater protection for members of selective distribution systems against sales from outside the territory to unauthorised distributors inside that territory
Online sales restrictions
The majority of online sales restrictions are currently treated as passive sales restrictions with only very few qualifying as active sales restrictions. The CMA recognises that significant developments in e-commerce have taken place since the original EU VBER and Guidance were adopted in 2010, and it proposes to provide updated guidance on the treatment of different online strategies as either active or passive selling.
The following indirect online sales restrictions which are currently treated as hardcore restrictions:
- dual pricing, where a distributor is charged a higher price for products intended to be sold online than for products intended to be sold offline
- imposing criteria for online sales that are not overall equivalent to the criteria imposed on brick-and-mortar stores in the context of selective distribution
will no longer be regarded as hardcore restrictions under the CMA’s proposals.
Parity clauses (MFNs)
Parity clauses or MFNs are currently not included in the retained VBER or in the Guidelines. They have become more common since the EU VBER was adopted in 2010, in particular in the context of agreements involving online platforms, and have been investigated by the CMA and by a number of competition authorities in the EU.
In order to reflect these developments and to provide more certainty regarding their treatment under UK competition law, the CMA intends to include parity obligations in the UK VABEO and in the VABEO Guidance. It proposes that ‘wide parity clauses’ or ‘indirect sales channel parity obligations’, under which a product or service may not be offered on better terms on any other channels, and which have been found to raise significant competition concerns, will be treated as hardcore restrictions. Narrow MFNs or ‘direct sales channel parity obligations’ will not be included in the list of hardcore or excluded restrictions, given the potential efficiencies that may result from their use in certain markets, but the CMA will investigate where there is evidence that their use replicates the effects of indirect sales channel parity obligations.
Non-compete provisions in excess of five years, or for an indefinite period, are currently excluded restrictions under the retained VBER and must be assessed individually for compliance with the Chapter I prohibition. The CMA proposes not to change this position under the new UK VABEO. It has considered whether non-compete provisions that are tacitly renewable should be exempt where reasonable termination provisions are available, but decided against this approach as it has concerns that this could result in higher barriers to entry or expansion for competing providers, as a result of inertia by the parties where an agreement is tacitly renewable.
The CMA proposes that issues regarding agency are dealt with in the VABEO Guidance and not in the UK VABEO itself. It intends to provide additional guidance on agency agreements, in particular on:
- The application of the agency principles to arrangements with online platforms
- The application of the rules on agency and RPM to tripartite relationships between suppliers, intermediaries and final customers, in circumstances where the intermediaries adhere to the commercial conditions agreed beforehand between their supplier and a particular customer and focus solely on executing that agreement
- Application of the rules on agency to circumstances where an undertaking active on a downstream market acts both as an agent and as an independent distributor for different products of the same supplier (dual role agents)
The CMA considers that the treatment of environmental benefits under the Chapter I prohibition is not specific to vertical agreements but needs to be considered in the broader context of competition policy. It is however proposing to provide guidance on sustainability issues in the context of the VABEO Guidance, in particular in relation to their use as criteria for selective distribution.