On 1 June 2022 new rules came into force in both the EU and UK concerning exemptions from competition law rules for so-called ‘vertical’ agreements.
Vertical agreements are between companies at different levels of the supply chain, for example an agreement between a manufacturer and a distributor, and then onward between a distributor and a retailer. Because the parties to a vertical agreement are not generally competitors, agreements between them enjoy a general or ‘block’ exemption from competition law rules, provided certain conditions are met. Those conditions in turn point clearly to types of agreement that not only are unprotected by the exemption, but are very likely to involve a competition law breach in and of themselves.
The block exemption was previously provided in the EU by the 2010 Vertical Agreements Block Exemption Regulation (known as ‘VABER’), which was maintained in UK law post-Brexit.
That expired on 31 May 2022, and a new revised VABER came into force in the EU on 1 June. At the same time, a replacement for VABER came into force in the UK (the Vertical Agreements Block Exemption Order, or ‘VABEO’). Both instruments update the conditions for an agreement to be exempt, but each makes subtly different changes. The law on vertical agreements is therefore now different between the UK and EU, for the first time ever.
The key points
VABER and VABEO apply the same basic approach: vertical agreements that meet certain conditions (including that neither party to the agreement can have a market share higher than 30% at its level of the supply chain) are exempted from the general prohibition on agreements with anti-competitive objects or effects.
However, some types of restriction remain prohibited, while some ‘hardcore restrictions’ are so serious that including one in an agreement will result in the entire agreement losing the benefit of the exemption, as well as themselves being very likely to be a competition law breach.
Hardcore restrictions
The following are the key examples of restrictions that fall into that category:
- Resale Price Maintenance (RPM) clauses, meaning a seller cannot (directly or indirectly) set a minimum or standard price at which the buyer must sell (or indeed advertise) the seller’s products – this is the most serious type of ‘vertical’ breach, consistently leading to large fines.
- Restricting the territories into which or customers to whom the buyer party can sell products – unless the seller is only restricting ‘active’ sales into a territory or customer group allocated to another buyer or reserved to the seller (‘active’ sales means pursuing customers, as opposed to ‘passive’ sales where the customer seeks out the sale, which cannot generally be restricted).
- Preventing buyers within a selective distribution system (where the seller will only sell to or through buyers who meet certain criteria) from supplying other buyers within the system, though they can be prohibited from selling outside the system.
- Restricting the ability of a supplier of components to sell those components to third parties as spare parts.
- Preventing the buyer from making ‘effective use’ of the internet, including by selling via price comparison websites.
- Imposing Most Favoured Nation (MFN) or price parity clauses – ie requiring that a product or service may not be offered on better terms on any other platform or channel (called a ‘wide MFN’), although ‘narrow MFNs’ which stop the seller from undercutting the buyer on its own channels, are permitted. There is some divergence here – the EU rules only prohibit wide MFNs for price comparison websites, whereas the UK rules prohibit them entirely.
The online and MFN restrictions are new additions to the list, clearing up what had been grey areas under the old rules.
The old prohibition on ‘dual pricing’ (ie charging the buyer more for products to be sold online than for offline products) has been removed entirely, in recognition that online channels no longer need protection (and that, perhaps, brick and mortar retailers now do).
Other restrictions
VABER/VABEO still will not protect a non-compete clause longer than five years (including if it is indefinite or automatically renewable) or that applies post-termination, though unlike hardcore restrictions those will not remove protection from the whole agreement as long as the offending clause can be severed from the rest of the contract. The new EU rules do allow tacitly renewable non-competes where the contract can be renegotiated or terminated with reasonable notice and at reasonable cost. The UK rules still do not protect them at all.
In addition to the divergence on prohibited MFN clauses and non-competes, the other main difference between VABER and VABEO is that the UK rules continue to exempt non-reciprocal ‘dual distribution’ arrangements – ie manufacturers who distribute their goods both directly and through distributors, whereas the EU rules now only exempt dual distributors where their market share, aggregated with that of the buyer, does not exceed 10%.
What does this mean for businesses?
Vertical agreements will continue to benefit from an exemption from the usual competition rules until at least 2028 in the UK (and 2034 in the EU).
The new rules are more favourable to sellers. They can now impose the permitted distribution restrictions (eg prohibiting active sales into exclusive territories) on their buyer’s customers, extending those down the supply chain, and appoint multiple distributors (five under VABER, ‘a limited number’ under VABEO) to a particular ‘exclusive’ territory. It is also now easier to operate selective distribution systems (and to combine these with exclusive distribution).
The new rules also make significant but double-edged changes for online sales. While buyers must now be allowed to use the internet, including price comparison websites, such online intermediaries are now treated as suppliers rather than agents, and dual pricing is now permitted as noted above. In addition, different criteria can now be set for online and offline sales in selective distribution systems. Sellers now have much more freedom to discount the price of goods a buyer will be selling in physical stores, and can apply different rules to their ‘bricks and mortar’ distributors from the rules imposed on their online distributors. This change may produce some rebalancing between physical and online retail, after the old VABER gave significant additional advantages to the latter.
More broadly, the small but important divergences between the EU and UK rules on vertical agreements mean that producers and distributors operating in both territories will need to take account of both sets of rules in their distribution agreements. We have significant expertise advising a range of clients on how distribution agreements are affected by competition law, so do get in touch if you need assistance or would like to know more.
The CMA has published detailed guidance on how the new VABEO regime is intended to work in practice, which can be found at https://www.gov.uk/government/consultations/draft-vabeo-guidance