New antitrust rules for distribution agreements in the UK

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On 12 July 2022, the UK Competition and Markets Authority published final guidance for its new antitrust rules governing vertical agreements. The new rules provide additional flexibility for the design of distribution arrangements, although business will need to navigate some divergence between the EU and UK systems.

 

What are the VABEO and CMA Guidance?

Up to 1 June 2022, the 2010 EU Vertical Agreements Block Exemption (VBER) applied to vertical agreements in the UK, since the VBER was retained in UK law following the UK's exit from the EU. This provided parties to vertical agreements (agreements entered into between businesses operating at different levels of the supply chain) with clarity about the compatibility of their agreements with UK antitrust law, by creating a safe harbour exemption, pending the UK Government deciding how to amend the rules governing vertical agreements in a post-Brexit environment.

On 1 June 2022, the old VBER expired and new rules came into force in both the EU and UK. The 2010 EU VBER was replaced by a new VBER (see our previous alert here), and the UK now has its own separate exemption having introduced a new Vertical Agreements Block Exemption Order (VABEO).

The VABEO has a transitional period of one year, during which agreements that were entered into before 1 June 2022 and comply with the 2010 VBER, will remain exempt until 1 June 2023.

The VABEO will be in force for 6 years until 1 June 2028. This a shorter duration than that foreseen for the new VBER which will be in force for 12 years. This provides for flexibility to see how the new rules impact business in practice, and opens up the possibility of the UK revisiting its approach to vertical agreements significantly earlier than the European Commission, with the possibility of further divergence between the EU and UK down the road.

The Competition and Markets Authority (CMA) Guidance on the VABEO aims to help companies self-assess whether their agreements benefit from the VABEO, or otherwise comply with UK antitrust law.

 

Key features

Set out below is a snapshot overview of the key features of the new UK vertical regime. In some respects the VABEO retains concepts familiar to UK business from the old VBER but in other respects there are now different rules to those applying under the new VBER (we highlight key differences to the new VBER in bold).

Assessment framework

The following  continue to be exempted:

  • Vertical agreements between companies that are not competing undertakings (actual or potential competitors), as well as non-reciprocal1 agreements between competing undertakings at the downstream level provided the buyer is not an upstream competitor, provided:
    • neither party's market share exceeds 30% on the relevant sales and purchasing markets; and
    • the agreement does not contain any so-called "hardcore restrictions" that are listed in the VABEO (including, for example, resale price maintenance or certain territorial/customer restrictions).

Agreements that do not fulfil the conditions for exemption under the VABEO may still be compatible with UK antitrust law. These agreements will require individual assessment as to whether they fulfil the conditions for exemption under section 9 of the UK Competition Act 1998 (efficiency benefits).

Dual distribution

Dual distribution covers situations where a supplier is active both upstream and downstream, and hence may be regarded as competing with its downstream customers (e.g. where a manufacturer does not only sell its goods or services through independent  retailers but also directly to end customers). The rise of online sales – in particular, through suppliers' own online shops – has resulted in a significant increase in dual distribution.

The CMA has retained the exemption for dual distribution, and the VABEO also extends the benefit to wholesalers and importers.  

The VABEO does not exclude online intermediaries from the exemption. In contrast, the new VBER does not apply to vertical agreements relating to the provision of online intermediation services where the provider of the online intermediation services is a competing undertaking on the relevant market for the sale of the intermediated goods or services. These agreements must be assessed individually under Article 101 (1) TFEU.

The CMA's Guidelines clarify that the benefit of the block exemption extends to information exchange in dual distribution scenarios – but only if it is required to implement the vertical agreement and does not restrict competition by object. The CMA provides a non-exhaustive list of examples of information likely and not likely to fulfil these conditions. 

There is likely to be limited divergence between the UK and EU on the issue of information exchange in dual distribution arrangements, although the new VBER provides a slightly differently formulated limitation to the application of the block exemption, which is that it does not apply "to the exchange of information between the supplier and the buyer that is not necessary to improve the production or distribution of the contract goods or services by the buyer".

Online sales restrictions

Greater tolerance of online restrictions, subject to the introduction of "prevention of the effective use of the internet" as a new hardcore restriction. This would capture a total ban on online sales, for example, but also restrictions that prohibit a buyer from using an entire online advertising channel (search engines, price comparison sites, or the buyer's own website). 

Therefore, it may be possible to place restrictions on the way in which online sales are conducted, including dual-pricing, i.e. differential pricing as between physical and online stores.  The key requirement is that  these restrictions do not prevent the effective use of the internet. The new VBER takes a similar approach: restrictions should not have the object of preventing the effective use of the internet by the buyer.

Quality requirements relating to online sales may also benefit from the exemption under the VABEO and the VBER, e.g. a requirement to set up and operate an online after-sales helpdesk, a requirement to cover the costs of customers returning purchased products, or the use of secure payment systems.

Dual pricing

Dual pricing means charging the same distributor different prices for products intended to be sold online and products sold offline. 

Dual pricing is no longer treated as a hardcore restriction, as it may incentivise or reward an appropriate level of investments, especially in offline sales channels. 

However, where the difference in the wholesale price has the object of preventing the effective use of the internet by the buyer to sell the contract goods or services to particular geographical areas or customer groups, it remains a hardcore restriction.

Parity obligations/MFNs

Parity obligations (referred also as Most Favoured Nation Clauses, or MFNs) require a company to offer its contracting party the same or better conditions as to other outlets (be it other platforms or any other sales channel). While all parity obligations used to be fully exempted, the VABEO narrows the scope of the safe harbour for MFN clauses as follows:

  • Across-platform retail parity obligations, whereby an online platform restricts a supplier from offering its product on other retail platforms/channels at a lower price/better terms ("wide" parity clauses), are hardcore restrictions
    • This contrasts with the approach of the European Commission under the new VBER which treats wide retail parity clauses as "excluded restrictions" – meaning that it is only the specific clause which will not benefit from the block exemption
  • Other parity obligations, including retail parity obligations relating to direct sales or marketing channels (so-called "narrow" parity clauses) are still exempted, e.g. clauses that restrict suppliers from offering better terms on their own websites are still exempted. 
     
Exclusive distribution agreements

In exclusive distribution agreements, shared exclusivity is permitted. The number of exclusive distributors appointed must be determined "in proportion to the allocated geographical area or customer group in such a way as to preserve the incentive of the distributors to invest in promoting and selling the supplier's goods or services". 

  • This contrasts with the approach adopted by the European Commission under the new VBER that establishes that suppliers can appoint up to 5 exclusive distributors for any given territory or customer group.

Greater protection for distributors against active selling into their exclusive territory or customer group. Suppliers are now permitted to require distributors to pass on active sales restrictions to their own customers. 

Selective distribution agreements

Greater protection for members of a selective distribution system.  A supplier can now restrict its authorised distributors and their customers from making    active or passive sales to unauthorised distributors located within the geographical area where the supplier operates a selective distribution system.

A selective distribution system can be combined with an exclusive distribution system in the same geographic territory – provided that they are established at different levels of the distribution chain (i.e. exclusive distribution at the wholesale level and selective distribution at the retail level). 

  • This contrasts with the approach adopted by the European Commission under the new VBER, which only allows the combination of selective and exclusive distribution in different territories within the EU.
     
RPM (including minimum advertised prices "MAPs" and fulfilment contracts) 

RPM ("retail price maintenance") – namely agreements or concerted practices, having as their direct or indirect object the restriction of the buyer's ability to determine its onward sale price (including the establishment of a fixed or minimum resale price) - remains a hardcore restriction. It is likely that RPM will continue to be the target of aggressive enforcement by CMA.

MAPs prohibit the distributor from advertising prices below a level set by the supplier.

  • MAPs will be treated as an indirect means of applying RPM.

In limited individual circumstances, it may be possible to bring forward efficiency justifications showing that all conditions for exemption are fulfilled, e.g.:

  • When a manufacturer introduces a new product, RPM may be an efficient means to induce distributors to better take into account the manufacturer's interest to promote this product.
  • Fixed resale prices, and not just maximum resale prices, may be necessary to organise a co-ordinated short-term low-price campaign (of two to six weeks in most cases), which will also benefit consumers. 
  • A MAP can be used to prevent a particular distributor from using the product of a supplier as a loss leader. Where a distributor regularly resells a product below the wholesale price, this can damage the brand image of the product and, over time, reduce overall demand for the product and undermine the supplier's incentives to invest in quality and brand image. In that case, preventing that distributor from selling below the wholesale price, by imposing on it, a targeted minimum resale price or MAP may be considered on balance pro-competitive.

Fulfilment contracts are agreements where a supplier enters into a vertical agreement with an intermediary purchaser for the purposes of executing a supply agreement concluded previously between the supplier and a specific customer (e.g. where a supplier has a framework contract with a customer in which the price is already agreed, but for some – e.g. logistical – reasons needs to execute the contract "through" an independent distributor). The VABEO takes the same approach as the new VBER, namely

  • Where the supplier selects the undertaking that will provide the fulfilment services, the imposition of a resale price by the supplier is not RPM
  • Where the undertaking that will provide the fulfilment services is selected by the customer, the imposition of a resale price may amount to RPM.

"Online intermediation services" (OIS) providers (e.g. online marketplaces) are precluded from imposing retail prices on retailers for the transactions that they intermediate via the platform.

Agency

Certain agency agreements continue to fall outside the scope of the Chapter I prohibition (the UK prohibition on an anti-competitive agreements contained in Chapter I of the UK Competition Act 1998, i.e. the UK equivalent to Article 101).

Restrictions in agreements with "dual role agents", who act both as agent and distributor for the same products of a supplier may be caught by the Chapter I prohibition.

However, an independent distributor of some products of a supplier may also be considered to act as an agent for other products of that same supplier, provided that the activities and risks covered by the agency agreement can be effectively delineated (e.g. because they concern products presenting additional functionalities or new features).

Agreements entered into by undertakings active in the online platform economy are generally unlikely to meet the conditions to be categorised as agency agreements that fall outside the scope of the Chapter I prohibition. Such undertakings generally act as independent economic operators and not as part of the undertakings for which they provide services.

Non-compete obligations

Non-compete (exclusivity) obligations that are tacitly renewable beyond a period of five years are excluded from the VABEO and will need to be assessed on a case-by-case basis. 

  • This contrasts with the approach taken by the European Commission where such obligations can benefit from the new VBER provided that the buyer can effectively renegotiate or terminate with a reasonable period of notice and at a reasonable cost.
Information requests

A specific power to obtain information has been incorporated into the VABEO.

The CMA may require any person (including an undertaking) to provide the CMA with requested information in order to monitor vertical agreements. 

Requests must be complied with within 10 working days. If the request is not complied with without reasonable excuse, the CMA may cancel the benefit of the block exemption (subject to the CMA first giving notice in writing of its proposal and considering any representations made to it).

 

Impact

The VABEO may give companies operating in the UK more flexibility as to how the structure their vertical agreements, compared to the equivalent European rules under the new VBER. However, as many EU and UK companies will continue to operate in both the UK and EU (including Northern Ireland where the EU rules continue to apply) the divergence between the VABEO and new VBER may cause difficulties, to the extent that different rules may apply to their distribution agreements depending on the territories in which they are supposed to operate.

Multi-national companies may be used to operating under different rules (e.g. as between the EU and the US), but for companies typically focussed only on Europe the divergence may lead to some teething problems. It may be that some companies adopt a single template for vertical agreements covering both the EU and UK, incorporating the most restrictive rules from each of the new VBER and VABEO. This may be easier for business but consumers may not then benefit from some of the changes introduced by the new VBER or VABEO. So whilst the rules may now diverge it remains to be seen whether companies seek to amend their arrangements to benefit from them to the fullest extent.

 

1 Non-reciprocal means, for instance, that where one manufacturer becomes the distributor of the products of another manufacturer, the latter does not become a distributor of the products of the first manufacturer.

 

This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2022 White & Case LLP

 

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