U.K. Authority Publishes New Vertical Agreement Guidelines
On 12 July 2022, the Competition and Markets Authority (CMA), the U.K.’s principal competition regulator, published the final version of its Interpretative Guidance (Vertical Agreements Guidelines) to accompany the Competition Act 1998 (Vertical Agreements Block Exemption) Order 2022 (VABEO), which replaced the retained EU Vertical Agreements Block Exemption Commission Regulation 2010/330 on 1 June 2022. The Vertical Agreements Guidelines replace the 2010 EU Guidelines on Vertical Restraints and the 2004 Office of Fair Trading (OFT) guidance on Vertical Agreements in the U.K.
The VABEO and the Vertical Agreements Guidelines set out the U.K.’s safe harbour rules for a range of common vertical agreements including distribution and supply agreements until 2028. The new rules came into force on 1 June 2022, but parties with existing agreements have a grace period of one year to ensure their agreements meet the requirements of the new rules.
Agreements which fit within the terms of the VABEO are block-exempted from the prohibition on anticompetitive agreements in Chapter I of Competition Act 1998, and any restrictions of competition are valid and fully enforceable. Therefore, legal advisers and companies should ensure they fit their distribution agreements and other vertical arrangements within the VABEO’s terms to take advantage of the legal certainty it brings.
There are broad-based prohibitions of restrictive agreements in both EU (Article 101 of the Treaty on the Functioning of the European Union (TFEU)) and U.K. (Chapter I of Competition Act 1998) competition law. However, agreements which may at first sight breach those prohibitions may be exempted if the pro-competitive elements of those agreements outweigh their anticompetitive effects.
This can be done through the grant of an exemption where an individual agreement meets the criteria set out in Article 101(3) TFEU or Section 9 of the Competition Act 1998. Alternatively, the EU Commission has introduced safe harbour legislation or “block exemption” for certain common types of restrictive agreements which meet the conditions set out in the legislation. However, if certain types of serious restrictions are present in an agreement, the benefit of the block exemption is lost. In that case the parties must individually assess whether the agreement could still merit an individual exemption.
Agreements which merit an individual exemption, or which can take advantage of a block exemption, are fully valid and enforceable. One of the most important block exemptions is the EU Vertical Agreements Block Exemption (VABE) which covers vertical agreements relating to the supply of goods or services.
Upon Brexit, the U.K. retained the then EU VABE contained in Commission Regulation 2010/330. This applied in the U.K. until 31 May 2022. Upon its expiry, the U.K. had to pass its own block exemption legislation. It therefore passed the VABEO which came into force 1 June 2022.
In addition, the EU passed its own successor VABE legislation in Commission Regulation 2022/720 which also came into force on 1 June 2022. Both the VABE and the VABEO are accompanied by interpretative guidelines which help explain the provisions and scope of the respective legislation issued by the European Commission and the CMA respectively. Between them, this legislation sets out the rules for vertical agreements in the EU (until 2034) and the U.K. (until 2028).
Scope and Provisions
There are now two sets of vertical agreements rules which legal advisers and companies need to consider when drafting distribution and other vertical agreements in Europe. The U.K. and the EU rules are very similar, but there are some crucial differences both in the letter and the interpretation of the legislation, and therefore caution is advised. The VABEO applies when the agreement is likely to have only an appreciable effect on trade and competition within the U.K., and the VABE applies where the effect is solely within the EU. In cases where an agreement has an effect in both the U.K. and the EU, it is best to ensure compliance with the most stringent requirements in both pieces of legislation.
Vertical Agreements Guidelines
The Vertical Agreements Guidelines are intended to help businesses self-assess their vertical agreements and decide whether these fall within the scope of the VABEO. The guidance provides an overview of the steps in the assessment of vertical agreements under the Chapter I prohibition and the VABEO and addresses the CMA's assessment of vertical practices such as:
- Dual distribution: Extension of the block exemption to cover dual distribution by wholesalers and importers.
- Resale price maintenance: Further guidance on possible efficiency justifications.
- Geographical area and customer group restrictions: Clarification of the boundary between active and passive sales and additional flexibility for businesses to design distribution systems according to their needs.
- Indirect measures restricting online sales: Removal of the prohibition of dual pricing of internet and brick and mortar sales, and the requirement for overall equivalence from the list of restrictions.
- Parity obligations: Guidance on the treatment of wide retail parity obligations as restrictions and the assessment of other parity obligations.
- Agency agreements: Clarification that providers of online intermediation services are suppliers for the purposes of the VABEO and clarification of other issues relating to online platforms, fulfilment contracts and dual role agents.
The Vertical Agreements Guidelines also provide insight on a range of other concepts referred to in the VABEO, such as the distinction between active and passive sales.
The VABEO considerably updates the treatment of ecommerce practices which were in their infancy at the time of the previous block exemption in 2010. The guidance assists in the interpretation of these new requirements. In particular, there is guidance on key issues such as restrictions on the use of online marketplaces, the position in relation to the use of price comparison sites and information exchange in dual distribution. The Vertical Agreements Guidelines also cover the CMA assessment of the most common vertical restraints, such as single branding, exclusive distribution, selective distribution, franchising, exclusive supply and upfront access payments.
If you have any questions or queries regarding the EU or U.K. competition law treatment of vertical agreements, please contact your regular AT lawyer or one of the authors listed below.