UK’s Vertical Agreement Block Exemption Order goes live - heralding a new age of vertical divergence?

Background

Following the end of the Brexit transition period, the UK retained the VBER as part of domestic law. However, the Competition and Markets Authority (CMA) published recommendations to replace the retained VBER in November 2021 and launched a consultation on published draft guidance to accompany the proposed VABEO in March of this year.  The finalised VABEO was laid before Parliament on 9 May 2022 and came into force on 1 June 2022 (following the expiry of the retained VBER on 31 May).

The VABEO is now subject to a 12 month transition period for pre-existing agreements that satisfied the conditions for exemption under the retained VBER but which may need to be re-assessed to ensure they continue to benefit under the VABEO post 1 June 2023.   In parallel, the European Union (EU)’s revised VBER also came into force this month but, unlike its UK counterpart, will not expire until 2034.  For more detail on the revised VBER, please see All-clear for dual distribution? New EU rules on Vertical Agreements provide important guidance and Platforms, Parity And Price Maintenance – New EU Rules For Three Distribution Essentials.

This alert outlines the key changes made by the VABEO and the resulting points of divergence with the EU’s revised VBER in relation to the following:

• Dual distribution;
• Wide retail parity obligations;
• Dual pricing;
• Territorial and customer restrictions; and
• Other changes

Dual distribution (information exchange)

The retained VBER’s safe harbour applied to dual distribution – a scenario in which  a supplier both manufactures and distributes its products in competition with its distributors. The VABEO retains this exemption and expands its scope to now include dual distribution agreements with wholesalers and importers.

The key issue in such a scenario is the scope for information exchange between a supplier and distributor where they also compete downstream. The VABEO guidance clarifies that this exemption includes, in principle, such information exchange under the (vertical) agreement. However, the guidance also makes clear that this is only the case where the information exchange is required to implement the vertical agreement (i.e. is genuinely vertical) and to the extent that the information exchange does not restrict competition by object.

The guidance provides useful examples of the types of information exchange that are unlikely to constitute an object restriction – this includes information relating to:

• The contract products;
• The supply;
• Customer purchases, preferences and feedback (where aggregated);
• Prices of the contract product;
• The supplier’s recommended or maximum resale prices (provided that these are not used to restrict the buyer’s ability to determine its own sale price); and
• Marketing.

The guidance also provides examples of the types of information exchange that are likely to constitute an object restriction (or otherwise unlikely to be genuinely vertical) – including information relating to:

• The actual future prices at which the supplier will sell the contract products downstream (unless necessary to organise a coordinated short-term low price campaign);
• Customer-specific sales data; and
• Goods sold by a buyer under its own brand name with a manufacturer of competing branded goods (unless the manufacturer is also the producer of the own-brand goods).

By contrast, the draft VBER guidance initially suggested that the EU’s safe harbour would be restricted in its application to dual distribution in two ways:

1. all information exchange was to be excluded from the block exemption unless the parties’ aggregate retail market share was 10% or less; and
2. the benefit of the block exemption would not apply to providers of online platforms that have a hybrid function i.e. sell goods in competition with enterprises to which they provide online intermediation services.

However, a negative consultation response to the first of these proposed restrictions led the European Commission (Commission) to abandon the new 10% threshold, with the updated VBER guidance now stating that the block exemption “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”. The guidance suggests that companies can take certain precautions to mitigate against the risk of  exchanging information that falls outside the scope of the block exemption:

• Exchange aggregated sales information;
• Ensure a delay between the generation and exchange of exchange; and
• Use internal firewalls within each party exchanging information.

The Commission’s guidance on this point largely mirrors the CMA’s guidance, meaning that in practice there should be very limited divergence between the UK and EU rules on this issue.

However, an important divergence emerges with the second restriction: by contrast to the revised VBER, the VABEO does not exclude online intermediaries from the benefit of the block exemption. Therefore, in such a scenario, online intermediaries may exchange information which falls outside of the scope of the revised VBER block exemption in the EU but which falls within the scope of the VABEO exemption. It remains to be seen how this divergence will apply in practice (particularly given that some of the large platforms concerned might, in any event, be expected to fall outside the safe harbour on account of market shares in excess of 30%).

Wide retail parity obligations

Wide retail parity obligations (also known as wide MFN clauses) are clauses that seek to prevent suppliers from offering goods/services on better terms on any other platform or sales channel (whether online or offline) – to the extent that these clauses apply to retail agreements, such clauses are now a hardcore restriction under the VABEO. A typical example of this is in the context of online intermediation services where a supplier is prevented from offering its goods/services on better terms on any other sales channel than on a price comparison website.

By contrast, clauses that seek to prevent suppliers from offering goods/services on better terms on any of its direct sales channels (e.g. its own website) are known as narrow MFN clauses – these obligations still benefit from the block exemption (both in the UK and EU).

The CMA’s guidance expresses concern that wide MFN clauses restrict competition between horizontal competitors at both the supplier and the intermediary level for the following reasons:

• The supplier cannot offer better terms to another intermediary and other intermediaries therefore cannot gain a competitive advantage by improving the terms of their intermediation service;
• Wide MFN clauses reduce competitive pressure on commission rates and other terms offered by intermediaries to product suppliers; and
• Wide MFN clauses reduce competition between product suppliers competing on intermediaries, particularly online.

In addition, the guidance notes that wide MFN clauses can be applied by both direct and indirect means, e.g. differential pricing, and that the hardcore restriction also applies to measures that have the same effect as a wide MFN clause.

This represents a point of divergence with the EU rules, under which wide (retail) MFN clauses are not automatically prohibited. However, wide retail MFN clauses imposed on suppliers by online platforms (e.g. price comparison websites) are excluded from the block exemption (meaning they are not covered by the block exemption but the VBER will not exclude its benefit where the clause is severable). In addition, the EU’s measure specifically targets online intermediation services, whilst the VABEO does not restrict itself in this way.

Dual pricing

Under the VABEO, dual pricing is no longer a hardcore restriction. This means that suppliers can now charge buyers different (i.e. higher) prices for the same products regardless of whether the products are to be resold online or offline without automatically falling outside the scope of the block exemption’s safe harbour.

The EU’s revised VBER has also adopted this approach, although the VBER makes this conditional on the supplier satisfying additional requirements; namely, that any price difference is intended to incentivise or reward the appropriate levels of investment (made in relation to the offline and online sales channels) and can be related to the difference in costs incurred by the distributors in each channel.

Territorial and customer restrictions

While territorial and customer restrictions generally remain hardcore restrictions outside the scope of the block exemption, the VABEO introduces new exceptions to this rule:

• The combination of selective and exclusive distribution in the same territory (if the selective/exclusive distribution is at different levels and the exclusive wholesaler is not also a member of the selective distribution system).  By contrast, the revised VBER only permits the combination of selective and exclusive distribution in different territories within the EU;
• Shared exclusivity – suppliers were previously limited to one exclusive distributor per territory or customer group; however, under the new rules a supplier may now allocate exclusivity to a “limited number” of exclusive distributors, provided that the number of exclusive distributors is determined in proportion to the allocated territory or customer group and the level of volume of business required to recoup the supplier’s investment (the revised VBER provides for a maximum of five distributors per territory or customer group); and
• Greater protection for members of a SDS against sales from outside the SDS territory to unauthorised distributors inside the territory (e.g. the supplier may commit not to make any direct sales into that territory itself).

Other changes

The VABEO confers on the CMA strengthened powers in relation to information gathering and its discretion to cancel the block exemption. In addition, a minor divergence has arisen between the UK and EU’s treatment of non-compete obligations.

• Information gathering: the VABEO introduces an obligation on parties to vertical agreements to provide the CMA with information within 10 business days of being requested to do so. Failure to provide information within this timeline without reasonable excuse may result in the CMA cancelling 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.
• Agency – online intermediation services: the VABEO guidance confirms that undertakings providing online intermediation services are considered suppliers (and therefore not agents).
• Expanded powers to withdraw the block exemption: previously, the Commission had the power to cancel the block exemption in relation to parallel networks of similar vertical agreements that covered more than 50% of a relevant market. The VABEO expands this power to enable the CMA to cancel the block exemption in relation to any agreement which it does not consider to be exempt. While this is a power only to be used in exceptional circumstances, its introduction brings significant scope for uncertainty with no clear guidance as to the limits on this power.
• Non-compete obligations: the treatment of non-compete obligations under the VABEO remains unchanged –  non-compete obligations with a duration of more than five years or that are of an indefinite duration, including where tacitly renewable, remain excluded (but potentially severable) from the benefit of the block exemption. However, the treatment of non-compete obligations under the revised VBER is less strict: non-compete obligations that are tacitly renewable beyond a period of five years may still benefit from the block exemption if the buyer can effectively renegotiate or terminate the contract with a reasonable notice period and at reasonable cost (allowing the buyer to effectively switch its supplier after the initial five-year term).

Practical impact – close, but no longer identical

In sum, the VABEO largely mirrors the retained VBER which it replaces as well as the revised VBER now in force in the EU. However, as outlined above, some notable divergences between the new UK and EU rules have emerged and these pose additional compliance challenges for clients, especially suppliers operating across the EU and UK. In practice, we expect that many will likely conform to the most restrictive version of the relevant rules though that might not necessarily be the case where the UK rules are more stringent.

Next steps

As noted above, by contrast to the 12 year duration of the new VBER (which will expire in 2034), the VABEO will only last for 6 years (until 1 June 2028), with another round of consultations likely to be launched well in advance of its expiration. This shorter duration may suggest that the UK Government believes the anticipated speed of technological/commercial change necessitates revisiting issues much sooner and/or is looking to take advantage, at the earliest possible opportunity, of the possibilities for greater divergence from the EU regime. This disparity in timing no doubt introduces further scope for divergence between the UK and EU rules in the not-too-distant future. We will continue to monitor these developments and keep you up to date with the latest changes.

Please get in touch with us to discuss the impact that the new rules could have on your business. Let us help you navigate the complex multi-jurisdictional regulations and, if necessary, engage with the CMA and other relevant stakeholders.

Authored by Mez Azizi, Matt Giles, and Christopher Hutton.