The New Draft Vertical Agreements Block Exemption Order

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Commercial Article

14 March, 2022

On 21 February 2022, the Department of Business, Energy and Industrial ("BEIS") published its awaited draft of The Competition Act 1998 (Vertical Agreements Block Exemption) Order 2022 ("draft VABEO") which will replace retained EU law - the retained Vertical Agreements Block Exemption Regulation ("VABER") when it expires on 31 May 2022. This follows on from the Competition and Markets Authority's ("CMA") recommendation to BEIS in November 2021 that the retained VABER should be replaced with a UK specific Order. BEIS is running a technical consultation on the draft VABEO which will be open until 16 March 2022.

Background

Under competition law, agreements which prevent, restrict or distort competition are prohibited. Agreements may be exempt from the prohibition where they produce benefits that outweigh any restrictive effects on competition. A "block exemption" provides an exemption from the prohibition for a whole category of agreements, provided the conditions set out in the block exemption are met.

A "vertical agreement" is one entered into between two or more parties, each of which operates at a different level of the production chain, and that relates to the conditions under which the parties may purchase, sell or resell certain goods or services. These types of agreements, such as distribution or franchise agreements, are ubiquitous across the UK economy and represent a fundamental route for businesses to reach consumers.

In November 2021, the CMA issues its recommendation to BEIS to replace the retained VABER with a block exemption order under the Competition Act 1998. The CMA recommended that the new provision should largely preserve the existing exemption for vertical agreements, while also identifying some important amendments to improve on the existing legal framework and ensure the rules are the most effective and appropriate for the UK market.

BEIS has now published its draft VABEO for technical consultation. The stated purpose of the draft VABEO is to ensure that businesses are not prevented or disincentivised from entering into agreements that the CMA considers to be beneficial and not anticompetitive.

Key Changes

The draft largely preserves the existing approach to vertical agreements under the retained VABER, in accordance with the CMA's recommendation. The key changes however are summarised below:

  • "Wide retail parity obligations" to be treated as hardcore restrictions. Wide parity clauses that restrict the offering of better terms on any sales channel have been the subject of multiple investigations in recent years and are now generally viewed as anticompetitive. Under the draft VABEO, wide parity clauses are to be treated as hardcore restrictions, i.e. terms that are presumed illegal, which cannot benefit from exemption. Importantly, this will not apply in business-to-business markets.
  • Online sales restrictions. Recognising the growth of online sales and increased challenges faced by high street retailers, the draft VABEO seeks to create a more level playing field by expanding the exemptions to cover agreements that treat online and offline sales differently. Dual pricing is no longer to be regarded as a hardcore restriction of competition. Suppliers will be able to set a higher price for products intended to be resold online than for products intended to be sold offline by the same distributor. Imposing different criteria for online and offline sales in the context of a selective distribution system will also no longer be a hardcore restriction.
  • Territorial and customer restrictions. To allow businesses more flexibility in designing their distribution systems, the draft VABEO includes new exceptions that permit:
  1. the allocation of "shared exclusivity" for a particular territory or customer group (for example, allowing the allocation of one territory to more than one "exclusive" buyer); the combination of exclusive and selective distribution networks in the same or different territories; and
  2. protection for members of selective distribution systems from sales made outside of their territory to unauthorised resellers/distributors in their territory.
  • Dual distribution. The draft VABEO retains an exception for "dual distribution" that grants the benefit of the safe harbour to nonreciprocal agreements between competitors, for example, where the supplier is a manufacturer and distributor of goods, while the buyer is a distributor and not a competing manufacturer. The exemption is extended under the draft VABEO to capture dual distribution agreements between wholesalers and importers.

Next Steps

The draft VABEO reflects the CMA's recommendations to BEIS, and is positive news for businesses that have relied on the safe harbour offered by the current rules for their supply and distribution agreements over the past 10 years since the current regime came into effect.

The proposed changes in the draft VABEO reflect significant market changes including the exponential growth of online sales and increased direct-to-consumer sales over that time, whilst not departing wholesale from the existing, familiar rules. The UK Government is consulting on the legal wording of the draft VABEO and parties who wish to respond may do so by 16 March 2022. It is anticipated that the CMA will also publish further guidance to accompany the legislation in due course.

There is also a transitional period of one year to allow businesses to adapt their practices, which would mean, in effect, that agreements already in force on expiry of the retained VABER will not fall foul of competition law. Despite this transition period, businesses may wish to begin factoring in the upcoming changes as contracts come up for renewal, which is something that our Solicitors within our Commercial Department can assist with.

For more information contact John Pickervance in our Commercial department via email or phone on 0333 207 1134. Alternatively send any question through to Forbes Solicitors via our online Contact Form.

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