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CMA Recommendation on Vertical Agreements: divergence from the EU?

CMA Recommendation on Vertical Agreements: divergence from the EU?

Overview

On 3 October 2021, the UK Competition & Markets Authority ('CMA') published its recommendation to the Secretary of State for Business, Energy and Industrial Strategy as to whether the existing Vertical Agreements Block Exemption Regulation ('VABER'), both in force in the EU and retained from EU law following Brexit, should be renewed or varied in the UK. The retained VABER will expire on 31 May 2022 so, without a renewal or variation, an automatic exemption regime for vertical agreements would cease to apply in the UK.


In short, the CMA has recommended that the retained VABER be replaced with a UK order (the 'Vertical Agreements Block Exemption Order' or 'UK VABEO').

The CMA will consult on accompanying guidance later this year or in early 2022. The final text of the new UK VABEO is expected in 2022, and to come into force in June 2022 (although there will be a one year transition period to allow businesses time to adjust to the changes).

The CMA's recommendation falls against the backdrop of a parallel review of the VABER at the EU level. The European Commission published its draft revised VABER back in July 2021 (given the VABER is also due to expire in the EU on 31 May 2022). Businesses and law firms are now carefully scrutinising the areas of commonality and divergence between the proposed new UK and EU regimes, given a pan-European approach is commonly applied to distribution arrangements.

Areas where the CMA's proposed changes diverge from the EU position

The CMA recommendations for the UK VABEO are generally in line with the European Commission's proposed new VABER. However, in some areas, the CMA takes a more permissive approach than the Commission (see below on dual distribution) and, in others, the UK approach is more restrictive (see below on 'most favoured nation' clauses).

Wide retail MFNs

The CMA recommends that wide retail MFNs (i.e. where a supplier must not offer the product/service on better terms on any other platform or channel, including the supplier's own website) are a hardcore restriction (i.e. bringing a vertical agreement outside of the scope of the UK VABEO). However, conversely, the CMA recommends that narrow retail MFNs (i.e. where a supplier must not offer the product/service on better terms on its own website) remain block exempted by the new UK VABEO.

The hardcore restriction would be confined to wide retail MFNs (i.e. business to business MFNs would not be included within the scope of the hardcore restriction) and would apply to both online and offline intermediation services.

In contrast, under the European Commission's proposals, only those wide retail MFNs that are imposed on purchasers of online intermediation services (i.e. imposed on sellers by online platforms such as price comparison websites) would be excluded from the benefit of the VABER. (Note: the Commission proposes to treat these wide MFNs as excluded, rather than hardcore, meaning that they are severable from the rest of the vertical agreement and fall to be assessed under the individual exemption provisions of Article 101(3)).  In line with the UK position, narrow retail MFNs will continue to be block exempted.

The CMA therefore proposes to take a stricter approach than the Commission – wide retail MFNs will, if the recommendation is implemented, be considered hardcore in the UK, but the same clause would not be automatically prohibited in the EU (except potentially where imposed by online platforms).

 

Dual distribution 

Under the CMA's recommendations, dual distribution (i.e. agreements between manufacturers and retailers where the manufacturer is both a retailer – i.e. sells directly to consumers - and also a wholesaler of its branded products) would continue to be block exempted under the new UK VABEO. In addition, the CMA proposes to extend the benefit of exemption to dual distribution by wholesalers and importers who are also active downstream. In welcome news for business, the CMA has also stated that it will provide guidance on horizontal information exchange issues in dual distribution scenarios.

Whilst the European Commission agrees with extending the benefit of the VABER to wholesaler and importer dual distribution scenarios, it also proposes to introduce a stricter combined (10%) market share threshold at the retail level to benefit from the exemption. This would mean that the block exemption would apply to all aspects of a dual distribution system, even any horizontal restrictions resulting from the exchange of information between the competing parties. Nevertheless, whilst the proposed market share change has attracted criticism from a variety of stakeholders, the proposals provide that, if the combined market share of the parties at the retail level exceeds 10%, but the combined share is lower than 30% on the relevant purchase or sale market (i.e. the usual basis on which the market share threshold is calculated under the VABER), the block exemption would still apply to the vertical agreement but not to any exchange of information (the latter would need to be assessed under the EU rules on horizontal agreements). The CMA has explicitly decided against introducing a stricter market share threshold.

 

Non-compete obligations 

The CMA recommends that the treatment of non-compete obligations under the UK VABEO remains the same as the current position under the VABER (i.e. 5 year general rule).

In contrast, the European Commission's proposals would allow some non-compete obligations which are tacitly renewable beyond five years to benefit from block exemption, i.e. if the buyer can effectively renegotiate or terminate the contract with reasonable notice and at reasonable cost.

 

Timing

The UK VABEO would come into force in June 2022 and last for six years: a shorter duration than the new EU VABER, which is to expire in May 2034 (i.e. after 12 years).

Commonalities between the EU and UK proposed changes

Dual pricing 

Both the CMA and the European Commission propose that dual pricing strategies (i.e. charging the same distributor or reseller a higher price for products intended to be sold online, than for products intended to be sold offline) should no longer amount to a hardcore restriction. However, the European Commission introduces certain conditions in order for the block exemption to apply: i.e. that the price difference is intended to incentivise or reward the appropriate level of investments and is related to the difference in distributor costs incurred in each sales channel. Guidance as to the UK position is awaited.

In addition, under both sets of proposals, there would no longer be a requirement for overall equivalence on criteria between online and offline sales in the context of selective distribution systems.

 

Agency agreements

At both the UK and EU levels, online intermediaries would be considered as suppliers of online intermediation services, rather than as agents. The CMA will address this and related agency issues (such as dual-role agents) in its guidance.

Key points remaining the same in the UK

Both RPM (resale price maintenance) and territorial and customer restrictions will remain hardcore in the UK. In addition, the current exception allowing the restriction of "active" (but not "passive") sales will continue.

The CMA will give more guidance on how to judge whether sales are "active" or "passive" (in light of developments such as the growth in online sales), and also further guidance on the treatment of RPM. This guidance will need to be carefully compared to the EU guidelines to track divergence and commonalities of approach.

Environment sustainability

The CMA will provide guidance on environmental sustainability and vertical agreements, particularly on the criteria for admission to selective distribution systems.

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