Government publishes draft Vertical Block Exemption Order set to replace retained EU law

The UK government has published a draft Vertical Agreements Block Exemption Order (VABEO), which will replace the retained EU Vertical Agreements Block Exemption Regulation (retained VABER) when it expires on 31 May 2022. 

25th February 2022

The UK Government has published a draft Vertical Agreements Block Exemption Order (VABEO), which will replace the retained EU Vertical Agreements Block Exemption Regulation (VABER) when it expires on 31 May 2022. The purpose of the VABEO is to ensure that businesses in a ‘vertical’ relationship with each other are not prevented or disincentivised from entering into agreements that the Competition and Markets Authority (CMA) considers to be overall beneficial and not anti-competitive.

This article summarises the background and key changes.

Background

Competition law seeks to ensure market failures are prevented or remedied by prohibiting agreements between businesses that prevent, restrict or distort competition. However, certain categories of agreements may be exempted from the prohibition where their pro-competitive benefits outweigh their anti-competitive effects. This includes vertical agreements that meet certain conditions.

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.

Prior to the UK’s withdrawal from the EU, block exemption regulations under VABER that exempt certain categories of agreement from the Article 101(1) TFEU prohibition were applied to the Chapter I prohibition as parallel exemptions. VABER was retained under domestic law following the UK’s exit, and will continue to form part of UK law until it expires on 31 May 2022.

In November 2021, the CMA issued its recommendation to the Secretary of State for Business, Energy and Industrial Strategy (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 consultation. Once in force, compliance with VABEO will ensure a company can market its products or services without provisions in its distribution agreements infringing competition law, ensuring they are legally enforceable and not subject to potential fines. 
 
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 are summarised below.

  • Wide retail parity obligations/most favoured nation clauses. 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 anti-competitive. 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:
    • 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
    • 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 non-reciprocal agreements between competitors, for example, where the supplier is a manufacturer and distributer of goods, while the buyer is a distributor and not a competing manufacturer. The exception is extended under the draft VABEO to capture dual distribution agreements between wholesalers and importers.

In accordance with the CMA’s recommendation, the new UK rules largely preserve the existing approach. There are, however, some important amendments to ensure the rules align with the needs of UK businesses and consumers. 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 to be 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. It is important to bear in mind however, that EU exemption rules may still apply in parallel to those agreements.

For more information, please contact Gordon Downie, Partner in our regulation and markets team, at gordon.downie@shepwedd.com, or your usual Shepherd and Wedderburn contact.