On 1 January 2023, the Competition Act 1998 (Research and Development Agreements Block Exemption) Order 2022 (R&D BEO) and the Competition Act (Specialisation Agreements Block Exemption) Order 2022 (Specialisation Agreements BEO) came into force in the UK, replacing the retained EU regulations which expired on 31 December 2022.
This article summarises the policy background and key changes.
Policy background
Competition law and its enforcement contribute to ensuring that market failures are prevented or remedied by prohibiting agreements between businesses that prevent, restrict or distort competition. This can include, for example, price-fixing, sharing commercially sensitive information, or obligations to supply a product exclusively to a particular buyer. In this way, competition law protects UK businesses and consumers from illegal and anti-competitive behaviours across the economy.
That said, certain types of agreements, which would ordinarily be captured by this prohibition, are generally considered to be beneficial and not anti-competitive. For example, horizontal cooperation agreements between two or more competitors operating at the same level in the market can lead to substantial economic and sustainability benefits, particularly if companies combine complementary activities, skills or assets.
Research and development (R&D) agreements are a type of horizontal co-operation agreement which can facilitate early breakthroughs in research and product development and support more efficient resource allocation through collaborative R&D. Specialisation agreements also comprise types of horizontal agreement: joint production agreements, unilateral specialisation agreements, and reciprocal specialisation agreements which concern the manufacture of goods or the preparation of services. These types of agreement have the potential to improve production processes and lower costs, which can ultimately lead to lower prices for consumers and greater market efficiency.
Why the change?
Prior to the UK’s exit from the EU, block exemption regulations made by the European Commission which exempt certain categories of agreement from Article 101(1) TFEU prohibition (which is equivalent to the Chapter I prohibition in UK law) were applied to the Chapter I prohibition as “parallel exemptions”.
The EU R&D and Specialisation Agreements block exemptions were respectively retained in UK law after Brexit. The retained regulations expired on 31 December 2022 and have now been replaced, following consultation by the Competition and Markets Authority (the CMA).
CMA recommendation
The CMA recommended that the Secretary of State for BEIS replace the retained R&D block exemption under the Competition Act 1998. The recommendation was based on a review of the retained block exemptions and their effect on UK markets. It drew on relevant evidence gathered from businesses with operations in the UK relying on the retained block exemptions, law firms advising businesses on the application of competition law to horizontal agreements in the UK, and relevant trade and industry associations.
While the CMA recommended that the new provisions should largely reflect and preserve the retained EU block exemption regulations, it also identified some important amendments to improve on the existing frameworks and to ensure that the exemptions are most effective and suited to the UK market.
R&D BEO: what has changed?
In many respects, the new R&D BEO largely preserves the retained EU block exemption regulation that expired last month, however there are some key updates highlighted below.
Competing in innovation
The most significant of the changes, is a new separate test setting out when R&D agreements between firms competing in innovation (i.e. competing in the development of new products or technologies) can benefit from the safe harbour. Under the retained regulation, parties to R&D agreements of this nature were not subject to a market share threshold and were treated as if they were not competitors. The CMA identified a risk to dynamic competition if that approach were to continue. Dynamic competition is where firms are making efforts or investments (i.e. through R&D) that may eventually lead to their entry or expansion based on the opportunity to win new sales and profits. This is important because it drives innovation by increasing the likelihood of new and improved products being made available and at better prices.
In that context, to fall within the scope of the new order, parties will now need to demonstrate that, at the time of entering into the agreement, there are:
- Three or more competing R&D efforts comparable with those of the parties to the R&D agreement, or
- Three or more third parties that are able independently to engage in R&D effort which concerns: (1) R&D of a new product or technology which is the same as, or likely to be substitutable for, a new product or technology that would be covered by the R&D agreement, or (2) an R&D cluster pursuing an aim or objective which is the same, or substantially the same, as an aim or objective that would be covered by the R&D agreement.
This new test seeks to protect dynamic competition and drive innovation, which the CMA indicates will provide new benefits to consumers and businesses by ensuring that firms compete effectively where markets develop in the future. That said, the test adds a layer of complexity that may prove challenging for parties to meet in practice.
New definitions
The order also contains some new definitions to assist with key concepts underpinning the new test, including definitions for “R&D cluster” and “competing R&D effort”. The definition of research and development is also amended to capture earlier stages of R&D, such as acquiring know-how relating to existing or new products, technologies, or processes.
The additional definitions help afford a greater degree of certainty for business in determining whether or not an agreement falls within the scope of the exemption.
Specialisation Agreements BEO: what has changed?
The new Specialisation Agreements BEO also largely follows the previous approach in the retained EU regulation. That said, there are some modifications.
Unilateral specialisation agreements
The order expands the scope of the block exemption to include unilateral specialisation agreements between more than two parties. Unilateral specialisation agreements entered into by more than two parties are likely to be beneficial as they can be efficiency enhancing. The idea being that this type of agreement may result in products being produced more efficiently and cheaply, thus benefitting businesses and consumers alike.
New definitions
The new Specialisation Agreements BEO includes a number of changes to key definitions. For example, the definition of “potential competitor” is clarified to ensure that the block exemption becomes easier to apply and achieves greater clarity for businesses. The meaning of “joint” in the context of distribution is also further clarified in the context of activities carried out by the parties to a specialisation agreement through a joint team, organisation or undertaking. The new definitions and clarifications are a welcome change and will help achieve a greater level of certainty for businesses.
Final thoughts
Meanwhile, the European Commission has adopted two regulations extending the period of validity of the EU Block Exemption Regulations on R&D and Specialisation Agreements which would otherwise have expired in the EU on 31 December 2022. The extension prolongs the period of validity to 30 June 2023, which will allow the European Commission time to complete its review exercise in respect of the existing block exemptions.
Moving forward, it will be important for businesses to bear in mind that EU and UK exemptions may still apply in parallel to their agreements.
If you are interested in finding out more about these developments, please contact our Regulation and Markets team.