UK Verticals Reform: An Added Layer of Complexity for International Companies

Contrary to the traditional position in the US, the EU has long had a focus on the competitive effects of vertical agreements and international companies, particularly those with a US-led contractual approach, need to be cognisant of this difference in approach. These matters are now further complicated post-Brexit owing to parallel consultations by the EC on the Vertical Agreements Block Exemption Regulation (“VBER”) (see our previous blog here), and the CMA on the proposed new UK Vertical Agreements Block Exemption Order (“VABEO”). Whilst both essentially focus on identical issues, they have produced some diverging outcomes.

The CMA recently published its final recommendation to the Secretary of State about replacement of the retained VBER, which is set to expire in May 2022, with the proposed new VABEO (available here). This final recommendation now incorporates the feedback received in the public consultation the CMA undertook from June, to which Freshfields responded. It is important that firms with vertical agreements across the EU and UK start thinking about the differences in approach between the regimes in advance of this new legislation entering into force in 2023.

Continued Application of VBER in the UK and Proposals for Change 

Before the UK’s withdrawal from the EU, the VBER applied in the UK and provided an automatic exemption for vertical agreements meeting its conditions. When the Transition Period for the withdrawal of the UK from the EU ended on 31 December 2020, such that EU laws generally ceased to apply, VBER was retained in UK law. This means that vertical agreements in the UK could still benefit from the block exemption (both pre-existing and new agreements), provided they meet the relevant conditions. That is the current position until the VBER expires on 31 May 2022.

CMA’s Proposals for Change

The CMA’s recommendation is that the UK VABEO should make certain important amendments to the current EU VBER approach. The evidence gathered showed that the current VBER is a relevant and useful tool for businesses, providing legal certainty for common types of commercial agreements that pose no significant harm to competition. However, stakeholders, including Freshfields, underlined several areas where the framework could be brought up to date to better reflect market conditions. In particular, the CMA noted feedback that the rapid development of the digital economy necessitated updates to the current regime, such as to provide additional clarity on vertical issues arising in relation to online intermediation platforms.

General Approach to Divergence

The CMA recognises the advantages of ongoing consistency with the EU and related reduction in compliance costs, all other things being equal, and particularly for businesses with activities in both the UK and the EU. However, where the CMA sees material advantages in divergence – for example to tackle what it considers to be harmful anti-competitive practices – it does not consider that the advantages of consistency should be regarded as outweighing the need to protect UK consumers and the UK economy. This has led to a number of areas of divergence between the proposed revised VBER in the EU and the new VABEO in the UK, so that in certain areas the UK proposals are either less permissive (as in the case of parity clauses) or more permissive (as in the case of dual distribution) in approach.

These areas of divergence are set out below.

Dual distribution: In general, the current VBER does not apply to agreements between competitors. However, there is an exception for ‘dual distribution’ arrangements – that is, distribution arrangements made by a supplier that also distributes their own products or services alongside their appointed distributors - which can benefit from the general block exemption. The UK proposes to maintain this position (and extend it to also apply to wholesalers and importers). The EU, however, proposes to amend the current rules to limit the application of VBER to parties with a less than 10% market share for information sharing between suppliers and resellers in a dual distribution context. In addition, unlike the CMA proposal, the revised draft VBER excludes suppliers of online intermediation services that have a hybrid function from the dual distribution exception.

This is a very significant divergence in practice given that “omnichannel” distribution (a multichannel approach taken by companies to give customers a way to purchase and receive orders from several sales channels with one-touch seamless integration) is now commonplace in the digital economy and is a critical part of the go to market strategy of a large number of businesses internationally.

Parity or most favoured nation (MFN) clauses: The UK proposes to make “wide” retail parity clauses (where a seller promises a reseller/platform the best terms available to any indirect distribution channel) a hard-core restriction ― i.e. presumptively illegal. By contrast, the EU’s proposal is that parity clauses would continue to be exempt except when the restriction is sought by online intermediaries across all retail platforms. Moreover, even then there would be no presumption that these terms are illegal; but rather they would be “excluded restrictions” subject to an effects-based test.

Tacitly renewable non-compete obligations (beyond 5 years): The UK proposes to maintain the status quo that a non-compete obligation imposed on buyers which is tacitly renewable beyond a period of five years is deemed to have been concluded for an indefinite duration and therefore would be an excluded restriction (i.e. subject to an effects-based test). By contrast, the revised VBER has removed this provision and clarified that non-compete obligations that are tacitly renewable beyond a period of five years are covered by the block exemption, provided that the buyer can effectively renegotiate or terminate the vertical agreement containing the obligation with a reasonable notice period and at a reasonable cost.

Guidance on environmental sustainability issues in selective distribution systems: Although the CMA has not yet published its proposed verticals guidance (expected later in 2021 or early in 2022) it has indicated that it is minded to include guidance on the extent to which environmental sustainability criteria for admission to a selective distribution system can be regarded as necessary to protect the quality of the product in question. The draft EC guidance does not specifically address this issue.  

Duration: The new UK VABEO will have a duration of six years. By contrast, the new EU VBER will be in force for twice this duration. The CMA considers it is important to review the block exemption after a relatively short timeframe given the ongoing impact of a number of important market developments in the UK, such as the growth in online sales, the UK’s withdrawal from the EU and the COVID-19 pandemic. The CMA also notes that this shorter duration would also allow a more thoroughgoing and fundamental reappraisal of the revised provisions of the block exemption in the context of UK markets.

Obligation to provide information: The new VABEO will impose an obligation for parties to provide the CMA with information in connection with those vertical agreements to which they are a party, if requested to do so, within 10 working days. Failure to do so without reasonable excuse will result in cancellation, i.e. withdrawal, of the block exemption. The proposed VBER does not contain this information gathering power and the EC cannot withdraw the application of the block exemption unless it concludes that the agreement in question has effects which are incompatible with the grounds for exemption under Article 101(3).

Conclusions

The CMA has noted that the UK’s exit from the EU presents both challenges and opportunities. The divergence between the proposed EU and UK verticals regimes exemplifies this and reflects the influence of a range of factors on post-Brexit competition policy. These include:

• The ability to tailor policy to UK specific economic conditions (for example that e-commerce is more widely adopted than in many EU member states)
• Existing CMA expertise in, and substantial investigatory focus upon, certain subject matter areas (for example its high-profile enforcement actions against MFNs by online platforms)
• Specific policy directions from the UK government (for example to maximise the opportunities arising from the digital economy).

For companies, this new divergence provides some insight into what the post Brexit regulatory environment might look like more generally and demonstrates the importance of staying on top of compliance issues, particularly for agreements spanning both the UK and the EU. For US companies in particular, the revisions to both the EU and UK regimes are also a useful reminder that antitrust tolerance for restrictive vertical agreements is much lower outside the US.

Please do not hesitate to contact the Freshfields team if you would like to consider any of these issues in further detail.