UK Verticals Reform: VABEO Text Published as UK Inches Towards New Regime

Following publication of the final recommendation of the Competition and Markets Authority (CMA) to the Secretary of State last November, the UK Government has now published the draft text for the new Vertical Agreements Block Exemption Order (UK VABEO) which is due to come into force on 31 May 2022. The November recommendations have been adopted in the draft text without modification. A technical consultation seeking feedback on the text of the proposed draft is taking place until 16 March 2022.

As with the previous retained Vertical Block Exemption Regulation, the draft legislation sets out the framework and structure of the rules applying to vertical arrangements. Those familiar with the retained Vertical Block Exemption will recognise the analytical framework being proposed, which exempts qualifying agreements insofar as they do not contain so-called ‘hardcore restrictions’, or ‘excluded restrictions’ that cannot be severed from the rest of the vertical arrangement. However, the CMA is yet to release its long-awaited Verticals Guidance accompanying the new UK VABEO, in which more of the detailed application, in particular around agency agreements and the treatment of agreements/provisions falling outside the exemption, will be found. The CMA has indicated informally that these will be released in the coming weeks. 

The new UK VABEO text largely reflects and incorporates many of the points set out in the public consultation document from the CMA last June, to which Freshfields responded. It is encouraging to see that many of the comments provided in connection with that consultation have been taken into account in the new draft legislation, in particular, to reflect changes in the UK market, including the rapid development of the UK digital economy. Indeed, the UK VABEO confirms that its purpose is to ensure that businesses are not prevented or disincentivised from entering into agreements that the CMA considers to be overall beneficial and not anticompetitive.

The UK’s technical consultation follows that of the European Commission, which invited contributions on the text of its new Vertical Agreements Block Exemption Regulation (EU VABER) last September and is running alongside the UK reforms.  As noted in our previous blog commenting on the key differences between the proposed UK and EU provisions (available here), this parallel review is important for businesses operating in both the UK and the EU, who face having to comply with both sets of rules and therefore need to remain cognisant of any discrepancies between the two sets of legislation.

The good news is that the new UK VABEO is largely consistent with its proposed European counterpart, given that both texts are derived from the EU regulation that came into force in 2010, and this common foundation will make doing business cross border easier.  However, the CMA has not resiled from its position that it was willing to differ from the approach in the EU where it considers those amendments in the UK’s economic interests. As such, some points of divergence still exist, despite previous feedback about the importance of alignment. Notably, the UK VABEO is more restrictive when it comes to the treatment of parity clauses, including wide retail parity clauses in its list of hardcore restrictions presumed to be illegal.  In contrast, the draft EU VABER is more permissive, with parity clauses continuing to be exempt except when the restriction is sought by online intermediaries across all retail platforms.  

Conversely, the proposed UK VABEO affords more flexibility to parties by permitting the combination of both exclusive and selective distribution systems within the same geographic territory, whilst the Commission follows a more restrictive approach by only allowing such combinations in different territories under the new EU VABER regime.  As ever, the devil will be in the detail and it will be important for companies operating distribution networks across the EEA and the UK to scrutinise the Vertical Guidance once available to work out points of difference in the treatment of vertical arrangements under Article 101 TFEU in the EU and Chapter I of the Competition Act 1998 in the UK.

If you have any questions about how the proposed changes in either the UK or EU could affect your business, please don’t hesitate to contact the Freshfields team.