The UK Competition Appeal Tribunal (the CAT) has overturned a decision by the Competition and Markets Authority (the CMA) to fine Compare The Market (CTM) for its use of wide retail parity obligations (referred to in the judgment as Most Favoured Nation clauses).
The CAT’s judgment (available here) arrives hot on the heels of the Vertical Agreements Block Exemption Order 2022 (VABEO) which came into force on 1 June 2022, and the CMA’s accompanying guidance (the VABEO Guidance, available here) published on 20 July 2022. The VABEO and VABEO Guidance make it clear that wide retail parity clauses should be treated as ‘hardcore restrictions’, and by contrast that narrow parity clauses may benefit from the safe harbour exemption that disapplies the prohibition in Chapter I of the Competition Act 1998 (the Chapter I Prohibition).
While the conduct at issue before the CAT pre-dates the VABEO Guidance, the decision will nevertheless impact how both wide and narrow retail parity clauses are assessed in future. In this blog post, we provide some practical pointers for businesses trying to navigate what can be very complicated legal territory.
In brief: what did the original CMA decision find?
The CMA’s decision in November 2020 (the non-confidential version of which is available here) focused on CTM’s use of wide retail parity clauses in its agreements with home insurance providers. The CMA concluded that CTM’s network of wide retail parity clauses, during the period from December 2015 to December 2017, gave rise to appreciable effects on competition which were not capable of qualifying for individual exemption and imposed a £17.9 million fine on CTM. Specifically, the CMA took the view that CTM’s use of wide retail parity clauses had the following effects on competition:
- that relevant insurers were disincentivised from reducing their prices, thereby causing higher prices for consumers;
- that rival price comparison websites couldn’t gain a competitive advantage, thereby entrenching CTM’s ‘market power’; and
- that CTM relied on its network of retail parity clauses rather than competing on the merits.
Although the CMA’s decision didn’t directly analyse the extent to which anti-competitive effects may arise as a consequence of narrow parity clauses, the use of a counterfactual in which that CTM only used narrow parity clauses in its contracts with home insurance providers (together with comments made in cross-examination at the CAT hearing) strongly implied that, in line with the approach set out in VABEO, the CMA did not consider the narrow parity clauses to be problematic.
The CMA’s CTM decision in November 2020 signalled the clear continuation of a trend that began in 2014, when an investigation by the Competition Commission into the private motor insurance sector found that wide retail parity clauses in contracts between private motor insurance providers and price comparison websites gave rise to adverse effects on competition (namely the prevention of price competition between price comparison websites). Conversely, the Competition Commission found that while narrow parity clauses may reduce the competitive constraint that own-website channels have on price comparison websites, this reduction is unlikely to cause any significant anti-competitive effects on the relevant market as a whole.
Treatment of wide and narrow retail parity clauses in the VABEO and VABEO Guidance
As we set out in a blog post earlier this year, wide retail parity clauses are listed as ‘hardcore restrictions’ in the VABEO. This means that an agreement containing a wide retail parity clause cannot benefit from the block exemption. Instead, it is presumed to restrict competition by object (such that no assessment of whether they give rise to appreciable effects on competition is necessary) and must be assessed according to the individual exemption criteria. In conducting an individual assessment, the VABEO Guidance notes that relevant factors may include whether the investments by the intermediary provide objective benefits, whether the parity obligation is necessary for achieving that objective benefit, whether the risk of free-riding is real and substantial, and the extent to which users of the intermediary multi-home.
By contrast, narrow retail parity clauses are not designated as ‘hardcore restrictions’ under the VABEO. Narrow retail parity clauses may therefore fall within the safe harbour which exempts certain agreements from the application of the Chapter I Prohibition. For agreements that don’t qualify for safe harbour treatment (e.g., because either party to the agreement has a share of supply that exceeds 30% of the relevant market), the VABEO Guidance makes it clear that “narrow retail parity obligations are more likely to fulfil the conditions for individual exemption” than wide retail parity clauses due to their restrictive effects being “generally less severe than those of wide retail parity obligations”. It goes on to list the factors it will take into account when considering the competitive effects of a narrow retail parity clause. These include the market position of the party imposing the parity clause, the relative size of the direct sales channels covered by the obligation, the substitutability of the direct channels and intermediaries, and whether the restrictions are imposed by multiple intermediaries (and therefore have a cumulative effect).
Has the CAT’s recent decision thrown this trend off course and where are we now?
The CAT’s decision is certainly a setback for the CMA – out of the six substantive grounds of appeal that CTM advanced in respect of the CMA decision, the CAT unanimously agreed with CTM on five of them. Amongst other things, the CAT found that the CMA had defined the relevant market(s) incorrectly and failed to establish that the wide retail parity clauses had had an appreciable effect on competition. Importantly, comments made by the Tribunal in its decision with regard to retail parity obligations, both wide and narrow, can be hard to reconcile with the VABEO Guidance in places.
Wide retail parity clauses
What the CAT’s judgment tells us is that, contrary to the position set out in the VABEO Guidance, wide retail parity clauses shouldn’t presumptively be viewed as “by object” restrictions in all cases. For example, on the facts, the CAT noted that CTM’s use of wide retail parity clauses could, at least in theory, have pro-competitive or at least neutral aims, such as ensuring that home insurers don’t seek to undercut price comparison websites who have invested in advertising the home insurers’ products. Given the CAT’s position, we would expect that in future the CMA (and any private claimants) will seek to establish that any wide retail parity clauses under investigation give rise to appreciable effects on competition (at least in the alternative), rather than simply claiming that the use of a wide retail parity clause is a by object restriction.
As to the CMA’s effects analysis, the CAT underlined the need for the CMA to identify an appropriate quantitative evidence base for any stated effects (rather than, as it held the CMA did in its CTM decision, “operating at the level of theory or bare assertion”). While the CAT made no findings as to whether or not CTM’s use of wide retail parity clauses did or did not give rise to appreciable effects on competition, it noted that the CMA’s assessment in this regard was deficient. The CAT was clear in its view that appreciable effects could not simply be assumed and went on to provide two examples that show why the effects of wide retail parity clauses need to be demonstrated:
- In one scenario, the CAT imagined a market in which all price comparison websites imposed wide retail parity clauses as a matter of course. The result would be the elimination of what the CAT calls intra-brand competition (i.e., competition across different channels). According to the CAT, the “upside would be that competition between home insurance providers would be sharpened” – users of price comparison websites would be quoted the same price across all price comparison websites, and so all stakeholders would instead have to focus on inter-brand competition.
- In a second scenario, the CAT imagined a world in which wide retail parity clauses were completely outlawed. The CAT argued that it would be “‘open season’ for differential pricing” and that retailers and suppliers with market power could favour one price comparison website over another by offering cheaper quotations and promotional deals.
In summary, despite the CMA’s VABEO Guidance seeking to place a burden on parties to substantiate efficiencies that result from including a wide retail parity clause in an agreement, the CAT’s decision clarifies that, unless it is alleging a “by object” infringement (which may now be difficult for the CMA to rely on), the CMA must demonstrate anti-competitive effects by adducing reliable quantitative evidence that is consistent with its theory of harm.
Narrow retail parity clauses
Conversely, while agreements containing narrow retail parity clauses can still qualify for block exemption under the VABEO, the CAT repeatedly reiterated in its judgment that narrow retail parity clauses are also capable of infringing the Chapter I Prohibition. For example, at footnote 220 of its decision, the CAT notes that “a case can be made that [narrow retail parity clauses] are actually themselves infringements of the Chapter I prohibition”, which is a different stance to that proffered by the VABEO Guidance, in which the starting point is that the block exemption applies to all types of parity obligation other than wide parity obligations in vertical agreements.
Practical points to consider
While the CAT’s decision comes at an unfortunate moment for the CMA, given its recent publication of the VABEO Guidance, in practical terms it may not change too much. We’ve summarised below the key points that it will be important to keep in mind when considering the use of parity clauses:
- The VABEO, of course, remains unaffected by the decision. Accordingly, narrow retail parity clauses and non-retail parity clauses will still qualify for safe harbour treatment where they meet the terms of the VABEO. Agreements containing wide retail parity clauses will still be treated as hardcore restrictions of competition that will need to be individually assessed.
- If a narrow parity clause falls outside the safe harbour, it cannot be assumed to have a benign effect on competition. Companies with market shares close to or above 30% should therefore tread carefully when considering whether to impose such restrictions. Contrary to the VABEO Guidance, wide retail parity clauses cannot be simply assumed to give rise to a restriction of competition by object in all cases. Further, when considering effects, it is important to keep in mind relevant market conditions including, for example, the degree of inter-brand competition on the relevant market, the market position of the intermediary imposing the clause as well as that of the direct sales channel, and the substitutability of the intermediary and the direct channel from the perspectives of suppliers and end users. It remains the case, however, that the use of wide retail parity clauses remains a high-risk area, and competition advice should be sought by companies thinking about using them.
Ultimately, navigating risks associated with retail parity obligations can be complex and will often require a fact-specific analysis. If you’re considering either the impact of the CAT’s decision, or the use of parity clauses more generally, please do get in touch with our team.