Andrew Maxwell
Andrew Maxwell

What do changes to vertical agreement rules mean for you?

4 November 2022

Changes to the ‘vertical agreements’ rules mean businesses should conduct a competition law review of their supply and distribution contracts, as Andrew Maxwell explains.

On 1 June 2022 the UK’s retained EU block exemption (VABER) was replaced by its own new Vertical Agreements Block Exemption Order (VABEO). Compliance with VABEO will provide businesses with certainty that their distribution and supply agreements do not infringe UK competition law and ensure agreements are legally enforceable. But while it provides greater flexibility for businesses, it also introduces new prohibitions.

The Competition Act 1998 prohibits agreements and arrangements between businesses that restrict competition in the UK, unless they are exempted or excluded. VABER was introduced in the EU in 2010 to support this and, following the completion of the Brexit transition, it was one of the seven EU block exemption regulations retained under UK law. So what is the difference?

What has changed

Vertical agreements are entered into between businesses operating at different levels of the production or distribution chain, such as agreements between manufacturers and wholesalers or retailers. VABER provides a ‘safe harbour’ and automatically exempts agreements which satisfy its conditions. It also provides a full exemption for vertical agreements entered into between businesses with market shares of 30% or less where they do not contain any so-called ‘hardcore’ (or ‘excluded’) restrictions.

VABEO aims to reflect market developments that have occurred since VABER’s introduction and seeks to ensure businesses in a ‘vertical’ relationship with each other are not prevented or disincentivised from entering into agreements the CMA considers to be beneficial and not anti-competitive overall.

Notable changes to the rules include:

  • Wide retail parity obligations will be classed as ‘hardcore’ restrictions that remove the benefit of the exemption and are presumed to restrict competition, and
  • Wide retail parity obligations are now a type of most-favoured nation clause. They require that a product or service is not offered on better terms on any other sales channel. This would include both the product supplier’s website and any third-party platforms.

To date, these obligations have received most attention in relation to vertical agreements involving online platforms (eg. price comparison websites). The CMA is concerned they restrict competition by reducing incentives to compete on price, enter markets or expand.

This doesn’t apply to narrow retail parity obligations such that parties can agree a prohibition on a product supplier offering better terms on its own website; and only applies to agreements that relate to the offer, sale or resale and any similar parity obligations agreed between businesses will not be hardcore restrictions and can still benefit from the VABEO.

Growth of online sales

The continuing growth of online sales has led to an increase in businesses operating dual distribution models eg a business selling to both retail and wholesale customers would result in both competing for the same customers.

Vertical agreements between competitors will not fall within the scope of VABEO unless they are non-reciprocal or within one of the dual distribution exceptions; for instance, where the supplier both manufactures and distributes products and the distributor does not compete at the manufacturing level.

While VABER championed and protected online sales, VABEO – and the draft guidance – attempts to redress the recent imbalance by allowing suppliers to benefit from the exemption where they either charge a higher price for products intended to be sold online than in-store, or they impose different criteria for online and offline sales on distributors party to a selective distribution system. Businesses can also restrict the use of a specific sales channel, such as an online marketplace, regardless of the distribution model adopted, and still benefit from the block exemption provided by VABEO.

However, restrictions that aim to prevent the effective use of the internet as a sales channel will remain ‘hardcore’. The draft guidance provides examples, such as requiring a distributor not to use a supplier trademark or brand name on its website, restricting the use of online advertising channels or banning the use of a supplier’s trademarks when bidding for online search advertising.

Restrictions on the territories and customers to which a buyer can sell will continue to be ‘hardcore’ restrictions under VABEO. However, the scope of the exceptions to this general rule will be extended to allow:

  • The combination of exclusive distribution across geographical areas
  • Shared exclusivity in a geographical area or for a customer group (eg allowing the allocation of a geographical area to more than one distributor), and
  • The provision of greater protection for members of a selective distribution system against sales from outside the geographical area to unauthorised distributors.

 VABEO provides the CMA with the statutory power to request information in relation to vertical agreements within 10 working days. Failure to comply, without reasonable excuse, could lead to the CMA cancelling the application of VABEO to the agreement.

Andrew Maxwell is a partner and head of competition at Freeths

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