UK vertical market reform: an additional layer of complexity for international businesses

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Contrary to the traditional US position, the EU has long focused on the competitive effects of vertical agreements and international companies, especially those with a US-led contractual approach, should be aware of this difference. approach. These issues are now even more complicated after Brexit due to parallel consultations by the EC on the Vertical Agreements Block Exemption Regulation (“VBER“) (see our previous blog here), and the CMA on the new UK Vertical Agreement Block Exemption Order (“VABEO“). Although the two essentially focus on identical problems, they have produced divergent results.

The CMA recently released its final recommendation to the Secretary of State on replacing the retained VBER, which is due to expire in May 2022, with the proposed new VABEO (available here). This final recommendation now incorporates comments received during the public consultation CMA undertook in June, to which Freshfields responded. It is important for companies with vertical agreements in the EU and UK to start thinking about the differences in approach between schemes before this new legislation comes into force in 2023.

Continued application of VBER in UK and proposals for change

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

CMA’s proposals for change

The recommendation of the CMA is that the UK VABEO make some important amendments to the current EU VBER approach. Evidence gathered has shown that the current VBER is a relevant and useful tool for businesses, providing legal certainty for common types of trade agreements that do not significantly harm competition. However, stakeholders including Freshfields have highlighted several areas where the framework could be updated to better reflect market conditions. In particular, the CMA took note of comments that the rapid development of the digital economy requires updates to the current regime, in order to further clarify the vertical issues related to online intermediation platforms.

General approach to divergence

The CMA recognizes the benefits of continued consistency with the EU and the associated reduction in compliance costs, all other things being equal, and in particular for companies with operations both in the UK and in the UK. the EU. However, when the CMA sees material advantages in the divergence – for example in combating what it considers to be harmful anti-competitive practices – it does not consider that the advantages of consistency should be seen as outweighing the need to protect UK consumers and the UK economy. . This has led to a number of areas of divergence between the revised VBER proposed in the EU and the new VABEO in the UK, such that in some areas the UK proposals are either less permissive (as in the in the case of parity clauses) or more permissive. (as in the case of double distribution) on approach.

These areas of divergence are described below.

Double distribution: In general, the current VBER does not apply to agreements between competitors. However, there is an exception for “dual distribution” agreements – that is, distribution agreements entered into by a supplier who also distributes its own products or services alongside its designated distributors – which may benefit from the general block exemption. The UK proposes to maintain this position (and to extend it to apply also to wholesalers and importers). However, the EU proposes to modify the current rules to limit the application of the VBER to parties holding less than 10% of the market share for the sharing of information between suppliers and resellers in a context of dual distribution. In addition, contrary to the CMA’s proposal, the revised VBER draft excludes from the dual distribution exception providers of online intermediation services that have a hybrid function.

This is a very significant divergence in practice given that “omnichannel” distribution (a multi-channel approach taken by businesses to give customers a way to buy and receive orders from multiple 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 for many companies globally.

Parity or Most Favored Nation (MFN) clauses: The UK proposes to make “broad” parity clauses (where a seller promises a reseller / platform the best terms available for any indirect distribution channel) an unconditional restriction, i.e. say presumed illegal. In contrast, the EU’s proposal is that parity clauses would continue to be exempt, except where the restriction is requested by online intermediaries on all retail platforms. Moreover, even then, there would be no presumption that these terms are illegal; rather, they would be “excluded restrictions” subject to an effects-based test.

Tacitly renewable non-compete obligations (beyond 5 years): The United Kingdom proposes to maintain the status quo whereby a non-compete obligation imposed on buyers which is tacitly renewable beyond a period of five years is deemed to have been entered into for an indefinite period and would therefore be an excluded restriction. (i.e. subject to effects -test based). On the other hand, the revised VBER deleted this provision and clarified that non-compete obligations 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 reasonable notice and at reasonable cost.

Guidance on issues of environmental sustainability in selective distribution systems: While the CMA has yet to release its proposed vertical guidance (expected later in 2021 or early 2022), it has indicated that it is considering including guidance on the extent to which environmental sustainability criteria for admission to a selective distribution system may be considered necessary to protect the quality of the product in question. The EC’s draft guidance does not specifically address this issue.

Duration: The new British VABEO will run for six years. On the other hand, the new EU VBER will be in force for twice this period. The CMA considers it important to revisit the block exemption after a relatively short period of time given the continuing 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 for a more in-depth and fundamental reassessment of the revised block exemption provisions in the context of the UK markets.

Obligation to inform: The new VABEO will impose on the parties the obligation to provide the CMA with information relating to vertical agreements to which they are parties, if requested to do so, within 10 working days. Failure to do so without a reasonable excuse will result in the cancellation, i.e. withdrawal, of the block exemption. The proposed VBER does not contain this power to collect information and the EC can only withdraw the application of the block exemption if it concludes that the agreement in question has effects incompatible with the grounds for exemption provided for in Article 101, paragraph 3.

Conclusion

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

  • The ability to tailor policy to specific economic conditions in the UK (e.g. e-commerce is more widely adopted than in many EU member states)
  • The AMC’s existing expertise and the importance of its investigations in certain areas (for example, its high-profile enforcement actions against MFNs through online platforms)
  • UK Government specific policy guidance (eg to maximize opportunities arising from the digital economy).

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

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