Vertical block exemption regimes in the EU and the UK: key differences post Brexit

Vertical block exemption regimes

After a one-year transitional period for agreements concluded before 1 June 2022 to be brought in line with the new vertical block exemption regimes, applicable in the European Union and the United Kingdom, it is time to take stock. What are the main changes in the new EU regulation, affecting vertical agreements? How does the UK order on vertical block exemption differ from the new EU framework, now? What can we expect, in the near to medium-term future, in terms of enforcement of these regimes on national and pan-European commercial agreements and distribution networks? What are the best options for cross-border businesses, now that two vertical block exemption regimes exist, side-by-side, in the EU and the UK?

Vertical agreements are a common feature of the economy. They are agreements between businesses operating at different levels of the production or distribution chain (for example, distribution agreements between manufacturers and wholesalers or retailers).

Since 1 May 2004, in the member-states of the European Union (‟EU”), companies have been required to self-assess whether their agreements comply with competition law, superseding the prior negative clearance regime. In a self-assessment context, a block exemption is valuable, providing a safe harbour for businesses which allows them to proceed with confidence, provided that the agreement respects stipulated thresholds and features.

Up until 31 May 2022, a single self-assessment exercise would have covered compliance with competition law in the EU and the United Kingdom (‟UK”). Since Brexit, however, the EU and UK legal frameworks on vertical agreements have diverged as follows.

1.1. European Union

Article 101 of the  treaty on the functioning of the European Union (‟TFEU”) prohibits agreements between companies and any concerted practice, susceptible to affect trade between EU member-states and which object, or effect, is to limit or alter the competition game, inside the common market.

However, article 101 (3) of the TFEU provides for various exemptions to such prohibitions set out in article 101 (1) of the TFEU, in particular in relation to categories of vertical agreements and concerted practices.

Via various EU regulations, updated on a regular basis, the EU has empowered the European Commission (the ‟Commission”) to adopt block exemption regulations relating to vertical agreements, thereby gradually constructing its legal framework concerning the application of article 101 (3) of the TFEU to categories of vertical agreements and concerted practices, as follows:

  • regulation 2790/1999 of 22 December 1999 on the application of article 81(3) of the treaty establishing the European Community (now article 101 (3) of the TFEU) to categories of vertical agreements and concerted practices (‟Regulation 2790/1999”), which expired on 31 May 2010;
  • its replacement, regulation 330/2010 of 20 April 2010 on the application of article 101 (3) of the TFEU to categories of vertical agreements and concerted practices (‟Regulation 330/2010”), which expired on 31 May 2022, and
  • the replacement to Regulation 330/2010, regulation 2022/720 of 10 May 2022, on the application of article 101 (3) of the TFEU to categories of vertical agreements and concerted practices (‟Regulation 2022/720”), which came into effect on 1 June 2022.

Those EU vertical block exemption regulations are complemented with guidelines on vertical restraints, setting out the principles for the assessment of vertical agreements under article 101 of the TFEU (the ‟Guidelines”). The latest, and current, Guidelines are the guidelines on vertical restraints (2022/C 248/01).

The gist of the EU regulations and Guidelines is that the block exemptions provide widely-applicable safe harbours for vertical agreements from the EU prohibitions on anti-competitive agreements, provided that the parties have market shares of less than 30 percent of their respective markets and that the agreement does not contain any ‟hardcore” restrictions of competition (such as resale price maintenance). If an agreement does not benefit from a block exemption, then this contract will need to be assessed individually for compliance with EU competition law.

Thanks to these block exemptions, European companies can lawfully set up selective distribution networks, or even exclusive distribution networks, depending on the needs of, and appropriate strategy for, their products and brands.

1.2. United Kingdom

Section 2 of the UK Competition Act 1998 (the ‟Act”) prohibits agreements between companies and any concerted practice, susceptible to affect trade within the UK and which object, or effect, is to limit or alter the competition game, inside the UK.

Section 6 of the Act provides that the UK Competition and Markets Authority (‟CMA”) may recommend that the UK secretary of state makes an order specifying certain categories of vertical agreements which, in the opinion of the CMA, should be exempted via block exemption (a block exemption order).

In compliance with section 8 of the Act, before making any recommendation, the CMA must publish some details of its proposed recommendation and consider the presentations about it which were made to it.

Of course, when the UK used to be an EU member-state, the above-mentioned EU block exemptions regulations and Guidelines applied directly in this country too, without any need for transposition (or enactment of any national block exemption order).

However, since exiting the EU via its Brexit, the UK retained the EU Regulation 330/2010 as retained EU Vertical Agreements Block Exemption Regulation. Then, on 1 June 2022, when this retained regulation expired, the UK replaced it with its own Competition Act 1998 (Vertical Agreements Block Exemption) Order 2022 (‟VABEO”).

The VABEO is complemented with a guidance on how the CMA applies the Chapter I prohibition in the Act to vertical agreements, and on the application of the VABEO to vertical agreements (the ‟Guidance”).

Like the EU exemption regulations and Guidelines, the VABEO and Guidance provide for widely-applicable safe harbours for vertical agreements from the UK prohibitions on anticompetitive agreements, provided the parties have market shares of less than 30 percent on their respective markets and the agreement does not contain any ‟hardcore” restrictions of competition. If an agreement does not benefit from a block exemption, then the agreement will need to be assessed individually for compliance with UK competition law.

Both EU Regulation 2022/720 and the UK VABEO allowed a one-year transitional period for agreements concluded before 1 June 2022 to be brought in line with the new regimes.

With both EU and UK regimes now applicable to ‟old” and ‟new” vertical agreements alike, this article provides an overview of the key differences between EU Regulation 2022/720 and the UK VABEO.

2. EU Regulation 2022/720: What has changed?

Regulation 2022/720 is the result of extensive evaluation and consultation with stakeholders across the EU and introduces material changes to the scope of the safe harbour.

In short, this is an evolution, rather than a revolution.

Regulation 2022/720’s central framework remains the same: certain restrictions in vertical agreements, between businesses operating different levels in the supply chain (like manufacturers, distributors and retailers), are assumed to benefit from an efficiency defence under article 101 (3) of the TFEU as long as the parties’ market shares are below 30 percent, they are not competitors (with some exceptions) and the agreement does not contain hardcore restrictions.

There is also still a separate list of so-called ‟excluded” restrictions which are not automatically block-exempted, and which require case-by-case assessment.

However, the perimeter of the safe harbour has been partially redrawn with a view, according to the Commission, to ‟eliminating false positives and reducing false negatives”. The Commission has also updated the Guidelines with the stated goal of providing more certainty to businesses navigating these tricky waters.

Let’s focus on five key areas of change in the Regulation 2022/720.

2.1. Dual distribution

The Commission’s evaluation indicated that the dual distribution model – where a supplier sells directly to end customers as well as via independent distributors, with whom the supplier therefore competes downstream, on the retail market – is more prevalent today that when the initial EU block exemption regulation was introduced, and that it may raise non-negligible horizontal competition concerns.

Indeed, in the dual distribution scenario, from a distributor’s perspective, suppliers are both partners at the supply level and competitors at the retail level, whereas from a customer’s perspective, they constitute alternative supply options. Due to this hybrid situation, dual distribution can potentially give rise to conflicts of interest and concerns of information sharing.

However, the dual distribution exemption (i.e. an exception to the general rule that vertical agreements between competitors cannot be block-exempted) has been retained, and has in fact been extended to more levels of the supply chain to cover importers and wholesalers as well.

But two key changes relate to (i) information exchange and (ii) hybrid platforms.

Information exchange in a dual distribution context will now only be exempted where it is (i) directly related to the implementation of the vertical agreement and (ii) necessary to improve the production or distribution of the contract goods or services. Helpfully, the current Guidelines provide examples of information exchange that are likely to be exempted, such as technical, logistical or performance-related information, and information which is likely to fall outside the exemption, such as information relating to future pricing, identified end users and goods sold by a buyer under its own brand.

Additionally, hybrid platforms (i.e. providers of online intermediation services, such as online marketplaces like Amazon, offer goods and services in competition which other companies using their online platform, and therefore also compete on the downstream market for goods or services) have been excluded from the dual distribution exemption, on the basis that they may have an incentive to favour their own sales and the ability to influence the outcome of competition on those markets.

In summary, considerably more caution is required when it comes to dual distribution, in the future, as the safe harbour was narrowed in Regulation 2022/720, in respect of information exchange and hybrid platforms.

2.2. Parity obligations

Parity obligations require an undertaking to offer the same, or better, terms to its counterparty than those offered on third party sales/marketing/distribution channels (e.g. on other platforms or direct distribution channels such as the seller’s own sales website). These parity obligations are also called ‟most favoured nations” clauses.

Previously, all types of parity provisions were exempted. However, retail parity provisions (relating to the conditions under which products are offered to end users) have been subject to extensive enforcement action by a range of regulators in recent years.

Article 5 (1) (d) of Regulation 2022/720 removes the exemption for cross-platform or ‟wide” retail parity obligations (i.e. where a company pledges to offer the same or better prices and conditions as on all other distribution channels), adding them to the list of excluded restrictions (i.e. they will under no circumstances fall under the safe harbour provided by Regulation 2022/720 and must therefore be thoroughly assessed individually under Article 101 of the TFEU).

Conversely, other types of parity obligations (including the so-called ‟narrow” parity provisions, relating to conditions on direct sales channels, and wholesale parity obligations) are still block-exempted (article 2(1) of Regulation 2022/720). However, a new article 6 warns that the benefit of the exemption may be withdrawn in certain circumstances, and refers explicitly to the use of ‟narrow” retail parity provisions in concentrated platform markets where there is no evidence of efficiencies.

In summary, considerable more caution is required when it comes to parity obligations, in the future, as the safe harbour was narrowed in Regulation 2022/720, in respect of these obligations.

2.3. Online sales restrictions

The previous EU exemption blocks regulation was drawn up at a time when e-commerce was thought to require special protection. The Commission’s evaluation showed – unsurprisingly – that this is no longer the case. As a result, dual pricing – where suppliers can charge different wholesale prices to the same buyer depending on the sales channel – is no longer a hardcore restriction, subject to certain limiting principles.

Moreover, criteria imposed by suppliers for online/offline sales in selective distribution systems no longer need to be equivalent, provided the online sales criteria do not have the object of preventing the effective use of the internet.

A new article 4(e) codifies the development of the recent EU case law (in particular Pierre Fabre and Coty) by stipulating that restrictions on the use of the online channel will be hardcore where they have the object of preventing buyers, or their customers, from effectively using the internet to sell the goods or services, including restrictions preventing the use of one or more entire online advertising channels. Recital 15 clarifies that a restriction will be hardcore if its object is to significantly diminish the aggregate volume of online sales of the goods/services or the possibility for consumers to buy them online.

Further guidance is set out in the current Guidelines, for assessing online sales restrictions. Quality requirements, marketplace bans, online advertising restrictions (except those relating to the most widely-used providers if they de facto ban the use of that advertising channel) and requirements to operate offline stores or make a minimum absolute volume of sales offline, will be block-exempted. However, provisions amounting to a de facto prohibition on internet sales are excluded – including requirements to only sell in physical stores, banning the use of a suppliers’ brand online, requiring a buyer to block website access to customers outside the territory, or the use of foreign credit cards, or requiring a buyer to make a certain share of their total sales offline. Additionally, bans on price comparison websites and keyword bidding restrictions in search engine advertising are confirmed to be hardcore restrictions as they prohibit the use of entire online advertising channels (codifying the Commission’s decision in Guess).

The safe harbour has therefore been extended, with respect to online sales restrictions, in Regulation 2022/720.

2.4. Active sales restrictions

The scope of the block exemption has been broadened in respect of active sales restrictions, which limit a buyer’s ability to proactively approach customers and generally constitute hardcore restrictions. The Commission’s evaluation found that these rules were unclear, and hampered suppliers in designing their distribution systems.

A new and more flexible concept of ‟shared exclusivity” has been introduced: a supplier can now appoint a maximum of five distributors per exclusive territory or customer group.

Moreover, suppliers can oblige distributors to ‟pass on” restrictions of active sales to their immediate customers – which was not previously possible.

Selective distribution systems have also received enhanced protection (i.e. suppliers can now prevent buyers and their customers from selling to unauthorised distributors in a territory where the supplier operates a selective distribution system, regardless of whether those buyers and customers are located in or outside the territory).

However, the combination of exclusive and selective distribution in the same territory (i.e. appointing an exclusive wholesaler plus selected retailers) is still excluded from the block exemption.

So, in respect of active sales restrictions, the safe harbour has been extended, in Regulation 2022/720.

2.5. Online platforms

Additional guidance has been provided on the rules relating to online platforms.

Online platforms that meet the definition of ‟online intermediation services” (i.e. platforms which facilitate direct transactions between two other parties, such as Amazon and Ebay) are categorised as suppliers, and cannot be categorised as a buyer in respect of the intermediated goods or services.

The list of hardcore restrictions therefore applies to restrictions imposed by the platform, but not to restrictions imposed on the platform by sellers.

Online platforms outside that definition have to self-assess whether they would be categorised as a buyer or a seller in respect of their vertical agreements.

The current Guidelines also clarify that online platforms generally are not considered genuine agents as they deal with too many sellers, there is a material imbalance in bargaining power and they bear significant market-specific risks.

3. UK VABEO: key differences from EU Regulation 2022/720

The UK VABEO is more closely aligned to EU Regulation 2022/720 that might have been expected – and that might perhaps have been the case if the revisions had been made with more water under the bridge post-Brexit.

That said, there are some differences.

3.1. Dual distribution: more lenient approach

While the VABEO includes similar provisions around information exchange, hybrid platforms are currently not excluded from the dual distribution exemption. The CMA noted in its recommendations to the secretary of state that, while it understood the competition concerns regarding hybrid platforms, it did not currently believe that there was sufficient evidence to warrant treating them differently to other platforms.

So, the VABEO takes a more lenient approach to dual distribution than the EU Regulation 2022/207.

However, the CMA will keep this under review so, while there is increased flexibility in the UK for now, this may change.

3.2. Wide retail parity provisions: stricter view

The VABEO is more restrictive than Regulation 2022/720, including wide retail parity clauses in its list of hardcore restrictions presumed to be illegal as opposed to simply excluding them from the benefit of the exemption.

Additionally, unlike Regulation 2022/720, which refers only to ‟other online intermediation services”, the VABEO prohibition on wide parity also applies to offline channels.

3.3. Distribution networks: more lenient view

The CMA also introduced a principle of shared exclusivity (capped at a ‟limited number” of distributors rather than five), whilst it will also now allow active sales restrictions to be passed on in exclusive and selective distribution networks.

Unlike in the EU, however, it will allow suppliers to combine selective and exclusive distribution in the same territory as long as they are established at different levels of the value chain and the exclusive wholesaler is not also a member of the selective distribution system.

So the VABEO takes a more lenient approach than Regulation 2022/207, with respect to exclusive distribution networks.

3.4. Online sales restrictions

Unlike Regulation 2022/720, the CMA has not included a specific reference to online sales restrictions, amounting to a hardcore or excluded restriction, in the VABEO.

However, the CMA’s Guidance, and existing case law in the UK, make clear that, in practice, the UK regime is aligned with the EU one (i.e. restrictions that prevent the effective use of the internet essentially amount to restrictions on the territories into which, or the customers to whom, a distributor can sell), and will be considered a hardcore restriction.

3.5. Non-compete clauses

Non-compete clauses with a duration not exceeding five years are block-exempted under both the VABEO and Regulation 2022/207.

However, the VABEO takes a stricter approach than Regulation 2022/207, with respect to non-compete obligations which are tacitly renewable beyond five years. Such obligations are excluded from the block exemption and assessed on a case-by-case basis in the UK (the rest of the agreement containing the excluded non-compete clause may nevertheless benefit from the protection of the VABEO, provided that the relevant conditions are met).

By contrast, non-compete obligations which are tacitly renewable beyond five years are covered by Regulation 2022/207, provided that the contract can be renegotiated or terminated with a reasonable notice period and at reasonable cost.

3.6. Duration

Regulation 2022/207 expires on 31 May 2034, in keeping with the usual 12-year duration for block exemption regulations.

However, the VABEO will cease to have effect on 1 June 2028, so six years earlier than Regulation 2022/207.

The stated rationale for UK VABEO’s shorter duration is to enable the UK government to reflect and action market developments more quickly in the VABEO’s successor. But this shorter duration will also mean that businesses will face changes and potential divergences from the EU Regulation 2022/207 sooner.

3.7. Obligations to provide information

Under the VABEO, parties are required to provide the CMA with information requested in relation to their vertical agreement(s) within 10 working days, or longer if the CMA agrees ‟having regard to the particular circumstances of the case”. If the parties fail, without reasonable excuse, to provide the requested information by the deadline agreed with the CMA, the CMA may cancel the block exemption for the relevant agreements (with prospective effect only).

This is a new addition to the CMA’s wide-ranging information-gathering powers which it has used extensively, giving rise to heightened enforcement action in areas such as merger control. No equivalent provision exists in Regulation 2022/207, although the Commission and national competition authorities in EU member-states may withdraw the benefit of the block exemption in other circumstances.

This is consistent with the fact that the CMA has been one of the most active European competition law enforcers pursuing vertical agreements, in recent years. The CMA will likely continue to focus on vertical agreements, within its monitoring and enforcement activity.

To conclude, while the EU and UK block exemptions regimes are broadly aligned, there are some material divergences. Whilst the VABEO takes a more stringent approach to wide retail parity clauses, it has a more lenient take in relation to dual distribution and exclusive distribution, than Regulation 2022/207.

In practice, cross-border businesses may be unwilling to take different approaches between the EU and the UK, in respect of their distribution networks, and may therefore be more likely to comply with whichever regime is more restrictive. This would imply that the more lenient aspects of each regime could have limited effect in reality – although it may at least be a comfort for businesses to know the scope is there.

Therefore, it is prudent for pan-European businesses to draft any vertical agreement with the most stringent obligations under both Regulation 2022/207 and the VABEO in mind. If they have not done so already, during the one-year transition period, businesses with EU and/or UK distribution operations must review their agreements in light of these new obligations under Regulation 2022/207 and the VABEO.

Crefovi’s live webinar: Vertical block exemption regimes in the EU and the UK, post Brexit – key differences – 21 June 2023

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