Replacing the Vertical Agreements Block Exemption: introducing the UK VABEO

1st July 2021

On 17 June 2021, the UK Competition and Markets Authority (CMA) launched a consultation on its proposals for the replacement of the retained Vertical Agreements Block Exemption Regulation (VBER) in the UK, following its expiry in May 2022[1]. The consultation document published with the announcement provides an overview of the CMA’s plans.

The core proposal is to replace the retained block exemption upon expiry with a new UK Vertical Agreements Block Exemption Order (VABEO), which will be “tailored to the needs of businesses operating in the UK and UK consumers”. This will include a handful of specific and impactful changes (detailed below), though the VABEO will retain much of the structure of the existing VBER. The CMA has also confirmed that it intends to prepare guidance notes to accompany the VABEO (the Guidance), similar to the European Commission’s vertical guidelines[2]. It anticipates that the VABEO will expire after six years, and that a one-year transition period should also be incorporated.

Same, same…

As an overarching comment, the CMA’s consultation document concludes that large-scale and fundamental changes to the current exemption are not appropriate at this time. Similarly, it recognises that divergence from the EU regime may increase undertakings’ compliance costs, which is undesirable. The VABEO will therefore be based on the VBER as a starting point.

From its roundtable discussions with businesses, organisations and experts in the field, the CMA has also concluded that the ‘safe harbour’ provided by the block exemption for the majority of vertical agreements is a relevant and useful tool, which should be retained in full. It therefore proposes to leave the exemption and accompanying market share thresholds[3] intact.

Though changes are envisaged to the list of hardcore and exempted restrictions (see below), the CMA has concluded from its roundtable discussions that the following provisions should be retained in full:

• Resale price maintenance (RPM) – should be retained as a hardcore restriction, though the CMA is minded to clarify in its Guidance that it remains open to efficiency justifications in the course of an investigation; and
• Restrictions amounting to long non-competes – should be retained as excluded restrictions where they are indefinite in duration, or exceed 5 years. Non-competes which are tacitly renewable beyond a period of five years will continue to be treated as indefinite in duration.

In addition, the CMA had also been consulting on possible changes and guidance relating to (i) the application of agency principles to vertical agreements and (ii) the treatment of vertical agreements which may contribute tangible benefits to environmental sustainability. In both cases, the CMA has not proposed to amend the existing provisions in the new VABEO, but does intend to add significant detail on these topics in its Guidance.

…but different

The consultation document does however suggest changes in the following areas:

In terms of scope, the CMA recognises that the increasing role of dual distribution (i.e. where an entity supplies it products both to distributors and direct to end customers), and the preference of many businesses to extend the exemption to offer further protection in these scenarios. It proposes that the VABEO should capture dual distribution by wholesalers and importers, in addition to the current protection for manufacturers.

The CMA has also signalled that it may be open to adjusting the turnover threshold for agreements with associations of undertakings to benefit from protection by the exemption (currently £44 million) on account of inflation, market developments or other relevant factors.

For the list of hardcore restrictions (which if included will automatically remove an agreement from the benefit of the block exemption), the CMA is proposing the following changes:

• Restrictions on territory and customer groups – should be amended to:
  • permit the combination of exclusive and selective distribution in the same or different territories;
  • allow for ‘shared exclusivity’ in a territory or customer group by more than one distributor; and
  • enhance protection for selective distribution systems against sales from outside the territory by unauthorised distributors inside the territory.

The CMA also plans to continue developing the distinction between ‘active’ and ‘passive’ sales within the VABEO, with details in the Guidance on where online sales may be considered ‘active’.

• Restrictions on buyer’s ability to determine sale price and criteria – the Guidance should be amended to clarify that dual pricing (charging different prices to online and brick-and-mortar distributors for the same products) and the imposition of different criteria for different sales channels (e.g. online versus brick-and-mortar) in a selective distribution system are not hardcore restrictions.
• Restrictions on supplier’s ability to supply other sales channels on better terms (sales channel parity obligations) – should be added to the hardcore restrictions list. This will cover only “indirect” sales channel parity obligations (i.e. covering third party intermediaries’, as well as the supplier’s, sales channels), but not “direct” obligations (i.e. covering only the supplier’s own direct sales channels).

Next Steps

The CMA is now asking for comments on its consultation document proposals from interested stakeholders, with a view to finalising its recommendation to the Secretary of State shortly. The consultation period will run for 5 weeks from 17 June to 22 July 2021 (at 5pm), and responses can be sent to vberreview@cma.gov.uk.

Walker Morris will continue to report on the progress of the UK VABEO and the EU-equivalent replacement. The next steps will be the completion of the CMA’s consultation for the UK, and the publication of the European Commission’s replacement proposals for the EU. For further information or advice on how changes to the vertical agreements block exemptions may affect you, please do not hesitate to contact any of our competition law experts.

[1] Further details of the replacement process were given in our recent briefing on the subject, which is available here.

[2] The CMA expects to consult on this new guidance later this year and early next year, with a view to introducing the guidance together with the VABEO in May 2022.

[3] Currently Articles 1, 2, 3, 7 and 8 of the VBER.