Episode 5, Vertical Agreements in the EU and UK: Comparing the UK and EU Rules

Fiona Garside:
Hello, everyone. I'd like to welcome you to the final episode in our podcast series on the new rules on vertical agreements in the EU and UK. In this series we've been focusing on the impact of the new rules on agency agreements, dual distribution, traditional and online distribution models, and now areas where the EU and UK approaches have diverged. My name is Fiona Garside and I'm a senior expertise lawyer in the antitrust regulation and foreign investment team at Ashurst in London. I'm delighted to be joined today by Steven Vaz, a partner in our London office, and Maria Held, a counsel in our Munich team. Today we're going to be talking about the differences and similarities between the EU and UK rules on vertical agreements. Thank you both for joining me.

Maria Held:
Thanks, Fiona. It's great to be here.

Steven Vaz:
Good to be with you both. Thank you.

Fiona Garside:
As listeners may be aware, on the 1st of June 2022, the revised EU Vertical Block Exemption Regulation also, known as VBER, entered into force alongside new vertical guidelines. On the same date, the new UK Vertical Agreements Block Exemption Order, which also known as the VABEO, entered into force, and the VABEO guidance was published on the 12th of July. These block exemptions provide widely applicable safe harbours for vertical agreements from the EU and UK prohibitions on anti-competitive agreements provided that the parties have market shares of less than 30% on their respective markets and that the agreement does not contain any hardcore restrictions of competition. As of the 1st of June, the EU and UK now have separate rules governing vertical agreements and companies active in both jurisdictions will need to ensure compliance with the two regimes. Steven, what effect has Brexit had on the process for adopting these new rules?

Steven Vaz:
When the UK left the EU, certain EU laws including the VBER were adopted by the UK to avoid a legal vacuum. Regulations were passed in 2019 to enable the Secretary of State to renew or replace block exemptions as they expire, and the previous VBER expired on the 31st of May 2022. In November 2021, the CMA recommended that the Secretary of State for Business, Energy & Industrial Strategy (or BEIS) should replace the retained VBER with new UK legislation. Following a consultation process, the UK has adopted the VABEO, exempting certain vertical agreements from the application of the prohibition on anti-competitive agreements. Similarly, the European Commission ran a consultation process in parallel before adopting the revised VBER and guidelines. In many respects, the UK VABEO and its accompanying guidance mirrors the revised EU VBER and vertical guidelines. However, there are a number of important differences based in part on the CMA's previous enforcement experience.

Fiona Garside:
And before we dive into those differences in more detail, Maria, at the outset, let's talk about the similarities between the new EU and UK rules.

Maria Held:
Yes, thanks Fiona. As Steven just mentioned, in many respects the two regimes have remained consistent and the basic elements of the block exemption have also remained the same as under the previous regime. For example, there's no change to the market share threshold, both block exemptions apply where the parties have market shares of less than 30%. For the most part, the list of hardcore restrictions is consistent between the EU and the UK. For example, both include resale price maintenance and customer and territorial restrictions.

Fiona Garside:
Thanks, Maria. And turning now to the first area where the two regimes have diverged, which is parity obligations. Now there are two types of parity clauses, which are also known as Most Favoured Nation clauses, or MFNs. We've got narrow parity clauses and wide parity clauses. Just in case listeners aren't aware, narrow parity clauses are when restrictions are imposed on the offer of better terms on direct sales channels only, and wide parity clauses impose restrictions on the offer of better terms on any other sales channel so that would include the suppliers own website, as well as any other indirect channels, such as third party distributors or online platforms. Maria, what approach has the European Commission taken to parity obligations?

Maria Held:
Under the new EU rules, narrow parity clauses continue to benefit from the block exemption. Wide parity clause are treated differently depending on whether or not they apply at the retail level, meaning they apply to sales to end customers. The revised VBER removes the benefit of the block exemption for wide retail parity clauses imposed by providers of online intermediation services, also known as OIS. For example, where an online platform restricts a seller on that marketplace offering its products at a better price to another online marketplace, this will not benefit from the block exemption. These clauses are categorised as so-called excluded restrictions. As a result it is only the specific clause that will not benefit from the block exemptions and which must be assessed individually. The rest of the agreement may still benefit from the block exemption.

Fiona Garside:
And Steven, we've alluded to this being an important area of divergence, what approach has the UK taken?

Steven Vaz:
The UK's taken a stricter approach to parity obligations in two important respects. First, the UK VABEO characterises wide retail parity clauses as hardcore restrictions. That means that the whole agreement will fall outside the block exemption. It is also likely that agreements containing such clauses will be considered to infringe competition law.

Secondly, while the EU rules only exclude wide parity clauses imposed by OIS providers, in the UK all wide retail parity clauses, whether online or offline, are classified as hardcore restrictions regardless of the type of company imposing the restriction. The rationale for this stricter approach in the UK is set out in the CMA's recommendation for a vertical block exemption. In that recommendation, the CMA commented that based on its previous enforcement experience, wide retail parity obligations reduced competitors incentives to compete on price, to innovate and to enter markets.

Maria Held:
Yes, and despite the different approaches to wide retail parity obligations, we should emphasise that in both the EU and the UK the block exemption continues to be available for parity obligations relating to the conditions under which goods or services are offered to undertakings that are not end users, meaning non-retail parity obligations which relate to the conditions under which manufacturers, wholesalers or retailers purchase goods or services as inputs.

Fiona Garside:
Thank you both. And the next area we're going to talk about where the UK is taking a stricter approach is non-compete obligations. Maria, what changed under the EU rules this time?

Maria Held:
Previously, non-compete obligations did not benefit from the block exemption if their duration was indefinite or over five years. Non-compete obligations which were tacitly renewable beyond five years were also not covered as they were considered to be evergreen and therefore needed to be assessed on a case by case basis. Now, the revised VBER relaxes this position, now non-compete obligations which are tacitly renewable beyond five years can benefit from the block exemption provided the contract can be effectively renegotiated or terminated with a reasonable notice period and at a reasonable cost.

Steven Vaz:
Now, the UK has not adopted this approach, which means that non-compete obligations which are tacitly renewable beyond five years are excluded from the block exemption. This doesn't prevent companies from entering into non-compete obligations which last for more than five years, but it does mean that a case by case assessment will need to be made to determine whether the restrictions in question infringe competition law.

Fiona Garside:
Turning next to the differences in dual distribution rules. In a previous episode we've talked about this in more detail, but to recap for listeners, dual distribution agreements are situations where a supplier sells its goods or services directly to end customers as well as through independent distributors. As a result, the supplier is in competition with its distributors. Now, while there are some nuances to the rules on when information exchange will be covered under the VBER and VABEO, the significant difference in this area is the treatment of OIS providers. Maria, what approach has the EU taken?

Maria Held:
The EU VBER does not apply to agreements relating to the provision of OIS, meaning online intermediation services, where the OIS provider also sells good to services in competition with the firms to which it provides such services. In these situations, the OIS provider is regarded as having a hybrid function, therefore needs to be assessed individually. The European Commission's rationale is that the OIS provider may have an incentive to favour their own sales and their ability to influence the outcome of competition between undertakings using their OIS. The Commission also notes in the vertical guidelines that it is unlikely to prioritise enforcement action in respect of vertical agreements relating to the provision of OIS by hybrid platforms where the agreement does not contain "by object" restrictions and the platform does not ensure significant market power.

Steven Vaz:
In contrast, the UK has taken a more relaxed approach in this area. The VABEO covers agreements involving OIS providers, regardless of whether they have a hybrid function.

Fiona Garside:
Thank you both. Again, recapping from a previous episode, previously exclusive distribution models involved a supplier appointing a single distributor for a particular territory or customer group and there was no concept of shared exclusivity. Both regimes have now introduced a concept of shared exclusivity. Could you each talk us through the approach in your jurisdiction? Maria, perhaps if we start with the EU?

Maria Held:
Yes, as you say, Fiona, the revised EU VBER now allows for a more flexible approach by allowing shared exclusive distribution to benefit from a block exemption provided that the territory or customer group is shared by a maximum of five exclusive distributors.

Steven Vaz:
That differs a little bit from the UK. In the UK the VABEO takes a similar approach but it doesn't prescribe a maximum number of exclusive distributors. Instead, the number of shared exclusive distributors should be determined in proportion to the territory or customer group in such a way as to secure a certain volume of business that preserves their investment efforts.

Fiona Garside:
And what other changes have been made to the exclusive distribution rules under the revised VBER and VABEO?

Maria Held:
Under the EU VBER, supplies may also require distributors to impose exempted restrictions on their own customers. For example, this means that a supplier could require a distributor to pass onto their immediate customers restrictions on making active sales into territories or customer groups exclusively allocated to other distributors. The block exemption, so the EU VBER, will not cover any further pass on down the distribution chain. Previously, it was not possible to impose any restriction upon the buyer's customers and benefit from the block exemption.

Steven Vaz:
In the UK, suppliers may only require distributors to pass on restrictions to its customers if the customer has either entered into a distribution agreement with a supplier or with a party given distribution rights by the supplier. It's unclear in practice whether this will result in a significant difference to the EU.

Another change in the UK is to allow the combination of selective distribution with exclusive distribution in the same territory, and that's provided the two operate at different levels of the supply chain. For example, the block exemption would apply if a supplier chose to use an exclusive distribution model at the wholesale level and selective distribution at the retail level. However, the EU has not made this change and the block exemption will therefore not cover the combination of exclusive and selective distribution models in the same EU territory.

Fiona Garside:
We've covered the differences in the rules around restrictions. Now, what about where a party to an agreement subsequently exceeds the market share threshold? How have the two regimes approached this issue?

Maria Held:
Thanks Fiona, under the EU if indeed a party's market share rises above 30% then the agreement will continue to benefit from the block exemption for two calendar years after the year in which the market threshold is exceeded.

Fiona Garside:
And Steven, is the same approach taken in the UK?

Steven Vaz:
That approach is taken in the UK, but if the relevant market share goes above 35% then the exemption will only apply for one year after that 35% threshold is exceeded.

Fiona Garside:
Speaking of the block exemption ceasing to apply, what powers do the CMA and the European Commission have to withdraw the block exemption for specific agreements?

Maria Held:
Under the EU law previously, the VBER allowed the block exemption to be withdrawn in parallel networks if similar vertical restraints covered more than 50% of the relevant market. Under the now new revised VBER, the Commission may withdraw the block exemption where a particular vertical agreement has effects that are incompatible with the efficiency exemption to the prohibition on anti-competitive agreements.

Steven Vaz:
In the UK, the CMA is able to cancel the block exemption for any agreement that it considers not to be exempt. In its recommendation to the Secretary of State, the CMA indicated that the withdrawal right will only be used in exceptional circumstances, however this does still introduce a degree of legal uncertainty. In the VABEO guidance, the CMA gives two examples of when the block exemption may be cancelled for individual agreements. Firstly, if the CMA considers that a particular agreement is not one to which the efficiency exemption applies, and that might be the agreement on its own or in conjunction with similar agreements. The second example is where there is a failure to comply with the obligation to provide the CMA with information without a reasonable excuse.

Fiona Garside:
Thank you. And just to finish up, are there any other discrepancies between the two systems that we should flag?

Steven Vaz:
So, Fiona, I think as we've already touched on, the UK rules provide the CMA with the power to request information in relation to vertical agreements and that requires any party to a vertical agreement to provide the requested information within ten working days. If a party fails to comply with this obligation without a reasonable excuse then the CMA may cancel the VABEO's application to the relevant agreement. This power has been designed to enable more effective enforcement of the rules and to encourage businesses to review their agreements to ensure compliance with the rules. There's no equivalent power under the EU VBER.

Fiona Garside:
Thank you both for that interesting overview of how the rules on vertical agreements have changed in the EU and UK.

Steven Vaz:
Thanks, Fiona.

Maria Held:
Thank you, Fiona and Steven.

Fiona Garside:
While the regimes remain broadly consistent, it is important that companies active in both jurisdictions understand the nuances and where the discrepancies lie. In particular, companies should consider the practical implications for different approaches to wide retail parity obligations and non-compete obligations which are tacitly renewable beyond five years.
If you're interested in learning more about the new EU Vertical Block Exemption Regulation and the Vertical Agreements Block Exemption Order in the UK, then we have a briefing available on our website, and don't forget to check out the other episodes in this series. To ensure you don't miss any future episodes do subscribe now on Apple podcasts, Spotify, or your favourite podcast platform. And while you're there, please feel free to keep the conversation going and leave us a rating or overview. We hope you found the series informative and thank you for listening.

Speaker 4:
If you enjoy Ashurst Legal Outlook, why not check out our other two podcast series as well. Ashurst Business Agenda tackles the big strategic issues that business leaders face, and ESG Matters at Ashurst reveals how business leaders are rising to mounting environmental, social, and governance challenges. You can listen and subscribe to Business Agenda and ESG matters wherever you get your podcasts.