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New competition rules for supply chain agreements in the EU and UK as of 1 June 2022
To promote competition and the market benefits it brings, both the UK and the EU prohibit anti-competitive agreements and conduct by entities that constitute an abuse of a dominant market position. Anti-competitive agreements may be unenforceable, and those involved can be fined substantial sums.
The competition regime naturally applies to agreements between competitors but also applies to vertical agreements: agreements between two or more parties which each operate (for the purposes of the agreement) at different levels of the supply chain for the purpose of purchasing, supplying, or reselling goods or services. Distributors, suppliers, agents and resellers, and licensors and licensees should therefore be alert to the types of provisions restricted in vertical agreements under the competition regime.
What is the position in the UK?
Following separate review and consultation in both the UK and the EU, new rules for vertical agreements came into force on 1 June 2022 and will result in significant changes to the current competition legal framework. This article explores the main changes introduced by the new rules and the next steps for those engaged in vertical agreements in both the UK and the EU.
In the UK (as in the EU), agreements which have as their object or effect the prevention, restriction, or distortion of competition in the market are, as a general rule, prohibited. This general restriction would apply, for example, to an agreement where a supplier prohibits its distributor from distributing goods sourced from a competitor of the supplier or from selling the goods into specified territories.
However, both UK and EU law allows certain agreements to be exempt from the general prohibition, provided that specified requirements are satisfied.
The UK has approved a new exemption, known as the Vertical Agreement Block Exemption Order (VABEO), which came into effect on 1 June 2022. By complying with VABEO, businesses involved in vertical agreements can distribute their products and services without infringing UK competition law. For UK businesses, VABEO effectively replaces the EU block exemption for vertical agreements (see below) that applied previously but introduces some new principles that should be noted.
What is new with VABEO?
- Levelling the playing field for brick-and-mortar shops - VABEO removes the existing hardcore restriction (absolute ban) that prevented the party from setting up a selective distribution system from imposing criteria for online sales that are not equivalent to the criteria imposed for sales via a brick-and-mortar shop. It also removes the hardcore restriction on dual pricing, i.e. where a distributor is charged a higher price for products sold online than for those sold in a physical shop. Given the differences in operational costs, these changes are intended to create a more even playing field between e-commerce and brick-and-mortar store sales.
- Shared exclusivity and combined exclusive/selective distribution - VABEO introduces the concept of shared exclusivity – allowing for the appointment of more than one exclusive distributor in a territory – and the combination within a particular territory or customer group of both exclusive distributors (supplying only to one distributor) and selective distribution systems (supplying only to distributors that satisfy certain criteria). The impetus is to increase flexibility for distribution arrangements.
- Parity obligations - Parity obligations (often referred to as ‘most favoured nation’ clauses) are commonly divided into two classes. Wide parity obligations require the supplier to undertake that the relevant products or services will not be made available to end customers through any other sales channels (including the supplier’s own e-commerce site and those of other distributors or online platforms) on better terms than those available through the sales channel of the party benefiting from the clause. Narrow parity obligations require that better terms cannot be offered on a party’s own sales channel (such as the supplier’s e-commerce site), but sales via other indirect channels are not subject to the same restriction. Neither type of parity obligation was a hardcore restriction under the old regime, but VABEO will make wide retail parity obligations (i.e. wide parity obligations where the products are made available to end-users/consumers) a hardcore restriction, meaning that agreements containing such terms will no longer benefit from the block exemption. Wide parity obligations within a business-to-business arrangement and narrow parity obligations will not be considered as part of this hardcore restriction and will remain block exempt.
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New powers for the Competition and Markets Authority (CMA) - The CMA will have the power to request additional information from businesses in connection with vertical agreements, such information to be provided within ten working days. Failure to respond may result in the CMA removing the exemption under VABEO for such an agreement, resulting in difficulties enforcing its terms and potential dispute.
What is the position in the EU?
The corresponding exemption in the EU is known as the Vertical Block Exemption Regulation (VBER). The previous version expired on 31 May 2022 and was replaced with the new Vertical Block Exemption Regulation (New VBER) from 1 June 2022.
What is different with the New VBER:
- Shared exclusivity, combined exclusive/selective distribution, dual pricing and different criteria for e-commerce and brick-and-mortar sales, as discussed above under the UK regime, will also be largely replicated within the New VBER (with some variances).
- Dual distribution - Dual distribution is where a supplier sells goods or services through independent distributors but also directly itself to end customers in direct competition with its distributors. Under the New VBER, the existing exemption for dual distribution is extended to wholesalers and importers. Dual distribution has become more common, particularly as e-commerce has become more prevalent, and businesses looking to increase their access to the market will welcome additional flexibility in this area.
Next steps
Both UK and EU regimes commenced on 1 June 2022 and have a one-year transitional period. During this time, businesses should consider the following action:
- Review existing agreements within the supply chain where goods and/or services are traded within the UK and/or the EU. Identify any existing terms of such agreements which are now considered a hardcore restriction under the UK and/or EU regime (as applicable) and revise the terms accordingly to ensure the agreement continues to benefit from the applicable block exemption.
- Take the new regime into account for future agreements - The revised legal framework within the UK and the EU presents an opportunity for businesses (and particularly brand owners) to introduce new restrictions which were previously classed as hardcore restrictions and prohibited.
- Identify which competition regime applies - Review existing and future arrangements and conduct a mapping exercise of the supply chain to identify which elements of the business and corresponding agreements are governed by the UK and/or EU competition regime.
- Seek legal advice - From 1 June 2022, the UK and EU competition regimes will diverge, creating subtle differences for businesses to be aware of. Businesses operating in both the UK and the EU should seek early legal advice to ensure existing, and future agreements are compliant with the two regimes.