Whilst not a sea of difference apart, the two regimes present notable distinctions for companies operating on both sides of the Channel to navigate.
Upon its expiry on 31 May 2022, the 2010 Vertical Block Exemption Regulation was replaced by the 2022 Vertical Block Exemption Regulation (VBER) in the EU and the Vertical Agreements Block Exemption Order (VABEO) in the UK. The European Commission (EC) issued its Vertical Guidelines at the same time whilst the UK Competition and Markets Authority (CMA) published its VABEO guidance in July 2022. Both the EU VBER 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 regimes now applicable to “old” and “new” vertical agreements alike, this blog post provides an overview of the key differences between the EU VBER and the UK VABEO. It follows and updates our previous blog post which included an outline of the main similarities and differences between the draft UK VABEO and the draft EU VBER (as of September 2021).[1]
What Is the Vertical Block Exemption?
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, companies have been required to self-assess whether their agreements comply with EU and UK competition law, superseding the prior negative clearance regime. In a self-assessment context, a block exemption is valuable, providing a safe harbour for businesses allowing them to proceed with confidence provided that the agreement respects stipulated thresholds and features. In the case of vertical agreements, these thresholds and features are that:
- the market share of each party to the vertical agreement in its relevant market does not exceed 30%; and
- the vertical agreement does not contain any “hardcore” restrictions (such as upstream suppliers dictating the downstream resale price, known as “resale price maintenance”).
Vertical agreements which do not meet either condition do not necessarily infringe competition law. Rather, they are subject to a case-by-case assessment of their restrictive effects and countervailing efficiencies.
Up until 31 May 2022, a single self-assessment exercise would have covered compliance with both EU and UK competition law. Now, businesses are required to apply the EU VBER for vertical agreements that have effects in the EU and the UK VABEO for vertical agreements that have effects in the UK. As the House of Commons Business, Energy and Industrial Strategy Committee has warned, regulatory divergence over time will result in additional compliance costs for businesses trading in both the EU and the UK.[2] A working knowledge of the differences between the two vertical block exemption regimes can be a valuable tool in managing compliance costs and minimising impact on UK-EU trade more broadly.
Key Differences Between the EU and UK Regimes
Whilst the UK VABEO and the CMA’s accompanying guidance share many concepts and substantive provisions with the EU VBER and Vertical Guidelines, notable differences include the following:
Parity obligations/most favoured nation (MFN) clauses. This is perhaps the most complex area to navigate from a comparative perspective. In the UK, a recent judgment of the Competition Appeal Tribunal (CAT) in BGL (Holdings) Limited & Others v. The Competition and Markets Authority[3](BGL v. CMA) arguably calls into question the treatment of “wide” retail MFN clauses under the UK VABEO and, more generally, challenges the predominantly negative perception of such clauses that has developed on both sides of the Channel.
“Wide” retail MFN clauses — or “indirect sales channel parity obligations” — prevent suppliers from offering a product or service on better terms on any other sales channel in a retail context (i.e., to end users). All wide retail parity obligations (whether online and/or offline) — and measures with equivalent effect — imposed by any type of company constitute “hardcore” restrictions under the UK VABEO. An agreement with such an obligation therefore cannot benefit from the block exemption under the UK VABEO. Instead, such agreements must be analysed on a case-by-case basis to determine whether they infringe competition law.
The approach to retail MFN clauses in the EU VBER is less stringent than under the UK VABEO. Under the EU VBER, only wide retail parity obligations imposed by “online intermediation services” (OIS) providers attract stricter treatment. Moreover, such wide retail parity obligations are “excluded restrictions” rather than “hardcore restrictions”. This means that, provided that it is severable from the rest of the agreement, only the wide retail parity obligation imposed by the OIS supplier will not benefit from the block exemption under the EU VBER and will be assessed individually to determine whether it infringes competition law. Other parts of the agreement may still benefit from the block exemption provided that the conditions described above are met. Conceptually, this approach appears closer to the CAT’s judgment in BGL v. CMA, although it is not a given that the wide MFN clauses in that case would have been found not to infringe competition law on the other side of the Channel as well. Indeed, even within the EU, parallel Member State proceedings regarding price parity clauses in the online hotel booking sector have led to divergent outcomes. The EC’s Vertical Guidelines express similar potential concerns with wide retail MFN clauses as those espoused by the CMA, albeit in considerably more nuanced terms than the CMA’s VABEO guidance.
In BGL v. CMA, the CAT concluded that no anticompetitive effects were proven for the wide retail MFN clauses in that case (which concerned home insurance products on a price comparison website and which the CAT analysed at length). It also cast significant doubt over the theoretical underpinnings of wide retail parity provisions in general harming competition. These theoretical underpinnings are reflected in the CMA’s VABEO guidance (published less than a month before the CAT’s judgment) and informed both the treatment of wide retail parity obligations as “hardcore” restrictions under the UK VABEO and the practice of the CMA (and other competition authorities) in this space. The CAT’s judgment has not been appealed and it is currently the leading authority on analysing wide retail MFN clauses in the UK. It offers valuable and detailed guidance on the competitive assessment of agreements with wide retail parity obligations and it is likely significantly to influence the CMA’s — and perhaps other competition authorities’ — practice in this area.
“Narrow” retail MFN clauses (preventing suppliers from offering a product or service on better terms on their own direct sales channels only), as well as both wide and narrow parity obligations imposed at upstream business-to-business levels (not relating to the provision of goods or services to end users) may benefit from block exemption in both the UK and the EU. These restrictions are considered less likely to result in consumer harm: for example, the CMA’s VABEO guidance notes that the effects of business-to-business parity clauses (in particular, on consumers) will depend on the complexity of the vertical supply chain and the strength of competition downstream.
Dual distribution. By contrast to wide retail MFN clauses, the UK VABEO takes a more lenient approach to dual distribution than the EU VBER. Dual distribution occurs when a supplier sells goods or services not only at the upstream level, but also at the downstream level in competition with its independent distributors. Dual distribution and information exchange in dual distribution continue to be block-exempted under UK VABEO. The CMA’s VABEO guidance leaves horizontal concerns that may arise when a supplier competes directly with its distributors, notably in relation to information exchange, to be self-assessed and managed by businesses. By contrast, the EU VBER addresses such concerns outright:
- Dual distribution where OIS providers (e.g., online marketplaces) offer goods and services in competition with other companies using their online platform (also called “hybrid OIS”) is not block-exempted under the EU VBER. However, the EC’s Vertical Guidelines indicate that the enforcement action in relation to hybrid OIS is unlikely to be prioritised in the absence of “by object” restrictions of competition or significant market power.
- Information exchange in dual distribution is only block-exempted under the EU VBER when it is both (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. This cumulative two-limb test is explicitly set out in the EU VBER. No equivalent test exists in the UK VABEO, but the CMA’s VABEO guidance indicates that only information exchange which is “genuinely vertical” will be block-exempted. This is arguably synonymous with the first limb of the test under the EU VBER. Indeed, the CMA’s VABEO guidance on information exchange in dual distribution is extremely similar in substance to the EC’s Vertical Guidelines: for instance, they both offer the same examples of information exchange that is generally (i) likely, and (ii) unlikely to be block-exempted.
Exclusive distribution. The UK VABEO also takes a more lenient approach than the EU VBER to exclusive distribution (i.e., a distribution system in which the supplier allocates a territory or a group of customers exclusively to one or a limited number of buyers, restricting all its other buyers from actively selling into that exclusive territory or to that exclusive customer group):
- Both the UK VABEO and the EU VBER allow “shared exclusivity” between a number of appointed distributors, but this number is “limited” in the UK VABEO and explicitly capped at five in the VBER. The CMA’s VABEO guidance indicates that the “limited” number of appointed distributors “should be determined in proportion to the allocated geographical area or customer group in such a way as to preserve the incentive of the distributors to invest in promoting and selling the supplier’s goods or services, while providing the supplier with sufficient flexibility to design its distribution system”.[4] The EU VBER’s maximum number of appointed distributors aims to promote the same objectives whilst also providing increased legal certainty.
- The CMA’s VABEO guidance allows the combination of exclusive and selective distribution systems at different levels of the supply chain within the same territory, whereas combining exclusive and selective distribution within the same territory is not block-exempted under the EC’s Vertical Guidelines. This may result in suppliers designating the UK (or parts of it) as territories within which they may combine exclusive and selective distribution at different levels of the supply chain (e.g., exclusive wholesale distributor(s) with retail distributors appointed under a selective distribution system). By contrast, such a practice would not be block-exempted in the EU. The combination of exclusive and selective distribution systems across different territories is explicitly allowed under both regimes.
Non-compete clauses. The UK VABEO takes a stricter approach than the EU VBER 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 UK VABEO, provided that the relevant conditions are met.) By contrast, non-compete obligations which are tacitly renewable beyond five years are covered by the EU VBER, provided that the contract can be renegotiated or terminated with a reasonable notice period and at reasonable cost.Non-compete clauses with a duration not exceeding five years are block-exempted under both the UK VABEO and the EU VBER.
Duration. The UK VABEO ceases to have effect on 1 June 2028, whereas the EU VBER expires six years later, on 31 May 2034, in keeping with the usual 12-year duration for block exemption regulations. The stated rationale for the UK VABEO’s shorter duration is to enable the UK government to reflect and action market developments more quickly in the UK VABEO’s successor. However, the shorter duration will also mean that businesses may face changes and potential divergence from the EU VBER sooner.
Obligation to provide information. 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”.[5] 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 agreement(s) (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 the EU VBER, although the EC and national competition authorities in EU Member States may withdraw the benefit of the block exemption in other circumstances.
Practical Implications
Differences between the UK and EU regimes are modest in the round; neither regime is inherently more hostile or favourable to vertical restraints. Whilst the UK VABEO takes a more stringent approach to wide retail MFN clauses, in practice this approach is likely to be dampened by the CAT’s judgment in BGL v. CMA. On the other hand, the UK VABEO’s more lenient approach in relation to dual distribution and exclusive distribution will likely be of limited practical utility for companies operating on both sides of the Channel (in particular, hybrid OIS providers) or companies whose vertical agreements have effects in the EU, where they will need to comply with the more stringent rules under the EU VBER. Finally, the CMA’s new information-gathering power suggests that vertical agreements will likely continue to be a focus area for the CMA’s monitoring and enforcement activity. Indeed, the CMA has been one of the most active European competition law enforcers pursuing vertical agreements in recent years.
Endnotes
[1] For a detailed overview of the EU VBER and Vertical Guidelines, please refer to the Vertical Block Exemption Regulation and Guidelines Antitrust Client Briefing (27 May 2022).
[2] Post-pandemic economic growth: state aid and post-Brexit competition policy, House of Commons BEIS Committee Fourth Report of Session 2022-2023 (published on 25 October 2022).
[3] BGL (Holdings) Limited & Others v. The Competition and Markets Authority, CAT judgment of 8 August 2022.
[4] CMA VABEO Guidance (12 July 2022), paragraph 10.59.
[5] Ibid., paragraph 11.2.
