We are increasingly being asked to advise our national and international clients on what amendments are potentially needed to UK and EU supply and distribution agreements following the recent introduction of the new Competition Act 1998 (Vertical Agreements Block Exemption) Order 2022 (“VABEO”).
Before Brexit, supply and distribution (“vertical”) agreements were governed by the same rules of competition law in the UK and EU. On 1st June 2022, the old EU law that had been retained post-Brexit expired and two different sets of rules kicked in – VABEO in the UK and in the EU, Regulation (EU) 2022/720 (“VABR 2”).
Whilst VABEO does not seek to involve a total overhaul of the current rules, there are a number of changes to the UK competition rules that need to be considered:
- ‘Wide retail parity obligations’ in agreements will become a ‘hardcore’ restriction – these obligations require that a product or service is not offered on better terms on any other sales channel (whether offline or online). This would include both the product supplier’s own website and any other indirect channels such as third-party distributors or online platforms. The reason for this change is that the CMA is concerned that such obligations restrict competition between competitors by reducing their incentives to compete on price, to innovate and to enter markets or expand. However, the restriction does not apply to ‘narrow retail parity obligations’ so parties can agree a restriction on a supplier offering better terms on its own website and the restriction only apply to agreements that relate to the offer, sale or resale to end users.
- Resale price maintenance – under VABEO, obligations not to resell products below an agreed price will remain ‘hardcore’ and strictly illegal (with very few exemptions such as product launches in certain circumstances). One change to this area is that there has been clarification that online platforms are NOT considered genuine agents because they generally act as independent economic operators and so it will be important for organisations to review any existing agency agreements with online platforms to see if they need to be amended. The CMA are still taking this area extremely seriously as we have seen recently with the Dar Lighting Limited case where a fine of £1.5m was issued due to distribution agreements that restricted retailers from setting their own prices online.
- Exemption will now be available to a wider spectrum of ‘vertical’ relationships – the growth of the digital economy and sales online has led to an increase in businesses choosing to put in place ‘dual distribution’ models. An example of this is where an organisation chooses to sell to both retail and wholesale customers, which results in the organisation and its wholesale customer competing for the same retail customers. Such agreements will not fall under VABEO unless they are non-reciprocal and fall within one of the ‘dual distribution’ exemptions (an example of an exemption is where there is an agreement between suppliers and distributors where the supplier both manufactures and distributes products and the distributor does not compete at the manufacturing level).
- Opportunity to treat sales made online and offline differently – online shopping has grown exponentially in recent years and has created problems for the high street. Whilst the previous EU law very much protected and even supported online sales, VABEO redresses the previous imbalance and allows suppliers to benefit from an exemption where they charge a higher price for products intended to be sold online than for products to be sold instore by the same distributor (known as dual-pricing) and also set out different criteria for online and offline sales under a selective distribution system. It further clarifies that businesses can restrict the use of a specific sales channel (an example would be an online marketplace). However, restrictions which aim to specifically prevent the use of the internet as a sales channel will remain ‘hardcore’.
- More flexibility in the design of distribution systems – restrictions on the customers and territories to which a buyer can sell will continue to be ‘hardcore’ restrictions under the VABEO. That said, the scope of the exemption to this general rule will now be extended to allow the combination of selective and exclusive distribution in the same or different geographical areas, shared exclusivity in a geographical area or for a customer group (an example would be allowing the allocation of a geographical area to more than one distributor) and greater protection for those within a selective distribution system against sales from outside the geographical area to unauthorised distributors inside that geographical area.
- CMA Audit – VABEO provides the CMA with a power to request information in relation to supply and distribution agreements. It requires any party to provide the requested information within 10 working days and failure to comply with this obligation, without reasonable excuse, could lead to the CMA cancelling the application of the VABEO to the agreement concerned. This power gives more effective enforcement of the rules going forward and as such, should encourage businesses to review their agreements to ensure compliance with the new regime.
It should be noted that this briefing focuses only on a few changes that have been made by VABEO to the competition law rules for distribution and supply agreements in the UK and is not exhaustive. It also doesn’t cover the differences between VABEO and VABR 2 – which also need to be considered when amending agreements that cover cross-border distribution and supply. This article does not provide legal or other advice and you should not take or fail to take action based on its content.
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