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Replacing the Vertical Agreements Block Exemption: approaching a year to go

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10/05/2021

On 31 May 2021, the Vertical Agreements Block Exemption Regulation (VBER), which exempts certain agreements from the EU and UK prohibitions on anti-competitive agreements, enters its final year of service before its scheduled expiry at the end of May 2022. Both the UK’s Competition and Markets Authority (CMA) and the European Commission (EC) have begun consultations on whether to replace the current instrument and its accompanying guidelines and, if so, how the replacements can tackle some of their predecessors’ shortcomings.

As the proposals develop, businesses will wish to consider how this may affect their supply and distribution agreements going forward (such as requiring amendment of existing contracts or presenting further opportunities to develop distribution strategy). Those doing business in both the UK and the EU should also consider how a possible divergence in approach between the two regimes may affect them.

What is VBER and what does it do?

Under Article 101 of the Treaty on the Functioning of the European Union (Article 101) and its UK equivalent, Chapter I of the Competition Act 1998 (the Chapter I Prohibition), anti-competitive agreements are generally prohibited, unless their efficiency-enhancing benefits outweigh their anti-competitive effects, in which case an exemption may apply.

The VBER provides a ‘block’ exemption from the application of Article 101 for vertical agreements (i.e., those between businesses operating at different levels of the supply chain) where the market share of each of the parties to the agreement does not exceed 30% and the agreement does not include any so-called ‘hard-core’ restrictions (such as resale price maintenance or an outright ban on the distributor making sales in certain territories or to certain customers). The VBER also sets out a short list of ‘excluded restrictions’ which are not covered by the block exemption but whose inclusion in a vertical agreement will not preclude exemption for the rest of the agreement. This list includes, for example, non-compete provisions which are indefinite or exceed five years.

The EC’s Guidelines on Vertical Restraints (the Guidelines), published shortly after the current VBER, set out the principles the EC will apply when assessing vertical agreements under Article 101. As well as providing guidance on the application of the VBER, the Guidelines explain the types of vertical agreement that generally fall outside the scope of Article 101 (such as ‘genuine agency’ arrangements) and how agreements which do not benefit from exemption under the VBER (for example, because one or more of the parties exceeds the 30% market share threshold) should be assessed.

How has Brexit impacted the VBER?

The current VBER was retained in full in the UK following the end of the Brexit transition period, meaning that the same instrument currently operates as an exemption to both Article 101 and the Chapter I Prohibition.

When it expires on 31 May 2022, the UK will technically be free to deviate quite significantly from the EU’s approach to a new block exemption and accompanying guidelines. However, the UK started its review over two years after the EU. Therefore, on a practical level, while it would be surprising if the CMA were to follow exactly the approach taken by the EC, this shortened timetable may limit the scope of the changes the CMA is able to put forward.

What changes are expected in the replacement VBER?

It is widely recognised that the current rules need to be revised to reflect recent market developments (in particular, the growth of online sales and new market players, like online platforms), to refer to case law not incorporated in the present rules and to clarify certain points of potential confusion.

The EC’s Inception Impact Assessment[1], which kicked off the formal replacement process at the EU level, acknowledged as much and explained that the EC is looking to provide further clarity in certain areas, such as the rules relating to restrictions on distributors’ use of price comparison websites and online advertising, and the application of the rules to online marketplaces. It is also looking to clarify when resale price maintenance may satisfy the criteria for exemption from Article 101 and to change the rules on non-compete provisions so that a tacitly renewable non-compete obligation can benefit from the VBER to the extent the buyer can periodically terminate or renegotiate the agreement.

The EC also recognised that more significant changes to the rules may be required in a few key areas:

  • Dual distribution – the EC is considering whether a supplier’s non-reciprocal arrangements with its resellers should continue to be covered by the VBER where the supplier also sells its products directly to consumers. One option is to introduce a threshold based on the parties’ market shares in the retail market, above which the block exemption would not apply;
  • Active sales restrictions – the current VBER permits restrictions on a distributors’ ability to make active sales to certain customer groups or territories in only limited circumstances. Recognising that this limits suppliers’ flexibility to design distribution systems to suit their business needs, the EC is considering if these rules should be relaxed;
  • Indirect restrictions of online sales – the VBER currently allows only very limited differentiation between online and offline sales channels, despite their inherent differences. In particular, charging the same distributor a higher wholesale price for products intended to be sold online (‘dual pricing’), or imposing selective criteria for online sales that are not truly equivalent to the criteria imposed in brick-and-mortar shops (the ‘equivalence’ principle) are hard-core restrictions. The EC is considering whether dual pricing and/or failure to satisfy the equivalence principle should no longer be treated as hard-core restrictions, with certain safeguards; and
  • Parity obligations (or “most-favoured nation” clauses) – parity obligations typically require suppliers to provide the same pricing and/or other conditions to a given customer as those offered to third parties. These provisions are exempt under the current VBER, but have been found to be harmful under certain scenarios in a number of recent cases[2]. The EC is considering whether it should remove the benefit of the VBER for some or all types of parity provisions and include them within the list of ‘excluded restrictions’.

The CMA is known to be considering similar issues in its own review of the VBER.

What is the timetable for the replacement?

Both the UK and EU timetables centre on the expiry of the current VBER on 31 May 2022. In principle, this is the longstop date for adoption of a replacement block exemption, although this does not necessarily mean that the reform process will be entirely completed at this stage.

In 2021, we expect to see a draft of the EU replacement regulation (possibly before the end of May), as well as the CMA’s formal recommendation to the Secretary of State for Business, Energy & Industrial Strategy (BEIS).

A detailed timeline of the UK and EU’s current plans is included below:

October 2020

EU: EC publishes its impact assessment on the replacement of VBER for public consultation.

November 2020

EU: Deadline for responses to the EC’s impact assessment consultation.

December 2020

EU: EC launches general public consultation on policy options for VBER replacement.

February 2021

UK: CMA announces that it is reviewing the VBER.

EU: EC publishes its working paper on the application of Article 101 to agreements with ‘dual agents’.

March 2021

EU: Deadline for responses to the EC’s general public consultation.

Spring 2021

UK: CMA conducts stakeholder roundtable discussions.

EU: EC publishes draft replacement VBER for consultation (expected May 2021).

Summer 2021

UK: CMA publishes draft replacement VABE for consultation.

6 July 2021

UK: Deadline for responses to the CMA public consultation.

Autumn 2021

UK: CMA will provide a final recommendation to the Secretary of State for BEIS.

End of 2021

EU: EC submits proposed replacement to the European Parliament and Council for debate and amendment.

31 May 2021

Expiry of the current VBER (and deadline in principle for replacement).

Walker Morris will continue to report on the progress of the VBER replacements in both the UK and the EU. The next step will be publication of the EU proposals for a new regulation, expected later in May. For further information or advice on how changes to the VBER may affect you, please do not hesitate to contact any of our competition law experts.

 

[1] European Commission (DG COMP), ‘Inception Impact Assessment for Revision of the Vertical Block Exemption Regulation and the Vertical Guidelines’ (23 October 2020).

[2] For example, investigations have been conducted into online travel agents in both the UK and EU, where MFNs are frequently used by competing booking sites (such as Booking.com and Expedia). Other cases include the CMA’s investigation into motor insurance price comparison websites and the EC’s investigation into several of Apple’s supply relationships with publishers of e-books which are distributed on Apple devices.

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