New UK rules for distribution and other vertical agreements published

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New UK rules for distribution and other vertical agreements published

New UK rules for distribution and other vertical agreements published

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February 24, 2022

The UK government has published a draft Vertical Agreements Block Exemption Order (VABEO) which, from 31 May 2022, will set out how UK competition law applies to vertical agreements (i.e. those between parties at different levels of the supply chain that set out the conditions under which parties purchase, supply and resell goods or services, such as distribution agreements).

VABEO will replace the current Vertical Agreements Block Exemption Regulation in the UK, which was retained EU law after Brexit (Retained VABER). As the first major piece of UK competition legislation since Brexit, it will see some differences emerge between the approach of the UK and the EU – a potential challenge for businesses trading throughout Europe. Both the UK and EU have been reviewing the current rules in light of the growth of e-commerce since Retained VABER took effect in 2010. Here are links to our previous updates on these reviews:

Revision of competition rules governing vertical agreements
10 key points in the European Commission's proposals on Vertical Agreements
10 key points in the CMA's proposed new Vertical Agreements Block Exemption Order

Compliance with VABEO will ensure that a company can market its products or services without provisions in its distribution agreements infringing competition law, ensuring they are legally enforceable and not subject to potential fines. It will provide a safe harbour (and certainty) for vertical agreements so long as they meet VABEO's conditions: the market share of each party does not exceed 30% in its respective market(s) and the agreement does not include any specified "hardcore" or excluded restrictions.

Whilst many aspects of VABEO are familiar, as they are carried over from the Retained VABER, there are some key changes, which are summarised in the table below. Other provisions are also of note because the EU looks likely to take a different approach (the revised EU VABER is due to be published shortly).

VABEO	Implications	Is the EU likely to take the same approach?
Shared exclusivity	Allows a particular territory and/or customer group to be allocated to more than one "exclusive" buyer, so long as the number is in proportion to the territory/customer group, taking into account the volume of business required to recoup their investment.	Yes
Combining exclusive and selective distribution	This would allow suppliers to operate an exclusive distribution network at the wholesale level and a selective distribution system at the retail level.	Yes
Wide retail parity obligations (also known as "most favoured nation" (MFN) provisions) are hardcore restrictions which cannot benefit from exemption	Wide retail parity clauses are obligations that require one party to an agreement (usually a supplier) to offer the other party (often a platform) goods or services on terms that are no worse than those offered to any third party for retail. Narrow MFNs will benefit from exemption – these involve an agreement only that better terms will not be offered on a party’s own direct sales channel (e.g. its own website), without restricting terms of sales via other indirect channels.	Benefit of safe harbour likely to be excluded only for wide retail parity obligations imposed by online intermediation services
A supplier can charge higher prices for goods which will be sold online ("dual pricing")	This will no longer be a hardcore restriction, as it is not deemed necessary to provide preferential treatment to online sales. In addition, criteria for selective distribution systems no longer need to be equivalent for online and bricks-and-mortar retailers. These changes are intended to create a more level playing field between online and offline channels.	Yes
Buyers must be able to use the internet and one or more online advertising channels for the purposes of selling their goods or services online	Distributors must be free to sell online. The ability to advertise via price comparison websites or paid referencing on a search engine allows a distributor to attract potential customers to its website, and is regarded as a prerequisite for being able to sell online, whereas selling on a third party marketplace is not.	Yes
Non-compete obligations limited to five years	An obligation to refrain from selling competing products (or to buy at least 80% of the buyer's requirements from the supplier) must not be indefinite or exceed five years' duration. An agreement which automatically renews if not terminated is considered to be indefinite.	The EU is considering permitting non-compete obligations which last for longer than five years in certain circumstances
Restricting the customers of buyers not permitted	Suppliers can restrict active sales by other buyers into exclusively allocated territories, so long as sales by the buyers' customers are not restricted.	The EU is considering permitting the "pass on" of active sales restrictions to the customers of a supplier's buyer.
Dual distribution	Exemption will be available for "dual distribution", i.e. where a supplier not only sells its goods or services through independent distributors (such as retailers), but also directly to end customers in competition with its distributors.	The EU is consulting on an exclusion from exemption under VABER of information exchanges that are "not necessary to improve the production or distribution of the contract goods or services". It is not clear whether the EU has dropped an earlier proposal that exemption would apply only to dual distribution where the parties' aggregated market shares at the retail level did not exceed 10%.

There is to be a one year transition period for pre-existing agreements which comply with the Retained VABER. To strengthen its power to enforce UK competition law, the Competition and Markets Authority (CMA) will have a new power to require information from businesses in connection with vertical agreements within 10 working days. Failure to respond without reasonable excuse may result in the CMA cancelling exemption under VABEO for any vertical agreement to which the information request relates. This would clearly jeopardise the enforceability of such agreements and, depending on the circumstances, could lead to disputes or litigation between contracting parties.

Global supply chains are under particular scrutiny right now, with the CMA and other competition authorities warning companies not to use global supply chain disruptions as a cover for illegal anti-competitive conduct. Companies should therefore consider now whether their vertical agreements will benefit from exemption under VABEO or will need to be amended or replaced.