Hot off the press: the Competition and Markets Authority this week published the draft text of the Verticals Agreements Block Exemption (VABE) which will replace the EU Vertical Block Exemption Regulation (VBER), which was retained into UK law following Brexit. The VBER provides a safe harbour for certain restrictions in ‘vertical’ agreements between businesses operating at different levels in the supply chain (such as producers, distributors, and retailers).

While we still await the detailed guidance, the CMA has now confirmed the key divergences and convergences we can expect from the VBER that will be adopted at the same time in the EU in June 2022. The VABE text is open for consultation until 16 March.

The updated EU and UK vertical rules create a more lenient approach in some key areas, while strengthening restrictions in others. For businesses operating in both the EU and UK, awareness of the differences will be essential when designing and implementing their distribution networks.

Comforting convergence

While it was not a surprise to anyone that both authorities have stuck to their guns on retaining resale price maintenance as a ‘hardcore’ restriction (i.e. which is in general considered to be anti-competitive), many businesses will welcome the additional expected flexibility in their distribution arrangements on both side of the pond.  Specifically, the following types of agreements will no longer be treated as ‘hardcore’ restrictions in the UK and the EU:

• shared exclusivity by multiple exclusive distributors for a territory or customer group
• protections for selective distribution systems against sales from outside the territory to unauthorised distributors within the territory
• non-equivalent criteria for online sales and offline sales in the context of selective distribution
• dual/differential pricing for products intended to be sold online and offline by the same buyer

The convergence on paring back the protections on online sale restrictions is not surprising given the immense growth in the digital economy, which to some extent has placed bricks & mortar stores in a precarious position. Undoubtedly many businesses will find comfort in the convergence on these issues but query whether the difference in the drafting of these sections in the EU and UK exemptions may still give rise to some divergence.

Difficult divergence

While there is welcome convergence on the additional flexibility for exclusive and selective distribution on both sides of the pond (as noted above), the CMA and the European Commission (EC) have each taken a stricter approach in certain areas.

Distribution networks – a mixed bag

In particular, it is puzzling why the CMA has opted against the EC’s sensible approach of allowing the exclusivity and selective distribution restrictions to be passed on to the next level of buyers, which helps preserve the essence of these distribution systems. Similarly, it is unclear why the EC has decided against allowing for the combination of selective and exclusive distribution in the same territory, which will be allowed in the UK. These are not minor divergences, and it will be interesting to see how businesses opt to amend their pan-European distribution agreements.

Dual distribution – EU takes a stricter approach

Many UK-based businesses are no doubt relieved that the CMA has rejected the EU’s proposal on dual distribution arrangements, involving vertical agreements between suppliers and on-sellers who compete at the supply (but not manufacturing) level. In the EU (on the current drafting), businesses with combined retail market shares exceeding 10% will need to take extra measures to protect against anti-competitive information exchange between such suppliers and on-sellers since this will be carved out of the safe harbour.

Additionally, hybrid platforms, which sell goods or services in competition with firms to which they provide online intermediation services, will not benefit from the VBER in the EU and will have to carefully self-assess any vertical restrictions in their distribution arrangements.

Of course, for pan-European businesses, a differential approach for the more lenient UK would most likely not make sense.

Parity obligations (so-called most favoured nation clauses) – UK takes a stricter approach

A key point of divergence stems from the perceived anti-competitive effects of wide parity obligations in the retail space, involving a requirement that a supplier offers the same prices and terms for its products as offered to end users on all other sales channels. The CMA perceives the harmful effect on consumers to justify designating such parity clauses as ‘hardcore’ restrictions.

Here, the EU takes a slightly more nuanced approach and merely excludes such parity obligations from the safe harbour of the VBER, which will require platforms to self-assess the overall competitive effect of such clauses.

For pan-European businesses, in particular platforms, this may give rise to a slight conundrum in terms of adapting their distribution arrangements, where the UK tail may end up wagging the EU dog.

Watch this space!

With three months before the revised EU and UK exemptions come into force, the CMA still needs to consult on its VABE and the guidance - which has not yet been published. Thankfully, both exemptions anticipate a transitional period of one year.