Closer together? Final UK guidance on vertical agreements closes the gap with the EU - somewhat
The long-awaited final guidance to accompany the UK’s new Vertical Agreements Block Exemption Order (VABEO) has now been published. Similar to the refreshed EU Vertical Block Exemption Regulation (VBER) and accompanying vertical guidelines (see our recent client alert on this here), the VABEO provides a safe harbour for certain restrictions in “vertical” agreements between businesses operating at different levels in the supply chain, and the new guidelines provide significant insight on how this new regime will work in practice.
The final guidance came around six weeks after the refreshed VABEO came into force on 1 June 2022. There are many parallels between VABEO and VBER and its own amended guidelines. However, there were also some notable discrepancies between the EU and UK draft rules. With the final UK guidance now published, some of these gaps have closed, which will avoid interpretational discrepancies across the channel. Nonetheless, some important divergences remain.
In particular, the new guidance has brought the EU and UK closer together with respect to the treatment of resale price maintenance (including minimum advertised prices (MAPs) and fulfilment contracts), dual pricing and the non-equivalence principle, as well as the approach to hardcore restrictions. However, divergences remain in respect of the dual distribution exemption (in particular on permissible information exchanges and hybrid platforms), treatment of wide retail parity clauses, the approach to shared exclusivity, and acceptance of tacitly renewable non-competes.
RPM – general alignment but some differences remain
The approach to resale price maintenance has remained largely the same in both the EU and UK, with RPM remaining a hardcore restriction. However, there has been a notable shared development: minimum advertised prices.
The final EU rules designated MAPs as a “hardcore” restriction in a last-minute clarification. The earlier draft UK rules, mirroring the EU’s initial approach, did not take such an explicit approach to MAPs. Instead, they noted that MAPs could amount to RPM in certain instances. We have seen a change in this approach with the final UK guidance, where MAPs are now more explicitly included as conduct that will constitute RPM, thus aligning with the EU’s final position.
In a further last-mile addition, the UK guidance now also provides an efficiency defence for using MAPs to protect against brand damage through loss leadership. This addition mirrors the final EU guidance almost verbatim.
Another area where the UK guidance has been amended to mirror (essentially verbatim) the EU position is with respect to fulfilment contracts. The guidance now expressly provides that the imposition of resale prices by a supplier on a distributor in fulfilment contracts would not amount to RPM, where the undertaking providing fulfilment services is selected by the supplier (not customer).
However, it is important to note there has not been a wholesale adoption by the UK of the EU approach to RPM – for example, unlike in the EU, the UK has not expressly included free-riding as one of the efficiency defences for RPM.
Dual pricing and non-equivalence principle – wholesale alignment
Both the EU and UK have seen a relaxing of rules on dual pricing. Dual pricing is where a supplier charges different wholesale prices to the same reseller for products intended to be resold online or offline. Under the new rules, dual pricing will no longer be treated as a hardcore restriction, provided it does not have the object of preventing the effective use of the internet or restricting sales to particular territories or customers. The UK guidance has replaced its previous formulation (which required a “proportionality” type assessment) and now mirrors the final EU wording.
Similarly, the UK guidance has adopted the EU formulation for the non-equivalence principle. This means that suppliers in a selective distribution system will be able to impose non-equivalent criteria on online and offline sales without this being considered a hardcore restriction, provided that this does not have the object of preventing the effective use of the internet. The draft UK text previously referred to “identical” criteria and now has been brought in line with the EU text in referring to “equivalent” criteria.
Hardcore restrictions – some clarifications
In a further alignment in the approach with the EU rules, the UK guidance now includes clarification regarding the de minimis exemption. Unless an agreement has the object of restricting competition, if the parties’ market share does not exceed 15%, then the agreement will fall outside the scope of the Chapter I prohibition. This is more relaxed than the previous iteration of the guidance, which provided that agreements with “hardcore” restrictions would not benefit from the 15% exception to the application of Chapter I.
Another welcome alignment is the addition of a paragraph in the UK guidance to address the implications for extra-territorial conduct. This new addition clarifies, in line with the EU approach, that restrictions relating to “exports outside the UK or imports/re-imports from outside the UK” are “unlikely” to have an object of restricting competition and would be assessed on an effects basis. Notably, in the EU guidance, this is more categorical, stating that such conduct “cannot” have the object of restricting competition.
Dual distribution – remaining divergence on information exchange and hybrid platforms
In a dual distribution scenario, where the supplier is active both upstream and downstream, the supplier competes with its independent resellers on the distribution market. While generally distribution agreements between competitors are excluded from the safe harbour, an exception applies where the supplier and the distributor compete at the downstream level but not at the upstream level (i.e. where the distributor buys the products from the supplier).
In alignment with the recent EU reforms, the UK guidance extends the exception to suppliers who are wholesalers or importers, and allows for information to be exchanged between the supplier and distributor in a dual distribution scenario – if that information is required for the implementation of the vertical agreement. However, in divergence from the EU approach, the UK guidance does not have an additional requirement that such an information exchange must improve the production or distribution of the contract goods or services. The UK guidance does contain a list of examples of what type of information in the context of dual distribution would, and would not be, covered by the VABEO. This list largely mirrors the EU guidance.
While this might seem like a small difference, this discrepancy serves to highlight the potential risk for businesses navigating vertical agreements in both the EU and the UK, especially where the regimes are seemingly similar. In theory, information exchange that might be legitimate in the UK might not be exempted in the EU – and the repercussions for illegally exchanging information with what are essentially competitors could be high. It will be interesting to watch this space and see how this divergence plays out in practice since the list of “dos and don’ts” provided by both the EU and UK guidance are essentially the same.
The other stark divergence is that, unlike the approach taken in the EU, the UK vertical rules do not deprive hybrid platforms (i.e. providers of online intermediation services (OIS) that also sell products in competition with customers of its OIS) from the benefit of the dual distribution exemption.
Territorial and Customer Restrictions – alignment with a twist
The VABEO and guidance largely mirror the EU approach to exclusive and selective distribution, simultaneously relaxing and tightening the restrictions, with a few differences.
New protections for selective distribution largely aligned
For example, in alignment with the EU, the UK guidance provides that where a supplier operates an exclusive or “free” distribution system in one territory, and a selective one in another, they can restrict active and passive sales by exclusive (or “free”) distributors to unauthorised resellers in the area where the supplier operates a selective distribution system – and they can pass those restrictions down the chain to direct and indirect customers.
Interestingly, while reference to combining selective distribution and exclusive distributions systems has been removed from the VABEO itself, the UK guidance provides that combined systems are permitted in the same geographical area if they are at different levels of the distribution chain (i.e. exclusive distribution at the wholesale level and selective distribution at the retail level). This is not expressly provided for in the EU rules. However, to the extent that the UK proposal does not seem to allow the combination of exclusive and selective distribution systems where the exclusive wholesalers are “authorised” resellers within a selective system, this may not be as notable a divergence as it may seem on its face. No doubt this provision will lead to many interpretational questions.
A less-defined approach to shared exclusivity means some uncertainty but more flexibility
Similar to the EU refreshed vertical guidelines, the UK guidance also introduces a new concept of “shared exclusivity” where the supplier operates an exclusive distribution system, albeit with more vagueness than shared exclusivity in the EU.
In the EU, suppliers can appoint up to five exclusive distributors for the same territory or customer group. Conversely, the UK guidance does not limit shared exclusivity to a specific number of suppliers. Instead, the guidance provides that the number of exclusive distributors should be restricted to a “limited number”, and that the number of appointed distributors should be determined “in proportion to the allocated geographical area or customer group” so as to incentivise investment by distributors.
This means that, in the UK, businesses will need to carefully assess the potential effects of shared exclusivity when determining the exact number of exclusive distributors. While this essentially means greater uncertainty for businesses, it also means greater flexibility, with the potential to include more than five distributors in a given territory or customer group in the UK.
Notably, the UK guidance has aligned with the EU approach on what level of passing on is permitted for exclusive distribution systems (as with selective distribution), i.e. the supplier can require its non-exclusive distributors to pass on the territorial or customer active sales restrictions, protecting its exclusive resellers, to direct customers. But it cannot require the “direct” customers of its non-exclusive distributors to pass on active sales restrictions further down the chain (i.e. to indirect customers - contrary to what is possible for active and passive sales restrictions to unauthorised distributors within a selective distribution system). Essentially, this means that only one level of pass on is permitted in exclusive distribution systems.
Wide retail parity clauses - remain hardcore
Parity clauses, or so-called “most favoured nation” (MFN) clauses, are contractual provisions requiring a seller of goods/services to offer those goods/services to another party on no less favourable terms (price or non-price) than those offered to another party.
Past investigations have focused on wide retail MFNs (typically retail parity obligations that prevented buyers of OIS from offering, selling or reselling goods or services to end users under more favourable conditions via competing OIS), rather than narrow MFNs (which only restrict more favourable terms for the party’s own sales channel). In response, the revised EU VBER has tightened the rules and designated across-platform MFNs as “excluded” restrictions, requiring a self-assessment (i.e. EU rules are focused on the online space and platforms behaviour). The UK guidance takes this a step further, by designating all wide retail MFNs (relating to all indirect sales channels, whether online or offline) as “hardcore” restrictions.
Tacitly renewable non-competes - remain excluded
Another area where divergence remains is with respect to non-competes. The EU rules allow for the VBER safe harbour to extend to tacitly renewable non-competes that exceed a five-year period – so long as the distributor can effectively give notice and terminate the agreement. The UK guidance does not allow for this level of flexibility, and any non-competes exceeding a five-year time period will be “excluded” restrictions under the VABEO rules.