Vertical block exemption renewal: should businesses gear up for EU / UK divergence?
The EU vertical block exemption regulation renewal process is nearing its final stages, with important implications for how companies organise their distribution arrangements in the EU. And since the VBER and Guidelines were retained as part of UK law post Brexit, the UK Competition and Markets Authority has also recently launched its own parallel review to determine their future in the UK. The burning question for businesses, especially those with pan-European distribution networks, is whether they will soon be grappling with diverging rules on each side of the Channel.
What is the status of the EU and UK VBER renewal?
The EU and UK VBER are due to expire in May 2022. The European Commission commenced a comprehensive renewal process back in 2018 which will culminate in the publication of the proposed revised VBER text and guidelines this summer, followed by a public consultation on the revisions.
Whilst having the benefit of the various consultation materials and working papers from the EU process, the CMA nevertheless has so far had a relatively short period to get to grips with the various policy questions. The CMA is now catching up. It has recently held several roundtables with different stakeholders – including economists, law firms and businesses – to understand their views on the state of the UK distribution rules. The next step is a public consultation, expected at the start of this summer.
The CMA is gathering insights for its advice to the UK Secretary of State, who will ultimately determine the future of the UK VBER.
What are the key policy questions for the UK?
To diverge or not to diverge?
The first key decision for the UK is the extent that it is willing to diverge from the EU position, both in the short and medium term. While a key driver of Brexit was taking back the UK’s legislative freedom, there are a few considerations at play.
A leading consideration is that many businesses currently adopt a pan-European approach to their vertical arrangements and, therefore, major divergences between EU and UK could mean significant costs for cross-border businesses which have to restructure their distribution networks as a result. But since the EU position is generally treated as the strictest common denominator for global businesses, provided the UK divergences are not stricter, this may not have as great an impact on distribution networks in practice.
Finally, given the short lead up to the expiration of the UK VBER early next year, the CMA has already indicated that it won’t have time to seek a full overhaul. At the same time, the CMA is clear that while it is tracking EU progress, which may inform their thinking, we should not expect to see an EU transplant in the UK.
Abandon the Single Market Imperative?
The EU Single Market Imperative underpins a number of hardcore prohibitions in the context of the VBER, in particular relating to cross-border sales restrictions, which are designed to ensure the uninhibited movement of goods and services throughout the EU.
Absent any such imperative in the UK post Brexit, many are questioning the need to retain these as “hardcore” prohibitions in the UK. For example, restrictions on parallel trade often have pro-competitive rationales and many are interested to see whether the UK will adopt the Swiss per se approach or favour an effects-based assessment.
The Northern Irish border will raise an interesting question – not only for the UK but also for the EU – to the extent Northern Ireland remains (whether de jure or de facto) a part of the EU single market. For example, will restrictions on sales between the Republic of Ireland and Northern Ireland be considered hardcore restrictions?
More lenient stance on resale price maintenance?
While it’s clear that the EC has no plans to soften its approach on RPM, which is currently treated as a hardcore restriction, the CMA has an opportunity to take a different approach and align with other jurisdictions such as the US by adopting an effects based approach.
There is no convincing evidence that RPM has no efficiency justification and should be treated as inherently anti-competitive – even the EC’s recent econometric study in the book sector found RPM to result in lower prices and higher output. Will the UK consider that RPM isn’t worth the “hardcore” designation, especially in the absence of market power?
Alternatively, many businesses have called on both the EU and UK competition authorities to consider additional exceptions to the hardcore RPM prohibition (currently the Guidelines refer only to short term promotions and product launches).
Separately, many hope to see more guidance on the existing exceptions as the current lack of clarity, coupled with the severe consequences of getting it wrong, have left these exceptions largely unused in practice.
Opportunities for businesses to shape the CMA’s thinking
Aside from the above policy issues, the CMA is currently reflecting on the same elements of the VBER that were identified as requiring an update in the EU. In particular, the roundtables focused on: parity clauses, agency, dual distribution, territorial and online restrictions, tacitly renewable non-competes and sustainability.
The CMA has indicated its eagerness to receive input on these and other VBER related topics. So there is still lots of scope for businesses and other stakeholders to take the opportunity to shape its thinking in this area, especially in response to the CMA’s upcoming public consultation.