Under the Competition Act 1998, agreements and arrangements that restrict competition in the UK are prohibited. A safe harbour was providedvertical agreements if they met the requirements of the EUs Vertical Agreements Block Exemption Regulation (VABER). Following Brexit, VABER was retained in UK law until 31 May 2022. It has now been replaced by a new safe harbour under the Vertical Agreements Block Exemption Order (VABEO), and parties can no longer rely on VABER.
In light of this development, it is important for businesses to assess how this change affects their existing vertical agreements, as well as what it might men for future ones.
What is a vertical agreement? Vertical agreements are agreements between parties at different levels of the supply chain, e.g. an agreement between an industrial manufacturer of steel and a hardware distributor or retail store. These agreements are considered to present less of an obstacle to fair competition as they are not agreements between direct competitors. Vertical agreements which fall within the exemption criteria under VABEO (and previously VABER) are not deemed to be anti-competitive.
Whats changed? The safe harbour created under VABEO applies to vertical agreements where the parties respective market share does not exceed 30% and provided that the agreement does not contain any hardcore or excluded restrictions. While many aspects of the exemption have stayed the same, but there are some key changes to note:
- Shared Exclusivity – While previously prohibited, shared exclusivity is now an acceptable element of vertical agreements. Multiple exclusive distributors and buyers may be appointed in a territory (proportionate to the volume of business and size of the territory).
- Dual Distribution – Also previously prohibited, suppliers can now operate a dual distribution process where they can choose to operate both exclusively at the wholesale level and selectively at a retail level. This gives suppliers a level of flexibility previously unseen, allowing suppliers to compete with their own distributors. However, if parties share future prices, customer-specific sales data and information with a manufacturer of competing branded goods they will not be able to rely on the VABEO exemption.
- Most Favoured Nation – Previously allowed under VABER,most favoured nation provisions which have the effect of restricting pricing flexibility on different channels, or to different parties, are now classed as hard-core restrictions. Agreements containing them cannot benefit from the VABEO exemption.
- Dual Pricing – Previously prohibited as a hard-core restriction under VABER, suppliers will now be allowed to use dual-pricing strategies, charging higher prices for online product sales, provided the price difference relates to associated business investment or costs.
- Online Advertising – Also new to VABEO, buyers and distributors must now be free to advertise the products for sale online in order for the vertical agreement to call within VABEO.
Notably, the Competition and Markets Authority also has new powers to request information from parties to a vertical agreement, and a response is required within 10 working days. Failure to comply with this requirement could lead to the cancellation of VABEOs effect on the relevant agreement. VABEO is only set to be in force for six years, after which time we will surely see more changes in the exemptions provided in light of future industry trends.
What does your business need to do now?
A one-year transitional period is in place for any existing vertical agreements that currently comply with the VABER requirements, allowing businesses time to ensure that existing agreements are brought up to date and are compliant with the new VABEO provision. However, any new vertical agreements entered into post 1 June 2022 must comply with the new VABEO provisions as they will not be covered by VABER.
