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June 25, 2021

UK Competition and Markets Authority Recommends Post-Brexit Changes to Competition Laws Governing Distribution and Online Sales

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On June 17, the UK Competition and Markets Authority (‘CMA’) published a keenly awaited consultation document setting out its proposed recommendations to the UK Government for the new domestic competition law regime for vertical agreements. The CMA’s approach is welcome news for eControl clients, because it would favour brands in some important respects, while still remaining closely aligned with the developing EU vertical regime, thus reducing legal uncertainty and costs for business trading in both the EU and UK.

Background

While the UK was an EU member state, the status of vertical agreements (such as those implementing selective and exclusive distribution) in the UK was largely determined by the EU Vertical Agreements Block Exemption Regulation (‘VBER’). The VBER sets out the circumstances in which a vertical agreement is protected from challenge under EU competition law, and also defines certain ‘hardcore’ restrictions that render an agreement presumptively unlawful. Together with the accompanying European Commission Guidelines, the VBER effectively serves as a complete code for the treatment of vertical agreements in EU competition law.

While the UK has its own domestic competition law regime, that regime has been aligned entirely to the EU regime since 2004. However, since the direct application of EU competition law in the UK ceased at the end of the Brexit transition period on 31 December 2020, new arrangements were needed to determine the status of vertical agreements in UK competition law from that point. The immediate solution adopted by the UK Government was essentially to continue the pre-Brexit approach, by incorporating the current EU VBER into UK domestic law as a ‘retained block exemption’, at least until the VBER’s expiry on 31 May 2022. Since that date is now approaching, the UK Government needs to decide what to do. At the same time, the European Commission is part way through its own review of the VBER, as it needs to decide whether to update the EU VBER beginning 1 June 2022 or allow it to lapse.

While it may be tempting to continue with the UK’s current approach of aligning with EU law (which broadly works), unlike the last time the VBER was reviewed in 2010, UK officials no longer have any input on the text of the EU VBER and Guidelines. As a result, a decision simply to follow the (revised) EU regime from June 2022, whatever its form, would hardly be a ringing endorsement of the UK’s new found freedom to diverge from EU rules. On the other hand, the UK Government and the CMA need to bear in mind that diverging from EU law in this area for its own sake would introduce complexity for the large number of businesses that trade in the UK and EU. To introduce further complexity, many of the core principles of EU law competition law as applied to vertical agreements rest on EU-specific policy priorities arising from the need to create a single European market. It was unclear how far these EU policy priorities should continue to determine the shape of UK competition law, post-Brexit. Accordingly, the UK CMA consultation document, which sets out its recommendations to Government on how vertical agreements in the UK should be treated going forward, is an important step forward.

Key recommendations

The CMA consultation document makes it clear that the CMA favours a pragmatic and incremental approach on vertical agreements that will continue to be closely aligned with the EU regime. It explicitly recommends that the UK should avoid “large-scale and fundamental changes” to the current regime, which as noted above is completely aligned with EU law. Although the CMA document lists a number of recommendations for change, compared with the (2010) VBER as currently incorporated in UK law, the CMA has been careful to align its proposed changes with the direction of travel of the EU’s own proposed changes to the VBER. Indeed, the CMA consultation document references the European Commission’s recent Evaluation of the Vertical Block Exemption Regulation as a key source for identifying aspects of the current regime that need updating. Moreover, the changes proposed by the CMA will be beneficial to brands because they promise to provide additional clarity on how brands can manage their online distribution, as well as being more permissive regarding several aspects of that online distribution. This reflects the European Commission’s view that the current VBER and Guidelines may have swung too far towards facilitating the expansion of online retailers and platforms, given the strengthening of their market position since 2010.

The CMA recommends the adoptions of a new UK-specific Vertical Agreements Block Exemption order (‘VABEO’), and associated Guidance, that will retain the following central aspects of the EU regime:

  • a block exemption for all vertical agreements, using the same core definitions as the VBER and applying a market share threshold of 30%, which both parties must not exceed for the exemption to apply;
  • a list of hardcore restrictions that are presumptively unlawful, including territorial and customer restrictions (incorporating the EU law distinction between active and passive sales restrictions) and resale price maintenance;
  • a separate list of excluded restrictions, that are not protected by the block exemption but are not presumptively unlawful; and
  • flexibility to withdraw the benefit of the block exemption from specific agreements that raise concerns.

The CMA recommends the following changes, compared with the current VBER regime:

  • a new hardcore restriction for wide parity/’most favoured nation’ obligations, i.e. restrictions imposed by a platform on the ability of a seller using the platform to offer products on other platforms at more favourable prices or terms;
  • a more permissive treatment of so-called dual distribution (i.e. distribution systems where parties at different levels of the distribution chain compete downstream), so that agreements between retailers, and wholesalers or importers that also sell direct to consumers, are protected (in contrast to the current regime, which only protects such agreements between retailers and manufacturers);
  • a more permissive approach to dual pricing (i.e. setting different wholesale prices for online and offline retail);
  • a more permissive approach to selective distribution criteria for online sales, under which selective distribution criteria for online sales will no longer have to be overall equivalent to those criteria for brick-and-mortar sales;
  • new guidance to clarify the difference between active and passive sales, particularly in the online context;
  • new guidance on the treatment of agency agreements, including issues relating to online platforms; and
  • new guidance on the analysis of environmental sustainability considerations in vertical agreements.

The CMA has also recommended that the new UK VABEO should expire after six years, i.e. half the duration of the current EU VBER. The CMA acknowledges that this is a relatively short period but notes that it is important to be able to review the regime in this timescale to take account of what may be fast-moving market developments. The CMA has also recommended that there should be a transitional period of one year from 1 June 2022, during which agreements that are protected by the current retained VBER will continue to be protected, even if they are not compatible with the new UK VABEO.

Overall, these proposed recommendations, if enacted, will likely be favorable to brands, as they will provide clarity on the law and more flexibility to determine their online distribution arrangements, while also avoiding major divergence with EU law.

The only notable omission from the consultation document was any discussion of the CMA’s future treatment of restrictions on sales into the UK. While the scope for brands to restrict sales from the EU into the UK was limited while the UK was a member state, they have more scope to do so post-Brexit, at least as far as EU competition law is concerned. What is less clear is whether the imposition of such restrictions will be viewed as an infringement of UK competition law. It is to be hoped that this pressing issue will be addressed in the CMA’s guidance document, a draft of which should be published in due course.

Next steps

Following consultation on the CMA’s proposals, the Government must decide whether to adopt them. While the CMA’s proposed changes are sensible and welcome in themselves, it is notable that the European Commission has itself proposed very similar reforms to the EU VBER regime, which will take effect on expiry of the current VBER in May 2022. The alignment of approaches is presumably not coincidental, as the European Commission’s proposals take account of the same market and case law developments and evidence base as the CMA has used. It is also likely that CMA officials had some informal contact with the European Commission’s VBER review team, notwithstanding the lack of any formal cooperation agreement between the agencies. Furthermore, the CMA has acknowledged the desirability of maintaining a consistent approach, to the extent possible, to avoid excessive complexity and costs for businesses trading in the EU and UK. This is very welcome. It is therefore to be hoped that the Government follows this pragmatic approach, notwithstanding the professed desire of ministers to exercise the UK’s new found freedom to diverge from EU law.

Since the European Commission has not yet published the draft text of the new EU VBER and Guidelines, it is not yet possible to identify any specific areas of divergence from the revised EU position in the UK proposal. Although the European Commission’s proposals were also broadly sensible, some changes being considered (such as introducing a new lower market share threshold for certain forms of dual distribution) would introduce new levels of complexity to the EU regime. Were the more radical reform options to be adopted by the European Commission in the new VBER and Guidelines, there could be greater divergence between the EU and UK regime than is currently anticipated.

The CMA has set a deadline of 22 July for responses to its consultation. Hopefully the European Commission will have published its draft VBER and Guideline texts by then, so that respondents can take them into account when responding to the CMA.

Becket McGrath

Partner, Euclid Law and Head of eControl Europe