Introduction
00:03:54 – Function of VABEO
00:08:25 – VABEO timeline
00:10:00 – Key similarities between "old" and "new" regimes
00:20:21 – Evolution overview
00:26:31 – Evolution of exclusive distribution
00:33:12 – Selective distribution
00:35:10 – Evolution of neither/nor distribution
00:37:04 – Evolution of online and offline sales
00:41:21 – Evolution of online marketplaces
00:45:50 – Evolution of information exchange
00:50:00 – Key opportunities
00:51:50 – Obligation to provide information
00:53:30 – Transitional provision
00:54:34 - Questions
The United Kingdom's new vertical agreements block exemption order (VABEO) came to force on 1 June 2022, with a one-year transition period for existing arrangements. Businesses that will be affected need to be prepared.
This recent webinar outlines the new regime, identifying key changes and points of difference with the new EU regime and considers how businesses can seek to benefit from the opportunities resulting from these changes.
For a write-up of this webinar please see below.
The VABEO applies to vertical arrangements between different undertakings that are primarily at different levels of the supply chain. Those arrangements cover how the parties purchase and sell products and services.
The block exemption creates automatic exemption from section 2 of the Competition Act – the Chapter 1 prohibition – and this creates a safe harbour for arrangements that satisfy the criteria of the order. Helpfully for business, this safe harbour principle affords them greater certainty and of operational efficiency.
When the Competition and Markets Authority (CMA) was considering where the United Kingdom should go in terms of a vertical regime, the feedback from business was that the safe harbour concept works well, and it should be continued post-Brexit.
Against that background, businesses often consider entering into vertical arrangements and will usually seek to draft their agreement for the benefit from block exemptions. They will look at the applicable criteria and craft their arrangement around those.
When formulating the arrangement, it is important to consider whether it could be caught by the Chapter 1 prohibition. For many things they will be, but there are some arrangements that perhaps would not be because the parties' market shares are low enough for them to benefit, for example, from a de minimis exemption.
In situations where the arrangement is caught by the prohibition, the benefit of the block exemption is not legally required. The exemption is not needed if something does not apply and, if that is the case, it may give greater commercial freedom. Therefore, when thinking about structuring the arrangement, not having to consider the application of Chapter 1 rather than jumping straight into the block exemption, assuming it applies, may give greater commercial freedom to the structuring of that arrangement.
Where an arrangement is caught by the Chapter 1 prohibition but the block exemption is available, there will be an automatic exemption from that prohibition. If the arrangement falls outside the block exemption for any reason, the question is whether individual exemption is a possibility for the parties. Individual exemptions are provided for by section 9 of the Competition Act and, in this context, the parties must evidence the four cumulative conditions that are listed within section 9. In summary, the parties need to demonstrate, or be capable of demonstrating, that there are efficiencies that result from the arrangement. The consumers receive a fair share of these efficiencies.
The restrictions in question are actually necessary for the achievement and attainment of these efficiencies and the restrictions in question do not allow the opportunity for the parties to eliminate competition and this is where the parties have the obligation to self-assess. This is not something the CMA is going to do for the parties, and this is an issue for self-assessment.
There is draft guidance accompanying the new order that has been issued by the CMA. A final version of that is anticipated, but nevertheless the draft indicates a direction of travel enabling parties to consider and self-assessment whether they do have arrangements that would fall outside block exemption, and CMA guidance on sustainability agreements is expected. That has been flagged by the CMA as a point it will develop. There is not a timescale for that, but within the existing guidance for the block exemption, there are references there to this future guidance and sustainability agreement, so there will be other aspects in there, which would lend support to possible case individual exemption. So, self-assessment is required, but guidance is out there.
The vertical agreement block exemption regulation, which emanated from the European Union, entered into force on 1 June 2010. Fast forward 12 years, the new order enters into force in the Untied Kingdom, which replaces what became the retained block exemption. So, post Brexit, the existing EU regulation is rolled over into UK law, the new order fully replaces that and in parallel there is, within the European Union, a new block exemption, which entered into force on 1 June 2022. Interestingly, the EU block exemption is due to expire in 2034; the new order in the United Kingdom is due to expire in just under six years' time, and that was a very deliberate policy choice. When the new order was recommended to the secretary of state there was a lot of thought going into how markets may evolve, how technologies may develop which may then mean further revisions are required to the applicable order in the short(ish) term to ensure that this drives forward interest for the UK economy.
At present there is a broad alignment between the new order in the UK and the EU block exemption; however it will be really interesting to see in six years' time whether that alignment will still exist or whether there is further divergence taking into account the position and direction of travel within the UK economy and the role of the block exemption in the United Kingdom in furthering the interest of the UK economy.
00:10:00 – Key similarities between "old" and "new" regimes
Against that background, the old and the new regimes that apply in the United Kingdom can be compared and contrasted.
First, the new order reads very differently to the old retained block exemption, which was inherited post Brexit. Anyone who has had the opportunity to read the new order will see that it has a very different look and feel to it. It is not immediately recognisable as a "block exemption" – it has been recrafted, redrafted and has a very different look and feel.
However, after that initial reaction, many of the concepts actually remain the same, and there are also very clear similarities between the new order in the United Kingdom and the new EU block exemption, which applies to the European Union's member states. There is a lot that is actually staying the same within this even though this is obviously a new regime coming into force.
00:11:36 – Parties
One of the key similarities is parties. The new order primarily applies to non-competitors' vertical agreement block exemption; however, where there is a block exemption there is the possibility for this to apply to non-reciprocal arrangements between competitors, which is subject to certain conditions being satisfied. So, it can apply to arrangements between competitors if the supplier is a manufacturer and a distributor and the buyer is just a distributor, so they are competing at a downstream level. Equally, if the supplier is a multi-level service provider and the buyer is active at the retail level only, there is, again, just the competition at the retail level. Those arrangements, being non-reciprocal, could still potentially benefit from the new order and that is consistent with the position that existed under the old block exemption in the United Kingdom.
What the new order does it goes a little bit further. It expands the approach and allows the order to apply to situations where the supplier is perhaps a wholesaler and distributor, and the buyer is just a distributor and where the supplier is an importer and a distributor, and the buyer is a distributor. So, again, there is competition only at the retail level. They are competitors, but there are these exemptions that allow the VAVEO to cover those scenarios where other conditions are also satisfied.
This greater breadth application is to be welcomed. Under the previous regime, there were some grey areas where it was not quite clear based upon the definition of the supplier, whether or not the agreement could benefit from block exemption; so, greater breadth of application is to be welcomed. It also is consistent and aligns with the approach under the new EU block exemption.
00:13:43 – Market shares
Another familiar area in the context of vertical block exemptions is market shares. The new order in the UK is based upon the satisfaction of certain market share thresholds. These have not moved so these will be familiar. Initially, the market share that is applied is obviously 30% and the market share by this reference is the relevant market on which the supplier sells the contract products and services. Similarly, the market share of the buyer must not exceed 30% and, again, this is the relevant market upon the buyer purchases the contract products or services.
In terms of market definition (and this really is what underpins those shares) the CMA's guidance is going to be relevant in this context; it is relatively old guidance that the CMA has adopted from the Office of Fair Trading, but it is expressly endorsed within the accompanying guidance of the new order so that approach to market definition remains relevant. And when the parties are thinking about their shares, this is by reference to each party's corporate group. So, it is one entity in the context of a wider corporate group, which is thinking about what are the activities of that entire corporate group rather than just the contracted entity. And where relevant the shares should include the supplier's vertically integrated sales so if the supplier is active within its own group making sales downstream to parties acting as distributors, those need to be wrapped up in terms of its market shares; and shares to be calculated using ideally value data so if there is third party data considering market size that is going to be really helpful. If that is not available then the parties' substantiated estimates can be used in this context and the shares are calculated by reference to the preceding calendar year. So, with methodology outlined in the new order, which is consistent with both what existed before in the United Kingdom, and also the new vertical block exemption within the European Union, this bedrock of how to assess market shares and think about the application of the order has not changed. That remains consistent throughout, which is a really helpful point.
00:16:05 – Hardcore restrictions
The new order may apply provided the arrangement does not include hardcore restrictions. For example, resale price maintenance (the old chestnut in terms of a hardcore restriction) and certain restrictions upon sales into territories and types of customer and absolute bans on internet sales, all of which would be seen as hardcore restrictions. The hardcore list under the new order is a little bit different to what existed previously. The new order is more permissive of differing treatments of online and offline channels. So, the quite rigid approach taken in the old block exemption and the accompanying guidance for online or offline has gone in this new order, which again is to be welcomed and what is seen with the hardcore list under the new UK order is that it is broadly consistent with the direction of travel in the context of the EU new block exemption.
00:17:13 – Excluded restrictions
This is a familiar concept. The new order in the United Kingdom does not apply to severable excluded restrictions, so there is a list in the order and the order will not benefit, will not apply, or not protect those in terms of the safe harbour concept. So, if you have something that is a severable excluded restriction, it does not benefit from the order but can it benefit from individual exemption. A lot of these types of restrictions, if they are outside the order, may well find themselves capable of individual exemption under section 9; so, it is not something that is outright prohibited.
In the context of the new order, it is really clear that if an excluded restriction cannot be severed the entire agreement will lose the benefit of the VABEO, and that may be the first time that it has been articulated as clearly as that. When thinking about their drafting, it may be helpful to put in some wording to make expressly clear that if there are excluded restrictions in their agreement, that these are being identified and flagged as things that the parties intend to be severable so that these are clearly severable and, therefore, they are excluded restrictions that can be severed. The agreement should then benefit from the VABEO absent those restrictions.
The restrictions list does not really move the dial. It is consistent with what previously existed in the United Kingdom and it is broadly consistent with the new block exemption regime in the European Union. So, there is running theme of: "yes, it is a new regime but actually there are a lot of things here that are building upon what we had previously".
00:19:33 – Overall structure
The overall structure in the context of the new order is it is available where:
- the parties are not competitors or they are permitted competitors;
- the parties' market shares do not exceed 30%; and
- the agreement does not include any hardcore restrictions or exclude the restrictions that cannot be severed.
This overall structure looks and feels familiar and it is broadly aligned with the new EU block exemption; so, there is a lot of comfort around here in terms of this is an evolution rather than a revolution. There are things that look and feel familiar with some developments and nuances, but it is not starting again from scratch in terms of a brand-new novel UK regime.
So, thinking about areas of evolution, the first point to pick up on, and this is probably something that is a consequence post Brexit, but it is something that can be expected to change as well. So, this is a point where there has already been some evolution and some further evolution around this particular issue can be expected. So, the Chapter 1 prohibition applies to arrangements that are implemented or intended to be implemented in the United Kingdom. Obviously, that is much more limited in scope that the application of article 101 under the Treaty of the Functioning of the European Union – the old EU provisions.
What this means though is that, as drafted, arrangements that are implemented outside of the United Kingdom would not be caught by the Chapter 1 prohibition, and that is quite a big thing and , in the United Kingdom, there is not currently a comparable doctrine of qualified effects, as exists under EU law. So, under EU law, there can be things that are implemented outside the European Union, which have certain effects in the European Union and are still caught, therefore, by EU competition law. There is nothing comparable under the Chapter 1 prohibition at the moment. There is a proposal to revise the Chapter 1 prohibition and what this revision would do would extend its application to indeed cover certain arrangements that were implement outside the United Kingdom if these gave rise to specific types of effect in the United Kingdom – so, greater territoriality in terms of the reach of the prohibition from the United Kingdom to arrangements outside of the United Kingdom.
There is a really big question here, which will become more important for businesses that are active in both the United Kingdom and the European Union because, if this revision does take place, what does that mean in terms of both the application of the Chapter 1 prohibition and also the application of the VABEO (because that would then bring in certain restrictions that are taking place outside of the United Kingdom, if they have effects in the United Kingdom, which is likely to see them perhaps falling within the remit of the prohibition and, therefore, it may be necessary to think more about how the VABEO would apply to those sorts of arrangements)? There is not yet a timescale for the revision, but if and when that does happen, there will be further changes in terms of the VABEO and how this applies in practice.
00:23:16 – Core distribution models
At this point, it is probably helpful to outline a couple of the core distribution models that are considered within the new UK order. The first one is the basic model of exclusive distribution, whereby there is a supplier allocating geographic areas and/or customer groups either to itself or to a distributor and having allocated those areas or groups what the supplier can then do is restrict active sales being made into t hose areas. The exclusive distribution here is a degree of territorial protection in the context of the sale of contract goods or services.
The other model to pick up here is quantity of selective distribution that will be referred to here as "selective distribution" and, in this context, this is regarding a different model – a limited number of distributors have been selected, they are not allocated exclusive areas or customer groups, but they exist in a network. Those selective distributors cannot make active or passive sales to any unauthorised resellers in the area in which the network operates; so, in the context of selective distribution, there has traditionally been more brand protection or value protection rather than territorial protection.
00:24:50 – Active and passive sales
To confirm what is meant in the context of "active and passive sales", active sales refer to the active targeting of customers, and the new order has expanded this ever so slightly just to make clear that active sales would include things like using website language options that do not coincide with the allocated area, in terms of exclusive distribution and also the use of different geographic domain names. So if a .wales domain name is being used to make sales to customers based in Wales, that is actively selling into Wales as compared to, say, a .co.uk domain name, which is just a more general domain name, not actively targeting a specific customer base.
Passive sales refer to responding to customer requests that are unsolicited and what exists as a general wraparound is that the new order in the United Kingdom makes it really clear that suppliers should not prevent distributors or their customers from effectively using the internet to make active or passive sales, as they are permitted to do so. So, the internet is being viewed still by competition authorities as a key space within which customers consumers search for and attain value when they are purchasing products.
00:26:31 – Evolution of exclusive distribution
So, in terms of evolution and what the order brings now on the issue of exclusive distribution, the new order now permits a supplier to exclusively allocate more than one distributor to a geographical area or a customer group; so "exclusive" does not mean "one" any more. "Exclusive" can mean more than one distributor.
What this then means is where there is the allocation of an area to more than one distributor, that distributor in the area must be able to make active and passive sales in the area. So, when they have been allocated an area and there is more than one of them, they must all be able to make active and passive sales in their allocated area. Just by way of an example, territory one, which is Bristol in England, and this has been exclusively allocated to three distributors, and these three distributors must be able to make active and passive sales in Bristol, which is their allocated area.
What is also permitted under the new order, as with the old, is that the supplier can prevent an exclusive distributor from making active sales to an area or group that has either been exclusively allocated to one or more distributors or has been reserved to the supplier, even if the supplier itself is not active in that area the supplier can reserve an area. On that basis, the distributor cannot sell actively into that area. Under the order, there is a development of this theme whereby it is possible for the supplier to prevent the exclusive distributor's customers from making active sales into these areas of customer groups and, again, that has been positioned to seek to strengthen the protection around exclusive distribution as a model. So, there is not a situation where the exclusive distributor cannot make sales actively, but its customers can circumvent that by buying and then selling themselves actively into an area.
So, that exists as an additional nuance. To pick that up in the context of territory two, which is Newport in Wales and has been exclusively allocated to one distributor. The distributor in Bristol cannot make active sales into Newport because that has been allocated exclusively to somebody else; so, their Welsh language website is off the table. They cannot be doing that because that would be actively selling. What they can do though is make passive sales into Newport. So, if they invest in general advertising, and that happens to reach customers in Bristol and also customers in Newport, that would be passive selling, which would not be an issue in the context of this model.
The same principle applies for the distributor in Newport vis-à-vis Bristol. So, again, the distributor in Newport cannot make active sales into Bristol, that has been exclusively allocated, albeit to a number of distributors rather than to one. However, territory three, which is Bath in England, has not been exclusively allocated to any distributors and it has not been reserved by the supplier for itself. So, on this basis, the distributors in Bristol and Newport can make active sales into Bath; so, if they wanted, they could actually engage in some really quite targeted online search engine advertising to really look for customers within Bath who would be interested. They can also make passive sales into Bath by general advertisements that also reach consumers customers within that particular area.
Another development in the context of the new order is there is now greater clarity about where the supplier operates exclusive and selective distribution models in different areas. So, what the supplier can do in this context is, if it has these different models in operation within the United Kingdom, prevent an exclusive distributor and its customers from making active or passive sales to any unauthorised resellers who are located where the selective distribution network operates. So, there is that protection being afforded. It is not possible for an unauthorised reseller who is located in that distribution network to reach out to an exclusive distributor and passively purchase from them goods that can then be resold to undermine the selective distribution network. However, it would still be possible for that exclusive distributor to make active and passive sales into the area covered by the network. So, there is not complete protection there. There is protection from sales to unauthorised resellers undermining the network, but the selective distribution network can still be the subject of both active and passive selling by an exclusive distributor in the United Kingdom.
A really interesting feature of the new order, and where the new order in the United Kingdom goes some way to really open up possible new models and possible new approaches to channels, is that it allows the combination of exclusive and selective distribution in the same area of the United Kingdom at different levels of the supply chain, and this is something that the EU block exemption never permitted previously, it does not permit now, and this is a feature of the UK regime. So, what this envisages is at the wholesale level is that there would be an exclusive distribution model, whereby there would perhaps be different wholesalers being allocated certain territories and within those they are protected from active selling into those territories. And at the retail level, there is a selective distribution model in operation. So, this is more permissive than what existed previously in the United Kingdom and what is now in place in the EU; but despite these options being on the table, the implications of them would need to be carefully considered. It is quite tempting where you have new things being put forward to businesses for people to act on to really dig into those, but with all of this you are thinking about perhaps replacing or developing existing networks and it is a case of really sitting down and working through what would this all mean in practice because, for a lot of these different areas there are points that perhaps have not been tested so far and they will need careful thought before implementation.
00:33:12 – Selective distribution
In the context of selective distribution, it is possible for a supplier to prevent the distributor and its customers from making active or passive sales to unauthorised resellers that are located where the network operates. But, as with the quid pro quo of selective distribution to be admitted to the network, the distributor has to agree that they are not going to make any sales to unauthorised third parties who are then going to undermine brand the product, the reputation – effectively, the investments made by member of the network.
In addition, there is the possibility under the new order of preventing selective distributors from making active sales into areas or groups that have been reserved for the supplier or allocated to distributors. So, again, it is now fully embedded in the order the notion of having exclusive distribution and selective distribution in different areas in the United Kingdom and selective distributors can be required to respect the exclusive network. They can still make passive sales into the exclusively allocated territories, but they cannot actively sell into those areas. That is a real key framework within the order, this possibility of having both existing in conjunction. And, as is confirmed by the order where there is selective distribution, those appointed distributors must be able to make active and passive sales, firstly to end users if the network is operating at a retail level and also to other distributors who have been appointed to the network. They must always be free to make those active and passive sales, and the new order in the UK retains that status quo – that is unchanged.
00:35:10 – Evolution of neither/nor distribution
A slight curiosity in the context of the new order is a situation where neither exclusive nor selective distribution is considered and, in this context, where a supplier is selling to a distributor who is not part of an exclusive distribution model and are not a selective distributor that supplier can prevent the distributor and its customers from making active sales to reserve the exclusive appointed network. So, that exists, the possibility of protecting active selling. Passive sales will still be permitted by the distributor. It is possible to put in place restrictions to reserve the exclusive network, and the distributor, who is neither exclusive nor selective, can be prevented from making active or passive sales again to unauthorised resellers that are located where the selective distribution network operates. Again, the distributor itself could make active or passive sales into the selective distribution area, but they cannot make sales to unauthorised resellers who are then potentially going to harm the brand and the value of the products in question. That is an interesting development within the new order and, as a result, there is the possibility of at least three different models co-existing in the United Kingdom: exclusive, selective and neither exclusive nor selective. So, the new order is really seeking to set out a range of different options here that businesses may then wish to explore. However, with the benefits of these different models and how they interact with each other, they really will require very careful consideration as a new course is plotted through this landscape.
00:37:04 – Evolution of online and offline sales
Another area of evolution, perhaps where there has been more changes than in others, is the treatment of online and offline sales. So, what the new order makes really clear is that it is possible for certain restrictions to benefit from exemption of the order. As a starting point, and this is what existed under the previous regime, it is possible to require a distributor in any network form to have a physical store in a specific location so that is capable exemption. It is possible for a supplier to charge a distributor different prices depending upon whether the products are to be resold online or offline. In the old regime, that was a hardcore restriction, so that was something that would lose the benefit of the block exemption. In the new order, given the explosion of e-commerce, it is now quite clear to competition authorities that online is a separate channel in its own right and therefore there can be good reasons why a distributor should pay different prices, depending upon the channel they are making sales via.
So, that exists as something that is possible, benefiting from exemption under the order, equally imposing quality standards on a distributor and that would include exclusive distributors and using different quality standards for online and offline sales. That latter part again under the old regime that would have been a hardcore restriction because the intention was that there was effectively an equivalence of standards being used between the online and the offline worlds. Once those channels are decoupled and it is acknowledged that actually online is potentially reaching a very different audience to a brick-and-mortar store, having different quality standards starts to make a lot more sense and it starts to be something that actually could be very pro-competitive in terms of driving sales via those online channels, reaching new audiences, potentially investment in a new product, etc. So, this idea of having different quality standards for online and offline is something that would be capable of exemption in certain circumstances.
It is also possible to restrict a distributor's use of digital comparison tools, provided their use is not prevented. So, it would be possible, for example, to impose certain quality standards, perhaps to protect the look and feel of a particular product and the positioning of a brand. Those standards could then be used to shape how a distributor would use digital comparison tools, such as price comparison sites, provided that the use of those sites would not be prevented. It is also possible to impose direct or indirect bans on the use of marketplaces. The caveat wraparound all of this is all these things are possible and capable of exemption, provided that distributors are not prevented from effectively using the internet to make active or passive sales, as they are permitted to do so. For example, with price comparison websites, if it was the case that a supplier was saying to its distributors to implement an outright ban, that they cannot use price comparison websites, none of the products would ever appear on a price comparison website. That is very likely be seen by a competition authority as preventing the effective use of the internet because consumers would tend to use things like price comparison websites to try and find the best available deal, and that is the sort of thing that could then find the benefit of the block exemption being lost in those circumstances, if that was categorised as a hardcore restriction. So, all these things are possible, but there is this catch-all that allows it provided that it does not then prevent the effective use of the internet in those circumstances.
00:41:21 – Evolution of online marketplaces
There are a couple of "hot topics" that remain to be covered. The first is in relation to online marketplaces. This is an issue where, for a number of years following the judgment of the European Court of Justice in Coty and subsequent guidance from the Commission, there have been a number of questions from practitioners and businesses about what can happen in terms of the use of online marketplaces. Regarding online marketplaces, the new order in the United Kingdom is quite clear about what it thinks an online marketplace is. It thinks of this as being a platform that does something which is connecting resellers with customers and the reason it does that is to enable direct purchasers, so enabling that connection to achieve a direct purchase means an acknowledgement that suppliers may want to restrict distributors activities in relation to online marketplaces. Within the new order in the United Kingdom, it is possible to have exemptions for restrictions, and that would cover things like quality standards, whereby a limit could be imposed on the use of distributors' availability of these types of marketplaces, quality standards could be imposed, maybe one or two marketplaces can still be used, or it could go so far as to say there is to be an outright ban on the use of online marketplaces.
What is seen in the new order and the accompanying guidance is that exemption would be available subject to the conditions being satisfied. Suppliers could ban a distributor from using online marketplaces. They could just say none of their distributors are to use them and that will be capable of benefitting from the exemption. Implicitly it can also be gleaned from the guidance that the exemption should also be available if the supplier bans some distributors from using online marketplaces but permits others to do so and there is, within at least the United Kingdom's law, a very clear concept that within selective distribution models it is not required, for example, to treat all distributors equally. There are different standards being applied to different distributors for different reasons. So, following that through implicitly it would be capable of exemption if a supplier prevents some distributors using online marketplaces but permits others to do so.
Similarly, from the guidance it can be gleaned that the supplier may also decide it is going to use online marketplaces itself, but it is going to ban its distributors from doing so, and that again would be capable of benefiting from block exemption under the order where parties' shares are both 30%, etc.
With all of this, it needs to be remembered that there is a wraparound. The wraparound is that these things will be possible, provided the distributors are not then prevented from effectively using the internet to make sales. With the order, the draft guidance, there is this space being left for arguments to be made. Where people are thinking about online marketplace restrictions, it is worth bearing in mind that there is room to manoeuvre there for parties who are perhaps dissatisfied with decisions that are made.
So, if something is being implemented that could be viewed as being discriminatory vis-à-vis certain distributors, it may be possible given the current language and the lack of any caselaw issued in practice for certain distributors to mount a challenge to that based upon competition arguments and say: "actually this restriction does prevent us from effectively using the internet and therefore it should not be omitted under the block exemption". So, this is an area where, although there is now a clearer position, this is not settled and there will be further debates going on around the use of online marketplaces and how this can be positioned and structured.
00:45:50 – Evolution of information exchange
Another area that is worth touching upon is the issue of information exchange, and this is an area that has been a reasonably hot topic in recent years. There have been more brand owners moving into the retail level themselves and more head-to-head competition between brand owners and their established distribution networks. So, what is clear is when there is this competition at a retail level and there are exchanges of information between competing suppliers and their distributors, there is an acknowledgement by competition authorities that actually information does need to be exchanged. Yes, they are competing at retail level, but nevertheless there does need to be an exchange of information between those competitors, not least because the distributor is selling the supplier's products. They need to think about how they maximise sales that is both in the supplier's interests, the distributor's interests and ultimately, it is hoped, the consumer's interests. So, there does need to be an exchange of information between the parties. In the guidance that accompanies the new order, there is a categorisation of different types of information that should generally benefit from exemption under the order. So, where there are exchanges of information that relate to marketing, for example, information on perhaps new contract products or new promotional campaigns for those products, should be permitted in the circumstances. In the context of customer-related information, there is aggregated information about customer purchasers, information generally around customer preferences and feedback, which is valuable information in the context of improving the distribution of products and, therefore, it is appropriate for that to be shared between suppliers and their competing distributor. In certain performance-related information, given the sensitivity, there is aggregated information that could cover things like the marketing and sales activities of other distributors. So, at an aggregated level, where this is perhaps being used for benchmarking purposes, that would be something that would generally benefit from exemption under the new order in the United Kingdom.
Regarding things that would be unlikely to benefit, although a fact-specific assessment is required, the general categories would include things like retail pricing information and, arguably, positions and carve outs there about and intended promotions that are going to be consumer facing, low price and in a limited time period. Otherwise, more general sharing of future pricing information could be a cause for concern and also, regarding customer specific information, where this is disaggregated. So, there is granular information about the parties' sales to individual customers. Again, given that competitive dynamic between supplier and distributor at the retail level, it is clear why that could give rise to concerns and therefore be unlikely to benefit from exemption under the order.
If it is the case that aspects of the exchange would not benefit from exemption, and there is a question there about whether or not individual exemptions may be available, but more practically, this is where a lot of businesses would instinctively go: " firstly do we need the information in its current format? Can we revise? Can we restructure?". So, by pulling this back from where it is and getting comfortable that what is being operated day to day is actually something that by aggregating, for example, can move into that safer space of exemption under the order. So, the suspicion is that there will perhaps be a revision of some of that information exchange and a restructuring of some of those formats.
To summarise, under the order and the guidance is a basis, for the first time, stating really clearly of the co-existence of these updated core models in the United Kingdom. There is a more permissive approach to differing treatments of online and offline sales, which could give rise to lots of opportunities for businesses. There is greater clarity regarding the permissible restrictions upon distributors' use of online marketplaces. The debate is not settled, but there is a direction of travel and greater clarity in that regard. So, there is greater certainty about permissible exchange of information where there are competing suppliers and distributors at the retail level. It is worth flagging there that all these restrictions should be considered on a case by case basis even more, so when thinking about direct and indirect restrictions in the online world and the other point again, an eye needs to be kept on what is the approach going to be where there is a business that acquires arrangements implemented both within the United Kingdom and also in the European Union. So will you lean towards having one agreement that is compatible with both, taking the most restricted as a baseline or will you have separate agreements for each? And that is going to be commercial and based upon where the most value is going to be. If there is more value having a bespoke UK style agreement because of the importance of that particular space then obviously other businesses will go, it is worth thinking about now so that if it is necessary to have aspects that are tailored but that has been done in advance, rather than kind of 11th hour in the context of a project.
00:51:50 – Obligation to provide information
One point to note in the context of the new regime is a new power for the CMA. The CMA is empowered by the new UK order to request information from parties and persons are required to supply information that the CMA requests in relation to agreements, and they must do so within 10 working days of receiving written notice or, and in practice this is what will be seen, a longer period may be agreed with the CMA. If a party fails to comply without reasonable excuse, the CMA is able to cancel the benefit of the block exemption order in relation to any agreements to which the request relates. So, there is the stick approach of "we would like you to provide this and if you do not provide it we could ultimately cancel the benefit of the block exemption order". In reality, that may not affect businesses, particularly if the order was cancelled, the business would be OK because it can still fall back on the possibility of individual exemption under section 9. But, reputationally, there will be an issue there to make sure that parties are seen to be cooperative with the authority and there is a question here about: "is this something that the CMA starts to use on a regular basis or is this something that, yes it exists in theory, but actually in practice the CMA doesn't invoke this power?"
00:53:30 – Transitional provision
As the sun sets on the old regime and rises the next morning on the new, there is the transitional provision, which is captured within the order. And what this does is effectively gives comfort to the businesses that if there is an arrangement that was entered into before 1 June 2022, which is obviously when the new order came into force, and it did not benefit from the exemption at that time immediately prior to the order entering into force the agreement but did benefit from the exemption under the old regime that was in place, there is a period of one year within which that arrangement will be treated as benefitting from the new order. So, in effect, there is a year to get aligned with the new regime and to make sure that the business is comfortable and confident that it is compliant with the relevant provisions in those circumstances.
00:54:48 – Is the new regime more permissive in relation to resale price maintenance?
There was perhaps an expectation that, with the new UK regime, there may be some more flexibility around the use of resale price maintenance in certain circumstances. Resale price maintenance is still very much positioned as a hardcore restriction where there is an acknowledgement that resale price maintenance in certain circumstances can give rise to certain efficiencies. But, the efficiencies have in effect been reprised from the earlier guidance around verticals – so, things like a low-cost, short-term promotional offer where a fixed price is set or the launch of a new product where a fixed price is set to enable investment return investment to support the launch of a product. But, there has not been any further development of thinking around possible locations, so that sits almost as it did under the old regime.
00:56:27 – What happens if the agreement is entered into and market shares at the time are below 30% but then go above 30% afterwards?
In terms of 30%, that is not something whereby the agreement is entered at 30% and therefore, the block exemption will always be benefited from. This is something within markets whose shares can indeed fluctuate if parties find that their share does go above 30%, there are certain grace periods available. So, if their share goes above 35%, for example, they would then have a grace period of 12 months within which the block exemption order would continue to apply and once that expires if they are still in a position whereby they are outside the market share threshold. It would then be a case of thinking about the possibility of individual exemption under section 9 of the Competition Act and again going through those accumulative criteria with the assistance of things like the guidance that companies in the new order to self-assess in that context to ensure that the business is where it thinks it is in terms of compliance. However, it is a really good point in terms of particularly some of these markets where there will be big changes around participants that can obviously lead to shifts in shares, the view to businesses just to keep self-assessing and make sure that basically their agreements are benefiting from the exemption so far as it is available.
00:58:22 – Passing on obligations to customers
This is a new parameter under the UK order. It is quite thin in terms of how it would work in practice, so the notion of "passing on" is that either the distributors customers arrangement or agreement with the supplier or the distributor will enter into an agreement with its own customers to ensure that these obligations around the sales restrictions, for example, are then honoured by the customers in question. In practice, that may work really well in certain sectors and it maybe something that is well respected and self-policing. In other sectors, it could be really challenging to get customers to agree to that. It could hold up transactions. It could prompt more questions, more issues. So, what that translates to in terms of real-world commerce is going to vary sector by sector. Going to the theme of giving different options to businesses, it exists as an option, so it something businesses can now seek to do, which they did not have the option to do previously. In that respect, it is a welcome development. The question then is: "how do you go about implementing that?" That is, part of our brave new world with new order, something that we will, with trial and error, get to a landing point on.
For further information on this topic please contact Samuel Beighton at Gowling WLG by telephone (+44 207 379 0000) or email ([email protected]). The Gowling WLG website can be accessed at www.gowlingwlg.com.