On 1 June 2010 a new safe harbour came into effect regarding the application of competition law to 'vertical agreements'. Vertical agreements are those where the parties operate at different levels of the supply chain, such as distribution, agency and franchise agreements. Very often, these types of agreements do not raise any competition law concerns, so a 'Block Exemption' exists for them. (This is an exemption from Article 101(1) of the Treaty on the Functioning of the European Union and Chapter I of the Competition Act 1998. Briefly, these prohibit anti-competitive agreements which affect trade between member states or in the UK respectively.)

The new Vertical Agreements Block Exemption replaces the previous one and will be in force until 2022. It retains many of the old provisions, but there are some important changes, summarised below.

1) The safe harbour is now narrower in scope because it only applies to agreements where each of the supplier and the buyer have a market share of 30% or less. Previously, only the supplier's market share was relevant. As a result of this change, agreements that benefited from the old Block Exemption, but do not fall within the new one, will need to be reassessed as to their effect on competition. They will not automatically be anti-competitive or illegal, but their effect on competition should be checked.

2) The second major change relates to restrictions on online selling outside the distributor's territory. The basic policy is that every distributor must be able to use the internet to advertise and sell its products. However, there are limitations to this, as set out in the guidelines.

Distributors can be prevented from making 'active' online sales (ie actively approaching customers) into the exclusive territory or to an exclusive customer group which has been reserved to the supplier or allocated to another distributor. A distributor might do this by sending unsolicited e-mails or targeting website advertising at a particular territory, for example. Bans on this type of online selling are acceptable under the terms of the Block Exemption.

However, distributors cannot be prevented from 'passive' online selling, such as responding to unsolicited requests from customers, or hosting a website which is accessible to customers located outside the distributor's territory.

In addition, the guidelines list some 'hardcore restrictions' which, if included in an agreement, will take it outside the safe harbour. These include:

  • requiring the distributor to prevent customers outside its territory from viewing its website, or requiring the distributor to automatically re-route them to the supplier's or another distributor's website;
  • requiring the distributor to terminate an online sale if the customer's credit card details reveal an address outside the distributor's territory;
  • limiting the proportion of overall sales that the distributor can make online;
  • requiring the distributor to pay a higher price for goods to be sold online.

There are separate rules for selective distribution networks.

3) The third major change concerns resale price maintenance. Price fixing remains a hardcore restriction which will almost always be considered anti-competitive. However, the guidelines give three exceptions to this. These are where a fixed minimum price is needed to:

  • induce distributors to promote a new product;
  • for short term low price promotions in franchise systems (and possibly selective distribution networks);
  • to avoid free-riding of pre-sale services especially where the products are complex.

This is a complicated area. To avoid infringing UK and EC competition law, careful analysis is needed of any vertical agreement which contains restraints on competition law, and of its specific circumstances, including the parties' market shares.

There is a transitional period for existing agreements which fall within the old Regulations, until 31 May 2011. They will continue to be exempt until that time, but should be reviewed before then.