More clarity on the future UK VABEO for supply chain agreements

The recommendations build on the previously published consultation document in which the CMA sought views from stakeholders. In this alert, we give a brief run-down of the CMA’s recommendations, which largely align with the draft EU VBER. However, there are already important divergences in respect of the treatment of wide retail parity, dual distribution and the life span of the proposed order. We will continue to monitor the situation as the CMA is still to publish (at the time of going to press) it’s draft accompanying guidance where the devil will be in the detail.

1. Extending the benefit of the dual distribution exemption to wholesalers and importers, without limiting its scope through an additional market share threshold.

In synergy with the EU Commission, the CMA is recommending extending the benefit of the dual distribution exemption to wholesaler and importers.
However, whilst the CMA acknowledges that some information flows between suppliers and buyers could give rise to horizontal competition concerns, it diverges from the EU Commission’s controversial proposal of an additional 10% joint market share threshold. The CMA will not recommend limiting the scope of the dual distribution exemption through an additional market share threshold. In its view, this would add complexity and uncertainty for businesses. This is significant, as it will be one of the key divergences between the two regimes.

2. Resale price maintenance to remain a ‘hardcore restriction’

Unsurprisingly, the CMA does not recommend the removal of RPM from the category of hardcore restrictions in the VABEO. It will nonetheless clarify in the Vertical Guidance that it remains open to considering efficiencies arguments, carefully and objectively to see if RPM can meet the exemption criteria of section 9 CA98 on an individual assessment.

3. Clarification of the boundary between active and passive sales

The CMA recommends that territorial and customer restrictions should continue to be treated as ‘hardcore’ in the VABEO and that the current exception which allows the restriction of active sales to protect an excusive territory be maintained. However, the CMA will be consulting on the guidance dealing with the treatment of different online sales strategies as either passive or active selling.

Additionally, and in line with the EU proposals, the CMA recommends that the VABEO (i) permit the combination of exclusive and selective distribution in the same or different territories, (ii) introduce the concept of shared exclusivity, and (iii) increase protection for members of selective distribution systems against sales from outside the territory to unauthorised distributors inside that territory.

4. Removal of dual pricing and the equivalence principle from the list of hardcore restrictions

Again, in synergy with the EU Commission, the CMA is of the view that the current protection of online sales is no longer warranted. Offline channels now need incentives to invest in promoting products and to prevent free riding given the overheads they have to account for in contrast with their online only counterparts. In order to address this, the CMA is recommending the removal of dual pricing and of the equivalence principle from the list of hardcore restrictions.

5. Adding wide retail parity obligations to the list of hardcore restrictions

In line with UK case law but nonetheless diverging with the EU commission’s proposal, the CMA is recommending that wide retail parity obligations be added to the list of hardcore restrictions in the VABEO. In order for the new hardcore restriction to be implemented effectively, the restriction will also cover measures that have the same effect as a wide retail parity obligation. Narrow parity obligations will however remain block exempted.

6. Providers of online intermediation services to be defined as suppliers

The CMA is not recommending any substantive amendments to the treatment of agency agreements. It will however be providing more guidance on the assessment. In addition, the CMA recommends that providers of online intermediation services be treated as suppliers for the purposes of the VABEO and therefore will not be able to benefit from the genuine agency exception. This again, is in line with the EU position.

7. Provide more guidance in relation to environmental sustainability, in particular, in relation to the criteria for admission to selective distribution systems.

Lastly, now the CMA has included the transition to ‘net zero’ in its strategic priorities, it will be considering sustainability in all aspects of its work going forward. In the context of vertical agreements, the CMA will provide guidance on environmental sustainability issues, in particular in relation to the criteria for admission to selective distribution systems.

8. UK order to have a six-year lifespan and a 1-year transitional period

The CMA considers that a six-year duration for the VABEO is appropriate allowing for a reappraisal of the provisions in the not-too-distant future. This, in our view, is a wiser approach than the EU Commission’s proposal of a 12-year lifespan for the EU VBER, given the evolutionary speed of the commercial landscape which has changed beyond recognition in the last 10 years.

For more information contact Ariane Le Strat or Saskia King.