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Supply and Distribution Agreements - New Competition Law Regime in Force

on Wednesday, 08 June 2022.

Parties to agreements sometimes include restrictions, such as exclusive territory, minimum purchase requirements, recommended pricing, or some other requirements which may cause a problem under competition law.

Breach of competition law is serious - with huge fines, unenforceable agreements, third parties suing, bad PR, dawn raids and massive disruption. Certain restrictions are exempt, and the rules have recently changed.

EU and UK Competition Law - the Basic Background

Under EU competition law, agreement, decisions or concerted practices which have as their object or effect the prevention, restriction or distortion of competition and which may affect trade between EU Member States are prohibited unless an exemption applies (Article 81 of the Treaty on the Functioning of the European Union). The UK has an almost identical regime under the Chapter I Prohibition of the Competition Act 1998, except the impact is on trade within the UK.

There are certain block exemptions that apply to permit certain types of restriction in most case. An important one that affects people supplying or obtaining goods or services to or from someone else at a different level of the supply chain, is the Vertical Agreements Block Exemption Regulation (VBER) from 2010. VBER applied to both the EU and UK competition regimes, and expired on 31 May 2022.

The European Commission and the UK's Competition and Markets Authority have been looking into what regime to have following the expiry of VBER. With effect from 1 June 2022, the EU and UK have introduced new block exemptions. On 10 May 2022, the European Commission published the final details of the revised VBER, and accompanying updated Guidelines on vertical restraints (Guidelines). Meanwhile, the UK has published a new Competition Act (Vertical Agreements Block Exemption) Order 2022 and an Explanatory Memorandum.

Any existing agreements have a one year grace period and can still follow the 2010 regime until 31 May 2023, by which time they must be updated.

What's in the New Block Exemptions?

The good news is that many of the provisions in both the new EU and UK block exemptions follow the 2010 VBER. However, there are some changes:

  • The parties each have to have less than 30% market share for the block exemption to apply.
  • Certain 'hardcore' restrictions remain. This means that the whole of the agreement would fall outside of the block exemption and could therefore potentially be contrary to EU or UK competition law (unless they are otherwise exempt). The hardcore restrictions include:
      • Setting a minimum or actual resale price that the buyer would charge. However, genuine recommended or maximum resale prices would be fine.
      • Restricting sales to customers or territories by the buyer, except that restrictions of active sales is sometimes permitted. Responding to passive sales cannot be prohibited, though. Selling on the Internet must be permitted and a prohibition on using the Internet is a hardcore restriction on passive selling.
  • Certain excluded restrictions remain. These are seen as not as serious as hardcore restrictions, but would take the particular restriction outside of the block exemption. An example of an excluded restriction is a non-compete obligation that lasts indefinitely or for more than five years. This is a requirement on the buyer to obtain at least 80% of its annual requirements for a product or something similar to the product from the supplier.

So What's Changed in the New Block Exemptions?

In more good news for business, particularly those who trade in the UK and Ireland (and therefore will need to have agreements that reflect both the UK and EU regimes), the new UK and EU block exemptions follow extremely similar paths. There are some small nuanced differences that need to be carefully considered, but essentially the new regimes are extremely similar.

Here is a top level summary of the main differences from the 2010 VBER:

  • There is a clearer definition of what is meant by 'active sales'. Agreements should therefore follow this new definition.
  • The restriction on the territory or customer group where the buyer can sell can now be required for the buyer to impose on its first layer of customers. Previously, the supplier and buyer could not agree for restrictions to be imposed on the buyer's customer.
  • There is greater flexibility over prohibitions into exclusive or selective distribution agreement systems, as well as what constitutes an exclusive distribution agreement system - it no longer needs to be a single distributor but could be a small limited number in each territory or customer group.
  • Different prices can be charged to a wholesale buyer according to whether they are supplying online or offline - ie those that have a dual distribution model. The intention here is that, whilst the Internet selling must not be prohibited (directly or indirectly), there can be a recognition of the additional investment undertaken by a business acting offline.
  • There is a specific hardcore restriction on a parity obligation where the supplier has to offer the buyer goods or services on terms that are no worse than those offered to third parties.

The UK's Order lasts for six years, until 31 May 2028; the EU's new VBER lasts for 12 years, to 31 May 2034.

What Must You Do Now?

Any new agreements that may relate to trade anywhere in the UK or EU must follow the new regimes. In addition, it is worth dusting down those existing agreements to see what may need to change by May 2023. If there is anything that could potentially be anti-competitive, it may or may not be acceptable. If your agreement fails to comply with the new regimes under the EU and UK competition law, that could lead to severe consequences, including fines of up to 10% of your total turnover, third parties suing, the agreement being unenforceable, and huge inconvenience.

If you would like advice on your agreements with suppliers or purchasers, please contact Paul Gershlick in our Commercial Contracts team on 07795 570 072, or complete the form below.

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