After leaving the European Union effectively in 2021, the U.K. was no longer bound by EU rules, except in a few cases where the U.K. retained some EU rules for some time. Yet, the U.K. government is determined to use its renewed powers to rule on competition law matters and one of the first actions is issue a new “block exemption” to competition law.
Under EU law, certain agreements between producers, distributions and retailers are exempted from competition law because it is deemed that the benefits of these agreements clearly outweigh their anticompetitive effects. For example, if a manufacturer agrees with its distributors on how to resell a product, the pricing or other elements, this could be considered an anticompetitive agreement under competition law rules. However, a “block exemption” allows some types of vertical agreements to be exempted from competition rules, as long as certain requirements are met.
The U.K. retained these EU rules that exempt businesses in certain circumstances, but these rules will expire in May 2022 and the U.K. government will take this opportunity to design new “block exemption” rules.
“The new rules will ensure competition law does not impose unnecessary burdens, encouraging so-called ‘vertical agreements’ which are agreements between companies at different levels of the supply chain, such as farmers and grocers,” said the government in a statement.
Normally a “block exemption” comes within a vertical agreement guideline, a set of rules designed to rule over vertical relationships between manufacturers and distributors, or buyers. These types of rules have been in place for decades and there is consensus that they bring benefits to the companies that can benefit from them.
Where there is less agreement is on the exact requirements that a company needs to meet in order to benefit from an exemption, and the new U.K. rules will probably change slightly these requirements. For instance, EU rules establishes that in order for the block exemption to apply, the supplier’s and the buyer’s market share must each be 30% or less. The proposed U.K. rule also chooses 30% as the original percentage to benefit, but it adds a bit of flexibility. “If a market share is initially not more than 30% but subsequently rises above that level without exceeding 35%, the block exemption continues to apply for a period of two consecutive calendar years,” per the draft rules.
Another area where there is room for change is on parity clauses. A parity clause, usually included in distribution agreements, is an obligation for the distributor that a product or service may not be offered on better terms on any other indirect sales channels, including through intermediaries, such as other distributors or online platforms. For instance, Booking.com used to require all hotels not to offer its rooms on any other channel at a better price than on its platform. After some investigations and litigation, Booking.com decided to remove these clauses or to limit its scope. The effect of these types of clauses is not always anticompetitive, but the U.K. is proposing now to remove wide retail parity clauses from the exemptions as these are the most damaging for small distributors.
Read more: Platforms May Not Worry About EU’s Prohibition on Price Parity Clauses
In general, the proposed U.K. vertical agreement rules represent a small departure from EU rules, and this is probably a sensitive thing to do. While “block exemptions” may be adjusted, as the U.K. government defends, to promote investment and innovation, and to adapt to changes in the market, there is no need to drastically change what it already works. The government will leave a technical consultation on the wording of the legislation open until March 16, 2022.
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