Reviewing EU vertical agreements legislation

July 2019  |  FEATURE  |  COMPETITION & ANTITRUST

Financier Worldwide Magazine

July 2019 Issue

Vertical agreements are important in competition law. They create fewer antitrust concerns than horizontal agreements and allow two or more parties, which are at different levels of a production chain able to control costs, greater efficiencies while promoting beneficial interests.

Back in 2010, the European Union (EU) published a revised block exemption regulation and accompanying guidelines relating to vertical agreements. As a result, all businesses involved in supply and distribution arrangements need to consider and adhere to these rules, ensuring that existing and future agreements are compliant.

Vertical agreements that satisfy the criteria of the Vertical Agreements Block Exemption (VABE) are exempt from the prohibition on anti-competitive agreements contained in Article 101 of the Treaty on the Functioning of the EU. However, rules for dominant companies continue to apply. In order for the VABE to take effect, the parties must enter into a vertical agreement, the market share of each party to the agreement must not exceed 30 percent and there must be no hardcore restrictions in the agreement.

The VABE is arguably the most commonly used piece of EU competition legislation, exempting certain agreements and practices from the EU’s general competition rules. But it expires on 31 May 2022. Ahead of this date, the European Commission (EC) has begun the process of evaluating whether the regulation is “still effective, efficient, relevant, in line with other EU legislation and adds value”. The EC will examine whether the block exemption should be allowed to lapse, whether it should be extended or whether it ought to be revised it in order to take account of new market developments, such as the increasing importance of online sales and the emergence of new market players, most notably online platforms, which were much less important when the 2010 exemption was issued.

Online platforms have become a focus for the EC, reflected in a recent e-commerce sector inquiry and various EU court judgments. Notably, in 2018, the Commissioner for Competition, Margrethe Vestager, appointed a panel of special advisers to report on future challenges of digitalisation for competition policy. Their report evaluated the EC’s powers, procedures and practices specifically in relation to digital markets.

The EC has also introduced a number of legislative reforms designed to prohibit geo-blocking and other practices that differentiate the price or the terms of goods or services supplied, on the basis of the nationality or the place of residence of a customer. These rules were part of a number of reforms proposed in 2015 to promote the EC’s Digital Single Market strategy.

Until the end of 2018, the EC was inviting feedback on the future roadmap for the Vertical Block Exemption Regulation. Businesses were invited to help shape potential changes to EU competition laws relevant to vertical agreements. The EC also launched a consultation in the first quarter of 2019 to collect data from businesses, consumers and EU competition law enforcers on key competition issues arising in vertical relationships.

Furthermore, the European Court of Auditors, the EU’s independent financial watchdog, will publish a report on the impact of the EC’s competition enforcement by mid-2019, prior to the end of the Commissioner’s term of office in November 2019.

The UK angle

The decision of the EC notwithstanding, how block exemptions will work post-Brexit is a vexing issue. Under section 3 of the European Union (Withdrawal) Act 2018, ‘direct EU legislation’, including most regulations, operative immediately before exit day, “forms part of domestic law on and after exit day”. Indeed, the VABE regulation is one of the seven EU block exemptions that will be carried across into UK domestic law as ‘retained exemptions’. Clearly, block exemptions will have an important role to play in domestic competition law in the UK in the short term, since the Competition Act 1998 was deliberately modelled on the EU rules. But in the medium- to long-term, things become less clear.

The block exemption will remain in force, incorporated in UK domestic law until it expires. After expiration, if the UK has left the EU, it will be able to impose its own block exemption, or Domestic Exemption Order, under section 6 of the Competition Act – if it sees fit. The Competition and Markets Authority (CMA), in its draft guidance, confirmed that the geographic scope of the VABE Regulations retained in the UK will be amended so as to apply only to the UK market, rather than the EU market. However, additional guidance will be needed if companies are to understand what types of restrictions could fall foul of UK competition law post-Brexit.

It is not known if the CMA will undertake a consultation exercise on what should replace the VABE regulations or if there are any parts of the regulation which the CMA will focus on going forward. As with many Brexit-related issues, only time will tell.

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Richard Summerfield