Background
The UK’s departure from the EU has led to greater focus on the UK’s competition law regime. (EU competition law will continue to apply to those exporting goods or services to the EU).
In this article, we look at the Chapter I Prohibition on anti-competitive agreements and the banned, so-called “hardcore” restrictions. (In a second article, we will look at the range of exemptions, which allow agreements which may have some anti-competitive effects to continue to operate).
The Chapter I Prohibition
Section 2 of the Competition Act 1998 provides that vertical agreements (for example, between a manufacturer and a distributor) which affect trade in the UK are prohibited if they have as their object or effect the prevention, restriction or distortion of competition within the UK, unless exempt.
Examples are given as to what will be regarded as anti-competitive agreements, including those which directly or indirectly fix purchase or selling prices or other trading conditions, limit or control production, markets, technical development or investment, share markets or sources of supply, apply dissimilar conditions to equivalent transactions with other trading parties placing such parties at a disadvantage or making the completion of the agreement subject to un-related supplementary obligations.
The available exemptions are contained in a so-called “block exemption” (The Competition Act 1998 (Vertical Agreements Block Exemption) Order 2022).
The Hardcore Restrictions
Here we are focussing on the “hardcore” restrictions, the presence of one of which will render the agreement illegal.
These restrictions are those which have the object, whether directly or indirectly and whether on their own or in combination with other factors under the control of the parties to the agreement, of:
- Restricting the buyer’s ability to decide its onward sale price (resale price maintenance).
(However, the supplier can impose a maximum sale price or recommend a sale price, provided that such provisions do not amount to a fixed or minimum sale price as a result of pressure from or incentives offered by a party).
- Where the supplier operates an exclusive distribution system, restricting the geographical area into which or the customer group to whom the buyer who has been allocated an exclusive geographical area or customer group may actively or passively sell the contract goods or services.
(This is subject to some “excepted restrictions” which allow some limited control over such sales).
- Where the supplier operates a selective distribution system, restricting (a) the geographical area into which or the customer group to whom the distributor who has been allocated an exclusive geographical area or customer group may actively or passively sell the contract goods or services; (b) cross-supplies between distributors and (c) active or passive sales to end users by retail level distributors.
(This is subject to some other “excepted restrictions”, relating to active sales into reserved territories, sales to unauthorised distributors, control over the distributor’s place of establishment, sales by a wholesale distributor to end users and the sale of components to make competing goods).
- Outside a distribution system, restricting active or passive sales by a buyer to a geographic area or customer group.
(The “excepted restrictions” which apply here relate to sales into reserved territories, sales to unauthorised distributors, control over the buyer’s place of establishment, end user sales by a wholesaler and the sale of components to make competing goods).
- Restricting the supplier’s ability to sell spare parts to end users and independent repairers, etc that the supplier sells to the buyer as components.
- Amounting to a wide retail parity obligation, defined as “a restriction relating to any of the supplier’s indirect sales channels (whether online or offline…) which ensures that the prices or other terms and conditions at which the supplier’s goods or services are offered to end users on a sales channel are no worse than those offered by the supplier on another sales channel.”
As noted above, the presence of one of these restrictions in an agreement will render it illegal.
Competition law also controls post termination and other restrictive covenants.
Excluded Restrictions
In order to benefit from the block exemption, the commercial agreement must not contain an “excluded restriction”, defined as:
- A no-compete obligation, which is indefinite or exceeds 5 years (subject to the point mentioned below);
- A direct or indirect obligation causing the buyer, after termination of the agreement, not to manufacture, purchase, sell or re-sell any goods or services; or
- A direct or indirect obligation causing the members of a selective distribution system not to sell the brands of particular competing suppliers.
The time limit of five years in (a) does not apply where the goods or services are sold by the buyer from premises, land or a vehicle owned or leased by the supplier, provided that the period of the no–compete obligation does not exceed the period of occupancy of the premises or land or possession of the vehicle by the buyer.
The restriction in (b) is subject to an exception, where the obligation relates to competing goods or services, it is limited to the premises, land or vehicle from which the buyer operated, is indispensable to protect the supplier’s know-how used by the buyer and is for no more than one year.
There is a further exception, which is that, if a restriction is indispensable to protect secret know-how transferred by the supplier to the buyer, it will not be an excluded restriction, whether or not it is time-limited.
As regards excluded restrictions, if the agreement contains a severance clause, it will be possible to remove the excluded restriction, leaving the remainder of the agreement intact. However, if there is no severance clause, the excluded restriction will mean that the benefit of the block exemption cannot be claimed for that agreement.
Summary
Competition law is a complex area and the consequences of having an illegal agreement can be severe. This article is for general guidance and is not a substitute for specific legal advice. Businesses should carry out an analysis of their vertical commercial agreements to assess whether they are able to steer a safe path through the Competition Act and the block exemption.