Steering a course through the UK’s competition law regime part 2 – the vertical agreements block exemption

17-06-2022


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 Part 1, we looked at the Chapter I Prohibition on anti-competitive agreements and the banned, so-called “hardcore” restrictions. In Part 2 of this article, we will look at the range of exemptions, which allow agreements which may have some anti-competitive effects to continue to operate, provided they do not contain any hardcore restrictions.

The Chapter 1 Prohibition

The basic position under the Competition Act 1998 is that agreements 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.

The Exemptions

Vertical agreements (such as between a manufacturer and a distributor or a wholesaler and a reseller) can have the benefit of the block exemption, which provides legal certainty to companies regarding their commercial agreements. For certain types of vertical agreements, specific criteria need to be met (see below). However, rent and lease agreements, where no goods or services are being sold by the supplier to the buyer, are outside the scope of the block exemption.

An association and its members

All members of the association must be retailers of goods and the annual turnover of each member (and its group) must not exceed £44m. (If this threshold is not exceeded by more than 10% for two consecutive years, the benefit of the block exemption can still be claimed).

Assignment or licence of intellectual property (IP)

The primary object of the agreement must be other than the assignment or licensing of IP and the agreement must relate directly to the use, sale or re-sale of goods or service by the buyer or its customers. The agreement must not include vertical restrictions which are not exempted by the block exemption.

Agreements between competing undertakings

Any such agreement must be non-reciprocal and must meet the following criteria:

The Market Share Test

This test applies to any vertical agreement.

In order to benefit from the block exemption (and provided there are no hardcore restrictions), the supplier’s share of the market for the relevant goods and services must not exceed 30% of the relevant UK market and the buyer’s share of the market on which it purchases the relevant goods or services, must not exceed 30% of the relevant UK market.

If the market share rises above 30% but not 35%, the benefit of the block exemption can be  claimed for a further two years, but if it goes over 35%, that period is reduced to one year.

Transitional period

The UK vertical agreements block exemption came into force on 1st June 2022 (and will be in force until 1st June 2028). However, a “pre-existing vertical agreement”, being one which was entered before 1st June 2022, does not meet the requirements of this block exemption, but which meets the requirements for exemption under the EU block exemption for vertical agreements, will be treated as if it did meet the requirements of the UK block exemption until 1st June 2023.

Summary

In our two articles, we have sought to explain the rules around competition law and vertical agreements as succinctly as possible, but they should not be regarded as a substitute for specific legal advice. We would encourage businesses to review their vertical commercial agreements to make sure they fall within the scope of the new UK block exemption.


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