Competition Law Reform

EU/REGULATORY

Competition Law Reform

No more exclusions from UK competition law for certain agreements - Richard Murphy discusses recent changes.

As of 1st May this year, businesses are no longer able to rely on an exclusion from the UK competition rules for vertical agreements (vertical agreements are agreements between parties that operate at different levels of the production and distribution chain and include franchise, distribution, agency and supply agreements). Instead, in order to avoid breaching Chapter I of the Competition Act 1998 (the "Act") businesses will now have to satisfy themselves either that their vertical agreements satisfy the requirements of the EC Block Exemption on vertical agreements (the "Block Exemption") or alternatively assess whether the agreement meets the individual exemption criteria.

The Old Regime

The Chapter I prohibition prohibits agreements or conduct that may have a potential or actual effect on trade within the UK. However, vertical agreements are generally considered to give rise to few competition concerns, leading instead to better co-ordination of the distribution chain, something that ultimately benefits the consumer. When the Act came into force, the UK decided to exclude vertical agreements from the scope of Chapter I of the Act, except where they contained "hardcore" restrictions such as price fixing. However, at EC level, the European Commission introduced a Block Exemption for vertical agreements in relation to Article 81 of the EC Treaty.

The New Regime

Following the modernisation of EC Competition law last year and the abilityfor national competition authorities to enforce EC competition law as well as domestic competition law, the UK decided to remove the UK exclusion for vertical agreements and instead rely on the Block Exemption in order to ensure consistency of approach between EC and UK competition law.

The EC Block Exemption

The Block Exemption contains some stricter criteria on vertical agreements that may benefit from it:

• market share limitation: the Block Exemption will not apply where the supplier's (or, in some cases, the buyer's) share of the relevant market exceeds 30%
• "Hardcore" restrictions: if any of the five "hardcore" restrictions listed in the Block Exemption are included in a vertical agreement, the entire vertical agreement will lose the benefit of the Block Exemption. These "hardcore" restrictions
  are not limited to the price fixing restriction contained in the previous UK exclusion. They also include sales restrictions, such as restrictions on the territories into which, or of the customers to whom, the buyer may sell (although there are a number of significant exceptions to this particular restriction).


• non-compete obligations: the Block Exemption will not apply to non-compete obligations that exceed five years. Where such a provision can be severed from the vertical agreement, the Block Exemption may continue to apply to the rest of the vertical agreement. Where this is not possible, the whole
  agreement loses the benefit of the Block Exemption.

All is not lost

Falling outside the Block Exemption does not necessarily render an agreement unlawful or unenforceable. First, this will only be the case if the agreement has an appreciable effect on trade within the UK. Second, it may be possible to show that the agreement meets the individual exemption criteria under the Act.

Healthcheck

All vertical agreements should now be reviewed in light of the stricter Block Exemption rules.

Key issues to check include whether:

• you or the other party to a vertical agreement have more than a 30% market share;
• the agreement contains any "hardcore" restrictions such as price fixing or market sharing; and
• the agreement contains non-compete restrictions exceeding five years?

Failure to do so could put businesses in breach of the Chapter I prohibition and lead to investigations by the Office of Fair Trading, the imposition of fines, proceedings by third parties and/or the unenforceability of the agreement or certain key provisions. Early action is advised.

Richard is an Assistant Solicitor in the firm's Corporate Department advising on a range of corporate, commercial and competition issues. Richard can be contacted at richard.murphy@lestrangeandbrett.com

Quote: hardcore restrictions