Which is new?
Other points of divergence from the retained VABER
The UK government has published the long-awaited draft Vertical Agreement Block Exemption Order 2022 (VABEO). This will replace the retained Vertical Agreement Block Exemption Regulation (the retained VABER), which is due to expire in May 2022. This article examines the changes and the likely impact of the VABEO on franchise businesses operating in the UK.
A franchising or distribution agreement may breach UK competition law if it has the object or effect of restricting competition and is likely to affect trade within the UK. The Competition and Markets Authority (CMA) is responsible for enforcing UK competition law.
In order to maintain uniformity, protect know-how and effectively operate a network across sales channels and geographies, a franchise agreement will often seek to regulate areas such as online business , marketing, territorial rights, reserved channels, supply obligations, pricing and non-competition. However, competition law prohibits anti-competitive agreements, thus allowing certain types of restrictions only if
- the respective market share of the parties is sufficiently small for the restrictions to have no appreciable effect on competition; Where
- the parties’ respective market share is small enough to benefit from the “safe harbour” of the European Vertical Block Exemption Regulation (VBER) and the agreement does not contain any “hardcore” restrictions, such as restrictions on the ability to a franchisee to set their own prices or a ban on their ability to sell online.
Moreover, certain provisions essential to maintaining the identity and reputation of the franchise network or to protecting the transfer of the franchisor’s know-how are completely exempt from competition law (the so-called “Pronuptia” test).
After Brexit, the VBER was transposed directly into UK competition law as the retained VABER.
The VBER will expire on 31 May 2022, and the European Commission (the Commission), the body responsible for enforcing EU competition law between member states, is finalizing revisions to the VBER and its guidelines. The CMA has advised the UK government that following Brexit, the UK would have to replace the retained VABER with its own set of UK-specific rules, known as ‘VABEO’.
The CMA recommended that the scope of the VABEO remain largely the same as that of the retained VABER. The basic structure and form of VABEO, including market share thresholds, should remain unchanged. However, while the Commission is introducing changes at EU level through the revised VBER, the VABEO is expected to bring both divergence and new alignment between UK and EU rules.
Territorial restrictions and customers
VABEO will give companies more flexibility to design their distribution systems according to their needs. This will include authorizing:
- the combination of exclusive and selective distribution in the same geographical area or in different geographical areas;
- shared exclusivity in a geographical area or for a group of customers by allowing the allocation of a geographical area to several distributors; and
- increased protection for members of selective distribution systems against sales from outside the geographical area to unauthorized distributors within that geographical area.
Measures promoting physical sales
These will include the following:
- Dual pricing (i.e. charging the same distributor a higher price for products intended for resale online than for products intended for sale offline) will no longer be considered a hardcore restriction of competition as long as it does not lead de facto to the limitation of online sales.
- The imposition of criteria for online sales which are not broadly equivalent to the criteria imposed on physical stores in a selective distribution system will no longer be considered a hardcore restriction.
These changes may contribute to a more level playing field between online and brick-and-mortar retailers, and are broadly aligned with the Commission’s proposed changes to the revised VBER.
most favored nation
Terms which generally state that a product or service cannot be offered on better terms on other channels – including, for example, a supplier’s website or through other intermediaries, such as other distributors or online platforms – will be treated as hard core restrictions for both online and physical sales. This is a point of divergence with the new EU rules, as the revised VBER will only take into account most-favoured-nation clauses and strict restrictions in the online context.
Dual distribution generally covers situations in which a franchisor sells its products directly to end customers, in direct competition with its franchisees (ie direct competition at the retail level). In general, information sharing risks are more likely to arise at the retail (as opposed to wholesale) level, but dual distribution relationships may currently qualify for a “safe harbor” exemption. under the VABEO if neither party’s individual market share exceeds 30% and the agreement does not contain any hardcore restrictions.
If the individual market share of either party is close to or exceeds the threshold, a franchisor should instead self-assess under the rules applicable to competing businesses and consider putting in place measures to manage any potential risk of infringement of competition law (for example, establishing information barriers, limiting access and anonymizing or aggregating data). These are potentially detrimental to a franchise system whose maintenance and development depend, in part, on a fluid exchange of information within the network. In reality, many franchise systems fall below the current market share threshold, but for those uncomfortably close to its limits (assessing relevant market share is a complicated science), these rules regarding double distribution create a costly and ongoing compliance burden.
The good news is that the CMA recognizes that the dual distribution exemption is increasingly being invoked due to the growing practice of vendors selling directly to customers through their own websites. To this end, VABEO will keep the rules in force. In addition, VABEO will also extend its “safe harbour” to dual distribution at wholesaler and supply importer level, which is currently prohibited. The same is expected at EU level with the revised VBER.
The cornerstone of the franchise model is the transfer of information or “know-how” which is essential to maintaining a strong and consistent brand identity. Under VABEO, as long as neither party’s individual market share exceeds 30% and the agreement does not contain any hardcore restrictions, franchisors and franchisees will be able to freely exchange information (meaning, for example , that a franchisor may collect information on the sales of its products from its franchisees).
The VABEO “safe harbour” can therefore extend to the exchange of information whether or not the franchisor practices a dual distribution model. This contrasts sharply with the Commission, which is set to limit the application of the revised VBER “safe harbour” for dual distribution information exchanges by introducing a special combined market share threshold of 10% and a new self-assessment regime.
In its review of the current VBER, the CMA noted that potential concerns arising from the provision of sensitive information between franchisors and franchisees could be addressed through the use of information barriers, but the CMA said that it was better to leave this question to the companies. to self-evaluate.
On the one hand, VABEO’s alignment with the status quo is arguably disappointing and cannot be called a “Brexit dividend”. Nevertheless, the proposed changes are based on pragmatism and should allow for innovation in the way companies design their distribution systems. The VABEO also remains close to the current VBER on certain points from which the Commission is now moving away, such as the exchange of information in double distribution, while aligning itself with the revised VBER on other points. VABEO therefore signals that the CMA is ready to chart its own course and, where appropriate, take a pragmatic approach to issues that risk creating unwanted complexity and uncertainty for businesses – of which there have been many in recent times.
The Directorate for Business, Energy and Industrial Strategy has requested comments on the draft text of VABEO, the deadline for which was March 16, 2022. VABEO will enter into force on May 31, 2022 and will expire on June 1. 2028.
For more information on this subject, please contact Gordon Drake to Fieldfisher LLP by phone (+44 20 7861 4000) or email ([email protected]). Fieldfisher LLP’s website can be accessed at www.fieldfisher.com.