UK Competition Law – Exemption Possibilities for Commercial Agreements

Richard Eccles reviews the relevant block exemptions under UK competition law

Competition law permeates all areas of business life and all commercial agreements are in principle subject to competition law.  This is a serious issue because infringing agreements or at least the infringing provisions of commercial agreements will be invalid, and fines can be imposed, especially for the most serious types of competition restrictions. To achieve a measure of certainty for businesses, both the EU and UK competition law regimes provide block exemptions for various common types of agreements which meet specified criteria. These criteria include market share thresholds and requirements not to include various black-listed, hardcore restrictive provisions.

This briefing note provides an overview of the main relevant bock exemptions in the UK and reviews the recent and ongoing developments as regards the UK system of block exemption Orders.  It does not, however, attempt to explain all provisions of the block exemption Orders (or regulations applying as retained EU law) which are now considered, and indeed a detailed explanation of any of the block exemptions is outside the scope of this briefing note. 

The block exemptions are important because they provide a structure and a set of conditions with which businesses can conform their agreement so (where possible) as to achieve certainty of compliance with UK competition law.  Further, where it is not possible to bring an agreement fully within the framework of the relevant block exemption, for example because the parties’ market shares exceed the specified market share threshold, the block exemptions nonetheless provide  benchmarks against which to assess agreements individually for compliance with the statutory exemption criteria. In that situation, the agreement will not be automatically exempt under the relevant block exemption, but the block exemption provisions may provide a measure of support for an individual assessment to the effect that the agreement could reasonably be considered to be compliant under the general statutory provisions on exemption.

Until last year, all block exemptions under UK competition law were in the form of retained EU law, and some EU-derived block exemptions continue in the UK as retained EU law.  More specifically the various EU block exemption Regulations were adopted with specific amendments to convert them from EU measures to UK domestic secondary legislation, under The Competition (Amendment etc.) EU Exit Regulations 2019, SI 2019 No. 93.  However, in the past 12 months, three UK block exemption Orders have been adopted; these are the following: 

• The Vertical Agreements Block Exemption Order: SI 2022 No. 516 which entered into force on 1st June 2022;
• The Research and Development Agreements Block Exemption Order: SI 2022 No. 1271 which entered into force on 1st January 2023; and
• The Specialisation Agreements Block Exemption Order: SI 2022 No. 1272 which also entered into force on 1st January 2023.

Despite the UK’s withdrawal from the EU, these block exemption orders follow their EU counterparts very closely in content. The Vertical Agreements Block Exemption Order (the “VABEO”) also came into force on the same date as the new and current EU block exemption Regulation for vertical agreements, European Commission Regulation 2022/720.  Meanwhile the Specialisation Agreements and Research and Development Agreements Block Exemption Orders are closely based on the current relevant EU Regulations, those EU Regulations having already been renewed for six months to expire on 30th June 2023, replacement EU block exemptions being pending.

The Vertical Agreements Block Exemption Order

The scope of the VABEO covers any agreement between two or more undertakings at different levels of the supply chain concerning the purchase or sale of goods or services, including supply agreements, distribution agreements and some agency agreements.  The block exemption does not generally apply where the parties are competing suppliers (subject to specific exceptions) and its application is subject to market share thresholds of 30% as regards the seller in the market in which it sells relevant goods or services and also as regards the buyer’s share of the market on which the buyer purchases relevant goods or services. 

The hardcore restrictions, the inclusion of which will prevent the block exemption applying, include the following:

• restrictions on the buyer’s ability to set its onward sale prices;
• restrictions on the geographical area or customers to which or to whom the buyer may sell the contract goods or services (actively or passively) subject to specified exceptions as regards active sales;
• restrictions in relation to the supply of components, on the supplier’s ability to sell the components as spare parts to end users, repairers or wholesalers; and
• wide retail parity obligations (or measures having the same effect). 

The hardcore restriction concerning wide retail parity obligations is provided for in both the EU and UK block exemptions and is new, in that it was not included in the previous EU or (in the UK) retained EU law block exemptions.  A “wide” retail parity obligation is a restriction by reference to any of the supplier’s indirect sales channels (online or offline) requiring that the prices or other terms at which the supplier’s goods or services are offered are no worse than those offered by the supplier on another sales channel.  By contrast, a “narrow” retail party obligation, which involves such comparison only as between the relevant indirect sales channel of the supplier and the supplier’s own website, is generally likely to be acceptable.

The VABEO sets out various further excluded restrictions, the inclusion of which will not automatically prevent the block exemption applying, i.e. the block exemption will not apply as regards such specific individual restrictions provided that the restriction in question can be severed from the rest of the agreement as a matter of contract law. These excluded restrictions are unchanged from the previous EU (and, in the UK, retained EU law) block exemptions and include the following: obligations on the buyer not to manufacture or deal in competing products for a duration which is indefinite or which exceeds five years; and any such non-competition obligation on the buyer that applies after termination of the agreement except for a very specific type of obligation for one year only, limited to premises or vehicles from which to the buyer operated during the contract, and which is necessary to protect the supplier’s know-how.

The VABEO contains some important provisions on the distinction between active sales and passive sales, especially with regard to Internet selling. The active versus passive sales distinction is important because, as regards geographical and customer restrictions, certain active sales restrictions specified in the Order are permitted, whereas passive sales restrictions are generally prohibited for purposes of the Order.  Restrictions on internet selling are generally treated as restrictions on passive sales and so will not generally be acceptable.  However, the VABEO states that the following are active (as opposed to passive) sales: 

• targeted advertising and promotion including by means of online media, digital comparison tools or advertising on search engines targeting customers in specific geographical areas or customer groups;
• offering, on a website, language options different to the ones commonly used in the distributor’s geographical area; and
• using a domain name corresponding to a geographical area other than the one where the distributor is established. 

These provisions are important in adapting the block exemption regime to the developing digital environment.

Vertical agreements in the motor vehicles sector – Retained EU law block exemption

There is a separate EU block exemption Regulation for the motor vehicles sector, including the provision of spare parts, repair and maintenance services for motor vehicles, which continues in force until 31st May 2023 and applies in the UK (in amended form) until then as retained EU law. This Regulation states that the supply of new motor vehicles is covered by the main EU Vertical Agreements block exemption Regulation, but sets out additional hardcore restrictions in respect of the supply of spare parts and components (and certain other equipment), the inclusion of which would prevent the block exemption applying to the relevant agreement.  (An explanation of the hardcore restrictions is outside the scope of this briefing note.)  To benefit from the block exemption, the relevant agreement must also comply with the requirements of the main EU Vertical Agreements block exemption Regulation.  The European Commission has indicated an intention to renew the EU Regulation for a further five years. 

In the UK, the Department of Business and Trade has in February 2023 issued a draft Block Exemption Order to replace the retained EU block exemption as from 1st June 2023.  This draft Order is in broadly similar terms to the current retained EU block exemption (with reference to the VABEO instead of the EU Vertical Agreements Regulation).  However, it contains a new excluded restriction concerning any restriction on the ability of an independent operator to access technical or vehicle information, tools or training needed for the repair and maintenance of vehicles of a particular make, and also contains various updated definitions.  This is currently a draft Order, and meanwhile the existing EU block exemption Regulation applies in the UK as retained EU law until 31st May 2023.

The Research and Development Agreements Block Exemption Order

The Research and Development Agreements Block Exemption Order applies to agreements between two or more parties concerning agreements for joint research and development (“R&D”) and agreements for paid-for R&D, whether or not also providing for joint exploitation of the results of that R&D, and to agreements for joint exploitation of the results of R&D carried out under a prior agreement between the same parties.  This includes R&D agreements containing provisions for the assignment or licensing of intellectual property rights to one or more of the parties (or to an entity which the parties establish to carry out the joint R&D or paid-for R&D or joint exploitation of results) provided that such assignment or licensing is not the primary object of the agreement and provided that the assignment or licensing is directly related to and necessary for the implementation of the agreement.

The following are basic conditions for the application of the block exemption to the relevant R&D agreement:

• The agreement must provide for all parties to have access to the final results of the joint R&D or paid-for R&D (i.e. access to any intellectual property rights and know-how resulting from the relevant R&D), for purposes of further R&D and exploitation of the results, as soon as reasonably practicable after the final results become available.
• If the agreement does not provide for joint exploitation of the results, it must provide that each party is to be granted access to any pre-existing know how of the other parties if this know-how is indispensable for purposes of exploitation of the results.
• If the R&D agreement provides for joint exploitation of the results, such joint exploitation must relate only to results which are indispensable for the production of the contract products or the application of the contract technology, and must be protected by intellectual property rights or constitute know-how.  Also, if production of a contract product is allocated to one or more of the parties by way of specialisation relating to exploitation, such party or parties must be required to fulfil orders from other parties for supplies of the product (subject to certain stated exceptions).

The Block Exemption Order specifies various hardcore restrictions, the inclusion of which will prevent the block exemption applying.  These include the following: 

• a restriction on the freedom of any party to carry out research and development independently or in co-operation with third parties in an unconnected field or in any field after completion of the relevant research and development;
• a limitation of output or sales;
• any fixing of prices in relation to sales of contract products (or licensing of contract technology) to third parties;
• a restriction of the geographical area or of customers in which or to whom the parties may make passive sales of a contract product or license a contract technology;
• a requirement not to make, or to limit, active sales of a contract product or contract technology in particular geographical areas or to customers which have not been exclusively allocated to any of the parties by way of specialisation in exploitation.  

This is not an exhaustive list, and it should be noted that there are specified exceptions to these hardcore restrictions.

Certain restrictions are specified as excluded, meaning that the block exemption will not apply to them but will apply to the rest of the agreement, provided that such restrictions can be severed from the rest of the agreement. These include specified obligations not to challenge the validity of relevant intellectual property rights and an obligation not to grant licences to third parties to produce a contract product or to apply a contract technology.

The block exemption applies for the duration of any joint R&D, and for a period of any joint exploitation of the results of seven years from the time a contract product or contract technology was first put on the market.  Where two or more of the parties are competitors at the time that the agreement is entered into, the block exemption only applies on condition that the combined market share of the parties to the agreement does not exceed 25% of any relevant product market or relevant technology market. The block exemption can continue beyond the seven years period of exploitation for as long as the combined market share of the parties does not exceed 25% of any such market.

The Block Exemption Order contains a specific further condition that does not feature in the EU R&D Agreements block exemption Regulation, which applies where two or more parties compete in innovation at the time the agreement is entered into.  In this situation it is a condition for applicability of the Block Exemption Order that there must be (in relation to the relevant R&D agreement): (a) three or more competing and comparable R&D efforts, or (b) three or more third parties that are able independently to engage in a R&D effort which (i) concerns a new product or technology the same as or likely to be substitutable for a product or technology of the relevant R&D agreement, or (ii) has substantially the same aims or objectives.  The rationale for this is that where businesses are competing in innovation, it will typically not be possible to measure market shares in the way that they could be measured for established products or technologies.

The Specialisation Agreements Block Exemption Order

The Specialisation Agreements Block Exemption Order was made on the same date as the Research and Development Agreements Block Exemption Order and likewise came into force on 1st January 2023. The Specialisation Agreements block exemption is also modelled on the equivalent EU block exemption Regulation.

The Block Exemption Order provides exemption from the competition rules for specialisation agreements meeting all the specified criteria, which include the parties having an aggregate market share of not more than 20% of any relevant market.  The agreements covered by the Block Exemption Order (subject to fulfilling the stated criteria) are essentially agreements entered into by two or more undertakings which are active in the same product market and in which at least one of the parties agrees (unilaterally or reciprocally) to refrain from producing a particular product and to purchase that product instead from one (or more) of the other parties, or in which two undertakings active in the same product market agree to produce a particular product jointly. The block exemption applies also to specialisation agreements where one or more of the parties agrees to purchase or to supply the relevant product exclusively, or the parties agree to distribute the relevant product jointly and not to sell them independently.

The hardcore restrictions, inclusion of which would prevent the block exemption applying, are the following: fixing prices for the sale of specialisation products to third parties and the limitation of output or sales (subject in each case to clarifications specified in the Order) and also the allocation of markets or customers.

Technology transfer agreements – Retained EU law block exemption

There is not yet a UK block exemption Order for technology transfer agreements, but there is an EU block exemption Regulation which continues in force until 30th April 2026 and which applies in the UK at present (in amended form) as retained EU law.  There are various specified criteria for the application of the block exemption, including market share thresholds and the absence of specified hardcore restrictions (but an explanation of these is outside the scope of this briefing note).  The European Commission has issued a call for evidence on the evaluation of this block exemption (and the related Guidelines).  It is reasonable to consider that such agreements may in due course become the subject of a proposed UK block exemption Order. 

The EU block exemption Regulation for technology transfer agreements covers agreements for the licensing of technology rights (and also assignments of such rights where part of the risk remains with the assignor), subject to fulfilment of all the stated criteria (including market share thresholds and the absence of any hardcore restrictions). Technology rights for these purposes are patents, secret know-how, design rights, software copyright and certain neighbouring rights (or any combination of them).  In order to benefit from the block exemption, such agreements must provide for licensed production of goods or services.

It is worth noting that, in relation to software licensing, the EU technology transfer agreements block exemption does not apply to agreements for the mere reproduction and distribution of software copyright-protected works (which the European Commission considers to be covered by analogy by the EU block exemption for vertical agreements and related guidelines) or to the licensing of software by means of “shrink-wrap” licensing for purposes of software distribution.  The latter model is (according to the relevant CMA Guidelines) within the scope of the UK Vertical Agreements Block Exemption Order, where the reseller does not itself acquire a licence in relation to the software but only has the right to resell the hard copies.