Q&A: vertical agreements in United Kingdom
- EU Regulation
- September 1, 2022
- No Comment
Special rules and exemptions
Do any special rules or exemptions apply to the assessment of anticompetitive agreements between undertakings active at different levels of the supply chain in digital markets in your jurisdiction?
There are no special rules or exemptions that apply to the assessment of anticompetitive agreements between undertakings active at different levels of the supply chain in digital markets in the UK. Instead, the general rules applicable to vertical agreements also apply to agreements in the digital sector. On 1 June 2022 the Vertical Agreements Block Exemption Order (VABEO) came into force in the UK, replacing the EU Vertical Block Exemption Regulation regime. The VABEO provides a safe harbour for vertical agreements, provided the 30 per cent market share threshold of the parties is not exceeded and the agreement does not contain any hardcore restrictions. The UK decided that large-scale and fundamental differences from the EU rules were not appropriate as this would create additional compliance costs for businesses operating in both the UK and the EU, but there are nevertheless a number of differences between the two regimes. This is the case, in particular, for wide retail most favoured nation clauses (MFNs), which have become a hardcore restriction under the VABEO.
The Competition and Markets Authority’s (CMA) VABEO Guidance contains a section that deals with vertical agreements in the platform economy and provides useful guidance on the application of the VABEO in the context of online platforms.
Online sales bans
How has the competition authority in your jurisdiction addressed absolute bans on online sales in digital markets?
In the UK, suppliers are not permitted to impose absolute bans on retailers from selling their products online. A restriction of online sales or online advertising that prohibits the buyer from using the internet to sell the contract goods or services qualifies as a restriction by object under the VABEO and will therefore not benefit from its safe harbour. This is in line with the case law, with the leading case in the UK being the Ping golf clubs case. In August 2017, golf club manufacturer Ping was fined £1.45 million by the Competition and Markets Authority (CMA) for banning UK retailers from selling its golf clubs online. The aim of Ping’s online sales ban was to promote in-store custom fitting for its golf clubs. Although the CMA accepted that this was a legitimate commercial strategy, it concluded that alternative and less restrictive measures were available to Ping that would achieve the same outcome. Ping unsuccessfully appealed the CMA’s decision to the Competition Appeal Tribunal and from there to the Court of Appeal. In January 2020, the Court of Appeal confirmed that the online sales restriction imposed by Ping on its approved retailers under its internet sales policy was a restriction of competition ‘by object’, the most serious type of competition law infringement that does not require the competition authorities to carry out a detailed analysis of the effect of the restriction on competition. The Court of Appeal’s ruling is based on the European Commission’s Guidelines on vertical restraints and the European Court of Justice’s case law (Pierre Fabre and Coty).
Resale price maintenance
How has the competition authority in your jurisdiction addressed online resale price maintenance?
Over the past few years, the CMA has investigated online resale price maintenance (RPM) resulting in fines in a range of sectors (light fittings, commercial catering equipment, bathroom fittings) where suppliers were dictating minimum prices at which resellers could sell their products online. The CMA has particular concerns over practices that restrict retailers from advertising prices below the supplier’s recommended resale price (even though they are ultimately able to sell at such low prices), because according to the CMA, in the context of online sales, the price advertised online is normally the price paid by the customer. Minimum advertised prices (MAPs) are listed in the VABEO Guidance as a form of indirect RPM, which is a hardcore restriction under the VABEO.
In June 2020, the CMA imposed total fines of £5.8 million for resale price maintenance in the musical instruments and equipment sector, in three separate cases. This follows fines imposed on Casio (£3.7 million) and on Fender (£4.5 million) for similar conduct. In most cases, compliance with the supplier’s pricing policy was monitored and enforced via automated repricing software. The VABEO Guidance recognises that price monitoring is increasingly used in e-commerce, where both manufacturers and retailers often use specific price monitoring software. This software increases price transparency in the market and although it does not, on its own, constitute RPM, it is often a feature of arrangements that do amount to RPM. It is also interesting to note that the infringing conduct was picked up through the CMA’s in-house price monitoring tool, which was developed by its Data, Technology and Analytics unit to detect suspicious online pricing activity. In an open letter to the musical instruments sector the CMA advises retailers that, if they agree with suppliers to sell at fixed or minimum prices, they may be found to be infringing competition law. Although addressed to the musical instruments sector, the open letter sets out practical guidance relevant to suppliers and retailers in all sectors.
Geoblocking and territorial restrictions
How has the competition authority in your jurisdiction addressed geoblocking and other territorial restrictions?
The Geo-Blocking (Enforcement) Regulations 2018 (the UK Geo-Blocking Regulations), which came into force on 3 December 2018, implement EU Regulation 2018/302, which obliges firms to treat EU customers (both consumers and other end users) equivalently, regardless of their nationality, place of residence or place of establishment. From 1 January 2021, as a result of Brexit, EU businesses no longer have to follow the EU Geo-Blocking Regulation when they sell to the UK, but UK businesses selling into the EU will need to continue to comply with the EU Regulation.
Under the new VABEO the UK has decided to continue treating territorial restrictions as hardcore restrictions. Although this approach was historically, in part, driven by the EU single market imperative, the CMA recognises it was also driven by an interest in preserving intra-brand competition and consumer choice. The CMA is also mindful that the implications of the UK’s withdrawal from the EU, including the Northern Ireland Protocol, are not yet fully understood. The CMA therefore also decided to treat territorial and customer restrictions as hardcore restrictions, to avoid inadvertently compromising the integrity of the UK internal market.
The CMA will keep the position under review, in order to take into account any market developments if and when they arise. This is also one of the reasons why the VABEO has been adopted for a six-year period only (it expires on 1 June 2028), as opposed to the 12-year period for the Vertical Block Exemption Regulation (VBER), as that will allow the CMA to review the position sooner if necessary.
How has the competition authority in your jurisdiction addressed supplier-imposed restrictions on distributors’ use of online platforms or marketplaces and restrictions on online platform operators themselves?
There have been no other cases in the UK dealing with restrictions on distributors for specific platforms or marketplaces. The only case in the UK to date is the Ping case, which deals with an absolute ban on online sales imposed by a supplier on its distributors.
The VABEO Guidance recognises that a restriction or ban on online marketplaces may in principle benefit from the VABEO exemption (provided the agreement meets the requirements of the VABEO). While such a restriction or ban restricts the use of a specific online channel, other online channels remain available to the buyer. The buyer may still sell the contract goods or services via its own online store and other online channels, and it may use search engine optimisation techniques or advertise online (including on third-party platforms) to increase the visibility of its online store or other sales channels.
Targeted online advertising
How has the competition authority in your jurisdiction addressed restrictions on using or bidding for a manufacturer’s brand name for the purposes of targeted online advertising?
The CMA has not brought any cases relating to restrictions on using or bidding for a manufacturer’s brand name for the purposes of targeted online advertising. However, it has discussed the issue of brand restriction in relation to targeted online advertising across its various reports. In the final report of its online platforms and digital advertising market study, the CMA discussed brand bidding in search advertising. Brand bidding refers to bidding by advertisers on keywords relating to either the advertiser’s own brand or the brand of a rival. At a high level, the CMA acknowledged that brand bidding may have pro-competitive effects (insofar as it may increase competition between advertisers by increasing the range of keywords advertisers can bid on) or anticompetitive effects (insofar as it may enable advertisers to free ride on each other’s brands by capturing rival traffic when users search for brands using a search engine, thereby driving up advertising spend and costs).
The CMA did not find clear evidence that Google promoted brand bidding in practice, though it did find that Google appears to have the ability and incentive to exploit its market power in general search by allowing and promoting brand bidding.
In March 2022 the CMA launched an investigation into Google and Meta, focused on whether both companies restricted or prevented the uptake of header bidding services and whether Google also affected the ability of other firms to compete with its products in this market. Header bidding is a service that allows sellers, such as news publishers, to offer their online advertising space to multiple buyers at the same time, rather than receiving offers one by one. This allows advertisers to compete for advertising space, and publishers to compare bids from multiple buyers simultaneously, making auctions more competitive. The CMA is considering whether an agreement between Google and Meta (codenamed ‘Jedi Blue’ by Google) was in breach of competition law by making it harder for competitors to provide online display advertising services to compete. The CMA is also investigating Google’s conduct in relation to header bidding more widely and whether it is abusing its dominant position in that market and making it harder for competitors to provide a similar service.
In February 2022 the CMA accepted commitments from Google in relation to its proposals to remove third-party cookies on its Chrome browser and develop its Privacy Sandbox tools, bringing the investigation to an end. The commitments relate to issues such as the development and implementation criteria for the sandbox; transparency and consultation requirements with third parties and mechanisms for regulatory involvement in the design process. The CMA and the Information Commissioner’s Office (ICO) will remain involved in the development and testing of the sandbox proposals and Google will be required to report on the progress of the proposals and publish quarterly reports.
How has the competition authority in your jurisdiction addressed most-favoured-nation clauses?
The CMA has taken an active interest in the use of most-favoured-nation (MFN) clauses in online markets, generally considering that ‘wide’ MFNs (ie, clauses that prevent firms from offering lower prices on their own proprietary websites and other price comparison websites) may infringe UK competition law, but that ‘narrow’ MFNs (preventing firms only from offering lower prices on their own websites) are less likely to give rise to adverse effects on competition. In 2014, the OFT (the CMA’s predecessor) accepted commitments from online booking platforms allowing hotels to offer cheaper rates on competing online travel agents’ sites. In its private motor insurance market (PMI) investigation the CMA also prohibited use of such ‘wide’ retail MFNs. The CMA considered, however, that narrow MFNs might be necessary in the PMI market to ensure the viability of the current price comparison website business model, the existence of which had served to enhance price competition between insurance providers.
The most recent application of this approach is the CompareTheMarket home insurance case. In November 2020, the CMA imposed a fine of £17.9 million on CompareTheMarket for its use of wide MFN clauses in certain contracts with home insurance providers that prevented rival comparison sites and other channels from offering cheaper prices than CompareTheMarket. The case is currently on appeal before the Competition Appeal Tribunal.
Wide retail parity obligations (wide MFNs), or measures that have the same effect, are listed as a hardcore restriction in the new VABEO. It is important to note here that this hardcore restriction only applies in relation to agreements that relate to the offer, sale or resale to end users. Therefore, wide parity obligations that apply to upstream business-to-business markets are not treated as hardcore restrictions. The VABEO Guidance makes it clear that the CMA will carefully consider, on a case-by-case basis, any efficiency arguments, but does not provide any examples of such efficiencies as it considers the onus here will be on businesses who try to justify their clauses.
Multisided digital markets
How has the competition authority in your jurisdiction addressed vertical restraints imposed in multisided digital markets? How have potential efficiency arguments been addressed?
The CMA has considered the impact of MFNs, non-brand bidding and non-re-solicitation clauses.
The CMA identified two main efficiencies in relation to narrow MFNs: credibility and free riding. The credibility efficiency relates to the argument that digital comparison tools’ business models would be undermined if consumers could find cheaper offers on suppliers’ direct channels. The CMA considered that while this efficiency is plausible, its strength depends on the extent to which the digital comparison tool is new or less established. The free riding efficiency relates to the arguments that digital comparison tools allow consumers to reduce search costs and that individual suppliers should not be able to freely benefit from this service. The CMA found that reducing the risk of free riding by suppliers is a plausible efficiency justification for narrow MFNs, but that the strength of this efficiency may be stronger in some sectors than in others, depending on how easy it is for consumers to obtain and compare quotes from multiple sites. The CMA also noted that it was unclear how applying narrow MFNs to suppliers’ existing customers would mitigate free riding and lead to efficiencies.
On the issue of narrow non-brand bidding, wide non-brand bidding, and negative matching agreements, the CMA found that these agreements may (to varying degrees) reduce the likelihood of digital comparison tools’ adverts appearing on top of a search engine’s results page, thereby reducing supplier competition. In response to this concern, the CMA was presented with three claimed efficiencies: preventing free riding on brand owners’ investments; reducing the risk of consumer confusion when searching for a particular brand; and reducing marketing costs to brand owners. The CMA concluded that the free riding efficiency could hold for narrow non-brand bidding but was less credible for wide non-brand bidding and especially unpersuasive in respect of negative matching agreements. The CMA found that while the other two efficiencies were plausible, it was not presented with any evidence that demonstrated their existence.
Finally, the CMA also examined non-re-solicitation clauses in contracts between digital comparison tools and suppliers, being clauses that require digital comparison tools not to contact customers who have purchased a supplier’s product from that digital comparison tool for a certain period. The CMA found that non-re-solicitation clauses may have a negative impact on both competition between suppliers (by reducing the visibility of digital comparison tools and the competing offers they provided) as well as innovation by digital comparison tools to engage in targeted marketing strategies (eg, automated reminders around the time of the renewal of a policy). In response to these concerns, the CMA was presented with a number of potential efficiency justifications, of which it considered the most plausible to be preventing re-solicitation shortly after the purchase of the product for the purpose of recouping the commission paid to the digital comparison too. The CMA concluded that while this efficiency was legitimate, it did not justify preventing re-solicitation for long periods.
Have any other key issues emerged in your jurisdiction in relation to the application of competition law to vertical agreements in digital markets?
No other key issues have emerged.