10 key themes
A Vertical Revival – Expanding The Enforcement Toolkit
In 2022, supply and distribution agreements (vertical agreements) were at the top of the agenda for a number of antitrust authorities, with important legal reforms in the EU, the UK and China, as well as new or revived regulatory scrutiny in Hong Kong and the United States. We can expect vertical restraints to remain an enforcement priority in 2023.
Vertical restraints in Europe
In 2022, both the EU and the UK introduced updated rules and guidelines for vertical agreements. These rules apply across sectors and will have implications beyond Europe – with companies often using the EU framework as their global compliance template and regulators equally looking to it for inspiration.
The changes were largely evolutionary, updating the rules to address technology platforms and e-commerce. Suppliers generally gained flexibility, with some exceptions such as online platform providers that will face more scrutiny under the new rules.
The revised EU rules have introduced welcome clarifications and flexibility on important topics like exclusive distribution, selective distribution and some online sales restrictions.
Rules for the age of e-commerce
The new legal frameworks appear to have been, on balance, relatively well received, and they go a long way toward clarifying how the EU and UK rules should apply in an e-commerce setting. However, suppliers of online intermediation services are subject to stringent new rules, particularly in the EU.
Indeed, large e-commerce players, particularly those on which a marketplace service is also embedded, are in for a complex ride. Not only will they have to consider their operating model under the prism of those new vertical rules (if they apply to them, which will not always be the case), but some of them will also need to factor in the existing abuse of dominance rules as well as the implications of the DMA (see Theme 7).
An early test case for regulatory divergence post-Brexit
The 2010 EU rules were brought into UK domestic law as “retained EU law” post-Brexit. The expiry of the 2010 rules on May 31, 2022 therefore necessitated new UK-specific rules on vertical agreements and represented an early test of whether the UK – no longer bound by EU-specific considerations such as the single market imperative – would diverge from the EU in its approach to restrictive agreements.
The benefits of continued regulatory alignment ultimately won the day. While there are some important points of divergence between the new EU and UK rules and their accompanying guidelines, for the most part, the two regimes remain closely aligned. Further, a review of the few substantive points on which the two sets of rules do differ does not reveal any recurring grounds for divergence.
The continued close alignment of the EU and UK rules relating to vertical arrangements will be welcome to suppliers and distributors with a pan-European presence. How permanent this alignment will be remains to be seen: the UK rules expire in 2028, six years prior to the expiry of the EU rules, leaving the UK with an interesting thought leadership opportunity – ‘stick or twist'.
Increased focus on vertical restraints in Asia
Vertical restraints have also been an area of increased focus in both China and Hong Kong.
China’s new AML, which entered into force on August 1, 2022, empowers SAMR to establish safe harbors for vertical agreements. This will create a presumption of legality for certain types of vertical agreements where the parties’ market share(s) are below thresholds to be set by SAMR (currently expected to be 15 percent and provided that the relevant practice does not result in anticompetitive effects). It is worth noting that the AML does not explicitly exclude hardcore restrictions (such as resale price maintenance (RPM)) from benefiting from the safe harbor. However, it is likely that such restrictions will not be covered by the safe harbor in practice given that the AML presumes RPM is unlawful.
2022 also saw the Hong Kong Competition Commission (HKCC) bring its first RPM action before the Competition Tribunal (CT). The action alleges that the respondent, one of the largest manufacturers and suppliers of monosodium glutamate (MSG) powder in Hong Kong, has been imposing minimum resale prices for its MSG powder on its two main local distributors and using disincentives and threats of penalties to ensure compliance with the minimum pricing. This is the first vertical case to be prosecuted by the HKCC before the CT. The HKCC is contending that the arrangement constitutes serious anticompetitive conduct, which designation stops the respondent from being able to remedy its conduct and avoid court proceedings. The case is still pending before the CT.
A revival of vertical enforcement in the United States
The US agencies’ enforcement actions and policy initiatives relating to vertical arrangements have in some ways made what was old new again. Companies should review distribution arrangements like loyalty programs and exclusivity agreements to determine whether they might become subject to scrutiny under the revitalized analytical standards.
In the United States, vertical arrangements have become subject to heightened regulatory scrutiny as part of the antitrust agencies’ ongoing commitment under the Biden administration to ramp up antitrust enforcement. Enforcement efforts include reinvigorating analytical standards and reliance on laws that in recent decades have come to be viewed as too difficult to administer and insufficient to achieve the policy goals of the antitrust laws. For example, the FTC challenged a loyalty rebate program it labeled a pay-to-block scheme under a law it has not sought to enforce in decades. The agency also issued a policy statement broadening its interpretation of its authorizing statute to prohibit a wide range of business practices, including some that heretofore have been treated as lawful, e.g., exclusivity agreements where the contracting parties do not have market power.
With this plethora of new rules globally, now is the time to conduct a “legal audit” of material contracts in light of the new provisions.
Looking ahead in 2023
With new rules now settled in the EU and UK, we can expect enforcement of anticompetitive vertical restraints to be high on European competition authorities’ agendas. Both the EU and UK rules build in a one-year grace period for entities to bring any existing vertical agreements in line with the new rules. Following this, we expect both the EC (and national competition authorities in Europe) and the UK’s CMA to ramp up enforcement of the new rules.
New safe harbors for vertical agreements giving rise to anticompetitive effects in China will – as has been the case in Europe – greatly simplify the task of assessing whether such agreements comply with the AML. Businesses and advisors will need to wait for implementing rules to specify the safe harbor thresholds before the anticipated simplification. The MSG powder case in Hong Kong will be one to watch. A victory for the HKCC could spur it to launch enforcement proceedings as it looks to deter suppliers from engaging in RPM strategies.
The US antitrust agencies have made clear that they intend to target business practices that they have not focused on previously. Businesses are well advised to consider whether vertical arrangements that historically have been viewed as ordinary course might now be deemed unfair and subject to regulatory scrutiny.
With thanks to Rory Jones, Angela Landry, Tracey Lu, Charles Tay and Lucas Vanassche for their contributions to this theme.
10 key themes
- 01. The Changing Face of Antitrust
- 02. Is Merger Control Fit for Purpose – Evolution or Revolution?
- 03. Foreign Direct Investment – Record Year for Prohibitions and New Developments
- 04. Financial Investors – In The Regulatory Spotlight
- 05. Collaboration and Licensing – New Risks and Opportunities
- 06. A Vertical Revival – Expanding The Enforcement Toolkit
- 07. A New Age For Investigations – Prepare for Agencies to Come Knocking
- 08. Digital Regulation – Contagion of New Rules
- 09. Mass Claims and Antitrust Litigation
- 10. Trade and Subsidy Control
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