UK competition law: the CMA’s recommendations on the retained block exemption regulation

On 28 June 2022, the Competition and Markets Authority (“CMA”) published its recommendations to the Secretary of State on whether the two EU Horizontal Block Exemption Regulations retained from EU law (“HBERs”), should be renewed or varied after 31 December 2022.

This includes certain categories of research and development agreements, in which two or more parties agree to collaborate in relation to the research and development of products, technologies or processes, and categories of specialisation agreements, which include unilateral specialisation agreements, reciprocal specialisation agreements, and joint production agreements.

summary

The CMA recommends replacing the retained HBERs with a UK Specialisation Block Exemption Order and UK R&D Block Exemption Order (respectively, “Specialisation BEO” and “R&D BEO”, together “UK HBEOs”). However, the CMA does not consider it necessary to introduce fundamental changes to the retained HBERs, and instead, they recommend amendments to reflect market developments and clarify the existing rules and improve their effectiveness. From the CMA’s perspective, it is important that the UK HBEOs are tailored to the needs of businesses operating in the UK and UK consumers.

For the Specialisation BEO, the CMA recommends preserving a safe harbour for some specialisation agreements. The recommended changes will be on the scope of the Specialisation BEO, market share thresholds and their application, clarity of the definitions, and conditions to be met to benefit from the exemption.

Considering the R&D BEO, the CMA recommends changes in market share thresholds and their application, treatment of innovation markets, access requirements, and clarity on certain definitions.

hbers

The following two HBERs currently continue to apply in the UK to provide an automatic exemption from the Chapter I prohibition of the Competition Act 1998 to agreements that meet the conditions of the HBERs:

  1. Commission Regulation 1217/2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union (TFEU) to certain categories of research and development agreements (the R&D BER). This provides an exemption for agreements pursuant to which two or more parties agree to collaborate in relation to the research and development of products, technologies or processes; and
  2. Commission Regulation 1218/2010 on the application of Article 101(3) of the TFEU to certain categories of specialisation agreements (the Specialisation BER). This exempts the following types of agreement: unilateral specialisation agreements; reciprocal specialisation agreements; and joint production agreements.

In November 2021, the CMA announced that it was assessing whether the retained HBERs meet their intended purpose and take account of specific features of the UK economy serving the interests of UK businesses and consumers.

specialisation beo – proposed changes

  • scope of the Specialisation BEO: to include “unilateral specialisation agreements” (to cover more than two parties), as the retained HBERs only cover agreements between two parties;
  • definitions: changes to make the definitions more accessible for non-legal professionals and support stakeholders’ understanding. Additionally, they recommended excluding from the definition of “potential competitor” the reference to “a small but permanent increase in relative prices”. This should simplify and in turn facilitate the assessment by companies of what may constitute a potential competitor. This would align, to a large extent, the definition of potential competitor in the Specialisation BEO with that used in the Competition Act 1998 (Vertical Agreements Block Exemption) Order 2022 and also that recommended in the R&D BEO;
  • exclusivity: to make it clearer in any Specialisation BEO that the block exemption applies even where purchase supply obligations are not exclusive, or the parties are not jointly distributing the specialisation products;
  • market share thresholds: the retention of the current 20% market share threshold in relation to specialisation agreements and clarification in relation to intermediary products. The CMA recommends that the Specialisation BEO clarifies that in relation to intermediary products, the 20% market share threshold also applies to the parties’ market share on the relevant downstream market;
  • guidance: the CMA is looking to provide further practical guidance to help small and medium enterprises (“SMEs”) to establish their market share; and
  • application of the market share threshold: introduction of a single grace period of two years after the 20% market share threshold has been exceeded, and a period to consider for establishing parties’ market share (market share calculated as an average of the parties’ market shares of the three preceding calendar years).

R&D BEO – proposed changes

  • definitions: introduction of new definitions to clarify the block exemption and explain key concepts to the separate test for undertakings competing in innovation (e.g. R&D pole, competing R&D effort, not competing undertaking, undertaking competing in innovation, new product or technology, active sales and passive sales); modifications to the existing definitions, such as research and development, potential competitor, and intellectual property rights;
  •  guidance: clarifying the conditions that must be satisfied for R&D agreement exemptions by restructuring the provisions and providing further guidance, including pre-existing know-how and full access to results;
  •  market share threshold: the CMA recommended that they should not be raised (or abolished) for undertakings competing or in potential competition for existing products or service. The current provisions for not competing undertakings should be retained except for agreements between undertakings competing in innovation (not in relation to existing products or services) and, a new separate test for R&D agreements between parties competing in innovation should be introduced. This test would require that there should be three or more competing R&D efforts in addition to and comparable with those of the parties;
  • the same recommendations for Specialisation BEO related to grace period and a period to consider for establishing parties’ market share were made for the R&D BEO.

 uk hbeos – proposed changes

  • duration: the CMA considered 12 years to be appropriate for the next review to take place. The UK HBEOs should also allow a transitional period of two years, so existing agreements under the retained HBERs could continue to benefit from its terms for two years after its expiry, whereas agreements entered into after its expiry would need to meet the conditions of the new UK HBEO to benefit from the block exemption;
  • timing: for R&D agreements between undertakings competing in innovation, the CMA recommends that the proposed separate test in the UK R&D BEO should only apply to agreements that enter into force after 31 December 2023;
  • cancellation of benefits: the CMA recommends that the UK HBEOs enable the CMA to cancel the benefit for individual agreements they do not consider to meet the conditions for exemption. Cancellation should be in writing after the CMA has given notice and considered representations. The UK HBEOs should also include an obligation for businesses to supply the CMA with information about their horizontal agreements, allowing the CMA to investigate instances where competition law concerns arise from parallel networks of similar horizontal restraints. The failure to provide the requested information, without reasonable excuse, can result in the cancellation of the block exemption.

next steps

The impact of these changes for firms means that the current regime for businesses will continue with some amendments in response to market developments and to clarify the existing rules and improve their effectiveness. The CMA recommendations on the UK HBEOs should be accompanied by guidance, which is likely to deal with other categories of horizontal agreement, in addition to specialisation and R&D agreements. The CMA plans to publish draft guidance for consultation in autumn/winter 2022.

To review the CMA’s recommendation please click here.

For more information, and any guidance or advice on competition law matters, Cleveland & Co External in-house counsel™, your specialist outsourced legal team, are here to help.

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