Background
Horizontal agreements are agreements entered into between actual or potential competitors. Horizontal agreements can lead to substantial benefits in sustainability, cost, quality and innovation. However, they may also reduce competition, and may potentially breach the Competition Act 1998 prohibition on anticompetitive agreements between businesses.
In recognition to the fact that some agreements which restrict competition can, on balance, be beneficial to consumers, an agreement will be treated as automatically exempt from this prohibition if it meets conditions set out in a ‘block exemption’ applicable to that particular category of agreements. The purpose of block exemptions is to ensure that businesses are not prevented or disincentivised from entering into agreements that are in fact overall beneficial and not anticompetitive.
Horizontal Block Exemption Regulations (HBERs) providing automatic exemptions for certain categories of horizontal agreements were retained in UK law following the UK’s withdrawal from the European Union (EU) at the end of the Transition Period. The Research and Development Block Exemption Regulations (R&D BER) and the Specialisation Block Exemption Regulation (Specialisation BER) were due to expire on 31 December 2022.
What are Specialisation and R&D agreements?
Specialisation agreements include agreements entered into between parties which are active on the same product market, and by virtue of which one party (in the case of unilateral specialisation) or two or more parties (in the case of reciprocal specialisation) agree to cease or restrain from producing a particular product, and instead obtain it only from the other party/parties, or two or more parties agree to have a product manufactured only jointly. Such agreements were previously regulated under the Specialisation BER.
R&D agreements are agreements relating to the conditions under which the parties pursue research and development, or agreements providing for joint exploitation of the results of R&D carried out under a prior such agreement. Research and development includes activities aimed at acquiring know-how, conducting analysis or experimentation, and the technical testing of products or processes. The R&D BER previously applied to such agreements.
The CMA recommendation
The CMA made a recommendation in June 2022 that the retained HBERs be replaced with a UK Specialisation Agreement Block Exemption Order and a UK R&D Block Exemption Order (the SABEO and the R&D BEO, respectively (together, the UK HBEOs)).
The CMA recommended that the two UK HBEOs be similar to the retained HBERs in order to reduce compliance costs for businesses with activities in both the UK and the EU, while making some amendments in response to market developments and to clarify the existing rules and improve their effectiveness.
The resultant Competition Act 1998 (Specialisation Agreements Block Exemption) Order 2022 and Competition Act 1998 (Research and Development Agreements Block Exemption) Order 2022 were both laid before Parliament on 5th December 2022 and came into force on 1st January 2023. The changes brought about by these two HBEOs is set out below.
The SABEO
The old rules
The retained Specialisation BER exempts specialisation agreements from the Chapter I prohibition subject to conditions regarding market share and hard core restrictions including:
- The combined market share of the parties to the specialisation agreement must not exceed 20%.
- A two year grace period applies if the combined market share is initially below 20% and rises to 25% without exceeding it.
- A one year grace period applies if the combined market share rises above 25%.
The new rules
The SABEO makes the following changes:
- Expanding the scope of the block exemption to include unilateral specialisation agreements between more than two parties. This is due to such agreements being likely to be beneficial.
- Setting out more clearly which agreements are in scope, which will assist businesses in their application of the block exemption.
- A number of definitions are changed: e.g. ‘potential competitor’ has been removed and instead integrated into the definition of a ‘competing undertaking’, ensuring easier application of the exemption.
- The market share threshold of 20% is retained, but rules for applying thresholds are simplified. A single grace period of two years applies if the 20% market share threshold has been exceeded.
- Calculation of the market share threshold has also been simplified.
Consider, for example, an agreement between two parties with a combined market share of 10% where one agrees to refrain from producing a particular product and will purchase the product from the other party, and the other agrees to produce and supply that product to them. This would not be considered anti-competitive – provided that there are no hard core restrictions, and therefore exempt from the prohibition. Hard core restrictions are provisions in an agreement which are generally considered to be serious restrictions of competition – such as fixing prices when selling any of the specialisation products to third parties.
The R&D BEO
The old rules
The retained R&D BER provides an exemption for agreements where two or more parties agree to collaborate in relation to the research and development of existing or new products, technologies, or processes – subject to satisfying conditions including:
- Where the parties to an agreement are not competing undertakings, there is no market share threshold, and the exemption will apply for the duration of the R&D.
- Where the parties jointly exploit the results of the R&D, the exemption will continue to apply for 7 years from the time the products or technologies are first put on the market.
- Where the parties are competing undertakings, the exemption applies for the 7 year period only if, at the time the agreement is entered into, the combined market share of the parties does not exceed 25% on the relevant product and technology markets.
- A two year grace period applies after those 7 years if the parties’ combined market share rises above 25%.
- A one year grace period applies if the parties’ combined market share subsequently rises above 30%. This period starts from the point at which the combined market share first exceeds 30%.
The new rules
The R&D BEO makes the following changes:
- Provisions have been restructured and re-drafted to provide a clearer description of the conditions for the block exemption.
- Agreements between undertakings competing in innovation (which under the old rules were treated as if they are not competing undertakings) will be subject to a new test, in an effort to protect dynamic competition and to ensure firms compete effectively where markets develop.
- Parties to such agreements will need to demonstrate that there are three or more:
- competing R&D efforts in addition to and comparable with those of the parties to the R&D agreement; or
- third parties able to independently engage in relevant R&D.
- A number of new definitions have been introduced to support the introduction of this new test (e.g. defining ‘undertaking competing in innovation’).
- A single grace period of two years after the 25% market share threshold has been exceeded. The calculation of the market share threshold has also been simplified.
For example, if an agreement to pursue joint research and development is entered into between parties who independently engage in research and development efforts concern new products or technology also covered by the R&D agreement, they will be considered to be competing in innovation, and therefore will need to be aware of and satisfy the newly introduced "competing in innovation" test, as set out above.
Next Steps
The HBEOs will provide for a transitional period to allow businesses to review and (if necessary) revise their existing agreements. It is important for businesses who are parties to R&D or specialisation agreements to be aware of the changes brought about by the new legislation and to make corresponding changes to their agreements, as they may risk falling outside the scope of the exemption. Existing agreements that meet the conditions of the retained HBERs will be treated as an agreement that benefits from the HBEOs until the end of 31 December 2024. Agreements entered into after the retained HBERs expiry will need to meet the conditions of the new block exemption in order to benefit from the exemption.
The CMA is consulting on draft guidance on the application of the Chapter I prohibition in the Competition Act 1998 to horizontal agreements, and is seeking responses by 8 March 2023. The draft guidance describes the application of the HBEOs, and provides some useful clarification and assistance for businesses assessing horizontal agreements to establish whether they fall within the scope of these block exemptions. After the consultation, the CMA will prepare the final version of the guidance taking into account feedback received.
On 8 December 2022, the European Commission adopted regulations extending the period of validity of the HBERs until 30 June 2023. This was in order to provide time to complete its review of feedback received in response to a public consultation on its new draft regulations. The Commission's stated goal is to adopt the new regulations and associated guidelines in the first half of 2023. Although the HBEOs were drafted to ensure that they do not diverge significantly from the existing EU rules in order to minimise compliance costs, it is inevitable that businesses with activities in both the UK and EU will have to deal with ensuring that agreements do comply with the two different regimes.
If you have any questions about the new UK block exemption orders, the EU HBERs, or about competition law more generally, please get in touch with our contacts below.
Whether you already have R&D or specialisation agreements in place and need assistance with reviewing them, are thinking of entering into new agreements which fall within the scope of either of the orders, or are unsure about the application of these new rules, we can help with understanding how these changes may impact on your business, and how to ensure compliance with the new legislation.
