Franchise Agreements and the UK’s new Vertical Block Exemption

As we approach the end of the one-year transition period for the UK’s new vertical block exemption regime, franchisors and franchisees alike need to be prepared for the changes imposed by the legislation but also aware of the opportunities it presents.

Why is competition law relevant to Franchise Agreements?

A franchise agreement may infringe UK competition law if it has the object or effect of restricting competition in the UK. Due to the nature of franchising and a franchisor’s interest to protect the goodwill of its business, it is typical for a franchise agreement to contain provisions which may restrict competition. For example, non-compete clauses, territorial rights and supply obligations are all examples of provisions in a franchise agreement which can restrict competition. The consequences of breaching competition law can include a fine of up to 10% of a company’s worldwide turnover and/or the agreement in question being void.

The Vertical Block Exemption Regulation (VBER) and the new Vertical Agreement Block Exemption Order (VABEO)

An anticompetitive franchise agreement will not infringe Chapter I of the UK Competition Act 1998 if the VBER applies to the agreement. VBER provides a “safe harbour” to agreements which would otherwise infringe competition law. In order to benefit from the block exemption, the relevant market share of the franchisor and franchisee each must not exceed 30% and the franchise agreement must not contain any hardcore restrictions, or any “excluded” restrictions that cannot be severed from the rest of the agreement.

On 1st June 2022, the UK replaced the EU VBER with the new UK VABEO. Since then, the UK has been in a 1-year transition period whereby the old EU VBER continues to apply to agreements made prior to 1st June 2022 that do not satisfy the new conditions for exemption under VABEO but do satisfy the conditions under VBER.

What the end of the ‘transition period’ means for Franchise Agreements

The UK is fast approaching the end of the transition period, and on 1st June 2023 the new VABEO legislation will supersede the VBER and will apply to all agreements made under UK law.

This means that following 1st June 2023, if a franchise agreement complies with EU VBER but does not comply with the new UK VABEO, then the agreement will no longer be granted a safe harbour from the Chapter I provisions. Consequently, there is a risk that a franchise agreement which was previously deemed as compliant with the Chapter I provisions being determined as being anticompetitive and in breach of the legislation if it no longer qualifies for the safe harbour. It is, therefore, the last opportunity for franchisors and franchisees to review their agreements in preparation of the transition period ending.

Divergence between EU / UK Law

Whilst the VABEO largely replicates the premise of the EU VBER, there are some distinct changes which directly impact whether a franchise agreement will benefit from the block exemption. Some of the key areas of divergence between the VBER and the VABEO are outlined below:

• There are stringent rules regarding dual distribution and information exchange for agreements regulated under the new EU VBER compared to the UK’s VABEO;
• Wide Retail Parity clauses are now a hardcore restriction under the VABEO meaning clauses requiring a franchisee not to offer goods or services to customers at better prices or on better terms through a different medium (i.e. online or in store) will cause an agreement to lose the benefit of the block exemption.
• New considerations around non-compete provisions and restrictions on the use of ‘knowhow’ during and after the termination of a franchise agreement.

Therefore, as we approach the end of the transition period, it is vital that franchisors and franchisees review their franchise agreements to ensure that their agreements comply with the provisions of VABEO to benefit from the safe harbour at offer, where necessary.

Further, it is particularly important to review your agreement if you operate in both the UK and the EU, as we would recommend that you review your agreements to ensure that you comply with the rules in both jurisdictions as having one template agreement to cover both the UK and EU may no longer be appropriate because of the divergence between the UK / EU law.

Joel Gocool specialises in advising on and negotiating franchise agreements. Joel has a wealth of experience in setting up franchise networks and advising established franchisors. If you require advice on franchising, please contact Joel Gocool on 01276 686 222 or at Joel.Gocool@herrington-carmichael.com.