In all the talk about the block exemption, don't overlook UK legislation. The Supply of New Cars Order 2000 (SI no 2088) was the legislative response to the last Competition Commission investigation of the new car market and it remains in force.
An earlier statutory instrument, the Restrictions on Agreements (Manufacturers and Importers of Motor Cars) Order 1982 (SI 1982/1146) has been repealed - not before time, because it was defective when made, because it covered motor cars when it should have been limited to passenger cars. I asked a friendly backbench MP to oppose the SI in Parliament at the time: the government assured him that his fears (my fears, and therefore the fears of my employer the Society of Motor Manufacturers and Traders) were unfounded, and it became law in its defective state. So much for the negative resolution procedure. Or was it positive? I forget.
Thursday 20 May 2010
New rules for authorised repairers
Back in 1985, the justification for granting a block exemption for motor vehicle distribution and servicing agreements was that motor vehicles were complex products that required periodical maintenance and repair, not always in the same place: and the best way to ensure that consumers could get those services wherever in the European Community they happened to be was to make it a condition of exemption that the two went hand in hand. In other words, if you wanted to sell the vehicles you had to offer the service, or try to get individual exemption for your arrangement and the Commission could be expected not to look very kindly on it.
The same philosophy remained in fashion in 1995 when the block exemption was renewed (or, perhaps more accurately, the first Regulation was replaced), but by 2002 the sales-service link was seen as a problem rather than a solution. Strange how these things can change, and I don't recall ever seeing a convincing explanation for it. These things are so often dressed up to meet the needs of political expediency, or to hide the fact that it just wouldn't work to change another piece of law (which is what's now happening with multifranchising, as described in my last blog post here).
Of course, this time round - in block exemption v4 - the divide is even more pronounced. Actually, I should refer to block exemption 4.1, which deals with the aftermarket, and block exemption 4.2, which will deal with vehicle distribution but in a couple of years from now. And since we've all started referring to the block exemption as MBER, make that MBER 4.1 and 4.2. I wonder whether I will start a trend here? I will when I write the new version of the Motor Law Guide.
I have already described the main points of the vertical restraints block exemption, the VBER, Regulation 330/2010. To appreciate how this instrument regulates the automotive aftermarket, it will be necessary to consider also the specific "mini-block-exemption" which the Commission still hasn't finalised, which I shall call MBER 4.11. However, it published a draft in December last year and doesn't seem minded to make many changes (and if looking back through my various notes I discover otherwise in any respect I will let you know, dear reader) so we can look at that document for guidance, as well as the accompanying notice and the contributions of those who commented.
The important thing about MBER 4.11 is that it preserves the hard core restrictions that we know and love from Regulation 1400: sales of spares to the independent sector, restrictions on the sale of spares, tools or diagnostic equipment, and branding. Nothing here about technical information, but the other basic stuff that we are used to seeing to enable independent repairers to continue in business is all carried forward. The first of these three hardcore restrictions (how pleased I am that the expression "blacklist" has completely disappeared from the vocabulary) is a matter for those of us drafting or reviewing authorised repairer agreements, and so up to a point is the second, while the third is a matter of the vehicle manufacturer's conduct. In fact, Article 4(e) of the VBER protects sales of spares too and has to be read in conjunction with the relevant provision of MBER I am going to have to some cutting and pasting to put all these provisions next to each other so we can make sense of them.
The same philosophy remained in fashion in 1995 when the block exemption was renewed (or, perhaps more accurately, the first Regulation was replaced), but by 2002 the sales-service link was seen as a problem rather than a solution. Strange how these things can change, and I don't recall ever seeing a convincing explanation for it. These things are so often dressed up to meet the needs of political expediency, or to hide the fact that it just wouldn't work to change another piece of law (which is what's now happening with multifranchising, as described in my last blog post here).
Of course, this time round - in block exemption v4 - the divide is even more pronounced. Actually, I should refer to block exemption 4.1, which deals with the aftermarket, and block exemption 4.2, which will deal with vehicle distribution but in a couple of years from now. And since we've all started referring to the block exemption as MBER, make that MBER 4.1 and 4.2. I wonder whether I will start a trend here? I will when I write the new version of the Motor Law Guide.
I have already described the main points of the vertical restraints block exemption, the VBER, Regulation 330/2010. To appreciate how this instrument regulates the automotive aftermarket, it will be necessary to consider also the specific "mini-block-exemption" which the Commission still hasn't finalised, which I shall call MBER 4.11. However, it published a draft in December last year and doesn't seem minded to make many changes (and if looking back through my various notes I discover otherwise in any respect I will let you know, dear reader) so we can look at that document for guidance, as well as the accompanying notice and the contributions of those who commented.
The important thing about MBER 4.11 is that it preserves the hard core restrictions that we know and love from Regulation 1400: sales of spares to the independent sector, restrictions on the sale of spares, tools or diagnostic equipment, and branding. Nothing here about technical information, but the other basic stuff that we are used to seeing to enable independent repairers to continue in business is all carried forward. The first of these three hardcore restrictions (how pleased I am that the expression "blacklist" has completely disappeared from the vocabulary) is a matter for those of us drafting or reviewing authorised repairer agreements, and so up to a point is the second, while the third is a matter of the vehicle manufacturer's conduct. In fact, Article 4(e) of the VBER protects sales of spares too and has to be read in conjunction with the relevant provision of MBER I am going to have to some cutting and pasting to put all these provisions next to each other so we can make sense of them.
The new vertical restraints block exemption
The starting point for understanding what is happening in the automotive sector is the vertical restraints block exemption. The new Regulation was adopted on 20 April, and you can read the press release here and the regulation itself here. There are some questions and answers produced by the Commission too, here. Guidelines are in preparation.
The new regulation is no 330/2010, and it applies across the whole gamut of vertical agreements - exclusive distribution, exclusive purchasing, selective distribution, franchising - with the important exception of motor vehicle distribution agreements. These will however be brought within its scope in three years' time. Aftermarket activities are already subject to this regime (or at least they will be from 1 June), albeit under the terms of a specific "mini-block-exemption" and a set of tailor-made guidelines.
The vertical restraints block exemption - the VBER, as it now seems to be called - applies where the parties' market shares do not exceed 30 per cent. Below this threshold, selective or exclusive agreements are permitted. (The Commission will keep talking of "distribution" in the aftermarket, which is fine as far as parts are concerned but which makes no sense at all in connection with services.) So there's a difference to start with: under the existing motor vehicle block exemption, Regulation 1400/2002, there are different thresholds for exclusive distribution agreements and selective ones, the latter being less restrictive of competition and therefore tolerated at higher market shares. Indeed, for a purely qualititative selective distribution agreement, no market share criteria apply at all under the present regulation. So in effect there are changes at both ends of the spectrum - although with a purely qualitative arrangement, it is at least arguable that there is no affect on competition to worry about and exemption is therefore unnecessary.
The market share criteria apply to both parties - in the case of a repairer agreement, to both the vehicle manufacturer or importer and to the authorised repairer. It's probably not an issue in the context of authorised repairers, because the 30 per cent threshold will always be exceeded because of the captive nature of the market: that was certainly the analysis that was applied under Regulation 1400. Exclusive agreements, and quantitative selection, are unacceptable under the block exemption. Which doesn't mean that they are always prohibited, but it does mean that they won't find a berth in the safe harbour and will need indiidual assessment and justification if they are to enjoy exemption.
The inclusion of a market share threshold for the authorised repairer (or the distributor or franchisee in other types of arrangement) is intended to protect small and medium-sized enterprises. If they find themselves dealing with large customers, they might find that they lack countervailing power, hence the extra protection given to them by providing that the agreement will not be admitted to the safe harbour. It may nevertheless enjoy exemption, just not automatically. Again, in the aftermarket it is hard to imagine sircumstances in which this might be important: in the vehicle market, it is perfectly possible that a large dealer group might have a lot more muscle than a small manufacturer or importer. Remember too that easing the entry of new manufacturers, which entails ensuring that they can hire dealers and repairers, is an important item on the Commission's agenda.
In addition, the agreement must not contain what are referred to as "hard core" restrictions - resale price maintenance and certain types of resale restrictions, which can have the effect of partitioing the internal market. Again, merely because they are not exempted does not make them unlawful, though they will be difficult to justify.
Exclusive distributors may be protected against competition from other distributors, as all members of the network should concentrate on the territory or customer group allocated to them. But they cannot be prevented from accepting orders from a customer who should be the "property" of another member of the network. The distinction between active sales and passive ones has run through block exemptions ever since they were first produced. A ban on pasive sales would be hard core.
In selective distribution systems, there are no exclusive territories or customer groups, so selected dealers are free to sell to other dealers and also to customers from anywhere. Again, a restriction that went further than this would be hard core and would not be automatically exempt.
Restrictions on dealers using the Internet to sell products would also be considered to be hard core restrictions. The Internet, after all, is a means of marketing to consumers throughout the Internal Market. The agreement cannot require customers to be "rerouted" if they turn out to come from another part of the market (which their credit card details would reveal). Nor can it cap the volume of products that a distributor can sell online as opposed to through bricks-and-mortar premises, or impose two-tier pricing to deter or limit Internet sales. Probably not important issues in the aftermarket, but clearly significant in the primary (vehicle) market.
The VBER permits non-compete obligations, as does Regulation 1400, but on rather different terms. In fact, it defines them very differently. In the context of motor vehicle distribution, the provisions on non-compete clauses are what govern the extent to which multi-franchising (or multi-branding, as it is now being called) is protected: Regulation 1400 says that a clause that requires the distributor to purchase 30 per cent of its requirements from the manufacturer is permitted, so effectively they can have three franchises (perhaps four, if one or more of them will settle for less than 30 per cent). In the context of authorised repairer contracts, which fit within the distribution model only with difficulty, it means that you can have three (or possibly four) authorisations. But the VBER says 80 per cent.
Now, 80 per cent is much more like a true non-compete (though literally it would have to stipulate 100 per cent). Effectively, multi-franchising is out of the window. The Commission makes a virtue out of necessity by claiming (quite accurately, as we probably all know) that multifranchising never really worked anyway. There is, however, one ray of hope for anyone who does want to be able to take on more than one brand: the VBER only allows these non-compete obligations to last for five years. They can be renewed, but it has to be by agreement and the rules are designed to prevent any sort of duress.
So we have a basic structure for the new regime that isn't entirely unlike parts of what we already have. This much is in place now, though not in operation until next month. In order to make the new regime even more like what we have had since 2002 we have to look at some other instruments, and I'll proceed to write them up next.
The new regulation is no 330/2010, and it applies across the whole gamut of vertical agreements - exclusive distribution, exclusive purchasing, selective distribution, franchising - with the important exception of motor vehicle distribution agreements. These will however be brought within its scope in three years' time. Aftermarket activities are already subject to this regime (or at least they will be from 1 June), albeit under the terms of a specific "mini-block-exemption" and a set of tailor-made guidelines.
The vertical restraints block exemption - the VBER, as it now seems to be called - applies where the parties' market shares do not exceed 30 per cent. Below this threshold, selective or exclusive agreements are permitted. (The Commission will keep talking of "distribution" in the aftermarket, which is fine as far as parts are concerned but which makes no sense at all in connection with services.) So there's a difference to start with: under the existing motor vehicle block exemption, Regulation 1400/2002, there are different thresholds for exclusive distribution agreements and selective ones, the latter being less restrictive of competition and therefore tolerated at higher market shares. Indeed, for a purely qualititative selective distribution agreement, no market share criteria apply at all under the present regulation. So in effect there are changes at both ends of the spectrum - although with a purely qualitative arrangement, it is at least arguable that there is no affect on competition to worry about and exemption is therefore unnecessary.
The market share criteria apply to both parties - in the case of a repairer agreement, to both the vehicle manufacturer or importer and to the authorised repairer. It's probably not an issue in the context of authorised repairers, because the 30 per cent threshold will always be exceeded because of the captive nature of the market: that was certainly the analysis that was applied under Regulation 1400. Exclusive agreements, and quantitative selection, are unacceptable under the block exemption. Which doesn't mean that they are always prohibited, but it does mean that they won't find a berth in the safe harbour and will need indiidual assessment and justification if they are to enjoy exemption.
The inclusion of a market share threshold for the authorised repairer (or the distributor or franchisee in other types of arrangement) is intended to protect small and medium-sized enterprises. If they find themselves dealing with large customers, they might find that they lack countervailing power, hence the extra protection given to them by providing that the agreement will not be admitted to the safe harbour. It may nevertheless enjoy exemption, just not automatically. Again, in the aftermarket it is hard to imagine sircumstances in which this might be important: in the vehicle market, it is perfectly possible that a large dealer group might have a lot more muscle than a small manufacturer or importer. Remember too that easing the entry of new manufacturers, which entails ensuring that they can hire dealers and repairers, is an important item on the Commission's agenda.
In addition, the agreement must not contain what are referred to as "hard core" restrictions - resale price maintenance and certain types of resale restrictions, which can have the effect of partitioing the internal market. Again, merely because they are not exempted does not make them unlawful, though they will be difficult to justify.
Exclusive distributors may be protected against competition from other distributors, as all members of the network should concentrate on the territory or customer group allocated to them. But they cannot be prevented from accepting orders from a customer who should be the "property" of another member of the network. The distinction between active sales and passive ones has run through block exemptions ever since they were first produced. A ban on pasive sales would be hard core.
In selective distribution systems, there are no exclusive territories or customer groups, so selected dealers are free to sell to other dealers and also to customers from anywhere. Again, a restriction that went further than this would be hard core and would not be automatically exempt.
Restrictions on dealers using the Internet to sell products would also be considered to be hard core restrictions. The Internet, after all, is a means of marketing to consumers throughout the Internal Market. The agreement cannot require customers to be "rerouted" if they turn out to come from another part of the market (which their credit card details would reveal). Nor can it cap the volume of products that a distributor can sell online as opposed to through bricks-and-mortar premises, or impose two-tier pricing to deter or limit Internet sales. Probably not important issues in the aftermarket, but clearly significant in the primary (vehicle) market.
The VBER permits non-compete obligations, as does Regulation 1400, but on rather different terms. In fact, it defines them very differently. In the context of motor vehicle distribution, the provisions on non-compete clauses are what govern the extent to which multi-franchising (or multi-branding, as it is now being called) is protected: Regulation 1400 says that a clause that requires the distributor to purchase 30 per cent of its requirements from the manufacturer is permitted, so effectively they can have three franchises (perhaps four, if one or more of them will settle for less than 30 per cent). In the context of authorised repairer contracts, which fit within the distribution model only with difficulty, it means that you can have three (or possibly four) authorisations. But the VBER says 80 per cent.
Now, 80 per cent is much more like a true non-compete (though literally it would have to stipulate 100 per cent). Effectively, multi-franchising is out of the window. The Commission makes a virtue out of necessity by claiming (quite accurately, as we probably all know) that multifranchising never really worked anyway. There is, however, one ray of hope for anyone who does want to be able to take on more than one brand: the VBER only allows these non-compete obligations to last for five years. They can be renewed, but it has to be by agreement and the rules are designed to prevent any sort of duress.
So we have a basic structure for the new regime that isn't entirely unlike parts of what we already have. This much is in place now, though not in operation until next month. In order to make the new regime even more like what we have had since 2002 we have to look at some other instruments, and I'll proceed to write them up next.
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