USA: State legislatures strengthen dealer protection

Automotive News reported last month (here) that states in the USA are strengthening laws to protect dealers. The story focuses on the cost to a Mercedes-Benz dealer of complying with the manufacturer's specification for the premises from which the dealership runs - and the dealer principal's fear that not making the huge investment will mean that he will miss out on bonuses.

How can the law protect dealers? Well, for example in Virginia the law restricts the manufacturer from requiring dealers to remodel until ten years has elapsed since the last remodelling. There are probably some fine points of definition involved in that, but the principal seems good. Moreover, dealers have the right to source the materials for the remodelling from local businesses - they aren't obliged to go to the suppliers the manufacturer nominates. Other states have similar laws: in Colorado, a dealer who's spent $250,000 doing what the manufacturer wanted can't be required to remodel for seven years.

The state of the economy doesn't seem to be stopping manufacturers from insisting on substantial investments from dealers - in the States, or in Europe. Which makes it all the stranger that state legislatures on the other side of the Atlantic are tightening their laws while over here legal protection is being removed.

Manufacturers' rights of first refusal in the USA

A dealer's ability to sell the business complete with franchise has been a controversial topic under the block exemption for years. Not surprisingly, perhaps, it doesn't only affect dealers in Europe. Start Automobile, a US Mercedes-Benz dealer, was recently prevented from selling its Mercedes dealership:  Mercedes-Benz USA, LLC v. Star Automobile Co., et al., No. 3-11-cv-73, Order For Preliminary Injunction, (M.D. Ga. June 3, 2011).

The dealer agreement gave the manufacturer a right of first refusal, and on a preliminary application the Federal District Court accepted that the manufacturer would suffer "immediate and irreparable injury" if the injunction were not granted.

Not only did the dealer agreement to give the manufacturer a right of first refusal, but it also had a statutory right of first refusal under Georgia law. Applying principles governing the grant of an injunction in such a situation, the court said that an monetary damages would be difficult, if not impossible, to calculate. The harm the manufacturer would suffer if the injunction were denied would be likely to exceed any damage that an injunction would cause the defendant. Although there would be a delay in the transfer of the dealership, the company would continue to operate it.

The dealer challenged injunction on the grounds that it went against a state dealer statutory provision which governs the review and approval of all an ordinary business sale agreements as applied to dealers. And dealers enjoy a great deal more protection in the United States and they do in Europe, but the court explained that the rights of first refusal should be regarded as a counterweight to the approval provision. The court said this was "a less restrictive form of control a franchisor has over the identity of its business partners."

As this is only a preliminary injunction, the case might yet go to trial - though the court made clear that it considered the manufacturer was likely to succeed on its claim.

Validity of Commission's "soft law"

We're accustomed to block exemption regulations being accompanied by "explanatory brochures" and now "guidelines", and very helpful they are given the lack of detail in the actual regulations. They don't apply only to the motor vehicle block exemption (in which expression I now include the vertical restraints block exemption, as it's an integral part of the industry's exemption), but of course that's where we are particularly interested in Guidelines. And it's clear that Guidelines are intended to be much more legally significant than the old explanatory brochures.
Which makes this article by Wolfgang Weiß in the Journal of European Competition Law and Practice particularly interesting. As the abstract says, following the Treaty of Lisbon, is it lawful for the Commission to adopt "soft law" interpretations of primary and secondary legislation? Is it in effect amending the law, contrary to the democratic principles laid down in the Treaty? As the Abstract of teh article says,

Article 290 of the Treaty on the Functioning of the European Union (TFEU) considerably increased the legal requirements for authorizing the Commission to adopt delegated legislation. These requirements cannot be undermined by adopting administrative standards, especially if these are of considerable legal significance.

It's a piece that will certainly bear careful reading (and, if you don't already subscribe to the Journal, you can get a day's access to the article for $50), and when I have had a chance to give it proper attention I will comment some more.