US: Tesla licensed in Massachusets

Tesla wins license to sell cars near Boston, says Automotive World. Not a matter of direct concern to us in Europe, but another illustration of the way dealers are protected in the United States. Tesla's approach to selling cars, which has been compared to Apple's retail operation, cuts right across dealer protection and licensing legislation, and is proving highly contentious (though I can't help feeling that the dealers are trying to stop an incoming tide). Hard to imagine having to obtain a licence to sell cars - hard also for Americans to imagine a manufacturer getting such a licence, as they are supposed to be there to protect dealers ...

Netherlands: Court rules on refusal to appoint repairers

Although it happened in July (on the 25th to be precise , reports of the decision of the Court of First Instance in Amsterdam have been slow to reach me. Brussels law firm Van Bael and Bellis, who have fingers in every interesting EU competition law case affecting the motor industry, and probably every other industry too, publicised it in their imaginatively-titled newsletter VBB on Competition Law in September, so it will be covered in the next Motor Law newsletter - but meanwhile you can follow the link to the horse's mouth.

The story is that three former authorised repairers brought an action against Kia Motors Nederland BV, which took over from the bankrupt former importer, claiming that it had unlawfully refused to reappoint them as repairers. The President of the Court ordered their temporary reappointment on 3 December 2009, and the case came before the Court on the merits this year.

In Case T-19/92, Groupement d'Achat Édouard Leclerc v Commission [1996] ECR II-1851, [1997] 4 CMLR 995 and Case T-88/92 Groupement d'Achat Édouard Leclerc v Commission  [1996] ECR II-1961, [1997] 4 CMLR 995 the Court of First Instance (now the General Court), referring to earlier cases, held that a selective distribution system is compatible with Article 85 (now Article 101 TFEU) if:

1. The characteristics of the product in question necessitate a selective distribution system, in the sense that such a system constitutes a legitimate requirement having regard to the nature of the product concerned, in particular its high quality or technical sophistication, in order to preserve its quality and ensure its proper use;
2. Resellers are chosen on the basis of objective criteria of a qualitative nature which are laid down uniformly for all potential resellers and are not applied in a discriminatory fashion;
3. The system in question seeks to achieve a result which enhances competition and thus counterbalances the restriction of competition inherent in selective distribution systems, in particular as regards price; and
4. The criteria laid down do not go beyond what is necessary.

Both parties, oddly, agreed that Kia Motors' system did not meet these criteria - Kia conceding that they did not admit to the system all repairers who met the qualitative criteria - but they differed about the consequences. The excluded repairers argued that the system was automatically illegal, whereas the manufacturer contended that it was still necessary to consider the compatibility of the system with the competition rules before coming to a conclusion. The Court agreed with Kia that just because it did not apply the criteria in a non-discriminatory fashion did not mean that it automatically infringed the competition rules.

The next question for the court was whether Kia had refused to appoint applicants who were not also dealers as authorised repairers. This was not a hard-core restriction under the relevant version of the block exemption, but if it had happened the system would be likely to be in breach of the rules. However, the facts showed that Kia did not restrict admission to the repairer network to applicants that were also dealers, so the question of whether there was a breach did not arise.

The would-be authorised repairers also tried to argue that Kia's warranties breached competition rules, because they required vehicles to be serviced by authorised repairers: but the court found no evidence to show that a warranty would in fact be invalidated if the vehicle were serviced by an independent.

There was also an argument that Kia were abusing their dominant position in the repair market, and the court agreed that Kia were in such a position. However, they were free to choose with whom to contract. It was inherent in the system that authorised and unauthorised repairers would be treated differently, and the court was satisfied that the unauthorised ones were quite capable of competing.

Ontario court rules dealership not a franchise for purposes of Ontario legislation

Here's an interesting article by Rebecca Hamovitch of Canadian lawyers, Cassels Brock, about a case (Butera et al. v. Mitsubishi Motors et al.) on 31 August in which the Ontario Superior Court of Justice granted a motion for summary judgment brought the defendants and dismissed the action brought by the plaintiffs. The Court held that the dealer agreement in this case did not give rise to a franchise relationship, so the Arthur Wishart Act (Franchise Disclosure), 2000 did not apply.

The long title of the Act (if that's the correct name for the statement of what it's all about in Canada) describes this piece of legislation as:

"An Act to require fair dealing between parties to franchise agreements, to ensure that franchisees have the right to associate and to impose disclosure obligations on franchisors."

What an extraordinary idea! Imagine interfering with the free operation of market forces like that. It would give the European Commission palpitations.

The story is that in 2002, Butera submitted an application to acquire a Mitsubishi dealership. He included sales forecasts which he based on figures from the United States and the defendants' predictions of expanded sales in both the United States and Canada (in the case of Canada, expanded from nothing, as Mitsubishi cars were not being sold there at the time). Those predictions later formed the basis of the claim, which alleged misrepresentation, breach of collateral warranty and failure to comply with the Arthur Wishart Act.

The judge threw out the claim and allowed the defendants' counterclaim. There was no evidence that the figures of sales in the United States were not accurate, nor was there any evidence to suggest that the defendants' agents did not honestly believe their predictions of success. So there was no misrepresentation. The facts that there was an entire agreement clause in the dealer agreement, and the dealer was himself a lawyer, also appear to have been persuasive. As for the Act, because the dealer was not required to pay the manufacturer the agreement fell outside the definition of "franchise". Even if that were wrong, the Act would not be any help to the dealer because it largely codified the common law, on the basis of which the plaintiff's claims had already been thrown out.

We still use the word "franchise" rather loosely over here. There isn't the same degree of statutory protection for franchisees in the EU as there is in Canada, so there's little to be gained by trying to argue that a dealer agreement is in fact a franchise, but the likelihood is that it would be doomed to failure ... When it comes to trying to extend dealer protection in the EU, the commercial agents directive is a much more promising starting point.

France: Autorité de la Concurrence publishes sector inquiry report on car maintenance and repair

The Autorité aimed to conduct a full appraisal of the sector, and to issue recommendations to boost competition and bring down prices. The report is available from 12a21_en.pdf. I have provided a link to the English version, and look forward to the day when our Competition Commission provides its reports in French! However, the following summary is based on what the Autorité says in its annual report.

Its main proposal is a gradual and controlled opening up of the market in visible spare parts, which it says are protected by industrial design rights in France. This gives vehicle manufacturers a monopoly over more than70 per cent of sales of visible spare parts, and a duopoly with the original equipment manufacturer over the remaining 30 per cent. This means, of course, that repairers must have recourse to the manufacturer's network more often than they might like.

The Autorité observes that there is a difference between protecting visible original equipment parts and such parts destined for repairs - aftermarket parts - and it proposes removing the restriction in the aftermarket, in the gradual and controlled manner referred to earlier. It says that eleven EU Member States have already adopted this approach, "which also prevails in the United States and Germany where much lower prices can be observed". I think that means that Germany already had such a law, not that it is not to be included among the EU Member States where this approach is taken.

Its suggestion is that the principle be enacted by law and the timescale set by decree, with a transition period so that the market can be opened up gradually, one type of part at a time. This would enable players in the market to adapt their business models and for French parts makers to prepare for the new open market. And what about parts makers from other EU countries? Is this the French doing exactly as we expect them to?

Whether removing protection from visible parts is a good or a bad thing (and the UK's experience appears to be that it has forced prices down, which cannot be an altogether bad thing, and has not brought about the end of civilisation as we know it, which the car makers suggested would be the case back in 1988 when the Copyright, Designs and Patents Act made the big changes), retaining it for original equipment parts seems like no sort of sop to the manufacturers. The aftermarket is highly competitive: I can buy spares from many different sources. The original equipment market, by definition, cannot be competitive, because the intellectual property rights in the visible parts invariably belong to the vehicle manufacturer (it is often different with internal parts) and the vehicle manufacturer is not only able to control supply using its intellectual property, but as a monopsonist, it controls the market completely. Even if the IP rights were removed, it would still be the only customer.

Among other proposals, the Autorité says it wants to see original equipment manufacturers, the companies best-placed to serve the aftermarket, able to put their parts on the market freely. It also addresses the matter of repair and maintenance information, threatening where necessary 'to sanction, in a dissuasive manner, any restrictions' on access to such information on the part of independent repairers.

It also proposes to draw up clauses for warranty (including extended warranty) contracts, making them as clear and explicit as possible regarding the consumer's right to use the services of an independent repairer without losing the benefit of the warranty. This follows the furrow ploughed years ago by the OFT.

Finally, it wants to ensure that the retail prices for parts recommended by vehicle and parts manufacturers do not lead to a restriction of competition between operators - presumably it means factors, wholesalers and retailers, as well perhaps as independent repairers. Well, retail price maintenance is pretty well covered in French law, as in ours, I imagine.

Commission publishes Frequently Asked Questions

The long-awaited FAQs on the block exemption have been published today, perhaps as a late birthday present for me: the press release is at http://europa.eu/rapid/pressReleasesAction.do?reference=IP/12/915&format=HTML&aged=0&language=EN&guiLanguage=en.

I'll post a commentary on them as soon as I have a chance to get my head round them. Only 12 pages, 18 questions, not including the most frequently-asked question of all ("When will the FAQs be published?") which they nevertheless answer ... There must be a lot of questions that have not been asked sufficiently often, as I'm sure there are more than 18 questions calling for answers.

Auto 24: specific criteria

The Court of Justice  in Luxembourg has handed down another judgment in which it considers what the old block exemption – Regulation 1400/2002 – means: Auto 24 v Jaguar Land-Rover. The Court's wisdom remains relevant to the new regime.

The block exemption gives vehicle manufacturers setting up networks three choices, depending on their market share. They can go for exclusive distribution but only if they have under 30 per cent, and on terms so unattractive that only one carmaker has opted for it. They can go instead for selective distribution, and if their market share is less than 40 per cent they can choose to impose quantitative criteria in addition to the qualitative criteria that are permissible regardless of market share.

The market share issue is not significant in many national markets, but remember that in the early 1990s when the Monopolies and Mergers Commission (as we called it back then) investigated the new car market in the UK it found not only a complex monopoly situation but also a scale monopoly enjoyed by the Ford Motor Company and its subsidiary, Jaguar (remember those days?). There are countries in the EU where a single manufacturer has over 40 per cent of the market.

Anyway, we can forget exclusive distribution – as the industry has. With a market share under 40 per cent, the block exemption allows you to go for quantitative selective distribution, and even above that you can still have qualitative selection of dealers. Just to remind you, dear reader, a qualitative selective distribution system is one in which you set requirements for admission to the network but don't apply any criteria to do with numbers of dealers. This, of course, is what happens in the aftermarket – where everyone is assumed to have shares of well over 40 per cent of their captive markets. In that situation you have to accept all qualified businesses: you can't limit their numbers, and still less can you grant exclusive territories – that is something that can only be done within an exclusive distribution system, and you need a  market share under 30 per cent to be able to do that within the block exemption.

The block exemption regulation provides definitions of these concepts, among other matters. The definition of “selective distribution” refers to “specified critria”, which lies at the heart of the judgment. The litigation began with the termination, in 2002 (when the new block exemption came into effect) of Auto 24's Jaguar Land-Rover franchise in Périgueux. Up to then the dealer could lawfully have had an exclusive territory, but JLR took the view that it did not need a dealer there. It had a little list – referred to in the judgment as a “numerus clausus” - which did not call for a dealer in Périgueux.

All very well, you might think (as I did) – manufacturers can decide how many dealers they want in the market served by a single distribution company, but surely since location clauses were outlawed in 2006 the manufacturer can have no say over where the dealer is located? JLR might have been within their rights at the key time for Auto 24, but surely not now? The numerus clausus looks suspiciously like an attempt to recreate an old-style selective and exclusive dealer network.

In October 2006, when location clauses became prohibited, the numerus clausus should have counted for nothing. A JLR dealer, Pericaud Automobilies, opened an outlet in Trélissac, not far from Périgueux, and not surprisingly Auto 24 sued for compensation for JLR's refusal to appoint it for that area.

This was Auto 24's second legal action arising from the original termination and refusal to reappoint. The first, in the Tribunal de Commerce, Versailles, was based on a claim that JLR's decision was discriminatory under French law. The court awarded damages for Auto 24's  lost business. The second claim was less successful. The Tribunal de Commerce in Bordeaux dismissed the claim, and the Cour d'Appel upheld the judgment. Auto 24 appealed to the Cour de Cassation, which referred a question to Luxembourg: “what is to be understood by the words 'specified criteria' in Article 1(1)(f) …?”

I'd have preferred to see a different question, but this is the only one the Court had. What if the Cour de Cassation had asked on what basis does the numerus clausus stand, given that location clauses are no-no's? But that would have been of no help to Auto 24, so there was little point in asking it.

The court, as it must in a reference such as this, gave a bland answer the full meaning of which will only become apparent when the national court applies it to the facts of the case before it. But just to tell us that “specified criteria” “must be interpreted [where does the “must “ come from, incidentally?] as referring to criteria whose precise content may be verified”. Which, I think, sounds like something quite different from “specified criteria”.

Those criteria need not be published, as the Court recognised that to require publication would put trade secrets at risk.

Competition Law Challenges in the Motor Sector

IBC Legal Conferences hold what seems to be an annual conference on competition law in the automotive sector. In previous years it's been in February, but this year it's in June - next Thursday (28th) to be precise, in Brussels. You can read all about it here. The speaker panel seems to be a constant (although I have only ever been invited to speak once - did I say something wrong?): I have heard the same line-up in previous years and they are pretty good. I'm interested to see who the Commission speaker is ...

If you are interested in going, but haven't booked yet, Motor Law subscribers can enjoy (I use the word advisedly) a 10 per cent discount - drop me an email or give me a call if you wish to take advantage of this.

PS: I blogged throughout the day from the conference. See the report on the Motor Law blog (www.motorlaw.com/blog).

Court of Justice rules on selection criteria

The Court of Justice handed down judgment today in Case C-158/11, Auto 24 SARL v Jaguar Land Rover France SAS, a reference from the Cour de cassation. It's an important decision on the application of Regulation 1400/2002 which will remain relevant after the new rules come into force this time next year. While I read and digest the judgment, here's an extract from the press release to be going on with:

The present case concerns the quantitative selective distribution system established by Jaguar Land Rover France (JLR), which refused to appoint the French company Auto 24 as an authorised distributor of new Land Rover  motor vehicles in Périgueux (France).  JLR’s distribution system provided for the possibility of concluding 72 dealership agreements for 109 sites, set out in a table in which the town of Périgueux does not feature. 

Auto 24 brought an appeal before the Cour de cassation (France) seeking, in essence, compensation for the loss resulting from the refusal to appoint it as an authorised JLR distributor in Périgueux. That court asks the Court of Justice to interpret the term ‘specified criteria’ [found in Article 1(1)(f) of the block exemption]. In essence, the question is whether, in order to benefit from that regulation, a quantitative selective distribution system must be based on criteria which are objectively justified and applied in a uniform manner in respect of all applicants for authorisation. 

... [T]he Court explains that it refers to criteria whose precise content may  be verified. It states that  it is not necessary that the selection criteria used be published, at the risk  of compromising business secrets, or even facilitating possible collusive behaviour.  

The Court  points out that  the exemption regulation lays down distinct conditions for application according to  whether the system in question is classified as ‘quantitative selective distribution’ or ‘qualitative selective distribution’. Therefore, if, in the context of the regulation, the quantitative selection criteria had to be objective and non-discriminatory, that would result in a conflation of the conditions required by the regulation for the application of the exemption regulation to qualitative selective  distribution  systems and those required for the application of the exemption to quantitative selective distribution systems. 

Consequently, the Court's answer is that, in order to benefit from the exemption regulation, a quantitative selective distribution system must be based, inter alia, on criteria whose precise content may be verified, but it is not necessary for such a system to be based on criteria which are objectively justified and applied in a uniform and non-differentiated manner in respect of all applicants for authorisation. 

The emphasis is in the original. Cross-posted from the Motor Law blog.

Code of Good Practice

Speaking, or writing, of the Code of Good Practice - what was supposed to be the voluntary arrangement under which the dealer protection provisions of Regulation 1400 would be continued, even perhaps extended, in the New Age of block exemption - it seems like a good moment to provide an update. Not very up-to-date, as it happens, but this will serve to record what's happening.

The main thing is, there isn't just one Code of Good Practice, there are two. Now, in some circumstances having two of something instead of one would be an advantage. This glass of wine which my wife just placed on my desk is a good example, although perhaps a second one would shortly give rise to some eccentric blogging. But that does not hold true of codes of practice.

In my naivety, I had assumed that a code of practice would be an agreed document, into which the manufacturers and dealers both bought. Oh, no. That would be far too simple. ACEA produced theirs, and CECRA produced theirs, and never the twain shall meet. You'll find some further comment on CECRA's website here and here and in the interests of fairness the announcement of the ACEA code (in 2010) is here.

The need for a code arises because the Commission decided that a competition regulation is not the place for dealer protection provisions. I disagree - but I'll leave it at that for the moment. Actually it was far more convenient for the Commission to excise the dealer protection stuff from the new block exemption when it was obliged to go down the route of lumping automotive dealer agreements in with vertical restraints in general. But, as Paulo Cesarini made clear when he was the man in charge, the block exemption was no longer the right place for such provisions.

So will the Commission help to create a single code to fill the gap? Yes, but only as an "honest broker", without favour to one side's code or the other's. So John Clark, from Mr Cesarini's old Unit in the Competition Directorate (now Mrs Rehbinder's), told the Motor Law conference in March. I suppose it's logical: competition is the name of the game, so a choice of codes of practice is quite right. I wonder how many manufacturers will opt for the CECRA offering, though?

Dealing with dealer disputes: the Canadian way

How dealers will be protected from the arbitrary exercise of manufacturers' market power is, of course, a key topic whenever one talks about the block exemption (and who doesn't?). Here's an interesting piece (and here's another) by Irvin Schein, a commercial litigator at Minden Gross LLP, about how such disputes are handled in Canada, where National Automobile Dealer Arbitration Program exists to deal with precisely that sort of thing.

It sets out rules which bind both parties once they adopt them by signing an implementation agreement, usually at the same time as signing the dealer agreement. Where there is a conflict between the program and the dealer agreement, the program explicitly takes precedence. Very similar in many ways to the much-vaunted code of good practice to be operated as a supplement to the block exemption. Make that codes of good practice, as it is unlikely that there'll be one agreed code.

The Canadian program is more than just procedural rules: it also contains substantive provisions. There's a long list of the sorts of disputes that will be covered, including refusals to renew a dealer agreement. So manufacturers and importers are obliged to renew, unless they have cause not to do so. Just as US dealers have their Day in Court Act, so Canadian ones have their day in arbitration.

Just what we need over here - some would say.

Should the block exemption be less generous to independent spares?

An article from law firm Reed Smith here argues that the way the block exemption deals with independent spares is out of step with the realities of a market in which people hold on to their cars for longer. In particular, because the Commission starts from the (rebuttable) assumption that authorised networks will have more than 30 per cent of the market, because the markets for spares and repairs are brand-specific, the block exemption will never apply. The article calls this "favouritism" towards the independent sector, and argues that manufacturers and their networks need to be able to recoup from the aftermarket what they don't make on the primary market when they sell vehicles.

Twas ever thus, wasn't it? I remember a few years ago hearing Prof Garel Rhys explaining how cross-subsidisation between markets was never a good idea: vehicle sales, parts sales and maintenance and repair have to stand on their own feet, and that is what the Commission is trying, with the blunt instruments at their disposal, to achieve.