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.