The motor trade as self-employed commercial agents

 Dealers, or retailers as they are often called or distributors as the Block Exemption refers to them (and as I will do below), could enjoy new legal protection because of the accelerating move towards converting networks into collections of agents. While there's a lot of talk about the form of any future block exemption, more important is the fact that it has no application to the agency model and distributors should be looking elsewhere for legislation that affects their relationship with the manufacturer.

Distribution and agency

The first thing to understand is the nature of the principal-agent relationship. I remember trying to teach Legal Practice Course students about this, over 20 years ago, and the concept seemed be surprisingly difficult for them. The whole idea of an agent is that he, she, they or it acts on the instructions of the principal: within the scope of the agency agreement, the agent has no, or limited, freedom of movement. It's a concept that we encounter in many contexts: for one example, a company lacks the ability to do anything itself - it can only make things by using human agents (employees) to do the work for it.

Agents do enjoy different levels of autonomy, depending on the nature of the agreement. Some employees, for example, are specifically engaged to do creative work and therefore enjoy more freedom to spend their working time as they think appropriate: others are there just to put machines together, and giving them scope to do that however they want would result in chaos. Distributors already act as agents for their suppliers in some respects, and generally the agency agreements they have show that the supplier recognises that dealers have expertise that they need to be free to use.

The key feature of an agency relationship is the allocation of risk. A distributor buys cars and parts and sells them on their own account: there is a lot more to it, inclusing sales targets, bonuses, and consignment and financing arrangements, but in essence the distributor is a retailer (and is often called just that). If the cars don't sell, the distributor makes no profit. If the cars are damaged in the showroom, then in principle the loss is the distributor's (though in practice the cars will usually be on consignment, so still the supplier's property). An agent, on the other hand, finds buyers for the principal's goods, then either makes the contract on behalf of the principal or drops out of the picture and leaves the customer and supplier to make their own deal.

So far so good, or bad as the case may be. The line between distributor is not, however, as clear as it might be. In Case 266/93, Budeskartellamt v VW AG, VAG Leasing GmbH and VW Haendlerbeirat eV, the Court of Justice considered that the risk taken by the dealer/agent when they had to buy the car back at the end of the lease meant that, whatever else the agreement said about the relationship with the leasing company, it was not truly an agency one.

VW's argument in that case was that the brand's German dealers and the leasing company on whose behalf they acted as intermediaries formed a single undertaking. Competition law is not so much concerned with legal form as with economic effect, and an agent who enjoys no autonomy will be considered to be part of a single economic unit: in that situation, Article 85(1) of the Treaty (as it was then - Article 101(1) now) has no application to the relationship. If you only have one undertaking involved, you cannot logically have an agreement or arrangement between undertakings. If Article 101(1) is not engaged, the arrangement is not prima facie prohibited and there is no need for it to be exempted. The current block exemption, found in Regulations 330/2010 and 461/2010, applies to certain vertical agreements, meaning:

... agreement[s] or concerted practice[s] entered into between two or more undertakings each of which operates, for the purposes of the agreement or the concerted practice, at a different level of the production or distribution chain, and relating to the conditions under which the parties may purchase, sell or resell certain goods or services...

Clearly, it does not apply to agency agreements, but it doesn't need to.

Back in the days when the Block Exemption used to give extensive protection to dealers, this would have been significant: staying within the distribution model would have guaranteed a certain amount of protection. However, the 2010 iteration of the block exemption dropped the last vestiges of dealer protection and left it to national law to protect dealers, if countries wanted to (and many continental jurisdictions do). The UK, however, doesn't: traditionally, English law has emphasised freedom of contract, and regarded as unobjectionable business activities that do not cross the line into criminality.

Legal protection for commercial agents

Dealers (or distributors) don't enjoy any special treatment under English law, but crucially some agents do, and that's thanks to the European Union. The Commercial Agents (Council Directive) Regulations 1993 (SI 1993 No. 3053) implemented the directive on self-employed commercial agents, and like tons of other laws survive Brexit under the general heading of "retained EU law". How long the regulations might survive is another matter, but for the time being we still have to consider them.

The Regulations give commercial agents the sort of protection that you might normally associate with employment - but they are not applicable only to individuals. They define a commercial agent as a "self-employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of their principal or to negotiate and conclude such transactions on behalf of and in the name of that principal". Although "self-employed" suggests an individual, it also includes other legal persons - a limited company can be a commercial agent.

If the commercial agent's activities as a commercial agent are secondary, the Regulations will not apply to them, and arguably this would mean that they are of no help to distributors whose primary business activity is governed by a traditional dealer agreement but who have side-agreements with their supplier under which they are agents. The driving force in the shift to agency is electric vehicles, of course, and as they become a larger proportion of the distributor's business the likelihood that this exception will apply will diminish.

The Regulations only apply where the agent is negotiating the sale or purchase of goods, so services are outside the scope of the Regulations - important, given that service is an area where carmakers are making the switch, as the needs of electric vehicles demand a different approach to that taken in the past. But with that proviso, it seems that the switch to agency will bring the franchised motor trade firmly within the scope of the Regulations.

Notice periods

What, then, are the legal consequences? For one thing, minimum notice periods apply, but compared with what the Block Exemption used to give they are very unexciting: one month for the first year, two months for the second year and three months for any third or subsequent years. The parties may agree longer notice periods than those specified by the Regulations but, if they do, the notice provisions imposed on the agent must be no longer than those to be given by the principal. Of course, the notice periods will be part of the supplier's "take it or leave it" offer, but the fact that the agent cannot be obliged to give longer notice than the principal should ensure that notice periods remain in line with current practice - the old Block Exemption's minimum two-year notice period, along with the one-year period where a re-organisation is necessary, seems to have been generally adopted by the industry.

Duties of agent and principal

The Regulations set out the parties' duties, which is not something that the Block Exemption ever set out to do.The common law already imposes duties on agents, including to obey the principal's lawful instruction, to act only only within the limits of authority,not to put itself in position where there is a conflict of interest,not to make a secret profit or accept bribes, and not to delegate authority, and carmakers can be expected to include specific duties in their agreements. The Regulations expand a little on the common law duties, stating that the agent must:

• act in the best interests of the principal, and act dutifully and in good faith;
• make proper efforts to negotiate and, where appropriate, conclude transactions;
• communicate to the principal all necessary information available to him;
• comply with the reasonable instructions of the principal.

The Regulations also impose duties on the principal, in addition to common law duties to pay commission or remuneration, to pay the agent's expenses, and to indemnify the agent against losses suffered in the proper performance of the agreement. The principal is required to act dutifully and in good faith when dealing with the agent, for one thing, which is rather general but pretty big. It must provide necessary documentation relating to the goods, obtain for the agent all information necessary to perform the agency contract, and notify the agent of any anticipated drop in volume of transactions or any refusal or non-execution by the principal of a transaction which the agent has procured (which would affect the commission payable to the agent).

Remuneration and commission

The agency agreement should, and surely will, clearly set out what commission is payable to the agent and when. The Regulations contain a fall-back position in case the parties fail to agree, but it is unlikely that this will be something that the agreement omits to deal with in detail.  The agent is entitled to commission on a transaction where the transaction between the principal and third party is concluded as a result of the agent's action, or with a third party whom the agent has previously acquired as a customer for transactions of the same kind, or with a customer belonging to any specific geographical area or group of customers to which the agent has been given an exclusive right under the agency agreement.

Commission is also payable on transactions concluded after the agency agreement is terminated if the transaction is mainly attributable to the agent's efforts during the agreement term and entered into within a reasonable period after the agency contract has terminated, or where the customer's order reaches the agent or the principal before the agreement expires or is terminated, or where the order is only accepted after the agency agreement has terminated. However, we can expect that agency agreements offered by carmakers will contain express provisions dealing with these and other matters relating to commission, so the legislation will not have to be relied on.

Any provisions in the agreement relating to post-termination restraint of trade restriction must be in writing and relate to the geographical area, goods and groups of customers covered by the agency agreement, and may last for no more than two years post-termination.

Termination

When an agency agreement is terminated, the agent will be concerned about any outstanding commission and any 'pipeline' commission (unless this is specifically excluded from the agreement). But probably the best thing about the Regulations (from the agent's point of view) is that it will be entitled to compensation for termination to reflect the value of the goodwill the agent has generated for the principal, unless the agent has been terminated for breach or has terminated the agreement itself.

This may be on an indemnity basis or compensation basis. If the agreement does not specify how compensation will be calculated, the payment will be calculated on a compensation basis which will probably be less valuable to the agent, and could involve a considerable burden of proof. But either way, the possibility of a termination payment is a radical departure compared with what the Block Exemption gives.

Indemnity basis: an agent will be entitled to an indemnity if it has brought in new customers or increased volume from existing customers, and the principal continues to derive substantial benefits from the business. The amount of the indemnity must be equitable, and is subject to a cap based on one year's average gross commission based on the five years before termination or the whole life of the agreement if shorter.

Compensation basis: the agent will be entitled to compensation for the damage it suffers as a result of the termination of the agreement. When the termination takes place in circumstances which deprive the agent of commission which it would have earned had the agreement continued, or have not enabled the agent to recover the costs it has incurred in connection with the performance of the agreement, or both, damage will be deemed to have occurred.

The amount of compensation  depends on the value of the agency that has been lost. This is often hard to quantify, especially if in that sector agencies are not traded as businesses (and how transferrable an agency is, compared to a dealership, is another matter). Importantly, there is no cap on the level of a compensatory payment. The agent may also be entitled to an additional amount in lieu of notice.

Slovenia: Competition Protection Agency adopts commitments for Hyundai Auto Trade

The Slovenian competition authority has accepted undertakings from the local Hyundai concessionaire, which are intended to ensure that warranty terms are no longer used to keep repair and maintenance work within the authorised network, according to a report from law firm Shoenherr. The case was brought under domestic competition legislation (Article 6 of the Prevention of Restriction of Competition Act) but the principles contained in the block exemption were applied.

Germany: court recognises repair and service market is brand-specific

In 2011 the Bundesgerichtshof controversially took the view in the MAN case that the aftermarket is not brand-specific, so quantitative restrictions on authorised repairers are permissible. Now the same court has come to the opposite conclusion, in a case (KZR 41/14) involving Jaguar. 

Court of Justice to consider online sales ban in selective distribution

The whole idea of selective distribution is that the manufacturer is allowed to decide how its goods will reach the market - through a certain type of reseller, which in the motor sector means a dealer who meets a raft of standards imposed by the manufacturer. Luxury goods might be limited to shops with a certain ambience, and in only the best locations. In Case C-439/09, Pierre Fabre, the Court of Justice ruled that absolute bans on online sales were prohibited, in selective distribution agreements and elsewhere. But can selected retailers be prevented just from selling the goods using online platforms like eBay and Amazon?

That's the topic of a reference from the Oberlandesgericht Frankfurt am Main to the Court of Justice (Case C-230/16, Coty Germany). The courts in Germany have taken a different view from that of the competition authorities there, which is a bit of a problem: the competition authorities have struck down online sales bans, while the courts (or at least the OLG Frankfurt am Main, here) have been upholding them. That court applied something very like the traditional justification for selective distribution, that a manufacturer has a legitimate interest in ensuring that its branded products are perceived as high-quality products, and that customers receive the right sales advice, so the manufacturer is free in principle to dictate the conditions under which its products are sold provided that they are necessary to meet its quality standards. Note that the court was there concerned with branded goods: it looks as if the fact that the new reference to Luxembourg concerns luxury products is significant, as the headings of the court documents suggest. The earlier case concerned "The question of the admissibility of the prohibition of Internet sales of brand-name items and their setting in the price search engines" and the new one is headed "Decision on the admissibility of selective distribution systems, which are directed on distribution of luxury and prestige goods" (thanks, Yandex Translate).

The motor industry is still quite a long way from having a big problem with online sales, with new car transactions still being showroom-based - but that isn't going to remain the case for ever. Depending on what the Court of Justice says, it might be a long, long time before online sales become significant. But we'll have to wait a while just to know that - about 15 months, according to one commentator.

[Hat tip to Isabelle Rahman, a partner in Sheppard Mullin's Brussels office, on the firm's Fashion Apparel Law blog - the commentator cited above.]

IAAF calls guilty verdict against Kia a 'major victory' for IAM | Professional Motor Mechanic

Professional Motor Mechanic reports an appeal decision in Sweden which IAAF has hailed as a major victory for the independent sector (though using criminal law terms like "guilty" can't be right). In December 2012, the Market Court in Sweden had ruled (MD 2012:13) that exclusivity clauses in Kia's 7-year warranty contracts breached competition rules. If the customer breached the terms, the warranty was not void - it was reduced to three years (although whether the terms remained the same is not clear). The company was ordered to allow its customers to choose independent repairers as well as authorised ones, and was fined SEK 5 million. Three years later the Supreme Court in Stockholm dismissed Kia's application for leave to appeal and for a retrial.

Manufacturers are generally prohibited from refusing to honour a vehicle's warranty on grounds only that it has been serviced by a non-authorised repairer or non-original parts have been fitted. Kia's warranty required servicing to be carried out by an authorised workshop. The Association of Swedish Car Parts Wholesalers (SBF), the Swedish member of FIGIEFA, reported the matter to the Competition Authority, which declined to take action. The SBF then took legal action against the manufacturer in the Market Court, which granted an injunction against Kia under Chapter 3, section 2 of the Competition Act - a provision which enables a party to obtain an injunction to bring an infringement to an end, when the Competition Authority has decided not to proceed. (Of course, that's a different matter from the Competition Authority deciding that no infringement has been committed: it might well decide not to proceed for other reasons, perhaps - I'm guessing here - because there is insufficient public interest, although this shouldn't have been a case where that was a good reason for not devoting resources to it.) In essence, it allows a private interest to take action where the public body hasn't.

Section 2 does not enable the party bringing the action to claim damages, but it does deal directly with the problem - and there remains the possibility of a follow-on action for damages anyway. The Market Court has decided a number of cases - 14, according to the CELEC report, which is now three years old: and the petitioner has been successful in "several" of them.

The Market Court took the view - unsurprisingly, I think - that the relevant market for servicing and repairs was a brand-specific one. It decided that the condition in the warranty had serious foreclosing effects because independents were excluded from competing: one of the objects of the condition was to restrict competition. It would be prohibited under Article 101 TFEU and the equivalent provision in the Swedish competition law.

Prof Henriksson of the Center [sic] for European Law and Economics (CELEC) questions whether it is correct to view the agreement between Kia and its authorised repairers as restricting competition because of the condition imposed on customers. It's an interesting point, although it might be answered by scrutinising the authorised repairer agreement. If Kia have been clever, though, I guess the agreement will be silent on the matter and the restriction will be imposed through the back door, by deterring consumers from going elsewhere. Perhaps the AR agreement says that dealers will not honour warranties in the prescribed circumstances - or in practice they will be prevented from doing so, within the framework of the AR agreement, by the fact that they won't get paid for their work.

Prof Henriksson also asks whether this is indicative of a difference of opinion between the competition authority and the court about what amounts to a breach of the prohibition. That seems unlikely: Christer Liljenberg, Chairman of SBF, is quoted by FIGIEFA as saying that the competition authority had indicated that it did seem to be a breach.

German Court dismisses repair shop action over right to be admitted to a passenger car manufacturer’s authorised repair network

Consumer Welfare in EU Competition Law: What is It (Not) About? by Victoria Daskalova :: SSRN

Consumer Welfare in EU Competition Law: What is It (Not) About? by Victoria Daskalova will be of interest to anyone concerned about the working of the block exemption - like me. The abstract reads:

"More than a decade after the proclamation of consumer welfare as a goal of EU competition law, a fundamental question remains unanswered: namely, what is the content of the EU consumer welfare standard? What types of benefits and harms count respectively as welfare and as harm? Whose harm and whose benefit is included in the definition? Few answers have been available to these crucial, from a legal perspective, questions.

The goal of this article is to explore the meaning of consumer welfare in terms of these questions. In particular, considering the assumption that the notion of consumer welfare in EU competition law is borrowed from economics, the article will attempt to verify to what extent consumer welfare coincides with the notion of consumer surplus in economics. The focus is therefore on 1) whether consumer can be taken to mean the final consumer or the intermediary purchaser and 2) whether the notion of harm refers primarily to price effects. Part I of the paper focuses on the definition of consumer welfare in antitrust law and in economics. Part II considers the definitions of consumer welfare in the Commission’s soft law and argues that a finding of an end user surplus cannot be supported. Part III turns to the jurisprudence of the European Courts and argues that support for end-user surplus cannot be found in the Court’s case law. The paper concludes that although we do not find support for an end-user surplus standard in the Court’s jurisprudence, the change in language in the 2012 Post Danmark ruling leaves us wondering as to whether and in what direction the Court’s approach might change."

If you feel an urge to read the 26-page article in full, you can download it from the link above.

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