Commission rejects Federauto's complaint against VW

The European Commission has rejected a complain lodged by the Italian dealer organisation, Federauto, concerning SEAT dealer agreements. The complaint alleged that competition rules had been broken because teh manufacturer (Volkswagen Group Italia) had unilaterally reduced the dealers' margin from 15.85 per cent to 12.85 per cent, and had converted part of the margin from fixed to variable. The case is number AT.40050: it is not easy to find on the Commission website (a Google search found it for me) and anyway it is 10 pages of Italian, which might be more useful to you than it is to me. It is however helpfully reported by our good friends at Van Bael and Bellis: here is a link to the article on the Mondaq service, for which you might have to register. It is also in that firm's competition law newsletter, the relevant edition of which you can download from here.
Federauto argued that this violated the rationale underlying Art 3 of Regulation 1400 as well as being contrary to the vertical restraints block exemption regulation (Regulation 330/2010). Not a great start to be basing your case on the law's rationale rather than its clear words, and always a bad idea to rely on positive obligations created by a block exemption, because generally there aren't any. If you read the argument as being that because of the failure to comply with the conditions for exemption set out in the Regulation(s) the agreement was in breach of Article 101 of the Treaty, that sounds a bit better: but it still doesn't get you to where you want to be, because you then have to convince the Commission that there is a breach Article 101 somewhere.
The Commission was not convinced. There was no evidence of a restriction of competition, such as would breach Article 101(1). The clauses in the dealership contracts concerning margins were not hardcore restrictions. The new margins did not amount to retail price maintenance because dealers remained free to fund their own discounts on sales to consumers.
The complaint also touched on another, very sensitive, area: Federauto complained that VWGI did not have a code of conduct regulating relationships with dealers. The Commission's Supplemental Guidelines on Vertical Restraints in Agreements for the Sale and Repair of Motor Vehicles tells us, of course, that the existence of such a code is a relevant factor in assessing a supplier's conduct in individual cases concerning pressure on dealers to achieve anti-competitive outcomes. However, there was no evidence that such pressure had been exerted and the Commission stated that mere failure to have a code did not amount to a breach. Nothing very surprising there.
The complaint could be seen as a last-ditch attempt to restore dealer protection principles to the block exemption regime, following their removal in the latest iteration of the Regulation. If that is what it was, the best that can be said is "nice try". Dealer protection is never going to be restored by asking the Commission to read something into the Regulation that clearly isn't there: it is going to come from the Commission imposing a code of conduct on the manufacturers, or adopting legislation like the commercial agents' directive.

USA: Nissan dealer's sales affected by local Chevrolet plant

Ah, if only we had laws like the ones in the USA that protect dealers. What little we had under the block exemption disappeared at the end of May. Sims v Nissan 2013-Ohio-2662 is a case in the Ohio Supreme Court involving a Nissan dealer in Warren, Ohio. There is a GM plant in Lordstown, about six miles away. The Ohio Supreme Court agreed with the dealer's argument that Chevrolet's unusual popularity in his market makes Nissan's sales expectations for him unrealistic.

There was a time, not so long ago, when a European dealer would have been able to invoke the dispute resolution procedures required by the block exemption to get such a problem sorted, by an arbitrator or expert third party. No longer. The Code of Good Practice issued by ACEA states that dealers will have the right to refer disputes to an independent expert or arbitrator, but what provides the basis for a dispute that can be referred? The dealer would have to argue that the target was set so high that it amounted to an unlawful restriction on competition - perhaps it would prevent the dealer in question taking in additional franchises. But it's pretty nebulous.

And while it might sound like an unfair commercial practice, the Unfair Commercial Practices Directive (Directive 2005/29/EC), which sounds as if it might be the right instrument to look to for redress, only applies to B2C transactions, not B2B which is what dealer agreements are. It is occasionally mentioned as a possible source of dealer protection, but for this simple reason it doesn't look very useful. But there is a green paper under discussion at present in Brussels, on unfair commercial practices, which was originally launched with a view to looking at practices in the food retailing sector. However, 34 per cent of responses (of which there were 746 altogether) came from the motor trade, and the NFDA is now pushing for the Commission to reintroduce some dealer protection measures. The consultation is being carried out by the Commission's Directorate General for Internal market and Services, and as so often happens it is quite possible that you'll get a different answer from them than from DG Competition - whose agenda, of course, is quite different. The UK government's response to the Commission's consultation is here.

USA: Federal Statute Precluding Enforcement of Arbitration Clauses in Motor Vehicle Franchise Contracts Inapplicable to Snowmobile, ATV Dealer Agreements

Mandatory arbitration clauses are common in franchise agreements, including motor vehicle franchise agreements. Whether a manufacturer can enforce such a provision requires an analysis of competing state and federal statutes and a determination of whether the vehicles sold fall within the statutory definition of a “motor vehicle.” In an opinion addressing the various statutory regimes, a federal district court in New York held the Motor Vehicle Franchise Contract Arbitration Fairness Act, 15 U.S.C. 1226 did not limit a franchisor’s effort to arbitrate a dispute concerning dealer agreements for snowmobiles and all-terrain vehicles (ATVs). At the same time, the court held that the Fairness Act did serve to block arbitration of claims regarding the same dealer’s motorcycle franchise.

Champion Auto Sales, LLC v. Polaris Sales Inc., 2013 U.S. Dist. Lexis 65219 (E.D.N.Y. Mar. 27, 2013). 

Full casenote on Day Pinkney LLP's website here. 

New Hampshire Supreme Court Holds Settlement Unenforceable Under Anti-Waiver Provisions of State Motor Vehicle Franchise Law

In the US, where dealers enjoy protection that would cause apoplexy in the European Commission, state motor vehicle franchise laws often proscribe agreements that purport to waive the statutory protection given to dealers. When a new franchise relationship is formed, a manufacturer cannot pressure the new dealer into forgoing legislative safeguards against termination or encroachment, among other things. But what happens when a dealer waives such rights in connection with a settlement of litigation? In New Hampshire, at least, such a settlement agreement will not be enforceable, according to a recent ruling by that state's supreme court.

Sounds not unlike what's going on with Fiat's dealers in Greece ...

Strike Four, LLC v. Nissan North America, Inc., No. 2012-193, 2013 N.H. Lexis 37 (April 12, 2013). 

 

See the full story here from Day Pitney LLP.

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 ...

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.

Selling franchised dealerships

One of the important pieces of protection given to dealers in the 2002 Block Exemption - still there, until 2013, but cut from the new version of the Regulation - is the right to transfer the franchise to another member of the network. Previously, vehicle manufacturers had generally reserved the right to dictate to whom a dealer might sell, and often they would have preferred candidates. "Of course you can sell your dealership: and this is who you can sell it to ...". The provision in the 2002 Regulation that effectively said members of the network were pre-approved recognised an inherent truth in the way dealer networks are structured, but at the same time deprived manufacturers of protection against over-concentration of franchises in the hands of large dealer groups, which can be as much a problem for competition as vehicle manufacturers having market power.

With the removal of this condition for exemption, the protection of dealers will be significantly weakened. Whether this is a good or bad thing depends in the first place on where you stand - but to my mind, this is a dealer protection provision too far. No-one should be obliged to do business with someone they haven't chosen. Competition law does not generally require this, although for a dominant firm a refusal to supply may be an abuse (and therefore a breach of Article 102 TFEU or Part II of the Competition Act). Within the manufacturer-dealer relationship, of course, the manufacturer might be regarded as dominant, and certainly just because the new Regulation is silent on the question of transfers doesn't mean that the manufacturer will always be able to impose its wishes on the dealer - there is no exemption from Article 102.

However, the biggest limitation on the usefulness of the block exemption has always been the gap between the rights given to dealers and the practicalities of enforcing them. Legal action against a vehicle manufacturer to enforce rights given by the Regulation has clearly never been an attractive proposition for dealers: I can't think of any legal actions being brought. There have been a few disputes referred to expert determination, as the Regulation also requires for certain matters, but not many. Even just intimating to one's supplier that one's rights might have been breached is likely to be a step too far for most dealers.

The removal of the automatic right to transfer will look to dealers like a huge step backwards. On the face of it, manufacturers will be able arbitrarily to stop dealers transferring their business as a going concern. In fact, it merely reinforces the fact that the value of that business is built entirely on a contract, and it is common to find that rights under a commercial contract cannot be transferred freely. Obligations perhaps, but that makes no difference here. And even now, if the manufacturer doesn't like what the dealer proposes to do it can terminate the contract on notice. It would have to state its reasons, which must be objective, but unless it were blatantly anti-competitive it's not likely to help the dealer much as the block exemption contains no automatic sanction for a breach of this requirement. So perhaps the current dealer protection measure doesn't count for much anyway.

So there's a window of opportunity until the end of May 2013 for dealers to sell or buy, if they see an opportunity for consolidation - and manufacturers will probably be cautious about trying to terminate in such circumstances. (Of course, many networks are under wholesale  notices of termination during the two-year run-up to the change anyway.) After that, the basic competition rules will be there as a long-stop to prevent egregious anti-competitive behaviour - as they always have been. And there remains the possibility that the matter will be dealt with in the much-vaunted Code of Conduct.

However, the Code of good practice regarding certain aspects of vertical agreements in the motor vehicle sector. seems to be in trouble. The manufacturers, through ACEA, had offered a draft, but it didn't cover all the aspects of dealer protection - being limited to dispute resolution and minimum periods of notice. The Commission, which at first adopted a "hands off" approach consistent with its view that dealer protection had nothing to do with competition, has now become more proactive and announced that it wanted ACEA to reach agreement with CECRA before November this year. Subsequently it seems that ACEA has decided not to take part in further discussions - presumably, standing by its draft Code. So whether we will ever see anything in a form useful to dealers is up in the air - but as ACEA will be well aware there's always the general competition law lurking in the background to deal with any arbitrary exercise of power by vehicle manufacturers - if dealers dare invoke it.

NFDA concern over new agreements

New agreements are being issued by manufacturers, and the National Franchise Dealer Association (NFDA) is warning dealer councils that they should alert their members to them. Press reports (such as this one in Fleet News) are not clear exactly what they need to be alerted about - but the main concern seems to be that dealers are not being given adequate opportunity to take advice on the effect of the new agreements. Sue Robinson, director of RMI NFDA, said:

The European Commission has created an expectation that manufacturers should operate in a transparent manner with their dealers and adhere to minimum standards of behaviour in their commercial relationships, as set out in a published code of conduct. We are urging all dealer councils to lobby manufacturers for such a code that would make the relationship between dealers and manufacturers as fair as possible.

The Supplementary Guidelines on the new motor vehicle block exemption (Regulation 461/2010) say (in para 7):

The history of competition enforcement in this sector shows that certain restraints can be arrived at either as a result of explicit direct contractual obligations or through indirect obligations or indirect means which nonetheless achieve the same anti-competitive result. Suppliers wishing to influence a distributor's competitive behaviour may, for instance, resort to threats or intimidation, warnings or penalties. They may also delay or suspend deliveries or threaten to terminate the contracts of distributors that sell to foreign consumers or fail to observe a given price level. Transparent relationships between contracting parties would normally reduce the risk of manufacturers being held responsible for using such indirect forms of pressure aimed at achieving anticompetitive outcomes. Adhering to a Code of Conduct is one means of achieving greater transparency in commercial relationships between parties. Such codes may inter alia provide for notice periods for contract termination, which may be determined in function of the contract duration, for compensation to be given for outstanding relationship- specific investments made by the dealer in case of early termination without just cause, as well as for arbitration as an alternative mechanism for dispute resolution. If a supplier incorporates such a Code of Conduct into its agreements with distributors and repairers, makes it publicly available, and complies with its provisions, this will be regarded as a relevant factor for assessing the supplier's conduct in individual cases. 

I have added the emphasis - both the italics and the bold. That word "if" makes a huge difference - not that the NFDA is wrong, but clearly it is not a mandatory requirement to have a Code. Of course, the sort of Code the guidelines are talking about would do the job of the old dealer protection measures in the block exemption - the ones that the Commission decided had no place in a competition instrument ...

The highest level of dealer protection?

Manufacturers will be made responsible for unsold cars under a new law in Spain, Automotive News Europe reported on 17 February. Dealers would be entitled to claim a refund for unsold cars which have been hanging around for three months, and sometimes to charge the carmaker for their sales teams' efforts and other expenses.

The manufacturers will also be required to compensate terminated dealers for loss of business and the cost of layoffs. The same would also apply if the dealer's appointment was not renewed. This echoes proposals, emanating from the European Distribution Lawyers group and other sources, for dealer agreements to be treated like commercial agency agreements under European Union law.

Sounds too good to be true? Perhaps it is - though it's not yet 1 April, as you'll have noticed. In fact, it seems that the vehicle manufacturers were taken rather by surprise when the proposed Spanish law was announced, and they have prevailed on the Spanish government to put it on the back burner for the time being. It certainly seems to have contributed to a rift between the two sides of the industry in Spain.

The law was published along with a bundle of other measures to stimulate the Spanish economy (though how this one, however worthy, might be expected to have that effect isn't clear). The industry ministry quickly announced that it was calling a meeting to assess the new law with regional governments, unions and car manufacturers (did they forget dealers?). Revised proposals are expected within three months.

ANFAC, the Spanish carmakers' association, at first indicated (predictably) that its members would have to reconsider their investment plans. ANFAC chairman Francisco Javier Garcia Sanz said that the lawmakers had "made a mistake and they are going to have to correct it. If they do not, they will be responsible for the loss of investment and employment that this law will cause." Exactly the sort of thing we'd have said back in the days when I worked at the SMMT. On the other hand, the dealers's association Faconauto said that the new law would safeguard jobs by reforming a legal framework that left them at the whim of changes to dealer agreements. According to the Spanish website cincodias.com, Faconauto claims the price of cars would come down by an average of €400 to €500 as a result of the law and the closure of 30 per cent of dealer outlets would be prevented. CincoDias also reports that ANFAC points out that the protection of the law would benefit shareholders, not employees, of dealers, an analysis that might rebound on the vehicle  manufacturers one day.

NFDA lobbies for dealer rights (of course)

Motor Trader reports that NFDA director, Sue Robinson, has been lobbying for a continuation of the dealer protection provisions of the block exemption when the present regulation expires.  She has been talking to Paolo Cesarini, the Commission official responsible for the regulation, and to a member of the cabinet of Commission Vice President Verheugen, Joanna Szychowska.  She has also been talking to Malcolm Harbour MEP, which I suspect was the easiest of the meetings, and Marc Greven of ACEA, whose members mostly support the Cesarini approach of removing everything from the regulation that does not have a clear antitrust role.

Associations call for retention of Block Exemption

Automotive News reports that five dealer trade associations - the ZDK (Germany) and its counterparts from Luxembourg, Switzerland, South Tyrol, and Austria, have called on "the EU" to extend the block exemption for at least 10 years.  It notes that the "EU Commission" has offered little hope of an extension, and then in an extraordinary non-sequitur that the block exemption affects about 2.8 million workers in 350,000 small and medium-sized automotive companies.

Leave aside that the EU has nothing to do with competition policy, which is the exclusive domain of the European Community, and that the title of the institution that is responsible for the block exemption is the European Commission.  More to the point, the Associations are pleading for the retention of the multifranchising rules to protect the investment of these enterprises.  They argue that:

'If the automotive block exemption were to disappear in 2010 without a replacement, "auto manufacturers could, in particular, prohibit multiple-brand operations"...'

Not so, at least not automatically.  Whether a restriction on multifranchising would be permitted would require an analysis of the effect of such a provision on competition.  It is highly likely that this would conclude that the provision would be prohibited under Article 81(1) and not exempt under Article 81(3).  But the dealer associations are still right to call for a continuation of the certainty that the Regulation gives, because without the protection of the block exemption dealers might well find their suppliers taking the view (now that Article 81(3) is a matter for self-assessment) that a ban on multi-franchising was permissible, leaving it for the dealers to take the matter to court or to the competition authorities - and as I have observed many times before, the rights given to delers by the block exemption are of interest only to those dealers tired of their franchises.  What rational dealer, in the present climate especially, would pick a fight of such importance with a vehicle maker?

There is, it seems to me, a good reason why the USA has had the Dealer's Day in Court Act for over 50 years now, and it is that same reason that makes the dealer protection provisions of the block exemption an essential part of the apparatus that protects competition.

An endangered species

According to a PriceWaterhouse Coopers report described in an article in the on-line edition of Motor Trader: "Car dealers are an endangered species and their number in the UK will be significantly reduced in the future". I think I have read similar predictions of the demise of the franchised dealer in the past ... each new iteration of the Block Exemption seems to bring with it similar comments.
Suppliers are taking every opportunity to exercise more and more control over dealers, but this is nothing new. It was going on before we ever had a block exemption, and is an unavoidable consequence of the fact that the public face of the supplier is the dealer. All the valuable goodwill - the attractive force that brings customers back for more, or gets them interested in the cars in the first place - is in the hands of the independent dealer. Is it any surprise that car makers will cast around for anything that enables them to protect that reputation?
The important point is that surely that the process is reaching a new level. Every few years, the car makers' scope for exercising control over dealers has been diluted by the latest iteration of the block exemption regulation. It is due to happen for the fourth time in 2010, although the dilution of the car makers' powers has never been as great as dealers would have liked. In between new regulations, the car makers have striven to get back the control they lost, and more.
This time, when the Regulation is replaced, the chances are that dealers will find the outcome uncomfortable. The Commission, which in 1995 was moved to replace block exemption v1 following an extraordinary demonstration of how suppliers could exercise arbitrary power over their dealers (from memory, it was the president of CECRA whose franchise was terminated for no apparent reason, though I am sure that this is a gross oversimplification), is now set to remove all the dealer protection stuff that has been lobbied for and written into the regulation over the decades. They consider it out of place in a competition law instrument, and point out that the general competition rules can be used to control arbitrary abuses on the part of the supplier. So they can, but the process of invoking them (and moving national competition authorities to enforce the rules) will be long, complicated and expensive.
If the Commission is determined to lift the burden of regulation on the manufacturers, it should be putting in place protection for dealers similar to that given to commercial agents in the European Community and to auto dealers in most if not all states in the USA. If manufacturers could recognise that they are in it together with their dealers, and treat them as the independent experts they are supposed to be rather than micro-managing every aspect of the dealer's business, we might achieve a satisfactory outcome without legal intervention: but the history of the block exemption tends to show that more not less regulation of the manufacturer-dealer relationship is needed to preserve an appropriate balance in the market.