The European Commission is good at dressing up things that have to be done, to make them look as if they are actually desirable rather than simply inevitable. So, for example, its chosen approach to the motor vehicle block exemption - bringing dealer and repairer agreements under the umbrella of the vertical restraints block exemption - meant that multifranchising would be impossible to continue in the form the industry knew it: so they said it never really worked anyway. I don't think everyone agrees with that assessment, and the Commission's whole approach to the motor industry often looks like the work of people who trade in their Mercs or BMWs every couple of years and get their impression of the motor industry from that ...
So too a few years ago, when regulation 1/2003 was presented as a modernisation measure. Its most important feature was a switch from the old system under which you could only get exemption for a restrictive agreement from the Commission, which is what made block exemptions necessary. Since it came into operation on 1 May 2004 it has been for the parties to an agreement to decide whether it was caught by the competition rules, and if so whether it could be exempted. It became a matter for self-assessment - with the Commission and national competition authorities in the background, to keep the parties to the agreements honest.
Now, those of you with a penchant for modern European history will realise that 1 May 2004 was also the day on which the European Union expanded from 15 Member States to 25. Every previous enlargement had caused a flood - perhaps tsunami, or avalanche, would be a better word - of agreements to be sent to the Commission to get exemption. The old system not only gave the Commission the exclusive power to grant exemption (which for convenience it exercised in large part by promulgating block exemptions, permitting whole categories of agreements), it also said that once you send in your agreement with a request for exemption you are free to carry on operating it until the Commission says you can't. There were an awful lot of precautionary notifications, and the thought of all those agreements from the new members - and the languages they'd be written in! - left no alternative but to change the system. Or, as the Commission put it, "modernise".
That's not an arcane piece of knowledge, of interest only to competition law specialists. The block exemption is of central importance to everyone in the motor industry, and the modernisation regulation has a fundamental and far-reaching effect on the way in which it works (or, perhaps, doesn't). Remember, this change to the fundamentals of EC competition law came in while Regulation 1400/2002 was already in force, so the renewal process we're now going through is the first opportunity to judge how block exemption will work in this brave new world.
This is, of course, the fourth block exemption. The first two (in 1985 and 1995) were straitjackets: they told you exactly what you could do, what was not permitted was generally prohibited, and the block exemption was the right place to write prohibitions and conditions. Regulation 1400 took a radically different approach: what was not prohibited was permitted, which made it a lot harder to work out where you stood - and deprived dealers and authorised repairers (as well as independent repairers) of much of the protection that they'd previously had. (Leaving aside the fact that the protection often turned out to be an illusion, requiring as it did a complaint to the Commission and the will then for the bureaucrats to take it up.) But still, you needed to have the Commission's OK for your restrictive agreement, and if that were available merely by complying with the terms of a Regulation that wasn't too hard.
The new Regulations - the block exemption is now found in two separate instruments, the vertical restraints block exemption and the motor vehicle one - still offer what is now invariably, and trendily, referred to as a safe harbour for dealer and repairer agreements. The difference is that since modernisation the parties can decide, with the benefit of legal and economic advice, whether they need to seek shelter in the safe harbour or whether they can simply drop anchor in the open sea. The authorities can still tell them that they need to anchor elsewhere, and there are some heinous anticompetitive practices like price-fixing and export bans that will hardly ever be tolerated, but the block exemption has become very much an optional regime.
I recently reviewed an authorised repairer agreement for a dealer association. In previous years I'd been able to say whether each clause appeared to comply with the block exemption, and that was almost job done. Now, to do it properly, one would have to engage economic consultants, consider the state of the market and the vehicle manufacturer's position in it, and also the position of the network. It would be a massive job, and I bet it's never going to get done for any franchise.
Back in the mists of time, Commissioner Monti promised to put the consumer in the driving seat with regulation 1400. Regulation 1/2003 had effectively put the car manufacturers back in the driving seat long before regulations 330 and 461/2010 came along. The scope for taking issue with anything the manufacturers write into their agreements is negligible. Of course, commercially they don't enjoy freedom of action, but the additional constraints imposed on them by competition rules, so important for the protection of the networks in a hugely unequal relationship, have effectively been lifted.
Monday, 5 July 2010
Friday, 2 July 2010
Technical information, tools, training, and all that stuff
Diagnostic information and special tools and training have been bones of contention in debates on the block exemption for years. The independent sector had secured a set of rules in the last block exemption regulation, which for the aftermarket has just expired: what does the new one do?
Actually, that’s almost the wrong question now: the new block exemption (Regulation 461/2010) is deliberately much less draconian than its predecessor. Instead of setting down strict conditions and prohibitions, it leaves most restrictions in (and outside) agreements to be scrutinised under basic competition rules.
Changes brought in a few years ago make the competition rules a matter for something like self-assessment. Block exemptions are safe harbours that can be used by those whose arrangements will fit within them, or who want certainly above all. The European Commission has trimmed off those parts of the old block exemption that seemed to serve no competition-law purpose – minimum notice periods, requirements for arbitration or mediation, and rules about diagnostic information, training and tools. The basic competition rules will apply if the treatment of these matters have a detrimental effect in the aftermarket: action can be taken, but it no longer says on the face of the Regulation that these practices are prohibited.
Suppliers to vehicle manufacturers of spare parts, tools, and diagnostic and other equipment do still have an express right under the new Regulation to sell direct to the independent aftermarket. But while vehicle manufacturers can decide that they don’t actually need to be in the safe harbour, it’s just possible that they could justify such restrictions anyway.
Nor does the regulation oblige those suppliers to sell to the independents. If they unilaterally choose not to, that could be an abuse of a dominant position which the competition rules prohibit, but that’s an extremely blunt instrument and one that independents would find prohibitively costly to use.
The block exemption regulation is supplemented by Guidelines, which explain among other things how restraints are to be assessed outside the cut and dried situations set out in the block exemption. While it’s permissible for vehicle makers to select their authorised, repairers, anything they do to prevent independents competing could be prohibited – the buzz-word is “foreclosure”. Independents who don’t have access to technical information suffer this fate.
Vehicle repair and maintenance information is now dealt with in type approval legislation. Regulation 715/2007 obliges manufacturers to make the information available for passenger cars marketed after 1 September 2009. (Another regulation does the same for CVs, from the end of 2012.) As for earlier vehicles – which is probably what the independent sector is worried about – the Guidelines say that the Commission will take these regulations into account when assessing cases of withholding of information. The Commission will consider whether the item in question is available to authorised repairers, whether the information will be used for repair or maintenance or another purpose (such as writing a DIY manual), and whether withholding it will have “an appreciable impact on the ability of independent operators to carry out their tasks and exercise a competitive constraint on the market”. The nature of the information will also be relevant: if it is commercial rather than technical it can probably legitimately be withheld.
Technical information will include software, fault codes and other parameters needed to work on CPUs. Regulation 715 defines vehicle repair and technical information to include all information required for diagnosis, servicing, inspection, periodic monitoring, repair, re-programming or re-initialising of the vehicle which the manufacturers provide for their authorised dealers and repairers, including all subsequent amendments and supplements. It also includes all information required for fitting parts or equipment on vehicles. According to the Guidelines, vehicle identification methods are also included, along with parts catalogues (that’ll be contentious) and recall notices. Independents must be able to get access without delay and on demand: anything less wouldn’t truly amount to “access”. They can be charged, but not so much that they are discouraged: the charge must take account of the use they will make of the information. Independents must have access at the same time as authorised repairers get it, and cannot be obliged to buy more than they need for the job they are trying to do.
The Guidelines treat tools and training in the same way. Tools include diagnostic and other repair tools, plus software for those tools, updates for the software, and aftersales service for the tools. So the Guidelines seem to cover the problem fairly comprehensively – the only problem being how to make these rules stick.
Previously, you could at least point to the block exemption and say its requirements were being broken. Morally, the party in breach of the rules would be in the wrong, even though legally no-one did anything about it. Now you’d have to be sure of your ground, whether the other party is acting anti-competitively, and that inevitably requires a lot of expensive economic and legal analysis. The documents say all the right things, but who will make them stick, and how?
Actually, that’s almost the wrong question now: the new block exemption (Regulation 461/2010) is deliberately much less draconian than its predecessor. Instead of setting down strict conditions and prohibitions, it leaves most restrictions in (and outside) agreements to be scrutinised under basic competition rules.
Changes brought in a few years ago make the competition rules a matter for something like self-assessment. Block exemptions are safe harbours that can be used by those whose arrangements will fit within them, or who want certainly above all. The European Commission has trimmed off those parts of the old block exemption that seemed to serve no competition-law purpose – minimum notice periods, requirements for arbitration or mediation, and rules about diagnostic information, training and tools. The basic competition rules will apply if the treatment of these matters have a detrimental effect in the aftermarket: action can be taken, but it no longer says on the face of the Regulation that these practices are prohibited.
Suppliers to vehicle manufacturers of spare parts, tools, and diagnostic and other equipment do still have an express right under the new Regulation to sell direct to the independent aftermarket. But while vehicle manufacturers can decide that they don’t actually need to be in the safe harbour, it’s just possible that they could justify such restrictions anyway.
Nor does the regulation oblige those suppliers to sell to the independents. If they unilaterally choose not to, that could be an abuse of a dominant position which the competition rules prohibit, but that’s an extremely blunt instrument and one that independents would find prohibitively costly to use.
The block exemption regulation is supplemented by Guidelines, which explain among other things how restraints are to be assessed outside the cut and dried situations set out in the block exemption. While it’s permissible for vehicle makers to select their authorised, repairers, anything they do to prevent independents competing could be prohibited – the buzz-word is “foreclosure”. Independents who don’t have access to technical information suffer this fate.
Vehicle repair and maintenance information is now dealt with in type approval legislation. Regulation 715/2007 obliges manufacturers to make the information available for passenger cars marketed after 1 September 2009. (Another regulation does the same for CVs, from the end of 2012.) As for earlier vehicles – which is probably what the independent sector is worried about – the Guidelines say that the Commission will take these regulations into account when assessing cases of withholding of information. The Commission will consider whether the item in question is available to authorised repairers, whether the information will be used for repair or maintenance or another purpose (such as writing a DIY manual), and whether withholding it will have “an appreciable impact on the ability of independent operators to carry out their tasks and exercise a competitive constraint on the market”. The nature of the information will also be relevant: if it is commercial rather than technical it can probably legitimately be withheld.
Technical information will include software, fault codes and other parameters needed to work on CPUs. Regulation 715 defines vehicle repair and technical information to include all information required for diagnosis, servicing, inspection, periodic monitoring, repair, re-programming or re-initialising of the vehicle which the manufacturers provide for their authorised dealers and repairers, including all subsequent amendments and supplements. It also includes all information required for fitting parts or equipment on vehicles. According to the Guidelines, vehicle identification methods are also included, along with parts catalogues (that’ll be contentious) and recall notices. Independents must be able to get access without delay and on demand: anything less wouldn’t truly amount to “access”. They can be charged, but not so much that they are discouraged: the charge must take account of the use they will make of the information. Independents must have access at the same time as authorised repairers get it, and cannot be obliged to buy more than they need for the job they are trying to do.
The Guidelines treat tools and training in the same way. Tools include diagnostic and other repair tools, plus software for those tools, updates for the software, and aftersales service for the tools. So the Guidelines seem to cover the problem fairly comprehensively – the only problem being how to make these rules stick.
Previously, you could at least point to the block exemption and say its requirements were being broken. Morally, the party in breach of the rules would be in the wrong, even though legally no-one did anything about it. Now you’d have to be sure of your ground, whether the other party is acting anti-competitively, and that inevitably requires a lot of expensive economic and legal analysis. The documents say all the right things, but who will make them stick, and how?
Tuesday, 29 June 2010
The legislative jigsaw
Once upon a time, all there was to worry about was the block exemption regulation itself. The Commission produced a Notice setting out some detail about price differentials, and later one that expanded on how to recognise an intermediary, but essentially the rules that applied to the motor industry seemed pretty self-contained. Now the rules are split between two separate block exemption regulations, each of which comes with guidelines (items 1 to 4 in the list below), plus the manufacturers' concessions on dealer protection issues in the form of the code of good practice, while there are more guidelines and Notices that might be relevant to considering the application of the competition rules to motor vehicle agreements. And technical information is now dealt with in Regulation 715/2007. They can all be found through the Commission's website, but for ease of reference I'll post links here:
- Commission Regulation (EU) 461/2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices in the motor vehicle sector.
- Supplementary guidelines on vertical restraints in agreements for the sale and repair of motor vehicles and for the distribution of spare parts for motor vehicles.
- Commission Regulation 330/2010 of 20 April 2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices.
- Commission notice - Guidelines on Vertical Restraints (Official Journal C 130, 19.05.2010, p. 1).
- Code of good practice regarding certain aspects of vertical agreements in the motor vehicle sector.
- Commission notice on the definition of the relevant market for the purposes of Community competition law (Official Journal: OJ C 372 09.12.1997, p. 5-13).
- Commission Notice on agreements of minor importance which do not appreciably restrict competition under Article 81(1) of the Treaty establishing the European Community (de minimis) ( Official Journal C 368, 22.12.2001, pages 13-15).
- Communication from the Commission - Notice - Guidelines on the application of Article 81(3) of the Treaty (Official Journal C 101, 27.04.2004, pages 97-118).
- Commission Notice - Guidelines on the effect on trade concept contained in Articles 81 and 82 of the Treaty (Official Journal C 101, 27.04.2004, pages 81-96)
- Regulation (EC) No 715/2007 of the European Parliament and of the Council of 20 June 2007 on type approval of motor vehicles with respect to emissions from light passenger and commercial vehicles (Euro 5 and Euro 6) and on access to vehicle repair and maintenance information.
The demise of multifranchising: problems for small networks?
One area where there are big differences between the new block exemption regime and the old one is in the treatment of multifranchising. In essence, the problem arises because of the different definitions of non-compete obligations in the old and new regulations. Under Regulation 1400, non-competes were permitted up to 30 per cent - meaning that a dealer or authorised repairer could be obliged to buy up to 30 per cent of its requirements from one source, which left room for them to have three sources (and a frustrating and useless bit to spare). That, you'll notice, is a rather liberal interpretation of "non-compete". Now, the vertical restraints block exemption (Regulation 330/2010)has become the relevant part of the patchwork of documents that now makes up the motor vehicle block exemption, and it takes a more logical but less helpful view of what amounts to a non-compete: it says 80 per cent is permissible.
The Commission has tried to justify this enormous change (and big step backwards, whether you approve of it or not, because it takes us back to the first motor vehicle block exemption which didn't permit multifranchising at all) by dismissing multifranchising (or multibranding, as they now like to call it) as something that never really worked anyway.
The idea of allowing dealers - by which I mean distributors and authorised repairers - to take on more than one marque is intended to prevent foreclosure of the market. A small manufacture, or a new entrant, needs to be able to get a toe-hold, and they can't expect to find lots of garages looking for a solus franchise. The only way competition can realistically be preserved in this area is by insisting that dealers be allowed to take on more than one franchise. So, for small manufacturers and their networks, as Automotive Management reports this week in connection with Hyundai, the changes are not good news.
Competition authorities will point out that if foreclosure is a problem the rules on competition can be brought to bear. It will be a breach of Article101 of the new Treaty, and if it is conduct that the block exemption permits, that permission can be withdrawn. True, but the Commission hasn't yet withdrawn exemption from a motor vehicle distribution agreeement and it's had 25 years in which to do so - and don't tell me there haven't been enough problems to justify it. Anyway, what dealer - especially the sort of dealer who's likely to be anxious about being able to multifranchise - is going to pick that sort of fight with a vehicle manufacturer?
The Commission has tried to justify this enormous change (and big step backwards, whether you approve of it or not, because it takes us back to the first motor vehicle block exemption which didn't permit multifranchising at all) by dismissing multifranchising (or multibranding, as they now like to call it) as something that never really worked anyway.
The idea of allowing dealers - by which I mean distributors and authorised repairers - to take on more than one marque is intended to prevent foreclosure of the market. A small manufacture, or a new entrant, needs to be able to get a toe-hold, and they can't expect to find lots of garages looking for a solus franchise. The only way competition can realistically be preserved in this area is by insisting that dealers be allowed to take on more than one franchise. So, for small manufacturers and their networks, as Automotive Management reports this week in connection with Hyundai, the changes are not good news.
Competition authorities will point out that if foreclosure is a problem the rules on competition can be brought to bear. It will be a breach of Article101 of the new Treaty, and if it is conduct that the block exemption permits, that permission can be withdrawn. True, but the Commission hasn't yet withdrawn exemption from a motor vehicle distribution agreeement and it's had 25 years in which to do so - and don't tell me there haven't been enough problems to justify it. Anyway, what dealer - especially the sort of dealer who's likely to be anxious about being able to multifranchise - is going to pick that sort of fight with a vehicle manufacturer?
Thursday, 20 May 2010
Domestic legislation
In all the talk about the block exemption, don't overlook UK legislation. The Supply of New Cars Order 2000 (SI no 2088) was the legislative response to the last Competition Commission investigation of the new car market and it remains in force.
An earlier statutory instrument, the Restrictions on Agreements (Manufacturers and Importers of Motor Cars) Order 1982 (SI 1982/1146) has been repealed - not before time, because it was defective when made, because it covered motor cars when it should have been limited to passenger cars. I asked a friendly backbench MP to oppose the SI in Parliament at the time: the government assured him that his fears (my fears, and therefore the fears of my employer the Society of Motor Manufacturers and Traders) were unfounded, and it became law in its defective state. So much for the negative resolution procedure. Or was it positive? I forget.
An earlier statutory instrument, the Restrictions on Agreements (Manufacturers and Importers of Motor Cars) Order 1982 (SI 1982/1146) has been repealed - not before time, because it was defective when made, because it covered motor cars when it should have been limited to passenger cars. I asked a friendly backbench MP to oppose the SI in Parliament at the time: the government assured him that his fears (my fears, and therefore the fears of my employer the Society of Motor Manufacturers and Traders) were unfounded, and it became law in its defective state. So much for the negative resolution procedure. Or was it positive? I forget.
New rules for authorised repairers
Back in 1985, the justification for granting a block exemption for motor vehicle distribution and servicing agreements was that motor vehicles were complex products that required periodical maintenance and repair, not always in the same place: and the best way to ensure that consumers could get those services wherever in the European Community they happened to be was to make it a condition of exemption that the two went hand in hand. In other words, if you wanted to sell the vehicles you had to offer the service, or try to get individual exemption for your arrangement and the Commission could be expected not to look very kindly on it.
The same philosophy remained in fashion in 1995 when the block exemption was renewed (or, perhaps more accurately, the first Regulation was replaced), but by 2002 the sales-service link was seen as a problem rather than a solution. Strange how these things can change, and I don't recall ever seeing a convincing explanation for it. These things are so often dressed up to meet the needs of political expediency, or to hide the fact that it just wouldn't work to change another piece of law (which is what's now happening with multifranchising, as described in my last blog post here).
Of course, this time round - in block exemption v4 - the divide is even more pronounced. Actually, I should refer to block exemption 4.1, which deals with the aftermarket, and block exemption 4.2, which will deal with vehicle distribution but in a couple of years from now. And since we've all started referring to the block exemption as MBER, make that MBER 4.1 and 4.2. I wonder whether I will start a trend here? I will when I write the new version of the Motor Law Guide.
I have already described the main points of the vertical restraints block exemption, the VBER, Regulation 330/2010. To appreciate how this instrument regulates the automotive aftermarket, it will be necessary to consider also the specific "mini-block-exemption" which the Commission still hasn't finalised, which I shall call MBER 4.11. However, it published a draft in December last year and doesn't seem minded to make many changes (and if looking back through my various notes I discover otherwise in any respect I will let you know, dear reader) so we can look at that document for guidance, as well as the accompanying notice and the contributions of those who commented.
The important thing about MBER 4.11 is that it preserves the hard core restrictions that we know and love from Regulation 1400: sales of spares to the independent sector, restrictions on the sale of spares, tools or diagnostic equipment, and branding. Nothing here about technical information, but the other basic stuff that we are used to seeing to enable independent repairers to continue in business is all carried forward. The first of these three hardcore restrictions (how pleased I am that the expression "blacklist" has completely disappeared from the vocabulary) is a matter for those of us drafting or reviewing authorised repairer agreements, and so up to a point is the second, while the third is a matter of the vehicle manufacturer's conduct. In fact, Article 4(e) of the VBER protects sales of spares too and has to be read in conjunction with the relevant provision of MBER I am going to have to some cutting and pasting to put all these provisions next to each other so we can make sense of them.
The same philosophy remained in fashion in 1995 when the block exemption was renewed (or, perhaps more accurately, the first Regulation was replaced), but by 2002 the sales-service link was seen as a problem rather than a solution. Strange how these things can change, and I don't recall ever seeing a convincing explanation for it. These things are so often dressed up to meet the needs of political expediency, or to hide the fact that it just wouldn't work to change another piece of law (which is what's now happening with multifranchising, as described in my last blog post here).
Of course, this time round - in block exemption v4 - the divide is even more pronounced. Actually, I should refer to block exemption 4.1, which deals with the aftermarket, and block exemption 4.2, which will deal with vehicle distribution but in a couple of years from now. And since we've all started referring to the block exemption as MBER, make that MBER 4.1 and 4.2. I wonder whether I will start a trend here? I will when I write the new version of the Motor Law Guide.
I have already described the main points of the vertical restraints block exemption, the VBER, Regulation 330/2010. To appreciate how this instrument regulates the automotive aftermarket, it will be necessary to consider also the specific "mini-block-exemption" which the Commission still hasn't finalised, which I shall call MBER 4.11. However, it published a draft in December last year and doesn't seem minded to make many changes (and if looking back through my various notes I discover otherwise in any respect I will let you know, dear reader) so we can look at that document for guidance, as well as the accompanying notice and the contributions of those who commented.
The important thing about MBER 4.11 is that it preserves the hard core restrictions that we know and love from Regulation 1400: sales of spares to the independent sector, restrictions on the sale of spares, tools or diagnostic equipment, and branding. Nothing here about technical information, but the other basic stuff that we are used to seeing to enable independent repairers to continue in business is all carried forward. The first of these three hardcore restrictions (how pleased I am that the expression "blacklist" has completely disappeared from the vocabulary) is a matter for those of us drafting or reviewing authorised repairer agreements, and so up to a point is the second, while the third is a matter of the vehicle manufacturer's conduct. In fact, Article 4(e) of the VBER protects sales of spares too and has to be read in conjunction with the relevant provision of MBER I am going to have to some cutting and pasting to put all these provisions next to each other so we can make sense of them.
The new vertical restraints block exemption
The starting point for understanding what is happening in the automotive sector is the vertical restraints block exemption. The new Regulation was adopted on 20 April, and you can read the press release here and the regulation itself here. There are some questions and answers produced by the Commission too, here. Guidelines are in preparation.
The new regulation is no 330/2010, and it applies across the whole gamut of vertical agreements - exclusive distribution, exclusive purchasing, selective distribution, franchising - with the important exception of motor vehicle distribution agreements. These will however be brought within its scope in three years' time. Aftermarket activities are already subject to this regime (or at least they will be from 1 June), albeit under the terms of a specific "mini-block-exemption" and a set of tailor-made guidelines.
The vertical restraints block exemption - the VBER, as it now seems to be called - applies where the parties' market shares do not exceed 30 per cent. Below this threshold, selective or exclusive agreements are permitted. (The Commission will keep talking of "distribution" in the aftermarket, which is fine as far as parts are concerned but which makes no sense at all in connection with services.) So there's a difference to start with: under the existing motor vehicle block exemption, Regulation 1400/2002, there are different thresholds for exclusive distribution agreements and selective ones, the latter being less restrictive of competition and therefore tolerated at higher market shares. Indeed, for a purely qualititative selective distribution agreement, no market share criteria apply at all under the present regulation. So in effect there are changes at both ends of the spectrum - although with a purely qualitative arrangement, it is at least arguable that there is no affect on competition to worry about and exemption is therefore unnecessary.
The market share criteria apply to both parties - in the case of a repairer agreement, to both the vehicle manufacturer or importer and to the authorised repairer. It's probably not an issue in the context of authorised repairers, because the 30 per cent threshold will always be exceeded because of the captive nature of the market: that was certainly the analysis that was applied under Regulation 1400. Exclusive agreements, and quantitative selection, are unacceptable under the block exemption. Which doesn't mean that they are always prohibited, but it does mean that they won't find a berth in the safe harbour and will need indiidual assessment and justification if they are to enjoy exemption.
The inclusion of a market share threshold for the authorised repairer (or the distributor or franchisee in other types of arrangement) is intended to protect small and medium-sized enterprises. If they find themselves dealing with large customers, they might find that they lack countervailing power, hence the extra protection given to them by providing that the agreement will not be admitted to the safe harbour. It may nevertheless enjoy exemption, just not automatically. Again, in the aftermarket it is hard to imagine sircumstances in which this might be important: in the vehicle market, it is perfectly possible that a large dealer group might have a lot more muscle than a small manufacturer or importer. Remember too that easing the entry of new manufacturers, which entails ensuring that they can hire dealers and repairers, is an important item on the Commission's agenda.
In addition, the agreement must not contain what are referred to as "hard core" restrictions - resale price maintenance and certain types of resale restrictions, which can have the effect of partitioing the internal market. Again, merely because they are not exempted does not make them unlawful, though they will be difficult to justify.
Exclusive distributors may be protected against competition from other distributors, as all members of the network should concentrate on the territory or customer group allocated to them. But they cannot be prevented from accepting orders from a customer who should be the "property" of another member of the network. The distinction between active sales and passive ones has run through block exemptions ever since they were first produced. A ban on pasive sales would be hard core.
In selective distribution systems, there are no exclusive territories or customer groups, so selected dealers are free to sell to other dealers and also to customers from anywhere. Again, a restriction that went further than this would be hard core and would not be automatically exempt.
Restrictions on dealers using the Internet to sell products would also be considered to be hard core restrictions. The Internet, after all, is a means of marketing to consumers throughout the Internal Market. The agreement cannot require customers to be "rerouted" if they turn out to come from another part of the market (which their credit card details would reveal). Nor can it cap the volume of products that a distributor can sell online as opposed to through bricks-and-mortar premises, or impose two-tier pricing to deter or limit Internet sales. Probably not important issues in the aftermarket, but clearly significant in the primary (vehicle) market.
The VBER permits non-compete obligations, as does Regulation 1400, but on rather different terms. In fact, it defines them very differently. In the context of motor vehicle distribution, the provisions on non-compete clauses are what govern the extent to which multi-franchising (or multi-branding, as it is now being called) is protected: Regulation 1400 says that a clause that requires the distributor to purchase 30 per cent of its requirements from the manufacturer is permitted, so effectively they can have three franchises (perhaps four, if one or more of them will settle for less than 30 per cent). In the context of authorised repairer contracts, which fit within the distribution model only with difficulty, it means that you can have three (or possibly four) authorisations. But the VBER says 80 per cent.
Now, 80 per cent is much more like a true non-compete (though literally it would have to stipulate 100 per cent). Effectively, multi-franchising is out of the window. The Commission makes a virtue out of necessity by claiming (quite accurately, as we probably all know) that multifranchising never really worked anyway. There is, however, one ray of hope for anyone who does want to be able to take on more than one brand: the VBER only allows these non-compete obligations to last for five years. They can be renewed, but it has to be by agreement and the rules are designed to prevent any sort of duress.
So we have a basic structure for the new regime that isn't entirely unlike parts of what we already have. This much is in place now, though not in operation until next month. In order to make the new regime even more like what we have had since 2002 we have to look at some other instruments, and I'll proceed to write them up next.
The new regulation is no 330/2010, and it applies across the whole gamut of vertical agreements - exclusive distribution, exclusive purchasing, selective distribution, franchising - with the important exception of motor vehicle distribution agreements. These will however be brought within its scope in three years' time. Aftermarket activities are already subject to this regime (or at least they will be from 1 June), albeit under the terms of a specific "mini-block-exemption" and a set of tailor-made guidelines.
The vertical restraints block exemption - the VBER, as it now seems to be called - applies where the parties' market shares do not exceed 30 per cent. Below this threshold, selective or exclusive agreements are permitted. (The Commission will keep talking of "distribution" in the aftermarket, which is fine as far as parts are concerned but which makes no sense at all in connection with services.) So there's a difference to start with: under the existing motor vehicle block exemption, Regulation 1400/2002, there are different thresholds for exclusive distribution agreements and selective ones, the latter being less restrictive of competition and therefore tolerated at higher market shares. Indeed, for a purely qualititative selective distribution agreement, no market share criteria apply at all under the present regulation. So in effect there are changes at both ends of the spectrum - although with a purely qualitative arrangement, it is at least arguable that there is no affect on competition to worry about and exemption is therefore unnecessary.
The market share criteria apply to both parties - in the case of a repairer agreement, to both the vehicle manufacturer or importer and to the authorised repairer. It's probably not an issue in the context of authorised repairers, because the 30 per cent threshold will always be exceeded because of the captive nature of the market: that was certainly the analysis that was applied under Regulation 1400. Exclusive agreements, and quantitative selection, are unacceptable under the block exemption. Which doesn't mean that they are always prohibited, but it does mean that they won't find a berth in the safe harbour and will need indiidual assessment and justification if they are to enjoy exemption.
The inclusion of a market share threshold for the authorised repairer (or the distributor or franchisee in other types of arrangement) is intended to protect small and medium-sized enterprises. If they find themselves dealing with large customers, they might find that they lack countervailing power, hence the extra protection given to them by providing that the agreement will not be admitted to the safe harbour. It may nevertheless enjoy exemption, just not automatically. Again, in the aftermarket it is hard to imagine sircumstances in which this might be important: in the vehicle market, it is perfectly possible that a large dealer group might have a lot more muscle than a small manufacturer or importer. Remember too that easing the entry of new manufacturers, which entails ensuring that they can hire dealers and repairers, is an important item on the Commission's agenda.
In addition, the agreement must not contain what are referred to as "hard core" restrictions - resale price maintenance and certain types of resale restrictions, which can have the effect of partitioing the internal market. Again, merely because they are not exempted does not make them unlawful, though they will be difficult to justify.
Exclusive distributors may be protected against competition from other distributors, as all members of the network should concentrate on the territory or customer group allocated to them. But they cannot be prevented from accepting orders from a customer who should be the "property" of another member of the network. The distinction between active sales and passive ones has run through block exemptions ever since they were first produced. A ban on pasive sales would be hard core.
In selective distribution systems, there are no exclusive territories or customer groups, so selected dealers are free to sell to other dealers and also to customers from anywhere. Again, a restriction that went further than this would be hard core and would not be automatically exempt.
Restrictions on dealers using the Internet to sell products would also be considered to be hard core restrictions. The Internet, after all, is a means of marketing to consumers throughout the Internal Market. The agreement cannot require customers to be "rerouted" if they turn out to come from another part of the market (which their credit card details would reveal). Nor can it cap the volume of products that a distributor can sell online as opposed to through bricks-and-mortar premises, or impose two-tier pricing to deter or limit Internet sales. Probably not important issues in the aftermarket, but clearly significant in the primary (vehicle) market.
The VBER permits non-compete obligations, as does Regulation 1400, but on rather different terms. In fact, it defines them very differently. In the context of motor vehicle distribution, the provisions on non-compete clauses are what govern the extent to which multi-franchising (or multi-branding, as it is now being called) is protected: Regulation 1400 says that a clause that requires the distributor to purchase 30 per cent of its requirements from the manufacturer is permitted, so effectively they can have three franchises (perhaps four, if one or more of them will settle for less than 30 per cent). In the context of authorised repairer contracts, which fit within the distribution model only with difficulty, it means that you can have three (or possibly four) authorisations. But the VBER says 80 per cent.
Now, 80 per cent is much more like a true non-compete (though literally it would have to stipulate 100 per cent). Effectively, multi-franchising is out of the window. The Commission makes a virtue out of necessity by claiming (quite accurately, as we probably all know) that multifranchising never really worked anyway. There is, however, one ray of hope for anyone who does want to be able to take on more than one brand: the VBER only allows these non-compete obligations to last for five years. They can be renewed, but it has to be by agreement and the rules are designed to prevent any sort of duress.
So we have a basic structure for the new regime that isn't entirely unlike parts of what we already have. This much is in place now, though not in operation until next month. In order to make the new regime even more like what we have had since 2002 we have to look at some other instruments, and I'll proceed to write them up next.
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