CV manufacturer not dominant in repair market

I seem to find myself reading judgments of the Bundesgerichtshof, the German federal supreme court, more often these days than those of any other court. It's doing my scant knowledge of German a lot of good, too. They have more than their fair share of cases relating to competition in the motor industry. The latest to come to my attention (a bit tardily, I'm afraid) is case no ZR 7/09 from 30 March, in which a Daimler commercial vehicle dealer and repairer sought appointment to MAN's network too. When MAN turned the application down, the dealer claimed that it was an abuse of MAN's dominant position contrary to § 20 of the Gesetz gegen Wettbewerbsbeschränkungen (law against restraints of competition). This isn't a straightforward rehash of Article 102 TFEU, as what I still think of as Article 86 is now known - but it amounts to a similar thing.

To resolve a question of abuse of a dominant position, you have to start by considering whether the undertaking concerned is in a dominant position in the market, which means taking a step back and working out what the relevant market is. The lower court had taken the view that the relevant market was the one in which customers bought services from MAN repairers - the highly brand-specific market which the Commission believes requires the strict regulation provided for under the 2010 block exemption arrangements. The BGH rejected this approach, which meant rejecting the claim.

The BGH considered that the relevant market was the market for all those products, services, and rights that enable a repairer to gain entry to the market for repair and maintenance services for commercial vehicles – the "downstream" market. The "upstream" market, as it might therefore be called, includes spare parts, diagnostic tools, repair tools, and training in brand-specific know-how as well as admission to the network.

This market is not brand-specific, according to the judgment. It is not limited to goods, services, or rights supplied by MAN, and accordingly the vehicle manufacturer did not hold a dominant position in it. Admission to the MAN was not a prerequisite for a repair shop to be active in the downstream market for repair and maintenance services. A non-authorised repair shop might not be able to do warranty work, perform services on a goodwill basis (at least, not on the basis of the manufacturer's goodwill), or participate in recall campaigns, but could still offer plenty of other. The existence of such independent repair shops did not escape the notice of the Court, and illustrated that providing these services was economically attractive. 

MAN might enjoy a big share of the downstream market for repair and maintenance services for MAN vehicles, but the Court took the view that this had no bearing on its position in the "upstream" market, the market for facilities for entry to the downstream market.

This is a rather different market analysis to that adopted by the Commission, which has tended to focus on the downstream market. Given that this is the market in which consumers are active, this is not entirely surprising, and ultimately what competition law needs to concern itself with is consumer welfare. The fact that this case involved commercial vehicles probably makes the downstream market less important, though I have to admit to not having worked through the judgment to see whether this is in fact relevant. It's certainly an interesting statement about manufacturer dominance in the repair market, and one with a surprising outcome which might prove influential in the future.

Refusal to appoint repairer not abuse of dominant position

I seem to find myself reading judgments of the Bundesgerichtshof, the German federal supreme court, more often these days than those of any other court. It's doing my scant knowledge of German a lot of good, too. They have more than their fair share of cases relating to competition in the motor industry. The latest to come to my attention (a bit tardily, I'm afraid) is case no ZR 7/09 from 30 March, in which a Daimler commercial vehicle dealer and repairer sought appointment to MAN's network too. When MAN turned the application down, the dealer claimed that it was an abuse of MAN's dominant position contrary to § 20 of the Gesetz gegen Wettbewerbsbeschränkungen (law against restraints of competition). This isn't a straightforward rehash of Article 102 TFEU, as what I still think of as Article 86 is now known - but it amounts to a similar thing.

To resolve a question of abuse of a dominant position, you have to start by considering whether the undertaking concerned is in a dominant position in the market, which means taking a step back and working out what the relevant market is. The lower court had taken the view that the relevant market was the one in which customers bought services from MAN repairers - the highly brand-specific market which the Commission believes requires the strict regulation provided for under the 2010 block exemption arrangements. The BGH rejected this approach, which meant rejecting the claim.

The BGH considered that the relevant market was the market for all those products, services, and rights that enable a repairer to gain entry to the market for repair and maintenance services for commercial vehicles – the "downstream" market. The "upstream" market, as it might therefore be called, includes spare parts, diagnostic tools, repair tools, and training in brand-specific know-how as well as admission to the network.

This market is not brand-specific, according to the judgment. It is not limited to goods, services, or rights supplied by MAN, and accordingly the vehicle manufacturer did not hold a dominant position in it. Admission to the MAN was not a prerequisite for a repair shop to be active in the downstream market for repair and maintenance services. A non-authorised repair shop might not be able to do warranty work, perform services on a goodwill basis (at least, not on the basis of the manufacturer's goodwill), or participate in recall campaigns, but could still offer plenty of other. The existence of such independent repair shops did not escape the notice of the Court, and illustrated that providing these services was economically attractive. 

MAN might enjoy a big share of the downstream market for repair and maintenance services for MAN vehicles, but the Court took the view that this had no bearing on its position in the "upstream" market, the market for facilities for entry to the downstream market.

This is a rather different market analysis to that adopted by the Commission, which has tended to focus on the downstream market. Given that this is the market in which consumers are active, this is not entirely surprising, and ultimately what competition law needs to concern itself with is consumer welfare. The fact that this case involved commercial vehicles probably makes the downstream market less important, though I have to admit to not having worked through the judgment to see whether this is in fact relevant. It's certainly an interesting statement about manufacturer dominance in the repair market, and one with a surprising outcome which might prove influential in the future.

Car price differentials in 2010

The European Commission has published its latest car price report (press release here). The data are six months old, relating to the start of this year.

It seems a long time since this information was anxiously awaited, when car price differences and the (misguided, in my view) attempt to prevent them drove the whole policy underlying the block exemption. Now of course the Commission is able to say that the market for new vehicles is competitive and doesn't need the close attention of which a sectoral block exemption was symptomatic. Curiously, though, we still have special rules and extensive quasi-legal guidelines which rather indicate that the motor sector remains a special case - just special in a different way, I guess. The Commission is certainly not as excited about the price differentials as it used to be, although in a true single market perhaps it should zealously stamp out any differentials ... And some of them still look pretty big to me.

One major explanation for the ending of price differentials has been the advent of the Euro, and the Commission's report distinguishes the situation in the Eurozone from that in the non-Eurozone countries. What if the Euro fails to survive its present difficulties? Perhaps it will be back to the good old days of parallel imports - and sectoral block exemptions.

Widely differing tax treatment of car purchases also made a large contribution to the problem of price differentials, and that remains: VAT rates are far from harmonised. But even more importantly, spending power is more uneven than ever - during the last few years, in which price differentials have closed, the EU has expanded considerably, bringing in eastern European countries where spending power must be a great deal less than in some other Member States. The price might be the same in Germany and Bulgaria

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.

Dealer standards American style

It's a story very reminiscent of what happens over here too. Ford has told Lincoln dealers to put their hands in their pockets and come up with an average of $1 million to remodel their dealerships. For those dealers fortunate enough to represent Ford too, the average is $1.9 million, Automotive News reports. But maybe some British dealers (or  manufacturers) would regard that as small beer? All in the name of "dealer standards", "brand values" and "customer experience."

Block exemption effect on property market

Nothing new about block exemption replacement creating uncertainty in all sorts of ways, including the property market. Automotive Management has this story. The trend, not only for block exemption reasons, is towards larger dealers, and it's the bigger dealer groups (not to mention the sponsored dealers) who are financially in a position to benefit from the disruption caused by the block exemption. I certainly recall clients deciding that it was time to retire when a new block exemption came along - back in '95 and '02.

Mike Pearce, of Rapleys, the nationwide commercial property and planning consultants, is quoted in AM on the demand for showroom properties from retailers and fast-fit outlets, which I suppose conveniently (in a way) meshes with dealers moving to ever-more-flamboyant gin palaces on the edge of town. He says that while manufacturers have not been raising the dealer standards bar during the financial crisis, they are changing tack now and the cost of entry to the established and especially premium networks, already high, will increase. On the other hand, he thinks that multifranchising (multibranding as the block exemption has unnecessarily rechristened it) for smaller marques will be the way forward for many smaller dealers as well as for smaller manufacturers and new entrants. What a pity that the Commission has effectively written multifranchising out of the block exemption at this stage - not that it's prohibited, of course, just not a right for dealers.

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 ...