Overview of the presentation
- The rules under the MVBER
- The self-assessment rules
- The enforcement practice since 2002 (BMW/GM)
- The Evaluation Report
- The likely regime in 2010 and its consequences
The treatment of non-competes under the MVBER
- The approach to non-competes in the MVBER is stricter than in any other sector.
- The Vertical Agreements Block Exemption (VABER) exempts full non-competes on dealers for up to 5 years.
- Dealers can be required to be 80% loyal to a supplier for an indefinite period of time.
- In contrast, full non-competes (regardless of their duration) are not exempted at all under the MVBER (Art. 5.1(a)).
The treatment of non-competes under the MVBER (2)
- The most a supplier can require under the MVBER is that a dealer is 30% loyal (allowing a dealer to represent at least 3 brands).
- This applies even for premises owned or leased by a supplier but operated by independent dealers (Explanatory Brochure, Q.15).
- A dealer must be allowed to sell motor vehicles of different suppliers in the same showroom: only brand-exclusive sales areas within the same showroom are exempted (Art. 1.1(b)).
- Otherwise, brand exclusivity (even of coffee machines) within the showroom is treated as an indirect non-compete.
The treatment of non-competes under the MVBER (3)
- For example, an obligation on a dealer to have brand-specific sales personnel is not exempted by the MVBER unless the dealer so chooses and is reimbursed by the supplier (Art. 1.1(b)).
- Key brand-specific requirements may, according to the Commission, have to be relaxed to facilitate multi-branding (size of exclusive showroom area, corporate signage and visual identity).
The treatment of non-competes under the MVBER (4)
Why was this strict approach adopted?
- To prevent foreclosure of other suppliers
- To promote dealer diversity
Analysis outside the MVBER : Self-assessment
Non-compete obligations are not hardcore restrictions. They do not prevent the application of the block exemption to the other restrictions in the agreement and may be valid on an individual analysis.
Suppliers arguably already have significant scope to impose restrictions which qualify as non-competes under the MVBER.
Analysis outside the MVBER – De Minimis Exception
- Even full non-competes do not restrict competition, and do not infringe Art. 81(1), if the “de minimis” exception applies.
- In any event, this exemption applies when a supplier has a market share of less than 5% (Porsche case).
- Even if the de minimis market share thresholds are exceeded, full non-competes imposed by a supplier, regardless of its market share, are unlikely to infringe Art. 81(1) where they cover no more 5% of the market (Vertical Guidelines, para 142). This would allow every supplier to have a core of mono-brand dealers.
Analysis outside the MVBER – individual assessment under the Vertical Guidelines
- Even if the de minimis exception does not apply, full non-competes will only infringe Art. 81(1) if there is a risk of material foreclosure of competing suppliers.
- There will be no risk of material foreclosure unless the prevalence of non-competes prevent, in particular, smaller brands from establishing viable dealer networks.
- In any event, normally at least 40% of the market would need to be covered by non-competes for there to be material foreclosure (Vertical Guidelines, paragraph 149). Clearly, this is not currently the case.
Analysis outside the MVBER – individual assessment under the Vertical Guidelines (2)
- 5 years is generally the maximum duration for non-competes.
- Even if there is a risk of material foreclosure, a full non-compete may meet the conditions for exemption under Art. 81(3) if it is indispensable to achieve objective economic benefits (e.g. establishment of new brand or model).
The BMW and General Motors settlements – dealer targets
- The Commission objected to GM’s sales and performance targets as they would deter dealers from selling competing brands.
- These targets evaluated dealer performance against average network performance and the brand’s national market share.
- GM agreed to more flexible targets :
- to be agreed with dealers,
- to take into account changes in market and dealer circumstances (e.g., taking on another brand),
- not to be used to sanction dealers
- to be subject to arbitration in case of dispute.
The BMW and General Motors settlements – dealer targets (2)
- The Commission claims that this outcome would have been the same under the VABER as the sales targets would be indirect noncompetes, which would not be exempted as GM concludes contracts for more than 5 years.
- The Commission also invoked the general case law on selective distribution to support its position, suggesting it could not exempt requirements which exclude innovative and alternative forms of distribution such as multi-brand retailing when nearly all suppliers use quantitative selective distribution.
- This legal analysis did not sit comfortably with the Commission’s stated view that suppliers can exclude supermarkets and e-retailers from their selective distribution systems.
The BMW and General Motors settlements – dealer targets (3)
- The Commission’s approach confirms that a dealer must be allowed to sell less of one brand if it chooses to sell a competing brand.
- Given the maximum threshold of 30% of requirements, can a mono-brand dealer demand a reduction of 70% in its sales target if it takes on a competing brand?
- This approach is a potential obstacle to effective brand representation, especially for smaller brands.
- However, the requirement even on smaller dealers to display 3-4 BMW vehicles was not held to be an indirect non-compete even in circumstances where it prevented multi-branding without additional investment.
- This requirement was seen as legitimately aimed at ensuring an effective and even representation of the model range in a quantitative selective distribution system and effected only a minority and the smallest dealers.
The BMW and General Motors settlements – standards and systems
• One or both manufacturers recognized that :
– all dealer facilities other than the part of the showroom dedicated to the sale of their brand could be used by other brands;
– the reception, customer area, façade and back office can be set up in a brand-neutral manner if the dealer chooses;
– the display of trade marks, signs and other visual identifiers of other brands must in any event respect the principle of co-existence (which was an issue in the Peugeot Blue Box case in the UK);
– dealer IT systems can be generic provided they are of equal functionality and quality to the system recommended by the manufacturer and the interfaces are fully compatible;
The BMW and General Motors settlements – standards and systems (2)
– dealers are not required to report or disclose in audits commercially sensitive information concerning other brands;
– dealers must be allowed to use multi-brand internet sites; and
– all staff must be allowed to sell other brands and (Opel) training is not required for staff only selling competing brands.
The Evaluation Report
The overall verdict: an exercise in potentially harmful over-regulation.
- The approach of the MVBER to multibranding was intended (i) to prevent foreclosure of competing suppliers and (ii) promote diversity of distribution models at dealer level.
- Although foreclosure has not occurred and recent entrants have grown (e.g., Hyundai/Kia), there is only a limited link between this and the specific approach of the MVBER.
- The goal of diversity is judged not to have been achieved: although multibranding has increased to some extent, few dealers sell competing brands from the same showroom (instead they use separate sites or at least premises).
The Evaluation Report (2)
- The Commission appears to consider it was a mistake to require multibranding from the same showroom as:
(i) it may have led suppliers to set higher dealer standards to prevent possible brand dilution; and
(ii) it interferes with the pro-competitive increase in brand differentiation.
- The approach of the MVBER may also have fuelled the growth of large dealer groups covering multiple brands (leading to increased concentration levels at the retail level).
The Evaluation Report (3)
What would have been the appropriate alternative legal standard?
- The Commission considers that the level of protection of the VABER would have been sufficient, BUT assuming that:
(i) suppliers would not have been able to impose full non-competes even had the VABER applied because they use contracts of unlimited duration.
(ii) suppliers will in any event continue to allow multibranding where this makes commercial sense (e.g., in the case of low population density or of a weak brand).
- This implies that, in any event, a supplier should be able to require each of its dealers to be 80% loyal even in contracts of unlimited duration (as such an obligation does not qualify as a non-compete under the VABER). The 30% rule also appears to be seen to have been a mistake.
The Future Regime?
Will the VABER be applied without modification?
- If so, this means there will be major changes compared to the MVBER and even (for larger manufacturers) compared to what could be achieved under self-assessment .
- This could encourage a switch to 5 year contracts to benefit from the right to impose full non-competes.
- The potential adverse impact of this change for large dealer groups.
The Future Regime? (2)
- But would manufacturers try to use this right or simply re-apply the pre-2002 obligation to sell competing brands from separate premises?
- Would the interference with sales targets continue in contracts of indefinite duration?