Presentation: Multi-branding reform of the regulatory framework of the motor vehicle distribution

Overview of the presentation

•The rules under the MVBER

•The self-assessment rules

•Mea culpa: acknowledgement of the deficiencies of the MVBER

•Future regime

–what steps to take to benefit from it?
–what will provoke future intervention?

The treatment of non-competes under the MVBER

•The approach to non-competes as reflected in the MVBER is stricter than that applied in any other sector.

•Full non-competes are not exempted at all under the MVBER (Art. 5.1(a)).

•The most a supplier can require under the MVBER is that a dealeris 30% loyal (allowing a dealer to represent at least 3 brands).

•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)).

The treatment of non-competes under the MVBER (2)

•Otherwise, brand exclusivity of areas, equipment and staff within the showroom/back office has been treated as an indirect non-compete (GM and BMW cases).

•The few legitimate 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).

•Sales targets linked to brand market share and average network performance have been found to fall foul of this strict standard (GM case: targets to be negotiated with dealers and lower targets for dealers who choose to multi-brand).

Analysis outside the MVBER : Self-assessment

•Non-compete obligations are not hardcore restrictions. They do not prevent the application of the block exemption to other restrictions in the agreement and may well be valid on an individual assessment under Art. 81.

•Full non-competes are allowed under the De Minimis Notice (Porsche case).

•Otherwise, the test should be whether the prevalence of non-competes in the market results in a real risk of smaller brands being prevented from having viable dealer networks to a degree that jeopardizes effective competition.

•Normally, at least 40% of the market would need to be closed off by non-competes for there to be this risk of material foreclosure (Vertical Guidelines, paragraph 149). This is not likely to be the case.

•Even then, non-competes may in some cases be justified by efficiencies.

Analysis outside the MVBER –Self-assessment (2)

•Larger suppliers arguably already have significant scope to impose restrictions which are non-competes as defined by the MVBER but few take advantage of it.

•This is not surprising in light of GM and BMW which suggest that Art. 81 may be infringed by any obligations which result in a dealer incurring extra costs if it chooses to sell a competing brand.

•The use of quantitative selective distribution by virtually all manufacturers was raised as a legal reason why restrictions on multibranding could not be accepted even if there is no real risk of foreclosure of competing brands.

Mea culpa : acknowledgement of the shortcomings of the MVBER

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 no proven 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 except in isolated areas (instead they use separate sites or at least premises).

Mea culpa : acknowledgement of the shortcomings of the MVBER(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 Future Regime : the VABER will be applied without modification

•No change to the block exemption until June 2013. After that, the VABER applies to motor vehicles sales.

•Under the VABER, an obligation on a dealer to be more than80% loyal will be block exempted for upto 5 years.

•Not exempted: non-competes which are (i) of indefinite duration nor (ii) tacitlyrenewablebeyond5 years.

•Where the supplier owns (including by way of a lease) the premises/land from which the dealer sells the vehicles, a non-compete will be exempted for as long as the dealer uses those premises to sell the supplier’s vehicles.

The Future Regime : the VABER will be applied without modification (2)

•Post-termnon-competesof 1 year will be block exempted where the yare indispensble to protect know-how of the supplier and are limited to existing premises.

•As it does not qualify as a non-compete, an obligation on a dealer to be upto 80% loyal will be block exempted for an unlimited period of time.

•Obligation not to sell named brands is not exempted in a selective distribution system.

Indirect non-competes under the VABER (5 year limitation)

•An obligation on a dealer related to the sale of competing brands should only be an indirect non-compete where it is not economically viable for a dealer operating in the relevant market to sell competing brands under such a condition:

-Obligation to sell competing brands in separate showroom/premises (e.g., in areas of very low demand).
-Obligation to sell competing brands through a separate legal entity/management.
-Obligation to use different facilities, IT systems, staff etc. in selling a competing brand (GM & BMW).

•The fact that an obligation will result in a dealer having to incur extra costs to sell a competing brand should not be enough to make the obligation an indirect non-compete (but what are qualitative standards specifically designed to discourage the sale of competing brands?).

Indirect non-competes under the VABER (5 year limitation) (2)
•Contractual sales targets/bonus schemes as indirect non-competes:

-VABER may not apply where a supplier has the right to set contractual purchase/sales targets in excessof80% of requirementsin an agreement of indefinite duration (cf. targets which are negotiated annually; GM &BMW).

-rebates may in some circumstances be non-competes where they are in exchange for exclusivity, 80%/+ targets or growth by mono-brand dealers, but they will rarely be agreed for 5 years.

The new two-sided market share threshold under the VABER

•Market share threshold: the market share of the buyer, as well as of the supplier, must notexceed30%.

•The importance of the buyer’s share may well introduce added uncertainty in assessing the application of the block exemption (e.g., what is the scope of the geographic market of the dealer?).

•Foreclosure depends primarily on the market power of the supplier and not of the buyer.

•Why should it matter if the buyer happens to have a high share in a small local market as foreclosure of brands will only occur at a national or EU-wide level?

•Probably largely a theoretical concern: large dealer groups with higher market shares based on a broad brand portfolio are unlikely to accept full non-competes (only separate premises).

What will suppliers need to do to benefit from new freedom?

•There will be no change for smaller brands that previously chose to take advantage of the De Minimis exception.

–They can continue to apply non-competes of unlimited duration nor more limited restrictions on multi-branding(if they succeeded in recruiting dealers on this basis).

•Under existing agreements, larger suppliers will generally not have the contractual right to impose non-competes or many more limited restrictions on multi-branding without the consent of the dealer.

–They will therefore need to terminate, or at least amend, existing dealer agreements.
–To do this, they will generally need to give 2 years notice under agreements of indefinite duration (which partly limits the effect of the 3 year extension of the stricter MVBER).

Duration of new agreements

•Duration of the new agreement: the non-compete should be limited to 5 years for a non-compete to be block exempted.

•When will the 5 year period start to run? From the date of the agreement by the dealer to comply with an obligation thatmeetsthedefinitionofa non-compete(thestartdate of the first contractual relationship between the parties should not be relevant).

•Either thenon-competeshouldendafter 5 years or a new agreement with a non-compete will need to be concluded after 5 years.

Simpler longer-term solution: obligation on dealer to sell competing brands from separate premises using separate facilities combined with 80% loyalty requirement should not be subject to 5 year cap.

What would provoke future intervention?

•The practices of smaller brands are unlikely to be a concern even if they go beyond the block exemption because:

(i) they cannot foreclose the market (note 5% minimum tied market share required under Vertical Guidelines); and in any event
(ii) their goal of enhancing brand image through exclusivity is likely to be considered pro-competitive.

•Possible alarming scenario: the best-performing dealers are made subject to non-competes resulting in widespread termination of agreements with smaller suppliers.

What would provoke future intervention? (2)

•As it is still not common for smaller brands to be sold in the same showroom as larger brands despite the current MVBER, it is not clear why larger suppliers would provoke this.

• Instead, larger brands may simply seek to formalise current practice in the form of contractual obligations (exclusive use of facilities/staff) and, perhaps with potentially more effect, try to impose more robust sales targets.

 What would provoke future intervention (3)?

•If larger brands acted aggressively and smaller brands looked as if they would take a serious hit, the competition authorities may be reluctant to stand back(however much they would dislike the prospect of embarking on a process of re-regulating the market by withdrawing the benefit of the block exemption).

•The guidance suggests there may be a foreclosure concern once there is a cumulative tied market share of 40% (or even30% if a supplier has a shareover30%), but it is far from clear that this is the type of market where non-competes are likely to result in serious foreclosure.