Belgium: European Commission Proposes New Rules For Motor Vehicle Distribution

Co-written by Jonathan Branton

The European Commission has agreed proposals for the reform of the rules under which cars are sold in the European Union. These were announced on 4 February 2002 and were made public in March 2002.

The Commission's proposals intend to replace the existing 'block exemption' Regulation 1475/95, which outlines what restrictions motor vehicle manufacturers can and cannot impose on dealers. The effect of the block exemption is to exclude the commercial relations between manufacturers, dealers and repairers from the usual EC competition rules (prohibiting anti-competitive restrictions between manufacturers and dealers/repairers), provided that certain conditions are respected. The new regime is due to come into force in October 2002.

Overall, the Commission intends to adopt a stricter approach towards the major manufacturers than in the past and lessen the 'special' treatment that the motor vehicle industry has enjoyed up to now. In so doing, the Commission intends to reduce the large differentials in the price of cars across the EU; to increase the independence of dealers and repairers vis-à-vis manufacturers; and to increase competition between both manufacturers and dealers.

• Selective or exclusive distribution: Manufacturers will continue to be allowed to operate selective distribution networks, that is, to select dealers on pre-determined criteria (e.g. quality of showroom or extent of dealer's facilities). Independent repairers may also become authorised repairers within the manufacturers’ networks provided they meet the quality standards set by the manufacturer. Alternatively, manufacturers may operate exclusive distribution networks, i.e. they may grant dealers or repairers exclusive sales territories. Manufacturers are thus expected to be able to exclude supermarkets and internet distributors from their sales networks.
• No restriction of sales by location of customer: Manufacturers may not prevent dealers or repairers within a selective distribution network, operating at the retail level of trade, from selling motor vehicles, spare parts for all motor vehicles, or repair and maintenance services, to end users anywhere within the EU, even via the internet. Any indirect attempt to hinder dealers doing this by only supplying them with sufficient vehicles to serve their local area, for example, will be prohibited. Many examples of manufacturers attempting to do this in the past exist.
• Dealers to sell more than one brand: Manufacturers will no longer be entitled to prevent dealers selling more than one brand. Nor may they require dealers to display the entire range of vehicles belonging to their brand if this is simply an indirect way of preventing the dealer from selling another brand. Manufacturers may, however, oblige dealers to display different brands in different areas within one showroom, provided it is not an indirect way of preventing sales of another brand.
• Dealers to be allowed multiple outlets: Manufacturers of passenger vehicles operating a selective distribution network will not be able to restrict their selected dealers from opening extra sales outlets as they see fit. For non-passenger vehicles any restriction as to location must not exceed five years.
• No requirement to provide after-sales service: The traditional link between car sales and after sales services is to be broken. Manufacturers cannot insist on dealers also providing repair services, which means that dealers may specialise purely in car sales and contract out after-sales services to other authorised members of the manufacturer's network, be it another dealer/repairer or a repairer only. Repairers authorised by a manufacturer may not be prevented from providing similar services for other manufacturers.
• Availability of technical information: Manufacturers must make available to independent repairers the same technical information, tools and diagnostic equipment as supplied to authorised repairers. It is expected that the Commission will take swift action against producers who choose to ignore this. While this obligation exists under the present block exemption, the Commission has expressed its frustration at the unwillingness of car manufacturers to abide by it. Such behaviour in the future can be expected to incur heavy fines.
• Spare parts available to independent repairers: Manufacturers may not prevent dealers within a selective distribution system from supplying spare parts to independent repairers. Similarly, manufacturers may not prevent the suppliers of original spare parts, repair tools or diagnostic equipment from supplying these goods to independent repairers.
• Spare parts of matching quality: Manufacturers may not prevent distributors or repairers from obtaining original spare parts or parts of matching quality from any undertaking of their choice except in the case of repairs carried out under warranty, free servicing or vehicle recall work.
• Market share thresholds: The new block exemption will employ market share thresholds. The significance of this is primarily that if the manufacturer has market shares above the thresholds, they may not benefit from the block exemption at all. In such a case, they may not impose any material restrictions on competition at all, including those otherwise permitted for manufacturers with smaller market shares (e.g. the chance to restrict an exclusive distributor from actively selling outside his given area etc.).

The Commission has come down hard in recent years on manufacturers who have failed to follow its rules in relation to car sales. In October 2001, DaimlerChrysler was fined 71 million Euros for attempting to prevent customers benefiting from price variations between Member States. VW has been fined over 103 million Euros over the last three years for similar behaviour, as well as for attempting to fix prices between dealers. The Commission is entitled to fine undertakings who breach the EC competition rules up to 10% of their worldwide annual turnover.

Following the eventual implementation of the Commission's plans, it appears that manufacturers who fail to adapt to the new rules can expect a swift reaction from the European Commission in Brussels.

Furthermore, it is now established following a recent decision of the European Court of Justice, that parties to agreements found to breach European competition law may be able to sue each other for damages in national courts under certain circumstances, notably when the aggrieved party had not enjoyed a real bargaining position in the first place. A potentially increased threat of litigation from dealers may therefore become a more powerful influence on the behaviour of manufacturers.

The Commission's proposals will now be submitted to the Member States and the European Parliament for consultation and subsequently published in the EC Official Journal in order to give all interested parties one month in which to bring their comments to the attention of the Commission. After considering comments, and following a second consultation of Member States, the draft will be finalised and submitted to the Commission for adoption before the summer break. The new regulation is to come into force on 1 October 2002. There will be a transition period, normally of one year, in which all distribution agreements existing as of that date will have to be brought in line with the new rules.