Analysis on The Regulation 1400/2002 On Motor Vehicle Distribution
Stj.Av.Ferya TAŞ


The single market in the sale and after-sale servicing of motor vehicles has been slow to develop: differing tax regimes and methods of distribution, fluctuating exchange rates, and the fact that certain Member States drive on the wrong' side of the road, have meant that this market remains much less integrated than others.

The Commission has, for years, monitored price differentials between Member States. Over the years the Commission has had cause to examine a number of anti-competitive practices in the market for motor cars, in particular the partitioning of national markets to prevent sales of vehicles from low-to-high priced Member States, and has adopted numerous decisions finding infringements both of Article 81 (1) and, on a few occasions, of Article 82. as far as the system of block exemptions in concerned, the distribution of motor vehicles has, since 1985, been subject to a legislative regime separate from that for vertical agreements generally. There have been many cases brought before the Community Courts relating to the special regime for cars.

After a lengthy period of review and consultation of the operation of Regulation No 1475/95, the Commission concluded that a more economic and flexible approach to motor car distribution was required. The Regulation No 1400/2002, which entered fully into force on 1 October 2002, shows the significant change in the Commission's approach toward the motor car sector.

In the Member States of the European Union motor vehicle manufacturers and spare parts manufacturers distribute their products via networks of distributors (dealers) and set up networks of authorized repairers. For the purposes of competition law, the relevant agreements rank as vertical agreements since the manufacturer and distributor or the repairer, each operate at a different level of the production or distribution chain. Vertical agreements, which are normally prohibited, may qualify for exemption under the Regulation No 2790/1999 or for a sectoral block exemption, as in the case of the motor vehicle sector.

On the basis of its experience with distribution agreements for new motor vehicles, spare parts and after-sales service in the motor vehicle sector, the Comission concluded that consideration could be given to introducing sectoral exemptions. These exemptions had though to be sufficiently targeted as to allow compliance with the competition rules. Although more flexible overall, the present regulation is stricter than the Regulation No 1475/95, which has governed the sector until now, and the Regulation No 2790/1999 on supply and distribution agreements. The present regulation is designed to enhance competition between distributors by faciliating cross-border purchases of new vehicles and to provide practical benefits for European consumers as regards both motor vehicle sales and after-sales services.

The new block exemption concerns all levels of motor vehicle distribution: the sale of new motor vehicles, after-sale servicing and the supply of spare parts and it applies to passenger cars, light commercial vehicles, trucks and busses. It represents a fundamental move away from a distribution environment whose lines were rigidly laid down by regulation and by car manufacturers, towards a more balanced flexible system in which all operators have more scope to act pro-competitively. It offers an unprecedented opportunity for those who are willing to be imaginative in the way that they carry out their business and who are prepared to respond to consumer demand rather than conform to a single model. At the same time it reduces the opportunities for car manufacturers to abuse their powers.

The new regulation also entails greater liberties: for example, all dealers in selective distribution systems will be able to take the initiative in marketing vehicles to consumers in other areas of the European Union. Moreover, almost all of the previous restrictions on intermediaries have been lifted, allowing them to play a more active role in helping consumers get the car they want, at a more favourable price, from any dealer in the European Union.

The objective of the Regulation No 1400/2002 on motor vehicle distribution is to exempt, under certain conditions, specific categories of vertical agreements and concerted practices in the motor vehicle sector. Regulation No 1400/2002 follows the basic structure as Regulation No 2790/99: it applies a market share test; it denies block exemption to agreement containing hard-core restrictions; and it disapplies the block exemption to specific obligations. However, Regulation No 1400/2002 is stricter than the general regime for vertical agreements in certain important respects: for example, Article 1 (b) of Regulation No 1400/2002 defines a non-compete obligation to include any obligation on the buyer to purchase from the supplier, or from an undertaking designated by the supplier, more than 30% of the buyer's total purchases of the contract goods or services and their substitutes on the relevant market, whereas Article 1 (b) of Regulation No 2790/99 sets the figure at 80%; article 4 (2) of Regulation No 1400/2002 requires that independent operators must be given access to technical information, diagnostic equipment, tools, including relevant software, and training: this has no counterpart in Regulation No 2790/99.

The new block exemption aims to create more competition on the sales and servicing markets as well as on the markets for the supply of spare parts. It also aims to ensure that Single Market functions properly for consumers just as it already does for carmakers, who can after all move vehicles and components easily across the European Union's internal frontiers.

The Regulation No 1400/2002 applies to vertical agreements concluded in the motor vehicle sector at all stages of the trade in and supply of new vehicles or spare parts, including repair and maintenance services. The products covered by the Regulation No 1400/2002 range from passenger cars to light commercial vehicles and from lorries to buses and coaches.

The Regulation No 1400/2002 applies to vertical agreements entered into between:

-A motor vehicle manufacturer or its subsidiary and independent importers or wholesalers that are not subsidiaries of that manufacturer and can be entrusted with the task of supplying and managing the latter's distribution and repair work in one or more Member States;

-A motor vehicle manufacturer and members of its network of distributors and authorized repairers taken individually, including with regard to intellectual property rights;

-A motor vehicle manufacturer, a main distributor and a sub-distributor;

-A motor vehicle manufacturer and an association of dealers or authorized or independent repairers that sell vehicles and spare parts where no individual member of the association has a total annual turnover exceeding 50 million;

-A supplier of spare parts and the members of a repair network that repairs or maintains vehicles.

In principle, the regulation does not apply to vertical agreements entered into between competing undertakings. Only agreements that a motor vehicle manufacturer selling direct to end users can conclude with the individuual members of its distribution network are exempt. The Regulation is applicable in the Member States of the European Union but also in the countries of the European Economic Area.

Unlike the Regulation No 1475/95 and 2790/99, the new block exemption does not allow the combination of exclusive distribution and selective distribution; car manufacturers must choose one or the other. This rule is meant to develop more effective intrabrand competition in the distribution of motor vehicles and to remove a straight jacket on the choice of distribution. The new rules open the way to the new distribution tecniques such as Internet sales and multi-branding introducing more competition between different retail channels. The new rules also tear down residual barriers to cross-border purchases and allow dealers to place advertisements or mail shots throughout the single market. Car owners will have a wider choice of after sales service providers be it through authorized repair shops or fully independent repair shops. No repair shop may be prevented from servicing several brands and repair shops will no longer be obliged to operate a dealership as well.

The Competition Commissioner Mario Monti stated: More competition in car distribution leads to lower prices. By finally tearing down remaining obstacles to cross-border vehicle purchases, consumers will make use of the full potential of the single market for car purchases. With this new regulation there will be also new possibilities for operating stand-alone after-sales services and I expect these new service providers to exercise a downward pressure on the high after sales service prices.

An important source of increasing competition in the distribution of motor vehicles has emerged from the Internet, in the form of on-line dealers and electronic market places; Recital 15 of the block exemption says that authorised car dealers should have the right to use the Internet or an Internet referral site. One of the Comission's key concerns when reviewing the rules on motor vehicle distribution was the independence of car dealers vis-a vis car manufacturers. This concern manifests itself in several provisions in the block exemption, notably the ability of dealers to sell more than one brand of car in their showroom; the possibility of contracting out after-sales services to third party; and, within the context of selective distribution, the possibility of active sales and the establishment by distributors of additional outlets. The new block exemption also seeks to improve acess to and competition in the markets for after-sale servicing and spare parts.

The main features introduced by the new rules are
-multi-branding,
-stand-alone repair shops,
-independent repair that are not affiliated to a particular brand,
-more liberal rules on thee use of spare parts and more possibilities for dealers to sell to customers from abroad.

A.Multi-Brand Dealership

Dealers are able to sell more than one brand within the same showroom. This multi-branding reinforces dealers' commercial independence vis-a-vis their suppliers and also enables dealers in sparsely populated areas to keep their businesses profitable.

The new rules therefore gives retailers a choice as to whether they sell more than one brand. Carmaker may only impose a requirement to display their cars in brand specific areas within the showroom. Most manufacturers have accepted the possibility of multi-branding. In some cases the Commission is still examining manufacturers' requirements on displaying cars in the showroom make multi-branding a viable undertaking.

B.More Stand-Alone Repair Shops

Under the old rules, anyone who sells new cars was obliged to carry out repair services as well. However, under the new rules dealers may choose whether they wish to carry out repairs themselves, or sub-contract them to another authorized member of the manufacturer's network, be it another integrated dealer/repairer or a repair-only outlet.

The new rules also allow any repair shop that meets the quality standards set by a manufacturer to become authorized repairers within that manufacturer's network, without being obliged to sell new cars. The carmaker may not limit the number of authorized repairers, and may not limit an authorized repairer's right to repair vehicles of other makes.

Studies have shown that consumers prefer a dense network of repairers, and this proposed change should help to maintain network density while reinforcing the current level of technical expertise within the network. While most car manufacturers accept the separation between the operation of a dealership and a repair shop, the Commission is still looking at isolated cases in which a former dealer is not authorized as a stand-alone repair shop.

C.More Independent Repair Shops

According to the new rules, carmakers must also allow independent repair shops those who prefer to remain unaffiliated with a particular brand- to have access to all necessary technical information, tools, equipment, including diagnostic equipment and training.

Furthermore, the new rules forbid clauses that seek to prevent authorized repairers from supplying original spare parts or parts of matching quality to independent repairers. These provisions aim to ensure that independent repairers can continue to compete effectively with the manufacturer's network of authorized repairers. The consumer will therefore have a choice as to where his vehicle is repaired.

D.Greater Variety of Spare Parts

The Regulation also aims to give consumers a choice as to which spare parts are used to repair their vehicle. Carmakers may no longer prevent authorized repairer shops from obtaining spare parts from other sources or restrict the repairers from using spare parts that match the quality standard of original spare parts.

These measures should lead to more spare parts being sold directly to repairers by the spare part producers, giving the consumer more choice and increasing competition for the supply of parts.

However, in view of the vehicle manufacturers' direct contractual involvement in free servicing, recall operations, and repairs under warranty, authorized repairers may be obliged to use original spare parts supplied by the carmakers for these types of repair.

E.More Possibilities To Sell Cars To Customers In Other Member States

Already now, no dealer can be prevented from supplying cars to consumers from abroad. This allows consumers to make cross-border purchases, and has enabled, for example UK and Irish consumers to obtain right-hand-drice vehicles from Continental dealers at lower prices. The Comission's twice-yearly car price report has consistently revealed major differences in new car prices between Eropean Union Member States. A study published for the Comission last year, concluded that these differences cannot totally be explained by differences in tax levels. Therefore, existing restrictions on intermediary dealers who act on behalf of a consumer with regard to the purchase of a vehicle will be lifted. In future, these representatives, commonly referred to as intermediaries, will only have to produce a mandate showing that they are acting on behalf of a consumer.

Furthermore, dealers in a selective distribution system may place advertisements throughout the single market and adress mail shots and personalized e-mails to consumers located anywhere in the European Union. Dealers may not be penalized in any sense for selling in this manner.

Dealers in an exclusive distribution system may actively sell to independent resellers based outside their territory. These active sales inside the territory, and unsolicited sales outside the territory, will create the conditions for better price competition across the EU than under the current regime where all active sales outside the territory, as well as sales to independent operators, were forbidden.

Sales & Delivery Outlets in Several Member States

As of 1 October 2005, dealers in a selective distribution system may set up a secondary sales outlet or a delivery point in another part of their own country or in another Member State of the European Union. Thus, a dealer in Spain who commonly sells many vehicles to French consumers may set up a sales or delivery outlet in Marseilles. With the fall of this so-called location clause there will be no more territorial protection for dealers in a selective distribution network. These measures should help to ensure that the Single market operates to allow consumers to take advantage of the still considerable price differentials that exist between Member States of the European Union.

To qualify for exemption, vertical agreements on the sale of new motor vehicles, spare parts or repair and maintanence services must not represent more than 30% of the relevant market. The regulation excludes direct or indirect obligations on distributors or repairers to purchase from a single supplier more than 30% of their purchases of vehicles or spare parts on the same relevant market. The 30% limit applies to direct or indirect non-compete obligations and must allow members of qualitative selective distribution network, which so desire to purchase or sell products supplied by at least three different suppliers.

However, in the case of quantitative selective distribution agreements for the sale of new motor vehicles, the threshold is 40%. Application of the Regulation to distribution agreements entails, first, oefinition of the relevant market or markets affected by the agreements and, then, calculation of the market shares. If the market share is more than 35% or 45%, the exemption will continue to apply for one calendar year following the year in which the level of 30% or 40% respectively was first exceeded.

With a view to maintaining a relatively stable contractual framework, the regulation also requires the parties to comply with the following contractual conditions:

-The right of the dealer or authorized repairer to sell his business and all the associated rights and obligations to another member of the brand network;

-The obligation to state the reasons for terminating an agreement;

-The right to arbitration in the event of a dispute relating to the agreement;

-The obligation to conclude agreements of limited duration for a minimum period and to require a period of notice in the event of non-renewal or termination of the agreement.

The Regulation then gives a list of severely anti-competitive restraints which, if included in the contract, result in the loss of entitlement to the block exemption for the agreement as a whole. Liikewise, it lists a number of specific conditions which, if contained in the agreement, render the conditions themselves and not the contract null and void. The purpose of these restrictions is to safeguard competition and to introduce a new approach towards the distribution of new motor vehicles, this approach is centered on the following principles:

-The possibility for distributors to effect local, national or cross-border sales without discrimination (product allocation cannot be limited to local demand). If the distributor is not authorized to sell to independent resellers (selective distribution), the Regulation allows it to open other sales rooms and points of delivery and to effect active sales throughout the European Union. If, however, the distributor has an exclusive territory allocated to him (exclusive distribution), the Regulation allows it to sell to independent resellers and to effect passive sales throughout the European Union

-The prohibition of a combination of selective distribution (system in which an authorized distributor may sell actively to all end consumers but not to ressellers outside the authorized network) and authorized exclusive distribution (system in which each distributor is allocated a specific territory). Manufacturers must opt either for a selective distribution system or an exclusive distribution system;

-The strengtheninig of competition between dealers by not granting an exemption for distribution agreements restricting passive or active sales and agreements prohibiting dealers from setting up additional sales outlets on other territories within the common market. The dealer may expand by opening up secondary sales outlets throughout the European Union (within the framework of selective distribution) or by selling new vehicles to independent resellers (with the framework of exclusive distribution);

-The abolition of the obligation for a particular firm to manage both sales and after-sales services by encouraging the subtracting of maintanance and repair services to authorized repairers that meet the manufacturers quality criteria;

-The promotion of multibranding by prohibiting any restriction on the sale of motor vehicles of diffferent brands by the same dealer;

-The maintanance of the availability clause by not exempting agreements restricting a dealer's ability to sell vehicles with characteristics different from those of equivalent models in the range covered by the agreement;

-The strengthening of dealer independence vis-a-vis manufacturers.

However, as regards repair and maintenance services, this new approach introduces greater flexibility:

-It allows manufacturers to set criteria for selecting authorized repairers and does not oblige an authorized repairer to sell new vehicles and to concentrate on repair activities;

-It enhances competition between authorized repairers by allowing all operators meeting the criteria set by the supplier of new motor vehicles to provide after-sales service;

-It improves access by authorized repairers to spare parts competing with the parts sold by the motor vehicle manufacturer and facilitates access by spare-parts manufacturers to authorized repairers. This will allow European consumers to choose between original spare parts and spare parts of matching quality supplied by another spare-parts manufacturer;

-It safeguards and strengthens the competitive situation of independent repairers by giving them access to spare parts and to technical information representing technical progress.

The Comission and, in certain cases, the competent authority in a Member State may withdraw the benefit of the exemption where it finds that the conditions laid down in Article 81(3) are not met by a particular agreement on account of special circumstances. Where parallel networks of similar vertical restraints cover more than 50% of the relevant market, the Comission may by regulation exclude vertical agreements containing specific restraints from the block exemption.

The Regulation No 1400/2002 is applicable from 1 October 2002 to 31 May 2010. To benefit from the block exemption, new agreements taking effect after 1 October 2002 must satisfy its provisions. However, in order to give all operators time to adopt vertical agreements that are compatible with the new provisions, there is a transitional period until 30 September 2003 for such agreements. The Comission is required to monitor the operation of the Regulation on a regular basis and to draw up a report on it not later than 31 May 2008. The Regulation expires on 31 May 2010.

Enforcement

The Commission will continue to monitor motor vehicle distribution agreements and make sure that car manufacturers apply the new rules properly on both the sales and after-sales markets. If cases cannot be resolved between manufacturers and dealers, the Commission will take all legal steps necessary that consumers derive the full panoply of benefits of the new rules on motor vehicle distribution.