Latham & Watkins Litigation Antitrust & Competition

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1 Number June 2010 Client Alert Latham & Watkins Litigation Antitrust & Competition New Antitrust Rules for the Motor Vehicle Sector Challenges Ahead for Car Manufacturers, Dealers, Spare Parts Suppliers and Repairers All stakeholders will have to evaluate whether existing agreements comply with the new framework or whether the new rules allow for a more proactive competitive conduct. The European Commission (Commission) has adopted a new Regulation exempting certain types of agreements in the motor vehicle sector from the EU general prohibition on practices restrictive of competition (motor vehicle block exemption regulation or BER). In force since 1 June, the new BER replaces the previous motor vehicle block exemption which expired on 31 May While the previous Regulation exempted agreements for the distribution of new motor vehicles as well as aftermarket agreements (i.e., distribution of spare parts for motor vehicles and/or the provision of repair and maintenance services), the new BER only continues to exempt the latter. In addition to the new BER, the Commission has issued supplementary guidelines for the motor vehicle sector (the Guidelines) aimed at helping companies to assess whether their agreements comply with applicable competition law. In light of the specific regulatory environment for the motor vehicle sector and considering that the new BER deals with some important business practices, the recent legal developments are of exceptional importance for car manufacturers, dealers, authorized and independent repairers, spare part suppliers (irrespective of the fact that they manufacture OEM, OES or matching quality parts) and consumers active in the European Union. All stakeholders will have to evaluate whether existing agreements comply with the new framework or whether the new rules allow for a more proactive competitive conduct. Why Is the BER Important for the Motor Vehicle Sector? The contractual relationships and cooperation between car manufacturers, dealers and repairers as well as other stakeholders such as component suppliers may have anti-competitive effects and therefore may fall within the EU and national prohibition on anti-competitive agreements. If this is the case, such agreements are prohibited by law and may lead to significant fines and litigation risks. Against this background, the BER identifies a safe harbor and provides legal certainty on the permissibility of certain agreements between players with a market share of less than 30 percent. Above that threshold, which Latham & Watkins operates as a limited liability partnership worldwide with affiliated limited liability partnerships conducting the practice in the United Kingdom, France and Italy and affiliated partnerships conducting the practice in Hong Kong, Japan and Singapore. Latham & Watkins practices in Saudi Arabia in association with the Law Office of Mohammed Al-Sheikh. Under New York s Code of Professional Responsibility, portions of this communication contain attorney advertising. Prior results do not guarantee a similar outcome. Results depend upon a variety of factors unique to each representation. Please direct all inquiries regarding our conduct under New York s Disciplinary Rules to Latham & Watkins LLP, 885 Third Avenue, New York, NY , Phone: Copyright 2010 Latham & Watkins. All Rights Reserved.

2 applies to most manufacturers, or if the BER is not applicable for any other reasons, companies are required to self-assess whether and under which conditions the cooperation is permitted on the basis of general competition rules. Potentially restrictive agreements that should be assessed carefully include, e.g., territorial exclusivity (also in relation to Internet sales), noncompete clauses, field-of-use provisions, selective distribution price agreements. Are All Relevant Business Practices Covered by the BER? No. Common agreements of major importance in the motor vehicle sector, like research and development agreements, subcontracting agreements or production agreements are not or only to some extent covered by the BER and have to be assessed on the basis of different competition rules. Aftermarket Agreements: Possibility of Exemption and More Severe Rules Continue to Find Application The Commission renewed the BER in regard to agreements for the supply of spare parts and for repair and maintenance services (aftermarket agreements). The Commission considers that the motor vehicle aftermarket should continue to have its own BER as it believes that competition in those markets is less intense than in the sector for the distribution of new motor vehicles (e.g., upward price trend for individual repair and maintanance jobs). According to the new provisions, aftermarket agreements restrictive of competition are only exempted if strict market share constraints are not exceeded. In addition, agreements must not contain serious restrictions of competition, commonly referred to as hardcore-restrictions, for example: imposed by its buyer to sell those spare parts to end-users, independent repairers and service providers Restriction on an authorized repairer to sell parts to an independent repairer imposed by a car manufacturer to sell those spare parts to authorized and/or independent distributors and repairers imposed by a car manufacturer to place its trademark or logo effectively and in an easily visible manner on the spare parts supplied Do Manufacturers Have to Grant Access to Technical Information? Even if the Guidelines state that suppliers not providing independent operators with the full scope of technical information needed to perform repair and maintenance work on motor vehicles of their brands may have possible negative effects on competition, the new BER does not contain any provisions regarding access to technical information and thus the rules are not as clear as they were under the previous regime. Recent EU rules on emissions regulation for passenger cars and for commercial vehicles now provide for a full and non-discriminatory access to technical information which independent repairers need to repair today s complex vehicles. Although the regulations only apply to new type approvals from September 2009 (passenger cars) and January 2013 (commercial vehicles) respectively, the Guidelines highlight that the Commission will take these regulations into account when assessing cases of suspected withholding of technical repair and maintenance information concerning vehicles commercialized before those dates. Exemptions on Distribution Agreements on New Cars Are Not Renewed The new BER does not continue to exempt vertical agreements for the purchase, sale and resale of new motor vehicles, as the Commission has not found any significant competition shortcomings which would distinguish the 2 Number June 2010

3 distribution of new motor vehicles from other economic sectors and which could require the application of rules different from and stricter than those established by non-sector specific competition law. In future, agreements for the distribution of new motor vehicles will have to be assessed under the less strict general block exemption regulation on supply and distribution agreements. The new regulatory framework results in some marked changes, the most crucial being: Less protection for multibrand showrooms: Single-branding obligations prevent or otherwise restrict dealers from selling competing brands. The previous BER prohibited obligations on dealers causing them to purchase more than 30 percent of their requirements from the supplier. In future, under general competition rules, single-branding obligations are generally allowed to cover up to 80 percent of the requirements of the dealer. In order to benefit from this wide safe harbor, however, the general block exemption on supply and distribution agreements is only applicable if strict market share constraints are not exceeded and the duration of the single branding obligation does not exceed five years. This means that in order to benefit from the general block exemption, dealers must be able to effectively end the single-branding arrangement after the initial five-year period, without losing their distribution contract and the brand-specific investments connected with it. Location clauses as well as restrictions of sales-only dealers may be permitted: The previous BER contained, in particular, restrictions on preventing dealers from subcontracting repair and maintenance activities ( sales-only dealers) and the opening by dealers of additional sales outlets ( location clause ). However, the Commission observed that this has led to higher investment costs and lower margins for dealers. In future, under general competition rules, location clauses as well as restrictions of sales-only dealers may be permitted, but this must be assessed on a case-by-case basis. No more protection of some contractual clauses typically requested by dealers: The previous BER contained provisions that aimed at safeguarding the dealers sunk costs such as provisions with regard to: contract duration, certain periods of notice for terminations for network reorganization, qualified reasoning of contract terminations and transfer of dealerships contracts between the members of the same networks. General competition rules do not contain similar provisions since the Commission considers that the ability to reorganize the dealers network is vital for the car manufacturers industry. Restrictions of cross-border sales continue to be illegal: In past years, the Commission has brought several cases against motor vehicles manufacturers for impeding parallel trade. The Guidelines also give guidance on the circumstances in which agreements restricting dealers ability to obtain and resell vehicles with foreign specifications ( availability clause ) would amount to an indirect restriction on active and/or passive sales (a hardcore restriction) and, therefore, infringe competition rules. Will Agreements That Are Not Covered by the BER Inevitably Infringe Competition Rules? In practice, many agreements will not be covered by the BER for various reasons, in particular because often manufacturers have market shares exceeding the relevant market share threshold of 30 percent. Agreements not covered by the BER do not necessarily violate the relevant competition rules, unless they include severe restrictions of competition law (hardcore restrictions). The parties will have to carefully assess whether the envisaged agreements contain any legal risks. 3 Number June 2010

4 Will There Be a Transitional Period for Undertakings to Adapt to the New Regime? The revised provisions on aftermarkets apply as of 1 June Regarding the distribution of new motor vehicles, the Commission provided for a three-year transition period. In order to give all stakeholders time to adapt to the new regime as well as to allow sufficient time for dealers, who invested in multibranding, to amortize their investment, the new BER extends the period of validity of the provisions of the previous BER relating to agreements for the distribution of new motor vehicles until 31 May Will the Commission Be Less Active in Enforcing Competition Rules in the Motor Vehicle Sector in Future? The European Commission has formally announced that it will keep on monitoring the motor vehicle sector carefully. In particular, the Commission has singled out access to technical information for independent repairers and apparently restrictive warranty requests as areas that it will watch. National competition authorities will continue to have a growing role in the enforcement of competition rules in this sector and will investigate possible infringements of the applicable EU competition rules. New Challenges Ahead for Car Manufacturers, Dealers, Spare Parts Suppliers and Repairers Many sensitive business practices in the motor vehicle sector are not and were not covered by the BER. However, the changes described above and the fact that distribution of new motor vehicles are not covered anymore by a specific exemption regulation will probably trigger a revision of current situation and a reflection about future commercial strategies and priorities both for car manufacturers and for dealers and parts suppliers. Effective compliance measures remain essential to support business in a safe manner. Therefore, in considering the options available to adapt to this new scenario all parties should carefully examine their specific situation and fully understand on which fronts they are now more exposed, and which ones allow for better legal protection from the antitrust law perspective. If you have any questions about this Client Alert or would like additional information regarding the issues discussed herein or our special experience in the field of motor vehicle antitrust law, please contact the authors listed below or the Latham attorney with whom you normally consult: Javier Ruiz Calzado javier.ruiz.calzado@lw.com Gianni De Stefano gianni.destefano@lw.com Fabian Stancke fabian.stancke@lw.com Hamburg 4 Number June 2010

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