Buttigieg Spare Parts

Vertical Agreements and Concerted Practices in the Motor
Vehicle Sector under EC Competition Law – Implications for

European Consumers
EUGENE BUTTIGIEG*
1. Introduction
For several years successive motor vehicle distribution and servicing block exemp-
tions1 have came in for some harsh criticism from consumer organizations amongst
others.2 For instance, the British National Consumer Council noted that the practice
sanctioned by the erstwhile block exemption of manufacturers and importers fran-
chising dealers to sell only one make of product in an exclusive geographical area was
making it very difficult for consumers especially in rural areas to compare one brand
with another as they were compelled to visit different dealers to see each make.3
The argument for maintaining this system of distribution was that the difficulties
for consumers in making brand comparisons were compensated for by the high stand-
ards of after sales service that the franchising of dealers in this way provides for.
However, consumer organizations have shown through market studies in Britain,
France and Germany that franchised dealers charged much higher prices for servicing
cars bought through them and provided no better service than independent garages
outside the dealer networks that charged much less for servicing their cars.
Indeed these distribution and servicing agreements were purposely4 left out from
the general block exemption on vertical restraints5 probably because, since the motor
* LL.D. (University of Malta); LL.M. (University of Exeter); Ph.D. Candidate, Institute of

Advanced Legal Studies, University of London. Senior Lecturer, Department of European and Compar-
ative Law, University of Malta.
1 Commission Regulation 123/85 on the Application of Art 85(3) of the Treaty to Certain Categories
of Motor Vehicle Distribution and Servicing Agreements [1985] OJ L15/16; Commission Regulation
1475/95 on the Application of Art 85(3) of the Treaty to Certain Categories of Motor Vehicle Distribution
and Servicing Agreements [1995] OJ L145/25.
2 S Locke ‘The Supply of New Cars and the EU Block Exemption’ (1994) 4 CPR 1.
3 National Consumer Council Response to the Commission of the European Communities’ Green
Paper on Vertical Restraints in EC Competition Policy (NCC London 1997) 16.

4 It was the intention from the outset as indicated in the Commission Green Paper on Vertical
Restraints in EC Competition Policy COM(96)721 that preceded the new block exemption on vertical
restraints. In its press release (IP/00/520) the Commission explained that this was primarily due to the fact
that Commission Regulation 1475/95 (n 1) had only been in force for two years when the review of policy
on vertical restraints was launched in 1997. K Middleton ‘The Legal Framework for Motor Vehicle Distri-
bution – A New Model?’ (2001) 22 ECLR 3 opines however that given the complexity of motor vehicle
distribution agreements in the EU and the controversy surrounding the renegotiation of the preceding
Commission Regulation 123/85 (n 1) it is more likely that the exclusion was a policy decision.
5 Commission Regulation 2790/1999 on Vertical Agreements and Concerted Practices [1999] OJ L336/21.
743
744 EUGENE BUTTIGIEG
vehicle distribution is an economic sector where there are still significant price differ-
entials between the Member States so that it is fair ground for parallel importation, it
was deemed advisable for vertical agreements in this sector to continue to be
governed by an ad hoc regulation that is specifically devised to protect and encourage
parallel importation by consumers of new motor vehicles without however opening
the door wide open to parallel imports by distinguishing between authorized interme-
diaries and independent resellers.6
Central to the selective and exclusive distribution system sanctioned by the block
exemption was the supplier’s refusal to supply new cars to retailers other than its
franchised dealers, the associated prohibition on dealers from reselling except to final
customers and other dealers in the manufacturer’s network, the granting of exclusive
territories to dealers and the requirement that dealers sell exclusively one brand of
new cars. Dealers were required to provide servicing and repair services. Dealer
agreements would of course then typically contain other restrictions and obligations
beyond the ones mentioned in the block exemption concerning matters such as sales
targets, advertising and promotion.
Vertical restraints between producers and distributors can have both pro- and anti-
competitive effects that may respectively benefit or harm consumers. In particular
such agreements may enable producers to penetrate into the new markets that Euro-
pean integration brings about (penetration of new markets takes time and investment
and is risky), thereby increasing consumer choice, and enhance efficient distribution
at the local level with appropriate pre- and after-sales support – all to the benefit of
consumers. On the other hand, however, such arrangements may also be used to
partition the market and exclude new entrants at the production and distribution level,
preventing an intensification of competition that would lead to downward pressure
on prices. Thus, vertical agreements can be used either pro-competitively to promote
market integration and efficient distribution or anti-competitively to block integra-
tion and competition. In the motor vehicle industry, the price differences between
Member States provide the incentive for firms to enter new markets as well as to erect
barriers against new entrants. So the block exemption sought to strike the right
balance to permit only such vertical restraints as would generate pro-competitive
effects.
The European Commission’s report on the evaluation of Regulation 1475/957
showed that the selectivity features of a motor vehicle distribution agreement based
on qualitative as well as quantitative criteria effectively allow manufacturers in the
industry to dictate to their retailers both the type and the location of their customers.
On the other hand, the exclusivity features of the agreement enable the manufacturer
6 This distinction between the intermediary and an independent reseller was made because according
to S Petropoulos ‘Parallel Imports, “Free Riders” and the Distribution of Motor Vehicles in the EEC: The
ECO System/Peugeot Case’ [1994] Consum L J 9, 16 the intermediary is perceived to be more than just a
‘parallel’ seller who stimulates intra-brand competition but also ‘an economic operator who gives genuine
assistance to European consumers by facilitating access to goods in the Community’.
7 Report on the evaluation of Regulation (EC) No 1475/95 on the application of Article 85(3) of the
Treaty to certain categories of motor vehicle distribution and servicing agreements COM(2000) 743. See
also M Monti ‘Beyond the EU’s Block Exemption’ (2000) No 2 Competition Policy Newsletter 1.
VERTICAL AGREEMENTS AND CONCERTED PRACTICES [2003] EBLR 745
to split up the market and assign defined territories on an exclusive basis to its
distributors.
Various justifications for selective and exclusive distribution in the supply of new
cars have been brought forward, some of which were considered by the European
Court of Justice in Cabour.8 The main reason is to allow manufacturers to continue
to influence the quality of their product by ensuring that a small concentrated number
of dealers have the degree of expertise and quality necessary to offer a high standard
of service for the consumer. Thus in the name of consumer welfare the manufacturer
usually agrees to supply only to dealers satisfying certain professional or technical
requirements9 while the approved dealers accept certain territorial restrictions and
undertake not to purchase or sell the contract goods from or to wholesalers or retailers
outside the official network. The Commission itself used consumer protection as a
justification for the restrictions that it allowed in the block exemption noting in the
preamble to Regulation 1475/95 that due to the nature of the product concerned a
number of restrictions of a selective and exclusive kind on distributors were indispen-
sable in order to allow some rationalization and as a result better motor vehicle
distribution and servicing (recital 4). In particular, it was felt that exclusion of whole-
salers not belonging to the distribution system of a manufacturer or importer from the
distribution of spare parts originating from the manufacturer should be exempted as
otherwise rapid availability of original spare parts, including those with low turnover,
would not be possible and this would then not be in the interest of consumers
(recital 6).
2. Selective Distribution Systems and Consumer Interests
This echoes what the Commission had said in the early 1970s when it justified the
granting of an exemption to the selective distribution systems of BMW,10 SABA11
and Campari12 on grounds of consumer protection, holding that only by having
specially controlled outlets could a high standard of supply and service be guaranteed.
Yet it has always been debatable whether selective distribution systems in general
with the restricted competition that they generate are really providing benefits for
8 Case C-230/96 Cabour SA et Nord Distribution Automobile SA v Arnor SOCO SARL [1998] ECR
I-2055.
9 For instance car manufacturers argue that the selectivity features and quality controls of the system
are necessary to ensure minimum and uniform standards that consumers expect from such reputed
suppliers and brands since consumers tend to identify the dealer with the supplier and to ensure that
consumers would be advised by retailers whose staff had the adequate expertise since cars are highly
complex products. Moreover if the right standard could not be maintained by the dealer, the supplier’s
reputation would be damaged as the consumer would not be able to determine whether the fault in the car
is due to the dealer’s inaptitude to repair or a defect in the make.
10 BMW [1975] OJ L29/1. In fact the first motor sector block exemption regulation, Regulation 123/
85 (n 1), was drawn along the lines set out in the Commission BMW exemption decision.
11 SABA [1976] OJ L28/19.
12 Campari [1978] OJ L70/69.
consumers that cannot be achieved in fully competitive markets as is claimed by

suppliers of such products.
Reich13 observes that in these cases one is confronted with the dilemma of defining
what is the true consumer interest in such circumstances. On the one hand, a selective
distribution system might benefit consumers because even if products are sold at a
higher price they get good service but on the other hand consumers may prefer that new
competitors that are not part of the selective distribution system be allowed to come
into the market and offer the product at a lower price. Good service is still guaranteed
since if they do not supply good service the consumer would desert them and at the
same time contract law on warranties and guarantees would ensure that suppliers abide
by quality standards. This argument is stronger now with the guarantees, product safety
and product liability directives inserting certain principles in all national contract laws.
Reich laments that we still do not know exactly what effects selective distribution
systems have on consumers. But he submits that the old theory that consumers’ inter-
ests are best served by industry (in the sense of ‘industry knows what’s right for the
consumer’ mentality) and a closely knit selective distribution system cannot be justi-
fied any longer. The consumer today has a wide choice of outlets and is protected by
civil law legislation. There is no reason why producers should be allowed to have a
selective distribution system in the name of consumer protection. The consumer will
be better served by competition backed up by strict rules on civil liability for warran-
ties, guarantees and product safety (now being further improved and given more bite
by the recent review of the product safety and product liability directives).
Thus BEUC had asked the Commission not to renew the exemption for SABA and
other producers of electronic devices on the grounds that the consumer interest could
be better served by other means and should certainly not justify a restriction of
competition.14 It feared that most producers would use the argument of consumer
protection to restrict competition in the entire market of electronic devices. Yet in
1983 the Commission renewed the exemption for a further 5 years.15 It considered
that the distribution would bring immediate benefits for consumers in the form of
efficient after-sales service and availability of a wider range and faster delivery from
wholesalers and retailers. Moreover it felt that the benefits SABA receives in terms
of rationalization of its production and sales are likely to be passed on, in view of the
fierce competition in the consumer electronics business and the fact that all its whole-
salers and retailers can sell competing goods.
As for the Court, not only did it uphold the Commission decision on appeal but it
actually cleared the selective distribution agreement applying an almost rule of
reason analysis that however was even more complacent towards consumer interests
13 N Reich ‘Community Consumer Law: Authoritative Power of the European Commission and the
Role of the Court of Justice with Regard to Consumer Law and Policy’ in T Bourgoignie (ed) European
Consumer Law: Prospects for Integration of Consumer Law and Policy within the EC (Cabay-Jezierski
Louvain-La-Neuve Belgium 1982) 217, 237.
14 Reich ibid.
15 SABA (No 2) [1983] OJ L376/41. Reich (n 13) makes a plea to the Commission to at least hear
consumer associations first, if it is going to exempt a selective distribution system under Art 81(3), as it is
obliged to do by Regulation 17.
than the Commission’s approach.16 It demanded only that the conditions of supply be
improved by the selective distribution system without requiring any proven benefit
to consumers for example in the form of better after-sales service, guarantees and so
forth.17 Van Houtte is critical of the Metro judgment:
It is not clear, however, how much weight the Court gives to consumer interests.
The Court merely notes in passing that a specialized distribution channel is in the
interest of consumers. The Court’s insistence on intra-brand competition within
the distribution channel is presumably intended to benefit consumers, but it is
doubtful that consumers’ interests are served when products can be purchased
only from approved dealers, who will usually employ a more expensive selling
apparatus than would be the case in an openly competitive market. A plausible
argument can be made that at least some consumers would prefer a completely
competitive distribution system permitting them to buy products ‘off the shelf’ at
the lowest possible prices. Regardless of whether insistence on intra-brand
competition adequately protects consumers it is clear from the Court’s approval
of selective distribution systems that it gave more weight to the interests of manu-
facturers than to either consumers or excluded dealers.18
3. Motor Vehicle Group Exemptions’ Impact on Consumer Welfare
The motor vehicle group exemption attracted more widespread criticism because,
unlike the individual exemptions, it was granting Commission blessing to restricted
competition in an entire industry and thereby depriving consumers of the benefits that
full competition might have generated in the car industry. Criticism heightened when
after ten years experience under the first regulation19 had shown that the anticipated
benefits had not materialized while prices in certain States remained excessively high
the subsequent regulation20 renewed the block exemption for a further seven years
with minor changes. When the regulation was due to expire in September 2002 there
were renewed calls for its non-renewal with fresh arguments centering not only on
the high prices in States such as UK and Germany and the unjustified price differen-
tials between States21 but also on the effect that the system was having on consumer
16 Case 26/76 Metro SB-Großmärkte GmbH & Co KG v Commission (No 1) [1977] ECR 1875 and
Case 75/84 Metro SB-Großmärkte GmbH & Co KG v Commission (No 2) [1986] ECR 3021.
17 N Reich ‘Competition Law and the Consumer’ in L Gormley (ed) Current and Future Perspectives
on EC Competition Law (Kluwer London 1997) 127, 133 notes that here court was content with a mere
improvement in supply – it was satisfied that consumers’ interests amounted simply to an increased choice
without giving any consideration to the need for a guarantee of high quality servicing.
18 B Van Houtte ‘A Standard of Reason in EEC Antitrust Law: Some Comments on the Application
of Parts 1 and 3 of Article 85’ [1982] NJILB 497, 503.

19 Commission Regulation 123/85 [1985] OJ L15/16.
20 Commission Regulation 1475/95 [1995] OJ L145/25.
21 The report on car prices published by the Commission in July 2002 shows that these substantial
price differentials have remained even after the advent of the euro – Press Release IP/02/1109.
choice as it dampened parallel trading by reducing dealer capacity to compete on

price22 and limiting, through the sales targets and car allocation arrangements based
solely on sales made within the contract territory as sanctioned by the regulation, new
car availability for cross-border sales23 while the emergence of new alternative forms
of car retailing that are more convenient for consumers were being hampered by the
system that was propagated by the regulation.
In this block exemption the Commission tried to juggle between the interests of
consumers in having the possibility of sourcing new vehicles and after-sales services
throughout the common market and of acquiring quality products and after-sales
services at a competitive price and the contrasting interests of car manufacturers, car
dealers, independent resellers, independent repairers and spare-part producers.24 But
the end result was a block exemption that by allowing too many restrictions on the
dealer’s freedom weighed the scales against consumer interests, especially now that
22 The restrictions that the manufacturer was entitled by the block exemption to impose on dealers and
indeed the whole fabric of the selective and distribution system permitted by the block exemption placed
the dealer in a much weaker negotiating position vis-à-vis the supplier and this affected negatively
consumer interests as the dealer was unable to offer the competitive prices and choice that otherwise he
would have been able to offer. Without the restrictions authorized by the block exemption it is unlikely that
the suppliers would have been able to sustain the practice of effectively maintaining standard wholesale
prices for dealers by not giving them any volume discounts that would have exerted downward competi-
tive pressure on wholesale and retail prices. Moreover, brand exclusivity leads to dealerships being closely
identified with their suppliers to the extent that dealers behave more like agents for their supplier than
independent retailers. See the European Commission’s Report on the evaluation of Regulation (EC) No
1475/95 on the application of Article 85(3) of the Treaty to certain categories of motor vehicle distribution
and servicing agreements COM(2000) 743 where it remarks that American dealers are generally in a
stronger position towards car manufacturers than their European counterparts and that in the US guaran-
teeing the independence of dealers is seen as a means of protecting consumer choice and the UK
Competition Commission’s Report on the Supply of New Motor Cars within the UK (The Stationery Office
2000) CM4660 which stressed that the inequality of power between manufacturers and dealers was
resulting in higher prices for UK private consumers by as much as 10 per cent. The Regulation allowed
the manufacturer to end dealer agreements even without cause with only two years’ notice and the diffi-
culty faced by dealers in such an eventuality of shifting to another brand because normally all sales
territories are already ‘occupied’ by other dealers or even of recouping the money spent in substantial
investment to comply with the suppliers’ requirements was a strong incentive to dealers not to pursue a
sales policy which is disliked by their manufacturers. See M Monti ‘Beyond the EU’s Block Exemption’
(2000) No 2 Competition Policy Newsletter 1, 3.
23 In UK, according to the UK Competition Commission’s report ibid, suppliers imposed targets at an
unreasonably high level that is hard to achieve and that did not include cars obtained by the dealer from
elsewhere in the EU. This prevented dealers from obtaining cars from other dealers outside UK and selling
them at a cheaper price to some consumers or spreading the savings over all customers to offer reductions
on all cars because they feared that then they would fail to meet the sales target and this is a ground for
termination of their contract.
24 Two of the stated aims of this regulation were directly concerned with consumer interests. First, the
regulation according to recitals 4, 7 and 30 of Regulation 1475/95 (and previously recitals 4 and 25 of
Regulation 123/85) was designed to ensure that motor vehicle distribution and servicing take place in an
efficient way to the benefit of consumers with effective competition existing between manufacturers’
distribution systems and to a certain extent within each system. Secondly, the regulation according to
recital 26 was intended to further increase the consumer’s choice in accordance with the principles of the
internal market by creating an environment that improves the possibilities for inter- and intra-brand
competition and for parallel imports. In order to achieve this second aim the regulation had introduced the
new forms of retailing and advanced car technology have negated the rationale
behind certain restrictions.25
The Regulation allowed manufacturers to appoint only one dealer for a geograph-
ically limited territory on which the dealer had to concentrate his marketing efforts
and endeavour to sell contract products in accordance with the sales targets agreed
with the manufacturer.26 Therefore, dealers were not allowed to open sales outlets or
to appoint sub-dealers or sales agents outside their contract territory. Moreover, the
practice common amongst nearly all car manufacturers of prohibiting their dealers
following rules: the dealers’ remuneration may not depend on the final destination of a vehicle; dealers
may also actively promote the final sale of new vehicles outside their contract territory by advertising,
provided it is not personalized advertising; manufacturers have to impose on dealers an obligation to carry
out repair and maintenance work also on vehicles sold by another dealer within the distribution network.
It was also assumed that by strengthening the dealer’s independence from manufacturers and thereby
increasing the dealer’s competitiveness and by protecting competition in the after-sales service market
both in relation to spare-part manufacturers and independent repairers, consumers would benefit
indirectly.
25 The block exemption allowed exclusivity and selectivity on the assumption that there is a degree of
inter-brand competition between the manufacturers of different brands and to a lesser extent even intra-
brand competition between the different dealers of the same brand with the objective of the block exemp-
tion (recital 30) being to ensure that European consumers take an equitable share in the benefit from the
operation of this competition. But in reality both inter-brand and intra-brand competition were rather
subdued so that the regulation by following a wrong assumption was, according to the Commission’s own
report (n 22), leading to lesser competition in the car industry. In particular in reality dealers’ leeway to set
prices freely is severely limited due to the margin system operated by car manufacturers while they are
generally unable to compete effectively against the manufacturer for the latter’s reserved customers. On
the other hand, inter-brand competition is muted because real multi-brand arrangements (in the sense that
the different brands do not belong to the same manufacturer) though allowed even under the previous
regulation are very rare in Europe, brand loyalty is very high among consumers and there is limited price
competition between large and smaller car manufacturers. See also comments by Jim Murray of BEUC at
the February 2001 hearing on the European Commission report claiming that the situation was actually
worse than depicted in the Commission report with very little real intra-brand or inter-brand competition
and that ‘the block exemption is a major factor in facilitating unreasonable, unjustified and unnecessary
restrictions on competition’ – <http://www.europa.eu.int/comm/competition/car_sector/distribution/
eval_reg_1475_95/report/hearing/#02_13>.
26 According to the European Commission most manufacturers took up this possibility – its report
(n 22) noted that as a result of the combination of selectivity and exclusivity features in these vertical
agreements, while car manufacturers were entitled to impose high quality criteria on their dealers they
were not obliged to supply any new potential dealer who meets these criteria. The UK Competition
Commission claimed in its report (n 22) that though the sales targets were supposed to be agreed to
between the manufacturer and the dealer in line with the block exemption they are usually set by the
supplier unilaterally and by setting a target for every model the supplier could effectively force the dealer
to supply every range. So though full-line forcing was not specifically exempted by the block exemption,
dealers due to the fear of termination of their agreement and because the selectivity and exclusivity
features of the system made them dependent upon the supplier to sell that make they normally accepted
the sales targets set by the supplier and this effectively forced them to sell the full range of models. This
in turn prevented some dealers from specializing in models that sell well with lower costs and lower
prices. So the features of this system were giving the ability to the suppliers to impose their will on
dealers and set targets for each model in a range with the adverse effect of raising prices for consumers
while full-line forcing was depriving consumers of a wider choice of type of retail outlets from where to
buy their cars.
from selling actively by means of personalized advertising within the territory of any
other dealer was allowed. Restrictions on an active sales policy by car dealers outside
their contract territories were exempted on the grounds that these are indispensable
to ensure more intensive distribution and servicing efforts, better knowledge of the
market through closer consumer contact and a more demand oriented supply. In
effect, manufacturers were therefore allowed to divide up the market into exclusive
sales territories and to hamper consumers from purchasing especially across borders
new cars from resellers outside the manufacturer’s distribution network through a
ban on active sales by authorized dealers to independent resellers.27
Although consumers were entitled to purchase a new vehicle from authorised
dealers through an intermediary acting on their behalf (as an exception to the
embargo on active sales to independent resellers) the Regulation allowed manufac-
turers to make this subject to the rule that the distributor’s sales to intermediaries
must not make up more than 10 per cent of the distributor’s overall sales and that the
intermediary must have a clear mandate from the consumer to act on his behalf.28
Thus in the final analysis for consumers there was no real alternative source of supply
for purchasing motor vehicles other than via the dealer networks.
27 Unlimited territorial protection however was not condoned as this was deemed to exclude the Euro-
pean consumer’s freedom to buy anywhere in the common market – see recital 12. Therefore, dealers had
to be allowed to meet demand from final consumers in other areas of the common market and could not
be prevented from advertising in media which covered a wider area than their contract territory. In order
to ensure that consumers could exercise their right to purchase vehicles from anywhere in the common
market, dealers had inter alia the right to order from the manufacturer ‘corresponding’ motor vehicles (this
is the so-called ‘availability clause’) – vehicles similar to the ones distributed by the dealer but with
different technical specifications such as right-hand drive. On the other hand, dealers did not have total
exclusivity within their territory because most manufacturers do not give their dealers the exclusive right
to supply new vehicles to all consumers in the dealer’s territory – they retain the right to sell new vehicles
to certain categories of consumers, so-called ‘reserved consumers or customers’ in competition with their
dealers.
28 The Notice accompanying Regulation 123/85 [1985] OJ C17/4 explained that refusal to supply is
permitted should the consumer or intermediary be unable to show documentary evidence that the interme-
diary is acting on behalf and on account of the consumer. While it has been argued that by institutionalising
the agency system the Regulation has invited abuse by bogus mandate-holders, this Notice was also the
centre of controversy in the Ecosystem case ([1992] OJ L66/1, on appeal [1993] ECR II-0493 and [1994]
ECR I-277) where it was alleged that it appeared to contradict Art 3(11) of the Regulation. The Ecosystem
case concerned a French company that offered its services to French consumers to purchase a car on their
behalf in Belgium at a lower price than that charged by French distributors, prices of Peugeot cars being
substantially higher in France than in Belgium. Peugeot tried to stop Ecosystem from continuing to offer
such services by sending a circular to its distributors and resellers in France, Belgium and Luxembourg
asking them not to accept orders from Ecosystem nor to supply it with any new cars. The Commission found
that this circular violated Art 81(1) and withdrew the exemption granted by the then Regulation 123/85 to
the standard distributorship agreement for Peugeot cars in Belgium and Luxembourg. This Regulation (Art
3(11)) already protected the activities of intermediaries acting specifically on behalf of final consumers and
duly authorized in writing by them. However, the Notice, referred to above, clarified that undertakings that
pursued ‘an activity equivalent to resale’ would not be protected so that authorized distributors would be
entitled to refuse to sell vehicles to such third parties. This seemed to conflict with Art 3(11) of the Regula-
tion as it implied that even duly authorized intermediaries holding an express mandate from final consumers
could be refused delivery if de facto they pursue an activity equivalent to resale. Thus Peugeot challenged
this decision before the Court of First Instance on the ground that although Eco System was legally an agent
By permitting exclusive and selective distribution systems, considering that all
manufacturers used such or similar agreements throughout the Community, the
Regulation allowed a cumulative anti-competitive effect to be generated by the
resulting network of agreements. On the one hand, through their single branding
clauses these agreements foreclosed or hampered market access for new manufac-
turers so that manufacturers might not have found distributors for their products
because all of them were bound to their existing supplier by an exclusivity clause. On
the other hand, the selectivity features of the agreements could likewise have had a
negative anti-competitive effect on distributors since EU-wide quantitative selection
coupled with territorial exclusivity of all dealers might have resulted in new distrib-
utors being unable to find a manufacturer willing to sell new cars to them.
An argument brought by manufacturers to justify exclusivity apart from the usual
‘enhancing of inter-brand competition concept’ is that it ensures national coverage of
the supplier’s network as without allocated territories while the more populous areas
would be dominated by a few dealers and the weak ones ousted (due to fierce compe-
tition leading to closures), the less populated areas would not be adequately catered
for as dealers would concentrate on where demand is high. But this argument ignores
the fact that the rural areas could still be catered for by outlets that might take
different forms than those in urban areas (eg cooperatives or dealer groups) while as
regards the urban areas, that there would be a degree of dealer openings and closures
is the way a healthy market operates – lack of closures due to allocated territories is
a market operating in an unnatural manner.
Moreover, this system of exclusive territories tends to protect inefficient dealers –
efficiency can best be ensured through the discipline of market forces. Furthermore,
the granting of exclusive territories and the associated prohibition on the use of
personalized advertising outside the territory represents both a restriction on entry
and a major restriction on dealers’ ability to grow and hence a further disincentive for
efficient dealers to displace the inefficient.
of the consumer, in reality it pursued an activity equivalent to resale within the terms of this Notice. But the
CFI saw no conflict between the Regulation and the Notice. Nevertheless to clarify matters the Commission
within a fortnight of its decision adopted a specific notice on intermediaries – Clarification of the Activities
of Motor Vehicle Intermediaries [1991] OJ C329/20 – to further clarify the circumstances where they can
intervene on behalf of consumers setting out various criteria that distinguish intermediaries from mere
resellers. See S Petropoulos ‘Parallel Imports, “Free Riders” and the Distribution of Motor Vehicles in the
EEC: The ECO System/Peugeot Case’ [1994] Consum L J 9. In particular the Notice placed various restric-
tions on intermediaries, some of which hindered them from giving an efficient service by limiting their
scope to organize their businesses freely and in the most efficient way. Eg, intermediaries had to avoid
carrying out their operations using a common name or sign, were prohibited from using an outlet within the
premises of a supermarket where the principal activities of the supermarket are carried out as well as from
receiving discounts different from those which are customary on the market of the country in which the car
is purchased. As a result of these restrictions, an intermediary was unable to get better deals for his
customers by grouping orders together and thereby getting higher rebates from a dealer who would save
advertising costs because of such group orders. Thus these rules governing the activities of intermediaries
made it difficult for them to become an easy and efficient channel for buyers who want to take advantage
of the price differentials in the single market and hindered intermediaries from growing sufficiently to force
manufacturers to reduce the price differentials in Europe.
The usual ‘free rider’ argument was brought by car manufacturers to justify the
selectivity and exclusivity elements of their distribution network. However, the free
rider argument does not take into account that not all consumers need the expert
advice of authorized dealers. Consumers are increasingly making use of specialist
magazines and the Internet as alternative source of information so that when they
visit the dealer they would already have decided on the make and model. In such
cases through this system authorized by the block exemption consumers were being
deprived of lower prices as they were constrained to pay for a service that they do
not need (prices reflect the cost of such services). Allowing alternative retail outlets
for new cars would mean that such category of consumers would be able to buy a
car at a cheaper price by forfeiting the service of expert advice. Indeed this would
be consonant with the principle currently underlying EC consumer policy that its
role is to ensure that the consumer is allowed to make his own fully informed
choices rather than to impose on him the choice that society thinks is best for the
consumer.
Likewise the practice of requiring dealers to achieve specified minimum standards
relating to various aspects of their business as endorsed by the block exemption
prevented some dealers from setting up and operating businesses with lower costs
and hence lower prices. This prevented the authorized dealers from adopting more
modern, efficient and cost effective forms of retailing that enhance intra-brand
competition, depriving consumers of lower prices and better delivery times, innova-
tive forms of car retailing more in line with consumer preferences and greater choice
of retailer from whom to purchase their new cars.29
Moreover, the combination of selectivity and exclusivity elements in the distribu-
tion system together with the strict restrictions on intermediaries meant that other
alternative forms of car distribution outside the manufacturer’s dealer network that
arguably provide consumers not only with a more convenient form of retailing and a
wider choice but possibly lower prices due to lower distribution and specialized
29 According to the Regulation, a dealer could use all existing means to promote the sales of new cars
provided that he observed the minimum standards laid down by the manufacturer relating to advertising
and did not personally contact potential customers located outside his contract territory such as for instance
via e-mail – otherwise the promotion of new cars by dealers through the Internet could not be prohibited,
even if the general advertising or promotion on the Internet reached customers outside the advertiser’s
territory (this is considered as passive sales by the Guidelines on Vertical Restraints). The difficulties arose
however when the block exemption was applied to brokerage or agency arrangements between dealers and
Internet operators. The Regulation hampered arrangements by virtue of which Internet operators might
operate as brokers or agents acting on behalf of the dealers. Apart from being inappropriate for the use of
Internet as this removes geographical barriers and territorial exclusivity, these rules had actually been used
by car manufacturers to impede the activity of Internet operators acting on behalf of a given dealer in the
exclusive territories of other dealers. See the European Commission’s report (n 22) point 406 and Monti
(n 22) 7. The Regulation also excluded Internet operators from qualifying as dealers as they would not
fulfil the traditional criteria for the selection of new dealers used by all car manufacturers and endorsed by
the Regulation. Besides, the Regulation only exempted distribution agreements for new cars if the distrib-
utor apart from selling new cars also provided after-sales servicing – something which the Internet operator
is not in a position to provide. Nor did the Regulation entitle dealers to sell to Internet operators who would
then resell directly to consumers as it exempted the prohibition of the sale of new cars by dealers to inde-
pendent resellers. Even acting as intermediaries might have presented problems for Internet operators
service costs such as Internet retailing,30 supermarkets, vertically integrated sales
companies or dealers specialized in the sale of a specific type of car were inhibited
because the supplier was allowed to refuse to supply such alternative outlets with
stock and to prevent his dealers from selling to them.31
Multi-branding or multi-marketing (ie, the sale of competing manufacturers’
vehicles) was also to a large extent excluded by the Regulation and most car dealers
in fact only sell cars belonging to one manufacturer, even if sold under different
brands. Selling a make produced by a different manufacturer would only have been
allowed in the rare instance where the seller is a separate legal entity run by separate
management and where the sale is made in separate premises and in a manner which
avoids confusion between makes.32 These restrictions laid down in the Regulation
regarding separation of premises and management proved to be unattractive to
because of the above mentioned requirement of a written and signed mandate in the Regulation. This
requirement raises practical problems for transactions carried out via the Internet where the authorization
may consist of an electronic message. Likewise sales via supermarkets generally suffered from the same
difficulties as Internet operators when they act as brokers or agents of a dealer, as dealers themselves or
as independent resellers of cars. Acting as intermediaries for final consumers could also present problems
for supermarkets. Ironically, the restrictions imposed in the notice on intermediaries (n 28) were intended
to protect consumers but they might discourage supermarkets to offer such services to the consumer.
According to the notice, supermarkets had to take all measures to avoid confusion in the minds of
consumers as regards on the one hand their activities as an intermediary and on the other their normal
commercial activities as a supermarket selling goods.
30 ‘Virtual dealers’ would promote new cars solely or mainly through the Internet and deliver them to
customers’ homes. Since customers might rarely visit the premises of such dealers, the premises could be
provided more cost-effectively, in lower-cost areas, than existing showrooms. It is also envisaged that as
greater use is made of Internet in car distribution in Europe, parallel cross-border trade would flourish
resulting in a reduction in price differentials between Member States and an increase in competition in the
after-market between the official networks and independent undertakings.
31 During the February 2001 hearing on the European Commission report the Comitato Consumatori
Altroconsumo argued that it should be the free market and not a regulation that determines the form of
distribution that retailers can best develop to meet demand. This would enable consumers to gain from the
big differences in price between Member States. This would mean that there would not be just one form
of distribution for the whole of Europe but the market would develop various alternative forms of distri-
bution determined by market forces and differing according to the type of car and geographically or
regionally tailored to the local demand. See <http://www.europa.eu.int/comm/competition/car_sector/
distribution/eval_reg_1475_95/report/hearing/#02_13>.
32 The Commission reported (Commission report n 22) that in practice true multi-brand dealerships
where dealers sell brands from different manufacturers not belonging to the same group, are rare as in
most cases where a dealer sells a second brand this brand belongs to the same manufacturer. Moreover, a
good percentage of all main dealers sell only one brand. In UK, according to the UK Competition
Commission’s report (n 22), most dealer groups operate separate franchises for several suppliers and some
operate multiple franchises from distinct but adjacent premises. In the US multi-branding dealerships are
more common as US rules on multi-marketing are less strict but the European Commission (report n 22)
shows that even here the dealers generally take complementary franchises rather than franchises for prod-
ucts directly competing with the products they are distributing. Only a very small percentage of US
dealers would sell competing American makes – most would sell European or Asian makes with the
American make.
dealers in financial terms so that real multi-marketing was rare.33 This prohibition
of multi-marketing as well as of the sale of spare parts that do not match the quality
of spare parts of the contract range34 was generally allowed by the Regulation
because this was deemed to contribute to the concentration of the dealers on the
contract products and thus ensure appropriate distribution and servicing of vehicles.
But multi-marketing is advantageous to final consumers because it provides a
wider range of products and/or brands at one single site obviating the need to shop
around to compare different models. Though adjacent dealerships as permitted by
Regulation 1475/95 would still have reduced search costs for the consumer, they did
not allow the possibility of receiving directly comparative advice from sales staff on
the merits of cars of different brands. Thus the perceived benefits for consumers from
multi-marketing intended by the Regulation never materialized.
Suppliers argued that brand exclusivity was needed because cars are complex,
expensive and potentially dangerous products and so sales staff must be experts in
the particular brand but this argument is unpersuasive since surveys show that a good
proportion of consumers would wish to purchase cars from multiple brands outlets or
supermarkets and because they increasingly obtain their information from sources
other than the expert salesman – they do not seek his expert advice to purchase a new
car.
It has also been argued that consumers do not expect unbiased advice from sales
staff in an outlet which is exclusive to one brand, whereas they might in a multi-brand
outlet, with a consequent risk of their being misled if the outlet concerned pushes the
models that brings them the highest commission. However, this difference between
the two situations should not be exaggerated as even sales staff in an exclusive outlet
may be motivated to push one model variant ahead of others, if for example, the deal-
ership has a particular desire to sell that variant in order to meet a sales target and
hence earn bonus.
A further important consideration is that since with multi-marketing dealers are
able to choose which products to offer, suppliers would have to compete for their
business. This competition at wholesale level for dealers’ ‘shelf-space’ would bring
downward pressure on wholesale prices and increased pressure on suppliers to
improve product quality and overall value for money. It is also argued that brand
exclusivity has a negative effect on innovation as it makes it impossible for suppliers
with a small share of total sales and for new entrants to have their products displayed
and sold by existing outlets. Moreover, brand exclusivity greatly restricts dealers’
freedom to develop multi-franchise outlets and reduces the choice of type of retailer
from which customers may buy new cars and reduces innovation in car retailing.
33 The restrictions did not allow dealers to take advantage of the economies of scale which multi-
marketing would normally allow as regards overheads. Dealers were also unable to develop buying skills
and use them to select the products that offer the best value for money.
34 As regards spare parts that match the quality of contract goods, the dealers had to be allowed to
source such parts from other suppliers and to use them for the repair of vehicles unless this is done within
the warranty period or in the context of a recall operation.
Car manufacturers were required by the Regulation to impose on dealers the obli-
gation to provide after-sales services. This tied two different types of businesses – the
sale of new cars to the after-sales services activities. However the Commission
regarded the linking of servicing and distribution of new vehicles as more efficient
than a separation of both activities, particularly as the distributor must give new vehi-
cles a technical inspection according to the manufacturer’s specifications before their
delivery to final consumers (recital 4). It was claimed that there is a ‘natural link’
between sales and servicing based on technical35 and economic36 considerations.
Moreover, it was argued that the link guarantees safety and product reliability for
consumers as the dealer himself would be required to carry out the pre-sale inspection
of the car being sold and ensures appropriate servicing thereafter.
However, today this link is not proved empirically as a number of car manufac-
turers have in fact appointed separate service outlets so as their dealers may
concentrate solely on the sale of new cars while some dealers themselves run service
centres that are physically separated from their sales outlets. Indeed, it is claimed that
the technical and economic considerations that hitherto justified this link no longer
apply nowadays.37 And in any case there are alternative ways by which the necessary
result can be achieved without having the tying; for instance, by a sales only retailer
subcontracting local garages for this purpose and some of the pre-delivery inspec-
tions being done by the supplier centrally while for warranty related services the
supplier could approve a number of garages as suitable to carry out warranty and
product recall work.
Moreover, though it is argued that such a tying of sales and servicing is advanta-
geous to all – manufacturers, importers, dealers and consumers – the majority of
consumer associations actually hold the view that such a link is not indispensable and
35 Such as that the new car requires a pre-delivery inspection according to the manufacturer’s speci-
fications which can only be carried out by the dealer who delivers the car to the final consumer. Moreover
the link was also considered important for the purposes of the manufacturer’s warranty, recall campaigns
and vehicle repair and maintenance.
36 Profitability from the sale of new cars is low and so dealers need to supplement their income by
revenue from the more lucrative and viable business of after-sales services.
37 Pre-delivery inspections are no longer necessary and where required are already carried out with
the car manufacturer’s consent by undertakings that do not belong to its distribution network. Moreover,
since the car manufacturer has no control over the repair and maintenance of a car once sold, there is
nothing to stop consumers from seeking other network dealers or service outlets than the one from whom
the car was bought or even independent repairers who are all technically equipped to carry out such after-
sales services, without this having an effect on the warranty – this therefore defeats the argument that
technical reasons militate in favour of the link. As for economic considerations, the Commission in its
report questions whether the reason for the low profitability of new car selling is really due to lack of
incentive on the part of dealers to rationalize their sales departments to reduce costs because they have the
possibility of offsetting this activity with profits from the after-sales department. It could therefore well be
that economically the sales activity could in reality be a stand-alone activity and remain viable as in such
a scenario the dealer would make it adequately profitable by reducing costs, once he can no longer rely on
the after-sales activity. Moreover, in order to be able to honour the warranty and offer repair services for
faulty vehicles free of charge to their customers it is not necessary for manufacturers to tie selling of cars
to after-sales services as manufacturers can, as some do, make arrangements with reliable service outlet
networks to carry out the repair services and then be reimbursed by the manufacturer.
that a split would be advantageous for consumers with some associations criticizing
the cross-subsidization between sale and servicing activities.38
Furthermore, while pre-sale inspection is increasingly not necessary nowadays,
high consumer mobility today results in cars being serviced not by the dealer who
sold the car but by another network dealer or service outlet. Since all these undertak-
ings operate on the basis of the standards set by the manufacturer, the consumer is
guaranteed safety and product reliability without the need for the dealer to be obliged
to offer the after-sales services as well. So the behaviour of consumers puts in doubt
the existence of a natural link between these two activities. This conclusion is further
strengthened by the findings in the European Commission report that owners of older
cars that naturally are in need of more repair tend to seek independent repairers rather
than the dealer from whom the car was bought to preserve the value and safety of the
car.
Furthermore, a study carried out by Autopolis concluded that although some
consumers want their car serviced by the same firm that sold them the vehicle, the
sales-service link was in the main not driven by a genuine market need, but was rather
‘forced’ by car manufacturers operating within the Regulation.39 The imposed link
curtailed the activities of many types of undertakings engaged in car repair outside
the network. Autopolis claims that ‘without this imposition there might have been
more opportunity for innovative offerings from a variety of operators in both the fran-
chise and non-franchise sectors, in response to consumer-driven market
requirements’. It also observed that lack of standardisation in electronic diagnostic
equipment might also be used by the car manufacturers to shut independent repairers
out of a large part of the repair and servicing market.
It was also argued by suppliers that this tying of sales with servicing was necessary
because a dealer business combining both sales and services was inherently more
stable than one providing sales only because inter alia of the cyclical nature of the
new car market. But this means that once there exist these reasons, even without
tying, dealers would do both anyway – they would still continue to operate an inte-
grated business even if they were not required to do so. On the other hand, the
compulsory element in this tying prevented the emergence of outlets specializing in
either new car sales or supplier-approved servicing but not both. Consumers were
thus left without a choice of type of outlet while the benefits of specialization in both
were dubious.
With a view to enhancing consumer choice in relation to the range and price of
spare parts (non-originals of matching quality are about 30 per cent cheaper
according to the European Commission report) the regulation protected the freedom
of dealers to purchase spare parts of matching quality from sources other than the car
38 Spare-part producers were also critical as they felt that this tying was strengthening the dominance
of manufacturers and their dealer networks over spare-part suppliers as all parts were sourced through car
manufacturers thereby cutting out spare-part producers and preventing them from having direct access to
the dealer networks.
39 The Natural Link between Sales and Service November 2000
<http://www.europa.eu.int/comm/competition/car_sector/distribution/#studies>.
manufacturer with whom they have a contractual relationship for the repair and main-
tenance of cars. On the other hand, in order to protect another consumer consideration
– his safety – this freedom was limited by the requirement that the parts must corre-
spond in quality to those produced and distributed by the car manufacturer who was
entitled to verify the quality of these parts and to require dealers to use original parts
only for work under guarantee, free servicing and vehicle-recall work. Moreover,
there was a general obligation imposed upon dealers to inform customers on the use
of non-original spare parts – a rare case of a competition law measure imposing an
information obligation in favour of consumers. Usually such information obligations
are contained in consumer protection measures that in tandem with competition law
guarantee fair trading in the market for the consumer by redressing market failures
and information deficiency that inhibit proper economic self-determination.
However, the European Commission report showed that in reality dealers due to
discounts and other incentives or indirect coercive tactics by car manufacturers
generally preferred to use original spare-parts so that consumers were not getting the
benefit of choice and lower prices.40 So the objective of the Regulation was not being
fully achieved.
Another weakness identified by the European Commission report was the weak
consumer choice as regards independent repairers because due to various practical,
economic, financial and technical reasons most independent repairers in contrast to
the dealers still did not have full access to technical information raising even safety
and environmental concerns.
Another factor that the Commission identified as weakening consumer welfare in
relation to after-sales services was that most manufacturers have inserted a clause
that makes the manufacturer’s warranty conditional on the consumers having their
cars serviced solely by the network dealers or service outlets so that the warranty is
forfeited if the car is repaired or maintained by an independent repairer. This tying
clause which can have a very negative effect on competition and consumer welfare
especially where there is a low ratio between the duration of the warranty and the
lifetime of the vehicle was not prohibited by the Regulation.
40 Large discounts granted by car manufacturers to their dealers for the purchase of original parts; the
practice of most car manufacturers to recommend (though not impose) to their network the range and
number of spare parts that a dealer should hold for optimum efficiency or include annual target sales; fear
of losing end-of-year bonuses granted on the basis of the annual original spare-part turnover; fear that
excessive use of non-original parts will lead to the termination of their contract; the practice by most car
manufacturers (though this was blacklisted by the Regulation) of requiring their component suppliers to
sell components and spare parts for a given model only to them and not directly to its dealers. Moreover,
it is alleged that though Regulation 1475/95 (recital 8) contained a presumption that parts coming from the
same source of production were identical in quality to original spare parts and required the spare-part
manufacturer to confirm that these parts correspond to those supplied to the car manufacturer, some car
manufacturers still raised doubts about the quality of such parts. Furthermore, in some cases car manufac-
turers followed a policy of hindering car part producers from placing their trademark or logo in a visible
manner on these parts in order to avoid transparency as to the real origin of such parts. Thus consumers
would be unable to make a real choice between an original part and a part coming from the same part
producer but distributed under his brand name. Such a practice would of course be a violation of the
Regulation.
Yet another feature of Regulation 1475/95 that was criticized was that the standard
practice of suppliers setting list prices that in fact amount to recommended retail
prices (RRP) was not prohibited by the block exemption that only blacklisted a prac-
tice or requirement that directly or indirectly restricted the dealer’s freedom to
determine prices and discounts (Art 6(6)). Suppliers have argued that this practice is
actually beneficial to consumers as it provides a benchmark price with which dealers’
prices could be compared. Yet as is shown by the UK Competition Commission’s
report41 while this is true in certain retail sectors and circumstances, the retailing of
new cars differs from other retail sectors. Where retailers frequently offer different
prices and these are clearly advertised, whether in the media or in the retail outlet, the
posting of an RRP or the knowledge of it provides the consumer with useful informa-
tion for evaluating an offer and comparing it with those of other retail outlets. But in
the new car retail sector the price is open to a degree of negotiation and dealers gener-
ally display the RRP itself – or an on-the-road price based on it – rather than the price
at which they are prepared to sell. The real transaction price that is available may be
significantly different from the RRP but is not easy to establish. Not only do
consumers differ in their knowledge and expectations of the discounts that can be
negotiated, they cannot tell whether a particular offer is a good deal or not. In these
circumstances, the RRP is likely to have a misleading effect, at least for some
consumers. This is the more likely in that there are other features of the package for
the consumer – the wide availability of financial benefits, equipment ‘extras’ and
negotiated trade-in terms – on which the consumer’s attention may be focused, rather
than on the RRP. So in the circumstances of the car industry the suppliers’ practice
of setting RRPs reduces transparency for the consumer (in some countries this lack
of price transparency is further exacerbated by the practice of bundling of financial
benefits such as cheap finance and insurance with the car price) and increases the
average price paid.
A further effect that arises from the wider lack of transparency, in which RRPs are
a central element, is a reduction in the impact on transaction price setting of those
consumers who shop around, since dealers are able to discriminate between
purchasers and offer the more active consumer a better price without feeling any
pressure to offer the same price to other consumers. Without RRPs dealers would
play a more important role in price-setting by publicizing their own price lists.
Though these prices would also be negotiable as this is the custom and practice in the
market, this situation would increase the transparency of dealers’ price offers. Shop-
ping around by consumers would then lead to downward pressure on dealers’
published prices. So again this practice that was allowed under the block exemption
was also leading to prices for consumers higher than they would otherwise be.
41 Report on the Supply of New Motor Cars within the UK (The Stationery Office 2000) CM4660.
4. The New Regulation on Vertical Agreements and Concerted Practices in the
Motor Vehicle Sector
The new block exemption,42 that, while no longer exempting a combined selective
and exclusive distribution system nevertheless allows the manufacturer either to
impose a selective (minus the ‘location clause’) or an exclusive distribution system
on its dealers provided market share thresholds are not exceeded, seeks to redress
most of these shortcomings. For instance, the inequality of power that existed
between manufacturers and dealers43 has now been remedied in the new regulation
through more safeguards; supply quotas and sales targets must now be set for the
entire common market rather than for the small allocated territory as provided under
the previous regulation;44 the new regulation allows the development of innovative
distribution formats so that official dealers may now develop internet sales or enter
into partnership with referral sites to promote their business and with all kinds of
intermediaries having orders from final customers including supermarkets; the new
regulation provides for improved access to technical information for independent
repairers; it injects more competition into the market by now ensuring that inde-
pendent resellers and intermediaries are not hindered from acquiring new cars
unlimitedly by inter alia also removing the 10 per cent rule and all the other restric-
tions prescribed in the related Notices though it still maintains a distinction between
independent resellers and intermediaries by retaining the mandate requirement in
respect of the latter;45 multi-branding is made easier as different makes can be exhib-
ited in the same showroom but in different sales areas while the ‘location clause’ in
selective distribution systems (this clause allows a manufacturer to request that a
distributor only operates from a certain place of establishment usually in conjunction
with an undertaking not to allow any other distributor to open a showroom in that
territory) is now prohibited; the tying of the new car selling business to after sales
services activities has been removed while the new regulation seeks to ensure that the
consumer does get the full benefit of free competition in the spare parts market by
guaranteeing better direct access from spare part producers to authorized repairers
and greater consumer choice between original spare parts supplied by the car manu-
facturer, original spare parts supplied by the spare part manufacturer and matching
quality spare parts supplied by another spare part producer.
Although the new regulation retains the much criticized non-prohibition of the
standard practice of suppliers setting list prices that in fact amount to recommended
retail prices (Art 6(6) in the previous regulation and Art 4(1)(a) in the new regulation
only blacklists a practice or requirement that directly or indirectly restricts the
dealer’s freedom to determine prices and discounts), since the regulation has
42 Commission Regulation 1400/2002 on the application of Art 81(3) of the Treaty to Categories of
Vertical Agreements and Concerted Practices in the Motor Vehicle Sector [2002] OJ L203/30 in force
since 1 October 2002.
43 See n 22.
44 See n 23.
45 See n 28. These notices were abolished but the Regulation retains the mandate requirement – see
explanatory brochure <http://europa.eu.int/comm/competition/car_sector>.

removed the combination of selectivity and exclusivity elements from this distribu-
tion system, RRPs, as in any other distribution system, will now tend to provide more
benefits than harm to consumer interests. Certainly RRPs provide a single benchmark
price for each model variant and this would be very beneficial for consumers as it
reduces search costs. Moreover, some of the more vulnerable consumers might be
induced to pay higher prices than they otherwise would if RRPs were to be discon-
tinued. At the same time, RRPs would be much less likely to have an adverse effect
on transaction prices as retailers would now play a much more important role in the
advertising and setting of prices as they will no longer be subject to the suppliers’
pressure that induced them to stick closely to the suppliers’ RRPs.
Not all features of the previous regulation impacted negatively on consumer inter-
ests – in some respects the regulation did on balance result in consumer benefits. And
these features were retained in the new Regulation. In order to ensure the consumer’s
basic right to buy a motor vehicle and to have it maintained or repaired wherever
prices and conditions are most advantageous to him in the common market the Regu-
lation continues to provide that:
● A consumer is entitled to the normal product range that the dealer offers to his
incumbent customers. Moreover, this right is extended to vehicles which corre-
spond to vehicles distributed by a dealer but with the specifications marketed by
the manufacturer in the Member State where the consumer wants to register the
vehicle. This ‘availability clause’ in the Regulation means that a British or Irish
consumer is entitled to buy a right-hand drive passenger car from a dealer in
mainland Europe and the manufacturer is obliged to supply such a dealer on
order with cars with such specifications that are sold in UK and Ireland and vice-
versa. However, the dealer may of course be charged a supplement by the manu-
facturer in addition to the normal price, provided such supplement is objectively
justifiable on the basis of special distribution and administrative costs and differ-
ences in equipment and specification and not discriminatory (recital 20). Art 6
guards against abuse by empowering the Commission to withdraw the benefit of
the block exemption where objectively unjustified prices or conditions are
imposed for corresponding passenger cars. The latter scenarios impact directly
consumer interests and so the block exemption has an inbuilt mechanism to
diffuse situations where consumer interests are being affected negatively and in
fact the Commission in its report mentions one case where the car manufacturer
was found to be charging right-hand-drive supplements not based on objective
criteria and following the Commission’s intervention it reduced the supplement
substantially.
● The consumer’s freedom to source a vehicle or after-sales services wherever it
is most advantageous is also protected from direct or indirect bilateral or unilat-
eral measures on the part of manufacturers or distributors such as longer delivery
times or refusal to carry out warranty work. Thus in order to facilitate cross-
border sales of new cars by consumers, the Regulation obliges manufacturers to
impose on their dealers the obligation to honour the warranty and to perform free
servicing and vehicle recall work even when the car has been bought from
another dealer in the country or outside the country (recital 17). This rule that
clearly guarantees and protects the freedom of consumers to purchase new cars
wherever in the European Union they find advantageous prices and conditions
has its origins in the earlier Commission decisions such as Zanussi.46
● The Commission attempts to guard consumers against price differentials in
Europe by retaining the right to withdraw the benefit of the block exemption
should prices differ substantially between Member States as an effect of any
particular vertical agreement falling within the scope of the Regulation. This
apart from when there results a lack of competition or where parallel trading is
hindered in addition to the automatic loss of exemption when the manufacturer,
supplier or another undertaking within the network directly or indirectly impedes
final consumers from buying a vehicle where they consider it to be most
advantageous.47
In addition the prohibition of the ‘location clause’ in the new regulation means that
distributors from ‘cheap’ countries can now open sales or delivery outlets in high
46 Zanussi SpA Guarantee [1978] OJ L322/26. The first time the Commission made it clear that
geographical limitations on the terms of manufacturers’ guarantees or the way in which they were applied
could infringe Art 81(1) was in the context of an investigation into distribution of Constructa’s domestic
electrical appliances. At the Commission’s insistence arrangements were made to ensure that purchasers
of products in other Member States would have the manufacturer’s guarantee honoured in Belgium or
Luxembourg if necessary (IVth Report on Competition Policy (Commission 1974) point 109). This
approach has been endorsed by the Court. In Case 31/85 ETA Fabriques d’Ébauches SA v DK Investment
SA [1985] ECR 3933 the ECJ noted that it is important that ‘the possibility of obtaining products by means
of parallel imports should not be restricted. As far as the guarantee scheme was concerned, … it was essen-
tial for parallel imports to be fully covered by the manufacturer’s normal guarantee. A guarantee scheme
under which a supplier of goods restricts the guarantee to customers of his exclusive distributor places the
latter and the retailers to whom he sells in a privileged position as against parallel importers and distribu-
tors and must therefore be regarded as having the object or effect of restricting competition within the
meaning of Article 85(1) [81(1)] of the Treaty. The fact … that the manufacturer tolerates the distribution
of his products through a network of parallel importers must be considered irrelevant, since the guarantee
scheme may have the object or effect of bringing about, to some extent, a partitioning of national markets’.
Likewise in Case 86/82 Hasselblad (GB) Ltd v Commission [1984] ECR 883 Court held that there is an
infringement of Art 81(1) where a manufacturer undertakes with his exclusive distributor to grant a guar-
antee on his products to the consumer but withholds the benefit of this guarantee in respect of the products
purchased through parallel importers.
47 Prior to July 2002, this protection against price differentials was not absolute since the Commission
declared in the Notice accompanying the original Regulation 123/85, [1985] OJ C17/4, that it will inves-
tigate price differentials only if certain given conditions subsisted. Indeed though price differentials
continue to pervade the car industry this withdrawal mechanism was never activated and the Commission
found in its report that although its latest car price reports showed price differentials have not become
significantly smaller but regularly exceed 20 per cent and could be as high as 65 per cent in some cases
(its 2000 report showed that some consumers in the UK pay up to 76 per cent more for certain brands
than their European counterparts) it had not investigated because the excessive difference in price was
mostly due to the high car taxes imposed by some countries. According to the Notice, the Commission
would not investigate price differentials that do not exceed 12 per cent, nor those that exceed that
percentage by less than 6 per cent over a period of one year. Neither would it investigate if only an insig-
nificant portion of motor vehicles is concerned or if taxes, charges or fees for a new vehicle amount to
more than 100 per cent of the net price or if the level of resale prices is subject to state measures for more
than one year. Moreover, the Commission would also take account of exchange rate fluctuations when
investigating price differentials. However at least the reports on car prices within the EU published every
price countries and undercut the incumbent dealers. As a consequence consumers

would have a real opportunity of buying from a foreign distributor or as is more likely
the manufacturer would have to even-out prices across Europe. This latter effect so
far, from a survey carried out seven months from the entry into force of the new regu-
lation, has not materialized – the latest Commission car price report showing that
price differences remain substantial48 – but this might be due to the fact that there was
a one-year transitional period till October 2003 and that the prohibition of the loca-
tion clause is effective only from October 2005.
The right of consumers to make cross-border purchases of new cars to take
advantage of lower prices or shorter delivery times that this regulation seeks to
actively promote has also been safeguarded by direct Commission intervention in
cases where consumers complained that exercise of this right was being hampered
in violation of the Regulation. One such case was the Commission decision against
Volkswagen AG and its subsidiary Audi AG that was charged a hefty fine for oper-
ating a strategy in conjunction with their common importer for Italy of hindering
and/or preventing purchases of new cars in Italy by final consumers, particularly
German and Austrian consumers.49 In another case Volkswagen AG was found
guilty of price-fixing (resale price maintenance) that was discouraging German
dealers from competing effectively with dealers in other Member States where
prices were lower to the detriment of German consumers while reducing incentives
for customers from other high-price markets (such as the UK) to purchase a car in
six months by the Commission which it analyses in order to trace the development of price differentials
within the EU in view of the above-mentioned provision in the Regulation created to some extent greater
price transparency on recommended retail prices and induced consumers to acquire cars in another
Member State where prices are lower. It should be noted that the 12 per cent threshold was only chosen
as an indicator for price differentials which might need to be investigated and not as an absolute limit for
acceptable price differentials. The 12 per cent threshold was chosen because it was considered that if
price differences exceeded 12 per cent, demand would normally become mobile to a significant degree
and lead to parallel trading which in turn would exert a downward pressure on prices. So if price differ-
ences remained above that limit it would be an indication that something was wrong and a cause for
investigation. But of course the 12 per cent limit remains arbitrary and open to question as to its appro-
priateness. Interestingly, in the original draft of the first Regulation the threshold was actually an
absolute limit for acceptable price differentials as exceeding the percentage would have led to a tempo-
rary suspension of the contractual clause that prevents the resale of vehicles to independent resellers.
This notice has now been abolished.
48 Press Release IP/03/1117 of 25 July 2003.
49 [1998] OJ L124/60 confirmed on appeal by CFI in Case T-62/98 Volkswagen AG v Commission
[2000] ECR II-2707 but case is on appeal to the ECJ, Case C-338/00 (judgment pending). In Germany and
Austria prices tended to be higher. The measures identified as leading to such a restriction on parallel trade
were the bonus policy operated by Volkswagen by which it sanctioned export sales through non-payment
of the bonus normally granted for domestic sales, the restrictive supply policy, the behaviour towards
consumers who were discouraged from buying new cars in Italy and the control, warnings and sanctions
in respect of Italian dealers. See also U Krause-Heiber and K Schumm ‘Judgment by the Court of First
Instance of 6 July 2000 Concerning Commission Decision 98/273/Volkswagen of 28 January 1998’ (2000)
No 3 Competition Policy Newsletter 50.
Germany.50 While in another decision Opel Nederland was condemned for
restricting and preventing purchases of new Opel cars in the Netherlands destined
for immediate re-export to end consumers from other Member States.51
These cases are concrete evidence that in the context of the single market the
Commission is particularly vigilant to ensure that the consumer gets the full benefit of
the single market. Here the Commission has shown particular awareness of consumer
needs and of its responsibility in the protection of consumer interests with its decisions
bringing about clear benefits to consumers. The provisions of the Regulation in this
regard were clearly already favourable to consumer interests – where it had failed, and
it is here that the new Regulation tries to remedy, was in those aspects of the Regula-
tion that stifled the emergence of new forms of distribution by tying sales to services
and allowing selectivity and exclusivity elements to restrict competition.
In view of the shortcomings mentioned above the Regulation was not ensuring that
consumers were deriving from the distribution system endorsed by the block exemp-
tion a fair share of the benefits resulting from the restrictions exempted by the
Regulation as required by Article 81(3) EC and they could not take full advantage of
the European single market. Consequently, it replaced the Regulation with a radically
different one, one that tips the balance more towards consumer interests and gradu-
ally prepares the car industry for an eventually fully competitive environment52 when
50 [2001] OJ L262/14. The Commission found that when the car manufacturer introduced its new
Passat model in Germany it instructed German dealers not to grant discounts to customers but to hold to
the list price for all sales and even threatened dealers if they departed from the policy. Even under Regu-
lation 1475/95 price competition at the retail level was guaranteed as dealers were free to autonomously
determine prices and discounts to final consumers – car manufacturers were not allowed to directly or
indirectly restrict this freedom but could only recommend retail prices. This could be interpreted to extend
to freedom to advertise prices so that dealers are also free to advertise prices below the recommended retail
price. Likewise the Commission fined DaimlerChrysler AG in October 2001 for measures that restricted
or prevented sales to non-resident consumers and hindered cross-border sales of new cars – [2002] OJ
L257/1 – and is investigating similar cases concerning Renault SA, Peugeot SA and Citroen SA.
51 [2001] OJ L59/1. Appeal pending before CFI Case T-368/00 Opel Nederland BV v Commission.
See also IP/00/1028 of 20/9/2000 and U Krause-Heiber ‘Commission Decision of 20 September 2000
Imposing a Fine on Opel Nederland and General Motors Nederland for Obstruction of Exports of New
Cars from the Netherlands’ (2001) No 1 Competition Policy Newsletter 35. It used basically three meas-
ures to effect this strategy – the number of cars which dealers were expected to sell on the basis of their
sales targets had to be sold principally within the Netherlands, direct instructions were given to exporting
dealers to stop all export sales and bonus payments were forfeited by dealers carrying out sales to end
consumers from abroad. For, as stated above, while the Regulation allowed the prohibition of export sales
by an importer to resellers outside the network, it did not allow the prevention of sales to end consumers
from other Member States whether directly or via an authorized intermediary or to network dealers in other
Member States.
52 A fully competitive environment would take the shape recommended by the UK Competition
Commission – one bereft of selectivity and exclusivity elements where suppliers would be prohibited from
refusing to supply, on normal commercial terms, any party wishing to retail the supplier’s new cars;
retailers would be allowed to sell the supplier’s brand of cars not only to intermediaries but also to any
reseller; suppliers would be prohibited from withholding supplies on grounds such as that the retailer sold
competing makes, disapproval of retailer’s standards of presentation or facilities, disagreement over the
model ranges that the retailer wishes to sell or the provision of servicing or repair services; and suppliers
would also be prohibited from granting exclusive territories.
like other economic sectors it would fall within the scope of the more flexible vertical
restraints block exemption that would accommodate the new distribution methods
emerging in car retailing.53
53 K Middleton ‘The Legal Framework for Motor Vehicle Distribution – A New Model?’ (2001) 22
ECLR 3. Of course because of the 50 per cent market share threshold concerning parallel networks of
vertical restraints in the block exemption the large suppliers would not be able to benefit from this block
exemption but would have to ensure that their agreements satisfy the four criteria for an individual exemp-
tion on the lines of a possibly revised version of the guidelines on vertical restraints. Moreover the general
vertical restraints block exemption would also have to be modified to cater better for the particular char-
acteristics of the motor vehicle manufacture, distribution and servicing industry for, as the Commission
notes in its explanatory brochure <http://europa.eu.int/comm/competition/ car_sector>, under this block
exemption’s currently laxer rules there would be a regression even in terms of consumer protection.

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Vertical Agreements and Concerted Practices in the Motor

Vehicle Sector under EC Competition Law – Implications for

* LL.D. (University of Malta); LL.M. (University of Exeter); Ph.D. Candidate, Institute of

Paper on Vertical Restraints in EC Competition Policy (NCC London 1997) 16.

2. Selective Distribution Systems and Consumer Interests

consumers that cannot be achieved in fully competitive markets as is claimed by

3. Motor Vehicle Group Exemptions’ Impact on Consumer Welfare

of Parts 1 and 3 of Article 85’ [1982] NJILB 497, 503.

choice as it dampened parallel trading by reducing dealer capacity to compete on

explanatory brochure <http://europa.eu.int/comm/competition/car_sector>.

price countries and undercut the incumbent dealers. As a consequence consumers

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