Put the pedal to the metal

Whilst the competition rules against anti-competitive agreements can apply to franchise networks, the impact in practice has traditionally been low.

Whilst the competition rules against anti-competitive agreements can apply to franchise networks, the impact in practice has traditionally been low.  This is partly because competition authorities have taken a favourable approach to franchising and partly because of the potential 'life savers' available under EU law (e.g. the De Minimis Notice, the Vertical Agreements Block Exemption Regulation).

However, the decision taken by the UK's Competition and Markets Authority last year, in which it fined Mercedes-Benz (the franchisor) and its dealers (each a franchisee with a small share of the market for the supply of commercial vehicles) over £2.8 million for breaching UK competition law, may be the start of a shift in gear.

The dealers had colluded on their responses to requests for quotations from customers in each other's geographic 'zones' of business.  This was to ensure that the local dealer would win the business from his local zone.  Each dealer was fined between £116,000 and £660,000, wiping out up to 18 months’ of their profit after tax.

The franchisor, Mercedes-Benz, was held liable to pay over half of the total fine for its role as a 'facilitator' to the arrangement.  An employee of Mercedes-Benz organised (for a legitimate commercial purpose) and attended a meeting between two of the dealers at which the collusion took place.  By attending the meeting, that employee gave the dealers the impression that Mercedes-Benz approved of the arrangement. Unfortunately, she did not state that Mercedes-Benz did not condone the arrangement, she did not intervene to prevent discussions, and she did not leave the meeting.

This serves as a good reminder for franchise networks to put the pedal to the metal – rev up your competition compliance policies before you hit a red light.  For starters:

• Franchisees are competing businesses and must set their business strategies independently of competitors operating under different brands and the same brand.

• A franchisor or franchisee can be implicated in an infringement even if its involvement is limited, even if it is not active on the market (Mercedes-Benz did not sell direct to customers in its franchised territories) and (for serious infringements like this one) even if it has a small market share. 

• Franchisors should proactively alert franchisees to the importance of competition law compliance and the risks of getting it wrong.

• Franchisors should exercise particular vigilance in the conduct of their network, take documented steps to prevent anti-competitive conduct from arising and distance itself to the extent any problems do arise.

If you would like to discuss any of these issues please do not hesitate to contact us.