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Brussels, 30 September 2005

Competition: new rules for car distribution bring dealers greater freedom to compete across the EU

So-called ‘location clauses’ in contracts between carmakers and dealers will, as of 1st October 2005, no longer benefit from automatic (“block”) exemption from the EC Treaty’s prohibition on restrictive business practices (Article 81) under the European Commission’s car distribution Block Exemption Regulation 1400/2002. These clauses have served to stop dealers from opening outlets outside geographical territories defined by carmakers, including other EU Member States. However, many carmakers and dealers have already removed these clauses from their contracts. The change allows dealers to compete more widely, thereby facilitating price competition and stimulating innovation in distribution. This change concerning location clauses is the final part of the Commission’s reform of competition rules for car distribution, the rest of which came into force on 1 October 2002 (see IP/02/1073). The extra three years before the ‘location clauses’ lost the block exemption was aimed at allowing carmakers and dealers time to adapt.

Competition Commissioner Neelie Kroes said: “This measure stands to further increase competition in the car distribution sector. I am pleased that many carmakers have already eliminated location clauses from their distribution agreements with dealers.”

The new rules concern passenger cars and light commercial vehicles. Once location clauses are removed from contracts with carmakers, dealers can operate outside their home territories, including across borders. This means that dealers can set up outlets wherever they see a business opportunity, for example in areas where their brand is under-represented or in countries where prices are higher. This change also paves the way for innovative forms of distribution such as multi-brand outlets. Consumers therefore stand to benefit from an improved choice of dealers.

The Regulation allows carmakers to require dealers to meet defined quality standards, ensuring a high quality dealership system for consumers. By requiring that secondary sales outlets comply with all qualitative standards applicable to dealerships in the area where the outlet is to be opened, and by checking compliance in advance, carmakers can normally avoid the danger of unfair free-riding on the investment and promotion efforts of existing dealers. The Regulation expressly recognises the efficiencies of selective distribution systems, which aim at stimulating investment by dealers to promote the brand in their local area.

Secondary sales outlets are unlikely to increase carmakers’ transactional and logistical costs, as the contract in force with the dealer will continue to determine where the carmaker must deliver the cars ordered by the dealer. This means that where dealers open a secondary sales outlet in another Member State, an additional contract with the local importer is not needed, although the carmaker can of course delegate to the local importer functions such as checking compliance with the qualitative criteria. The purchasing conditions and sales targets will remain those applicable in respect of the dealer’s primary location.

In order to benefit from the full legal certainty offered by the block exemption Regulation, carmakers and dealers are obliged to remove location clauses from their agreements no later than 30th September 2005. This appears to be industry’s preferred option.

Carmakers and dealers that nevertheless maintain ‘location clauses’ after 30th September 2005 may face investigation by the Commission, national competition authorities or challenges before national courts on the basis of the EC Treaty’s rules on restrictive business practices (Article 81). The Regulation does not treat location clauses as clear cut ‘hardcore restrictions’, but the onus would be on firms to demonstrate, on a case by case basis, that a location clause met all conditions required to justify an exception under Article 81(3) of the EC Treaty, and, in particular, to show that there were significant benefits that outweighed the restrictive effects of the location clause.

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