NFDA – Exploring the Competition Law Risks of Agency Models in the Automotive Sector
The NFDA has instructed its specialist legal advisers, TLT LLP and leading counsel, to investigate the concept of “agency” insofar as it applies to the automotive sector. The NFDA is continuing to engage with regulators - the European Commission and the UK’s Competition and Markets Authority (CMA) - on this important issue against the backdrop of block exemption/retained block exemption review.
The NFDA is also committed to working positively with interested OEMs and other representative bodies, as well as the CMA, to help support legally compliant and commercially viable solutions that deliver good consumer outcomes. The NFDA, like its members, considers that the interests of the sector are best served by a model that delivers the best for consumers in terms of price, quality, convenience and choice.
The NFDA has already received a number of enquiries from members asking for its views on the agency model and its impact on competition, and the NFDA would therefore welcome feedback on the issues and challenges raised by the agency debate.
Putting aside the question of whether the agency model represents a good outcome for consumers, the risks associated with implementing a distribution model that – if not structured correctly - fails to satisfy the complex and strict legal criteria applicable to it are substantial. From a competition law perspective, these range from huge fines (up to 10% of group turnover) to director disqualification (up to 15 years) for the senior management of the businesses involved.
The sector faces two enormously difficult challenges as part of any potential transition:
• For those parties who wish to pursue a ‘genuine agency’ model, there is danger that they undervalue the market-specific risks that OEMs will have to remove from dealers’ shoulders (both going forward and on a legacy basis) to benefit from benign competition law treatment.
Further, those that seek to apply a partial agency model1 (and to distinguish markets artificially to avoid having to undertake an holistic analysis of the risks incurred by dealers outside any agency arrangement) could also face difficult challenges. Competition law focuses on substance over form and looks at the economic reality of the situation. This involves examining the whole relationship between an OEM and a dealer as well as the use and treatment of sunk dealer investments for agency activities going forward, which is a far more complex exercise than simply drawing an easy line between past and future investments, and between agency activities and non-agency activities for the same OEM.
• For those OEMs who might propose a ‘non-genuine agency’ model on the basis that they are prepared for their agents to share commission with customers (and so retain some control over the transaction price), this can also create genuine antitrust risk. Depending on the circumstances, such arrangements could give rise to competition law infringements (indirect RPM) if dealers are, in reality, prevented in practice from advertising discounts or otherwise constrained by narrower (agency) margins from offering anything that resembles a true discount to consumers. This issue also needs to be very carefully examined taking into account the economic reality of the situation.
It is inevitable that any transition to a sales channel that will diminish or eliminate intra-brand price competition will attract regulator interest, particularly a competition authority such as the CMA, which has an increasingly strong consumer protection agenda, wide enforcement powers and an appetite to stamp its independent practice on the post-Brexit economy.
Indeed, complex competition issues and substantial risks aside, the transition to agency has the potential to attract the application of other rules that will present unexpected consequences – duties and liabilities – for those involved, which do not seem to be fully appreciated at this stage.
It follows that any transition to agency – the commercial benefits of which are uncertain – will require detailed consideration (and open debate) on the part of both the “principal” (OEM) and the “agent” (the dealer) before implementation. If certain OEMs persist with the model regardless, at least in the UK, the risk of adverse consequences should not be underestimated. This is why the NFDA, on behalf of its members, is open to engaging with interested third parties (the CMA, OEMs, their representative bodies etc.) to ensure that, if the market does evolve in this way, it does so in a manner that recognises and respects the appropriate rules and delivers the best outcome for
1 For example, an agency model for certain products, brands or activities and a normal distribution/reseller model for others.