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Re-opening dealer networks – five competition law ‘watch outs’

As dealer networks in the automotive sector re-open for business following the COVID-19 lockdown, we share below our main competition law watch outs for suppliers over the coming weeks and months.

  1. We know that current market conditions are tempting some people to reach out to their competitors – any competitor contact needs to be managed carefully from a competition law perspective.

    Over the past few weeks we have seen several instances of staff exposing their businesses to competition law risk by contacting their counterparts at competitors to discuss commercial challenges arising in relation to COVID-19.

    For the most part, the examples we have seen have been seemingly well-intended, with the individuals in question seeking to overcome common problems rather than to act anti-competitively. Indeed, in these uncertain times, it is perhaps unsurprising that some people may want to exchange thoughts and ideas with others who they know will be experiencing the same challenges.

    The fact remains, however, that any contact with a competitor is potentially sensitive and should be properly risk-assessed in advance. Genuinely well-intended cooperation between competitors may well be lawful, but each scenario needs to be considered on its facts. The risks associated with getting it wrong are significant.

    Do therefore remain alert to the risks associated with contacts with competitors. Ensure that staff recognise that competition law continues to apply and that they should seek advice before having any meaningful contact with competitors.

  2. As they re-open for business, dealers are likely to need support and understanding from their manufacturers – but, when supporting dealers, suppliers must take care not to risk undermining the integrity of their selective distribution network.

    Ensuring that their selective distribution systems comply with competition law requires a degree of discipline and self-policing by suppliers.

    It is an inherent part of selective distribution, for example, that all authorised dealers must meet the relevant quality criteria, and that appropriate action should be taken against a dealer who fails to meet the criteria or who sells to an unauthorised reseller outside of the network.

    The re-opening of dealer networks is likely to bring pressure to bear on the operation of selective distribution systems. Compliance with COVID-secure rules for their premises might, for example, preclude (or, at least, make it more difficult) for some dealers to comply with aspects of the supplier’s quality criteria. Or, perhaps, financial constraints might impede certain dealers’ ability to comply.

    Advice should be taken before relaxing aspects of the network operation and/or before taking steps that might risk being perceived as giving certain dealers more favourable treatment than others. Ultimately, this is an area where pragmatic temporary workarounds should be achievable, provided appropriate care is taken to identify and manage any associated competition law risk.

  3. As dealers seek to make up for lost sales, suppliers must take care not to interfere in dealers’ commercial freedom.

    Even in normal times, we regularly experience suppliers grappling with the commercial temptation to interfere with dealers’ commercial freedom.

    Understandably, suppliers will often have firm views on the retail prices at which they would ideally like their products to be offered, which customers they would like each dealer to be focusing on selling to, whether they are supportive of online selling (including through platforms such as Carwow), and so on. But competition law is very clear – dealers must be free to make commercial decisions for themselves, without interference from their suppliers.

    In our experience, suppliers in the automotive sector are generally very well-versed in managing such issues. Indeed, their internal compliance messaging is bolstered by a long history of competition authority enforcement (and associated very significant fines) in the sector.

    These pressures are likely to be amplified as dealer networks re-open. In an effort to make up lost sales and shift excess stock, dealers may choose to offer significant discounts, increase their online sales activities and/or target customers from outside of their usual areas of operation.

    Suppliers would do well to remind their staff that they should seek guidance before doing anything that could risk being construed as interfering in dealers’ commercial freedom, otherwise they risk exposing themselves to considerable competition law risk.

  4. Take care to manage any product shortages appropriately.

    For many businesses, supply chains remain under considerable pressure and product shortages (or delays) continue.

    Generally speaking, competition law allows suppliers to decide for themselves what products they supply and to whom.

    However, to the extent that a supplier may hold a dominant market position, additional considerations come into play. Product allocation systems that risk being perceived as subjective, inconsistent or favourable to some dealers over others, or that appear to benefit the supplier’s own routes to market over third party dealers, potentially risk being challenged as an abuse of dominance.

    It is therefore important that suppliers have in place appropriate procedures for determining what product they will supply and to whom in times of shortage.

  5. Finally, competition law is not all about the don’ts - understand how you can lawfully support your dealers.

    Perhaps inevitably, competition law compliance is often perceived as a series of don’ts.

    It is however equally important to understand the dos.

    In the context of COVID-19, there are many ways in which suppliers may legitimately work with their dealers to help them re-open their sales premises safely and, hopefully, return towards normal trading conditions.

    There are however limits and, accordingly, appropriate care should be taken. Most importantly, suppliers’ engagement with dealers should not impinge on dealers’ commercial freedom or lead to coordination or any sharing of information between competing dealers regarding commercially sensitive matters.

 

Our underlying message to automotive businesses is simple: competition law continues to apply and COVID-19 does not create any excuses for acting in a manner that would ordinarily infringe competition law.

Again, over the past few weeks we have seen, through the eyes of our clients, examples of people getting it wrong with regard to competition law, in some cases simply because individuals have forgotten to consider the competition law implications of their actions.

If anything, the risks of getting it wrong are likely to be exacerbated over the coming weeks as dealer networks re-open in a very different world to the one in which they were operating two or three months ago.

Businesses would do well to take the opportunity to refresh staff’s familiarity with competition law. Consider running webinar refresher sessions or rolling out e-learning. And ensure that the compliance messaging is supported by senior management engagement and by legal teams’ (virtual) doors being open to staff who want to seek guidance or discuss issues that they come across.

Time will tell, but in the coming months we may well see competition authority investigations into certain businesses’ conduct in the current pandemic. Ensuring an appropriate awareness of competition law remains the key starting point in enabling businesses to identify and manage – and, ultimately, minimise – their potential exposure to competition law risk.

Disclaimer

This information is for educational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.

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