Quantitative distribution systems
A quantitative selective distribution system need not be based on objective criteria which are applied uniformly in relation to all those who would like to form part of such distribution network, the Court of Justice of the European Union recently affirmed. Provided that the content of such criteria can be clearly verified, a motor vehicle manufacturer is free to decide on the number of distributors who can form part of his network.
Any type of agreement, whether horizontal or vertical, which forecloses competition in a particular market, is in terms of EU law clearly illegal. However, provided that certain stipulated conditions are fulfilled, an anti-competitive agreement may benefit from an exemption. This is precisely the case with distribution agreements entered into between manufacturers and distributors. In the case of the motor-vehicle industry, the European Commission has even gone a step further by issuing a block exemption regulation which makes provision for an exemption from the applicability of the competition rules to distribution agreements concluded between the different actors in the motor-vehicle supply chain, that is, manufacturers, repairers and distributors. This is the case provided that the conditions provided for in the afore-mentioned block exemption are adhered to.
It is very common for motor vehicle manufacturers to opt for a selective distribution system in order to sell their motor vehicles. Under this system, the manufacturer sells his vehicles, either directly or indirectly, only to distributors or repairers selected on the basis of specified criteria. Two types of selective distribution systems are covered by the block exemption regulation: quantitative selective distribution systems and qualitative selective distribution systems. In a quantitative selective distribution system, the manufacturer uses criteria which directly limit the number of distributors who can form part of his network. Under a qualitative selective distribution system, the manufacturer applies purely qualitative criteria for the selection of distributors. These criteria are laid down uniformly for all distributors and applied in a non-discriminatory manner, and do not directly limit the number of distributors.
In the case under examination by the CJEU, Jaguar Land Rover France (JLR) operated a quantitative selective distribution system and refused to appoint Auto 24 as its authorised distributor of Perigueux in France. JLR’s distribution system provided for the possibility of concluding 72 dealership agreements for 109 sites, set out in a table where the town of Périgueux did not feature. Auto 24 filed proceedings before the national courts seeking financial compensation for the loss resulting from the refusal of JLR to appoint it as an authorised distributor in Périgueux.
The national court in turn made a preliminary reference to the CJEU requesting the latter court for guidance as to whether, in order to benefit from the block exemption regulation, a quantitative selective distribution system must be based on criteria which are objectively justified and applied uniformly in respect of all those who would like to form part of the distribution network.
The CJEU immediately pointed out that non-compliance of a manufacturer with a condition found in the block exemption does not give rise to an automatic right to damages on the part of the distributor or would be distributor. The court went on to clarify that the term “specified criteria” laid down in the block exemption in relation to selective distribution agreements refers to criteria whose precise content can be verified. This does not, however, mean that a car manufacturer is obliged to publish the selection criteria used.
The court maintained that the block exemption clearly lays down distinct conditions for application depending on whether the system chosen by the manufacturer is a ‘quantitative selective distribution’ one or a ‘qualitative selective distribution’ one. In the case of a qualitative selective distribution system, the block exemption lays down that any criteria stipulated by the manufacturer must be laid down uniformly for all distributors and applied in a non-discriminatory manner, and must not directly limit the number of distributors forming part of the network.
This is not the case with a quantitative selective distribution system. This means that if one were to insist that the quantitative selection criteria too had to be objective and non-discriminatory, there would have been no need for the block exemption to distinguish between the two systems as it currently does.
The CJEU therefore concluded, that in order to benefit from the exemption regulation, a quantitative selective distribution system must be based, on criteria whose precise content can be verified. However, it is not necessary for such a system to be based on criteria which are objectively justified and applied in a uniform and non-differentiated manner in respect of all those who would like to form part of the distribution network.
This ruling goes to prove that despite the widespread application of EU competition law to any type of agreement, the Court of Justice of the European Union appreciates that car manufacturers still enjoy an amount of discretion when taking a business decision as to which type of distribution network is best suited for their needs.
Dr Vella Cardona is a practising lawyer and a freelance consultant in EU, intellectual property, consumer protection and competition law. She is the deputy chairman of the Malta Competition and Consumer Affairs Authority as well as a member of the National Commission for the Promotion of Equality.