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04 November 2014
A franchising agreement is at risk of infringing EU competition law (Article 101(1) of the Treaty on the Functioning of the European Union) if it has the object or effect of restricting competition and is capable of affecting trade within the European Economic Area. The equivalent UK competition rules apply if trade in the United Kingdom is (or could be) affected by the agreement in question. The Competition and Markets Authority (CMA) – previously the Office of Fair Trading - is responsible for enforcing UK competition law.
An infringement of competition law can lead to the imposition of substantial fines on the parties concerned. The non-financial implications are equally severe, including damage to business reputation, the unenforceability of contracts, the risk of third-party damages actions and even the imposition of personal sanctions (fines, director disqualification and imprisonment) on executives of the parties concerned.
The 2013 decision of the CMA to fine Mercedes-Benz (a franchisor) and five of its dealers (each a franchisee) over £2.8 million for infringing UK competition law serves as an important reminder that franchisors and their networks – irrespective of their market shares and geographic scope – may infringe the competition rules. The level of the fine imposed on the franchisor and its five franchisees also demonstrates that the CMA is paying much closer attention to the activities of small and medium-sized enterprises (SMEs), a category which includes the majority of franchisors and franchisees.
The infringement in this case involved a collusive agreement among the dealers of Mercedes-Benz, each of which was a small player on the market for the supply of commercial vehicles, on how to respond to requests for quotations from customers in each other's geographic zones of business. The aim was to ensure that the local dealer would win the business from its local geographic zone.
The CMA found that this arrangement constituted a serious restriction on competition between the dealers – which, in common with most franchisees, were independent commercial businesses – involving at least some element of market sharing, price fixing or the exchange of commercially sensitive information. The dealers were each fined between about £116,000 and £660,000.
Of particular interest to franchisors is the fact that Mercedes-Benz was also found to be a party to the anti-competitive conduct for its role as a 'facilitator' to the arrangement. The CMA fined Mercedes-Benz more than half of the total fines imposed. This was because an employee of Mercedes-Benz organised (for a legitimate commercial purpose) and attended a meeting between two of the culpable dealers, at which the dealers discussed their collusive agreement. By attending, that employee gave the dealers the impression that Mercedes-Benz approved of the arrangement. Unfortunately for Mercedes-Benz, the employee made no statement that Mercedes-Benz did not condone the arrangement and did not intervene to prevent discussions or leave the meeting.
This case is a good illustration of how easy it is to cross the line between legitimate and illegitimate behaviour where competition law is concerned. It offers a number of important rules of engagement for franchisors, franchisees and their interactions as part of a franchise network:
Franchise agreements must be carefully drafted and regularly reviewed by an experienced lawyer to ensure that they adhere to competition law. It is equally important for franchisors to put in place (and regularly review) a system of policies, procedures and training to enable their own employees to understand and identify potentially anti-competitive conduct by franchisees (or by the franchisor itself), and to take appropriate action where any such conduct is suspected. It is also recommended that franchisors proactively alert franchisees to the importance of competition law compliance and the risks of getting it wrong.
For further information on this topic please contact Gordon Drakes or Jessica Burns at Fieldfisher by telephone (+44 20 7861 4000), fax (+44 20 7488 0084) or email (email@example.com or firstname.lastname@example.org). The Fieldfisher website can be accessed at www.fieldfisher.com.
(1) For further details, please see "European Commission tightens application of 'De Minimis' safe harbour".
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