Competition Authorities Gear Up For Scrutinising Franchise Networks

Author:Mr Gordon Drakes and Jessica Burns
Profession:Field Fisher Waterhouse

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 EEA. The equivalent UK competition rules apply if trade in the UK is (or is capable of being) 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 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 personal sanctions (fines, director disqualification and imprisonment) imposed on executives of the parties concerned.

The decision taken by the CMA in 2013, in which it fined 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 starting to pay much closer attention to the activities of small and medium sized enterprises ("SMEs"), a category which includes the majority of franchisors and franchisees.

The Mercedes-Benz Case

The infringement in this case involved a collusive agreement amongst the dealers of Mercedes-Benz, each of whom 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 his local geographic zone.

This arrangement was found by the CMA to constitute a serious restriction on competition between the dealers, who in common with most franchisees were independent commercial businesses, involving at least some element of market sharing, price fixing and/or the exchange of commercially sensitive information. The dealers were each fined between roughly £116,000 and £660,000.

Of particular interest to franchisors, however, is that Mercedes-Benz was also found to be a party to the anti-competitive conduct for its role as a 'facilitator' to...

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