Freedom to authorize dealers challenged on the basis of contract law

The 11 March 2018

On 24th May 2017, the Paris Court of Appeal issued a ruling that is very worrying for the heads of selective distribution networks.

In 2009, Chrysler liquidated its business and transferred the goodwill to FCA France with effect on 1st May 2010. On 25th May 2010, Chrysler terminated all its sales and after-sales service contracts with one year’s advance notice and announced a complete reorganization of the network. A few days later, FCA notified the network that distribution of two Chrysler brands was resuming in France and invited interested dealers to apply. One of the members of the former network applied for authorization for both sales and repairs but its application was rejected by FCA on the basis of non-fulfilment of its authorization criteria and due to the sharp fall in the distributor’s performances during the notice period. The former dealer summonsed FCA before the Commercial Court on the grounds that this decision was unlawful. The court found against the distributor on the basis that the refusal to authorize was legitimate and that the application had not been presented in good faith.
On appeal by the distributor, the Paris Court of Appeal found the manufacturer not guilty of any offence based on competition law (see I) but, however, found against it on the basis of contract law (see II). How should this result be viewed (see III) and what can companies do to protect themselves (see IV)?

I. The inapplicability of competition rules

• In respect of sales
The Paris Court of Appeal found that quantitative selective distribution systems like the one put in place by FCA were exempted at the time of the events by Regulation 1400/2002 below a 40% market share. Since FCA fulfilled this condition, it could claim automatic exemption except in the case of any “hardcore” restrictions as defined by the Regulation and the court ruled that the refusal to the network, even if this was discriminatory or unjustified, did not constitute such a restriction.
• In respect of repairs
The Court of Appeal found that FCA necessarily had more than an 80% share of the repair market so it could not claim automatic exemption but the court ruled that the refusal did not constitute an anticompetitive cartel (and therefore, implicitly, that it was a unilateral act) and that, in any event, the distributor had not attempted to demonstrate this. Nonetheless, the court ruled that the exemption (meaning that it could not be categorized as an anti-competitive practice) did not mean that it was excluded from the application of contract law.
II. The application of contract law
The Paris Court of Appeal ruled that suppliers must, as from the pre-contractual phase, fulfil the general obligation of good faith when choosing contracting parties.
Although the court recognised that suppliers have the right to “organize the means of distribution of their products and to make the changes and rationalizations that they think necessary without their contracting parties having any established right to remain”, it ruled that suppliers must select their distributors on the basis of objectively defined criteria and apply these criteria in a non-discriminatory manner. The court went on to say that manufacturers selecting dealers via an invitation to apply must substantiate the grounds for their choices according to the selection criteria that they freely define themselves on the basis of the general principle of good faith applicable as from the pre-contractual phase. According to the court, since they must substantiate the proper and non-discriminatory application of the selection criteria, they must:
•  notify all applicants of their criteria in the same way before they respond;
•  give reasons for any refusal in order to demonstrate that the applications have been properly examined, implying that a refusal should be accompanied by an assessment, in writing or figures, of whether the applicant fulfils the stated criteria or not;
•  refrain from discriminating, implying non-reliance on one main criterion preventing a comparison of applications made by distributors in different situations.
The court found that none of the above conditions had been fulfilled and concluded that FCA was tortiously liable on the basis of Article 1382 (now Article 1240) of the Civil Code for its refusal to grant a licence to the ex-distributor.
III. How should this result be viewed?
First, the ruling that competition law did not apply to the case is to be welcomed. In line with case law that has been consistent for several years, the Court of Appeal found that a refusal to authorize does not constitute a “hardcore” restriction as defined by the block exemption regulation or an anticompetitive practice as defined by French law. However, after throwing out competition law in one way, the court brought it back in another way by using, on the basis of a duty of good faith during the pre-contractual phase, the same criteria as those used previously to assess whether the refusal to approve a distributor complied with Article L420-1 of the Commercial Code.
The ruling is open to criticism on several counts:
•  Although the legislature very clearly and legitimately intended to put an end to the prohibition of discriminatory practices per se, the court, contrary to the principle of the law, has re-established this prohibition on the basis of the ordinary law of liability without establishing any wrongdoing that can be separated from the alleged discrimination.
•  The ruling undermines the practical effect of European competition law by instituting the prohibition of a practice which is permitted by European law because the Court of Justice has ruled that the head of a selective distribution network need solely establish specified criteria, i.e. the precise content of which may be verified, without these criteria having to be objectively justified and applied in a uniform and non-differentiated manner in respect of all applicants for authorisation (CJEU, 14th June 2012, Case C-158/11, Auto 24 SARL v Jaguar Land Rover France SAS, LawLex 12871). If a court adopts an interpretation contradicting the principle of domestic law and contrary to European competition law, it cannot be argued that its ruling is covered by the exception provided for in Article 3(3) of Regulation No 1/2003, which allows the application of provisions of national law that predominantly pursue an objective different from that pursued by Articles 101 and 102 of the Treaty.
•  The ruling does not comply with contract law. The obligation for contracts to be concluded in good faith did not come into force until the new Civil Code, which is applicable solely to contracts concluded as from 1st October 2016, so these provisions were not yet applicable at the time of the events concerned. Moreover, the contract was never concluded so one can suppose that the situation was a breakdown of negotiations. The consequence of this cannot be compensation for the non-concluded contract.
In addition, FCA quoted the Rolex case law established by the Paris Court of Appeal whereby the head of a selective distribution network does not have an obligation to conclude a contract with any distributor fulfilling its selection criteria (Paris Court of Appeal, 30th September 2015, LawLex151190), yet the Court of Appeal ruled that the Rolex case was not relevant to the FCA case because the former concerned a manufacturer’s refusal to authorize an applicant to the distribution network spontaneously and for the first time rather than a process for selecting several distributors implemented by the manufacturer itself, on its initiative. This would seem to mean that the Paris Court of Appeal considers that a manufacturer inviting applicants following the reorganization of its network is an offerer irrevocably obliged to approve all the applications fulfilling those criteria.
IV. How to avoid such a result
Henceforth, network heads must stop thinking that they are protected from any legal action simply because their practices comply with competition law. Two precautions must be taken:
•  To dispel the presumption of an irrevocable offer on which the ruling appears implicitly to be based, it is advisable for manufacturers to amend the wording of their contracts in order to highlight their degree of discretion. It should be stated that the selection criteria are freely defined by the manufacturer, which reserves the right to approve applicants or not, to leave some territories free and to give a selected applicant time to comply with its criteria.
•  It is important for manufacturers to adhere to their licensing procedure to avoid being accused of discrimination. It may prove useful to go back to the procedures put in place notably in the perfumery sector, which included a rating system with an obligation to obtain a specified average, and to be flexible in the definition of the criteria in order not to lay down qualifying criteria that a prospective applicant might not be able to fulfil.

Commentaires (0)


Leave a Reply