Mercedes-Benz collusion case has lessons for NZ franchisors and franchisees

The infringement came about when five Mercedes-Benz franchisees agreed how to respond to requests for quotations from customers in each other's geographic zones of business in a way that would ensure that the local dealer would win the business each time. This was found to constitute a serious restriction on competition under the UK’s laws.

As franchisor, Mercedes-Benz was found to be a party to the anti-competitive conduct because an employee of Mercedes-Benz attended a meeting between two of the culpable dealers at which the collusive agreement between dealers was discussed and did nothing to suggest that Mercedes-Benz did not condone the arrangement.

Franchise specialist Stewart Germann says that the case has some important lessons for New Zealand franchisors, as the UK law contains similar provisions to New Zealand’s Commerce Act 1986.

He says, ‘Field Fisher Waterhouse LLP, a UK law firm with whom I deal, states that the case is a good illustration of how easy it is to cross the line between legitimate and illegitimate behaviour where competition law is concerned.  They suggest the case offers a number of important ‘rules of engagement’ for franchisors, franchisees and the way in which they should interact with each other as part of the franchise network.’ These include:

• Franchisees must always remember (and be reminded) that they are independent competing businesses and must set their business strategies independently of both their competitors operating under different brands and franchisees of the same network.

• An infringement of competition law can arise even if the franchisor or franchisee's involvement is relatively limited, or even if it is not active on the affected market (Mercedes-Benz did not sell direct to customers in its dealers’ franchised territories).

• An infringement can arise if the franchisor or franchisee merely accepts competitively sensitive information disclosed by another party (even if it does not itself disclose any information).

• A franchisor or franchisee can be implicated through an employee's actions (even if that employee fails to tell those more senior about the illegal activities).

• A franchisor should display particular vigilance for anti‑competitive conduct between franchisees and take immediate, documented steps to prevent any anti-competitive conduct from continuing and to distance itself from it. This, Mercedes-Benz failed to do and it paid the price; and

• In the case of more serious ‘hard-core’ infringements, such as that in issue in the case of Mercedes-Benz, SME franchisees can be implicated regardless of the size of their market shares.

‘Field Fisher Waterhouse says that franchise agreements must be carefully drafted and regularly reviewed by an experienced lawyer to ensure they adhere to competition law,’ says Stewart Germann. ‘I have to agree with that, for to fall foul of our Commerce Act 1986 is to risk monetary penalties and serious adverse publicity.

‘All franchisors therefore need to be wary of current competition laws and any proposed changes, and ignore them at their peril.  The old saying that “ignorance of the law is no excuse” would apply and most pleas in mitigation would be ignored and laughed at.’