What competition and antitrust issues are specific to, or particularly relevant for, the automotive industry? Is follow-on litigation significant in competition cases?
Following Brexit, in substantive terms distribution systems in the UK automotive industry remain governed by the EU competition rules under the Vertical Block Exemption Regulation (330/2010/EU). This regulation has been carried over as a 'retained exemption' in the equivalent UK rules under the Competition Act 1998. This block exemption does not cover agreements relating to the purchase, sale or resale of spare parts for motor vehicles, or the provision of repair and maintenance services for motor vehicles, as these activities are covered by a separate block exemption, which came into force on 1 June 2010 (the Motor Vehicle Block Exemption Regulation (461/2010/EU)). This regulation has also been retained under the UK competition rules.
Over time, however, the UK rules will diverge from EU rules, since the post-Brexit UK regime under the Competition Act 1998 gives the UK competition authorities and courts greater scope to do so.
Both the EU Vertical Block Exemption Regulation and UK retained Vertical Block Exemption Regulation will expire on 31 May 2022 and be replaced by a new Vertical Block Exemption Regulation and UK Vertical Agreements Block Exemption Order, respectively. The drafts of these new exemptions are similar in many respects but include some differences in approach to be taken by the EU and the UK.
The Motor Vehicle Block Exemption Regulation is up for renewal or reform on its expiry in May 2023. This is an obvious point at which the UK may adopt a different approach. The UK’s Competition and Markets Authority has announced that it will launch a consultation on its proposed recommendation to the UK government on the Motor Vehicle Block Exemption Regulation in late spring/early summer 2022. The European Commission has already conducted its review of the Regulation.
In recent times, the UK competition authority has imposed significant fines on an original equipment manufacturer (OEM) and five of its commercial vehicles dealers for anticompetitive behaviour, including market sharing, price coordination and the exchange of commercially sensitive information. Following this, the authority issued an open letter to the motor industry warning against unlawful contact between competitors.
In addition, the Supply of New Cars Order 2000 (as amended) prevents new car suppliers from:
- discriminating on price between dealers and fleet buyers;
- providing bonuses and discounts to dealers on pre-registered cars; and
- imposing restrictions on price advertising on dealers.
The UK is currently a popular forum for private follow-on damages actions based on competition authorities’ infringement decisions, including in the automotive sector. For example, there was recently a claim for damages before the UK Competition Appeal Tribunal (which is a specialist judicial body with cross-disciplinary expertise in law, economics, business and accountancy, that hears and decides cases involving competition or economic regulatory issues) against automotive bearings suppliers.Dispute resolution mechanisms
What kind of disputes have been experienced in the automotive industry, and how are they usually resolved? Are there any quick solutions along the supply chain available?
The most common disputes in the automotive industry are supply chain disputes and disputes with dealers. These are usually settled out of court. The most common forum for resolving disputes with dealers and suppliers located in the UK is the English courts. The English courts have power to grant interim relief, including injunctions to compel performance. Where disputes concern international suppliers or joint ventures, it is common for the relevant contracts or joint venture agreements to provide for such disputes to be resolved through arbitration. Where arbitrations are seated in England and Wales, the English courts have the power to grant interim relief, including injunctions, in cases of urgency when the arbitral tribunal is unable to act.
There have also been an increasing number of technology licensing disputes as more technology companies enter the market.
There are procedures for group litigation in the UK. There is the potential for increased use of these procedures for collective redress, particularly in relation to claims by groups of consumers or distributors, or both.Distressed suppliers
What is the process for dealing with distressed suppliers in the automotive industry?
OEMs and their suppliers enter into long-term and highly symbiotic relationships. Tier 1 suppliers contract directly with the relevant OEM. Tier 2 suppliers’ contractual relationships lie with the Tier 1 suppliers. In some cases, there will be additional links in the chain (for example, Tier 3 suppliers contracting with the Tier 2 suppliers and so on). The relationships are complex and interdependent on account of the high level of investment needed in new car models. Additionally, car models may be in production for a decade or more. Every model invariably requires bespoke tooling even though some aspects (for example, vehicle platforms) may be common among a number of models.
The need for collaboration between OEMs and their suppliers will become all the greater over the next few years, as the market adapts to continuing evolution in powertrain developments stemming from ‘Dieselgate’, which saw a number of vehicle manufacturers artificially reduce harmful emissions from their cars during tests, and its fallout. Particular examples are the development of new lean-burn engines, and hybrid or electric power plants. The result is that OEMs and their suppliers will often work together on the development of new models and their respective key components. Tooling and car parts are very often difficult to transfer between particular models and the supplier market. The result is that if a supplier encounters financial difficulty, it may take an OEM months (and occasionally a year or more) to ‘re-tool’ and ‘re-source’ from one supplier to another.
Production interruptions or delays may cause an OEM (and other supply chain members) daily and weekly losses wholly out of proportion to the financial worth or turnover of an individual distressed supplier. Those losses can quickly and easily run into significant sums of money. For that reason, major OEMs manage supply relationships closely. Where possible, they will dual-source (and on occasion even multi-source) components. In all cases, OEMs are likely to monitor the creditworthiness and ongoing financial viability of suppliers. OEMs’ terms and conditions almost invariably also lay down approval procedures where suppliers change hands or, on a worst-case basis, encounter financial difficulties. Where problems arise, OEMs will therefore often be willing to provide ongoing finance to suppliers, negotiating priority arrangements with their bankers or other creditors. Such negotiations are likely to be combined with rights of access and inspection. In our experience, OEMs will also seek to secure access to intellectual property rights and the ability to remove tooling and finished parts, where a supplier gets into difficulty.
The relationship between the OEM’s rights and insolvency practitioners can also be complex. Where a supplier goes into liquidation or administration, the supplier’s administrator or liquidator will always seek to maximise recoveries from key OEM clients. In our experience, OEMs are frequently willing to fund production during an administration or liquidation in exchange for rights of inspection and the ability to influence (as a means of securing ongoing production) the identity of the purchaser of the business or assets of an insolvent supplier.Intellectual property disputes
Are intellectual property disputes significant in the automotive industry? If so, how effectively is industrial intellectual property protected? Are intellectual property disputes easily resolved?
Intellectual property (IP) disputes are significant in the automotive industry, and we anticipate this area of litigation will grow as technology from diversified fields is incorporated into vehicles.
IP disputes arise in the automotive industry in a variety of contexts. Automotive manufacturers have previously brought proceedings for infringement of the design rights they hold over the appearance of their parts. These disputes typically occur between two parties within the automotive industry. A well-known example is in the context of wheel rims; the European Court of Justice held that the manufacture and sale of replica car wheel rims by a third party was permissible in certain circumstances, where the products are visually identical and the purpose is for repairs.
Patent disputes in the automotive industry are also expected to become more commonplace owing to the increasing connectivity incorporated into vehicles, which in turn has caught the attention of (commonly litigious) patentholders of cellular telecommunications patents. Unlike designs disputes, this will bring parties from different industries together in court. Patent litigation of cellular patents which are necessary to operate certain cellular standards (such as 4G or 5G, and known as standard essential patents (SEPs)) is already very common for mobile phone manufacturers. As vehicles begin to incorporate the same technology, the owners of large SEP portfolios are now approaching manufacturers for substantial licensing royalties to use their technology. Where licence fees cannot be agreed, litigation (and with it the risk of an injunction preventing the use of the standard) can follow. A well-known recent example was between Nokia and Daimler, although this case resulted in settlement.
As to how well protected IP is, and how easy it is to resolve disputes, it is too early to reach a definitive conclusion. Design manufacturers may have been disappointed by the decision of the ECJ to permit the sale of replica components that do not contribute to a technical function of a vehicle under repair exemptions. As to how easy it will be to resolve disputes: SEP litigation, for example, can be complicated and expensive, and if history from mobile phone company disputes teaches us anything, they can last for several years and require multiple trials to determine different issues. Conclusion of licensing agreements is not always straightforward, given the high royalty fees SEP holders can command, many of whom are non-practising entities that have acquired their patents from other companies (commonly referred to as 'patent trolls').