Manufacturers can set margin components and bonuses for authorised dealers, rules Frankfurt court

The claimant is an association of authorised dealers with the capacity to bring legal actions against breaches of competition law and the law on general terms and conditions. The defendant manufactures vehicles and distributes them through authorised dealers under a selective distribution system. The authorised dealers are members of the claimant. A new dealer contract implemented by the defendant vehicle manufacturer provides that margin components and bonuses are not part of the dealer contract, and can be determined unilaterally by the manufacturer in an annual circular. This position was contested in the lawsuit, and the Frankfurt Regional Court prohibited the unilateral setting of margin components and bonuses in its judgment of 16 December 2021, 2‑03 O 410/20.

Now in a 14 February 2023 ruling, the Frankfurt Higher Regional Court has ruled exactly the opposite: stating that unilaterally determining margin components and bonuses annually by a motor vehicle manufacturer in relation to its authorised dealers is in principle not objectionable under competition law nor under the law on general terms and conditions.

The judgment by the Frankfurt Higher Regional Court is not surprising. It supports the private autonomy of the parties and gives the freedom of manufacturers to organise distribution precedence over a review of fairness under competition law and a review of appropriateness under the law on general terms and conditions. The decisive point is separating the content of the authorised dealer agreement as a framework agreement, and the sales contracts for individual vehicles entered into under the framework agreement. The dealers' margins result from the purchase prices and the sale prices of the individual vehicles. The manufacturer can unilaterally set margin components, which are related to the purchase price (e.g. the "basic margin") that is a rebate deducted from the recommend resale price (RRP). These margin components are not a consideration for the dealer's obligations under the framework agreement, nor are the bonuses that are subsequently determined based on purchase prices. Concerning these points, the Frankfurt Higher Regional Court stated the following:

• Review of setting margin components under competition law and the law on general terms and conditions

The manufacturer is the addressee of sections 19, 20 of the German Act against Restraints of Competition (ARC) because its authorised dealers are dependent on it for business purposes. They are oriented to a considerable extent to the manufacturer's products on the basis of contractual agreements and have made corresponding investments.

It is not an unfair impediment to dealers if manufacturers set margin components and bonuses unilaterally on an annual basis. Although it is true that an impediment can be unfair if the party concerned relies on terms and conditions for the conduct at issue that are void under the law on general terms and conditions. Setting margin components (i.e. the "basic margin") between the manufacturer and its authorised dealers is not regulated in the dealer agreement, so it is not objectionable under the law on general terms and conditions. The defendant has merely reserved the right to set the basic margin once a year in the last quarter of the calendar year for the following calendar year. Therefore, in the respective calendar year the dealer already knows when it enters into the purchase contract for the vehicle the amount of the basic discount granted by the manufacturer for the vehicle model in question, which is deducted from the RRP and therefore determines the dealer purchase price.

It is also not a unilateral right to specify performance, which is problematic under the law on general terms and conditions. This is because when the defendant sets the annual basic margin, the authorised dealer has not yet entered into the contract for which the basic margin constitutes an integral part of the contract that needs to be regulated.

Moreover, the manufacturer's interest in flexibly adjusting prices must be taken into account. This interest is justified due to possible changes in the economic framework conditions. The basic margin is not a trade margin that is actually achievable, nor is it a guaranteed profit margin for the dealers. Due to the usual discounts, the RRP is not the final sales price, which the dealer can actually get from end customers. The manufacturer's power to flexibly adjust the basic margin does not contradict the concept of a dealership contract because it does not exclude the defendant's power to react to market changes.

• Unilaterally setting bonuses

It also does not constitute an unfair impediment if manufacturers set bonus amounts unilaterally on an annual basis. The bonuses are additional voluntary benefits. They are not equivalent to special performance owed by the dealer, and the defendant does not have to grant them. Therefore, the manufacturer is free to determine their content and scope and doing so does not constitute an unreasonable disadvantage to its dealers. This applies all the more to the target fulfilment bonus and the customer satisfaction bonus.

What can businesses derive from this decision? As a practical tip, the judgment confirms the established practice of not drafting framework agreements in too much detail and handling aspects that are subject to regular changes in the course of the business relationship and in the sales contracts. This gives the manufacturer the necessary freedom to unilaterally adjust its prices and also other terms of delivery and payment at regular intervals. This tip applies irrespective of any issues under competition law because of the implications of unilateral reservations of the right to make changes under the law on general terms and conditions. If an issue is subject to ongoing changes, it should not be regulated in a framework agreement, where possible.

However, the manufacturer and the dealer may also have a common interest in the dealer making significant investments in the business in favour of the manufacturer. In return, the dealer should receive some level of certainty from the manufacturer with respect to the margin (e.g. a fixed functional discount in the framework agreement and performance-related bonuses and, possibly, also performance bonuses that can be adjusted unilaterally). If manufacturers and dealers argue about remuneration in court, one of the parties may win, but such disputes are not helpful for a good business relationship.

If manufacturers, however, are subject to the prohibition of abuse under competition law, it is necessary to balance interests, leaving a considerable degree of freedom for manufacturers. In principle, a manufacturer with market power or dominance may also freely negotiate its conditions as long as it pursues legitimate interests and does not act arbitrarily.

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