The Paris Court of Appeal has just handed down a key ruling on qualitative selection. It has upheld a decision of the Competition Authority rejecting the complaint of various candidates for entry into the Hyundai qualitative repair network for lack of sufficient evidence (Competition Authority decision No 19-D-08, 9 May 2019, LawLex19681). Vogel & Vogel assisted Hyundai in this case.

To provide some background on the issue, repeatedly and in various economic sectors using selective distribution (automobile distribution and repair, watchmaking, perfumes, etc.), former network members whose contracts have been terminated by way of ordinary contractual notice of termination, reapply during or at the end of the notice period for reinstatement to the network in situations where the relations between the parties were difficult and not conducive to harmonious dealings.

Increasingly, network heads are rejecting such requests for re-appointment to avoid rendering those difficult relationships virtually perpetual.

Where quantitative selective distribution is used – which is subject to block exemption if the market share is under 30% – such refusals do not generally raise problems since this type of distribution allows for refusals of approval based on the numerus clausus adopted by the network head. In any case, any eventual discriminatory practice is exempted pursuant the decision-making practice of the Authority if the undertaking falls below the 30% threshold (Competition Council decision No 03-D-60, 17 Dec. 2003, LawLex0443) and the leading  case law (Paris Commercial Court, 29 June 2016, LawLex18605; CA Paris, 22 Jan. 2014, LawLex14135; 19 Sept. 2014, LawLex14945; 30 sept. 2015, LawLex151190; 19 Oct. 2016, LawLex161737; 20 Dec. 2017, LawLex172136).

The situation is more delicate, however, in the case of qualitative selective distribution where the undertaking has a market share in excess of 30%.

Of course there is an undeniable trend in the case law validating refusals of approval on the grounds that they are unilateral acts arising from the sole initiative of the head of the network without consultation with other members of the network (see Paris Commercial Court, 29 June 2016, LawLex161202; 14 Dec. 2016, LawLex17120; 21 Feb. 2018, LawLex18320, upheld in CA Paris, 27 Nov. 2019, LawLex191441, Mercedes/Garage de Bretagne).

Nonetheless, the Competition Authority (decision of 9 May 2019, cited above) and decisions prior to the Mercedes/Garage de Bretagne ruling  continue to analyze refusals of approval on the basis of the rules on restrictive agreements considering that the selection is a result of an agreement with the network (CA Paris, 23 Jan. 2019, LawLex1980; 20 Feb. 2019, LawLex19230; 27 March. 2019, LawLex19403). This is an illogical position as refusals are purely unilateral.

It is true that in almost all cases an analysis based on the antitrust rules leads to a dismissal of the applicant’s claim due to the lack of any anticompetitive object per se and the finding of an absence of anticompetitive effect in the particular case (see especially CA Paris, 23 Jan. 2019, 20 Feb. 2019 and 27 Mar. 2019, cited above).

This new case is particularly interesting because it is the first time the Court of Appeal has issued a decision on this point in the context of Competition Authority proceedings and that it has taken a position after an in-depth reasoned review of all the arguments contested by the complainants, rejecting each of them.

The Authority had received complaints from various applicants for entry into the Hyundai repair network, a purely qualitative network. It dismissed the complaint on the grounds that there was insufficient evidence of a generalized policy of refusal concealing quantitative selection or discriminatory behavior, as the head of the network was able to provide reason for refusing approval in each case.

On appeal by the plaintiffs, the Court of Appeal has held that:

– Hyundai Motor France did not have to specify the grounds for terminating the contracts given the option provided for in the contracts to terminate them without cause and with two years’ notice,

– Similarly, an operator that does not meet the criteria may be refused entry to the network, hence the existence of a margin of maneuver for the supplier regarding how to constitute its network, as found by the Competition Authority,

– But this contractual freedom does not prevent the competition authorities from testing the lawfulness of the network and the uniform application of the criteria. In the present case, the investigation services handling the case found that the refusals of approval and terminations in question were based on factors such as a worsened financial situations, violation of the ban on resale outside the network, and even the loss of mutual trust related to legal disputes,

– Such justifications are therefore objective and the Authority was not required to investigate whether such behavior constituted serious breaches by the undertakings of their obligations, as this head of claim was not relevant to the allegation of a discriminatory practice,

– the Court was also under no duty to assess the merits of the reasons invoked by Hyundai Motor France to justify the refusals of approval,

– No general policy to refuse to approve repairers alone was demonstrated, in the light of the objective justifications put forward with regard to the complainants but also with regard to the other companies referred to without being party to the proceedings,

– The decrease in the number of (non-distributing) repairers is not relevant given that the number of terminations of authorized distributor/repairer contracts is bigger,

– In the absence of any evidence of discriminatory behavior, the Authority did not have to decide on the anticompetitive effects of the practices alleged.

From a practical and operational point of view, what we should take away from this ruling is that, while it is not necessary to provide the reasons for the refusal in the letter rejecting an application for entry to the network, it is important to preserve a file on each applicant listing the objective reasons for the refusal in the event of any challenge(not meeting financial criteria, violation of the resale outside the network ban, outstanding invoices, recurring disputes, loss of confidence, damaged relations, disinterest in the brand, etc.).

It is regrettable that the Court of Appeal did not declare the voluntary joinder of the network to the proceedings admissible because it would have been able to state its position on the argument raised,  in complement to that of the Competition Authority, that the refusals in this case were unilateral and an analysis on the basis of the rules regarding anticompetitive agreements was not even necessary. It is true that Hyundai Motor France was not a party in the case within the meaning of Article R. 464-17 of the Commercial Code, since it had not received any Statement of Objections and was not a party in the proceedings before the Authority; therefore its voluntary joinder to proceedings before the court of appeal could not be allowed under Article R. 464-17 of the Commercial Code. On the other hand, its intervention could have been considered justified on the basis of ordinary law (Article 330 of the Code of Civil Procedure), the head of the network being the primary party concerned as regards the validity of its network and its decisions, having participated in the proceedings before the Authority as a witness and able to shed light on the issues and having an interest in opposing new referral for investigation of the case. However, the Court dismissed its application to intervene voluntarily in view of the fact that the referral was dismissed solely for lack of evidence. The Court of Appeal therefore considers that it is only necessary to assess whether or not there is sufficient evidence to support the referral. It therefore considers that the possible overturning of the decision would not affect the rights of Hyundai Motor France insofar as, if the existence of sufficient evidence had been upheld, the case would be referred back to the Authority for further investigation, without any presumption of a finding of prohibited practices, since the pursuit of the investigation does not in itself give rise to a complaint.