In the first part of our series, we explored the business reasons driving car manufacturers and importers to gradually implement the agency sales model. However, a significant factor contributing to this shift is the updated interpretation of legal regulations by the European Commission. The agency model has become more flexible than it was a few years ago, making it a highly useful tool for car manufacturers to bring their products to market exactly as they envision. In this article, we summarise the main changes brought about by the new legal framework for distribution agreements related to agency. The final article of this series will focus on the competition law risks that must still be kept in mind.
Agency agreements are vertical agreements concluded within a supplier-buyer relationship. As you may already know, when introducing products to the market using an agency model, the prohibition of anticompetitive agreements does not apply as long as certain rules are followed. This allows car manufacturers and importers to dictate to dealers – that act as agents – to whom they can sell vehicles and at what price, thereby enabling better sales steering. However, contrary to an independent distribution system, the agency model requires car manufacturers to bear most of the risks associated with this sales method. Deciding which distribution model to choose thus requires a careful analysis of risks and opportunities.
Experience shows that implementing the agency system posed significant challenges prior to 2022. The previous interpretation of the legal framework was so inflexible that businesses often decided not to use the model. The European Commission seized the opportunity and – in connection with the amendment of the Vertical Block Exemption Regulation (VBER) – revised its approach and made several interpretative changes to make the use of the agency model easier.
We perceive that car manufacturers across Europe have increasingly adopted the agency sales model for this reason. Some have completely abandoned the independent distribution system, while others use agency for selling specific products (e.g., electric vehicles).
Let’s introduce the main updates.
From excessive formalism to common sense
Cost compensation: The decisive factor for classifying a relationship as an agency under competition law is that the agent should not bear more than negligible commercial or financial risks. The previous interpretation of the legislation by the European Commission was quite uncompromising. If the agent bore any significant risks, the supplier was no longer allowed to set resale prices or customer groups to the agent. It was necessary to ensure that the supplier bore the costs of the agent’s activities related to the sale of its products from the outset. Now, however, the Commission allows agents to bear initial costs, with the supplier subsequently compensating for them. This can be done through various methods, such as reimbursing actual costs against accounting documents or lump-sum payments. In other words, the supplier can buy out certain risks (e.g., associated with shipment or showroom equipment) transferred to the agent. However, it is necessary that the parties agree on a method for cost calculation, invoicing, and reimbursement, and to make this system as simple as possible for the agent.
Supplementing income test: The second change involves introducing an additional test that takes into account the total income agents earn from their agency activities. The Commission has now acknowledged the economic reality that the higher the agents’ commission, the greater risk they can bear while maintaining the benefits of the agency model. If the commission is high enough to cover the risks transferred to agents along with the usual margin, it can be argued (at least retrospectively) that the specific supplier-customer relationship met the criteria of an agency, despite certain risks were transferred to the agent.
Transfer of ownership to the agent: The most significant obstacle that previously hindered the implementation of the agency model was the almost absolute impossibility of transferring ownership of goods to the agent. The Commission previously held that ownership entails obligations and that the transfer of ownership to the agent necessarily involves the transfer of associated risks. It was therefore necessary to contractually ensure that the supplier transferred the goods directly to the end customer. This caused numerous practical problems, especially from an accounting and tax perspective. The Commission has now allowed flash transactions, where the agent acquires ownership of the goods for a very short period (usually a few seconds) before transferring it to the end customer, while maintaining the benefits of the agency model.
Bright future for agency
We believe that these changes have made the agency model significantly more practical and useful than it used to be. The new rules provide certain degree of flexibility (not only) for car manufacturers, in terms of the possibility of retroactive compensation of risks and taking the total income of the agent related to its intermediary activities into account. Instead of a complex setting up of immediate cost reimbursement processes, it is sufficient to introduce a mechanism for retrospective control, allowing agents to calculate exact costs for the purpose of their subsequent compensation.
However, the agency model is still not entirely free of competition law risks. This topic will be addressed in the final article of this series.
