Legal battle over switch to fixed-price new cars, a test case for Australian law

A number of automakers have moved to a fixed-price business model in Australia. The outcome of a court case will set legal precedent for the auto industry and help determine how much money dealerships invest in their businesses to look after customers.

A costly legal battle between a number of Mercedes-Benz dealerships in Australia and the German car giant will set a legal precedent that could impact the showroom customer experience for all new cars sold locally.

Last year, Japanese company Honda switched from its traditional dealership model to non-negotiable fixed prices in Australia.

Luxury brand Mercedes-Benz followed suit in Australia earlier this year, but a number of local dealerships have taken legal action claiming they have not been fairly compensated for drastic changes to their business structure – and for the clientele they have established over many years and, in some cases, decades.

Evan Stents, an automotive expert for HWL Ebsworth Lawyers – which is representing 38 Mercedes-Benz dealers in the lawsuit – told the Australian Automotive Dealers Association (AADA) conference in Brisbane last week that the lawsuit will establish s whether or not it is fair and reasonable for the auto giants to rewrite the contracts with their network of dealerships, designate them as sales “agents”, and offer them no goodwill in order to build up a network of loyal customers .

“This case which has been fought by Mercedes dealerships is probably the most significant legal case in the history of the Australian motor industry and franchising in general. There has not been a larger case,” said said Mr. Stents.

At the center of the problem is “franchisor opportunism” – where car manufacturers establish themselves in a certain country over many years “and they decide to take over that market, in effect acquiring the goodwill that has been developed by the franchisees (the dealers) and paying no attention to it. »

Mr Stents (pictured above) said the outcome of the legal battle against Mercedes-Benz could influence how much car dealerships of other car brands in Australia would be willing to invest in showrooms and l customer service experience they provide.

If automakers can tap into an established customer base for several years, it could discourage dealerships from upgrading their facilities or opening showrooms and service centers in new areas. It could also speed up the closure of established sites, amid fears of a takeover, industry experts say.

“This is a key threat because if the goodwill of dealers is not protected then there is a lack of investment confidence in the (automotive) industry,” said Mr Stents, who has noted that the Mercedes-Benz case is not just a landmark legal case. case of car dealerships but of “all-franchised” companies.

“The issue of protecting goodwill has been raised for 20 years in government reporting and franchising, but no one has done anything to protect it, but now it’s no longer moot. It’s real,” Mr. Stents said.

“Mercedes dealerships are currently fighting a monumental battle (with Mercedes-Benz headquarters in Germany) to protect their investment in their dealerships and be compensated for their goodwill.”

Mr Stents noted that it remains to be seen whether the move of certain brands of cars to non-negotiable fixed prices is in itself a concern.

“I’m not saying that (the fixed price business model) is wrong, but what I’m suggesting is that if a franchisor wants to convert their network work (to a fixed price business model), there has to be a fair remuneration paid to franchisees, because without it, it undermines any confidence in investing in this sector.

“It shouldn’t be up to Mercedes-Benz dealerships to fight this battle alone in the courts, and we need government intervention to protect that.” It’s critical, not just for … motor vehicle dealerships, but for all franchisees,” he said.

According to court documents seen by the Australian Financial ReviewMercedes-Benz Germany had predicted that the legal battle with dealerships in Australia could cost up to 500 million euros (A$752 million).

Australia’s franchising laws have since been expanded to cover traditional dealerships – as well as those appointed under the new regime as “agents” who sell new cars at fixed, non-negotiable prices.

Initially, it was unclear whether the fixed-price business model was “encompassed within a definition of motor vehicle dealership.”

However, Mr Stents said, “this has been changed to make it very clear now that a (fixed price business model) does qualify under this definition”.

“Finally now…there is an obligation under the code that whatever term is offered, it must be able to provide a reasonable return on the investment that the dealer is making,” Mr Stents said. .

“So when you look at these reforms…they are quite substantial, material and important.”

Meanwhile, motorists of all car brands now have a better chance of not losing their local dealership and service center to a sudden shutdown – following an update to franchising laws called “the ‘Holden Amendment’.

“As you know, Holden recently decided to retire the brand in Australia, but they did so midway through the terms of the dealership agreements,” Mr Stents said.

“As a result, there was a long and tortuous process of negotiation to get a fair and reasonable solution for the dealers. For most of them, this was a very unsatisfactory outcome.

“For a number of them, this resulted in a (legal) class action lawsuit, which is still ongoing to this day… watch this space.

“Now, as a result of this new amendment, if a manufacturer decides to leave the country in the medium term, to rationalize its dealer network or to change its business model, compensation must be paid for a number of different things.

“One of them is that there is a loss of goodwill, loss of profit and loss of goodwill, and they have to buy back all the parts and pay the possible redundancy costs (of the employees).

“It’s an important major overhaul following what happened with Holden.”

Joshua Dowling has been a motoring journalist for over 20 years, spending most of his time working for the Sydney Morning Herald (as motoring editor and an early member of the Drive team) and News Corp Australia. He joined CarAdvice/Drive in late 2018 and was a World Car of the Year judge for 10 years.

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