The Australian Automotive Dealer Association (AADA) and Mercedes-Benz dealers across the country are bitterly disappointed by today’s decision by the Federal Court to dismiss their appeal and to find in favour of Mercedes-Benz AG.
Commenting, AADA CEO James Voortman, said:
“Australian dealers have been fighting to stop Mercedes-Benz using their power over franchised dealers to force them into one-sided business relationships. Today’s decision is a significant blow to that fight which will have detrimental effects on Australia’s franchising sector.”
“In handing down today’s decision, there is now a clear need to protect Australian franchisees against unfair treatment from franchisors to arbitrarily change business models with no compensation.”
“The presiding Judge in the original court decision clearly articulated the need for further amendments to the Franchising Code to protect the investments dealers make in their businesses.”
“The Australian automotive industry is currently going through a major transition with the move to electric vehicles. This transition will require massive amounts of dealer investment in infrastructure and servicing to ensure consumers have the confidence to purchase an electric vehicle.”
“Today’s decision confirms that current laws in Australia do not adequately protect new car dealers against unfair conduct and particularly are not being supported against unfair decisions being made in head office overseas. It is imperative that the Federal Government moves at speed to implement the commitments it made in the election to protect franchisees against unfair contract terms and unfair trading practices.”
This decision comes on the back of Holden dealers losing their legal action against General Motors (GM) this year where the Judge found that there was no obligation by GM to supply vehicles to Australian dealers under their franchising agreement.
The AADA will advocate directly to the Federal Government to move with haste to ensure that all automotive franchisees are appropriately protected, so that the blueprint created by this court decision is not used by others.
About the Court Action
- Motor vehicle dealers operate over 3,700 dealership sites in Australia, and employ more than 68,000 workers directly and indirectly in sales of new and used cars, and in provision of service and parts.
- They are a small business success story in every Australian city, regional centre and town. Almost all dealerships started from the investment by a single individual or family, and over time some of the dealers have become large public and private company operating multiple brands and sites.
- The dealership model is under threat from the risk of unrestrained profit grabs by the large, overseas car manufacturers (OEMs) at the expense of Australian dealers, workers and consumers. This risk arises because there are loopholes in the Australian Franchising Code, that were exposed in a recent Federal Court judgment involving the Mercedes-Benz dealers which the dealers lost.[i]
- On 1 January 2022, Australia was one of the first countries to implement a new ‘agency’ model, for Mercedes-Benz globally, under its ‘Retail of the Future’ strategy.[ii] The dealers consistently opposed that model, having voted in December 2019 against the new model 51-4.[iii]
- Under the ‘agency’ model, Mercedes-Benz rather than the dealers is the legal seller of all new Mercedes-Benz cars in Australia, thus transferring all retail profits from the dealers to the OEM. The dealers’ new role is that of commission agent, with the original court decision Justice Beach finding that Mercedes-Benz set the commission rates to enable dealers to break even on their new car sales, by covering the dealers’ marginal costs of operation only.[iv]
- Justice Beach in the original decision also found at paragraph [390] that the modelling done for Australia, by the Mercedes-Benz Finance staff in Stuttgart, was seen ‘as a source of experimentation to see how low the [Dealers’ Return on Sales] could be pushed by lowering agency commissions. Australia and possibly one other country seem to have been the subject of the most cutting so to speak.’
- However, rather than buying out the dealers’ investments to run a centrally controlled sales system, Justice Beach concluded that Mercedes-Benz backed the dealers into a corner.[v] They did this by terminating their existing dealership agreements, by non-renewal notices, and then offering the dealers a choice of either closing their dealerships or signing up to the new ‘agency’ agreements prepared by Mercedes-Benz.[vi]
- Justice Beach also found that there was no meaningful negotiation of the financial terms by Mercedes-Benz, which only made concessions on ‘rats and mice issues’.[vii] Mercedes-Benz rejected the dealers’ requests for compensation, and provided a two-year ‘safety net’ which Justice Beach found was not compensation, but was designed to address transition issues.[viii] After considering the expert evidence, Justice Beach concluded that the dealers were materially worse off under new ‘agency’ agreements, and that Mercedes-Benz was substantially better off at the expense of the dealers.[ix]
- Ultimately this loss of dealer profit will translate into less future investment by the dealers, a diminished network of dealers, job losses and higher vehicle prices for consumers as competition is removed from the market. As the Mercedes-Benz case shows, Australia’s loss is Germany’s gain.[x] Applied across the whole of the industry, the AADA is concerned that restructuring by stealth will leave the Australian marketplace in a very weak and uncompetitive position in future years to the detriment of businesses, workers, and consumers.
[i] AHG WA (2015) v Mercedes-Benz Australia/Pacific Pty Ltd [2023] FCA 1022, Beach J, 30 August 2023 (“Judgment”), https://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/single/2023/2023fca1022
[ii] Judgment, paragraphs [1768], [1771], [2092]
[iii] Judgement, paragraphs [2], [1625].
[iv] Judgment, paragraph [2658].
[v] Judgment paragraph [2184].
[vi] Judgment, paragraph [2177].
[vii] Judgment, paragraph [245].
[viii] Judgment, paragraph [1797]. The transition issue was the possibility of an X% decline in Mercedes-Benz’ competitive market share as a direct result of the transition to an agency model – see Judgment, paragraph [907].
[ix] Judgment, paragraphs [2377], [3577], [3593].
[x] Judgment, paragraph [2267] shows how Mercedes-Benz could generate extra profits by raising prices from the ‘former transaction price’ to the ‘optimised fix price’, including by eliminating intra-brand competition.
