Managing COVID-19 competition law risk in the automotive sector

The COVID-19 outbreak is creating significant challenges for automotive businesses, forcing them to respond in new and unprecedented ways.

Whilst many measures adopted in response to the current crisis will not expose businesses to competition law risk, some inevitably will.

So, what potential pitfalls should automotive businesses look out for and how can they stay ‘safe’ with regard to the associated competition law risk? This article provides some insights and helpful tips.

What does the competition law landscape look like under COVID-19?

In high-level terms, the position is as follows:

• For the most part, competition law continues to apply in the ordinary way regardless of the challenges presented by COVID-19.
• The Competition and Markets Authority (CMA) has published new guidance that offers considerable comfort that, subject to certain conditions, cooperation that is genuinely intended to tackle legitimate COVID-19 related concerns will not face enforcement action (and, indeed, may merit exemption from competition law such that it will be lawful).
• The government, meanwhile, has formally excluded certain forms of cooperation in specified sectors. Of these, the exclusion for the groceries sector (which applies to supermarkets, groceries suppliers and logistics services providers) is the highest profile, but there are currently also exclusions for independent healthcare providers and Solent ferries. There is currently no exclusion applicable to the automotive sector, beyond logistics services providers in the context of the groceries sector.

A more detailed summary of the current position is available in our separate briefing here.

What are the competition law ‘watch-outs’ for automotive businesses?

First and foremost, businesses in all sectors (including automotive) must recognise that, for the most part, competition law continues to apply in the usual way. The CMA’s new guidance makes a point of saying that COVID-19 does not create a ‘free pass’ for anti-competitive conduct. With this in mind:

• Ensuring that staff continue to understand and respect the usual competition law compliance messaging will be crucial
• The coming weeks and months are likely to create significant opportunities for individuals to ‘get it wrong’ with regard to competition law, possibly wholly unintentionally and with the best of intentions. For example, a telephone call to a competitor to ask how they are managing the commercial challenges of COVID-19 will be just as likely to infringe competition law now as a similar conversation between competitors at any other time
• The mantra for staff should be that competition law applies in the usual way and that they should contact the legal team before doing anything that they would not ordinarily feel comfortable doing
• Maintaining staff’s compliance awareness is therefore a must. Indeed, to the extent that businesses already use remote forms of compliance training, such as e-learning, the coming weeks may well be an opportune and convenient time to ask staff to refresh their understanding of the rules

Turning to more structured commercial decisions, what sorts of conduct might automotive businesses be considering in light of COVID-19 that may require competition law consideration?

The challenges presented by COVID-19 and the ways in which businesses will seek to address them will no doubt be hugely varied and, at this stage, largely unpredictable. However, examples of the sorts of conduct that may need competition law input include:

• Contacts and cooperation with competitors. This is an area where, for obvious reasons, businesses must ordinarily take considerable care from a competition law perspective. Again, that should remain the case now. However, the CMA’s new guidance specifically states that it will not challenge temporary cooperation between competitors that:
  • is appropriate and necessary in order to avoid a shortage, or ensure security, of supply;
  • is clearly in the public interest;
  • contributes to the benefit or wellbeing of consumers;
  • deals with critical issues that arise as a result of the COVID-19 pandemic; and
  • lasts no longer than is necessary to deal with these critical issues.

The CMA guidance further recognises that certain forms of cooperation may bring about benefits such that they merit exemption from competition law. Exemption arguments are inherently fact-specific. It may well be the case the COVID-19 creates justifications for conduct that would ordinarily present competition law risk.

Needless to say, businesses will need to take care to apply the CMA’s guidance in a rigorous and disciplined way – overstepping the mark could well expose businesses to legal risk.

In the automotive sector, it is worth bearing in mind that cooperation between competitors could well take place at the manufacturer and/or the dealer level. To the extent that automotive brands consider it appropriate to facilitate cooperation between competing dealers, the CMA’s guidance should be relevant.

• Managing selective distribution systems. In the context of COVID-19, the relative rigidities of selective distribution criteria may give rise to particular challenges in the automotive sector. Manufacturers may wish to support their dealers by relaxing some of the quality criteria that they are ordinarily required to meet. Manufacturers may even wish temporarily to allow non-authorised operators into their networks, to ensure security of supply. Such decisions will require careful consideration from a competition law perspective to avoid undermining the integrity of the selective distribution system.

• Discussions with customers regarding how, to whom or on what terms they will supply. Again, this is another area where businesses would ordinarily exercise considerable caution from a competition law perspective. The CMA’s guidance does not address such issues (rather, it is limited to cooperation between competitors), potential justifications for such conduct do not readily come to mind and it is likely that the CMA would adopt a strict approach. If businesses consider they have a particular justification, they should explore whether that gives them sufficient comfort under competition law.

• Taking particular care where there is a risk of dominance. Many automotive businesses are well-aware of their potential dominance in relation to aftermarkets. This may present additional challenges when addressing COVID-19 concerns. The CMA has flagged that it will be on the look-out for possible exploitation by dominant businesses (for example, those who charge excessive prices). Manufacturers will also need to be alert to possible discrimination risks when, for example, deciding how to support dealers/repairers (including any group-owned operators) or how to allocate scarce products. This is an area where, in our experience, there is often a considerable overlap between the legal and commercial risks, and where there may be a number of alternative solutions to meet manufacturers’ objectives.

No doubt the harsh realities of the COVID-19 pandemic will throw up a considerable number of further issues that will require careful competition law consideration in the automotive sector. Businesses will need to remain alert to the risks and be ready to manage them accordingly.

The CMA’s guidance indicates a welcome willingness to recognise appropriate and necessary conduct, but its clear signal that COVID-19 does not offer a ‘free pass’ for anti-competitive conduct should not be overlooked. Businesses in all sectors, including automotive, therefore need to stay alert to the potential risks and ensure they manage them effectively.