The Italian Supreme Court rules that the reorganization of the Italian distribution network of a car manufacturer does not breach competition law

By a judgement recently handed down in Ballan Automobili v VolkswagenGroup Italia (BA v VGI), the Italian Supreme Court or Court of Cassation (the Court) has ruled that the plan for the reorganization of its Italian distribution network implemented by a German car manufacturer did not breach competition. The Court considered the reorganization plan as a legitimate business strategy, which did not restrain intra-brand competition.

The applicant, Ballan Automobili (BA), was an authorized dealer of Audi cars in the region of Umbria. The respondent, Volkswagen Group Italia (VGI), was the Italian exclusive importer of all the cars manufactured by the Volkswagen group. VGI decided to reorganize the Italian distribution network of Audi cars, thereby reducing the number of car dealers previously admitted to the network. To that effect, BA was notified by VGI the termination of the distribution agreement previously entered into by BA with the exclusive importer.

In 2007 BA sued VGI before the Court of Appeal of Perugia seeking compensation for the losses suffered due to the termination of that agreement. BA argued that the VGI reorganization plan breached Articles 2 and 3 of the Italian Competition Law no. 287/1990 corresponding to Article 101 and 102 TFEU, respectively. It also contended that the new generation of distribution agreements concluded by VGI restrained intra-brand competition. Finally, BA claimed that VGI had abused its dominance position by imposing the new distribution agreements on the selected dealers.

The Court of Appeal of Perugia, however, rejected all BA’s the claims. It held that the Volkswagen group did not have a dominant position in the Italian market and that the VGI reorganization plan constituted an acceptable commercial strategy. BA appealed the judgment of the Court of Appeal before the Court of Cassation.

First, the Court pointed out that the reorganization plan that brought about to the termination of the BA distribution agreement was necessary to give effect to the marketing strategy pursued by VGI, in accordance with Volskwagen. The aim of the marketing strategy was to reposition the Audi brand at the higher end of the car market. The decision of VGI to adopt this strategy was a business judgment of the firm that could not scrutinized by courts.

Second, the Court did not object the way in which VGI reorganized its distribution network. Initially, VGI reduced of the number of car dealers to be admitted to the national network on a purely quantitative basis. The relevant criteria referred to the sales volume allocated to each geographical area into the national distribution network was divided into. Subsequently, VGI decided which dealers to admit in accordance to a set of qualitative criteria. Crucially, the Court stressed that competition law could not be read to confer on a dealer a perpetual right to be part of the distribution network that prevails over the legitimate interest of the car manufacturer to amend the network.

Third, as Court of Appeal of Perugia did before, the Court took the view that VGI conducts did not negatively affect competition. The aim of VGI was to strengthen the market reputation of the Audi brand. Weighing the commercial freedom of VGI with the need to preserve competition health and consumer welfare, the VGI reorganization plan was part of a legitimate business strategy. An exclusive car importer, which was economically dependent on the car manufacturer, could not be obliged to keep unchanged the number of car dealers admitted to the distribution network if a reduction was necessary to reinforce the brand reputation of the imported cars. Had such an obligation been imposed on the distributor, its freedom to carry out an economic activity in a competitive market, which is protected by the Italian constitution, would have been infringed. The Court also noted that the new distribution agreements did not impose exclusive obligations on dealers. Dealers were free to sale the Audi cars within and outside the EEA as well as to procure Audi cars from other suppliers than VGI within the 30 % threshold of their yearly requirements. Under the new distribution agreements, dealers were allowed to sale also vehicles of competing car producers. Therefore, the new distribution network was found to be not liable to harm the consumer welfare.

Fourth, the Court found that the VGI conducts did not amount to abuse of dominant position. VGI did not have any dominant position and any event the conducts of a market player seeking to gain a leading market position were not abusive if such conducts did not limit the market freedom of competitors. The VGI decision to reorganize its distribution network was a legitimate business decision, though harmful for some car dealers.

In conclusion, what the Court said in BA v VGI is that an exclusive car importer is entitled to reorganize its distribution network, as agreed with the car producer, provided that such measure has no discriminatory intent. Whether the reorganization entails the removal of some dealers from the distribution network is not relevant to establish if the distributor breach competition. As reminded by the Court, objectives of competition law are to preserve the health of market competition and maximize the consumer welfare rather than protect firms  feeling aggrieved by the new commercial policies of suppliers.  Additionally, the new distribution agreements embraced a multi-branding model with the result that they did not lead to a restriction of intra-branded competition.