Clifford Chance

The ECJ's ruling on KIA Auto's warranty conditions confirms that it is sufficient to show potential anti-competitive effects in assessing whether a vertical agreement restricts competition in breach of the Article 101 TFEU prohibition on anticompetitive agreements. This ruling comes shortly after an active period for the ECJ in the area of vertical agreements, marked by the Booking judgment in September and the Super Bock case in June of 2023.

Background

KIA Auto is the sole authorised importer of cars of the KIA brand in Latvia. It selects and approves the authorised representatives who sell KIA cars and carry out repairs under the warranty granted by the manufacturer or importer.

The dispute revolves around a vertical agreement entered into between KIA Auto and the authorised dealers, whereby KIA Auto's warranty conditions required car owners, in order for the warranty to remain valid, (i) to carry out all routine maintenance of the vehicle planned by the manufacturer, KIA, and all repairs not covered by the warranty at those authorised dealers during the warranty period and (ii) to use original KIA spare parts in the routine maintenance and repairs carried out during that period.

In August 2014, the Latvian Competition Council (the Council) contended that these conditions breached EU competition law by effectively restricting competition in the car repair and spare parts market. The Council argued that such conditions hindered independent repair shops from competing, thereby limiting consumer choice and potentially leading to higher prices.

Legal issue

Upon appeal, Latvian judges sought guidance from the European Court of Justice (ECJ) to ascertain whether, to establish that an agreement is restrictive of competition by effect, it is necessary to demonstrate actual restrictive effects on competition, or if potential effects suffice.

ECJ ruling

The ECJ sided with the Council, determining that KIA Auto's warranty conditions could indeed restrict competition by effect (neither the Council nor the Latvian judges considered the restriction would be restrictive "by object" which is aligned with the fact that vertical agreements are generally less harmful to competition). The ECJ held that, when assessing whether the agreements restricted competition "by effect", the Council was not required to prove specific and actual negative effects on competition; it was sufficient to demonstrate the potential for such effects.

In line with previous case law, the ECJ reiterated that such potential restrictive effects must still be "sufficiently appreciable" and have to be considered against a credible and realistic counterfactual of the way competition would operate in the absence of the restrictive agreement. 

Notably, the ECJ stated that the concept of potential effects under Article 101 TFEU "corresponds to" the equivalent concept that has been developed in case law regarding the Article 102 TFEU prohibition on abuse of dominance, and therefore captured effects "which may hinder the arrival of potential competitors in the market".

Implications and takeaways

Guidance on the meaning of anti-competitive effects under Article 101 TFEU

The observations made by the ECJ raise several questions about the relationship between Articles 101 and 102 TFEU, considering the differences in case law and context.

In the context of Article 102 TFEU, potential effects are particularly significant, especially in markets dominated by a few players, where any potential new entry could have substantial pro-competitive effects. However, this may not always apply to Article 101 TFEU cases. In particular, an agreement that "hinders" potential entry might not necessarily impact the overall level of competition or consumer prices in a market that is already highly competitive.

The ECJ's reference to Article 102 TFEU indicates a convergence of the legal standards under Articles 101 and 102 TFEU, and arguably reduces the burden of proof for competition authorities to identify an infringement of Article 101 TFEU on the basis of potential effects that might (or might not) arise in the future. This approach could potentially capture agreements that are not overtly restrictive of competition, such as cooperation agreements.

Notwithstanding this ambiguity, it remains the case that, when assessing actual or potential effects of an agreement under Article 101 TFEU, the fundamental question is whether there would be appreciably more competition in a credible and realistic counterfactual world in which the restriction in question is not present. In the Kia Auto case, the entry of suppliers of unbranded spare parts would likely have a significant impact on competition, as unbranded spare parts are typically much cheaper.

It will be interesting to observe how the Latvian Court applies the Court's guidance and how competition authorities implement this test in the future.

Key takeaways for motor vehicle manufacturers

The judgment does not address the application of the Vertical Block Exemption Regulation or the Motor Vehicle Block Exemption Regulation (MVBER). Warranty requirements to use branded spare parts are block exempted by the MVBER if relevant market share thresholds are not exceeded (i.e., where the parties' market shares are below 30%). However, given that markets for repairs and spare parts are typically defined by reference to the brand of vehicles to which they relate, those thresholds are often exceeded by motor vehicle manufacturers and their authorised distributors. If the agreement falls outside the scope of the MVBER, the guidelines state this type of warranty restriction may be problematic. The Kia Auto ruling implies that in such cases, the threshold for demonstrating that limiting warranties to authorised dealers and spare parts is anti-competitive is low.

As a result, motor vehicle manufacturers should exercise increased caution and reassess their warranty conditions and repair networks to ensure compliance with competition law. This may involve re-evaluating agreements with authorised dealers and considering the competitive impact of such arrangements on independent repair shops and the broader market.

It is noteworthy that the MVBER is currently under evaluation by the European Commission ahead of its expiry in 2028, with a public consultation planned for the first quarter of 2025. The European Commission may include more detailed guidance on these points in the next iteration of its guidelines.