Australian Mercedes-Benz dealers are fighting a $650 million “battle of their lives” against the German luxury car maker in a test case described as one of the most important cases in franchise law history.
the main points:
- 38 Mercedes dealers sue the German automaker for $650 million in compensation
- Mercedes-Benz is one of a growing number of automakers switching to a fixed sales price and commission model
- Car dealers argue that Mercedes violated franchise law and consumer law
Bob Craig sold his 48-year dealership last year out of frustration with Mercedes-Benz’s decision to move to a fixed-price dealership sales model.
“I wish I had spent 50 years with Mercedes,” said Craig.
“In the past five years, there has been a deterioration in the relationship between the dealer and the manufacturer.”
Previously, dealers would buy Mercedes cars and could set their own selling price.
But under the agency model, which took effect in January, the manufacturer retains ownership of the cars while dealers become agents who sell cars at a fixed price for a set commission.
38 of the 55 Mercedes-Benz dealerships have launched a lawsuit against the company in federal court seeking compensation.
Dealers argue that they were forced to sign new dealership model deals with Mercedes that would drastically reduce their profits and wipe out years of goodwill with customers.
Mr. Craig is involved in legal proceedings despite selling his Orange business last year.
He also speaks on behalf of his former teammates who are reluctant to openly criticize Mercedes.
“They are all wrecked, their livelihoods shattered,” said Mr. Craig.
Dealers allege that Mercedes hatched a secret plan in 2016 to switch to an agency model, conducted a mock consultation process, and went ahead with a decision even though the majority of Australian dealers opposed it.
They claim that in an effort to profit from the dealers, Mercedes violated Australian consumer law by engaging in unreasonable behaviour, as well as violating the provisions of the good faith franchise law.
“This is a very important issue for the auto industry,” said James Furtman, chief executive of the Australian Automobile Dealers Association.
“In fact, it is probably one of the most important cases of franchise in Australian history.”
The dealers involved in the case are seeking $650 million in damages from the car brand.
“That takes into account all the millions of dollars of investment that went into the facilities, but also the equipment and goodwill that they created,” Furtman said.
“It’s a big claim, but it’s more than fair.”
“These are regional merchants, these are city merchants, and they are Australian companies, and they are in the struggle of their lives against a large multinational.”
In March 2019, Deloitte designed the effect of the agency model for dealers.
It found, for example, that under the agency model, a particular dealer’s profits would be reduced by more than 50 percent compared to the selling model.
The case against Mercedes, which saw federal court hearings begin this week, was funded by dealers involved in the legal battle, including billionaire businessman Nick Politis, the PR firm working for AADA confirmed.
“A lot of these merchants have liked the brand for decades, and they’ve invested a lot of money in the brand, and they put in a lot of work to get customers into the brand,” Furtman said.
“And now all that hard work is being taken away with the change to a new business model.
“They need compensation for this change, and we hope the court will agree to that.”
Test case for updated franchise laws
Last year, a Senate investigation, after General Motors decided to scrap the Holden brand, found an inherent imbalance of power between auto dealers and manufacturers.
The investigation also examined Japanese automaker Honda’s treatment of dealers in its transition to a fixed-rate dealership model.
Subsequent legislative changes introduced by the coalition government doubled fines for violations of the franchise law, and added other protections for car dealers, including “fair and reasonable compensation to franchisees in the event of early termination.”
Jenny Buchan of the University of New South Wales Business School said the federal court’s legal battle for Mercedes-Benz was a test of those new laws.
“Since 2015 there have been incremental minor modifications to the code, and the current modification is probably the largest we are dealing with,” Ms Buchan said.
“The current amendment presents very specific requirements regarding car dealers and the franchise agreements they enter into.
“It’s an important issue, and it’s really important that merchants spend their day in court, and that the courts have a chance to interpret the wording of this new franchise law change.”
“The problem with goodwill is that goodwill is a vague concept,” Ms. Buchan said.
Ms. Buchan said that a recent case involving franchisees on 7/11 demonstrated the difficulty of mounting legal arguments based on breach of good faith and unreasonable behavior.
“They didn’t succeed [at] In the name of good faith, they did not succeed with unreasonable behavior.”
“But they succeeded in establishing that 7/11 had misled them, so they were awarded damages in connection with the misleading behaviour.”
Ms Buchan believes that ultimately Australian franchise law is still too weak to protect franchisees.
“My really well-established view is that franchise law can never give franchisees the protection they ultimately need, and that we’re not really going to see true equality until franchisees are somehow brought in under corporate law,” she said.
Transparent Sales Form
A Mercedes-Benz Australia spokesperson said in a statement that the company is defending its position in court.
“It is clear that Australian customers have embraced the new and transparent sales model,” a company spokesperson said.
“We remain committed to the dealership model and the benefits it offers to our valued customers, particularly in terms of price transparency, reduced dealer delivery fees and access for all Australians to our national portfolio of vehicles, no matter where the customer may live.”
Steve Bragg, auto industry analyst, partner at Pitcher Partners said the dealership model has been in New Zealand for several years, and is becoming widely adopted in Europe and the UK.
Jaguar, BMW, Land Rover, Volkswagen and Honda are just some of the other companies transitioning to a fixed-price sales model.
Bragg said the potential positive advantage for customers buying through an agency model is price transparency — as long as they don’t pay too much.
“It’s an upcoming model, but that doesn’t mean that traders have to lose,” he said.
“In the future, as merchants do their part, they will need to be compensated as well — and what they charge needs to cover the costs.”
‘Not the company we admitted to’
With online direct sales growing and more companies moving to bypass merchants and maximize profits, the agency model marks the end of an era for industry veterans like Mr. Craig.
“In a rural town, the car dealership — not just Mercedes, but every franchisee — is a huge part of the community,” Craig said.
“Our customers are our friends and they (the merchants) are part of the fabric of our city.
“I don’t want to be the cranky old man who ran out [of the dealership].
“But in the past few years, it’s not been the company that we’ve recognized.”