Mercedes-Benz dealers launch ‘watershed’ Federal Court appeal

Mercedes-Benz sellers are appealing against a Federal Court decision, but they have lost the backing of one the country’s biggest dealerships.

Under the agency model Mercedes-Benz retains ownership and dealers sell at a fixed price for a commission. Picture: Gary Ramage

Mercedes-Benz dealers are appealing against the failure last year of a $650m lawsuit in which a Federal Court judge ruled in favour of the company’s decision to switch to an agency model.

But one of the case’s key backers, ASX-listed Peter Warren Automotive, has dropped off the list of appellants in the appeal which was lodged this week.

There are now 37 Mercedes-Benz dealers, from the original group of 38 which first lodged a case against the German carmaker in October 2021.

They alleged Mercedes-Benz engaged in unconscionable conduct when the company revealed plans to move away from a model of selling cars to dealers, who would on-sell them to consumers.

Instead, it intended to swap to an agency model under which Mercedes-Benz would retain ownership of the cars which the dealer would sell for a fixed price in exchange for a commission.

Australian Automotive Dealer Association chief James Voortman said the appeal was a “watershed” moment for Australia’s $170bn franchise sector.

“(It will) be a major test of the rights of franchisees where a substantial power imbalance exists between franchisor and franchisee,” he said.

“We are optimistic that a successful appeal will set clear boundaries for what is acceptable behaviour by franchisors.

“It is also a line in the sand for the automotive industry which has seen other manufacturers considering following the lead of Mercedes-Benz and force dealers to transition to an agency model.”

Mr Voortman said it was significant that the Federal Court judgment “flagged the need for further consideration to the terms of the Franchising Code and possible reform due to inadequate protections in the Franchising Code of the investment dealers make in goodwill of their dealership businesses”.

A Mercedes-Benz spokesman said he had no further comment on the matter while it was before the court.

“As we have stated, Mercedes-Benz welcomed the Federal Court’s decision and the comprehensive judgment of Justice Beach,” he said.

“Our focus continues to be on delivering luxury, high-performance cars for our valued customers around Australia, who have embraced the increased consumer choice and fairer pricing of the agency model.”

The dealers had claimed they were not properly consulted about the change and that their businesses would be damaged.

During closing arguments delivered last year, Tim Castle, SC, for the dealers told the court that when Mercedes-Benz could not get the dealers on-board with the new model, it issued non-renewal notices to them at the instruction of the manufacturer’s headquarters in Stuttgart, Germany.

“We say that was not done in good faith. We said it was done at Stuttgart’s direction … and we say fundamentally there’s a lack of fidelity to the bargaining,” Mr Castle said.

“We say the end result was an unconscionable taking of property. We still run the businesses but it’s now Mercedes-Benz that profits from it, and the evidence shows they took a calculated risk.

“They believed in the philosophy ‘Because we can’ and that really implied that the franchise laws in Australia were too weak to stop this sort of behaviour, which indeed involved them breaking their bargain and taking our property.”

In late August 2023, Federal Court judge Jonathan Beach found Mercedes-Benz could enforce its non-renewal of contracts and change business models.

As well, Justice Beach ruled Mercedes-Benz did not act in an unconscionable manner.

“I agree with (Mercedes-Benz) that the applicants in essence seek to rewrite the contractual bargain struck by the dealer agreements into one which better suits their commercial interests,” Justice Beach said.

“They seek to convert the commercial judgment they made when they entered into those agreements into a guarantee of permanent tenure.”

Peter Warren Automotive is due to report it’s first-half 2024 results on February 21, after it clocked a 21.1 per cent uplift in revenue to $2.07bn in the 2023 fiscal year, with profits down 7.8 per cent to $56.7m.

A Peter Warren Automotive spokeswoman declined to comment when contacted by The Australian.