Mercedes Benz successfully defends claim by dealers

The duration of an IP licence, and the circumstances in which the licence may be terminated, are critically important issues.  When there is a dispute between a licensor and licensee, the termination clauses will be amongst the first to be reviewed by the parties’ lawyers.  Yet the practical significance of these issues is sometimes not fully understood, as illustrated in a recent case that has been described as the most important legal case in the history of the Australian automotive industry.

Mercedes Benz wanted to switch its traditional dealer network to an agency model.  Under the traditional network model, dealers purchase vehicles from Mercedes Benz and are free to set the price at which they sell those vehicles to consumers.  Under the agency model, dealers sell to consumers as the agent of Mercedes Benz, at prices set by Mercedes Benz, and dealers receive a commission on sales.  The agency model is less financially rewarding to dealers than the traditional model.

The traditional dealership contracts between Mercedes Benz at its dealers permitted Mercedes Benz not to renew a dealership without cause (i.e. for any reason).   Mercedes Benz exercised its non-renewal right, and offered the dealers new agency agreements, which they accepted.  The dealers banded together and commenced proceedings against Mercedes Benz.  They argued that they accepted the agency agreements under economic duress, and that Mercedes Benz had no right to terminate the previous dealer contracts.  The dealers argued that the right of non-renewal could only be lawfully exercised by Mercedes Benz if a dealer failed to meet their targets or make mutually agreed improvements.

The Court disagreed, with Beach J stating: “… I agree with [Mercedes Benz] that the [dealers] in essence seek to rewrite the contractual bargain struck by the dealer agreements into one which better suits their commercial interests.  They seek to convert the commercial judgment they made when they entered into those agreements into a guarantee of permanent tenure (subject to certain qualifications that it is convenient for them to concede) and a fetter on the exercise by [Mercedes Benz] of its legitimate business judgment as to how best to adapt to a changing marketplace concerning the Mercedes-Benz brand in Australia.  In essence, the commercial judgment made by each dealer was that [Mercedes Benz] would not issue a notice of non-renewal if the dealer performed well, because it was assumed that it would be in [Mercedes Benz]’s commercial interest and the dealer’s interest for that agreement to continue. No doubt that was a sensible commercial assumption to make. But it was not the contractual bargain that was struck”.

To the extent that dealers were damaged commercially by the non-renewal of their dealership contracts, his Honour observed that “… the absence of any right at law for a franchisee to be compensated for goodwill on non-renewal of a franchise agreement has long been recognised”.

Ultimately, the Court held that in deciding not to renew the dealership agreements, Mercedes Benz exercised a contractual right for its own benefit, as it was entitled to do.