International Bar Association

26th Biennial Conference

Berlin

 

Committee X

"International Franchising"

Session of 23 October 1996

 

 

 

(presentation by Prof. Avv. ALDO FRIGNANI

of Pesce, Frignani, Pastore & Ruben;

Professor of EC Law, University of Turin)

 

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1. Vertical distribution under Italian antitrust law (law n. 287 of October 10, 1990)

 

Art. 2 of the Italian antitrust law forbids agreements between undertakings whose object or effect is the restriction of competition in the national market, or a relevant part thereof; in a consistent manner; these agreements, according to art. 2.3, are null and void.

 

Art. 3, on the other hand, prohibits abuses of dominant position.

  Both these articles are patterned upon the correspondent provisions of arts. 85 and 86 of the EC Treaty: moreover, art. 1.4 of the Italian antitrust law states that national antitrust rules must be interpreted following the legal principles of the EC rules on competition matters.

  In the EC experience, vertical distribution agreements may be caught by art. 86 when the producer has a market power, thus causing a barrier to entry for other competitors, both at the levels of production and distribution.

However, the main area of expansion of vertical agreements is covered by art. 85.

  We may like it or not, but the EC Commission and the Court believe that vertical agreements containing restrictive clauses are prohibited under art. 85, although neither of the parties has a dominant position. In such a case, the only available tool is either the eligibility for a block exemption, or to obtain an individual exemption.

 

2. The most relevant precedents of the antitrust Authority concerning vertical restrictions (the "effect test")

 

Vertical distribution agreements have been the subject-matter of quite an high number of decisions of the Italian antitrust Authority.

  The first case where article 2 was applied to vertical restrictions concerned non-exclusive distribution agreements. In the Benetton/CSP decision of 2/10/1991, the Authority stated that competition was not restricted by a non-exclusive distribution agreement, because the access to the product market (woman stockings) by third parties was not foreclosed and the market structure was highly fragmented.

  The first case regarding an exclusive distribution agreement was Vevy Europe/Res Pharma of 26/2/1992, which concerned the distribution of raw materials and semi-manufactured for pharmaceutical and cosmetic industries. In this decision, the agreement was considered as lawful because the relevant market structure was highly competitive, and many undertakings were present whose market share was higher than those of the parties. Moreover, the products involved had an high substitutability rate.

  The criteria for determining whether the exclusive clause may be considered as anticompetitive or not have been better determined in a series of subsequent decisions concerning various agreements between insurance companies and banks, concerning the exclusive distribution of insurance policies by banks. In the Alleanza Assicurazioni/Banco Ambrosiano Veneto decision of 24/11/1993, the Authority affirmed that the evaluation of the restrictive nature of the exclusive clause must be carried out taking into account the peculiarities of the single case (e.g., difficult access to the market by potential competitors, high market shares of the parties, very long duration of the agreement) and its effects of foreclosure in the relevant market (s.c. "effect test").

  Worth to note, in the decision INA/Banca di Roma of 13/10/1993, the Authority granted an individual exemption to an agreement between an insurance company and a bank concerning the exclusive distribution by the latter of the policies of the former, because the parties, after the procedure had been started, decided to create a new kind of insurance policy, which would have been distributed only through the bank party of the agreement, whose price would have been lower than the correspondent prices of traditional policies. In other decisions concerning similar agreements, the exclusive clause had to be eliminated from the contracts in order to obtain a favourable decision by the Authority.

  Of particular interest is the decision concerning the distribution of milk in the town of Rome and its neighbourhood. The decision regarded both an horizontal agreement, between the producers of milk, and a vertical one, between the producers and the association of the main distributors of milk in the relevant market (bars, dairies, ice-cream shops), whose main object was fixing the retail price of fresh and UHT milk, and yoghurt. In deciding this case, the Authority stated that: "It must be underlined that the carrying out of the common will of the producers of fixing a uniform retail price necessarily involved also the association of retail dealers, whose contribution to the fulfilment of the agreement consisted in communicating to its members and spreading among the retailers the existence and the contents of the agreement". In other words, the Authority may in some cases identify the presence of a vertical restriction through the analysis of the effects on the relevant market (in this case, the uniformity of prices) of an horizontal restraint.

  The decision Costituzione rete Dealer GSM of 2/5/1996, concerned the distribution of mobile telephone services by the State owned company Telecom Italia Mobile (TIM). The distribution ought to have taken place through a network of exclusive dealers, which were also distributors of the TACS mobile telephone services, and marketed mobile telephone devices too. The Authority stated that such an agreement ought to be considered as unlawful, according to both arts. 2 and 3 of the Italian antitrust law.

  First of all, the agreement between TIM and the dealers foreclosed to the competitor of TIM in the market of GSM services the access to the most qualified and skilled distributors of mobile telephone services (and devices), which had already acquired a good marketing experience through the marketing of the TACS system.

  On the other hand, TIM was at the time the only enterprise operating in the GSM market, because the other company to which the needed governmental concession had been granted, Omnitel Pronto Italia (OPI), was not yet ready to operate. Moreover, TIM was a monopolist on the market of TACS mobile telephone services. As a consequence, it has been considered by the Authority as being in a dominant position on the new GSM market. Entering the above mentioned distribution agreement with a great number of qualified dealers has been considered as an abuse of such a dominant position, according to art. 3, lett. b) (corresponding to art. 86, lett. b) of the EC Treaty) because it prevented OPI, the forthcoming competitor of TIM, from distributing its own GSM services through those dealers.

  Worth to note, the same reasoning had been previously set forth by the Authority in the decision (Ducati/SIP) of one of the cases concerning franchising which it has up to now examined; this decision, as we will see, regarded the distribution of mobile telephone devices, bearing the SIP (the former name of Telecom Italia, the State-owned telephone company under whose control is now TIM) trademark, through a franchised network of dealers.

  Recently, the Italian antitrust Authority opened a procedure regarding the distribution of ice-creams by the main Italian manufacturers. An independent company, operating in the field of wholesale marketing of ice-creams, complained to the Authority that it had undergone great difficulties in finding retail dealers who could market its products, because most of retailers were bound by exclusive supply agreements to large Italian ice-cream manufacturers. The antitrust Authority stated that these agreements may be considered as an unlawful restriction of competition, according to art. 2 of the Italian law, if it will be ascertained that the huge number of exclusive supply agreements, entered into by the main undertakings operating in the relevant market, with a great number of retailers, does foreclose the entry on the market of new competitors.(here the "cumulative effect" theory of the Delimitis case is echoed).

  The decision of the "ice-cream case" has been issued on 8 December 1996. According to the Authority, each agreement entered into by ice-cream manufacturers and retail dealers had to be considered as an unlawful restriction of competition, since those agreements included exclusive supply duties, along with the s.c. "freezer exclusivity" (i.e., the duty, cast on the dealer, not to sell competing products using the freezer which had been supplied free by the ice-cream manufacturer). The Authority pointed out that those duties had to be very carefully observed by retail dealers, because manufacturers usually enforced such clauses, withdrawing from contract and filing a claim for damages in any case when their inspectors had discovered that even a very small quantity of ice-cream supplied by competitors was sold by the retailer.

In the economic analysis of the market, the Authority upheld the "cumulative effect" theory, as it stated that an effect of foreclosure arose from the very high number of exclusive supply agreements (it was estimated that 68.1% of the total number of retailers were parties to one of those agreements),thus banning new entries.

  On this issue we may conclude that in opposition to the EC tendency to consider any vertical restraint whatsoever in violation of art. 85.1, with the only possible escape runaway of art. 85.3 (thus adopting a sort of a per se rule), the Italian Authority seems to have adopted a s.c. "effect test", which is supported by the text of art. 2 of the Italian law, when it says that are prohibited the practices which hinder the play of competition "in a consistent manner".

 

3. The cases specifically dealing with franchising (IN-SIP; Assistal/SIP; Parabella)

 

At the outset, it must be noted that the first case of application of antitrust rules by the Authority to a franchising agreement was assessed under art. 3, instead of art. 2. Franchising then has not been considered as a potentially anticompetitive agreement between its parties, according to the opinion which had inspired both the EC decisions on the matter and Regulation n. 4087/88, but as a possible mean for the dominant enterprise in order to exclude the entry on the market of new competitors, through the setting and the carrying out of a network of particularly skilled dealers of its products, bound by exclusive supply clauses.

The first decision of the Italian antitrust Authority concerning franchising is that of the case Ducati/SIP of 24/3/1993. SIP (now Telecom Italia), marketed mobile telephone devices bearing its trademark through a network of franchised dealers (using the trademark "IN-SIP"). The franchising agreement included both an exclusive supply and an exclusive resale clause cast upon the franchisees. In other words, the franchisees ought to market in their shops only the franchised products, which they could buy from the franchisor only.

The Authority stated that such clauses had the effect of foreclosing the access of the competitors of SIP (which was, at the time, a monopolist in the field of mobile telephone services), to the most qualified and skilled dealers of mobile telephone devices. On the other hand, dealers were strongly attracted in entering the IN-SIP network because of the high market share of SIP, and because of the monopoly which SIP held in the market of mobile telephone services, which would induce consumers to buy devices bearing its trademark (which acted as a kind of a quality-test of the device).

The Authority did recognise that exclusive supply and resale clauses included in franchising agreements may have positive consequences on the market structure, but the presence of those consequences is denied when the franchisor owns exclusive rights in the upstream market, as in the Ducati/SIP case, where the franchisor SIP was monopolist by means of legal provisions in the market of mobile telephone services. As a consequence, SIP was ordered by the Authority to eliminate the exclusive clause from its franchising contracts.

The exclusive supply and resale clause is, of course, a fundamental element of franchising agreements: moreover, it is clear that the franchisor will grant the franchise only to the undertakings which, in its opinion, are the most skilled in the specific field of activity, or, in any case, whose entrepreneurial ability it trust. According to the Italian antitrust Authority, such a clause cannot be included in distribution agreements one of whose parties is in a dominant position: as a consequence, these undertakings may not carry out a franchised network for the distribution of their products. Worth to note, it was again stated by the Authority (in the above mentioned Dealer GSM decision), that no exclusive distribution agreement at all can be entered into by an undertaking in a dominant position.

After the Ducati/SIP case had been decided, the Authority started a new procedure against SIP, which was suspected of foreclosing, by means of the creation of the same franchised network "IN-SIP", the access of its competitors to the most qualified dealers of telephone devices at large, and particularly in the field of distribution of key telephone systems and private automatic branch exchange systems. In its decision of 30/5/1995, the Authority stated that the fact that Telecom (the new name of SIP) was the head of a huge and experienced commercial network, whose main feature was the use of a common trade mark (formerly "IN-SIP", now "Telecom"), which was borne by the marketed products, proved, among other elements, that the franchisor Telecom was in a dominant position. Anyway, no further violation of arts. 2 or 3 of the Italian antitrust law was contested to Telecom for the carrying out of its franchised network, after the exclusive clause had been eliminated.

  In the Parabella case, the Authority examined the case of a franchised network of body care and slimming treatments, operating on the whole Italian territory, and also abroad, as it was maintained by the franchisor, whose franchising agreements included various anticompetitive clauses. For example, resale price-fixing clauses, exclusive supply duties, also for products which were not absolutely necessary for the identification of the dealer as a franchised undertaking, post-term competition bans for an indefinite time after the agreement had expired, were included in the franchising contract.

  The Authority decided not to start a proceeding, because the market share of the whole network (though defined in application of questionable criteria which included also gyms in the relevant market) was by far lower than 5%.

  This opinion can be criticised, since it leads to the consequence that franchisor whose market share is low can cast upon its franchisees any kind of anticompetitive restrictions, which would be unlawful if the market share of the franchisor was higher.

 

4. Franchising before the Courts in application of the antitrust act

 

Art. 33.2, of the Italian antitrust law states that "annulments proceedings, actions for damages and applications whose purpose is to obtain emergency measures in respect of infringements of provisions of Titles I to IV (including arts. 2 and 3) shall be begun before the Court of Appeal which has relevant territorial jurisdiction".

The question arose of determining which Court was competent by territory to deal with such claims, in the case when the plaintiff assumed that arts. 2 and 3 of the antitrust act had been violated by means of a franchising contract. The Courts of Appeal of Turin and Catania, in their decisions of the Parabella case (the same franchised network which has been examined by the antitrust Authority) stated that the competent Court is that of the place where the franchising contract is entered into, and not that of the place where the franchisee carried out their entrepreneurial activities. These decisions are undoubtedly wrongful, and can be widely criticised. The appropriate criterion for determining the competent judge is that of the locus commissi delicti, i.e., the place where the franchisee, which is the party whose entrepreneurial freedom of activity was unlawfully restricted, and this place is not, of course, that where the contract is entered into, but that where the franchisee carries out its business.

The Court of Appeal of Milan, in a decision concerning the same case, on 21/3/1995 faced the problem of determining whether the burden of proving the presence of the anticompetitive effects of the agreement in the whole national market, or in a relevant part thereof, was cast upon the plaintiff (a franchisee, which claimed for a declaration of voidness of the agreement for violation of art. 2) or upon the defendant (the franchisor). The Court stated that such burden is cast upon the plaintiff who claims a violation of antitrust law; moreover, it was pointed out that the previous decision of the antitrust Authority, which had stated (as we have seen) that the market share of the Parabella network was too low for determining any violation of antitrust law, though not being binding on the Court, based a presumption that no anticompetitive effects had been produced on the market by the franchising contract. Finally, it must be emphasized that the Court stated that no direct protection is granted to the damaged parties by the antitrust law, whose object of protection is the freedom of the market only. Though not fully agreeable with, this is also the opinion of the EC Court of justice .

A possible defence of the party in a franchising agreement whose entrepreneurial freedom is unlawfully restricted can be found in the decision of the case Studio Trezzano 2- ILFI, of 13/11/1989, by the Tribunal of Milan, which stated that EC Regulation 4087/88 may be applied to franchising agreements entered into by undertakings whose places of business are in the same member State, when these agreements are the basis for a more huge network, which may go beyond the borders of that State and extend in other member States. As a consequence, the price-fixing clause included in the franchising contract was declared null and void; moreover, considering that the franchisor had claimed that the contract had to be considered as automatically discharged in case of breach by the franchisee, voidness was extended to the whole contract.

In a recent decision, the Tribunal of Crema stated that a distribution agreement (in the field of distribution of automobiles) may be qualified as a franchising contract if the degree of co-ordination and integration between the undertakings of retailer and wholesale distributor (or producer) is so high that their contractual relationship fulfils the requirements of art. 1, n.3, lett. b) of Regulation 4087/88. As a consequence, the wholesale distributor may be held responsible for damages which arose to consumers as a consequence of breaches by the retailer of the contracts it enters into with the consumers. Worth to be noted the qualification of the contractual relationship as a "franchising" agreement is reached on the basis of a provision whose field of application cannot go beyond the limits of EC (or national) antitrust law, and which could not be applied to the specific subject-matter, which regarded a claim for breach of contract. Moreover, the responsibility of the wholesale distributor is based not on the qualification of the agreement as a "franchising" contract, according to the above mentioned provision of Reg. 4087/88, which is completely unnecessary, but on the detrimental reliance of the consumer on the fact that the retailer and the wholesale distributor, which, of course, both used the same signs and trademarks, were really parts of the same undertaking, and not two different undertakings.

 

Turin October 3, 1996

 

 

 

(Prof. Avv. Aldo Frignani)

 

 

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