close
ITALY

ITALY: Critical remarks on the investigation opened by the AGCM against Benetton for abuse of economic dependence in franchising.

On 17 November 2020, the Italian Antitrust Authority (AGCM) opened an investigation against Benetton s.r.l. and Benetton Group s.r.l. for abuse of economic dependence in a franchising and product resale contractual relationship.

Silvia BORTOLOTTI - 15.02.21
Country expert

The proceedings arose from a complaint by Miragreen s.r.l., a former franchisee that operated two Benetton shops, which complained of having suffered an abuse of economic dependence, which allegedly led it to cease trading.

On the basis of this complaint, the AGCM opened an antitrust investigation, considering that Benetton's conduct could constitute an abuse of economic dependence, relevant for the protection of competition, given its position on the market and the possible impact on all the entrepreneurs in its network.

It should be noted, in fact, that the competence to decide in this matter lies with the ordinary courts (art. 9, paragraph 3, law 192/1998), while the AGCM can intervene with warnings and sanctions only when it envisages, precisely, a relevance of the alleged abuse in terms of competition (art. 9, paragraph 3-bis, law 192/1998 and art. 15, law 287/1990).

The measure in question creates disconcertment and raises legitimate concerns among companies that manage franchising networks, under various profiles.

First of all, the list of clauses of the franchise agreement and of the general terms and conditions of sale, presented by the former franchisee as "clauses that would have hindered, or even prevented, the profitable conduct of its business activity, to the point of causing its cessation", are in fact standard clauses that can be found in any franchise agreement, used not only in Italy but also internationally, which have even been validated, from an antitrust point of view, by the EU Court of Justice in the Pronuptia case (CJEU, Judgment of 28/1/1986 - Case C-161/84, Pronuptia de Paris GmbH v. Pronuptia de Paris Irmgard Schillgallis).

In addition, the decision repeatedly states that the former franchisee, prior to the signing of the contract in question, already had a past situation of "heavy debt exposure" to Benetton, which, according to the AGCM's assessment, "could discourage, to the point of making impossible, the franchisee's search for a market alternative, thus determining economic dependence on the franchisor".

Frankly, it is difficult to see how such a circumstance, which, if anything, acknowledges Miragreen's previous failure to meet its payment obligations, can become a founding element of the position of economic dependence between the parties and become relevant in general terms for the network. It would be tantamount to saying that a company in financial difficulties negotiating a franchise agreement starts from a position of economic dependence vis-à-vis the franchisor and can therefore reserve the right to challenge in the future the contractual clauses it freely accepts.

However, it is necessary to examine the various aspects and the applicable discipline in more detail.

1.  Abuse of economic dependence

Article 9 of Law 192 of 1998 on subcontracting regulates the abuse of economic dependence in the following terms:

1. The abuse by one or more undertakings of the position of economic dependence in which a customer or supplier undertaking is, in or against them, shall be prohibited. An economic dependency is a situation in which an undertaking is able to cause, in its commercial relations with another undertaking, an excessive imbalance of rights and obligations. Economic dependence shall also be assessed taking into account the real possibility for the party subject to abuse, to find satisfactory alternatives on the market.

2.  Abuse may also consist in a refusal to sell or a refusal to buy, the imposition of unjustifiably onerous or discriminatory contractual conditions, or the arbitrary interruption of existing commercial relations.

3.  The pact through which the abuse of economic dependence is carried out shall be null and void.

In order to determine whether such an abuse exists, it must first be established that there is "economic dependence" between two undertakings, i.e. (1) that one of them is in a situation which leads to an excessive imbalance of rights and obligations in its commercial relations with the other; and (2) that the other undertaking has no real possibility of finding satisfactory alternatives on the market.

Once the existence of a situation of economic dependence has been established, it must then be ascertained whether the "strong" undertaking has committed an "abuse", with particular reference - in the present case - to the imposition of unjustifiably onerous or discriminatory contractual conditions.

The consequence of the abuse consists, again according to Art. 9, Law 192/1998, in the nullity of the contractual clause through which the abuse took place (with possible consequent compensation for damages, if proven).

2.  Application of the rule to franchising

Although the majority of the Italian case-law now acknowledges, in theory, the applicability of Article 9 of Law 192/1998 also to contracts other than subcontracting - including franchising contracts - its application in practice must be limited to extreme cases, considering that in contractual relationships between entrepreneurs (which is unquestionably also the franchisee), the principle of contractual autonomy must be considered prevailing. Therefore, without prejudice to the observance of mandatory rules of law, the parties are free to negotiate and accept contractual conditions, even "unbalanced" ones, according to their free entrepreneurial choices.

Franchise contracts are by their very nature "unbalanced" in favour of the franchisor, on the one hand because this is necessary to maintain a common image of the outlets, to guarantee and maintain the reputation of the brand etc.; on the other hand, because by joining the network the franchisee makes a limited investment compared to the advantages that derive from belonging to a network that is already known and consolidated in terms of image, assistance, procedures, organization, training etc.

Moreover, in most cases of product franchising, the outlets are single-brand outlets, so that the franchisee earns its entire turnover from the sale of the franchisor's products.

The Italian legislator has taken care to protect the franchisee, as the weaker party in the contractual relationship, by introducing a specific law on franchising (Law 129 of 2004), which requires the franchisor to provide the franchisee, at least 30 days before signing the contract, with specific information concerning the franchisor, the brand, the network, etc., in addition to the text of the contract. Pursuant to the same law, the contract must, inter alia, indicate: “the amount of the investments and any entry fees to be borne by the franchisee prior to the commencement of the business; the method of calculation and payment of royalties; any indication of a minimum revenue to be earned by the franchisee” and other information specifically listed.

In addition, the franchisee, at the time it makes such an assessment and decides to join the franchise network, is unquestionably in a position to find any alternative on the market.

In fact, to the best of our knowledge, the case law that has so far assessed the application of Article 9 to franchise agreements has always declared the absence of the prerequisites of economic dependence, without even going so far as to assess the abuse (see, in recent years: App. Rome, 14/09/2020, no. 4226; App. Milan 10/03/2020, no. 749; Trib. Milan, 10/3/2020 no. 2080; Trib. Treviso, 14/08/2019; Trib. Rome, 09/08/2019, no. 16265; Trib. Milan, 03/07/2019; Trib. Vicenza, 20/05/2019; Trib. Catania, 30/04/2019; Trib. Bolzano 11/04/2019, no. 370; Trib. Milan, 10/10/2018 no. 10116; App. Rome, 01/03/2018, no. 133; Trib. Reggio Emilia, 17/01/2018, no. 39; Trib. Genova 05/01/2018, no. 20/2018; Trib. Milano, sez. imprese, of 06/12/2017 - unfortunately, erroneously summarized and commented by some authors in the opposite sense to the content of the decision; see comment: https://www.bbmpartners.com/news/Abuso-di-dipendenza-economica-contratto-di-franchising; Trib. Monza, 4/7/2017; Trib. Torino, 9/5/2017; Trib. Roma, sez. VIII, 1/4/2017; App. Genoa, 04/11/2016; Trib. Bologna, 5/10/2016; Trib. Rome, no. 2033/2013), with two exceptions: App. Milan 15/07/2015, which recognized economic dependence but denied abuse, and Trib. Isernia 12/4/2006, in which the franchisor had adopted a particularly aggressive pricing policy towards the franchisee, selling to the franchisee's potential customers at prices lower than the franchisee's purchase prices, and abuse was recognized.

3.  The clauses of the Benetton contract

The elements that can be deduced from the decision of the AGCM, which the Authority considered sufficient to justify the opening of an investigation against the Benetton group, are contained in the franchise agreement and in the general conditions of sale to the franchisee.

In particular, those contained in the franchise agreement are as follows:

1.    The charge and costs to be borne by the franchisee for the design and construction of the shop and furnishings, based on costs estimated by Benetton and professionals selected by the latter, failure to comply with which shall result in termination of the agreement;

2.    the signing of a bank guarantee in favour of the franchisor;

3.    the stipulation of an insurance policy to protect the goods stored in the outlet;

4.    the prohibition of assignment of the contract by the franchisee without the franchisor's prior consent;

5.    prohibition of any change in the corporate structure, as well as any change in the administration, direction or management of the franchisee without the prior approval of Benetton;

6.    prohibition to transfer the outlet to third parties without offering pre-emption to Benetton or submitting the potential successor to Benetton in order to assess the adequacy of the requirements for the continuation or otherwise of the business relationship;

7.    termination of the agreement in the event of breach by the franchisee of the above obligations;

8.    exclusion of compensation or indemnity for the franchisee at the end of the relationship;

9.    always in the case of termination of the relationship "at the request of Bencom, the Franchisee shall sell to Bencom the furniture, lighting fixtures and materials of the point of sale that characterize the UCB Concept Store at the depreciation value or, if higher, at market value";

10. "Also with reference to the contractual products remaining unsold, it is left to Benetton to assess whether to purchase them at a price to be agreed; otherwise, the franchisee may resell them to third parties only by notifying Benetton in advance in writing";

11. seasonal budget communicated by the franchisee to Benetton and, on the basis of this budget, "the franchisee and Bencom will agree - also through intermediaries appointed by Bencom - the structure to be attributed to the overall purchase proposal relating to the commercial season in question";

12. the obligation to maintain a sufficiently large stock of seasonal clothing products;

13. a system of automatic replenishment of goods aimed at maintaining those products that best meet consumer preferences;

14.  "The Franchisee expressly acknowledges and accepts that the automatic replenishment system may eventually process and proceed to the delivery, in quantities greater than those originally ordered, of those specific references which, on the basis of the Franchisee's sales data sent daily through the Information System, are more in demand by end consumers;

15.  Specific "Fashion Products" that "are made and supplied with particular methods (pre-constituted packages) and timing in order to intercept the trends and tastes of consumers in the best and timely manner and that, given the timing of the supplies, it may be difficult for the Franchisee to plan the orders of said Fashion Products";

16.  The timing of orders for goods is defined by Benetton and it is provided that each purchase proposal from the franchisee is irrevocable for 10 months;

17. SEPA direct debit mandate for payment of goods;

18. retail prices "shall be determined exclusively by the Franchisee" (see art. 8). However, provision is made for termination of the agreement, inter alia, if the franchisee "refuses to participate in or does not fully comply with marketing advertising campaigns" (Art. 17.2 letter i) or "violates the prohibition to promote advertising campaigns without the written consent of Bencom".

Those contained in the general conditions of sale are:

19.  Delivery terms are for Benetton merely indicative;

20.  If the Franchisee refuses to receive delivery of even only part of the goods ordered by the same Benetton may, at its sole discretion, request the execution of the relevant sales contract or declare its total or partial cancellation;

21. there are limitations on the guarantee of the goods and strict procedures for returning flawed or excess items (Art. 6 "...the guarantee does not extend to shortages, differences in models, colours, sizes, finishes and assortments, or irregularities in packaging and wrapping which are within the tolerances of use at the time and place of delivery to the carrier or forwarding agent" ... "no return of goods is accepted unless previously agreed". Art. 7 General Terms and Conditions of Sale "Any shortages or failures apparent from the external examination of the packages containing the goods must be reported under penalty of forfeiture upon receipt..... Any claims for defects, failures and shortages not apparent from the external examination of the packages must be reported, under penalty of forfeiture, by registered letter with acknowledgement of receipt sent to Bencom within 15 days of receipt of the goods in the case of obvious defects and, respectively, within 15 days of discovery in the case of non-obvious defects");

22. the existence of complaints or the allegation of claims under the guarantee does not constitute for the purchaser a justified reason for the delay or suspension of payment, not even in part, and the purchaser's right to oppose, in compensation to the vendor, any credit reason in any case having its source in the guarantee is excluded.

As mentioned above, it seems incomprehensible that the above-mentioned clauses could be regarded as a situation of economic dependence of the franchisee, since they are commonly used in franchise networks with full functionality and efficiency of the same; moreover, they comply with the applicable legal rules and are even mentioned in the same Italian law on franchising (l. 129/2004).

Some of them, in fact, are typical clauses necessary to guarantee the uniformity of the network, to protect the investment on the brand and the concept made by the franchisor and enjoyed by all the members of the network itself. Consider, in particular: the image of the outlet (point 1); the prohibition to transfer the contract (4) or the outlet without giving it in pre-emption to the franchisor (6); the obligation to resell to Benetton the furniture at the end of the contract (9) and the management of unsold goods (10); the obligation to comply with the marketing policies and advertising campaigns of the franchisor (18).

Others are clauses necessary to maintain the reputation and image of the brand in relations with customers: obligation to maintain a wide range of products (12), to restock (13); to have available the products most in demand by customers (14, 15).

Other clauses are typical of contracts for the distribution and retail sale of products, against the economic risk that the franchisee, in his capacity as entrepreneur, assumes: bank guarantee (2); insurance on products stored in the shop (3); prohibition of changing the corporate structure (5); termination of the contract for breach of contract (7); exclusion of compensation at the end of the relationship (8); seasonal plan proposed by the franchisee and agreed with the franchisor (11); timing and proposed orders (16); payment through SEPA (17); freedom to determine the resale price of the products (18); delivery terms (19); non-performance of the franchisee's purchase obligations (20); limitation of the guarantee to industry tolerances and reasonable notice periods (21); prohibition of set-off or suspension of payments in case of complaints (22).

4.  The alleged abuse of economic dependence in the present case

First of all, Miragreen's past indebtedness cannot be the basis for the situation of economic dependence, since this debt does not appear to be in any way attributable to Benetton but is instead likely to derive from a breach by the franchisee of its payment obligations. Miragreen has not even argued that it was pushed or in any way obliged to enter into the franchise agreement in such circumstances, as this was a free business choice on its part. Moreover, since this situation specifically referred to Miragreen, it would be a matter for the ordinary courts and could not be assessed in the context of the AGCM investigation, given its irrelevance for the other members of the network and for antitrust purposes.

Therefore, having cleared the field of that assumption, the question arises whether the clauses examined above could in themselves place Benetton in a position to bring about an excessive imbalance in commercial relations with its franchisees, such as to make it impossible for them to find satisfactory alternatives on the market. If so, Benetton's 'abuse' would have to consist (again) in the imposition of unjustifiably onerous or discriminatory contractual conditions on its franchisees.

Under the first profile (conditions leading to an excessive imbalance), what has already been said about the fact that the conclusion of the contract by the franchisees is their free choice, made in a conscious manner and with the protections provided by law and as an alternative to countless other options on the market, should be sufficient.

In any event, an analysis of the contents of the clauses shows that, according to the above provisions, it is the franchisee himself who proposes the seasonal purchasing plan, which is then agreed with the franchisor (11); there is no obligation on the franchisee to purchase products, other than the obligation to diversify the product range (12); the franchisee therefore remains free to decide whether and how many orders to place, unless it incurs negative consequences if it does not comply with the obligations it assumes in the specific sales contracts it concludes (e.g. order irrevocability (16), refusal to take delivery of ordered goods (20)). The policy on automatic restocking typically concerns products that sell out more quickly and therefore need to be repurchased during the season to meet customer demand and therefore should not pose problems of unsold goods (13, 14, 15).

In conclusion, obviously on the basis of the sole elements emerging from the decision here commented, the clauses in question do not seem to create conditions of unjustified imbalance, considering the position of entrepreneur held by the franchisee, who assumes the economic risk and who should have had the opportunity to carefully evaluate the text of the contract, in view of the disclosure obligations, before signing.

As to the second aspect (impossibility of finding alternatives on the market), from an objective point of view, Benetton has countless competitors operating on the market and which could therefore constitute an alternative for its franchisees; from a subjective point of view, instead, the case law recognizes it "whenever an undertaking has made investments - in machinery and knowledge - which, because they are aimed at the production or distribution process proper and exclusive to another undertaking, would be difficult to reinvest in a relationship with a different undertaking". The franchisee operating in the field of sale of products, as in the case at hand, on the one hand makes a very limited initial investment, both compared to what he would have if he started any business on his own, and compared to the benefits he derives from the reputation of the brand and the organization of the system in which he is included. In the present case, it is not known whether the Benetton franchisee has to pay an entrance fee to enter the network and of what amount, nor is it known whether he has to pay royalties or is limited to paying for the products he purchases; but even if such conditions were provided for, it would still be a limited investment. Also the costs of setting up and designing the shop mentioned in the contract would not be absent in the case of setting up another business on one's own. Finally, the knowledge that the franchisee acquires (subject to any secrecy and non-competition obligations it may assume) is potentially reusable in any similar context of resale of products.

In conclusion, the conditions of economic dependence do not seem to be fulfilled.

Even if the conditions of economic dependence are met, it is not clear what the abuse could consist in: the imposition of (further) unjustifiably onerous or discriminatory contractual conditions?

5.  Relevance for antitrust purposes

The EU Court of Justice in the Pronuptia case expressly stated that:

-    "Provisions which are strictly necessary in order to ensure that the knowhow and assistance provided by the franchisor do not benefit competitors do not constitute restrictions of competition for the purposes of Article 85 (1)." [ECC Treaty, now 101(1) TFEU];

-    “Provisions which establish the control strictly necessary for maintaining the identity and reputation of the network identified by the common name or symbol do not constitute restrictions of competition for the purposes of Article 85 (1)' [ECC Treaty, now 101(1) TFEU];

Many of the clauses of the Benetton franchise agreement are among those specifically assessed by the Court of Justice and cannot therefore be regarded as contrary to Article 101(1) TFEU either.

As regards the other clauses, they are not contrary to EU Regulation 330/2010 (see, for example, the clause on prices) and are therefore compatible with antitrust law.

Moreover, without having sufficient elements to determine market shares, it seems unlikely that Benetton has a dominant position (or even a significant position) on the market for the resale of clothing products.

If we analyze the content of the only decision issued to date by the AGCM for abuse of economic dependence (Provv. 28043 of 20/12/2019, proc. A525, Boll. 3/2020 concerning the distribution of newspapers and periodicals) - without considering Provv. 26251 of 23/11/2016 on the abuse for widespread and repeated violation of the rules on payments, which is not relevant here - the differences with respect to the Benetton case appear obvious, if only considering that the companies that were accused of abuse had a 55-60% share of the reference market, that the abuse was identified in the arbitrary interruption of commercial relations (typical case) and that there were specific competition profiles, concerning the various companies involved.

Even on the basis of such a comparison, it is impossible to understand what profile of antitrust relevance can be identified in the present case.

6.  Conclusions

Given that this is the beginning of an investigation, it is not known what in-depth studies will be carried out and what further data and information may emerge.

However, the assessments made by the AGCM in the decision commented on here, to justify the initiation of proceedings appear to be totally unfounded.

On the one hand, in fact, it is hard to see how the Authority can make general assessments, departing from the specific situation of a company which has accumulated - due to its default - a large debt exposure to the franchisor and identify the elements of economic dependence (with particular reference to the impossibility of finding alternatives on the market), precisely on the basis of this assumption. That circumstance could possibly be considered in the context of proceedings on the merits of the specific case, which would fall within the jurisdiction of the ordinary courts, but certainly cannot be the subject-matter of a decision of the AGCM concerning the entire network.

Secondly, it has been extensively explained why the clauses mentioned are far from constituting economic commitments and burdens “such as to make it difficult, if not impossible, to seek satisfactory commercial alternatives on the market”, since they are typical clauses of franchising contracts commonly used both in Italy and abroad; they are daily validated and confirmed in courts all over Italy and some of them are even mentioned in the Italian law on franchising.

The analysis carried out on the specific clauses also leads to the exclusion of the existence of the same prerequisites of economic dependence (without even going so far as to assess the abuse), in accordance with the decisions of the courts of merit that have examined similar cases so far.

Finally, it should be remembered that, by way of derogation from the jurisdiction of the ordinary courts, pursuant to Article 9, paragraph 3-bis, Law 192/1998, the Antitrust authority's jurisdiction exists only when the alleged abuse is relevant from the point of view of competition. However, also from this point of view, as we have seen in the previous paragraph, it does not seem likely that Benetton has such a relevant position on the market for the sale of clothing products; moreover, the clauses contained in the Benetton contracts comply with the applicable antitrust law.

We therefore hope that the Authority, following a more thorough assessment, will review its position in the course of the proceedings.

 

AGCM DECISION - Benetton

 

Silvia Bortolotti, Secretary General IDI, IDI Country Expert for Italy

 

RELATED