The Court of Appeal in Warsaw in the judgment of 10 January 2018 upheld the decision of the President of the Office of Competition and Consumer Protection concerning imposition of fixed prices by the franchisor.
In the decision no. DOK - 1/2013, issued on 25 June 2013 (DOK3-410-4/12/AS), the President of the Office of Competition and Consumer Protection considered as practice restricting competition and violating the prohibition mentioned in Article 6 (1) (1) of the Act on Competition and Consumer Protection, concluding by the company (franchisor) agreement with franchisees operating restaurants under its brand name, consisting in settling fixed sales prices of products offered in restaurants operating under that brand. In this decision, the President of the Office of Competition and Consumer Protection ordered to discontinue the application of the agreement and imposed a fine of PLN 464,228.92 (approx. EUR 200,000) on the company - franchisor.
In the justification of this decision, the President of the Office for Competition and Consumer Protection stated that price fixing agreements are considered to be one of the most serious infringements of competition, as they usually have adverse effects on the market, distorting the market, limiting or eliminating competition on the market, and hence these actions infringe the general public interest. In the opinion of the President of the Office of Competition and Consumer Protection (UOKiK), price fixing by entrepreneurs results in depriving consumers of the possibility to purchase goods at prices lower than those resulting from the agreement, which could be used in the case of natural market mechanisms.
Franchise agreements concluded by the franchisor contained provisions on the franchisor’s exclusivity in terms of managing the pricing policy in contractual relations between this entity and franchisees, and the franchisor imposed prices on franchisees by obliging them to use one of the two price lists, the content and price changes of which, however, were consulted with franchisees before their introduction.
The President of the Office of Competition and Consumer Protection stated that in this case there was a serious breach of competition law and settle the basic amount of the penalty close to the lower limit of the range: more than 0.2% to 1% of the revenue generated in the financial year preceding the year in which the penalty was imposed. Within the scope of determining the amount of fine, the antitrust authority decided that the penalty cannot be abstracted from the specificity of the relevant market and the activity of entrepreneurs on that market, and therefore it should be subject to further modification, which may consist of increasing or decreasing the fixed amount by a maximum of 80%. Therefore, the President of the Office of Competition and Consumer Protection took into account the economic (market) potential of the infringing entrepreneur, recognizing that the informal restaurants market is a fragmented market, therefore there is no noticeable domination of one or more entities. Thus, the effects of the practice cannot be considered to have a significant impact on competition. In the opinion of the President of the Office of Competition and Consumer Protection, it was therefore justified to reduce the fine set in the first stage of the calculation of the fine by 40%. Further findings concerning the long-term and continuous application of (fixed) sales prices (lasting from 2000), the occurrence of aggravating circumstances (the company acting as the initiator and leader of the agreement; intentional action) and the lack of mitigating circumstances supported an increase in the basic amount of the fine. These findings determined the fine of PLN 464 228,92.
Franchisor did not agree with the position of the President of the Office of Competition and Consumer Protection that the provision on central management of pricing policy by the franchisor, which is shown by the use of common price lists, proves that the franchisees apply rigid prices in the franchise network, and the possibility for franchisees to choose one of the two menu pricelists is only their apparent freedom. The franchisor argued that setting menu prices in the entire franchise restaurant chain leads to offering catering services in the most identical manner and on the same principles. Therefore, it is one of the main factors in the unification of the chain and one of the essential elements of concluded franchise agreements.
In the opinion of the President of the Office of Competition and Consumer Protection, the franchisor mistakenly identified the fixed resale prices with the prices unilaterally determined, imposed on network participants by the organizer and for this reason it is irrelevant that the prices in the price lists were consulted with franchisees before their introduction, which would contradict the use of fixed prices. The President of the Office of Competition and Consumer Protection pointed out that the recognition that a price is permissible or prohibited does not depend on the manner in which it is set, but on whether the supplier has left the distributor free to change the level of prices set in the price list. For the assessment of the franchisor's compliance with the provisions of the competition law, it is not important that the prices in the price lists were consulted with franchisees, but the fact whether the franchisees were left free to change the level of prices agreed with the franchisor. There was no such freedom in this case.
After conducting court proceedings, caused first by the franchisor’s appeal against the decision of the President of the Office of Competition and Consumer Protection to the Regional Court in Warsaw (which dismissed the franchiser’s appeal), and then by the franchisor’s appeal against the judgment of the Regional Court in Warsaw, the Court of Appeal in Warsaw on 10 January 2018 (VII AGA 828/18), shared the position of the President of the Office for Competition and Consumer Protection and the Regional Court, but significantly reduced the penalty imposed on this franchisor - from PLN 464,228.92 to PLN 50,000.00 (from approximately EUR 200,000 to EUR 11,000).
The Court of Appeal emphasized that price agreements are prohibited irrespective of the market share of entrepreneurs and are not subject to exclusion under the de minimis clause. This also applies to vertical price agreements. In the opinion of the Court of Appeal, the franchisor’s arguments that the application of uniform prices is necessary to ensure uniformity of services within the network were not reflected in the facts of the case and the entrepreneur did not present any marketing analyses in this respect; the burden of proving the circumstances of exemption from the ban lies with the entrepreneur. A possible assessment of a price agreement within the rule of reason could be applied during the proceedings if the entrepreneur provided evidence of the pro-competitive nature of the concluded agreement.
However, the Court of Appeal decided to reduce the amount of the fine imposed by the decision of the President of the Office of Competition and Consumer Protection, as it indicated that the difference between the price which could have formed hypothetically if the price agreement had not been concluded and the price agreed upon under it could not have been large, which proves that it was not harmful. The Court of Appeal noted that the fact that the company has little influence on the relevant market may be taken into account when determining the amount of the fine, which may lead to a significant reduction in its amount. The Court of Appeal reduced the fine, despite the fact that it was still set by the President of the Office of Competition and Consumer Protection within the lower limits of the set range.
Magdalena Kowalczuk-Szymanska, IDI Country Expert for franchising in Poland