Abuse of economic dependence and franchising: the AGCM initiates an investigation against Benetton in Italy

On November 2020, the Italian Antitrust Authority (AGCM) initiated an investigation against the Benetton group for a suspected abuse of economic dependence, regarding a franchising agreement concerning the sale of products under the Benetton brand. The AGCM took action on an information of a former Benetton franchisee, who denounced the presence in the franchise agreement he had signed of a number of clauses that would have determined its structural economic dependence on the franchisor and would have hindered the profit-making of its business, causing its cessation. The abuse of economic dependence is described by art. 9 of Law no. 192/1998 as the situation in which a company is able to determine an excessive imbalance of rights and obligations in commercial relations with another company, also taking into account the real possibility for the company that suffers the abuse to find satisfactory alternatives on the market. Franchising contracts fall fully within the scope of such Law. So far, Italian case law has always denied the existence of a position of economic dependence of the franchisee towards the franchisor. However, if the measures of the AGCM – in the case of Benetton or in others – begin to follow one another, we will assist to an increase in litigation brought by affiliates or former affiliates against franchisors, for the ascertainment of situations of abuse of economic dependence and for the related compensation for damages.

1. The proceedings of the Italian Antitrust Authority against Benetton

On November 2020, the 𝐈𝐭𝐚𝐥𝐢𝐚𝐧 𝐀𝐧𝐭𝐢𝐭𝐫𝐮𝐬𝐭 𝐀𝐮𝐭𝐡𝐨𝐫𝐢𝐭𝐲 (𝐀𝐆𝐂𝐌) initiated an investigation against the Benetton group for a suspected abuse of economic dependence, regarding a franchising agreement concerning the sale of products under the Benetton brand.

The AGCM took action on an information of a former Benetton franchisee, who denounced the presence in the franchise agreement he had signed of a number of clauses that would have determined its structural economic dependence on the franchisor and would have hindered the profit-making of its business, causing its cessation.

In summary, the franchise agreement in question included the following clauses:

• a significant financial commitment for the design and construction of the store, entirely borne by the franchisee, who was obliged to accept the costs estimated by the franchisor and to rely on the professionals appointed by the same, also for the development of the architectural project and for the purchase of shop furnishings, under penalty of express termination of the contract;
• the signing of a bank guarantee in the event of any breach of contract by the franchisee, issued by a bank approved by the franchisor;
• the prohibition for the franchisee to transfer the contract, to change the shareholding structure without the prior approval of the franchisor, to transfer the store to third parties without offering the franchisor a pre-emption right, under penalty of termination of the contract;
• failure to pay the franchisee compensation in the event of termination of the contractual relationship, as well as some restrictions relating to the management of unsold items and store furnishings;
• the franchisee’s obligation to maintain a sufficiently large warehouse, with an automatic restocking mechanism for some products;
• the franchisor’s right to establish the timing of orders for goods and the irrevocability of the franchisee’s purchase proposals;
• the franchisee’s obligation to issue the franchisor with a SEPA direct debit mandate for payments due under the contract;
• the franchisee’s obligation to participate in the franchisor’s advertising campaigns and not to promote advertising campaigns without the latter’s consent;
• the non-binding nature of the delivery terms provided for the franchisor, against the obligation for the franchisee not to receive delivery of the goods;
• the provision of warranty limitations on goods and, at the same time, of strict procedures for returning spoiled or excess garments;

According to the preliminary analysis of the AGCM, the commitments and charges placed on the franchisee under the franchise agreement were such as to constitute an excessive imbalance in the relations between the franchisor and the franchisee, making it difficult for the latter, if it is not impossible, to seek satisfactory commercial alternatives on the market and to determine, therefore, the economic dependence of the franchisee on the franchisor.

In particular, the fulcrum of the franchisee’s commercial activity, consisting in the definition of purchase orders, would be subject to the discretion of the franchisor, not only in terms of timing, but also of quantities and assortments, which were disproportionate to normal needs of the affiliate.

2. Law no. 192/1998 on the abuse of economic dependence

The one in question is the third proceeding in the matter of abuse of economic dependence, within a few months, promoted by the AGCM (the previous two were initiated against companies operating in the sector of newspaper distribution and postal services), testifying to the new activism shown by the Authority against an institution that has so far almost never been used.

The abuse of economic dependence is described by art. 9 of Law no. 192/1998 as the situation in which a company is able to determine an excessive imbalance of rights and obligations in commercial relations with another company, also taking into account the real possibility for the company that suffers the abuse to find satisfactory alternatives on the market.

The rule in question typifies three cases that constitute the most relevant manifestations of the abuse of economic dependence, namely:

• the refusal to sell or buy;
• the imposition of unjustifiably burdensome or discriminatory contractual conditions;
• the arbitrary interruption of commercial relations.

When a situation of abuse of economic dependence arises, there are two consequences:•       on a judicial level, the agreement with which the abuse of economic dependence was carried out is null and void, with the consequent right to compensation for damages of the company that has suffered the abuse;•       on an administrative level, the Antitrust Authority may, pursuant to Law no. 287/1990, impose fines of up to 10% of the total turnover of the company itself on the company that has abused the economic dependence, if it does not comply with the warning issued by the same Authority.

3. The abuse of economic dependence in the franchising context

Although the Law n. 192/1998 concerns industrial subcontracting, the abuse of economic dependence is now considered a figure applicable, in general, to any contractual relationship between companies supported by logic of productive decentralization. Franchising contracts therefore fall fully within the scope of the standard in question.

So far, Italian case law, while recognizing, in its majority part, the applicability of art. 9 L. n. 192/1998 also to franchising contracts, has always denied the existence of a position of economic dependence of the franchisee towards the franchisor, not recognizing the extremes of the abuse of economic dependence in the terms indicated in the law and consequently rejecting the relative questions proposed by franchisees.

The main reason why the applications for the protection of affiliates were disregarded by the judges – beyond the lack of familiarity with the application of the law – lies in the fact that case law has so far considered – albeit with often very concise, superficial reasons and approximate – that the franchisee, even in the presence of a situation of objective excessive contractual imbalance, had the possibility of finding better or otherwise valid alternatives on the market, compared to those represented by the franchisor.

In fact, the analysis of many franchise agreements used in practice shows how, in general, the franchisee is often required to make investments that are not easily reinvested or convertible into another future and possible relationship (sunk costs).

Each franchisor, in fact, generally adopts a different distribution system than that of other franchisors existing on the market, so that the franchisee is forced to acquire knowledge and make investments that will be useful only in relations with that particular franchisor, and difficult to reuse in relation to of other entrepreneurs using different systems.

In other words, the franchisee physiologically finds himself in the situation of not being able to profit from satisfactory alternatives on the market. These alternatives, although present in the abstract, would require the loss of those investments and knowledge, and therefore become substantially inaccessible to the franchisee.

It is premature to predict what will be the evolution of Italian case law regarding the application of the rule of art. 9 L. n. 192/1998 to franchising agreements. It is presumable, however, that, if the measures of the AGCM – in the case of Benetton or in others – begin to follow one another, given the probative value now recognized to the provisions of the Authority in relation to the existence of the behavior ascertained by the latter, we will assist to an increase in litigation brought by affiliates or former affiliates against franchisors, for the ascertainment of situations of abuse of economic dependence and for the related compensation for damages.

 

Avv. Valerio Pandolfini

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The information contained in this article is of a general nature and is not to be considered an exhaustive examination of the various issues, nor is it intended to express an opinion or provide legal advice. Specific legal advice must be provided with regard to individual cases.