Insights

On 19 January 2023, the Court of Justice of the European Union (the “CJEU”) delivered a ruling in the case of Unilever Italia Mkt. Operations Srl v Autorità Garante della Concorrenza e del Mercato (Case C-680/20) wherein it held that:

1. the actions of distributors forming part of the distribution network for goods and services of a producer in a dominant position may be imputed to that producer;
2. exclusivity clauses in distribution contracts must be capable of having exclusionary effects for them to constitute an abuse of a dominant position on the market; and
3. the relevant competition authority is obliged to assess that actual capacity to exclude by also taking into account the evidence submitted by the undertaking in a dominant position.

Case Background

Unilever Italia Mkt. Operations Srl (“Unilever”) produces and distributes mass-market products, including packaged ice cream under the trade names Algida and Carte d’Or. Through a network of one hundred fifty distributors, Unilever provides individually packaged ice cream for consumption “outside”, or away from consumers’ homes at various leisure locations in Italy. Following an investigation by the Italian Competition and Markets Authority (the “AGCM”), in 2017, Unilever was fined over sixty million Euro for allegedly violating Article 102 of the Treaty on the Functioning of the European Union (the “TFEU”) by abusing its dominant position on the market for individually packaged ice cream.

Article 102 TFEU forbids any abuse by one or more undertakings of a dominant position in the internal market, or a substantial part of it, insofar as it may have an effect on trade between Member States. According to AGCM, Unilever’s market strategy was exclusionary and could impede the growth of its competitors. This is because the company’s distributors had imposed exclusivity clauses on the operators of sales outlets, effectively obliging them to source all of their individually packaged ice cream needs exclusively from Unilever. In return, these operators received commissions and rebates, the award of which was subject to conditions relating to the turnover or sale of a specific range of Unilever products. Controversially, the AGCM held that due to pre-existing contractual ties, Unilever and its distributors formed a ‘single economic entity’, and consequently attributed the alleged abusive conduct only to Unilever, even though it was carried out by the distributors.

During the appeal proceedings, the Italian Council of State (the “Referring Court”) referred the following questions to the CJEU for a preliminary ruling on the interpretation and application of EU competition law:

1. First, the Referring Court asked whether exclusivity clauses used by Unilever’s distributors could be attributed to Unilever itself as a producer. In this regard, the Referring Court sought clarity as to what are the necessary factors for determining whether contractual coordination between formally autonomous and independent economic operators results in the development of a single economic entity for the purposes of Articles 101 and 102 TFEU in situations other than those involving corporate control.

2. Second, the Referring Court questioned whether, in the presence of exclusivity clauses in distribution contracts, the competent competition authority is required to demonstrate that those clauses actually have the effect of excluding competitors who are as efficient as the dominant undertaking from the market. Here the Referring Court also sought clarity as to whether, where there are several contested practices, that authority is required to thoroughly review the economic analyses produced by the undertaking concerned.

The CJEU’s Considerations and Ruling

In relation to the first question regarding the imputation of liability for the conduct of distributors under Article 102 TFEU, the CJEU considered the matter from a more general viewpoint and applied the notion of attributability rather than that of an undertaking or of the ‘single economic entity’ doctrine. While, generally, decisions made in the context of a distribution agreement, which therefore do not constitute unilateral conduct, fall under the purview of Article 101 TFEU, which prohibits anti-competitive agreements, such actions of a dominant undertaking, may also violate Article 102 TFEU if they amount to an abuse of dominance.  As Article 102 TFEU prohibits both infringements caused directly by the conduct of an undertaking in a dominant position as well as the conduct that has been delegated by that undertaking to independent legal entities, the undertaking in a dominant position may indeed be held liable for the actions of its distributors, the CJEU held.

Therefore, distributors’ conduct may be attributed to the undertaking in a dominant position under Article 102 TFEU if such conduct was adopted in compliance with specific directives from the dominant undertaking, and therefore, as part of the execution of a unilateral policy that the distributors were expected to comply with. In this case, a distributor and the distribution network which they establish with the dominant undertaking are viewed as just tools for the territorial implementation of the dominant undertaking’s commercial strategy. This is especially true when the conduct takes the shape of standard contracts with exclusivity clauses that were entirely created by the dominant undertaking and that the distributors are required to have signed by operators of sales outlets without the possibility of any modification being made by such operators.

In answering the second question relating to the duty of competition authorities to take into account economic arguments showing no likelihood of foreclosure, the CJEU first reiterated that it is not necessary for the competition authority to demonstrate that the conduct in question actually produced anti-competitive effects for it to be considered abusive, rather what is important is whether such conduct had the ability of restricting competition on the merits. To answer this question, the CJEU also referred to Intel v Commission (Case C-413/14 P) (the “Intel Case”), which dealt with loyalty rebates. In the Intel Case, the CJEU stated that if the dominant undertaking in an Article 102 TFEU case submits evidence that its conduct was incapable of restricting competition and producing exclusionary effects, then the competition authority must analyse three factors:

1. How dominant a company is in the relevant market;

2. The share of the market that the contested practice affects, the terms and procedures under which the disputed rebates were granted, their duration, their amount, and the capacity to foreclose; and

3. The potential existence of a strategy designed to keep any of the dominant undertaking’s competitors that are as efficient from entering the market.

Secondly, in the Intel Case, the Court added that the evaluation of the capacity to exclude is equally important for determining whether a rebate system, which in theory is prohibited by Article 102 TFEU, may be objectively justified. Additionally, the competition-harming exclusionary effect that results from a rebate scheme may be counterbalanced, or even outweighed, by advantages in terms of efficiency that also benefit the customer. It is only after examining the practice’s inherent ability to exclude competitors who are at least as effective as the dominant undertaking, that the favourable and unfavourable consequences of the practice in question on competition can be balanced.

The CJEU clarified that these requirements set out in the Intel Case with regards to rebate schemes also apply with regards to exclusivity clauses, and therefore, to the case at hand. The CJEU further considered that the aim of Article 102 TFEU is not to ensure that competitors who are less efficient from the dominant undertaking remain on the market. Where the dominant undertaking presents evidence that its conduct did not exclude such equally efficient competitors, the relevant competition authority must examine that evidence and demonstrate the contrary. In fact, the CJEU held that since it is a general principle of EU law to respect the right to be heard, competition authorities must take dominant undertaking’s submissions into consideration and carefully and impartially consider all the pertinent circumstances of each case, and especially the evidence presented by the dominant undertaking itself.

The ‘as efficient competitor’ test is just one method of determining whether a practice is exclusionary, and it may not be suitable in cases of non-pricing practices such as refusal to supply. Because of this, competition authorities are not obliged to employ this test to determine whether a practice is abusive, however, they cannot simply rule it out. The CJEU therefore held that in those cases where a dominant undertaking submits an analysis based on the ‘as efficient competitor’ test, the competition authority cannot disregard that evidence without first considering its probative significance.

Concluding Remarks

It is interesting to note that the approach taken by the CJEU in this judgement in relation to the issue of attributability departs from that followed in multiple other judgements, such as Imperial Chemical Industries Ltd. vs Commission of the European Communities (Case 48/69) and Sumal SL v Mercedes Benz Trucks España SL (Case C-882/19), where the doctrine of the ‘single economic entity’ was used to attribute liability to the parent entity.

Another key takeaway from this judgement is that although by their very nature exclusivity clauses raise genuine competition concerns, their exclusionary effects do not arise automatically, and the relevant competition authority has the burden of actually proving the exclusionary effects of such clauses – which can be done through the use of the criteria as set out in the Intel Case. Furthermore, while the use of the ‘as efficient competitor’ test is not obligatory, the relevant competition authority must evaluate the probative value of any test findings submitted by the dominant undertaking.

The article was first published on The Malta Independent (8 February 2023).