ICA opens investigation in retail sector for alleged abuse of economic dependence

With a decision published on 25 November, the Italian Competition Authority (ICA) has opened an investigation (case A543) against two companies of the Benetton group, an undertaking operating in the fashion and retail sectors, to ascertain a possible abuse of economic dependence under Article 9, paragraph 3 bis, of Law 18 June 1998, no. 192, relevant for the protection of competition and the market.

The proceeding was initiated following a complaint submitted by a former Benetton franchisee, who claimed that the franchise agreements concluded with the Benetton group (the franchisor) included clauses that would have hindered, or even prevented, the profitable performance of his business activity, to the point of causing its termination.

In the decision opening the investigation, the ICA alleges that the Benetton group may have abused the economic dependence of its franchisee by imposing unjustifiably onerous contractual clauses and applying them discretionally, so as to affect the franchisee’s economic activity and prevent it from managing its commercial activity independently. The ICA takes the view that there may be a situation of excessive imbalance between the franchisee and the franchisor (the Benetton group), such as to make it difficult, or even impossible, for the franchisee to seek satisfactory commercial alternatives to the relationship with the franchisor on the market.

The clauses which, in the ICA’s view, contribute the most to an excessive imbalance include:

• the provision of obligations relating to the design and construction of the point of sale, which place the economic burden entirely on the franchisee;
• the obligation for the franchisee to sign a bank guarantee issued by a bank approved by the franchisor;
• the obligation for the franchisee to sign an insurance policy covering the possible loss of profit resulting from the occurrence of a harmful event, with the exclusion of any right of redress against the franchisor;
• clauses granting special contractual prerogatives to the franchisor, including the prohibition of the assignment of the contract by the franchisee without the prior consent of the franchisor, the prohibition of transferring the point of sale to third parties without offering pre-emption to the franchisor or submitting to the latter the potential successor in order to assess the adequacy of the requirements as to whether or not to continue the contractual relationship;
• the exclusion of indemnities and reimbursements in favour of the franchisee in the event of contract termination and the attribution to the franchisor of special prerogatives over unsold goods and furnishings;
• clauses which, according to the ICA, are likely to place the definition of purchase orders – in terms of timing and quantities purchased – at the discretion and unilateral will of the franchisor, giving the latter a power of interference which is not proportionate to the normal requirements of a franchising relationship; among these clauses, the clause reserving to the franchisor the right to evaluate with the franchisee the structure of the purchase proposal and to proceed, in certain circumstances, to an automatic re-assortment of the goods, with the related obligation for the franchisee to bear the costs arising from the exceeding of the order thresholds for each reference; the clause governing the purchase of packages of goods defined by the franchisor and providing for the supply of such packages, where not spontaneously purchased by the franchisee, in the manner and timing decided by the franchisor; and the clause providing for the irrevocability for ten months of every purchase proposal coming from the franchisee, which according to the ICA is capable of further stiffening the franchisee’s activity, leaving it a limited margin of flexibility as regards the possibility of adjusting the purchase of goods to the actual sales requirements;
• the provision of the termination of the contract in the event of non-participation in marketing advertising campaigns promoted by the franchisor or violation of the prohibition to promote advertising campaigns without the written consent of the franchisor; and
• other clauses laid down in the general terms and conditions of sale, including provisions which attribute to the terms of delivery envisaged by the franchisor a merely indicative value; provisions imposing strict conditions for the refusal of the goods and the return of excess or faulty garments and provisions aimed at limiting the guarantee on the integrity and correspondence of the goods to the order.

The ICA observes that in view of the prominent position in the clothing market enjoyed by the Benetton group and the strong commercial attractiveness of its brand, the case at issue is relevant not only with reference to the individual contractual relationship, but also in relation to the protection of competition and the market, a circumstance that motivates and justifies its intervention.

The deadline for the closure of the proceedings, to ascertain any infringement, is 31 December 2021.

It may be helpful to recall that the ICA has, among its powers, that of public enforcement of the prohibition of abuse of economic dependence, which can be exercised when the ICA considers that the conduct is relevant to the protection of competition. To this end, the ICA can, as it has done in this case, open an investigation and, if it ascertains the infringement, issue a warning against the undertaking and apply the same sanction mechanism provided for infringements of antitrust law, which provides for fines up to 10% of the undertaking’s annual turnover. This is a power that has been exercised only a few times so far. Before the investigation at issue, the ICA had opened only three other investigations concerning cases of abuse of economic dependence: in two cases the proceedings were closed with the finding of abuse of economic dependence and the provision of fines, while the third case is currently pending.

Case A543 is part of a trend of increasing attention of the competition authorities towards the retail sector, which is undergoing a phase of significant transformation, accelerated by the effects of the pandemic on consumption and the drive coming from digital innovation.