Issues of parallel imports under the light of the recent Unilever Hellas rulling
By Sofia Georgiadi, Attorney-at-Law, LL.M.
Recently, the Athens Three – Member Administrative Court of Appeal delivered a ruling (Dec. no. 3807/14) on the appeal filed by Unilever Hellas for the annulment of the Euros 7,000,000 fine imposed by the Hellenic Competition Committee (Decision no 441/V/2009) arguing, however, on the infringements of the European and national competition laws made by the company which is the Greek subsidiary of the Unilever Group. The scope of the present report is to present the facts that lead to the imposition of the aforementioned fine and highlight the fact that the Court, however, annulled the fine on various grounds.
In the context of an ex officio investigation conducted by the Hellenic General Bureau of Competition for the cleaning products market, in order to examine possible infringements of the Arts 1 and 2 of Law 3959/2011 (former Law 703/77) and Arts 101 and 102 of the EU Treaty on the Function of the European Union (TFEU), several questionnaires were sent to Unilever Hellas – among other companies – regarding information on their sales terms. The examination of the answers delivered by Unilever Hellas revealed that the largest part of the cleaning products in the Unilever Group trade chain is imported by affiliated companies abroad and the distribution in the local market is succeeded through direct sales to super markets, which constituted the main Unilever Group clients. After collecting the necessary documents (distribution agreements), the Hellenic Bureau noticed a clause implemented in several contracts agreed between Unilever Hellas and certain super market chains (characterized as vertical agreements) excluding the latter from the option to parallel import certain goods (cleaning products) from any third party suppliers, which formed an infringement of the competition law regulations and lead to a distortion of the free competition in the Greek market.
Under European legislation, vertical agreements (such as the ones concluded between Unilever Hellas and super market chains) are agreements or concerted practices entered into between two or more undertakings each of which operates, for the purposes of this agreement, at a different level of the production or distribution chain, and relating to the conditions under which the parties may purchase, sell or resell certain goods or services. Vertical agreements per se are not forbidden, but one must closely evaluate whether a restriction of competition may occur if the agreement contains restraints on the supplier, the buyer, or the prices. Accordingly, the disputed agreements were characterized as particularly restricting for the competition.
Moreover, it is common for wholesale companies, some of them also having a retail sale network, to buy brand products of well-known multinational groups from other countries of the European Union. According to the theory of exhaustion on intellectual property rights, the exclusive right of the patent or trademark holder to trade the protected product is exhausted, and thus ends, when the product is first launched on the market. When this principle of exhaustion on intellectual property rights is applied in a given territory, parallel trade may permitted to all residents in the state in question. Parallel imports can reduce the price of products by introducing competition. However, they can also have an adverse result for the competition, an issue though outside the present review.
For the purpose of the present article, it is important to notice some key characteristics of the Greek regulatory framework for the importation and trading of cleaning products in order to fully appreciate the problematic of competition challenges in this particular trading area. In order to supply cleaning products in the Greek market, the trader must be scrutinized through continuous quality controls, heavy bureaucracy, involving endless paperwork. Extended Greek and European legislation determine in detail the process of preparing the necessary file for importing and selling cleaning products in Greece . From the moment of the file examination by the General Chemistry of State until the final granting of the right to trade, several months and considerable fees and expenses are required. As highlighted below, this regulatory context – among other factors – encumbers the price levels and hampers healthy competition.
THE HELLENIC COMPETITION COMMITTEE DECISION
The Hellenic Competition Commission was called to decide on a specific clause inserted in the agreements made between Unilever Hellas and eight super market chains, which stated that in case a super market chain trades products of Unilever Group supplied by third party importers (parallel imports) then their agreement shall cease to be in force, as a whole. Adopting the aforementioned national and European legislation, the Hellenic Competition Commission in her decision described the structure of cleaning products market in Greece, stating that Greek subsidiaries of large multinational groups of companies (Unilever, Colgate, Rolco) occupy a dominant place in the relevant market and they operate under the strict guidelines of their mother companies. Accordingly, Unilever Hellas, showing a particular spread in this trade sector, has a dominant bargaining force and therefore can affect the content of the commercial agreements it concludes with its distributors. Therefore, the Hellenic Competition Commission strongly supported that the insertion of such a parallel imports clause is considered to establish an unequal geographical allocation of the product trading in the European Community market, a practice strongly disapproved by the European Committee as well as the European case law, given that this practice can directly or indirectly affect the trade flows between European countries, in a way that causes a concern for the deterrence of the single and free commerce in the Community. Accordingly, the ban of parallel imports may be treated as a particularly onerous practice, which affects negatively the national markets, blocking the vital commercial and economic interaction in the Community, which is the cornerstone of the European free market. Thus, the disputed Unilever Hellas clause – although it is included in national agreements – has an international commercial impact. Additionally, this clause refers to everyday necessary household products (cleaning material) and it is agreed between multinational companies and national supermarkets, where the bargaining force is certainly unequal. Also, it was proved that Unilever Hellas did not only suggest the insertion of the clause, but also monitored its implementation, lobbying the super market chain with the termination of the agreements.
Concluding its argumentation, the Hellenic Competition Commission resulted to the imposition of a Euros 7,000,000 fine on Unilever Hellas, for the infringement of national and European competition laws stemming from the clause inserted in the distribution contracts with super market chain.
THE COURT OF APPEAL DECISION
As anticipated, Unilever Hellas strongly reacted to the imposition of the fine and raised an appeal before the Administrative Athens Court of Appeals. On 26th of June 2014, the Court issued a decision, annulling the total amount (!!!) of the aforementioned fine, with a particular argumentation, that caused controversial responses.
In its decision, the Court fully endorsed the above argumentation of the Hellenic General Bureau of Competition, acknowledging that Unilever Hellas machinated the banning of parallel imports for cleaning products by imposing the said clause in the distribution contracts with the super market chains and by warning the termination of these agreements, in case the contracting party imported these products by third distributors. Furthermore the decision mentioned that this behavior cannot be regarded as an isolated event, but a steady entrepreneurial behavior targeted to the restriction of free competition. According to the decision, this conduct narrows the inter-competitive pressures and impedes the free commercial action, having as a direct result the creation and preservation of a uniformed and standard distribution price regarding the cleaning products, for Unilever Hellas own business profit. After an eight pages argumentation, almost identical to the one the Commission delivered, the Court decided, nevertheless, to delete the fine, on the grounds a) of the nature, the type and the gravity of the infringement, b) of the limited time period (seven cases in 2000 and one in 2001), c) the fact that Unilever Hellas abandoned the future use of this clause and d) that the clause was not implemented in all the company’s business agreements. Consequently, the Court ruled that these grounds do not justify the type and the amount of the penalty imposed. Accordingly, the Court imposed the penalty of “refraining in the future”, meaning that if Unilever Hellas repeats this conduct in the future, a Euros 10,000 fine per day will be imposed. Essentially, Unilever Hellas survived “unscathed” from this conflict, in spite of the condemnation of its commercial behavior by two Greek authorities.
TO BE CONTINUED..
However, the Court of Appeal decision is not final. According to the 03.11.2014 press release by the Hellenic Competition Commission, the latter informed the public that it has filed an application for annulment before the State Council, which is the highest Court for Administrative and Public Law cases in Greece, against the above decision. We will be expecting to read the State of Council ruling, especially when a large part of the Greek common view is set against the annulment of the fine, characterizing it as provocative and abusive of the company’s dominant position in the cleaning products market. It is commonly accepted by both the Greek government and the Greek traders, that the competition in cleaning products market presents special characteristics; not only because large multinational companies occupy the largest market share, but also because the importation procedure is extremely time consuming and expensive, two factors that may lead to a surcharge on the prices. The present case brought to light this problematic and pointed out the need for the safeguarding of the free competition but also the amelioration of the existing regulative frame for the support of the national commercial expansion.