Review of the recent decision of the Hellenic Competition Commission in franchising agreements

By Sofia Georgiadi, Attorney-at-Law, LL.M., Associate

In 31.12.2014 the Decision No 580/VII/2013 of the Hellenic Competition Commission (hereinafter “HCC”) was published in the Government Gazette, rekindling the debate on the franchising practice in Greece and the possible infringement of antitrust laws by many large companies that create a kind of a “franchising cartel” in the Greek market.

Following an extensive investigation, the HCC concluded that GERMANOS S.A (hereinafter “the Company”), a telecoms retail sale chain, infringed Articles 1 of Law 3959/2011 (formerly Law 703/77) and 101 TFEU in connection with its franchise network.

According to the decision, the Company engaged in practices which amounted to resale price maintenance and a restriction of cross-supplies between distributors/franchisees within its selective distribution system. These actions as vertical restrictions constitute serious infringements of competition law. The infringements lasted for a period exceeding 20 years (1990-2012).

For the above infringements, the HCC imposed on the Company fines totaling Euros 10,2 million (€10,251,548).

The examination was initiated after complaints filed before the HCC by several franchisees and although some of the complaints were withdrew by the applicants, the research continued ex officio by the HCC, in order to ascertain if the Company – when acting as a franchisor: a) determined either directly or indirectly the resale prices of its franchisee stores, both by applying antitrust contractual terms as well as by interfering in the franchising network’s day-to-day operation and b) imposed on the licensees the obligation to be exclusively supplied by the franchisor, limiting therefore the supplies between the franchisees of the selective network.[1]

In the 80-pages long decision, the HCC analyses thoroughly, both the terms of infringing franchising contracts and the antitrust regulative context applied in the case. It is interesting to underline certain key points of the HCC’s reasoning that led to the imposition of the considerable fine of Euros 10,251,548 on the Company.

The HCC pointed out that the Company’s franchising system was basically organized on predetermined contract clauses (“pilot agreements”), with minor adjustments in each franchising case. The contracts at question were used in the business course from 1990 to 2013 with minor amendments from time to time.

Nevertheless, the clauses were no independently examined by the HCC but were set in the context of the specific product market (technology and mobile communications), with very precise geographical characteristics and competition levels (the business development in the field and the respective market share of each company). Once it was noted that the Company’s market position was neither dominant nor of minor importance and that the practices implemented would certainly affect the competition environment, the HCC proceeded with the examination of the alleged practices and terms in the franchising net.

The complainant franchisees argued that the Company infringed the aforementioned legal provisions on free competition by implementing in the contracts (with the intent of hindering competition in the market) and actively following on a long-term basis in the franchising relationship, among others, the following clauses-practices:

a) The imposition of final retail prices by announcing an indicative yet binding retail price list together with the indirect imposition of the profit margin for each franchisee and the unilateral determination of the market prices by the franchisor and the determination of the sales levels for wholesale clients.

b) The imposition on the franchisee of the obligation to exclusively supply all of its products by the franchisor (the Company) or by another company indicated by the franchisor together with the imposition of a penalty in case the above clause was infringed and consequently the restriction of the mutual supplies among the distributors of the same selective distribution system.

Starting with the first clause, the HCC pointed out that the freedom of price determination within the European market constitutes one of the most essential objects of Articles 1 L. 703/1977 and 101 TFEU. These articles explicitly characterize as distorting for the competition all practices and agreements that determine prices or other transaction terms relating to the final selling conditions for each company. The price determination can either be direct (for instance, clauses implementing price restrictions) or indirect (for instance, profit margin terms, penalties, sales restrictions, etc.). The HCC unanimously ruled that despite that the franchisees appear to be free regarding retail price determination – due to the indicative nature of the price list accompanying each franchise contract, they are in fact strictly bound by contract clauses, because a) the franchisor determined a particular margin profit, b) the retail prices were an integral part of the franchisor’s price policy explicitly described in the contract and c) the franchisor implemented pre-determined sale levels for all the members of the network. Also, the fact that in all contracts the franchisor reserved the right to terminate the agreement in case the “price clauses” are not implemented (set in the form of penalty clause) enforces the ability of the latter to monitor and exclusively control the proposed resale policy, rendering the contract particularly onerous for the competition.

Interestingly, the HCC argued that, in any case, when a franchisor – as in the Company’s case – chooses to expand its network through independent franchisees, it must also undertake the risk that each member of the franchise network may follow an autonomous pricing policy and it is not allowed to impose the implementation of the proposed prices or decide on the suitability of each member’s pricing strategy.

Secondly, the HCC implemented Article 4 (d) of Reg. 330/2010[2] on the argued franchise agreements and pointed out that the restriction of cross-supplies, as implemented in clause (b) between authorized distributors of the same network, is considered as a severe restriction of competition. Specifically, a commercial agreement cannot directly or indirectly aim to the impeding or restriction of product sales between the selected distributors (distributors within the network). These distributors (like the companies acting as franchisees in the present case) must remain free to supply the contractual products by other authorized distributors-members of the network. Accordingly, the Commission ruled unanimously that the Company by implementing the aforementioned clause (b) in the contracts, reserved the right to be the only and exclusive supplier and the franchisees were banned from supplying products from another source-franchisee (exclusive supply clause). The said clause contained also a form of penalty, as the franchisees were obliged to pay the Company half of the sale income in case the product was supplied by another member of the franchising network and not by the franchisor.

Conclusively, after examining with extended scrutiny the general commercial environment in which the said companies operated, the HCC ruled, that the aforementioned disputed clauses were explicitly presented as the milestone of the franchising relationship (determination of the pricing policy and exclusive supply clause) and that they constituted a serious restriction of competition as an infringement of antitrust laws and a distortion of the particular market.

In order to calculate the imposed fine (10.251.548€), the HCC set as a starting point the total turnover of the franchisor (the Company) incurred by the sales of the products or services provided within the disputed franchising network[3].

This Decision is the third one issued by HCC, which examines obstructions in the price determination of franchise networks of large company groups. The first relevant Decision was issued in 2008 against DIA Hellas (a supermarket chain), where a fine of Euros 5,19 million was imposed. Another Decision against Carrefour- Marinopoulos S. A. (one of the largest supermarket chains in Greece) followed in 2010 and resulted in the imposition of the considerable fine of Euros 12,5 million.

It is interesting to note as a final remark, that the two market fields in Greece that present the highest concentration of companies share (meaning that 3 or 4 companies dominate the whole market) are the mobile and telecommunications market and the supermarkets chains. Thus, one can easily appreciate the crucial role of the HCC as the monitoring and controlling authority for the safeguarding of the competition principles on a national and European level.

[1] Pursuant Article 1 of the new EU Regulation 330/2010 for vertical agreements and concreted practices “selective distribution system’ means a distribution system where the supplier undertakes to sell the contract goods or services, either directly or indirectly, only to distributors selected on the basis of specified criteria and where these distributors undertake not to sell such goods or services to unauthorized distributors within the territory reserved by the supplier to operate that system;”

[2] “restriction of cross-supplies between distributors within a selective distribution system, including between distributors operating at different level of trade;”

[3] Article 25 par. 2a L. 3959/2011