ECJ rules that exclusivity clauses in distribution contracts must be capable for having exclusionary effects

It's a bit cold to think about ice cream - but

The Court of Justice of the EU ('ECJ') has published its decision in the Italian ice cream Case – Unilever. This is an interesting 'next step' in relation to how Article 102 TFEU applies to exclusionary behaviour, and in particular, exclusivity clauses, post Intel. The key findings from today's ruling, are that Article 102 TFEU must be interpreted as meaning:

1. the actions of distributors forming part of the distribution network of a producer holding a dominant position, may be imputed to that producer if it is established that those actions were not adopted independently by those distributors; and
2. where there are exclusivity clauses in distribution contracts, to find an abuse of a dominant position, a competition authority must establish, that those clauses are capable of restricting competition, or likely to have that effect. This analysis must be carried out in the light of all the relevant circumstances and where applicable, the economic analyses produced by the dominant player. The use of an ‘as efficient competitor’test is optional. However, if the results of such a test are submitted by the undertaking concerned during the administrative procedure, the competition authority must consider them.

This judgment, coupled with Intel and the judgment towards the end of last year in the SEN case, seem indicative of a more systematic treatment of non-pricing abuses by the European Courts, with no “per se” abuses under Article 102 TFEU. The focus of a competition authority's analysis must be on the possible / likely effect of the behaviour in question. The ECJ seems to prefer actual effects, as if relying on mere capability, it requires "tangible evidence which establishes, beyond mere hypothesis, that the practice in question is actually capable of producing such effects" – with the dominant player benefiting from any doubt. Moreover, dominant firms should have the chance to demonstrate that their conduct is not capable of excluding equally-efficient rivals; an issue which will be especially important in cases concerning the digital giants. This case also shows how the preliminary ruling procedure can be used strategically and offensively in a dispute.

Press release
Abuse of a dominant position: exclusivity clauses in distribution contracts must be capable of having exclusionary effects (europa.eu), in German here, and French here.

Full judgment
CURIA - Documents (europa.eu).

Deeper Dive

• Towards the end of 2017, the Italian Competition Authority ("AGCM") imposed a fine of €60.7m on Unilever Italia Mkt. Operations S.r.l. ("Unilever") for a breach of Article 102 TFEU. The basis of this was that Unilver had abused its dominant position, by preventing the entry / expansion of other competitors active in the market of the single-wrapped "impulse" (i.e. for immediate consumption) ice-creams through its Algida brand. The AGCM considered the exclusivity and rebate/bonuses schemes included by Unilever in its contracts with retailers which involved:
  • product exclusivity clauses requiring retailers to sell exclusively Unilever ice-creams;
  • cabinet exclusivity clauses requiring retailers to use only the fridges provided by Unilever;
  • rebate and bonuses provisions which were applied retroactively once certain sales targets were reached;
  • conditional bonuses which were only paid to retailers if they adopted specific Unilever promotional initiatives; and
  • "assortment" bonuses granted only if the retailer offered a specific basket of Algida ice-creams.
• The AGCM held that all of these clauses discouraged retailers from switching suppliers, even for limited volumes. Unilever also granted bonuses to retailers' trade associations in order to induce their members to choose Algida's products. Other interesting points to note about the Italian authority's finding include:
  • rejecting Unilever's claim that the agreements resulted in efficiency gains (is there an Article 101(3) equivalent for 102)?;
  • rejecting Unilever's claim that its alleged exclusionary conduct should have been subject to a quantitative economic assessment, as established by the ECJ in Intel, to ascertain whether an as efficient competitor could match the conduct in question. Unilever produced economic studies to show the practice did not exclude competitors, but the AGCM refused to take these into account, holding that Unilever's conduct differed to that of Intel in a number of ways such that, as a whole, Unilever's conduct could not be subject to the "as efficient competitor" test. As such, the exclusionary element of this case was primarily based on exclusivity agreements, which are capable in their own right of preventing market entry in certain circumstances; the long duration of the agreements concerned; and the use of trade associations to monitor compliance with the exclusivity provisions; and
  • the AGCM's view that the exclusivity obligation and loyalty rebates, which were largely implemented by Unilever IT’s network of 150 independent distributors, could be imputed to Unilever IT as a single economic unit with its distributors.
• Unilever unsuccessfully appealed this decision in the first instance, so then took the matter to Italy's Council of State, which in turn made an Article 267 reference to the ECJ with two questions:  (i) whether companies linked by contractual ties could constitute a “single economic unit”; and (ii) whether the Court of Justice’s ruling in Intel, that competition agencies must examine evidence put forward by the defendant that conduct is not capable of foreclosing equally efficient competitors, applies to practices beyond the exclusivity rebates considered in Intel.
• The hearing took place in March 2022. Last summer, AG Rantos published his non-binding opinion on these questions: CURIA - Documents (europa.eu).
•  On the first question, the ECJ found that the abusive conduct by distributors could be ascribed to Unilever if the conduct was not adopted independently by the distributors. On the second, the ECJ reminded competition authorities applying Article 102 TFEU, that they must adopt an effects based approach – for rebates and /or exclusivity clauses. To this end, the Italian competition authority should have assessed the evidence that might demonstrate that practices at issue would not exclude efficient competitors. The matter will now be sent back to the Italian court for a decision on the facts.
• Worth noting that the UK CMA looked into this issue at about the same time as the AGCM, and closed its case on the basis of there being 'no grounds for action': Investigation relating to supplies of impulse ice cream (publishing.service.gov.uk). Moreover, a little longer ago in 2006, the ECJ previously considered different, but related issues arising from an Irish case, where it dismissed an appeal by Unilever against a decision of the Court of First Instance (now the General Court) that there is a breach of EU competition law where a company supplies a retailer with a freezer cabinet on the basis that the retailer will stock the freezer only with the supplying company’s products: CURIA - List of results (europa.eu).