Distributors' conduct can be attributable to a supplier but the "Intel principle" also applies to exclusivity clauses (ECJ)

On 19 January 2023, the European Court of Justice (ECJ) issued its judgment in the Unilever competition law case concerning exclusivity clauses, following a request by the Italian Consiglio di Stato for a preliminary ruling (Unilever v Autorità Garante della Concorrenza e del Mercato, Case C-680/20). The ECJ concluded that:

1. Under Article 102 of the Treaty on the Functioning of the EU (TFEU), which prohibits an abuse of a dominant position, the actions of distributors forming part of the distribution network of a producer in a dominant position (DomCo) may be imputed to that DomCo producer if those actions were not adopted independently by those distributors, but formed part of a policy decided unilaterally by that producer and implemented through those distributors.
    
2. To conclude that exclusivity clauses in distribution contracts constitute an abuse under Article 102, a competition authority must establish that those clauses are capable of restricting competition. The use of an "as efficient competitor" test is optional but if the results of such a test are submitted by DomCo, the competition authority must assess the probative value of those results. In other words, if DomCo presents economic analysis to demonstrate that its conduct did not exclude competitors that are as efficient as the DomCo, then the authority cannot disregard the evidence without examining its probative value.

Background

The Italian Competition Authority (ICA) had found that Unilever:

• held a dominant position in the market for the sale of individually packaged ice creams intended for consumption away from consumers’ homes, and
• abused that position through an exclusionary strategy based mainly on the imposition, by Unilever’s distributors, of exclusivity clauses on the operators of sales outlet which:
  • obliged the operators of sales outlets to obtain supplies exclusively from Unilever for their entire individually packaged ice cream requirements, and
  • in return, those sales outlet operators received rebates and commissions conditional on the turnover/sale of a specific range of Unilever products, intended to provide the distributors with an incentive to continue to obtain their supplies exclusively from Unilever. 

Although the abusive conduct was materially committed by Unilever’s distributors, rather than Unilever itself, the ICA considered that the conduct had to be imputed solely to Unilever on the ground that Unilever and its distributors formed one and the same economic entity. Unilever operated a certain degree of interference in the distributors’ commercial policy, so that the distributors did not act independently when they imposed exclusivity clauses on the operators of sales outlets.

Due to e.g. the small amount of space available in sales outlets, ICA considered Unilever had at least limited the possibility for competitors to effectively compete on the merits of their products.

Unilever presented analysis to demonstrate that competitors that were as efficient as Unilever could still compete in the market and, therefore, the clauses in question were not exclusionary.

However, ICA did not consider itself obliged to analyse the economic studies produced by Unilever to demonstrate that Unilever’s practices did not have exclusionary effects vis-à-vis competitors that were at least as efficient. ICA argued the studies were irrelevant where there were exclusivity clauses, since a DomCo’s use of such clauses was sufficient to establish an abuse.

ECJ conclusions

Following appeals to Italian courts, who referred the matter to the ECJ for a preliminary ruling, the ECJ had two main questions to address:

1. Can a DomCo, under Article 102, be liable for the actions of distributors forming part of its distribution network if those actions were not adopted independently by those distributors, but formed part of a policy that was decided unilaterally by the DomCo-producer and implemented through those distributors?
2. In the case of exclusionary exclusivity clauses or conduct characterised by a number of abusive practices (loyalty-inducing rebates and exclusivity clauses), is the competition authority obliged to base its case on the "equally efficient competitor" criterion?

The ECJ concluded as follows:

Question 1

• Decisions taken in the context of a distribution agreement are not unilateral conduct but part of the relationships which the coordinating parties have with each other and therefore generally fall within the scope of Article 101 TFEU, which prohibits anti-competitive agreements. However, a DomCo’s conduct falling foul of Article 101 can also breach Article 102 if it constitutes an abuse of dominance. 
• DomCo may be held responsible for the conduct of its distributors, as Article 102 prevents not only infringements caused directly by DomCo’s conduct but also by conduct, the implementation of which has been delegated by that undertaking to independent legal entities. In other words, distributors’ conduct may be imputed to the DomCo under Article 102 if:
  • the conduct was adopted in accordance with DomCo’s specific instructions and
  • therefore as part of the implementation of a policy decided unilaterally by DomCo, with which the relevant distributors were required to comply. 

In such a scenario, a distributor - and the distribution network which they form with DomCo - is regarded as merely an instrument of territorial implementation of the commercial policy of DomCo.That is particularly the case where the conduct takes the form of standard contracts containing exclusivity clauses, drawn up entirely by the DomCo producer, which the distributors are required to get signed by the operators of sales outlets without being able to amend them.

Question 2

• The ECJ referred to the Intel case, which concerned loyalty rebates, stating that if DomCo in an Article 102-case submits evidence that its conduct was not capable of restricting competition and incapable of producing exclusionary effects, then the competition authority must analyse:
  • the extent of dominance on the relevant market
  • the share of the market covered by the challenged practice, as well as the conditions and arrangements for granting the rebates in question, their duration and their amount and the capacity to foreclose
  • the possible existence of a strategy aiming to exclude from the market any competitors that are as efficient as DomCo.

ECJ clarified that these requirements also apply in relation to exclusivity clauses.

• The purpose of Article 102 is not to ensure that competitors less efficient than an undertaking in a dominant position should remain in the market. The ‘as efficient competitor’ test asseses if a competitor of DomCo, which is as efficient as DomCo in terms of cost structure, can offer customers prices to encourage them to switch supplier without the competitor incurring losses. Where DomCo presents evidence that its conduct did not exclude such equally efficient competitors, the authority must examine that evidence and demonstrate the contrary. Respect for the right to be heard is a general principle of EU law, which means competition authorities must pay due attention to DomCo’s observations, examining carefully and impartially all the relevant aspects of the individual case and, in particular, the evidence submitted by DomCo. 
• The "as efficient competitor" test may be inappropriate in the case of non-pricing practices (e.g. refusal to supply) and is only one of many methods to assess whether a practice is exclusionary. Competition authorities are therefore not obliged to use this test in order to find that a practice is abusive but cannot be ruled out - i.e., where a DomCo provides an analysis based on that test, the authority cannot disregard the evidence without examining its probative value.

Comment

This judgment clarifies in which circumstances distributors’ conduct can be attributable to a supplier in a dominant position under Article 102. It also makes clear that the demanding criteria outlined in Intel for demonstrating exclusionary effects in cases relating to rebates also apply in Article 102 cases concerning exclusivity clauses. Following the UK’s departure from the EU, it remains to be seen whether the Competition & Markets Authority will take note of this judgment but, in light of case law to date, it appears likely UK courts would take a similar approach to the ECJ’s in similar abuse of dominance cases.