Another step towards more economic-based approach in the EU competition policy enforcement after Unilever Italy judgement

28 February 2023

ANOTHER STEP TOWARDS MORE ECONOMIC-BASED APPROACH IN THE EU COMPETITION POLICY ENFORCEMENT AFTER UNILEVER ITALY JUDGEMENT

On 31 October 2017 the Competition and Markets Authority of Italy imposed a fine of EUR 60 668 580 on Unilever (Italy) for abuse of its dominant position on the Italian market for the distribution of individually packaged ice creams intended for consumption away from consumers’ homes, in breach of Article 102 TFEU. According to the Competition and Markets Authority, Unilever imposed an exclusionary strategy by imposition of exclusivity clauses in the contracts with its distributors obliging them to obtain their supplies exclusively from Unilever for their entire individually packaged ice cream needs. As part of the strategy, Unilever provided its distributors with a wide range of rebates and commissions conditioned on certain turnover or sale of a specific range of Unilever products.

During the proceedings, the Competition and Markets Authority of Italy assumed outright that the mere use of exclusivity clauses by dominant undertaking is sufficient to establish an abuse of dominance under Article 102 TFEU and disregarded as irrelevant the economic analysis produced by Unilever Italy showing that the practice had no exclusionary effects vis-à-vis as efficient competitors.

The sanction was imposed solely on the producer – Unilever but not on any of its distributors because it was found that they do not constitute a single economic entity. The distributors are considered as part of a policy decided unilaterally by the producer and therefore cannot be held liable for the producer’s conduct.

Unilever appealed this decision before the Regional Administrative Court of Lazio, Italy, which dismissed the action. As final instance Unilever brought an appeal before the Council of State of Italy, which stayed the proceedings and requested for a preliminary ruling by the Court of Justice of the European Union (‘ECJ’).

With its judgement of 19 January 2023 in Case C-680/20 Unilever Italia Mkt. Oparations Srl v. Autorità Garante della Concorrenza e del Mercato (‘Unilever case’), ECJ delivered interpretation of generally the following preliminary questions of the Council of State of Italy:

  1. In what circumstances the contractual coordination among independent economic operators results in the creation of a single economic entity for the purposes of Article 101 and 102 TFEU.
  2. Is the competition authority, when assessing an abuse under Article 102 TFEU related to exclusivity clauses, obliged to examine economic analyses produced by the dominant undertaking, concerning the ability of to exclude equally efficient competitors from the market and whether the offence must be based on the “equally efficient competitor” test.

Limits of the ‘single economic entity’ concept

Interpreting the first question, the ECJ provided useful clarification on the circumstances that must be present for engaging distributors’ liability under Article 102 TFEU.

The ECJ establishes that where the conduct of the undertaking in a dominant position is decided unilaterally, that undertaking may be regarded as being solely liable for an abuse under Article 102 TFEU and the distribution network must be regarded solely as a tool for implementation of its strategy.

ECJ clarifies: “That is the case in particular, where such conduct takes the form of standard contracts, drawn up entirely by a producer in a dominant position and containing exclusivity clauses for the benefit of its products which the distributors of that producer are required to have signed by the operators of sales outlets without being able to amend them, unless that producer expressly agrees. In such circumstances, that producer cannot reasonably be unaware that, in view of the legal and economic links which has with those distributors, the latter will implement its instructions and, thereby, its commercial policy. Such a producer must therefore be regarded as being prepared to bear the risks of such conduct[1].”

According to the ECJ, where the above circumstances are present, in order to engage the sole liability of a dominant undertaking for the purposes of Article 102 TFEU, there will be no need of proving that the relevant distributors form part of the same undertaking or the existence of hierarchical link.

Standard of proof in establishing a violation of Article 102 TFEU when exclusivity clauses are involved.

Interpreting the second question, the ECJ, consistent with the judgement in Intel case[2] from 2017, confirmed that the exclusivity clauses are still able to restrict/distort competition, however, they are not per se abusive within the meaning of Article 102 TFEU and that such conclusion by the competition authorities may be rebutted if the dominant undertaking shows that the conduct is not capable of restricting competition and, in particular, of producing the foreclosure effects vis-à-vis as efficient competitors.

‘[…] although, by reason of their nature, exclusivity clauses give rise to legitimate concerns of competition, their ability to exclude competitors is not automatic […]’[3]

Stressing the role of economic and legal context in assessing whether such conduct is abusive, ECJ held that the competition authorities are obliged to examine any evidence submitted by the dominant undertaking, ‘capable of demonstrating the inability to produce restrictive effects’[4].

The ‘as efficient competitor’ test and the obligation of the competition authorities to use it when assessing abusive practices under Article 102 TFEU.

The ‘as efficient competitor’ test, as the ECJ held, refers to economic analyses aiming to ‘[…] assessing the ability of a practice to produce anti-competitive exclusionary effect by reference to the ability of a hypothetical competitor of the undertaking in a dominant position, which is as efficient as the dominant undertaking in terms of cost structure, to offer customers a rate which is sufficiently advantageous to encourage them to switch supplier, despite the disadvantages caused, without that causing that competitor to incur losses.’[5]

According to the ECJ, this test may be particularly useful in assessing the exclusionary effect for practices where the consequences can be quantified. However, the competition authorities are not obliged to use it when assessing whether a practice is abusive, since such test is only one of the methods that could be used for assessing whether a practice can produce exclusionary effects.

On the other hand, where exclusive dealing is concerned, the obligation that ECJ imputes to the competition authorities is to examine the probative value of an analysis based on ‘as efficient competitor test’, where the dominant undertaking provides such in the proceeding.

The conclusions that can be drawn from the ECJ’s judgement in the Unilever case are that there is reinforcement of the trend in the current practice of the ECJ under Article 102 TFEU – namely that purely form-based prohibitions under article 102 TFEU gives way to the more economic approach where the competitive process will be protected, and the undertakings will have the possibility to prove that their conduct in a specific economic and legal context in not capable of restrict/distort competition.

It follows that it will be extremely important for both competition authorities and for businesses to produce an appropriate economic rationale for their decisions, respectively for their market behaviour, especially when it comes to exclusivity clauses.

Author: Anastasiya Grunova

[1]Case C-680/20 Unilever Italia Mkt. Oparations Srl v Autorità Garante della Concorrenza e del Mercato, par. 31.

[2] Case C-413/14 P Intel Corp. v European Commission; In Intel case, the ECJ held that exclusivity rebates are not per se abuses of dominance and renders the so called ‘Intel effect’, i.e., that the effect-based (economic-based) approach applies to all types of rebates.

[3] Case C-680/20 Unilever Italia Mkt. Oparations Srl v Autorità Garante della Concorrenza e del Mercato, par. 51.

[4] Case C-680/20 Unilever Italia Mkt. Oparations Srl v Autorità Garante della Concorrenza e del Mercato, par. 54.

[5] Case C-680/20 Unilever Italia Mkt. Oparations Srl v Autorità Garante della Concorrenza e del Mercato, par 56.