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District Court considered "franchise agreements" in breach of competition in launderette cartel case

District Court considered "franchise agreements" in breach of competition in launderette cartel case

District Court considered "franchise agreements" in breach of competition in launderette cartel case

02.06.2016 EU law

On 12 May 2016, the Rotterdam District Court ("District Court") handed down its judgment in the launderette cartel case. While the companies argued that the agreements under scrutiny formed part of a legitimate vertical franchise agreement, the District Court found that the agreements de facto were only horizontal in nature and did not qualify as a franchise.

In the 1970's, four companies involved in the provision of laundry services to health care institutions jointly established a subsidiary: Rentex Nederland ("Rentex"). Rentex concluded "franchise agreements" with its shareholders, under which Rentex Nederland acted as the franchisor and its shareholders as the franchisees. Under those agreements, each franchisee was allocated its own territory. Later, between 1998 and 2009, the franchisees also agreed to supply only customers situated in their own territory and to refrain from selling to customers located in other franchisees' territories. The Dutch Competition Authority (now "ACM") found these agreements to be in breach of the cartel prohibition ex Article 6 Dutch Competition Act. It therefore imposed fines of EUR 18.4 million in total on the companies participating in Rentex.

The companies appealed the decision before the District Court. They argued, inter alia, that the agreements with Rentex were not anti-competitive but rather formed part of a legitimate vertical franchise relation. The District Court dismissed this line of argument. First, the Court considered there was no actual vertical relationship between the companies on the one hand and Rentex on the other. Siding with the ACM, the Court found that Rentex did not employ independent market activities but only provided services to its shareholders. Hence, the agreements under scrutiny de facto were horizontal agreements to which the EU Vertical Block Exemption Regulation did not apply. Secondly, the District Court held that the agreements did not constitute a franchise, as Rentex did not concern an established party that transferred specific market experience and know-how to companies at another level of the market.

One of the companies claimed that it had no choice but to join the agreements. It argued that it was not one of Rentex' original participants but that it had acquired a participating launderette company and had no choice but adhering to its existing contracts with Rentex. The District Court agreed with the ACM's finding that this circumstance did not constitute commercial coercion as the acquiring company should have refrained from the acquisition altogether had it not wanted to participate in the cartel. Moreover, even if there would have been coercion that would not cancel out the company's own responsibility to abstain from competition law violations.

While the District Court upheld the ACM's substantive analysis, it partially annulled the decision for procedural reasons. First of all, it annulled the decision vis-à-vis one of the companies because it found that the applicable statute of limitation had expired. The Court also granted the remaining companies a EUR 5.000 fine reduction, as it found ex officio that the proceedings' 18-month duration were in breach of the obligation to adjudicate the case within a reasonable time.

The District Court's judgment illustrates that the competition law analysis of an agreement revolves around its economic context rather than its legal form. It also confirms that an acquiring company performing due diligence would do well to assess its target's potentially harmful agreements ahead of time, in order to make an informed decision concerning its risk exposure.

This article was published in the Competition Law Newsletter of June 2016. Other articles in this newsletter:

  1. General Court rejects Trioplast's action for annulment of a Commission notice to pay interest
  2. Commission blocked Hutchison's proposed acquisition of Telefónica UK
  3. General Court confirmed that German law on renewable energy amounts to State aid
  4. European Commission publishes guidance on the notion of State aid
  5. District Court of Rotterdam upheld the ACM's unconditional clearance decision in telecoms merger KPN/Reggefiber
  6. UK High Court held that territorial limits apply to EU cartel damages claims

Team

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