Companies participating in a franchise agreement are advised to carefully assess possible competition law concerns, particularly if the franchisees are (potential) competitors. The Dutch Trade and Industry Appeal Tribunal (CBb) recently confirmed that a franchise agreement cannot be used to cover up anti-competitive horizontal agreements.
Market-sharing arrangements among competitors generally qualify as agreements with the object to restrict competition, even when part of a franchise agreement. However, the CBb found that the Dutch Authority for Consumers and Markets should have taken the cooperation's genuine franchise-related aspects, such as the joint development of knowhow, into account when setting the gravity factor for calculating the fine. It therefore reduced the gravity factor from 1 to 0.5.
On 23 October 2018, the CBb upheld the Rotterdam District Court's ruling that a 'franchise' agreement among four laundry service providers constituted anti-competitive market allocation.
The four laundry companies had jointly established a subsidiary Rentex Nederland (Rentex) in the 1970s which concluded "franchise agreements" with its shareholders. In 2011, the Dutch Authority for Consumers and Markets (ACM) had fined the companies for their participation in this agreement arguing that it in fact served as a means to allocate the market. This decision was upheld on appeal before the District Court, although the District Court annulled the decision vis-à-vis one of the companies (see our earlier newsletter).
Before the CBb, the companies reiterated their primary argument that the agreements under scrutiny were part of a legitimate vertical franchise agreement which was pro-competitive and did not infringe the cartel prohibition. Despite the vertical element, the CBb ruled that the 'franchise' agreement was predominantly horizontal in nature. The franchisees were the only shareholders of Rentex and were, as shareholders, actively involved in Rentex's strategic decisions (including those relating to the agreements under scrutiny). Also, the decisions taken in the shareholders' meetings affected the relationship among the laundry service providers themselves and thus had a horizontal effect.
The CBb ruled that the District Court erred in law in finding that one of the companies did not participate in the market allocation agreement as from August 2003. The CBb thus upheld the fine for this company as imposed by the ACM.
The CBb also concluded that the gravity factor used by the ACM for calculating the fine had to be reduced, considering that (i) the agreements had pro-competitive effects, such as development of knowhow, comparable to a franchise organisation, (ii) after receiving legal advice to assess the agreement the companies had ceased the passive sales restriction, (iii) the agreements were not clandestine and (iv) the actual detrimental effects on competition were limited. The reduction of the gravity factor led to a fine reduction for one of the companies.
This article was published in the Competition Law Newsletter of November 2018. Other articles in this newsletter:
- A problem shared is a problem halved: fine reduction and fine liability are correlated
- Rotterdam District Court rules on follow-on damages claim in relation to Dutch bitumen cartel
- ACM bound by its own rules during dawn raids
- European Court of Justice clarifies the application of choice of forum clauses in competition damages claims