Dominant undertakings had better think twice when imposing commercial policy on their distributors: liability for anti-competitive conduct can extend across different levels of the supply chain.
In the Unilever ruling, the ECJ found that a dominant supplier can be held liable for the anti-competitive conduct of its distributors if those distributors act as ‘mere instruments’ to implement the supplier’s commercial policy. Dominant companies thus need to tread carefully when giving instructions to their distributors, for instance when handing out standard contracts with exclusivity clauses for them to use further down the line.
At the same time, the ECJ ruled that economic evidence of the dominant supplier to demonstrate that exclusivity clauses are incapable of producing anti-competitive effects cannot be set aside without proper substantiation as to the reasons why: a confirmation that the Intel reasoning is not limited to rebates, but also applies to exclusivity.
On 19 January 2023, the European Court of Justice (ECJ) answered two preliminary questions referred by the Italian Council of State in proceedings between the Italian competition authority (ICA) and Unilever Italia Mkt. Operations Srl (Unilever). The authority imposed a EUR 60 million fine on Unilever for allegedly abusing its dominant position in relation to ice cream sales to ‘out of home’ outlets. Unilever was held liable for the behaviour of its distributors, who imposed exclusivity obligations on the outlets. These exclusivity obligations were part of standard contracts designed by Unilever, which could be altered only with Unilever’s permission. Unilever obligated its distributors to use these contracts.
Interestingly, Unilever’s liability was based on the ‘single economic unit’ doctrine, even though no capital links existed between Unilever and its distributors. This – and the fact that ICA considered it unnecessary to examine the effects of the exclusivity obligations – led to preliminary questions being presented to the ECJ.
First preliminary question – single economic units in the case of mere contractual links
The first preliminary question is about the conditions under which a ‘single economic unit’ can be established in the absence of capital links.
AG Rantos answered this question quite extensively in his opinion of 14 July 2022. He first addressed the single economic unit doctrine, explaining that an undertaking is an economic unit, consisting of several natural or legal persons, and entails the existence of a unity of conduct on the market. The AG confirmed that this requires decisive influence in the case of capital links and that this criterion should also apply in the case of contractual relationships. The AG suggested that decisive influence in those cases could particularly be assumed if distributors do not bear any of the financial risks associated with the sale of the producer's products or if they enter into exclusive contracts with the producer.
As the AG himself pointed out, this approach has quite far-reaching consequences. Belonging to the same economic unit (or undertaking) would lead to joint and severable liability and could mean a significantly increased fine, as the combined turnover would be taken into account. This approach would also mean that private damages actions can be brought against both the dominant producer and the distributors. Treating contractual parties as a single economic unit would also mean that their contractual relationship falls outside the scope of the cartel prohibition, which applies only to agreements made between separate undertakings.
The ECJ opted for an alternative approach. It found that Unilever can be held liable for the conduct of its distributors through attribution, and therefore without treating Unilever and its distributors as a single economic unit. The distributors’ actions can be imputed to Unilever if the actions were “not adopted independently by those distributors, but form part of a policy that is decided unilaterally by that producer and implemented through those distributors.” The distributors then merely act as the dominant producer’s instrument. According to the ECJ, this is particularly the case when dominant undertakings obligate the use of standard contracts in the way Unilever did.
Second preliminary question – the scope of Intel and the necessity of the AEC test
The response to the second question clarifies when competition authorities are required to assess the effects of exclusivity clauses.
Unilever had submitted economic studies to show that no ‘as efficient competitor’ (AEC) would be excluded from the market. The ICA disregarded these studies and claimed that it was not required to assess the effects of the investigated behaviour, considering it a per se infringement.
In Intel, the ECJ found that anti-competitive effects of loyalty rebates may be assumed unless a dominant undertaking puts forward evidence to argue that the practices are not capable of restricting competition on the basis of supporting evidence (see our February 2022 newsletter).
The ECJ now clarifies (in line with AG Rantos’ view) that this reasoning also applies to exclusivity clauses. Economic studies put forward by a dominant undertaking cannot simply be disregarded without explanation why they do not contribute to demonstrating the absence of anti-competitive effects. The ECJ also explained that a competition authority is not always required to perform an AEC test. However, if a dominant undertaking uses an AEC test in its defence, the authority must examine the probative value of the argumentation.
Conclusion
Unilever is a very helpful and welcome clarification of the required treatment of evidence in exclusivity cases. Evidence collection and assessment are therefore likely to become an even greater focal point in investigations. As for the issue of attribution of liability without any capital links, the ECJ has unfortunately failed to clearly outline the degree of influence that justifies attribution. For now, dominant undertakings should keep in mind that liability issues may come up when other companies are obligated to use their standard contracts with exclusivity clauses down the line.