Italian Competition Authority fines Unilever for exclusivity obligations and fidelity-inducing rebates in the ice cream sector

Published on 18th Jan 2018

By a decision of 31 October 2017, the Italian Competition Authority (ICA) fined Unilever for an abuse of dominance, in applying certain exclusivity provisions and fidelity-inducing rebates to its retail clients.

The decision comes after the long-awaited judgment of the Court of Justice of the EU in the Intel case[1] and casts an interesting light on how the ICA interprets the position expressed in very concise terms by the CJEU.

The ICA’s Decision

The investigation was launched in 2015, after a complaint lodged by a small Italian fruit lollies producer named “La Bomba”, who claimed that Unilever forced retailers not to sell its fruit lollies and to sell exclusively Unilever’s ice creams.

After a two-year investigation, the ICA came to the conclusion that Unilever held a dominant position in the Italian market for the sale of single-wrapped ice creams in the so-called out-of-home channel (snack bars, beach resorts, petrol stations, etc.). It also found that Unilever’s commercial policy – characterised by single-branding obligations, cabinet exclusivity obligations and fidelity-inducing rebates – unduly excluded its competitors from the market. As a consequence, the company has been ordered to pay a fine of just over €60 million and to adopt suitable measures to put an end to the anti-competitive practices.

A very important part of the ICA’s decision relates to the relationship between Unilever and its local distributors (concessionaires acting at the wholesale level): according to the ICA, the level of integration between Unilever and its distributors is so high that the latter do not act independently on the market, but simply implement Unilever’s commercial policy. This conclusion was based on the following factors, as found by the ICA:

  • concessionaires are exclusively (or predominantly) dedicated to the sale of Unilever’s products;
  • Unilever provides to its distributors strict indications on their product portfolio and on their retail price;
  • sales targets are unilaterally imposed by Unilever;
  • Unilever strictly monitors their activity; and
  • distributors bear only low risks in performing their activity in the interest of Unilever.

In light of these factors, the ICA concluded that local distributors acted as Unilever’s auxiliary organs and ultimately constituted a single economic entity with Unilever. Consequently, the single-branding obligations and rebates applied by distributors to their (retail) customers were considered part of Unilever’s commercial policy.

As indicated in the ICA’s decision, Unilever abused its dominant position in the relevant market by applying to its (and its distributors’) customers a complex mix of contractual obligations and commercial behaviour resulting in a foreclosure effect. The challenged clauses include:

  • single-branding obligations;
  • cabinet exclusivity obligations;
  • target rebates; and
  • portfolio rebates.

According to the ICA, the foreclosure effect of these clauses was further amplified by:

  • the long duration of the agreements (in many cases longer than 2 years, with automatic renewal);
  • a selective application of the exclusivity-inducing conditions to retailers most exposed to competition; and
  • the fact that discounts were granted also to trade associations, with the precise objective of inducing them to monitor the commercial activity of their members and, in particular, their compliance with the exclusivity provisions.

During the investigation, Unilever defended the legitimacy of its commercial practices by submitting an as-efficient-competitor-test aimed at demonstrating that the conditions applied to retailers had no real foreclosure effects since ‘as efficient’ competitors could replicate them. However, the ICA found that in the case in question, any quantitative analysis aimed at measuring the ability of Unilever’s competitors to replicate its rebates and discounts was not relevant. In particular, the ICA explained that: (i) single-branding obligations shall be considered illegal irrespective of any economic quantitative test and (ii) Unilever’s commercial policy was not based only on rebates and discounts. Rather, it was based on a complex mix of practices (such as long-term agreements and monitoring activities) which could not be adequately captured and measured by an as-efficient-competitor test or by a similar economic analysis. In other words, according to the ICA, the exclusionary effect of Unilever’s commercial policy derived from the targeted way it implemented its complex mix of single-branding obligations and exclusionary rebates, and not from the fact that its rebates were not replicable by its competitors (which was considered irrelevant in this case).

This said, the ICA recalled that, pursuant to the Intel judgment, “where the undertaking concerned submits, during the administrative procedure, on the basis of supporting evidence, that its conduct was not capable of restricting competition and, in particular, of producing the alleged foreclosure effects”, the authority “is not only required to analyse, first, the extent of the undertaking’s dominant position on the relevant market and, secondly, 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; it is also required to assess the possible existence of a strategy aiming to exclude competitors that are at least as efficient as the dominant undertaking from the market”.

According to the ICA, such further analysis confirmed the abusive nature of the conduct at stake, considering that:

  • Unilever had an absolutely predominant role on the market, in terms of markets share (60% both in volume and in value), presence in the most strategic areas, type of clients, brand reputation;
  • the exclusivity clauses covered 30%-40% of the market;
  • the duration of the contracts entered into by Unilever was on average longer than 2 years;
  • the exclusivity clauses, the incentives to maintain the exclusivity and the further conduct aimed at monitoring their application had been targeted at the single clients and to specific competitors considered from time to time capable of eroding Unilever’s sales; and
  • all of the conduct attributable to Unilever formed part of a strategy intentionally aimed at obstructing competitors’ presence on the market.

What can be learnt from this decision?

The main points of interest of the ICA decision relates to the relationship between Unilever and its distributors and to the assessment of the abusive nature of Unilever’s conduct.

On the first element, the ICA came to the conclusion that Unilever and its distributors were part of a single economic entity and, consequently, that its distributors’ conduct was attributable to Unilever without having to demonstrate that the latter act as Unilever’s agents. Indeed, the ICA’s conclusions were based on an overall analysis aimed at demonstrating that Unilever has a significant influence over the commercial policy of its distributors. This approach may have a tremendous impact for undertakings operating in Italy that should be aware that formal separation with their distributors may not be considered sufficient to exclude liability in case of antitrust violations by the distributors.

As regards the abusive nature of a conduct, the ICA’s interpretation of the Court of Justice’s ruling in the recent Intel judgment seems rather strict. In particular, the ICA seems to have been of the opinion that single-branding obligations should be always considered abusive if applied by a dominant undertaking and that the room for an economic test aimed at measuring the lack of foreclosure effects of discounts and rebates is rather small.

[1] Judgment of the European Court of Justice (Grand Chamber) of 6 September 2017, Intel Corp. v European Commission, case C-413/14 P.

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