Thanks to Marianna Riedo for collaborating on this article
On November 25, 2020, the Italian Competition Authority (“ICA”) opened an investigation regarding the Benetton Group (“Benetton”) and its suspected abuse of economic dependence pursuant to Sec. 9, para. 3 bis, of Law No 192 of June 18, 1998, in relation to two franchising agreements with identical content concerning the sale of Benetton branded products. The investigation was prompted by a complaint made by a former Benetton franchisee whose business has now ceased, allegedly because of the excessively onerous conditions and financial burdens imposed by the franchisor.
According to the ICA, Benetton apparently forced the retailer to implement and maintain a sales structure and a business organization designed around Benetton’s own needs, preventing it from managing its commercial activity independently. More specifically, the ICA analyzed some of the clauses of the contract entered into by Benetton and the franchisee that gave the former the possibility of setting organizational parameters relating to the latter’s business, to the point of conditioning its structure and strategies and preventing potential restructuring in case of termination of the agreement. The contested clauses mainly concern purchasing requirements related to both timing and quantity. The clauses also placed other onerous obligations and restrictions on the franchisee, including the obligation to provide bank and insurance guarantees and restrictions on the transfer of the contract or the sale of the business premises.
According to the ICA, the Benetton group, despite not enjoying a dominant position in the apparel goods market, is a sufficiently strong brand to place the franchisees forming part of its widespread retail network in a relationship of economic dependence, particularly in combination with certain allegedly imbalanced restrictions and obligations imposed upon the franchisee. In particular, the ICA claimed that certain contractual provisions may have imposed excessively onerous conditions on the franchisee, resulting in a limitation of its entrepreneurial independence. According to the AGCM, the excessive imbalance was determined, among other things, by the following obligations and restrictions in the agreements:
- the obligation to design the store according to the architectural plans established by Benetton, while having to independently bear the costs of implementing those plans;
- the obligation to sign a bank guarantee in favor of the franchisor and an insurance policy to protect the items kept in the store;
- a prohibition on transferring the contract without the prior consent of Benetton;
- a prohibition on selling the retail store to third parties without first offering it to Benetton or submitting the potential successor to Benetton to assess its suitability vis-à-vis the requirements for the prosecution or termination of the business relationship;
- the obligation to automatically restock some of the best-selling products;
- the obligation to participate in advertising and marketing campaigns determined by Benetton;
- limitations on warranties for purchased products and, on the other hand, the imposition of strict procedures for returning any damaged or overstocked items.
In addition, the franchise agreement and the general conditions provided that Benetton:
- had no obligation to provide compensation or indemnity for the franchisee at the termination of the agreement;
- had the power to set the timing for orders of goods without consulting the franchisee (with each purchase order from the franchisee being irrevocable for 10 months);
- was not obliged to meet delivery terms, which had a merely indicative nature;
- could decide whether to buy any unsold articles from the franchisee at a price to be negotiated, or to authorize their sale to third parties;
- could unilaterally increase the quantity of products that the franchisee was required to stock at a level higher than previously mutually agreed upon, based simply on an overall increase in sales figures.
In its preliminary analysis, the ICA found that such clauses may determine economic dependence of the franchisee in its relationship with the franchisor because, overall, they may make it impossible or excessively difficult for the former to restructure and move toward viable business alternatives on the market.
An analysis of the decision suggests that economic dependence may have crossed over into abuse in light of the financial exposure of the complainant toward Benetton, which may be traced to the same contested clauses in the agreement. According to the decision: “On the one hand, the franchising would have entailed charges such as to determine structural economic dependence of the retailer on Benetton; on the other hand, the Agreement would in fact have allowed Benetton to manage in a discretionary and allegedly abusive way the quantity and quality of orders to be allocated to the retail store,” including through a complex and ambiguous system for management of orders, returns, and warranties.
In the event abuse of economic dependence is established, an agreement may be deemed null and void and the contractually weak party may be entitled to compensation for damages. Moreover, the ICA could impose a penalty of up to 10% of turnover on Benetton. The deadline for the investigation is currently set for December 31, 2021.
The relevance of this investigation rests on the fact that the contested provisions in Benetton’s franchising agreements seem—at least somewhat—not to be unusual in franchising models of popular branded goods or services, and therefore this matter could represent a test case for a policy of aggressive enforcement of the rules on economic dependence by the ICA in the context of franchise business models.