The “As-Efficient-Competitor” test is alive & kicking!
In a preliminary ruling on 19 January 2023, the European Court of Justice (ECJ) decided (Case C-680/20 - Unilever Italia) that the conduct of distributors can be attributed to a product manufacturer, if the manufacturer has imposed that distributors must directly or indirectly agree on exclusivity with the resellers. The court also ruled that a competition authority is obliged to examine whether such clauses in distribution agreements have the effect of excluding equally efficient competitors from the market, before reaching a decision. Furthermore, the ECJ stated that analyses of the so-called "As-Efficient-Competitor" test ("AEC test") must be taken into account, in particular if this was submitted by the company concerned in the proceedings for alleged abuse of a dominant market position, pursuant to Art. 102 TFEU.
Whilst the judgement has far-reaching consequences for the liability of dominant companies, it also opens up the possibility for a dominant company to submit economic analyses as evidence against potentially harmful conduct, even if exclusivity clauses are used.
The ECJ’s preliminary ruling concerned an appeal against a decision of the Italian competition authority Autorità Garante della Concorrenza e del Mercato ("AGCM") imposing a fine of approx. 61 million EUR before the Amministrativo Regionale per il Lazio (Administrative Court for the Lazio Region, Italy), on Unilever Italia Mkt. Operations Srl. ("Unilever") for abuse of dominance.
In its decision, the AGCM had found that Unilever had abused its dominant position on the market under Art. 102 TFEU for the distribution of packaged ice cream. Unilever’s distributors had imposed exclusivity clauses on the operators of retail sales outlets, obliging them to purchase all their packaged ice cream requirements exclusively from Unilever. In return, these retailers were granted a large number of discounts and commissions. Although Unilever did not itself engage directly in the abusive conduct (i.e. the exclusivity enhancing discounts), its distributors did. Nevertheless, the ECJ confirmed that distributors’ conduct was to be regarded as Unilever's own conduct, as Unilever formed an economic unit with them and Unilever had intervened in the business policy of the distributors to the extent that they no longer acted independently. As such, the AGCM was of the opinion that Unilever had pursued a strategy which was not only suitable to hinder the growth of its competitors on the market, but also to persuade (retail) customers to continue to purchase their goods exclusively from Unilever/ its authorized distributors. ACGM purported that it did not matter whether Unilever itself or its distributors were responsible for the anti-competitive conduct.
In the course of the ACGM’s investigation, Unilever submitted economic analyses in accordance with the AEC test The AEC test is used to determine whether conduct in a specific case is likely to hinder equally efficient competitors. In coming to its decision, the AGCM did not take the outcome of these analyses into account. It believed that the analyses submitted were irrelevant in the case of exclusivity clauses, as the very use of such clauses by a dominant company was sufficient to establish an abuse.
Unilever brought an action against the AGCM's decision before the Tribunale Amministrativo Regionale per il Lazio, which dismissed the action in its entirety. Unilever appealed against this judgement to the Consiglio di Stato (Council of State, Italy), which suspended the proceedings and referred two questions to the ECJ for a preliminary ruling.
The first question concerned the extent to which the conduct of a distributor can be attributed to the manufacturer who holds a dominant position. The second question asked the court to comment on whether a competition authority may automatically assume that the use of exclusivity clauses in distribution agreements alone excludes equally efficient competitors, or whether it is obliged to examine this the effect of them in detail using the AEC test.
On the first question, the ECJ ruled that the abusive conduct of a dominant company’s distributors can in principle be attributed to the dominant company itself.
The decisive factor was that the distributor acted in accordance with the specific instructions of the dominant company and thus implemented a policy unilaterally decided by it. Due to the unilateral imposition of the adopted measures, the abusive conduct could be clearly attributed to the dominant company, which could be held responsible for the purpose of applying Art. 102 TFEU. In such a case, distributors and the distribution network are to be regarded as mere instruments for the territorial dissemination of the dominant company's business policy. This applies in particular if (i) such conduct is implemented by means of standard contracts to be used by the distributors, which (ii) have been drawn up completely and unilaterally by the manufacturer, (iii) may not be amended without the manufacturer's consent and (iv) contain exclusivity clauses in favour of its products. That the strategy may be attributed to the dominant company applies irrespective of whether the distributors formally belong to the same group of companies, or whether a hierarchical link between the companies exists.
In relation to the second question, the ECJ emphasizes that although the use of exclusivity clauses in distribution agreements may indicate the exploitation of a dominant position, competition authorities are nevertheless obliged to assess whether these clauses are capable of restricting competition in reality. In doing so, the competition authorities must also take into account economic analyses submitted by the dominant company.
The ECJ reasons that the use of rebate systems and exclusivity clauses can be objectively justified; this can be proven, for example, by the submission of economic analyses on the (lack of) anti-competitive effect. The use of exclusivity clauses may be an indication of - but does not necessarily constitute - market abuse. Furthermore, not every foreclosure effect necessarily results in a distortion of the market. Finally, Art. 102 TFEU does not pursue the objective of ensuring that less efficient competitors can remain on the market. With regard to rebate practices and exclusivity clauses, it must be examined in each individual case whether the alleged disadvantageous conduct cannot be offset or even outweighed by efficiency advantages. In this context, the AEC test could be an indication of the effects of some of these practices, particularly in the case of exclusivity clauses. Amongst other reasons, it is important to safeguard the right to be heard that, even if the competition authority is not itself obliged to carry out the test, it must nevertheless hear the argument of the dominant company, take note of the evidence submitted by it, and examine it for its probative value.
The ECJ's judgement supplements the circumstances in which the conduct of undertakings which are independent third parties under company law can be attributed to a dominant provider and thereby extends the scope of liability for dominant companies under Art. 102 TFEU. In the past, the courts have already determined the conditions under which formally autonomous economic operators form an economic unit, that allows to attribute their conduct to each other. In this regard, the General Court of the European Union has ruled, for example, that companies can be liable for the anti-competitive actions of their commercial agents, even if those work for several companies and the company has no knowledge of the anti-competitive actions of the commercial agents (General Court, judgement of 15 July 2015, case no. T-418/10 – Voestalpine). Such liability arises if the principal company has assumed the economic risk for the commercial agent’s activities, and the commercial agent cannot act independently of the principal. In the present case, the ECJ appears to have lowered the thresholds for the attribution of third-party conduct to dominant companies if and to the extent that they impose their distributors to enforce their (anti-competitive) business policy.
At the same time, the ruling confirms that certain competition-relevant conduct on the part of a dominant company may be justified in individual cases for reasons of efficiency. The ECJ thus validates the line already taken in the Intel judgement (ECJ, judgement of 6 September 2017, Case C-413/14 P – Intel), according to which an anti-competitive predatory effect can also be refuted by the dominant company by providing appropriate evidence to the contrary, when exclusive ties and fidelity rebates are at stake.
In the Unilever case, the ECJ once again confirms the trend towards a more comprehensive analysis of the effects of rebate systems and thereby allows dominant companies more scope to prove that the exclusivity clauses they impose do not have a predatory effect. It remains to be seen how the competition authorities will assess the evidence presented in individual cases. However, the ECJ already indicates in its judgement that analyses and tests, such as the AEC test, are not sufficient on their own to assess the existence of a predatory effect. It always needs an overall assessment of the specific circumstances of the case, where the scope of the (potentially predatory) market conduct, capacity bottlenecks of raw material suppliers and the question of whether the dominant company is (partially) an irreplaceable supplier, may play a decisive role.
Dominant companies are therefore well advised to seek legal and economic advice at the contract drafting stage in order to be able to assess whether the use of exclusivity clauses is justified in a specific case. Against the background of the case law described, it seems highly advisable to prepare and submit corresponding analyses at the latest when a corresponding procedure under Art. 102 TFEU has been initiated.
Dr Sebastian Felix Janka, LL.M. (Stellenbosch)
+49 89 23714 10915
Anne Caroline Wegner, LL.M. (European University Institute)
+49 211 5660 18742
+49 89 23714 24671