Italy: The Italian Competition And Market Authority Closes Investigation Over McDonald's Franchise Terms Confirming Continued Focus On Cases Of Abuse Of Economic Dependence

The Italian Competition and Market Authority ("AGCM" or "Authority") has closed an investigation launched in July 2021 against McDonald's Development Italy LLC ("McDonald's") regarding an alleged violation of art. 9 of Italian Law no. 192/1998 concerning the so called "abuse of economic dependence".

According to such provision, a company shall not exploit the state of economic dependence in which another company may be in connection to it. In this respect, economic dependence is defined as a situation where one company is capable of determining an excessive imbalance of rights and obligations with the dependent company.

This is a notion of abuse that applies irrespective of the existence of a dominant position on the market, if a position of relative dominance can be found in the contractual relationship, with one of the two contractual partners being in a position of dependence on the other, typically by virtue of sunk investments in the relationship. Historically, cases of economic dependence have primarily been brought before the civil courts, with limited interest in the notion by the AGCM. The last two years have however seen a renewed interest of the Authority in addressing cases of economic dependence (see e.g., the proceedings closed in August 2021 against Poste Italiane, the investigation opened in 2020 and still ongoing against Benetton, and the investigation opened in 2021 and still ongoing against WindTre). As stated in the Authority's latest yearly report (in my English translation):

"The action of the Authority aimed at ensuring competition on the market does not rest solely on the traditional apparatus of antitrust enforcement, but can also rely on the use of an instrument that has been, in recent years, the subject of a rediscovery and valorization by the Authority. We hereby refer to the rules against the abuse of economic dependence, regulated under Article 9, Paragraph 3-bis of Law No. 192 of 18 June 1998 (Discipline of subcontracting in productive activities). The Authority's intervention in such cases is intended not only to protect the weaker party in economic relations affected by contractual asymmetry, with the aim of fostering a fairer and more inclusive development, but above all to rebalance disparities deriving from excessive market power on the demand side that may, in the medium to long term, damage the supply side in terms of innovation and variety, with obvious repercussions on the level of competition".

The proceedings against McDonald's originated from the complaints of some former McDonald's franchisees, who complained that the former allegedly abused their economic dependence by imposing a set of conditions and obligations likely to stiffen the business structure of the franchisees and prevent them from independently running their businesses.

In particular, according to the franchisees' objections, the allegedly abusive conducts by McDonald's would include, by way of example:

After the start of the investigation, McDonald's submitted its undertakings, which were published by the Authority and underwent a market test. After the conclusion of the market test, McDonald's made further changes which resulted in a final version of the franchise contracts providing for:

• training costs and related facilities to be borne by McDonald's, when the courses are held at the Company's premises;
• a deadline of 15 days for reviewing and accepting the irrevocable contract sent by McDonald's to the candidate, ensuring that the franchisee is adequately informed of policies, procedures and other elements of the McDonald's system necessary for a proper understanding of the contract;
• a reduction of the minimum percentage of the franchisee's investment in local advertising to 0.5% of the turnover;
• an amendment of the non-compete obligation, removing the prohibition of carrying out competing activities for the period after the franchise contract, and limiting the scope of application to informal catering activities;
• an extension of the possibility for the franchisees to appoint suppliers of their choice for the purchase of services, products, equipment and materials, especially with reference to "non-core" and not identifying goods and services, as well as ancillary goods and services (expressly specified in the contract);
• the introduction of an obligation for McDonald's Development Italy, at the request of the franchisee, to (i) repurchase equipment and furnishings purchased within three years prior to the expiration of the contract at the original cost price, net of depreciation due to normal wear and tear quantified at 5% per year and to (ii) repurchase equipment and furnishings purchased before the three years prior to the natural expiration of the Contract at a price that is equal to the value of such assets resulting from the accounting records, increased by 20%.

The Authority found that the changes and commitments proposed by McDonald's Development Italy were entirely suitable to remove the concerns of abuse of economic dependence pursuant to Article 9 of Law 198/1992, and consequently closed the proceedings without a finding of infringement. The Italian original of the decision of the AGCM can be found here.

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