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The Italian Competition And Market Authority Closes Investigation Over McDonald’s Franchise Terms Confirming Continued Focus On Cases Of Abuse Of Economic Dependence – Antitrust, EU Competition



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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:

(i) the requirement that the potential franchisee undertake, at
its own expense and prior to the conclusion of the contract, a
period of training at McDonald’s restaurants;

(ii) the impossibility of reviewing the contract before entering
into it with a 3-day deadline for the franchisee to accept the
proposal;

(iii) the obligation to invest, throughout the business branch
lease and/or franchise agreements, no less than 1.5 percent of
turnover in local advertising;

(iv) the imposition of a non-compete obligation extended to any
food service business for the duration of the contract and for one
year after its termination;

(v) the obligation, during the contractual relationship, to rely
only on suppliers specified by McDonald’s Development Italy for
equipment, raw materials, and other products required for the
catering business;

(vi) the impossibility of reselling restaurant furniture and
equipment to other businesses at the end of the contractual
relationship, with McDonald’s alone being allowed to buy them
back at depreciated prices.

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.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

POPULAR ARTICLES ON: Anti-trust/Competition Law from Italy



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