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In franchising, business limitations do not constitute a compensable abuse to the franchisee

Published in: Disputes and Compensation
by Arlo Canella
Home > In franchising, business limitations do not constitute a compensable abuse to the franchisee

The judgment of the Court of Santa Maria Capua Vetere (Judgment 462 of 03/02/2023) ruled out the occurrence of abuse of a dominant position in the context of a franchise contract.

The business affiliation case examined by the court

Judgment No. 462 of Feb. 3, 2023, of the Court of Santa Maria Capua Vetere concerns a commercial affiliation (franchise) contract between a product distribution center and a company that operated a supermarket in the Italian Region Campania.

The supermarket (franchisee) had filed an opposition to an injunction ordering it to pay a sum of money, seeking revocation of the decree and compensation for the damage suffered. The franchisor contested the reasons given by the enjoined company.

In the ruling, the judge examined the question of whether the franchisor had a dominant position over the franchised supermarket and whether liability could be attributed to the alleged control and hetero-management of the supermarket.

What is economic dependency abuse?

Abuse of economic dependency occurs when there is an undue imbalance between the parties and one of the firms, holding a dominant position, acts arbitrarily to harass the other firm with the aim of grabbing the profit margin of others.

According to case law, two investigations are necessary for the application of this rule:

The first inquiry concerns the existence of the situation of “economic dependence,” which occurs when the imbalance of the parties’ rights and obligations is “excessive” and the contracting party suffering it is deprived of real economic alternatives in the market. For example, he or she may be deprived of such alternatives because he or she cannot easily differentiate his or her business or because he or she has made major investments in view of that relationship.
The second inquiry concerns “abuse”, which is arbitrary conduct contrary to good faith that aims to harass the other firm in order to appropriate the profit margin of others, without any legitimate interest. By way of example, the conduct may consist of modifying one’s expansion strategies, adjusting the type or quantity of product supplied, or bargaining for better terms.
Law 18/06/1998, No. 192 regulates the regulation of subcontracting in manufacturing activities. According to Article 9 of Law 18/06/1998, No. 192: “the abuse by one or more enterprises of the state of economic dependence in which a client or supplier enterprise is, in its or their regard, is prohibited. Economic dependence is considered to be the situation in which an enterprise is able to bring about an excessive imbalance of rights and obligations in its business relations with another enterprise. Economic dependence shall also be assessed by taking into account the real possibility for the abusive party to find satisfactory alternatives on the market”.

In addition, pursuant to Article 2497 of the Italian Civil Code: “Companies or entities that, by exercising management and coordination activities of companies, act in their own or others’ entrepreneurial interests in violation of the principles of proper corporate and entrepreneurial management of those companies, are directly liable to the shareholders of those companies for the damage caused to the profitability and value of the company’s shareholding, as well as to the company’s creditors for the damage caused to the integrity of the company’s assets”.

The logic followed by the Judge

The Court of Santa Maria Capua Vetere, in Judgment No. 462 of Feb. 3, 2023, ruled that there was no abuse of dominant position of the franchisor over the franchisee in a commercial affiliation (franchise) contract, since the commercial formulas and mutual obligations had been clearly specified in the contractual text and there was no loss of autonomy and independence of the franchisee.

The court found that the situation of economic dependence, necessary for the application of Article 9 of Law No. 192 of 1998 on unfair business practices, was not present, since the franchisee was not without real economic alternatives in the market. In addition, the court ruled out the franchisor’s liability for allegedly controlling and hetero-directing the supermarket.

The ruling took into consideration previous case law on the matter, including that of the Italian Supreme Court (Civil Sect. I, 21/01/2020, No. 1184) and the Court of Turin (ruling No. 2414/2017), and pointed out that the commercial limitations provided for in a franchise agreement do not in themselves constitute an abuse of a dominant position, but that the latter must be proven.

Economic dependency must be proven

In summary, the judge dismissed the opposition filed by the injunction and upheld the injunction previously issued in favor of the franchisor, pointing out that: “despite the allegations, the franchisee has not proven that as a result of the affiliation contract it has lost its autonomy and independence, nor even that it could not choose to operate with third parties in order to escape the contractual conditions deemed unfair, so that in the case at hand the recurrence of a dominant position is to be excluded.

This circumstance also excludes the alleged responsibilities, pursuant to Articles 2359, 2497 and 2497 septies of the Italian Civil Code, of the franchisor for the alleged control and self-direction of the franchisee since the autonomy in the management of the companies leads to the exclusion of an alleged management and coordination activity by the same on the affiliated companies, nor that the activity and entrepreneurial potential of the same depend on the contractual ties between the companies.” (Judgment No. 462 of February 3, 2023, Court of Santa Maria Capua Vetere).

The possible effect of the ruling on the franchising world

In the case at hand, the contractual text clearly specified the commercial formulas and mutual obligations that had been the result of free entrepreneurial choices. This decision assumes considerable importance as it reaffirms the need to prove the existence of an abuse of a dominant position in each individual case and that the commercial limitations provided by a franchise contract do not in themselves integrate such an abuse.

The Santa Maria Capua Vetere Court’s ruling could therefore have a significant impact on the world of franchising and the relationship between franchisor and franchisee. In particular, the Judge’s decision could have an impact on companies’ expansion strategies and business relationships between them, as it clarifies at least in part the limits and modalities of the abuse of dominant position in the franchising sphere.

The Canella Camaiora Law Firm is actively involved in commercial and competition law, with a particular focus on franchising and franchisor-franchisee relations. The Firm offers legal advisory services on franchise contracts, protection of rights related to them, and in the area of assessing the compliance of contractual clauses with current legislation.

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Publication date: 19 April 2023
Avv. Arlo Cannela

Avvocato Arlo Canella

Managing Partner of Canella Camaiora Law Firm, member of the Milan Bar Association, passionate about Branding, Communication and Design.
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