Minimum purchase and resale price: AGCM (Italian Competition Authority) on some unfair franchise clauses

This article provides an overview of the “Original Marines” case addressed by the AGCM (Italian Competition Authority) in order to clarify the risk of adding certain clauses in the franchise contract.

The report to the guarantor for the Original Marines franchise.

The report to the AGCM, described in the December 3, 2021 order, concerned the conduct of Original Marines, a fashion company with a commercial network of about 480 stores, most of them franchises.

According to reports from various individuals including former franchisees, the company allegedly engaged in a series of abusive conducts, including the imposition of particularly onerous contractual clauses and a specific strategy aimed at sacrificing the franchisee’s profitability in favor of the company.

Until 2017, Original Marines allegedly operated with a subsidiary company that enjoyed significantly more favorable conditions than other franchisees, cannibalizing competing outlets.

Such conduct allegedly resulted in the indebtedness of the network stores, turn over, and the purchase by Original Marines of numerous stores with several bankruptcy petitions against the companies involved.

The challenged clauses

Briefly, the clauses in Original Marines’ franchise agreement challenged concern particularly onerous contractual conditions and a specific strategy whereby the franchisee would encounter a system in which its own profitability is sacrificed in favor of Original Marines:

1. Original Marines would define the value and composition of orders by means of computer-based control over the store, imposing promotions and resale prices and, at the same time, preventing the franchisee from carrying out sales promotions campaigns unless expressly authorized in advance, precisely in order to “avoid competition with other outlets participating in the Original Marines program.”
2. Burdens and obligations on the franchisee in order to adapt the sales structure and conform the entire business activity to Original Marines’ directions at its own expense.
3. Among the clauses that have the greatest impact on the franchisee’s situation of economic dependence is the design and fitting out of the store, the economic commitment of which is placed entirely on the franchisee.
4. The franchisee is obligated to purchase a minimum quantity of products based on the standard assortment, and there are some products (so-called best sellers) whose purchase is mandatory for reasons of network uniformity.
5. Original Marines allegedly used the contract to dictate the promotions to be carried out in the store, reducing the marginality on which the franchisee allegedly relied and preventing proper planning of its business strategy.

Original Marines allegedly abused the economic dependence of its retailers through the imposition of burdensome clauses constraining the franchisee’s entrepreneurial autonomy, limiting the strategic choices of store management.

The critical nature of the minimum purchase bond and the ban on promotions

The AGCM’s decision of April 5, 2022 covers only some of the clauses, and the adoption of the commitments submitted by Original Marines was deemed sufficient in order to resolve the issues found in the investigation.

The commitments presented by the company consist of amendments to Original Marines’ contractual model and are aimed at eliminating the purchasing constraints inherent in the minimum quantity and type of products to be purchased, clarifying that reassortment is carried out only at the franchisee’s request and without minimum purchase obligations, and giving the franchisee decision-making autonomy regarding the determination of the resale price and the implementation of promotional campaigns.

To sum up, the “Original Marines” case highlights the importance of carefully evaluating contractual clauses in the context of franchising and monitoring any abusive conduct by franchisor companies in order to protect the position of franchisees.