The Benetton case: operational implications on the franchise agreement

This article reviews the Benetton case, in which the Italian Competition Authority (AGCM, No. 30472 of Jan. 31, 2023) investigated the possible violation of Article 9 of Law No. 192/1998 in relation to the abuse of economic dependence in the franchise agreements signed between Benetton and some of its franchisees.

What clauses in the franchise agreement are contested by franchisees?

The Benetton case concerns alleged violations of Article 9 of Law No. 192/1998 included in franchise agreements between Benetton and some of its franchisees. The Italian Competition Authority examined various behaviors and contractual clauses challenged by the franchisees.

The disputed clauses in the Benetton case include:

• Clause relating to past debt: a contractual clause that required the recognition and takeover of a significant past debt arising from a previous contractual relationship, aggravating the economic dependence of the franchisee.
• Investment-related clauses: contractual clauses aimed at imposing significant investments to adapt the franchisee’s sales structure to Benetton’s directions, further aggravating economic dependence.
• Discretionary management of supplies: contractual terms and clauses that allowed Benetton discretionary management of the quantities of goods to be allocated to the store, through a complex mechanism of order management and a system of automatisms in the assortment of goods.
• Compromise of entrepreneurial autonomy: the set of contested contractual conducts and clauses was such as to compromise the entrepreneurial autonomy of the franchisee, despite being recognized by the franchise agreement itself.

These clauses and conduct were challenged by the franchisees as potentially abusive and likely to constitute an abuse of economic dependence.

What are the concerns raised by the Italian Competition Authority and what exactly does the Antitrust Law state?

The concerns of the Italian Competition Authority in the Benetton case mainly relate to the abuse of economic dependence, as described by Article 9 of Law No. 192/1998, which prohibits entrepreneurs from exploiting the state of economic dependence of a customer or supplier. More specifically, the Authority focused on various conduct and contractual clauses that could result in an excessive imbalance of rights and obligations between Benetton and its franchisees, while also taking into account the real possibilities for franchisees to find suitable alternatives in the market.

The Authority’s concerns focus mainly on:

1. The possible impairment of franchisees’ entrepreneurial autonomy due to the challenged contractual conducts and clauses that could create a situation of economic dependence towards Benetton.
2. The enforcement of unreasonably burdensome or discriminatory contractual terms and conditions, which could constitute an abuse of economic dependence, as referred to in Article 9(2) of Law No. 192/1998.
3. Benetton’s discretionary management of supplies, which could limit franchisees’ decision-making autonomy in choosing and managing their product selection, contributing to the abuse of economic dependence.
4. The possible arbitrary termination of existing business relations, which could constitute a further abuse of economic dependence within the meaning of Article 9(2) of Law No. 192/1998.

These concerns led the Authority to thoroughly examine the conduct and contractual clauses challenged by the franchisees in order to assess whether they constituted an abuse of economic dependence in violation of Article 9 of Law No. 192/1998.

What are Benetton's commitments to rectify the situation?

Benetton has made several commitments to rectify the situation and address the Authority’s concerns regarding the abuse of economic dependence. These commitments include:

• Elimination of the annex regarding the recognition of past debt and the establishment of a procedure for suspending supplies in the event of the franchisee’s failure to meet specific obligations under the franchise agreement.
• Elimination of the contractual reference to the purchase budget in franchise contractual relationships.
• Introduction of a policy to clarify the process of sending and accepting purchase orders entirely and unilaterally defined by the franchisee.
• Elimination of the automatic replenishment system and establishment of a stock of products at Benetton to enable restocking by the franchisee.
• Inclusion of general terms and conditions in the franchise agreement and amendment of the same with respect to delivery terms and reference to the principles of the Italian Civil Code regarding refusal to receive goods.
• Introduction of a new contractual clause aimed at stipulating, in the event of termination of the franchise relationship, the repurchase at market value by Benetton of the furnishings identified by the parties at the time of signing the contract.
• Right for the franchisee to terminate the franchise agreement after the first year of the relationship with 6 months’ notice.

Following the analysis of the commitments proposed by Benetton and the assessment of their potential impact on competitive concerns, the Italian Competition Authority found that the commitments made by Benetton Group S.r.l. were overall suitable to remove the competitive concerns related to the abuse of economic dependence elements hypothesized in the initiating measure. Thus, the commitments were approved by the Authority.

What should every franchisor pay attention to?

The impact of the Italian Competition Authority’s ruling in the Benetton case is an important wake-up call for franchise network owners and franchisees. It highlights the importance of ensuring a proper contractual balance and adopting transparent business practices that comply with applicable regulations.

The network owner must pay special attention to protecting the interests of franchisees, avoiding situations of economic dependence and abusive practices. It is also essential to maintain open and collaborative communication between the parties involved, fostering dialogue and information sharing.

All in all, the Benetton case emphasizes the importance of a responsible and conscious approach in the franchising industry, with the aim of preventing any abusive or conflicting situations and ensuring the sustainability and success of relationships between network owners and franchisees.