On January 1, 2022, a modification of the Federal Act on Cartels and Other Restraints of Competition entered into force in Switzerland (Cartel Act), introducing the concept of relative market power. The purpose of this contribution is to analyse those modifications and discuss their possible impacts on franchise relationships. It will focus on the right granted to buyers to purchase goods or services offered both in Switzerland and abroad at the market prices and conditions customary in the industry in the foreign country concerned.
It is a fact that prices for goods and services are generally speaking higher in Switzerland compared to surrounding countries like France, Germany, Italy or Austria. For decades, the Commission for Competition (Comco), its Secretariat and the courts have been elaborating substantial caselaw regarding the prohibition to restrain parallel imports into Switzerland. Contrary to the European Union that aims at ensuring and strengthening a single market across the EU, the Swiss approach is driven by the concept of “expansiveness Island” within the European continent, against which the political authorities intend to fight, for the benefit of locally based business and, ultimately, consumers.
In January 2022, a modification of the Cartel Act entered into force, in particular its article 7. Said modification introduces the concept of relative market power by prohibiting the abuse of such relative power. More specifically, a new lit. g) has been added to article 7,which deems it unlawful to restrict buyers from purchasing goods or services offered both in Switzerland and abroad at the market prices and conditions customary in the industry of the foreign country concerned.
Concretely speaking, this allows a buyer based in Switzerland to force a purchaser based abroad to supply it at market prices and conditions that are applied in its own country, assuming the concerned goods or services are offered in both countries.
It is worth noting that simultaneously, the Swiss parliament modified the Federal Act against unfair competition in order to introduce a prohibition of the so-called geo-blocking (article 3a I of the Act against Unfair Competition), mirroring the European Regulation (EU) 2018/302.
At first sight, it seems obvious that a franchisor or a master franchisor has a relative market power deriving from the franchise agreement towards its franchisees and master franchisees. Assuming the first one is based in a foreign country where the second is in Switzerland, will article 7 of the Cartel Art force it to grant to its Swiss based counterparts the conditions customary abroad?
Relative market power Dependence
According to the new article 4 § 2bis, a company with relative market power is one on which other companies are dependent for the supply of or demand for a good or service, because they do not have sufficient and reasonable alternatives.
In principle, one must assume that this situation is exactly the case in a franchise relationship, assuming however that franchisor and franchisee are economically independent and shall participate autonomously to the economical process. Indeed, where franchisee and franchisor are not deemed to be “undertakings”, but are part of the same group, the group benefits in principle from the so-called “group privilege” recognized by the Swiss federal Supreme Court in connection with the limitation of parallel imports.
Further, the concept of relative market power differs from the concept of dominance in the sense that it is not related to the positioning of an undertaking on a specific market, but it applies to an individual and specific bilateral relationship between two undertakings. In other words, the same undertaking can be deemed to have a relative market towards one contractual partner, but not necessarily another one.
This nuance is probably not relevant with regards to franchise networks as we can assume that the same rules shall apply to all the Swiss based franchisee of the same franchise. Thus, a potential analysis by the authority shall probably more focus on the network itself and its consequences in Switzerland rather than on each any bilateral relationship, on a case-by-case basis.
It is worth noting that neither the market shares of the concerned undertakings nor their size is relevant regarding the determination of a relative market power. In addition, it is sufficient that the concerned practice as an effect on the Swiss market, without any quantitative appreciation of such effect.
Sufficient and reasonable alternatives
This condition must be analysed on a case-by-case basis and is certainly the one that is critical while evaluating the position of a franchisor. Indeed, at first sight, being the franchisor of a specific cosmetic brand or pastry chain does not prevent the franchisee to decide to terminate its existing relationship to become the franchisee of a competing franchisor.
It seems however that such an alternative shall not be deemed reasonable in the sense of the law, considering in particular the specific franchise-related investments and the conversion costs. But it remains however that the cause of the dependence still relies in the decision of the dependent undertaking to enter into the contractual relationship, even if the alleged discrimination in the supply conditions lies with the supplier, in that case the franchisor.
Another question is whether it is necessary for the dependent undertaking to demonstrate that it effectively tried to develop alternative sourcing channel. As said above the case-law that prohibits restrictions to parallel trade is quite strict in Switzerland and one could expect the franchisee to have explored such channels. That being said, it has to be noted that nothing in the law set forth such a condition. Further, parallel trade will never allow a purchaser in Switzerland to acquire goods or services directly from the supplier at conditions that are customary abroad, as it will necessarily have to deal with an intermediary.
The buying power?
Certain markets in Switzerland are characterized by the presence of very strong buyers or importers. In other words, it could be very difficult for suppliers abroad to decide not to deal with those counterparts. Would such a situation have an impact on the analysis of the alleged abuse of a relative market power?
The law does not mention the potential counter-power of the dependent undertaking that should be taken into consideration while applying the provisions on the relative market power. Considering the fact that a strong buying power can lead to certain obligations to contract under the rules prohibiting the abuse of a dominant position, one must assume that a balanced allocation of market powers on both sides might exclude the concept of dependence of one undertaking towards the other. And the dependence is one of the characteristics of the relationship that is envisaged by the new provision.
There would be a tension between a strong market power, in general and a relative market power in particular that certainly be dealt with on a case-by-case basis, taking into consideration the criteria set forth by Article 7 Cartel Act regarding the abuse of dominance.
In such case, this should be alleged and demonstrated as a defence by the undertaking that is deemed to abuse its relative power, in our case the Franchisor. With the modification of the law, apart from attempting to fight against the expansiveness island mentioned above, the law maker is clearly targeting an unbalanced allocation of powers between the parties. This means that such a defence should be very strictly assessed, notwithstanding the fact that it would, as a matter of principle, depends on the analysis of the position of the buyer on the market in general and not only in its bilateral relationship with its counterpart.
From the perspective of the franchisor, the analysis of the respective market powers should not be limited to the situation on the Swiss market, as the franchisor should be deemed to be the concerned undertaking. And from the perspective of the franchisee, it is certainly utmost relevant whether it is the sole franchisee on the Swiss market, or not.
The decision to become a franchisee
In principle, no business is forced to become a franchisee.
According to the message of the Federal Council in support of the proposed modification of the law, there can be no dependence when a company has put itself in a bind.
To put it differently, the law should not support or protect those who decide to take unreasonable entrepreneurial risks considering a disproportion between the commercial risks and opportunities. This is in particular the case of those franchisee which decide for instance to establish a shop in a border area, and which is most of their newly acquired clientele eventually deciding to cross the border to acquire the same product at a lower price… Considering the size of Switzerland and its geographical location within Europe, this example is certainly not a theoretical example.
This is a very critical point while considering the abuse of relative market power within a franchise network. Indeed, as mentioned above, it is a reality that the prices for goods and services are significantly lower in the surrounding countries of Switzerland, including within many most the well re-known franchise networks. Additionally it is also a reality that the levels of salaries, rental costs and others are significantly higher in Switzerland than in the surrounding countries. But if the conditions offered to the franchisee in Switzerland by the franchisor abroad are not similar to the conditions the franchisors offered to franchise in its own country, there is potentially an abuse of relative market power.
The principle mentioned above regarding the lack of protection granted to the entrepreneur which established an objectively unreasonable business has something to do with the concept of fault. The dependency should not have been created by the fault of the dependent undertaking.
As already mentioned, the establishment of a franchise is connected to adherence to a franchise model or network, which goes far beyond simply acquiring goods or services from a supplier. Evaluating the choice of the franchisee to put themselves in a situation where they depend on the franchisor – dependence which, by the way, is inherent to any franchise system- will depend on “all the circumstances”, as the Supreme Court often states..
In a jurisdiction where franchise law does not exist per-say and where the franchise relationships are governed by the general provisions of contractual law, unfair competition, competition law or other sectorial or specific regulations, a peculiar attention should be given by both parties, but specially by the franchisor to pre-contractual obligations and talks. The fact that no disclosure is required does not mean that no disclosure should take place.
Conclusion
Assuming a franchisor based in France or Germany supplies its Swiss franchisee with a significant mark-up compared to those based in France or Germany. Assuming such mark-up cannot not be objectively justified. Assuming that the franchisor is not facing significant buying power from its franchisee. This franchisor can avoid being condemned by the Swiss authorities for restricting the buyers’ opportunity to purchase goods or services at the market prices and conditions customary in the industry in the foreign country concerned, only if it can demonstrate that the franchisee knowingly put itself in that bind. This will only be possible through a very well documented and transparent disclosure of information during the pre-contractual discussion.
About Christophe Rapin
Christophe Rapin is a partner and co-head of Kellerhals Carrard’s Competition, Trade and Regulatory group. He is admitted to the bars of Geneva and Brussels and is recognized for his specific experience in the legal and economic aspects of business relations between Switzerland and the EU.
Christophe assists and represents clients with regards to antitrust matters as well as competition law matters and competition law procedure (cartel investigations, abuse of dominance, national and international merger control filings, counselling & compliance). He also has wide ranging experience in international distribution, including franchising.
He is also a member of Kellerhals Carrard’s M&A and corporate team and he is active in M&A transactions, particularly in connection to regulated industries.
Christophe has been chairman of the Swiss Association for Competition Law (ASAS) for eight years and is currently President of the International League for Competition Law (LIDC).
About Kellerhals Carrard
Kellerhals Carrard has equally strong local roots in all three language regions and all Swiss economic centres. We work in all national languages and many foreign languages and have global connections with leading law firms, economic centers, and professional organizations in all areas of business.
Our team advises domestic and foreign clients on antitrust proceedings at the Competition Commission and at civil courts, both under Swiss and European law. Many of our clients are market leaders and are therefore aware of the legal and economic implications of competition law. We also regularly represent our clients in merger control proceedings before the Swiss and European Competition Commission. In addition, our team has extensive experience in advising clients on proceedings relating to sector-specific regulations in the energy and telecommunications market.
Christophe Rapin
Partner, Kellerhals Carrard
Tel: +41 58 200 33 30
Fax: +41 58 200 33 11
Published by Lawyer Monthly Magazine – June 4th, 2024