European Union: Ice Cream Judgment - CFI Upholds Commission Decision

Originally published June 2004

On 23 October 2003, the European Court of First Instance (the "CFI") held that an exclusivity clause restricting ice-cream retailers' use of freezers supplied by Van den Bergh Foods in Ireland infringed EC competition law.

Van Den Bergh Foods, formerly HB Ice Cream Ltd ("HB") is a wholly owned subsidiary of Unilever plc. It is the main manufacturer of impulse ice-cream products (single-wrapped ice-creams for immediate consumption) in Ireland. For a number of years it has supplied retailers with freezer cabinets, in which it retains ownership, for no direct charge on the condition that the cabinets are used exclusively for the sale of HB products.

In 1989, Masterfoods Ltd (a subsidiary of Mars Inc) entered the Irish ice-cream market and persuaded some retailers to include its products in HB freezers. HB responded by enforcing the exclusivity clause in its distribution agreements. The distribution share of Masterfoods' ice-creams subsequently fell from 42% to 20%.

Masterfoods brought an action in the Irish High Court claiming that HB's exclusivity clause infringed domestic competition law and Articles 81 (prohibition on anti-competitive agreements) and 82 (prohibition on the abuse of a dominant position) of the EC Treaty. It also lodged a complaint with the European Commission. The Commission adopted a decision in March 1998 finding that the exclusivity provision in HB's distribution agreements relating to the use of its freezers infringed both Article 81 and Article 82. The Commission also refused to grant the distribution agreements an exemption under Article 81(3). The Commission decision required HB to release the retailers from the exclusivity provision.

The Irish High Court rejected Masterfoods' action and, on appeal, the Irish Supreme Court referred certain questions to the European Court of Justice (the "ECJ"). The ECJ found that, where a national court is considering issues that are already subject to a Commission decision, the court must not reach a judgment which conflicts with that decision.

HB applied to the CFI for an annulment of the Commission decision claiming that the Commission had overestimated the existence and extent of foreclosure, had erred in its application of Articles 81 and 82, had failed to respect HB's property rights as required by the general principles of EC law and had failed to give sufficient reasons for its decision.

The CFI dismissed HB's action and upheld the Commission's decision on the following grounds:

The CFI considered the following elements in reaching its conclusion that the agreements as a whole restricted competition on the market, and so infringed Article 81:

• The provision of a freezer without charge, the evident popularity of HB's ice cream, the breadth of its range of products and the benefits associated with the sale of them are all very important considerations in the eyes of retailers when they consider their strategy for selling impulse icecreams (that is whether to replace the HB freezer or to acquire an additional freezer).

• HB had an undisputed dominant position on the market and the CFI found that the Commission was right to take this into account in its assessment. It was relevant to the economic market conditions and the way in which retailers assess the risks and disadvantages of stocking another make of ice-cream. In reality, retailers have only very rarely opted to replace freezer cabinets supplied by HB.

• The measures taken by HB in order to ensure compliance with the exclusivity clause had the effect of causing retailers to act differently in regard to HB's products than they do in regard to the ice creams of other brands. This acted in a way which was liable to distort competition in the relevant market. Despite the popularity of HB's products, retailers would wish to stock ice creams of other brands alongside those of HB, provided that they could do so in the same freezer. The effect of the enforcement of the exclusivity provision was demonstrated by the fact that the distribution share of Masterfoods' products fell from 42% to less than 20% after HB started actively enforcing the provision.

• An exclusivity provision such as HB's has a considerable dissuasive effect on retailers with regard to the installation of their own cabinet or that of another manufacturer and has the effect of a tie on sales outlets that have only HB freezer cabinets. Although it is theoretically possible for retailers who have only an HB freezer cabinet to sell the ice creams of other manufacturers, the effect of the exclusivity clause in practice is to restrict the commercial freedom of retailers to choose the products that they wish to sell in their sales outlets.

• Competing suppliers are in effect prevented from gaining access to the relevant market and from expanding by a series of factors including the burden which the purchase and maintenance of a freezer cabinet represents for retailers, the retailers' aversion to risk and their reluctance to sever established relations with their suppliers. The ability to supply retailers with freezer cabinets and the running maintenance costs of those freezers represents a financial barrier to the entry of new suppliers and to the expansion of existing suppliers.

As regards the possibility of the grant of an individual exemption by the Commission, the CFI found that the Commission had correctly concluded that the first of the conditions for exemption in Article 81(3) (that the agreement contributes to the production or distribution of goods or to promoting technical or economic progress) did not apply. According to established case law this condition will only be satisfied where the improvement resulting from the agreement displays appreciable objective advantages for consumers of such a character as to compensate for the disadvantages which they cause to competition¹. The Commission found that due to the barriers to entry presented by HB's network of agreements and the consequent weakening of competition, this condition was not satisfied. The CFI agreed with this approach.

As the conditions for exemption apply cumulatively, the CFI did not consider it necessary to review the possible application of other conditions in Article 81(3).

Although the CFI accepted HB's argument that the provision of freezer cabinets on a condition of exclusivity constitutes a standard practice on the relevant market, this did not mean that it amounted to the conduct of normal competition by a dominant undertaking. The existence of a dominant player means that competition in the market is already restricted.

The CFI found that the Commission correctly held that HB is an "unavoidable partner" for many icecream retailers in Ireland and that it has a dominant position on that market. HB had a share of 89% of the relevant market at the time of the Commission's decision and it has the most extensive and most popular range of products on the relevant market. The CFI found that HB was the sole supplier of impulse ice-creams in approximately 40% of outlets in Ireland, and was part of the multinational Unilever group which has been producing and marketing ice creams for many years in all the Member States and many other countries (where it is often the leading supplier) and that the HB brand is very well-known.

HB had effectively tied 40% of the outlets in the relevant market by an exclusivity clause, which in reality created outlet exclusivity. This amounts to an abuse of a dominant position within the meaning of Article 82. The exclusivity clause has the effect of preventing (or restricting the ability of) the retailers concerned from selling other brands of ice cream. This is despite the fact that there is a demand for such brands. This therefore prevents competing manufacturers from gaining access to the relevant market. The CFI found that the Commission rightly held that HB was abusing its dominant position by inducing retailers who did not have any other ice cream freezer cabinet to accept agreements for the provision of cabinets subject to a condition of exclusivity and maintaining these cabinets free of any direct charge to the retailers.

The CFI also rejected HB's claims that the Commission's decision unlawfully infringed its right to property and that it failed to give adequate reasons for its decision.

The CFI judgment fully supports the Commission's application of law and fact. Following on from the earlier German ice-cream cases (Langnese-Iglo and Schöller) it confirms that, in the context of the market for impulse ice-creams, a network of agreements, which foreclose competition by virtue of requiring exclusive use of supplied freezer cabinets, infringes Article 81. This is the case even where, as in this case, the retailers are contractually free to sell the products of other manufacturers. Further, where the supplier is in a position of dominance the provision and maintenance of such cabinets, without extra charge, infringes Article 82.

The CFI specifically referred to the "wider Community importance" of the issues raised by the Commission decision, in particular in light of the fact that various national courts and competition authorities are dealing with parallel cases raising similar issues. It considered that the Commission decision was appropriate to ensure that the Community competition rules were applied coherently to the various forms of exclusivity practised by ice-cream manufacturers throughout the Community.

This case is currently under appeal to the ECJ.

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