Divesture commitments in a merger operation: reminder to maintain the profitability of the transferred business

On April 19, 2016, the French Competition Authority (FCA) once again punished the failure to respect the divesture commitments made in the context of a merger operation.

On October 30, 2014, the FCA had authorized SFR’s takeover by the Altice group subject to commitments. In particular, the parties had undertaken to transfer the Outremer Télécom business (OMT), SFR’s direct competitor in Réunion and Mayotte. Pending its effective transfer, OMT was to be managed separately and the parties were supposed to maintain “the economic viability, market value and competitiveness of the transferred business”.

Shortly after the merger authorization, OMT implemented a series of price increases.

According to the FCA, OMT’s commercial positioning was until then aggressive in terms of pricing, contrary to its competitors SFR and Orange. Noting OMT’s inferior quality of service, the FCA considered that this aggressive positioning was OMT’s main competitive advantage.

Thus, for the FCA, the price increases resulted in creating a risk of loss of competitiveness for OMT’s business (in terms of price and image). It therefore considered that this constituted a breach of the parties’ obligation not to modify the transferred business’ commercial strategy. These price increases also had an effect on OMT’s subscriber base: the number of terminations dramatically increased for the offers concerned by the price increases.

The FCA dismissed all of the parties’ arguments.

In particular, according to the parties, the price increases constituted an act of sound management, intended to improve the financial indicators so as to attract prospective acquirers. This reasoning is rejected by the FCA for which it is a distortion of the text of the commitment, which was intended to “avoid all risk of loss of competitiveness of the business”. Moreover, this attitude is contradictory with the separate management commitment of the businesses to be transferred: the price increase was in the sellers’ immediate interest, and not in the interest of the transferred business as future competitive player.

Accordingly, the FCA imposed on Altice and Numericable-SFR a penalty of €15 million, recalling the importance of the proper performance of the commitment and the value the FCA attaches thereto.

Wallpaper and mono-product activity: “Discount” on fines granted by the Paris Court of Appeal

The decision of the Paris Court of Appeal of April 14, 2016 provides an interesting perspective on the appreciation of a mono-product activity.

By a decision dated December 22, 2014, the FCA penalized several companies in the wallpaper sector for exchanges of sensitive information (commercial terms and conditions, prices, turnovers, etc.). Pursuant to its May 16, 2011 procedural release on the method for determining financial penalties, the FCA had granted various companies a 70% reduction on the fine, on the ground that they operated “the majority of [their] activity in the sector or market relating to the offense” (mono-product activity).

However, it had refused this reduction to several other companies, considering that the portion of turnover generated by the activity in issue was too low. To do so, the FCA had compared the turnover of the companies responsible for the offence and the consolidated turnover of the group to which they belong.

The Court of Appeal has sanctioned this reasoning, considering that, although account must be taken (in the denominator) of the group’s consolidated turnover, account must also be taken (in the numerator) of the turnover generated by all the companies of this group in the sector or market related to the offense.

Considering that the proportion of the activity for the relevant market thus calculated exceeded 90%, the Court of Appeal has also granted a 70% reduction on the fine to the relevant appellants.

The franchisor which integrates a new franchise in the franchisee’s catchment area breaches its duty of loyalty, even in the absence of territorial exclusivity

By judgment of March 8, 2016, the Versailles Court of Appeal decided on the extent of the duty of loyalty which a franchisor has vis-à-vis his franchisee regarding real estate agency franchises.

In the case at hand, Laforêt Franchise (Laforêt) integrated into its franchise network a new estate agency located 11 kilometers from another agency belonging to another franchised company, Ensemble et Toit.

According to Ensemble et Toit, this practice represents a failure by the franchisor to observe its duty of loyalty, preserve common interests and prevent competition with a franchisee by establishing a new agency. In this regard, the pre-contractual information document provided by the franchisor to Ensemble et Toit reported that the market of the municipality where the new estate agency was established was particularly difficult, implying that Ensemble et Toit was to extend geographically its activities to the catchment area where the new integrated agency is located. The franchisee therefore requested the judicial termination of the contract by reason of breach by the franchisor.

Laforêt then claimed that no territorial exclusivity has been granted to its franchisee and that the newly signed franchise contract has been concluded with a company that already operated an estate agency and that, as a franchisor, it could not be criticized for creating a point of sale ex nihilo as the agency in question was only integrating a franchise network.

The Court of Appeal considered that the franchise contract, which was concluded in the common interest of the two parties, involved an obligation of cooperation and loyalty by both parties, including the franchisor. The Court therefore considered that, by establishing a new agency in the neighboring municipality of another franchisee, Laforêt had failed to observe its duty of loyalty insofar as the catchment area was common to the two competing franchised agencies. On the basis of the duty to enforce in the common interest of both parties to the contract, the Court therefore ruled that the franchisor was guilty of misconduct, giving rise to a compensation estimated in the case at hand at €25,000 for the financial harm suffered by Ensemble et Toit.

Therefore, even in the absence of territorial exclusivity, the franchisor is likely to fail to observe its duty of loyalty and to abuse its right if it incorporates into its network an agency, even pre-existing, when common catchment areas are involved. The franchisee is therefore not deprived of protection in cases of disloyal behavior from its franchisor and the absence of exclusivity does not give the latter carte blanche to choose where to establish its future franchisees.

Companies cannot directly refer to the magistrate for custody and release during a search

By judgment of March 9, 2016, the criminal chamber of the French Supreme Court considered that companies subject to search and seizure operations could not directly refer to the magistrate for custody and release (the JLD) who had issued the order authorizing these searches.

In the case at hand, the lawyer of the company subject to the search and seizure operation wanted to report to the JLD, without going through law enforcement officers who must inevitably be present in the case of a search and seizure operation, issues relating to the discovery of documents protected by attorney-client privilege. The lawyer then tried to reach the magistrate by telephone while the search operation was underway, but the latter refused to consider the request. The Court of Appeal, with which an appeal against the conduct of the operations was lodged, cancelled all the operations against the company which had not had access to an effective remedy whilst the operations were conducted, as it considered that “to the company board, the seizure by law enforcement officers only represents a simple alternative to that of the magistrate, not an essential prerequisite.”

However, the French Supreme Court quashed the judgment of the Court of Appeal after stating that the company that intends to invoke with the JLD issues encountered during the search and seizure operations must refer to the law enforcement officer present on site beforehand, regardless of the type of issues involved. It is the law enforcement officer who is in charge of reporting to the magistrate the various issues that arise during the operations.

It is unfortunate that this practice, which would have strengthened the effectiveness of the rights of the defense in the face of the law enforcement officers’ passivity during searches requested by the French Competition Authority, was not accepted by the French Supreme Court.