Introduction

On 16 October 2018 the Administrative Council for Economic Defence (CADE) tribunal imposed a fine of R29.4 million (approximately $8.1 million)(1) on Unilever for the abuse of its dominant position in the impulse ice cream (ie, ice cream for immediate consumption) market.

According to CADE, Unilever had violated competition law by adopting different types of agreement with its points of sale that had resulted in their de facto exclusivity to sell Unilever ice creams under the brand Kibon. Nestlé had also been investigated during the administrative proceeding, but was not convicted due to its lack of market power in the affected market.

Legal framework

Article 36(3) of the Brazilian Competition Law (12.529/2011) provides examples of anti-competitive conduct, including:

  • limiting new companies' market access;
  • creating barriers for competitor development; and
  • preventing competitors from accessing distribution channels.

These practices are considered unlawful from an antitrust perspective if the investigated company holds a dominant position in the affected market and there is no evidence of legitimate reasons or efficiencies for the adoption of such practices (or such efficiencies do not offset all of the negative effects), which are then understood to have the potential to harm competition.

According to Article 36(2) of the law, a company or group of companies hold a 'dominant position' if they:

  • can unilaterally or jointly change market conditions; or
  • control 20% or more of the relevant affected market.

Background

The investigation against Unilever and Nestlé started after a competitor, Della Vita, filed a complaint in 2006. Della Vita claimed that it had faced obstacles that hindered its growth in the impulse ice cream market, supposedly due to the existence of different types of exclusivity agreement between the defendants Kibon (Unilever) and Nestlé with points of sale, in Rio de Janeiro and Sao Paulo.

The case was first handled by the former Secretariat of Economic Law of the Ministry of Justice and then by the General Superintendence, which investigated the following conduct in the impulse ice cream market:

  • merchandising exclusivity (eg, privileged exposure of products);
  • sales exclusivity;
  • exclusive use of freezers that store ice creams;
  • minimum sales volume; and
  • agreement terms.

After several years of requesting information from the retailers, a review of the investigated companies' arguments and an interview with one of Unilever's employees, the General Superintendence fully dismissed the case on the grounds that the sales and merchandising exclusivity requested by the investigated companies to points of sale had not resulted in market foreclosure for other competitors.

Both the Attorney General's Office and the Public Prosecutor's Office issued opinions following the General Superintendence's decision to dismiss the case.

The matter was sent to the CADE tribunal on 2 August 2017.

CADE tribunal decision

Reporting Commissioner João Paulo de Resende rejected the non-binding opinions of the General Superintendence and other CADE bodies and convicted Unilever on the grounds that:

  • the company had held market power in the affected markets during the period in question;
  • the exclusivity in the merchandising and minimal sales had had the potential to harm competition and foreclose the market to rivals; and
  • no legitimate reasons justified the adoption of most of those exclusive practices.

With respect to the request of exclusivity in the freezers used by the points of sale to store the ice creams, the tribunal concluded that if such exclusivity is not related to the payment of bonuses, it has an economic rationale and should not be seen as unlawful even if the company asking for the exclusivity holds market power.

CADE took the following additional factors into consideration:

  • Market power – according to Nielsen data from 2005 (ie, the year prior to the complaint), Kibon (Unilever) had a 60% to 70% and 80% to 90% market share in Sao Paulo and Rio de Janeiro, respectively; Nestlé had a 10% to 20% and 0% to 10% market share in the same cities. Even on a national basis, market shares were 60% to 70% for Kibon (Unilever) and 10% to 20% for Nestlé.
  • High barriers to entry – CADE held that there were barriers to entry in the investigated market, such as the importance of a strong brand and a minimum scale to operate.
  • Conduct – the affected points of sale were significant. Even with no formal agreement or written exclusivity provision, a number of the points of sales understood that they could sell only Kibon's (Unilever) products and Unilever had inspired the same type of exclusivity practice in its competitors.
  • No written exclusivity provision – Unilever's practices resulted in de facto exclusivity through discounts and bonuses granted to the point of sales in exchange of exclusivity of sales and merchandising.

Comment

This decision follows the reasoning adopted by the competition authorities in previous cases involving vertical restraints in which the investigated company held a dominant position in the affected market and the vertical restraint had the potential to result in market foreclosure and bar rivals' market entry.(2)

CADE's principal findings were that:

  • companies must have a dominant position to be convicted for vertical restraints practices; and
  • care must be taken when requesting exclusivity to important points of sale (with or without written clauses) since the mere existence of exclusivity can be understood as enough to result in market foreclosure when the company has market power (ie, a market share above 20%).

For further information on this topic please contact Camilla Paoletti or Gustavo H Kastrup at BMA Barbosa Müssnich Aragão by telephone (+55 21 3824 5800) or email (ccp@bmalaw.com.br or gck@bmalaw.com.br). The BMA Barbosa Müssnich Aragão website can be accessed at www.bmalaw.com.br.

Endnotes

(1) Considering the exchange rate of R3.72 to $1.

(2) See Administrative Proceedings 08012.003303/1998-25 (Investigation of Souza Cruz and Phillip Morris for exclusivity practices with point of sales), 08012.003805/2004-10 (Investigation and conviction of AMBEV for adoption of loyalty programs with point of sales) and 08012.012740/2007-46 (Investigation involving shopping malls that asked for exclusivity clauses in agreements with smaller retailers).

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