98/538/EC: Commission Decision of 17 June 1998 relating to a proceeding pursuant to Article 86 of the EC Treaty (IV/36.010-F3 - Amministrazione Autonoma dei Monopoli di Stato) (notified under document number C(1998) 1437) (Only the Italian text is authentic) (Text with EEA relevance)
Date: 1998-06-17
Institutions: European Commission
Subjects: Italy, distributive trades, dominant position, exclusive distribution agreement, restriction on competition, tobacco industry

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COMMISSION

COMMISSION DECISION

of 17 June 1998

relating to a proceeding pursuant to Article 86 of the EC Treaty

(IV/36.010-F3 (cid:190) Amministrazione Autonoma dei Monopoli di Stato)

(notified under document number C(1998) 1437)

(Only the Italian text is authentic)

(Text with EEA relevance)

(98/538/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

After consulting the Advisory Committee on Restrictive
Practices and Dominant Positions,

Having regard to the Treaty establishing the European
Community,

Whereas:

Having regard to Council Regulation No 17 of 6 February
1962, first Regulation implementing Articles 85 and 86 of
the Treaty (1), as last amended by the Act of Accession of
Austria, Finland and Sweden, and in particular Articles
3(1) and 15(2) thereof,

Having regard to the applications submitted pursuant to
Article 3 of Regulation No 17 by R. J. Reynolds Tobacco
GmbH and R. J. Reynolds Tobacco Company SAE, Roth-
mans
International BV and International Tobacco
Company for a finding that Amministrazione Autonoma
dei Monopoli di Stato has infringed Article 86 of the EC
Treaty,

(1)

Having regard to the Commission decision of 27
February 1997 to initiate proceedings in this case,

(2)

Having given the firm concerned the opportunity to
make known its views on the objections raised by the
Commission in accordance with Article 19(1) of Regula-
tion No 17 and with Commission Regulation (EEC) No
99/63 of 25 July 1963 on the hearings provided for in
Article 19(1) and (2) of Regulation No 17 (2),

PART I

THE FACTS

I. AAMS

‘AAMS')

referred to as

Amministrazione Autonoma dei Monopoli di Stato
(hereinafter
is a body
forming part of the financial administration of the
in addition to carrying out
Italian State which,
various administrative activities, also engages in the
production, import, export and wholesale distribu-
tion of manufactured tobaccos.

Article 45 of Law No 907 of 17 July 1942 (3) gives
AAMS the exclusive right to produce manufactured
tobacco on national territory.

AAMS currently exercises that right through 21
production plants employing some 7 500 persons.
In those plants, AAMS produces not only the cigar-
ette brands it owns but also brands owned by Philip
Morris. To that end, it has over several decades
concluded licensing agreements with Philip Morris

(1) OJ 13, 21. 2. 1962, p. 204/62.
(2) OJ 127, 20. 8. 1963, p. 2268/63.

(3) Law on the salt and tobacco monopoly, GURI (Gazzetta Offi-

ciale della Repubblica Italiana) No 199, 28. 5. 1942.

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(3)

(5)

to manufacture the Marlboro, Muratti Ambassador,
Mercedes and Diana brands in particular. In 1995
AAMS manufactured some 54 million kilograms of
cigarettes, of which 40 million kilograms were of
its own brand and 14 million were branded as
Philip Morris.

country by way of

In addition, AAMS engages in the import, intro-
duction into the
intra-
Community acquisition, distribution and sale of
manufactured tobaccos.
a distribution
capacity of some 102 million kilograms of cigar-
ettes per annum.

It has

II. The products and their distribution in

Italy

1. The products

(4)

The products concerned by these proceedings are
cigarettes (and not, therefore, other tobacco products
such as cigars, cigarillos, cut tobacco and snuff).

In 1995 legal sales of cigarettes in Italy totalled 90
million kilograms. The cigarettes were manufac-
tured, variously, in Italy (about 54 million) by AAMS
and in other Member States (about 36 million).

In recent years the market shares held by the
various producers have been as follows:

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

AAMS

62,2

61,9

61,1

58,4

56,0

51,5

48,5

48,5

45,1

43,6

42,1

Philip Morris

30,4

30,9

31,8

34,1

36,3

40,1

42,6

42,9

46,9

49,9

51,6

BAT

Rothmans

Reynolds

Others

2,9

1,1

1,5

1,9

2,9

1,1

1,6

1,6

2,6

1,2

1,8

1,5

2,7

1,3

2,0

1,5

2. Distribution of the products in Italy

The importation into Italy of cigarettes from other
Member States and their wholesale distribution
were ‘authorized' (cid:190) that is to say liberalised (cid:190) by
Article 1 of Law No 724 of 10 December 1975 (4),
which provided that, by way of derogation from
Article 45 of Law No 907/42 referred to above,
imports were authorised through distribution ware-
houses other
than those of AAMS provided,
however, that the warehouses had been authorised
the
by the financial administration and that
imports were already contained in the table listing
the selling prices of cigarettes. Subsequent decrees
of
the Finance Ministry, and in particular the
Ministerial Decree of 26 July 1983, laid down the
criteria and arrangements for obtaining authorisa-
tion to set up warehouses and the rules governing
the movement of the imports.

However, until now all Community cigarettes have
been imported into Italy by AAMS, which also
handles their wholesale distribution on the basis of
agreements concluded by it with the foreign manu-
facturers wishing to sell their cigarettes in Italy.

2,7

1,6

2,1

1,3

(6)

(7)

(8)

2,9

2,0

2,3

1,2

3,1

2,4

2,3

1,1

2,9

2,4

2,2

1,0

2,7

2,4

1,9

1,0

2,2

2,1

1,4

0,8

2,0

1,9

1,5

0,9

Law No 1293 of 22 December 1957 (5) provides for
the organisation of the services for the distribution
and sale of articles subject to monopoly and, there-
fore, cigarettes. Under that Law, the services are
provided by:

(a) departmental inspectorates;

(b) warehouses;

(c) warehouse outlets;

(d)

‘magazzini';

(e) retailers.

inspectorates

departmental

(hereinafter
The
referred to as the ‘inspectorates') supervise the
distribution and sale of the monopoly goods. In
accordance with the rules laid down by the AAMS
Executive Board, they organise the said services and
ensure their smooth operation (Article 2 of Law No
1293/57). The inspectorates are part of AAMS and
are headed by AAMS officials having disciplinary
authority over the staff of
the inspectorate and
dependent bodies, and over ‘magazzini' staff and
retailers.

The warehouses for monopoly goods (also referred
to as primary distribution units (cid:190) hereinafter
referred to as ‘warehouses') are responsible for
storing
receiving

the monopoly

goods,

(4) GURI 1 4, 7. 1. 1976.

(5) GURI No 9, 13. 1. 1958.

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them and distributing them for sale (Article 3(1) of
Law No 1293/57). The warehouses collect the tax
on sales of monopoly goods and all
revenue
accruing to AAMS and pay them to the Treasury
(Article 3(2) of Law No 1293/57). They form part of
AAMS and are run by AAMS officials. There are
currently 21 warehouses.

The warehouse sales outlets remove the monopoly
goods from the warehouses against payment of the
appropriate amount and sell them to the authorised
retailers. Exceptionally, they may also supply, on
(Article
behalf of the warehouses, the ‘magazzini'
4(1) of Law No 1293/57). In order to carry out their
tasks, the sales outlets receive an allocation of ‘sale
or return' goods (Article 4(2) of Law No 1293/57).

(9)

(also referred to as

The ‘magazzini'
secondary
distribution units, but referred to hereinafter as
‘magazzini') collect the monopoly goods from the
warehouses and sales outlets against payment of the
corresponding amount and sell them to authorized
retailers. The ‘magazzini'
are managed under
contract by private individuals who receive an allo-
cation of ‘sale or return' goods and are required to
provide a guarantee (Article 5(1) and (2) of Law No
1293/57). The subcontractor is remunerated on the
basis of the agreed weight of the goods sold (Article
the
5(3) of Law No 1293/57). Management of
‘magazzini' is governed by Decree No 1074 of 14
October 1958 (6), by a detailed list of specifications
and by instructions
are
currently some 600 ‘magazzini'.

from AAMS. There

(10)

The retailers of monopoly goods
(hereinafter
referred to as ‘retailers') purchase their cigarette
supplies from the ‘magazzini' and stock them with
a view to selling them to the public.

The special retail stores were set up to satisfy
particular requirements of the retail sales service
and may be temporary in cases where it is not
possible to establish an ordinary store (Article 22 of
Law No 1293/57).

AAMS may also authorise sales of monopoly goods
in public commercial concerns, community centres
and cooperatives. Such special authorisation is
granted in the form of a ‘temporary licence' (Article
23 of Law No 1293/57).

All retailers are required to pay AAMS an annual
fee in proportion to their income and an additional
flat-rate annual fee (Article 26 of Law No 1293/57).
They are paid through a system of ‘premiums',
which means a fixed amount determined by decree
the Finance Ministry in agreement with the
of
Treasury and in the light of the opinion of the
AAMS Administrative Board (Article 24 of Law No
1293/57). When the retailer collects the monopoly
goods, he pays an amount corresponding to their
price, less the amount of the premium. Manage-
ment of the retail outlets is governed by Decree No
1074/1958, by a detailed list of specifications and
by instructions issued by AAMS.

There are at present some 58 000 retailers and
some 18 000 public retail outlets with a ‘temporary
licence'.

(11)

Even if Community cigarettes were brought direct
into Italy by operators other than AAMS and were
therefore sent to wholesale warehouses other than
those controlled by the latter, sales to the public
would nevertheless continue to be subject to the
monopoly. As a result, other importers would in
any event have to use the retailers referred to above
in order to sell cigarettes to the public.

The retailers are divided into ordinary and special
retail stores. State retail stores were abolished by
Law No 198 of 13 May 1993.

The ordinary retail stores are run by private-sector
managers under contracts of not more than nine
years’ duration (Article 19 of Law No 1293/57).
They are set up as and when AAMS deems it
necessary and useful in the interests of the service
(Article 21 of Law No 1293/57) and are classified as
first- or second-category stores, depending on the
revenue yielded by the premiums on tobacco and
tobacco products.

(6) GURI No 308, 22. 12. 1958.

III. Behaviour of AAMS

(12)

The behaviour of AAMS at issue here relates to:

(cid:190) the standard distribution contract concluded by
AAMS with certain cigarette manufacturers
under which the latter entrust AAMS with the
introduction and wholesale distribution of
cigarettes manufactured in another Member
State,

(cid:190) certain unilateral decisions taken by AAMS
concerning cigarettes manufactured in another
Member State and subsequently brought into
Italy.

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1. Distribution contracts

(13) AAMS has developed a model contract (hereinafter
referred to as the ‘distribution contract') for the
wholesale distribution in Italy of cigarettes manu-
factured in any other Member State by another
producer (hereinafter referred to as ‘foreign firm').
In that context, AAMS sends
the distribution
contract for signature by the foreign firm that plans
to entrust AAMS with the distribution of its cigar-
ettes in Italy. AAMS uses the same contract for all
foreign firms. The latest version of the contract was
produced at the end of 1993. It has a five-year
duration and ends on 31 December 1998.

(14)

The text of the distribution contract is unilaterally
foreign firms having no
laid down by AAMS,
option but to sign it as submitted.

(15)

The facts relating to the renewal of the most recent
distribution contract (end 1993/early 1994) show
that foreign firms have no opportunity to negotiate
any of the contract clauses or to suggest changes
that take account of their views and interests.

to

SAE

referred

It is pointed out in this connection that, by letter
dated 10 November 1993, R. J. Reynolds Tobacco
Company
as
(hereinafter
‘Reynolds') sent AAMS a ‘list of more specific
observations we should like to discuss with you
with a view to their subsequent incorporation in
the contract in the form of clauses'. AAMS did not
follow up the letter and simply presented Reynolds,
by letter dated 28 December 1993, with a new
distribution contract which did not take account of
Reynolds’ proposals contained in its letter of 10
November. Then, on 7 January 1994, AAMS
informed Reynolds that, if it did not receive formal
it would
approval of
suspend distribution and sales of its cigarettes.

the distribution contract,

Similarly,
the letters sent by British American
Tobacco (Deutschland) Export GmbH (hereinafter
referred to as ‘BAT')) containing proposals relating
to renewal of the contract received no reply.

‘Rothmans')

Finally, a request made by Rothmans International
BV (hereinafter
for
referred to as
discussions on the possibility of amending the
distribution contract met with the same response.
In reply to the request for discussions made by
Rothmans in its letter of 12 November 1993,
AAMS simply forwarded on 21 December 1993 the
text of the new contract, which took no account at
all of the proposals by Rothmans, which ‘wished to
reach . . . agreement to distribute [Rothmans] prod-
ucts in accordance with the provisions of the draft
contract . . . to avoid an interruption of continuity
in distribution . . .'. On 7 January 1994 AAMS

informed Rothmans that it had ‘studied with care
the said request' adding that ‘despite the best will
in the world, it has not been possible to integrate
them in the provisions of the contract already sent
to your company, a contract already approved,
moreover, by our administrative board. The draft
contract submitted for approval by your company
must, therefore, be regarded as definitive . . . We
await receipt of your copy of the contract, duly
signed . . . failing which AAMS will be compelled
to suspend the distribution and sale of your compa-
ny’s products.' Faced with this stance, Rothmans
informed AAMS by letter of 10 January 1994 that
it would sign the new contract but added, ‘We do,
however, want to express our regrets that it has not
been possible to include in the contract or even
discuss with you the points we mentioned in our
letter of 12 November 1993'.

The most
contract may be summarised as follows:

important clauses of

the distribution

(a)

(b)

the foreign firm entrusts AAMS with the
wholesale and retail distribution in Italy of the
brands of processed tobacco listed in the
appendix to the contract (first paragraph of
Article 1);

the list of tobacco brands in the appendix to
the contract is updated directly by AAMS in
consequence of and in conformity with admin-
istrative provisions issued by the competent
government authority concerning any new
additions to the price-list of brands (second
paragraph of Article 1);

(c) once a brand has been added to the price list,
AAMS allows the foreign firm, twice a year, to
introduce new brands in its distribution system
(third subparagraph of Article 1);

(d)

the foreign firm pays AAMS an amount calcu-
lated, in respect of each brand, on the basis of
parameters which take account of quantities
sold (Article 7 and Appendix C). The payment
for cigarettes is based on every kilogram sold
in accordance with the annual scale of sales
laid down for each brand:

(cid:190) up to 100 000 kg
and new brands:

(cid:190) from 100 001 kg
to 500 000 kg:

(cid:190) from 5 001 kg
to 1 million kg:

(cid:190) from 1 000 001 kg
to 3 000 000 kg:

(cid:190) over 3 000 000 kg:

ITL 4 430/kg

ITL 3 800/kg

ITL 3 600/kg

ITL 3 400/kg

ITL 2 900/kg

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(e) payment for products is subject to presentation
by the foreign firm of a monthly invoice in
respect of the quantities transferred during the
same period from the warehouses
to the
‘magazzini'. To that end, AAMS makes avail-
able within the first 10 days, and in any case
not later than the first 15 days of the following
month,
for each brand, a list showing the
status in respect of each warehouse. AAMS
then issues the order of payment to the State
Accounting Department (Contabile del Porta-
foglio dello Stato) within 25 days of the date of
receipt of the invoice from the foreign firm
(Article 9);

(f)

for the initial introduction of new brands, the
quantities of cigarettes
to be imported or
acquired by way of intra-Community acquisi-
tion may not exceed 5 000 kg (fifth subpara-
graph of Appendix B). As regards subsequent
imports and for the 12 months following the
first order, orders presented by AAMS will
correspond to sales for the previous month
(sixth paragraph of Appendix B);

(g) AAMS undertakes to order from the foreign
firm the quantities of products necessary to
ensure that uninterrupted supplies are available
to the primary and secondary distribution
units, according to actual market demand (first
subparagraph of Article 2);

(h)

the monthly quantities necessary to ensure that
those aims are achieved are determined as
follows:

(cid:190) the stock at the warehouses at the starting
date of the contract and at the beginning of
each subsequent calendar year is based on
the average monthly sales of the previous
year, commensurate with the number of
months, as follows: two months for brands
whose monthly sales do not exceed 500
000 kg and one month for the others (first
paragraph of Appendix B),

(cid:190) the foreign firm supplies monthly orders
sold
commensurate with the quantities
during the preceding month (second para-
graph of Appendix B),

(cid:190) if the foreign firm intends to introduce
extra supplies of products in excess of
those defined above but not exceeding
30 % of
the monthly order allowed for
each brand, then the amount of such extra
supplies must be agreed with ARMS, taking
account of
the latter’s actual handling
capacity and foreseeable demand (fifth
subparagraph of Article 2),

(cid:190) should the foreign firm introduce extra
supplies of cigarettes, the payment due to
AAMS is increased by ITL 600 per kg,
calculated on the basis of the total quantity
supplied during the month in question
(sixth subparagraph of Article 2);

the quantities of cigarettes ordered by AAMS
are to be supplied by the foreign firm on the
basis of monthly plans for distribution among
the warehouses, agreed on each individual
occasion by the two firms (second subpara-
graph of Article 2);

the foreign firm supplies cigarettes packaged
in accordance with current
In
addition, the cigarettes must have the word
‘Monital' printed on them lengthways (first
subparagraph of Article 4);

regulations.

(i)

(j)

(k) AAMS may carry out inspections and qualita-
tive analyses on samples of imported cigarettes
(first subparagraph of Article 5). To that end,
the foreign firm is required to pay a fixed
annual
each brand (second
amount
subparagraph of Article 5);

for

(l)

‘magazzini' and retailers

the foreign firm is entitled to appoint its own
representative in Italy, who may visit ware-
houses,
(first and
second subparagraphs of Article 10). In order
to carry out these tasks, the representative may
employ staff (fourth subparagraph of Article
10). The appointment of the representative and
of
staff must be notified to AAMS (fifth
subparagraph of Article 10);

(m) both the foreign firm and AAMS agree to
desist from any form of cigarette promotion or
the granting of incentives to wholesalers and
retailers. In the event of repeated breach and
proven liability of the foreign firm or one of its
representatives,
the foreign firm may not
undertake the abovementioned visit without
having previously replaced the representative
concerned (sixth subparagraph of Article 10);

(n)

the foreign firm undertakes to supply to AAMS
cigarettes that do not conflict with the relevant
laws in force in Italy. In the event of any
breach of this obligation, the foreign firm must
withdraw the product and bear all expenses
connected with the withdrawal, accepting all
responsibility stemming from the marketing of
the product (Article 11);

(o) AAMS is entitled to return to the foreign firm
cigarettes that are no longer in perfect condi-
tion on account of lengthy storage or accident.
In such cases, any expenses connected with
returned goods are borne by the foreign firm
(fifth and sixth subparagraphs of Article 13);

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(p) AAMS undertakes to observe impartiality in its
distribution network, at any time and at any
level
thereof, with regard to all products
distributed, whether Italian or foreign, however
well known or important, ensuring that such
products are distributed at the various sales
outlets in accordance with market require-
ments (Article 12);

(q)

the distribution contract runs for five years
(first subparagraph of Article 15). However, if
the foreign firm decides to distribute its own
cigarettes, directly or indirectly, to wholesalers
the distribution contract may be
in Italy,
terminated by either party subject to notice of
three months (second subparagraph of Article
15).

2. Unilateral decisions concerning imported cigar-

ettes

refused to grant

increases
In April 1996 it
requested by Rothmans of up to 30 % in quantities
of Lord cigarettes. In August 1996 it refused to
grant
increases of up to 30 % in the cigarette
brands listed by Rothmans.

In August 1996 AAMS refused to grant increases of
up to 30 % in quantities of Barclay, Barclay UL,
Kim Menthol and Lucky Strike 10s cigarettes
requested by BAT. The refusals caused stocks to fall
below the levels provided for in the distribution
contract.

(18) AAMS constantly coordinates and supervises the
distribution activities of the ‘magazzini'. According
to AAMS, the purpose of the monitoring is to allow
it to assess real market requirements and supply
flows.

(16)

In recent years AAMS has acted in a manner which
has had a direct effect on the position in Italy of
cigarettes manufactured in another Member State
and then brought into Italy. Its actions may be
summarised under the following headings:

However, on several occasions, AAMS instructed
the ‘magazzini'
to reduce orders for introduced
cigarettes and/or increase orders for AAMS cigar-
ettes, threatening them with proceedings if they
failed to comply.

(a) refusal by AAMS to increase the quantities
imported and distributed under the distribution
contract;

(b) measures taken by AAMS in respect of

the
‘magazzini' in order to favour its own brands to
the detriment of competing brands;

(c) action taken by AAMS in respect of retailers in
order to favour its own brands to the detriment
of competing brands.

(17) As was

stated (point 15(h),

third and fourth
indents), foreign firms may apply to AAMS for an
increase in the quantities allowed onto the Italian
market up to a maximum of 30 % of the monthly
order. However, such an increase is subject
to
approval by AAMS.

the documents listed in and
On the basis of
appended to the statement of objections, it is clear
that AAMS refused to give approval in several cases
without adequate justification.

In 1995 AAMS refused on four occasions to allow
increases requested by Reynolds of up to 30 % in
quantities of Amadis cigarettes.

There are a number of examples of such behaviour:

(cid:190) in January 1990 Reynolds informed AAMS that
a number of warehouses had repeatedly cut
supplies of certain brands of cigarettes intended
for the ‘magazzini',

(cid:190) in October 1993 an inspectorate sent a letter to
the ‘magazzini' on its territory informing them
that, as far as some foreign brands and,
in
certain cases, all foreign brands were concerned,
it had identified ‘excessive stocks in relation to
therefore instructed
market requirements'. It
the local warehouse ‘to specifically check
requests for supplies in order to improve the
balance of stocks and rationalise the manage-
ment of allocations' granted to the ‘magazzini',

(cid:190) on an unspecified date another inspectorate
sent a letter to the ‘magazzini' on its territory
with almost exactly the same content as that
referred to above,

to the

‘magazzini' on its

(cid:190) in January 1994 an AAMS inspectorate sent a
letter
territory
requiring them ‘to comply with the abovemen-
tioned sales quota . . . in order to maintain if
not improve, where possible, the market shares
of AAMS brands'. The inspectorate also added
that ‘it goes without saying that an increase in

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sales of foreign products must go hand in hand
with a proportional
increase in the sales of
domestic products. Exceptional sales of non-
domestic products will in any case have to be
offset within the next two months so that the
“magazzino” in question obtains at the end of
1994, in relation to the market share referred to
above, the following result. . .',

(cid:190) in March 1994 an inspectorate sent a letter to
the ‘magazzini' on its territory requesting them
to take action to achieve the market shares
(domestic products/foreign products) laid down
by the inspectorate in an earlier letter,

(cid:190) in February 1995 an AAMS inspectorate sent a
letter to a ‘magazzino' stating that a retailer had
received a consignment of
foreign cigarettes
which appeared to be high in relation to the
total consignment of all products and higher
even than the quantities of consumer goods
taken. The inspectorate therefore decided that,
in future, foreign cigarettes would be supplied
only in quantities corresponding to the percen-
tage of sales achieved by the ‘magazzino'
in
question,

(cid:190) in July 1995 an AAMS inspectorate sent a letter
to a ‘magazzino' informing it that, according to
the checks it had carried out, the ‘magazzino'
had on several occasions requested a warehouse
to supply quantities of foreign products which
were ‘normally purchased in smaller quantities,
based far more closely on sales',

(cid:190) in November 1995 an AAMS inspectorate sent
a letter to a ‘magazzino' inviting it to reduce its
stocks of foreign products ‘to bring them to the
level essential
to overall operating require-
ments'.

(19) AAMS also constantly monitors the trading activ-
ities of retailers as it is kept informed, by means of
a system of standardised forms, of the choices of
the retailers in question concerning their cigarette
orders.

had infringed the principle of impartiality in
the distribution of products,

(cid:190) in February 1995 an AAMS inspectorate
informed a retailer that ‘the minimum quantity
of monopoly goods which must be kept perma-
nently in stock in the shop you manage . . . has
been fixed',

(cid:190) in February 1995 an AAMS inspectorate
it had ordered an
that
informed a retailer
abnormally high quantity of foreign cigarettes
compared with its total orders and with the
quantities of products having a higher turnover,

(cid:190) in April 1996 an AAMS inspectorate suspended
supplies of cigarettes to a retailer because the
latter had not only failed to promote the sale of
domestic cigarettes but had also culpably
favoured the distribution of a competitor’s
cigarettes.

PART II

LEGAL ASSESSMENT

A. ARTICLE 86 OF THE TREATY

(20) Article 86 of the Treaty prohibits as incompatible
with the common market any abuse by one or
more undertakings of a dominant position within
the common market, or in a substantial part of it,
in so far as it may affect trade between Member
States. In order to determine the applicability of
Article 86 to the present case, it is necessary to
decide whether the conditions set out in the Article
have been met.

Various examples show that AAMS has pursued its
monitoring activities with a view to favouring the
cigarettes it produces itself. To that end, it should
be noted that:

(cid:190) in March 1995 an AAMS inspectorate repri-
manded several retailers for having obtained, as
foreign
from November 1994, quantities of
to the
comparable
cigarettes which were
monthly sales of virtually the whole sector. For
that reason, it considered that those retailers
were favouring the cigarettes in question and

I. The undertaking

(21) AAMS is an entity engaged in economic activities
that are both industrial (production of manufac-
tured tobacco) and commercial (wholesale distrib-
utor of processed tobaccos) in nature. According to
the case-law of the Court of Justice (7), it therefore
constitutes an undertaking within the meaning of
Articles 85 to 90 of the Treaty. The fact that AAMS
does not have a separate legal personality from that
of the State does not affect this conclusion.

(7) Case 118/85 of 16 June 1987, Commission v. Italy [1987]

ECR, p. 2599.

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administration has

Although the State has a single legal personality,
Italian law recognises that each ministry and each
autonomous
its own legal
personality and, therefore, the capacity to be a party
to legal proceedings independently (legitimatio ad
causam). In order to achieve its ends, an auto-
nomous administration may make use of an
administrative system which, although continuing
to belong to the State, nevertheless enjoys consider-
autonomy (autonomy with
able organisational
regard to management, decision-making, assets and
budget).

The fact that the Italian State has delegated certain
public authority powers to AAMS does not mean
that
the Community competition rules do not
apply to the behaviour of AAMS in its business
activities
(production of goods and supply of
services) (8).

II. The relevant markets

In order to determine whether AAMS holds a
dominant position within the meaning of Article
86 of the Treaty, it is necessary to define the rele-
vant market (cid:190) that is, the economic sectors and
geographic areas forming the background to an
assessment of the economic strength of AAMS with
regard to its competitors and customers.

1. The markets for products and services

From the standpoint of products and services, it is
necessary to distinguish three markets. The first
consists of a group of products, whilst the other two
correspond to the supply of services.

First, there is the market for cigarettes produced in
Italy or in other Member States of the Community
for distribution and sale on Italian territory in order
to satisfy smokers’ demand (hereinafter referred to
as
various
competing cigarette manufacturers on this market
which endeavour to attract
the largest possible
number of consumers to their own brands and
ensure that existing customers remain loyal.

‘cigarette market'). There

the

are

Secondly, there is the market for services relating to
the distribution and wholesale of the abovemen-
tioned cigarettes (hereinafter referred to as the
‘wholesale distribution market'). On this market,
AAMS collects the cigarettes from the place of
manufacture (or, in the case of cigarettes manufac-
tured abroad, at the frontier), stores them in its own

(22)

(23)

(24)

(25)

warehouses and distributes them to ‘magazzini' or,
through the warehouse outlets,
to retailers. The
‘magazzini' stock the cigarettes and sell them on to
authorised retailers.

(26)

Lastly, there is the market for services relating to
the retailing of the cigarettes (hereinafter referred to
as the ‘retail distribution market'). There are some
58 000 authorised retailers of monopoly goods and
18 000 public outlets with a ‘temporary licence'.

(27) Although the markets in question are separate, they
are clearly highly interdependent,
so that any
action taken in one of them can have an appreci-
able effect on the others. This is particularly so
with the cigarette market, as the competitiveness of
economic operators is considerably influenced by
the way in which their products are affected by
activities in the wholesale and retail distribution
markets.

2. The geographic markets

(28)

From a geographic point of view,
the markets
outlined at points 24, 25 and 26 are located on
Italian territory. In the light of the Commission
notice on the definition of relevant market for the
purposes of Community competition law (9), that
territory must be regarded as separate from the
territories of
the
following reasons:

the other Member States for

(cid:190) the preferences of Italian smokers are different
from those of smokers in other Member States;
see point 46 of the Commission notice. The
brands produced by AAMS have a very high
market share in Italy (42,1 %), although they
are virtually non-existent
in other Member
States. In addition, the Philip Morris brands
have a much higher market share in Italy than
in the other Member States,

(cid:190) the retail prices for cigarettes differ consider-
ably from those in other Member States,

(cid:190) in order

to meet

the requirements of

the
prevailing Italian regulations, all foreign manu-
facturers wishing to sell their products in Italy
are required to label their cigarette packages
with appropriate warnings (such as:
‘tobacco
seriously damages your health') in Italian. Such
differences in the market should be taken into
account even if they stem from legal texts (see
point 50 of the Commission notice),

(8) Judgment of the Court of Justice of 20 March 1985 in Case

41/83 Italy v. Commission [1985] ECR, p. 873.

(9) OJ C 372, 9. 12. 1997, p. 5.

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(cid:190) there are no imports and/or exports by entities
other than the producers (in other words, there
are no parallel imports of cigarettes).

3. Conclusions concerning the relevant markets

(29) On the basis of the foregoing, it must be concluded
that the relevant markets for the purposes of the
present proceedings are as follows:

(cid:190) the Italian market for cigarettes,

(cid:190) the Italian wholesale distribution market,

(cid:190) the Italian retail distribution market.

III. The position of AAMS on the relevant

markets

1. The position of AAMS on the Italian market

for cigarettes

(30)

The Italian cigarette market consists of a duopoly
made up of Philip Morris and AAMS (together,
they hold some 94 % of the market), while other
firms have only a marginal share of the market
although they occupy stronger positions in other
Member States. This situation has existed for at
least 10 years. It should, however, be pointed out
that, although the combined market share of the
duopoly has remained virtually unchanged (over
90 % in any event), the share held by Philip Morris
has risen consistently and markedly in the last few
years whilst that of AAMS has fallen by roughly the
same amount. Philip Morris is therefore the only
firm to benefit from AAMS’s regular loss of market
share, the other firms having generally retained the
same share.

2. The position of AAMS on the Italian wholesale

distribution market

(31) With regard to the wholesale market, it should first
be noted that Italy has adopted legislation liber-
alizing the import and wholesale distribution of
cigarettes (10). As a result, any firm satisfying the

(10) Article 1 of Law No 724/1975.

extensive

requirements of the laws in force may engage in
the wholesale distribution of cigarettes on Italian
territory. A Community cigarette manufacturer
could create its own distribution network or use the
services of a wholesale distributor already operating
in Italy. However, until now no producers have
taken advantage of
the possibility, preferring to
continue to use the AAMS network to distribute
their products in Italy. It must be borne in mind
when analysing this choice that foreign firms have
considerable financial difficulty in setting up a
sufficiently
independent distribution
network. Furthermore, no firms (other than AAMS)
are at present engaged in wholesale distribution
which could possibly be used for such activities,
nor is the economic climate likely to encourage
Italian firms to seize the opportunities afforded by
the rules in force in order to enter the market.
Lastly, there are the very specific characteristics of
the Italian distribution system in the cigarette
sector (very strict control by AAMS of the activities
of
the deeply
ingrained habit of the ‘magazzini' and retailers of
inter-
having AAMS as
locutor, etc.). It must therefore be concluded that
foreign manufacturers have not had (and still do
not have) a viable alternative enabling them to
choose differently and that, therefore, AAMS is a
‘mandatory partner' for such firms.

sole commercial

and retailers,

‘magazzini'

their

the

AAMS is thus the only operator present on the
Italian market
for the wholesale distribution of
cigarettes and it therefore has a de facto monopoly.

In the course of these proceedings, AAMS argued
that since 1 January 1993 foreign firms have been
able to entrust the wholesale distribution of cigar-
ettes to a number of traders with bonded ware-
houses currently used to market other products
liable to excise duty (and are therefore subject to a
similar administrative and accounting regime as
cigarettes) (11).

In considering these arguments, it must be borne
in mind that bonded warehouse operators wishing
to distribute cigarettes under the relevant legisla-
tion would encounter
insurmountable financial
obstacles. First and foremost, Italian regulations
require manufactured tobaccos to be kept on sep-
arate premises from other bonded goods (such as
alcohol), and this would entail substantial invest-
ment by the economic operators concerned.

(11) The Decree Law of 31 December 1992, converted into Law
transposes into Italian law
No 427 of 29 October 1993,
Council Directive 92/12/EEC on the intra-Community move-
ment of products subject
to excise duty (OJ L 76, 23. 3.
1992, p. 1), as last amended by Directive 96/99/EC (OJ L 8,
11. 1. 1997, p. 12).

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Furthermore, the potential purchasers of cigarettes
(essentially the retailers) are very different from the
customers for other excise goods (such as retailers
in the food distribution sector,
in respect of
alcohol). This would involve setting up a new trans-
port and distribution structure without the chance
to benefit
from operational synergies with the
existing distribution structure.

Finally, it should be borne in mind that the market
share held by foreign manufacturers (excluding
Philip Morris, which is tied to AAMS by licensing
contracts) is extremely small (about 7 %) and does
not, therefore, provide a sufficient financial incen-
tive for firms wishing to compete against AAMS in
the wholesale distribution of tobacco. It is clear that
it would not be in the interests of retailers to obtain
supplies from a different wholesaler if the latter
could supply them only with a small proportion of
the cigarettes they required.

It must be concluded from the foregoing that
AAMS holds a dominant position within the
meaning of Article 86 of the Treaty on the Italian
market for the wholesale distribution of cigarettes.

3. The position of AAMS on the Italian retail

distribution market

(32) With regard to the retail market, the Italian State
has prohibited AAMS from engaging in the direct
retailing of cigarettes. On the other hand, AAMS
retains sole administrative authority to issue the
licences to operate as a retailer. The licences do
not, however, constitute a business activity because:

(cid:190) they represent an exercise of public authority
consisting in the issue of administrative acts in
the form of concessions granting authorisation
to engage in the retailing of cigarettes,

(cid:190) the fact that retail sales are subject to the issue
of licences by AAMS is not sufficient evidence
that the latter exercises economic control over
retailers. As a result, AAMS does not exercise de
facto control over
such as would
their independence on the
deprive them of
market. Retailers are therefore independent
firms in relation to AAMS, both legally and
commercially, and compete against each other.

retailers

It must therefore be concluded that AAMS is not
present on the market
for retail sales of cigar-
ettes (12).

(33)

IV. Abuses of a dominant position

The Court of Justice has consistently held (13) that
the concept of abuse is an objective concept
relating to the behaviour of an undertaking in a
dominant position which is such as to influence
the structure of a market where, as a result of the
very presence of the undertaking in question, the
degree of competition is weakened and which,
through recourse to methods different from those
which condition normal competition in products
or services on the basis of
the transactions of
commercial operators, has the effect of hindering
the maintenance of the degree of competition still
existing in the market or
that
competition.

the growth of

1. The distribution contracts

(34) As is stated at paragraph 31, AAMS holds a domi-
nant position on the market
for the wholesale
distribution of cigarettes, where it is the only oper-
ator present. As a result, foreign manufacturers have
invariably decided to use AAMS to distribute their
cigarettes in Italy.

In view of the factors described in point 31 above,
it would be reasonable to conclude that
the
decision of
the foreign firms to use AAMS to
distribute their cigarettes in Italy and to sign a
distribution contract to that end is based on under-
standable economic and commercial reasons.

scrutiny of

However,
the current distribution
contract reveals that some clauses give AAMS an
actual right of control and, whenever it considers it
expedient, a right to intervene in the many choices
facing a foreign firm which must be regarded as
essential to the firm’s competitive freedom. On the
basis of the clauses in question, AAMS is able to
limit the competitive initiatives of foreign firms on
the Italian market and thus protect the sale of its
own brands.

The clauses were imposed by AAMS since it unilat-
erally drafted the text of the distribution contract:
the foreign firms had the choice of signing it, as
drafted by AAMS, or dispensing with the latter’s
services for distributing their products in Italy. In
view of their very close dependence on AAMS, the
foreign firms were compelled to accept the clauses
imposed by AAMS in full, after expressing their
dissatisfaction.

(12) See the judgment of 14 December 1995 in Case C-387/93

Banchero [1995] ECR I, p. 4663.

(13) See the judgment of 13 February 1979 in Case 85/76 Hoff-

mann-La Roche v. Commission [1979] ECR, p. 461.

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It can therefore be concluded that AAMS exploited
its dominant position on the market for the whole-
sale distribution of cigarettes in order to incor-
porate in the distribution contract clauses allowing
it to control and even veto the competitive initia-
tives of the foreign firms, in order to protect its
own sales.

(37)

1.1. T h e c l a u s e s c o n c e r n i n g t h e i n t r o d u c -
t i o n o f n e w c i g a r e t t e b r a n d s o n t o t h e
m a r k e t

1.1.1. The clause relating to the time limit for the
introduction of new cigarette brands onto the
market

(35) Under the third subparagraph of Article 1 of the
distribution contract, AAMS allows foreign firms to
introduce new brands twice a year.

The clause limits the opportunities for a foreign
firm to launch new cigarette brands on the Italian
market at the moment it considers best. It must be
borne in mind that the seasons have a considerable
influence on certain brands of cigarettes. It may
therefore genuinely be in the interests of
the
foreign firm to introduce a brand on a given date
without being compelled to wait until AAMS has
decided to rule on the matter in accordance with
the abovementioned provision. In addition,
if a
manufacturer wishes to launch a new brand simul-
taneously throughout the Community, the delayed
introduction in Italy will compel it, for no reason
whatsoever, to modify its strategy and may harm its
competitiveness.

It must therefore be concluded that the imposition
the clause limiting the introduction of new
of
brands onto the Italian market
to twice a year
restricts the competitiveness of the foreign firm
and thus constitutes an abuse of a dominant posi-
tion within the meaning of Article 86 of the Treaty.

1.1.2. The clause relating to the maximum quanti-
ties of new cigarette brands allowed on the
market

(36)

The fifth paragraph of Appendix B of the distribu-
tion contract provides that the quantities of new
brands may not exceed 5 000 kg, while the sixth
paragraph of the Appendix provides that, in the
first year, orders from AAMS must be the same as
in the preceding month.

It should be noted that a producer must be free to
decide the conditions and arrangements for the
launch of a new product, including the quantity to
be marketed at the time of the launch. The relevant
provision of the contract deprives the foreign firm
of this facility.

In addition,
the quantity in question is totally
inadequate in relation to the requirements for
in Italy. Since the
launching a new product
minimum order that can be placed by a retailer is
one carton, only one third of retailers (or 25 000
out of 75 000 retailers) will be able to obtain the
new product at the time of the launch. However,
AAMS cigarettes and those manufactured under
licence are not subject
to the abovementioned
quantitative ceiling (14). As a result, the cigarettes of
foreign firms are discriminated against, compared
with AAMS brands, for no valid reason (15).

In fact,
the purpose of such a provision is to
impede the marketing of new foreign cigarettes or,
at the very least, to reduce their impact on the
market. This affects the competitiveness of
the
foreign firm, as the clause arbitrarily fixes at a very
low level the quantities that may be marketed when
a new product is launched.

Such a provision must be regarded as having a
in the event of a
particularly restrictive effect
foreign firm deciding to launch a new version (such
as ‘light' or ‘ultra light') of a widely marketed brand,
since it is likely in such a case that consumer
demand will be strong.

For these reasons it must be concluded that the
provision limiting the quantities of new products to
be placed on the market at the time of the launch
and in the following year constitutes a serious
restriction of the competitiveness of the foreign
firm and is accordingly an abuse within the
meaning of Article 86 of the Treaty.

1.2. T h e c l a u s e s

r e l a t i n g t o t h e m o n t h l y
q u a n t i t i e s o f c i g a r e t t e s a l l o w e d o n t h e
m a r k e t

1.2.1. The

clause

relating

the maximum
monthly quantities of cigarettes allowed on
the market

to

(38)

The second paragraph of Appendix B of
the
distribution contract provides that the quantities of
cigarettes of the foreign firm to be marketed in
Italy must be commensurate with the quantities
sold during the previous month.

(14) In the course of the proceedings, examples were provided of
recent launches of new brands by AAMS: in June 1996, the
first month of the launch, AAMS sold 33 217 kilograms of
MS E. Slim cigarettes and,
in July 1996, also in the first
it sold 35 543 kilograms of MS Personal cigarettes.
month,
than the
These quantities are some seven times greater
maximum allowed for foreign cigarettes.

(15) It was stressed in the course of the proceedings that AAMS
cigarettes are automatically distributed, from the first month
of being launched, to all ‘magazzini' and retailers.

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The clause restricts the freedom of foreign firms to
decide on the volume of goods to be sold. The
foreign firm is thus deprived of
the chance of
competing on the Italian market and taking full
advantage of the opportunities available. It must
therefore be concluded that the clause is designed
to protect the market position of AAMS cigarettes
and is indeed capable of doing so.

1.2.2. The clause relating to the increase in the
monthly quantities of cigarettes allowed on
the market

(39)

The clause in question does not appear to be justi-
fied by any objective need to protect any legitimate
interests of AAMS.
financial and/or commercial

(41)

First, AAMS has distribution capacities of some 102
million kilograms of cigarettes a year, which is
considerably in excess of actual market require-
ments in Italy (about 90 million kilograms). As a
result, it has far too much capacity, allowing it to
respond favourably to any requests from foreign
firms to increase the quantities distributed without
strengthening its distribution structures.

Furthermore,
the clause in question does not
appear to be justified by any need for the quantities
of foreign cigarettes distributed by AAMS to cor-
respond to actual market demand, as was argued by
AAMS in the course of the proceedings. It is not in
the interests of foreign firms to make available
through the AAMS distribution network more
cigarettes than the market can actually absorb
since, after a given time, they are required to with-
draw all unsold cigarettes stocked in AAMS ware-
houses at their own expense (Article 10 of the
if cigarettes
distribution contract).
remain in storage in the warehouses for a long
time,
the foreign firm must replace them with
other, more recent products.

In addition,

Lastly, the cigarettes produced by AAMS, whether
as its own brand or under licence, are not subject to
any comparable limitation and hence enjoy a
considerable
compared with
edge
cigarettes manufactured abroad.

competitive

(40)

For these reasons it must be concluded that the
imposition of the said clause constitutes an abuse
of a dominant position within the meaning of
Article 86 of the EC Treaty, despite the fact that it
allows for possible and partial derogation.

The fifth subparagraph of Article 2 of the distribu-
tion contract provides that the foreign firm may ask
AAMS to increase the quantities of cigarettes to be
placed on the Italian market. This possibility,
however, is subject to a threefold limitation. First,
the agreement of AAMS is required. Second, any
increases must not exceed 30 % of the ‘monthly
order allowed' (which must itself be commensurate
with sales in the previous months). Third, AAMS
approval of such increases gives rise to an obliga-
tion on the part of the foreign firm to pay a higher
distribution fee calculated not on the basis of the
‘additional' quantities, but on the basis of the entire
quantity supplied (sixth subparagraph of Article 2
of the distribution contract).

restricting the

the firm concerned by preventing it

These provisions seriously jeopardise the competi-
tive freedom of the foreign firms. A manufacturer
must be free to determine the quantities of prod-
ucts to be marketed. The need for AAMS approval
in order to increase quantities clearly has the object
of
foreign cigarettes.
sales of
Limiting increases to 30 % of the ‘monthly order
allowed' seriously jeopardises the competitiveness
of
from
responding in full
to existing demand on the
Italian market. This has particularly serious effects
in the case of cigarette sales, which are strongly
for example, a
affected by the seasons. Thus,
foreign firm might be unable to meet the demand
for a particularly popular brand of cigarettes during
the summer months and might have to content
itself with increasing the average quantities sold in
off peak months by 30 %. Lastly, the obligation to
pay AAMS an additional amount calculated on the
basis of total quantities in the event of an increase
in quantities does not appear to be in any way
justified. The distribution fee is structured in such a
way that its amount gradually diminishes as the
quantities sold increase (thus the fee for annual
sales in the 1 to 3 million kilogram range is ITL
3 400 per kilogram, whereas the fee for sales in
excess of 3 million kg is ITL 2 900 per kilogram).
Accordingly, an increase in quantities sold should
lead to a reduction in the distribution fee and not
to an increase as provided for in the contract.

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is

It thus seems clear both that the sole aim of the
provisions
from
increasing in response to market demand the quan-
tities sold on the Italian market, and that the provi-
sions are capable of achieving that aim.

foreign firms

to prevent

(42) According to AAMS, the clause in question is justi-
fied in the first instance by the need to avoid
excessive financial risk in the form of the payment
made for quantities of foreign cigarettes exceeding
market requirements. AAMS points out that the
distribution contract requires it, no later than the
15th day of each month, to inform the foreign firm
of the quantities of cigarettes that have left its
warehouses and, within 25 days of the date of the
receipt of the invoice from the foreign firm, to
issue the order of payment. In practice, therefore,
AAMS is required under the contract to arrange
payment within some 50 days of removal of the
foreign cigarettes from the warehouses. AAMS also
claims that, in view of the fact it is paid only when
the retailer purchases the cigarettes from the ware-
house, it runs the risk of having to advance sums
for a considerable period.

has

not

any

AAMS
information
provided
concerning the average time spent by cigarette
stocks in the warehouses; it has referred only to a
general risk of excessive periods of storage (16). On
the other hand, Rothmans stated at the hearings
that the average stock turnover rate was 20 days and
that, therefore, AAMS would not in general incur
any financial exposure but would, on the contrary,
benefit from a financial advantage of 30 days (as it
waits 20 days to receive payment and about 50 to
pay).

(43)

Secondly, AAMS claims that the clause in question
is justified by the need to avoid a number of nega-
tive economic consequences. It claims that the fact
that a foreign firm withdraws at its own expense
cigarettes which have remained too long in ware-
house storage is not sufficient to prevent AAMS
from having to bear certain financial costs, e.g.
expenditure on rail transport from the Italian fron-
tier to the warehouse, for unloading the wagons, for
stock management. However,
storage and for
AAMS has not given any figures on the extent of
the financial charges.

The clause appears to be disproportionate to the
objective. The parties could instead operate under
other non-restrictive measures designed to take
account of actual expenditure incurred by AAMS
on cigarettes which have remained unsold in its
warehouses and have therefore been removed by
the foreign firm.

the parties could incorporate into the
Lastly,
contract similar measures aimed at reimbursing
actual expenditure incurred by AAMS in connec-
tion with unsold cigarettes in ‘magazzini' (a hypo-
thetical
occur
frequently, for the reasons stated in point 42).

situation that

is unlikely

to

(44)

It is clear from the foregoing that the relevant
clause in the distribution contract concerning the
possibility of increasing the quantities of foreign
cigarettes distributed on the Italian market consid-
erably restricts the competitive scope of foreign
manufacturers and, therefore, constitutes an abuse
of a dominant position under Article 86 of the
Treaty.

1.3. T h e

c l a u s e s
a n d q u a l i t y c o n t r o l

c o n c e r n i n g

p a c k a g i n g

It can also be assumed that the ‘magazzini' operate
a rational commercial policy and do not therefore
usually acquire foreign cigarettes liable to stay in
stock for a long time. On the contrary,
it can
reasonably be
‘magazzini'
assumed that
purchase their stock from the warehouses on the
basis of actual demand from retailers, thus gener-
ally ruling out the risk of excessive storage periods
(and the associated financial risk for AAMS).

the

(16) AAMS states only that ‘products may remain in stock for a
long time in the distribution circuit (i.e.
in the warehouses
themselves) before reaching the retailer, in other words before
the moment at which [AAMS]
receives from the tobacco
retailers the price for the sale of the products'.

1.3.1. The clause concerning the printing of the

word ‘Monital' on the cigarettes

(45) Article 4 of the distribution contract requires the
foreign firm to print the word ‘Monital' (an abbre-
viation of ‘Italian monopolies') on each cigarette
intended for sale on the Italian market.

The obligation does not appear to be justified by
the need to distinguish legally marketed cigarettes
from contraband cigarettes, since it would suffice
simply to affix to each packet of cigarettes the
mark provided for by Article 4 of Law No 724/975,
as cigarettes cannot be sold singly.

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In addition, the obligation is a means of promoting
AAMS through a competing product. Lastly, the
obligation may create doubt on the part of
consumers as to the identity of the cigarette manu-
facturer in question.

It must therefore be concluded that the imposition
of the clause in question constitutes an abuse of a
dominant position under Article 86 of the Treaty.

amount in that connection is therefore an abuse of
a dominant position under Article 86 of the Treaty.

2. Unilateral action with regard to imported

cigarettes

1.3.2. The clause relating to quality control

2.1. R e f u s a l

t o

a u t h o r i s e

i n c r e a s e s

i n

c i g a r e t t e i m p o r t s

(46)

The quality controls provided for in Article 5 of the
distribution contract cannot be regarded as neces-
sary to enforce compliance with the rules in force;
as a result, their imposition by AAMS is not justi-
fied. Consequently, AAMS cannot require a foreign
firm to pay an annual amount for each packaging
of each brand as payment for such inspections and
analyses.

(47) AAMS on several occasions refused to allow foreign
firms to increase quantities of imported cigarettes
(see point 17). Its behaviour had the effect of
preventing foreign firms from marketing in Italy
the quantities of cigarettes they considered desir-
able and hence weakened their competitiveness.

Article 11 of the distribution contract requires the
foreign firm to supply to AAMS products that do
not conflict with the relevant legislation in force in
Italy. The legislation gives effect to Council Direc-
tive 89/662/EEC (17), as amended by Directive 92/
41/EEC (18) on the labelling of tobacco products,
and Council Directive 90/239/EEC (19) on the
maximum tar yield of cigarettes, which aim inter
alia at eliminating obstacles to intra-Community
trade and hence the need for controls.

Furthermore, such controls cannot be justified by
the need to protect AAMS from possible liability
for having distributed cigarettes that fail to conform
to the rules in force. Under Italian Law No 224 of
24 May 1988 giving effect to Council Directive
85/374/EEC (20) on liability for defective products, a
distributor is liable only if the manufacturer cannot
be identified.

It thus seems that, in practice, the controls had the
effect of unjustifiably delaying the launch of new
brands of foreign cigarettes on the Italian market,
as no new brands can be marketed until AAMS has
completed its checks.

The clause requiring the foreign firm to allow
AAMS to check its products and pay a fixed

(17) OJ L 359, 8. 12. 1989, p. 1.
(18) OJ L 151, 11. 6. 1992, p. 30.
(19) OJ L 137, 30. 5. 1990, p. 36.
(20) OJ L 210, 7. 8. 1985, p. 29.

Under the distribution contract, AAMS has the
right to reject requests for increases of more than
30 % in the monthly order allowed, whilst below
that threshold (that is, for increases of 0,1 % to
30 %)
for
increases. The AAMS refusals referred to above
concern requests for increases complying with the
contract (see point 17).

it can approve or

requests

reject

as

In its observations on the statement of objections,
the abovementioned refusals
AAMS stated that
were not unjustified because:
regards
(a)
Reynolds, on 30 June of 1983, 1984, 1985 and
1986, in relation to a market share of 1,9 %, 1,4 %,
1,5 % and 1,6 % respectively, stocks in AAMS
warehouses amounted to 3,47 %, 1,78 %, 1,60 %
and 1,79 %; (b) as regards Rothmans, on 30 June of
1983, 1984, 1985 and 1986, in relation to a market
share of 2,4 %, 2,1 %, 1,9 % and 1,8 % respec-
tively, stocks in AAMS warehouses were 3,7 %,
2,87 %, 2,95 % and 3,06 % of total cigarettes in
AAMS warehouses.

The comparison between the market shares of the
foreign firm and the percentage of that firm’s prod-
ucts in relation to total stocks in the warehouses is
entirely without relevance as a justification for the
behaviour of AAMS. A valid point would have been
to check whether the stocks in AAMS warehouses
could satisfy actual market demand for a specific
brand of cigarette (and not for all the brands of a
given foreign firm) at a specific time of year. AAMS
has not provided any data to allow such an assess-
ment to be made.

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It is worth noting, however, that the distribution
contract itself provides that cigarettes stocks (of a
given brand with monthly sales of under 500 000
kilograms) in warehouses must be equal to double
the average monthly sales (of that brand) in the
previous year
the distribution
(Appendix B of
contract). Such a clause (not called into question by
this Decision) is consistent with normal commer-
cial policy as regards stock management and could
serve as a parameter for assessing requests for
increases presented by foreign manufacturers.

The data provided by AAMS do not distinguish
between the various brands of each foreign firm.
However, the data for all brands show that ware-
house stocks were lower than those provided for in
the distribution contract and that consequently the
requests for increases were justified.

the refusal

Accordingly,
the increases
requested by the foreign firms constitutes an abuse
of a dominant position under Article 86 of the
Treaty.

to grant

2.2. B e h a v i o u r w i t h r e g a r d t o t h e ‘ m a g a z -

z i n i '

(48) AAMS supervises the activities of the ‘magazzini'
through its own inspectorates. On various occa-
sions, AAMS inspectors did not confine themselves
to exercising the supervisory powers conferred on
AAMS by the legislation in force but took action
aimed specifically at favouring domestic cigarettes
and limiting sales of imported cigarettes (see point
18). As such behaviour does not form part of the
public supervisory powers entrusted to AAMS, it
constitutes an action of an undertaking. The fact
that the behaviour constitutes an administrative act
would tend, if anything, to aggravate the abuse.

applicable both to AAMS cigarettes and to foreign
cigarettes.

Such behaviour is not required by any current
legislation or by any contractual provision. On the
contrary, it is clearly in breach of Article 12 of the
distribution contract, which establishes the prin-
ciple of an impartial distribution system.

(50) Accordingly, such behaviour in respect of ‘magaz-
zini' constitutes an abuse of a dominant position
under Article 86 of the Treaty.

2.3. B e h a v i o u r w i t h r e g a r d t o r e t a i l e r s

(51) AAMS supervises the activities of retailers through
its own inspectors. On various occasions, AAMS
inspectors did not confine themselves to exercising
the powers conferred on AAMS by the legislation
in force but
took action aimed specifically at
favouring AAMS cigarettes and limiting sales of
imported cigarettes (see point 19). On those occa-
sions, the AAMS inspectors did not confine them-
selves to their power to supervise retailers (21) but
acted with the sole aim of specifically favouring the
business activities of AAMS to the detriment of its
competitors. Such behaviour is manifestly unrelated
to the public powers conferred on AAMS and
therefore constitutes an act of an undertaking
aimed at increasing the sales of AAMS cigarettes in
relation to those of foreign firms. The fact that the
behaviour in question is in the form of an adminis-
trative act does not alter that conclusion.

(52)

The anti-competitive effect of such behaviour is
particularly severe in the case of AAMS, which
required retailers to purchase minimum quantities
of domestic cigarettes or, without reason, ruled that
the quantities of foreign cigarettes requested by
retailers were excessive.

is not

Such behaviour
required by any rules
currently in force or by any contract provisions. On
the contrary, it is clearly in breach of Article 12 of
the distribution contract, which establishes the
principle of an impartial distribution system.

(53) Accordingly, such behaviour with regard to retailers
constitutes an abuse of a dominant position within
the meaning of Article 86 of the Treaty.

(49)

The restrictive effect of such behaviour was particu-
larly severe in the cases where AAMS required
‘magazzini' to comply with effective sales quotas

(21) According to AAMS, the supervisory power ‘is a power con-
sisting exclusively in checking that the activity of retailing
complies with the requirement of
the act granting such
powers'.

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12. 9. 98

3. Conclusions on the abuses of dominant position

of this Decision). The foreign firms were informed
of the amendment on 22 September 1997.

(54)

It is clear from the foregoing that AAMS, bene-
fiting from its dominant position on the market for
imple-
the wholesale distribution of cigarettes,
mented a number of abusive measures aimed at
protecting and strengthening its position on the
market
for cigarettes, having recourse to means
other than those on which normal competition is
based.

V. The effect on trade between Member States

(55)

The behaviour
referred to above is specifically
aimed at hampering the introduction, distribution
and sale in Italy of cigarettes manufactured in other
Member States and therefore clearly satisfies the
requirements relating to trade between Member
States.

B. ARTICLE 3 OF REGULATION No 17

(56) Article 3 of Regulation No 17 provides that, where
the Commission finds that there is an infringement
of Article 86 of the Treaty,
it may require the
undertakings concerned to bring such infringe-
ment to an end.

an end to the

There are therefore grounds for requiring AAMS to
put
are
continuing and to take the necessary steps to
the
the continuation or
prevent
infringements in question (22).

infringements

repetition of

that

I. Termination of the ongoing infringements

(57)

In order to determine which infringements are still
taking place, it is necessary to consider the meas-
ures taken by AAMS while the case was under
examination and after the initiation of proceedings.

AAMS informed the Commission by letter dated
10 October 1997 of an amendment to the model
distribution contract consisting in the deletion of
the clause limiting the possibility of introducing
new cigarette brands to twice a year (third para-
graph of Article 1 of the contract (cid:190) see point 15(b)
of this Decision) and the clause requiring the word
‘Monital' to be printed on the cigarettes (first para-
graph of Article 4 of the contract (cid:190) see point 15(j)

(22) In its judgment of 6 March 1974 in Joined Cases 6 and 7/73
Commercial Solvents v. Commission ([1974] ECR, p. 223), the
Court of Justice held that the Commission had discretionary
power to order measures to ensure its decision was effective,
by requiring undertakings to do certain acts (paragraph 45).

(58) On the basis of

the foregoing, AAMS should
modify the other abusive clauses of the distribution
contract, namely, the clauses referred to in point
15(f), (h) and (k), in order to eliminate the abusive
aspects referred to in points 36 to 44 and point 46.

II. Measures to prevent the continuation and

repetition of the infringements

(59)

In order to allow the Commission to ascertain
whether the infringement has been terminated and
cannot be repeated, AAMS should be asked to
communicate to the Commission the new distribu-
tion contracts, amended in accordance with the
information referred to in point 58.

(60) With regard to the unilateral behaviour referred to
in point 17, it is necessary to require AAMS to
in respect of foreign firms,
refrain from taking,
to such
measures having an equivalent effect
behaviour.

Accordingly, for a period of three years from the
date of notification of this Decision, AAMS should
present to the Commission, within two months of
the end of the calendar year, a report indicating for
the preceding year the quantities of foreign cigar-
ettes distributed by AAMS and any refusals (total or
partial) on its part to distribute such cigarettes.

(61) As regards the unilateral behaviour referred to in
points 18 and 19, it is necessary to take account of
certain measures taken by AAMS during the exam-
ination phase of the case and following the initia-
tion of proceedings.

First, in its letter of 25 July 1997, AAMS provided
the Commission with a copy of the circular sent on
16 June 1997 by its executive board to all
its
inspectorates. In that letter, AAMS first invited all
the inspectors ‘to refrain from initiatives which
may constitute an infringement of the principle of
impartiality. . . both in respect of tobacco produced
domestically and foreign tobacco'.
In addition,
AAMS prohibited ‘all initiatives aimed in any way
whatsoever at influencing retailers’ requests, even
by fixing in advance the level for stock turnover, a
practice which is incompatible with the obligation

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L 252/63

on retailers to base their orders on consumer
demand'. Lastly, AAMS required all its inspector-
ates to inform the AAMS executive board of all
measures ‘concerning the marketing of manufac-
tured tobacco which they intended to notify to the
“magazzini” and the retailers of monopoly goods'.

Secondly, it should be noted that, by letters dated
25 July and 10 October 1997, AAMS informed the
Commission that, by circular of 18 April 1997, it
had abolished the obligation on retailers to contri-
bute to the development of domestic tobacco sales
previously provided for in Article 15 of the general
terms and conditions applicable to contracts for
State monopoly goods shops (23). The obligation
was replaced by the following provision:
‘retailers
shall ensure that they observe impartiality in the
sale of tobacco, whether domestic or foreign, and in
their display and presentation, which must comply
with normal commercial practice' (Article 14(4) of
the new terms and conditions). The new provision
was referred to in the abovementioned circular of
16 June 1997. By circular of 24 September 1997,
the AAMS executive board sent to all its inspector-
ates the text of the new terms and conditions for
public contracts to operate monopoly goods shops,
comprising several amendments, including the one
referred to above. The circular also provides that ‘to
ensure that all retailers of monopoly goods are
informed of the new text appended, the inspectors
will make as many copies as there are outlets
supplied by the “magazzini” within their jurisdic-
tion, and will require the said “magazzini” to give a
copy to each retailer and obtain acknowledgment
of receipt'. Furthermore, in another circular dated
24 September 1997, AAMS provided the inspector-
ates with the text of the new terms and conditions
for public contracts to manage ‘magazzini' for the
sale of monopoly goods (24). The new text abolishes
the obligation to promote domestic tobacco pre-
viously imposed on the ‘magazzini' and enshrines
the principle of impartial distribution. The circular
also requires inspectors to send the new text to the
‘magazzini' located on their territory.

In view of the foregoing, it does not seem necessary
to impose specific measures on AAMS to ensure
that the abuses referred to in points 18 and 19 of
this Decision are not repeated.

(23) The terms and conditions for public contracts to manage
State monopoly goods shops are State measures and are not
to
covered by these proceedings. However,
the specifications is taken into account here as relevant to
the assessment of the need to impose specific measures on
AAMS to ensure that the abuses in question are not repeated.

the amendment

(24) See footnote 23.

C. ARTICLE 15 OF REGULATION No 17

(62) Where, intentionally or negligently, undertakings
infringe Article 86 of the Treaty, the Commission
may, under Article 15(2) of Regulation No 17,
impose fines on them of from ECU 1 000 to ECU
1 million, or a sum in excess thereof but not
exceeding 10 % of the turnover in the preceding
business year of the undertaking in question. In
order to determine the amount of the fine, regard is
had both to the gravity and the duration of the
infringement.

The infringement was perpetrated by AAMS,
which, whilst not having a legal personality as such,
is an undertaking within the meaning of Article 86
the Treaty. AAMS also enjoys organisational
of
autonomy (in particular as regards asset manage-
ment) and has its own capacity ad litem (see point
21).

In this case, it is appropriate to impose a fine on
AAMS in view of its behaviour. In order to deter-
mine the amount of the fine, account should be
taken of the gravity and duration of the infringe-
ment and of any aggravating and/or attenuating
circumstances.

I. Gravity of the infringement

(63)

In determining the gravity of the infringement,
consideration must be given to the nature of the
infringement, its actual impact on the market and
the extent of the relevant geographic market.

1. Nature of the infringement

(64)

The infringements of Article 86 of
the Treaty
committed by AAMS form part of a policy specif-
ically aimed at obstructing,
systematically and
severely, access to the Italian cigarette market for
restricting their
competing producers,
opportunities for increasing their share of
that
market.

and at

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12. 9. 98

(65)

the Treaty were
The breaches of Article 86 of
committed intentionally by AAMS, which was
specifically
through such behaviour,
severely to hinder access to the Italian cigarette
market for competing producers.

aiming,

It should be pointed out in this connection that, on
several occasions, certain foreign firms expressly
drew the attention of AAMS to the fact that many
clauses of the distribution contract appeared to be
incompatible with the Community competition
rules.

2. Actual impact on the market

(66)

(67)

In assessing the actual impact which the infringe-
ment has had on the market, two factors must be
taken into consideration: the existence of restrictive
State measures and the evolution of the Italian
cigarette market.

First, the difficulties encountered by foreign firms
in gaining access to (and developing their activities
on) the Italian market must to a large extent be
ascribed to the measures adopted by the Italian
State during the period concerned. It should be
stressed here that:

(cid:190) the Finance Ministry repeatedly omitted to
adopt decrees adding new cigarette brands to
the price list, despite being requested to do so
by foreign firms (no decree adding foreign
cigarette brands to the price list was adopted
between 1992 and 1997), with the result that
the new brands could not be placed on the
Italian market (25). Such failure to act on the
part of
the
the State authorities meant
clauses on the placing on the market of new
cigarette brands (see point 15(c) and (f) of this
Decision) were
and
without practical effect during the periods
concerned,

rendered inapplicable

that

the Minister

(25) It should be noted here that Italian law requires, as an ab-
solute precondition for placing a new brand of cigarettes on
the Italian market, publication in the Official Gazette of the
Italian Republic of a decree of
for Finance
adding the brand to certain schedules (Article 2 of Law No
825 of 13 July 1965 on the tax rules for products covered by
the State monopoly, as amended by Article 27 of Decree-Law
No 331 of 30 August 1993, converted by Law No 427 of 29
October 1993 (GURI No 225, 29.10.1993), and by Article 9
of Law No 76 of 7 March 1985.
(GURI No 65, 16.3.1985)).
The completion of this procedure is therefore to be regarded,
to all intents and purposes, as a pre-condition to the placing
on the market of new cigarette brands.

(cid:190) during the whole of the period in which the
infringements were committed, retailers were
required, under Article 15 of the general terms
and conditions, to contribute to the develop-
ment of domestic tobacco sales (26). The view
should therefore be taken, here too, that the
this State measure on the
adverse effect of
development of
foreign cigarette sales partly
neutralised the effect of the contractual clauses,

(cid:190) up to August 1993, Italy had not brought its
legislation into line with the Community rules
on determination of the retail selling prices of
imported manufactured tobacco (27). Before that
date, Italian legislation had not allowed foreign
firms freely to determine the retail selling
prices of their cigarettes and was therefore a
those firms to
factor limiting the ability of
compete. It was therefore also likely to hinder
the development of sales of imported cigarettes
on the Italian market, since foreign firms were
denied the freedom to set the prices of their
cigarettes in line with their own marketing
strategies.

(68)

Secondly, during the currency of the infringement,
AAMS’ market shares declined constantly and very
considerably. Despite the existence of the infringe-
ment and of the above restrictive State measures,
AAMS did not therefore succeed in reversing the
downward trend in the sales of its own cigarettes
on the Italian market. The infringement may, at
the very most, have had the effect of slowing down
a decline in AAMS’ market share which could
otherwise have been even more significant.

(This matter

(26) See point 61 and footnote 23.
(27) Article 5 of Council Directive 72/464/EEC of 12 December
1972 on taxes other than turnover taxes which affect
the
consumption of manufactured tobacco (OJ L 303, 31.12.1972,
p. 1).
is currently governed by Article 9 of
Council Directive 95/59/EC (OJ L 291, 6.12.1995, p. 40).) Up
to August 1993, Italian legislation (Article 2 of Law 825/65)
stipulated that ‘the inclusion of each product subject to the
State monopoly in the tariffs (...) and changes in that regard
shall be effected by decree of the Minister for Finance in
relation to the prices requested by suppliers for imported
goods, after obtaining the opinion of
the Administrative
Board for State Monopolies, and in relation to the prices
proposed by the said Board for other goods'. The Court of
Justice of the European Communities declared that Italy had
failed to fulfil its obligations under Article 5 of Directive 72/
464/EEC by retaining legislation which did not expressly
indicate and did not clearly entail an obligation on the part
of the competent administrative authority to observe, under
the conditions and within the limits laid down by the Direc-
tive, the principle that manufacturers and importers are free
to determine the maximum prices of manufactured tobacco
imported into Italy (judgment of 28 April 1993 in Case C-
306/91 [1993] ECR I, p. 2133). In order to bring its legisla-
tion into line with that judgment, Italy adopted Decree-Law
No 331/93, Article 27 of which, amending Article 2 of Law
No 825/65, provides that ‘retail selling prices and changes in
those prices shall be established in line with the requests of
manufacturers and importers'.

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3. Extent of the relevant geographic market

IV. Aggravating and attenuating circum-

stances

(69)

It should be borne in mind that the anti-compet-
itive effects of the infringement are limited to a
single Member State, Italy.

(75)

There are no aggravating or attenuating circum-
stances that would justify increasing or reducing
the above basic amount.

4. Conclusion regarding

the

gravity

of

the

infringement

(70)

In the light of the foregoing, the behaviour in
question can be regarded, on the one hand, as
constituting infringements of a nature and with a
purpose that are markedly anti-competitive and, on
the other hand, as having had effects on the market
that are in practical terms relatively minor and
limited to a single Member State.

In view of the concurrence of the above factors, it
must be concluded that the behaviour in question
constitutes a serious infringement.

(71)

Since the amount of the fine must be determined,
according to the gravity of the infringement, in
such a way that it constitutes a sufficiently strong
deterrent to any repetition of the infringement, an
amount of ECU 3 000 000 is appropriate.

(72)

II. Duration of the infringement

in content

The current model distribution contracts came into
effect on 1 January 1995 and are to expire on 31
in these
December 1998. The abusive clauses
contracts are identical
to the cor-
responding clauses in the previous model distribu-
tion contracts, which were concluded at the begin-
ning of 1985 and expired on 31 December 1993.
The 1985 model distribution contracts in turn
reproduced the corresponding clauses of the earlier
model contracts (which are not, however, taken into
consideration). On the basis of the information in
the Commission’s possession,
the infringement
appears to have been pursued for at least 13 years
(namely since 1985).

Furthermore, the unilateral abusive behaviour (see
points 16 to 19) extends over seven years (from
1990 to 1996).

(73)

In the light of the foregoing, it is clear that the
infringement has been in existence for a long time.
It is therefore appropriate to increase the amount
of the fine determined on the basis of the gravity of
the infringement by 100 % (or ECU 3 000 000).

III. Basic amount of the fine

(74)

In the light of the foregoing, the basic amount of
the fine should be fixed at ECU 6 000 000.

V. Amount of the fine

(76)

For the above reasons,
should be fixed at ECU 6 000 000.

the amount of

the fine

HAS ADOPTED THIS DECISION:

Article 1

Taking advantage of its dominant position on the Italian
market for the wholesale distribution of cigarettes, Ammi-
nistrazione Autonoma dei Monopoli di Stato (hereinafter
‘AAMS') has engaged in improper behaviour in order to
protect its position on the Italian market for cigarettes, in
breach of Article 86 of the EC Treaty, through the use of
clauses compulsorily inserted in distribution contracts as
set out in Article 2, and through unilateral practices as set
out in Article 3.

Article 2

The compulsory clauses improperly inserted by AAMS in
the distribution contracts are as follows:

(a)

the clause relating to the time limit for the introduc-
tion of new cigarette brands onto the market (third
paragraph of Article 1);

(b) the clause relating to the maximum quantities of
cigarettes allowed on the market (Appendix B, fifth
and sixth paragraph);

(c) the clause relating to the maximum monthly quanti-
ties of cigarettes allowed on the market (Appendix B,
second paragraph);

(d) the clause relating to increases in the monthly quanti-
ties of cigarettes allowed on the market (fifth and sixth
paragraph of Article 2);

(e) the clause relating to the printing of ‘Monital' on the

cigarettes (Article 4);

(f)

the clause relating to inspection and analysis of the
cigarettes (Article 5).

Article 3

The improper unilateral practices pursued by AAMS are
as follows:

(a) refusal to authorise increases in the monthly quanti-
ties of foreign cigarette imports requested by foreign
undertakings
in conformity with the distribution
contracts;

(b) behaviour with regard to ‘magazzini' and retailers,
designed to promote national cigarettes and to limit
sales of foreign cigarettes.

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Article 4

AAMS shall forthwith put an end to the infringements
referred to in Articles 2 and 3, in so far as it has not
already done so. In particular, AAMS shall amend the
clauses of the distribution contracts referred to in Article
2 which are still in force, in such a way as to eliminate the
abuses found by this Decision to have occurred. The new
distribution contracts shall be submitted to the Commis-
sion.

Article 5

AAMS shall refrain from continuing or repeating the
behaviour referred to in Articles 2 and 3 and from all
activities having an equivalent effect.

To that end, AAMS shall, for a period of three years from
the date of notification of this Decision, forward to the
the end of each
Commission within two months of
calendar year, a report on the preceding year describing
the quantities of foreign cigarettes distributed by AAMS
as well as any refusal (total or partial) to distribute such
cigarettes.

Article 6

A fine of ECU 6 000 000 is hereby imposed on AAMS in
respect of the abuses referred to in Articles 2 and 3.

The above fine shall be paid, in ecus, within three months
of notification of this Decision. The amount shall be
transferred in ecus to the account of the Commission of
the European Communities No 310-0933000-43, Banque
Bruxelles Lambert, Agence Europ(cid:130)enne, 5 Rond Point
Schuman, B-1040 Brussels.

On expiry of that period, interest shall automatically be
payable at the rate charged by the European Central Bank
on the first working day of the month in which this
Decision was adopted, plus 3,5 percentage points, that is
to say 7,75 %.

Article 7

This Decision
to Amministrazione
addressed
Autonoma dei Monopoli di Stato, Piazza Mastai, 11,
I-00153 Rome.

is

This Decision shall be enforceable pursuant to Article
192 of the Treaty.

Done at Brussels, 17 June 1998.

For the Commission

Karel VAN MIERT

Member of the Commission