Interference with contractual relations, with reasonable expectations or business relations, with prospective economic advantages, and the induction refusal to deal are some groups of these kind of typical network bad practices.
Such practices deprive network members of the possibility to obtain the benefits they can reasonably expect from their investments and limit their expectations in the market.
The prohibition of encroachment may be grounded in the principles of loyalty, fair trade or good faith, depending on the different legal systems. Its acceptance varies from the British quasi negation to the German or Nordic firm defence.
A legal framework for networks must deal with these three questions: the protection of investments and reasonable expectations of network members, the recognition of directory’s coordination power, and the limits between legitimate competition and illegitimate interference.
The limits on the exercise of coordination by the network directory due to antitrust rules are, however, less relevant than it seems at first sight.
In cases involving the network head — acting in its own benefit or giving advantage to another member of the network — customer network reallocation comes from a discretionary decision of the network head and not from competition by efficiency.
Interference or encroachment are usually directed against highly efficient distributors for reasons clearly unrelated to competition policy such as preventing that a given member of the network gains too much internal weight or preventing the creation of autonomous power centres within the network that concede a greater bargaining power to its members.
A hypothetical intra-brand increased competition after the encroachment or interference does not justify the potential harm to the interests of one network member not covered by the prosecution of the shared interest when the conduct does not increase the inter-brand competition.
The exercise of coordination power to prevent encroachment or tortious interference shall not affect in any way inter-brand competition, since in these cases there is a cannibalization of customers belonging to the network and not an injection of new customers for the network.
The exercise of coordination power by network directory in cases of internal predatory practices between members also avoids the removal of members of the network and therefore the reduction of the number of competitors in the market keeping the competitive strength of the network. It has therefore a pro-competitive nature.
IV. NETWORK - THIRD PROBLEMS
Network members have business relationships with other businessmen and costumers — consumers or not —. A network may also be integrated in another — for example a credit cooperative member of a second degree cooperative integrated in a horizontal group part of a strategic alliance to have access to South American markets —.
Network members have individual relationships but these affect in many cases all network members or some of them —in the case the network head —.
Contractual and organizational regulations give not a satisfactory answer to questions like when the network relationship shall be recognized in business member/third relations, and to what extension.
This paper deals with two of these important problems: direct action and bankruptcy.
a. Direct action
One of the main problems to solve in network-thirds relationships is the possibility to act against a network member for the acts or omissions of another. In both organizational and contractual networks, separate legal personality of the consortium, horizontal group, EIG or cooperative or contractual parties and privy doctrine ensure the general refusal to this possibility. The described result can be obtained as a general remedy in some branches of Law only, such as antitrust law, in which the economic reality prevails over legal formality as a characteristic element, or by using some exceptional remedies such as the piercing the veil doctrine. The induction to law or contract infringement as an unfair competition act may also be used to reach this goal and the consumer protection rules as liability for defective products may also help.
This group of rules and court doctrines — with variable relevance in the Law of the EU member states, because they are outside of the harmonized area — are not enough to rule in an efficient form the relationships between third and network.
The doctrine of contracts connexion13 and the revision of privy doctrine try to solve these problems but there is no general acceptation of their conclusions.
A network legal framework explains more accurately the cases in which a direct action shall be accepted, generally against the network head but also against another network member. Discussion over liability in groups of companies may help us to understand these problems and to find solutions. Execution of network head’s instructions or diligent application of its directives shall be enough justification to admit the direct liability of the network head when the conduct of the member causes damage.
b. Bankruptcy in networks
The network members or the network head may be declared in bankruptcy. The more important effects on the network are produced in the second case. The two main questions in this field are the effects of bankruptcy without liquidation and with continuity of the activity in network contracts, being these long term contracts with successive execution needed to maintain the bankrupted company activity, and the network members possibility to finance, take participation or purchase the network head before or during the bankruptcy procedure14.
The bankruptcy of the network head produces severe consequences on the members in terms of goodwill, continuity of its own business, and leadership of the network, but these damages are not illicit and in general the members are not or very limited creditors of the network head. The bankruptcy procedure focusing on creditors tuition ignores the network members problematic and does not provide for them any special remedy or particular position in the bankruptcy procedure.
These are cases where the insolvent debtor’s business is susceptible to be restructured, in which economically linked firms are competitive in the market and the losses are caused by reasons not affecting the network members such as a corporate cost structure that does not reflect income from the typical activity, by an excessive reliance on external financing, by speculative investments, by the implementation of new production or research lines or foreign development activity undertaken by the insolvent debtor, by inadequate risk management, by internal business of the debtor bankrupt, or simply by extraordinary and extravagant personal expenses incurred by the debtor bankrupt.
As Bankruptcy Law is not a harmonized field in Europe, national legal systems present important differences. Talking from the Spanish experience it will be necessary that the bankruptcy administration and the Judge may identify in a simple and clear way which are the network companies. In some cases, such as franchising this may be relative easy but in other ones like outsourcing it may be more difficult.
Related companies present in procedure shall also be heard by the judge before he or she decides about the total or partial termination or suspension of business or about the closure of offices, facilities or production units if they are essential for the development of the economic activity on which the network depends like, for example, the research and development department in the case of networks based on software licenses or contracts for technology transfer.
Possible improvements of the settlement deal with two issues: the proposition of a convention and the order of deliberation of a proposed convention in the Assembly of creditors, if there is a plurality of proposals.
It seems appropriate to give preference in the discussion to the proposals of network members, at least when they are supported by a significant percentage of creditors, giving them the possibility to be discussed immediately after the rejection of the proposal by the debtor bankrupt.
Regarding the liquidation, it seems appropriate to recognize an independent right to network members to make comments or propose modifications