At the 190th Ordinary Trial Session (02/09/2022), the Administrative Council for Economic Defense’s Tribunal began the judgement of Voluntary Appeal no. 08700.007228/2021-88, filed by Total Pass Participações Ltda. (“Total Pass”). The appeal was filed against the General-Superintendence’s (“GS/CADE”) decision, issued at Administrative Inquiry no. 08700.004136/2020-65, in which the GS/CADE granted a preliminary injunction against GPBR Participações Ltda. (“Gympass”).
The inquiry was opened after a complaint was made by TotalPass, who denounced contractual conditions that were potentially restricting competition, such as exclusivity clauses and most favored nation clauses. In the complaint, TotalPass pled for a preliminary injunction to be adopted by the GS/CADE, so that Gympass would be required to cease those practices. Although the measure was granted – it determined that the most favored nation clauses should be suspended, for example – the GS/CADE did not grant TotalPass’s plea regarding the exclusivity clauses. With regard to this practice, the GS/CADE only prohibited Gympass from entering into exclusive agreements with gyms that were not yet members of its network. In other words, the effectiveness of the existing clauses was maintained.
TotalPass then filed a Voluntary Appeal, pleading for the reversal of the GS/CADE’s decision regarding the exclusivity clauses of Gympass’s contracts. According to TotalPass, the current level of market foreclosure caused by Gympass is approximately 80%. Therefore, the maintenance of exclusivity clauses in effect would bring harm to gyms, the users of the aggregation platforms, and Gympass’s competitors.
Although the President of Cade, Alexandre Cordeiro Macedo, requested that the trial be suspended to further review the case before deciding, CADE’s Tribunal has already formed a majority to reform the GS/CADE’s decision.
The vote that led to the majority decision was issued by Commissioner Paula Azevedo, who argued the following points: (i) there is market power, since Gympass’s exclusivity clauses covered about 70 to 80% of all gyms in Brazil; (ii) the practice in question prevents rivals from competing; and (iii) the justifications of the exclusivity clause – linked to the prohibition of free riding effects on the investments made by Gympass in final customers and accredited partners – have not been proven, since the clause does not even specify which is the transaction-specific investment to be protected.
Moreover, the fact that it is a two-sided platform reinforces the competitive problems found, in the Commissioner’s view, since the platform becomes dominant on both sides from the moment it reaches critical mass, and there are also indirect network effects arising from it.
For all the forementioned reasons, CADE’s Tribunal decided to grant the voluntary appeal to overturn the GS/CADE’s decision and, among other things, to immediately suspend the exclusivity agreements. To address the need of inhibiting potential free riding effects, the adoption of exclusivity clauses is allowed, provided that Gympass shows proof of investing in the gyms’ capital assets or infrastructure and that the clause duration is limited to the return time of the investment.
The public versions of the votes issued have not yet been made available.