Claves del derecho de redes empresariales

Both interests are expressed in the business activity of the organization and in the business activity of the members of the organization — network expressed in an organization — or in the business activity of contractual parties — contractual network— and both are legitimate in networks10. If it is easy to recognize the shared interest as a network interest we must also recognize that the divergent interest is also a network interest — just as our prior logic rejects the possibility of a particle being at the same time in two places following the quantum physics theory —.

As in networks the amount of value obtained for each member depends of the exercise of its own business activity — and is not fixed in relative terms as in companies — the marginal oscillation between the minimal and the maximum gain possible for each member is limited without the acquisition of new quotes of the market through the efficiency and competition or in the case through an arbitrary decision of network head.

That makes that nor company regulation nor exchange contracts regulation may be recognized as an adequate framework to deal with the relationship between the two kinds of network interest. In the case of company or organization regulation this is so because these regulations impose the prevalence of common interest in opposition to private divergent interest of parties. In the case of exchange contracts regulation because this imposes the prevalence of the parties' private interests.

The harmonization of interests is in consequence an important goal for a network regulation.

An efficient network regulation requires a legal framework that legitimizes both interests — the shared interest as well as the divergent — and shall explain with detail the parties’ or members’ relationships and the cases of prevalence of the first or the second interests when both are in conflict.

c. Hierarchy and market from the legal point of view

Only some words about this central question. Business networks imply cooperation, coordination and competition between members. There is no hierarchy but limited central direction — with different degrees of extension — and the position of the members in face of the direction may vary from the complete independent coordination to the dependence.

There is an inverse proportional relationship between market relationships between members or parties on the one hand, and the extension of central direction and the dependence of the members on the other hand.

A legal business network regulation must take account of this typical network miscegenation and of the dialectic relationship between dependence versus independence and coordination versus market.

d. Characteristics of business networks

Another key issue in the field of networks is the feature whose attendance allows us to recognize the existence of a business network.

Legal scholarship has identified the interdependence and stability — of the network, not the special relationship linking the members with her — as the characteristic of business networks. Complementary activities of the members or parties may be seen also as an essential element.

In the most of the cases these networks imply a division of the functions of production and distribution or others included in the value production chain such as research and development.

It is also characteristic that its members may sustain relations of cooperation and competition between them11. This statement has important consequences in relation with regarding the question of networks and public interest and in particular in relation with competition issues.

Other relevant feature is the existence of a connection with the market shared by the members or parties — brand, technology, products —.

III. DIRECTION - MEMBERS' PROBLEMS AND HORIZONTAL MEMBERS PROBLEMS

In every network there is a direction centre — network directory — that may reside in the network’s head company, may be a manufacturer — outsourcing — or a provider of services — franchising or credit cards —.

The network’s direction also may reside in the entity that structure the network — Joint ventures, cooperatives, consortium or EIG —, or in a stable committee, personified or not, representative of all or some members of the network.

a. Direction power, control and authorisation

Network’s directory has the power to issue instructions and set the general framework for the development of the activity, to monitoring the implementation of these and in general the activity of the members and to allow the members' business decisions in the cases fixed by contract or by statute.

The foundation of directive power in contractual networks lies in bilateral contracts. These contracts generally parallel, adhesive and with a wide homogeneity, limit the commercial autonomy of the member.

On the one hand they involve the setting — usually via contractual appendices — of essential elements of the member company’s business policy such as the suppliers identity, composition and level of minimum stocks, methods of business organization, tradedress, distinctive signs that identify the products or services and even the store of the member — franchising —, marketing formulas and commercial know-how, among others.

In this way the freedom of network members is limited to the framework specified by the contract, and this transfers the decisions on such questions to the network head.

The contracts also provide supervisory powers, to define a greater or lesser degree the organization of the company’s network member, to allow the head to exercise the of ius variandi — to which we will refer in the over next section —, to instruct network members and to found the network head’s power of moderation among networks members by reference to internal organizational documents of the network.

In the case of organizational or associative networks the power of direction founds in company regulations — cooperatives — or results from consensus — second-degree cooperatives, horizontal groups, consortiums, or EIG, even when statutes establish majority decision, since the members possess extremely easy ways to exercise the right of separation.

The network directory provides the network’s business strategy and controls the performance of its members based on the power under contracts or statutes that govern the relationship that links each one with the others or with the head of network.

It also coordinates the activities of its members on achieving the targets — expression of shared interest — and mediates or arbitrates competitive struggles among its members — expression of divergent interest —.

In any case, the preservation of effective competition in the market stands as a limit to power steering, as we will discuss in the last section of this paper.

b. Network’s governance

The exercise of the directive power in networks requires that is shall be done for the benefit of the network, as in the case of corporations and corporate groups, in which it should be exercised for the benefit of society or group.

Unlike the case of corporate common interest, the interest of the network includes not only the parallel interest shared by its members but also their divergent interests. The attainment of the shared interest must respect their contradictory divergent interests.

In this sense the network resembles democratic states which are characterized not only by taking majority decisions but by respecting minorities taking into account their interests.

In this sense the exercise of network directive power by the directory shall take into account of the divergent interest of the members and shall not hurt them if there is not need. Just as in antitrust logic we postulate that a directive action that hurts the divergent interest of a member shall be covered by the shared interest and justified as inevitable to obtain a network goal. This implies that it must be clear that no other less harmful alternative for the member may be found.

An efficient exercise of directive power requires appropriate network governance.

This involves the recognition of the existence of special duties of care and loyalty that affect the network directory in the exercise of directive power and the establishment of a framework for dialogue within the network, enabling efficient pursuit and not conflictual power steering.

Appropriate definition of network governance requires the identification of the duties of network head, the definition of the framework for dialogue in the network and the establishment of an internal frame of moderation and internal resolution of disputes through mediation and arbitration.

The duties of head of network includes a special duty to act in good faith that is based on the stability and duration — real or potential-of the network connection and on the intuitus personae character of network contracts — intuitus personae that includes the intuitus instrumenti that is not an opposed alternative to the former, as it is generally accepted by the legal scholarship, but an evolution of it —.

The duty of good faith may involve a special set of duties: the duties of information, the duty of confidentiality, duties of care, duty of deliberation of important decisions for the network or a duty to give a preferential option to the network members.

The duties of loyalty that affect the network head — that is to act in accordance with the interests of the network to create value and no unnecessary damage to the divergent interests of its members — are based on the collaborative nature of contractual agreements or the associative relationship in the case of networks of this nature and in any case in the existing cooperation between the parties or members of the network.

The duty of loyalty means acting in the best interests shared by network members without unduly hurting the divergent interests of its members. The act that fulfils these conditions is often described as an act in “network interest”.

Some duties are deduced from this, such as the duty of transparency regarding the interests of the network head in the enterprises providing goods or services to the network, the duty to refrain from using the network resources for business purposes, not shared with the members of the network, the prohibition to replace an efficient network member in order to appropriate their business, or the prohibition of the encroachment and tortious interference which in some legal systems as the Spanish one may be also grounded in the duty to act in good faith and fairly.

A network regulation or auto-regulation shall provide rules that ensure the respect of these duties.

A network legal framework may rule in a more detailed way — as it is done in internal documents of some networks — the limits of the ius variandi and when the opinion of either the head of network or the member shall prevail.

An internal framework of the network for a non-confrontational and efficient exercise of directive power steering also requires the dialogue with associations of members, the creation of advisory or co-makers councils and the co-development of the internal network rules of operation.

Network governance also implies the organization of an internal dispute resolution system through mediation and arbitration. These mediators or arbitrators shall help to find solutions or give solutions to the problems between the members but also between the direction or network head and the members. In order to be efficient and in accordance with the good faith principle, a truly independence of internal mediators or arbitrators from the network direction is need. This independence may be obtained by creating a wide list of eligible mediators or arbitrators and by limiting the number of interventions of each one of them. If arbitrators or mediators are always the same and are paid by the head of network it is difficult to believe that they will act independently.

c. Ius variandi

The change of the activity conditions implies in general the conformity of all the members in organizational networks, with the exception of cooperatives and second degree cooperatives, companies, and consortiums or EIG’s where the statutes introduce the majority principle.

The decision to submit some or all decisions about the change of conditions to the majority — in company directory or assembly — concerns all members.

In the case of contractual networks the change of conditions may be attributed by contract to one of the parties — the network head for example in parallel contracts' networks as franchise —. In these cases the ius variandi concerns only one of the network members, limited by abuse of right doctrine — not global accepted — an objective novatio doctrine.

All these systems of control — consensus or majority, and unilateral attribution of the ius variandi with the limits of abuse of right or objective novatio doctrine are inadequate to regulate this question in networks, as the experience teach us.

d. Encroachment, virtual encroachment and tortius interference

The relationship of network members with customers is a typical source of tensions between them and, in some cases, with the network head. Network direction shall coordinate its members without infringing competition rules12. Encroachment and tortius interference are sometimes used by the network head to convert shared customers in own exclusive ones. In the last years internet development has also created problems in networks regarding the internal relationships between members and between members and network head, if any, in relation with customers — virtual encroachment —.

In all these cases we find conducts which are far from competition by efficiency. The network head, either alone or in connexion with other network members, undertakes interference, obstruction or predatory practices affecting other members. These conducts infringe good faith and fair dealing — contractual and market ones — as well as loyalty principles.

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 to the settlement plan presented by the bankruptcy administration to the court, similar to the one held by workers.

The network members should be heard by the judge, just like workers of the bankrupt debtor’s business are, in the case of the joint sale of the company or the production units whose activities have a direct connection with the network activity.

In case of a separate auction for the rights and assets belonging to the active mass there could be a right of first refusal with respect to the bankrupt debtor’s assets which are essentials to the efficient pursuit of the activity or to maintain the competitiveness of the network.

The special interdependence of networks members justifies in these cases a priority right to take the control of the other member specially if it is the network head, before or during the procedure. For creditors this has the advantage of increasing the bankrupt solvability, and it ensures the continuity of the network activity — which in many cases it is the best way to be paid —. For the members this also implies the continuity of their own business and, if it is the case, the continuity of network leadership, in this case collective.

An efficient legal network framework should deal with these questions and include the same or similar solutions.

V. NETWORK AND PUBLIC INTEREST PROBLEMS

Networks are also relevant from the point of view of public interest. Networks often produce external benefits, from cultural to ecological, as a consequence of its interdependent activity. But we will now focus only on the interest in maintaining a workable competition for the benefit of the market and all its participants, mainly the consumers.