Competition/Distribution Law Newsletter – January 2019
On November 1, 2018, the French government promulgated a law “promoting balanced commercial relationships in the agricultural and food sector, as well as healthy, sustainable and affordable food” (known as the „EGalim“ Act).
The law, which emerged from the 2017 National Food Conference, was eagerly awaited by the various industry players and will no doubt have a major impact on the relationships between farmers, food manufacturers and retailers, as well as on the annual commercial negotiations between suppliers and retailers. The stated aim of the law is to ensure a better distribution of the value created by the farming and food industries along the production chain, in particular by boosting value creation and putting an end to the „price war“ raging among retailers. Thus, the law aims to regulate, (1) upstream, the relationships between farmers and initial buyers of agricultural products and, (2) downstream, the marketing of food industry products. It also signals (3) an overhaul of the rules governing trade negotiations and restrictive practices.
While the French lawmakers’ objective is relatively clear, some of the law’s provisions have been heavily criticized. The law also raises a number of questions and the practical scope of some of its provisions remains unclear in many respects. The next administrative controls will therefore inevitably give rise to substantial disputes and the official guidance (circulaire d’interprétation) announced by the government will be very useful.
With that in mind, below is our analysis of the key provisions of the new law
1. Regulation of the relationships between producers and initial buyers
The new law aims to provide producers with new tools during trade negotiations. In particular, it provides that any written sales agreement between the producer and the initial buyer of agricultural products must now be preceded by an offer from the producer. The law thus generalizes the inversion of the contractual proposal mechanism.
These agreements will have to include at least the following clauses: term; quantity, origin and quality of the products; delivery; deadline for payment, etc. The offer should also contain a clause establishing the criteria and methods for determining the price, factoring in indicators relating to agricultural production costs and their evolution in the market. Finally, renegotiation clauses contained in agreements with a term of more than three months will have to take into account product price indicators, which will be published by inter-professional associations. These provisions will come into force on February 1, 2019 (a time extension for compliance may be applied for in some cases), and any failure to comply will be punishable by an administrative fine of up to 2% of the offender’s revenue
2. Regulation of the food marketing industry
In order to curb the price war raging in the human and pet food marketing industries, the EGalim Act raises the threshold for the ban on below-cost pricing and provides for value and volume restrictions on promotional offers.
On December 13, 2018, the government issued a first Order (Ordonnance) providing for the following:
- A 10% increase in the below-cost pricing threshold
The Order provides for the application of a 1.10 coefficient to the effective purchase price, as defined in Article L. 442-2 of the French Commercial Code.
This measure will come into force on a date set by decree (décret). For now, it has been announced for February 1, 2019, but the government has until June 1, 2019, to make it effective.
This measure and its effectiveness have raised much doubt and criticism from both retailers, who fear inflation, and manufacturers, who are concerned about the complexity of the reform. On November 23, 2018, the French Competition Authority (“FCA”) issued a very reserved opinion on this new measure, finding that it would have a „negative“ impact on consumers and an „ambiguous“ impact on retailers, and doubting that it would „improve the situation of suppliers of products not directly concerned, those sold with a retail margin higher than 10% of three times the net purchase price, which, it should be recalled, was the primary objective of the mechanism„.
- Restrictions on sales promotions
The Order also imposes restrictions on the value and volume of sales promotions. This concerns all „immediate or deferred promotional offers resulting in a reduction in the retail price of human or pet food„. The Order only refers to price promotions and therefore does not concern rewards programs or game-based promotions, such as lotteries.
These provisions do not apply to perishable and quickly deteriorating goods, provided that the promotion is not advertised or announced outside the point of sale.
In terms of value, promotions are capped, for a given product, at 34% of the retail price or an equivalent increase in the quantity sold.
These restrictions prohibit retailers from making promotional offers such as „buy one, get one free“, or „2 for the price of 1“. However, promotions such as „buy 2, get 1 free“ are still allowed.
This measure suspends the provisions of Article L.441-7, para. 9 of the French Commercial Code, which caps promotions on certain agricultural and dairy products at 30% of the value of the base unit prices. Therefore, for the duration of the Order, promotions on these products will also be capped at 34% of the retail price.
These provisions came into force on January 1, 2019.
In terms of volume, the above-mentioned promotions, whether financed by the supplier or the retailer, are now capped at 25% of
– the estimated sales revenues provided for in the annual distribution agreement between the supplier and the reseller pursuant to Article L. 441-7 of the French Commercial Code (“convention unique”);
– the estimated volume provided for in private label contracts that meet the buyer’s specific needs;
– volume commitments for perishable agricultural products or products resulting from short production cycles, livestock, carcasses or fishery and aquaculture products.
The Order provides that these annual distribution agreements and private label contracts must „provide for an estimated revenue and an estimated volume, respectively„, but does not specify the methods to be used in determining these revenues and volumes.
These volume restrictions will apply to all commercial agreements for 2019, including those entered into before the entry into force of the Order.
Failure to comply with the provisions governing sales promotions carries a fine of up to €75,000 for individuals and €375,000 or half of the advertising costs incurred in connection with the promotion for legal entities.
It is also worth noting that the use of the term „free“ as a marketing tool for promoting food products is now prohibited, although the Order fails to specify whether the use of synonyms, such as „offered“, is allowed, undercutting the scope and coherence of this reform.
The law as promulgated is faithful to the last published draft. However, many questions remain following the publication of the Order, such as what types of promotions fall under the new law (what about retail loyalty programs?) and what methods should be used to determine the estimated revenue or the reference price for the 34% value cap? The FCA has already pointed out in its opinion that „all the factors to be considered in implementing the new law (whether the reference price, types of promotions, or even its territorial scope) refer to concepts that may be interpreted differently by the various stakeholders„. Therefore, its implementation will likely be complicated, which is why the Official Guidance announced by the French government is eagerly awaited.
The provisions raising the below-cost pricing threshold and restricting sales promotions are being tried „on an experimental basis“ and for a period of two years. Obviously, the government has duly noted the reservations expressed by the FCA, since Article 5 of the Order provides that the government may suspend the implementation of all or part of these provisions, upon consultation with the FCA. The FCA will therefore have to ensure that the implementation of the new law does not, in practice, lead to a distortion of competition
3. Overhaul of the rules on trade negotiations and restrictive practices
Finally, Article 17 of the EGalim Act heralds a major overhaul of Title IV of Book IV of the French Commercial Code, authorizing the government to legislate by orders until May 1, 2019. On December 28, 2018, the French Consumer Protection Agency (DGCCRF) launched a public consultation on a draft order, which provisions concern contract formation. Contributors only have until January 21 to submit their comments.
The current version of the text, as published, does not thoroughly simplify or modernize the provisions of Title IV, which it is supposed to reform. In particular, the prohibition of retail price maintenance under Article L. 442-5 of the French Commercial Code, which has been widely criticized, remains unchanged. In addition, the announced reforms are relatively modest:
With regard to billing practices, sellers would be required to issue their bill upon delivery of the goods or provision of the services within the meaning of Article 289 (I) (3) of the French General Tax Code. Billing rules would thus be aligned with tax law.
The draft order maintains the obligation to provide General Terms and Conditions and introduces an obligation to disclose, on request, the methods used to calculate the price or provide a sufficiently detailed quote (if the price of a service or type of service cannot be determined beforehand or accurately). The proposed order also provides that if a retailer intends to reject the supplier’s General Terms and Conditions, it must do so in writing and provide the reasons therefor.
The draft order also provides that the criminal penalties currently applicable will be replaced by administrative penalties for failure to comply with billing rules (a fine of up to €75,000 for individuals and €375,000 for legal entities) and failure to provide General Terms and Conditions (a fine of up to €15,000 for individuals and €75,000 for legal entities).
Finally, the draft order specifies the rules governing annual distribution agreements between suppliers and retailers/wholesalers, in particular by simplifying generally applicable rules. From now on, these agreements may specify „the types of situations and the conditions on which special terms of sale apply„. However, this simplification does not apply to annual distribution agreements for consumer products, which will be subject to a number of additional requirements. The simplified general rules for these agreements will therefore be limited to products other than food and beverages, non-durable household goods and personal care products. They also do not apply to the relationships between suppliers and wholesalers, so that three specific sets of rules would ultimately coexist.
It is also worth noting that the draft order requires that any amendment to an annual distribution agreement be made „in writing, setting out the reasons therefor“.
The most significant change concerns the timing of the negotiation of the annual distribution agreement: the proposed order would remove the annual deadline of March 1 (except for agreements with wholesalers), considering that the parties are free to set the date that best suits their business needs. The draft order proposes a new negotiation period of three months from the date the supplier provides its General Terms and Conditions of sale or service. If adopted, this provision will have significant practical repercussions, leaving suppliers and retailers with the task of keeping track of the various deadlines for negotiating their annual distribution agreements.
At a later stage, public input will be sought on a further draft order amending the provisions of Article L. 442-6 of the French Commercial Code on restrictive practices, in particular those regarding the abrupt termination of commercial relationships, legal remedies and civil penalties. Finally, another order will be issued amending Article L. 442-9 of the French Commercial Code to extend the prohibition of unfairly low prices to agricultural and food products by removing the requirement of a „cyclical crisis“ and by specifying, in particular, how to factor in agricultural production cost indicators.
These measures are not expected to impact negotiations in the agricultural/food industry until 2020.
Franklin’s Competition-Distribution practice is at your disposal for any further information on the changes introduced by the EGalim Act
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This newsletter does not constitute legal advice or legal opinion on specific facts or circumstances. The content of the newsletter is intended only to provide general information.
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