Competition law Newsletter – February 2017
I. Significant imbalance: France’s highest appellate court upholds order compelling a major retailer to refund €61.3 million to its suppliers
On 1 July 2015, the Paris Court of Appeal handed down a high-profile ruling fining LE GALEC (the buying group for French supermarkets Leclerc) €2 million for having imposed on 46 of its suppliers an obligation to grant an end-of-year rebate, thus creating a significant imbalance in the rights and obligations between them, and ordering LE GALEC to return €61.3 million to its suppliers.
On 25 January 2017, the Commercial Division of the Cour de Cassation, France’s highest appellate court (“the Court”) handed down ruling no. 15-23547 confirming the Court of Appeal’s decision.
The most important aspect of this case is the confirmation that a “significant imbalance” under Article L. 442-6 of the French Commercial Code can result from an inadequate price. The Court even considered that Article L. 442-6 allows courts to review prices that do not result from a free negotiation and entail a significant imbalance in the rights and obligations of the parties.
Therefore, it is now established that imposing or attempting to impose contractual obligations which create a “significant imbalance” under Article L. 442-6 of the Commercial Code must be distinguished from two closely related offenses:
- significant imbalance under consumer law: Article L. 212-1 of the French Consumer Code provides that a significant imbalance cannot result from the inadequacy of the price of, or consideration for, the goods or services being sold;
- significant imbalance under contract law, as recently introduced by order (Ordonnance) no. 2016-131 dated 10 February 2016: new Article 1171 of the French Civil Code provides that any term of a standard form contract which creates a significant imbalance in the rights and obligations of the parties is considered not written, but also that neither the main purpose of the contract nor the adequacy of the price are relevant in determining whether a significant imbalance exists.
Therefore, the ruling of 1 July 2017 is very important and companies should be particularly vigilant in negotiating prices, especially rebates, discounts and any kind of price reduction.
The rest of the ruling is consistent with the Court’s 2016 case law on significant imbalances, in that it confirms that:
- It can be inferred from the existence of pre-formulated clauses, betraying a lack of free negotiation, that the supplier merely submitted to terms dictated by the other party,
- The lack of consideration for a contractual obligation may result in a significant imbalance in the rights and obligations of the parties,
- An obligation without consideration can be compensated by other provisions which restore balance to the rights and obligations of the parties, and thus to the overall contract,
- In order to prevent the retailer from pressuring the suppliers, the unduly paid amounts can be refunded to them through the French Treasury.
II. Selective distribution: a recent decision of the Paris Court of Appeal suggests that brand owners might be afforded more latitude in organizing their networks
Elysées Shopping sought to join French watch manufacturer Rolex’s distribution network. Its application having been rejected, Elysées Shopping petitioned the Paris Commercial Court to compel Rolex to accept it as its reseller. On 12 March 2014, the court entered a judgement dismissing the petition, which Elysées Shopping then appealed.
As its main argument, the appellant claimed that Rolex’s selection criteria were not objective and were applied in a discriminatory manner, which suggested the existence of an anticompetitive cartel between Rolex and its distributors. As a secondary argument, Elysées Shopping claimed that in rejecting its application, Rolex had discriminated against Elysées Shopping and thus committed an abuse of rights.
By a ruling dated 19 October 2016, the Paris Court of Appeal (“the Court”) held that Rolex had lawfully rejected Elysées Shopping’s application and therefore dismissed the appeal (Paris Court of Appeal, 19 October 2016, ruling no. 14/07956, SARL Elysées Shopping v. SAS Rolex France).
The Court based its decision on the freedom of contract, which could suggest that brand owners will now be afforded more leeway in selecting their resellers.
In its decision, the Court pointed out that since the prohibition on the refusal to sell and the prohibition on discriminatory practice were repealed (by the ‘Galland’ Act of 1996 and the Act of 2008 on the Modernization of the Economy, respectively), discrimination no longer constitutes, in itself, a civil wrong. Discrimination is therefore prohibited only if it constitutes an anticompetitive practice (i.e., cartel or abuse of a dominant position) or an abuse of rights.
Outside these circumstances, the Court considered that a brand owner is free to refuse an aspiring distributor’s application, even if it meets its selection criteria, without having to justify its decision.
After having established these principles, the Court applied them to the case in hand:
- First, the Court pointed out that Elysées Shopping had not proved that Rolex’s refusal constituted an anticompetitive practice.
The Court held that Elysées Shopping had failed to prove that Rolex was not a lawful selective distribution network under the European Commission’s guidelines on vertical restraints (pursuant to which the distribution network must constitute a legitimate requirement, having regard to the nature of the product concerned (i); resellers must be chosen on the basis of objective criteria of a qualitative nature (ii); the criteria laid down must not go beyond what is necessary (iii)).
The Court found that Elysées Shopping:
- could not argue, without contradicting itself, that Rolex’s selection criteria are not specific and objective enough, and at the same time describe them specifically and claim to have fulfilled them,
- Did not establish that the criteria are discriminatory,
- Failed to demonstrate that Rolex’s criteria go beyond what is necessary to adequately distribute the products,
- Did not report any “black clause” under Regulation no. 330/2010 of 20 April 2010 on vertical restraints.
The Court also held that, since Elysées Shopping stocked 25 brands of luxury watches, it was not established that Rolex’s rejection was likely to eliminate or help eliminate competition.
- Second, the appellant failed to establish that it had been the victim of an abuse of rights.
The Court held that Elysées Shopping had also failed to prove that Rolex had applied its selection criteria in such a manner as to discriminate against Elysées Shopping.
Please feel free to contact our team at any time should you need any further information on the competition rules applicable to trade negotiation and distribution and on complying with these rules.
For more information on these subjects, please contact the Competition-Distribution Department of Franklin Law Firm:
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.
© 2017 Franklin. All rights reserved.