Newsletter Competition – Distribution n° 4 – April 2016
New developments in the fight against imbalances in trade relations.
Under French law, the weaker party in a trade relationship may seek protection from exploitation by the other by relying on the legal concepts of significant imbalance or abuse of economic dependence. These can be used to negotiate fair terms of purchase and sale, restore balance to an existing contractual relationship or obtain restitution.
Significant imbalance claims have been on the rise since the introduction of the Economic Growth, Activity and Equality Act of August 6, 2015 (the “Macron Act”), which raised the maximum fine prescribed by Article L. 442-6 of the Commercial Code. This concept was also enacted into the Civil Code by the order (ordonnance) dated February 10, 2016 reforming French contract and civil law (1).
On the contrary, an abuse of economic dependence is so difficult to prove that the concept is gradually becoming irrelevant, which prompted the proposal of a bill to the lower house of the French Parliament (the National Assembly), on March 15, 2016, to relax the standard of proof for this violation (2).
1. A tougher clamp-down on significant imbalance
The Act of August 4, 2008, on the Modernization of the Economy enacted the notion of significant imbalance in business-to-business relationships under Article L. 442-6, I, 2° of the Commercial Code, which prohibits “subjecting or attempting to subject a business partner to obligations that create a significant imbalance in the parties’ rights and obligations”.
Although it had a relatively limited application in the first years of its existence, courts are increasingly fining businesses based on this provision, which is why it is now crucial for companies to consider the penalties they could face for its violation:
- At the request of the Ministry of Economy or the State Counsel’s Office, a judge can declare unlawful provisions or contracts null and void and order the restitution of undue payments. For example, the Paris Court of Appeals has ordered a group purchasing organization to return an undue payment of EUR 61 million (Paris Court of Appeals, July 1, 2015, No.13/19251, Galec), thus sending a strong message to “powerful” companies.
- The wrongdoer may face a civil fine, which before the Macron Act could be as high as EUR 2 million or three times the amount of the undue payment, but can now be “increased […], proportionately to the benefits derived from the violation, to 5% of the revenues before taxes derived in France by the wrongdoer”.
This increase in the maximum fine amount, now similar to that for anti-competitive practices (10% of global revenues before taxes), suggests that the French legislators intend to harshen penalties for restrictive practices in general and significant imbalance in particular, which is raising considerable fine inflation concerns.
Many issues are bound to arise as to the quantum and imposition of the fine (as illustrated by the abundant competition-related case law on these issues). In this respect, on February 18, 2016, France’s highest appellate court (the Cour de cassation) applied to the Constitutional Council (Conseil Constitutionnel) for a “preliminary ruling on constitutionality”, to determine whether a judge could fine an acquiring company for practices attributable to the acquired company alone (Commercial Division of the Cour de Cassation, February 18, 2016, No. 15-22317, ITM).
- The injured party may also seek damages for the significant imbalance.
The Cour de Cassation clarified the terms of imposition of the fine in four rulings handed down in 2015 (Commercial Division of the Cour de Cassation, March 3, 2015, No. 14-10.907, Provera and No. 13-27.525, Eurauchan; May 27, 2015, No. 14-11387, Galec; September 29, 2015, No. 13-25043, EMC):
- Assessing the existence of a significant imbalance requires a global and concrete analysis of the terms of the contract and the context in which it was negotiated and entered into;
- It is up to the party that subjected the other to imbalanced rights and obligations to prove the existence of other contractual provisions restoring balance;
- Significant imbalance may exist regardless of the effects of the contract, so that there is no need to subject them to an economic analysis;
- The absence of genuine negotiations can be an indication of significant imbalance.
Finally, the order of February 10, 2016, introduces the concept of significant imbalance into the Civil Code under its new Article 1171, which will come into force on October 1, 2016 and apply to agreements signed after that date. Pursuant to this new article, any provision that creates a significant imbalance in the parties’ rights and obligations is null and void and must be treated as if it had never been written, provided that (i) the imbalance does not relate to the main subject matter of the agreement or to the adequacy of the price, and (ii) the agreement is a standard-form contract, in which cases other provisions of the Civil Code apply.
Questions remain as to how this new provision will mesh with the law on restrictive practices and to what extent it can be relied upon in commercial disputes. For example, it might be useful where the contracting parties cannot be called trading partners (because theirs is a one-off transaction) or where the injured party is not seeking damages but only to have a provision declared null and void.
Contrary to the increasing use of significant imbalance to restore a level playing field between the parties, provisions banning abuses of economic dependence have proved ineffective since their enactment on December 1, 1986. As a remedy, a recent bill has been introduced to facilitate their enforcement.
2. The limited effectiveness of the concept of abuse of economic dependence
Article L. 420-2, paragraph 2, of the Commercial Code, prohibits “any company or group of companies from abusing the economic dependence of its customers or suppliers”, if it is likely to affect the functioning or structure of competition. Just like provisions on significant imbalance, this provision aims to ensure a level-playing field between parties with unequal bargaining power.
On March 31, 2015, the French Competition Authority (“FCA”) rendered an opinion on mergers between group purchasing organizations (FCA opinion No. 15-A-06), in which it pointed out the limited effectiveness of the concept of abuse of economic dependence in cracking down on abusive practices in the retail industry, a failing partly attributed to its narrow scope.
As the law currently stands, an abuse of economic dependence exists if all the following four criteria are met:
- The “victim” derives a significant share of its sales revenues from its relationship with the wrongdoer;
- The wrongdoer has a predominant position in the market for the relevant products or services;
- The “victim” did not deliberately choose to do business primarily with the wrongdoer;
- There is no suitable alternative trading partner available to the “victim”.
This last criterion is particularly difficult to prove. According to the Cour de cassation, this criterion is met when “it is impossible for a company to find a technical or economic equivalent to its existing contractual relationship with the wrongdoer” (Commercial Division of the Cour de Cassation, February 12, 2013, no.12-21850). Abuse of economic dependence claims are rarely successful, since most plaintiffs are unable to prove the absence of any equivalent alternative.