Summary of the most important changes

On 28 January 2016, the Czech President signed  the  long anticipated amendment to Act no. 395/2009 Sb., on significant market power in the sale of agricultural  and food products and abuse thereof (the “Amendment”). The Amendment will come into effect on the 30th day after its publication, i.e. 6 March 2016.

The Act  on  Significant  Market  Power  (the  “ASMP”)  is  a special legal norm that regulates the relations between the suppliers of food products and their customers (pri- marily retail chain stores). The main objective of the ASMP is to prevent any abuse relating to suppliers’ economic dependence on customers. Supervision and compliance  in this area is entrusted to the Office for the Protection of Competition (the “Competition Office”).

The ASMP came into effect on 1 February 2010, and from the very beginning, there were substantial reservations from retail chain stores and a substantial part of theprofes- sional public. The critique concerned the lack of cohesion and incomprehensibility of the act. The Competition Office attempted to overcome this with its interpretive practice, but unfortunately, without any tangible results.

The goal of the Amendment was to eliminate the main interpretive uncertainties in the  ASMP  while  preserving its fundamental concepts and principles. The Amendment involves  all  parts  of  the  act,  i.e.  substantive  law (such as defining the abuse of significant market power or the division of offences) and procedural law (the Competition Office’s approach in exercising its powers).

We describe below some of these changes and supple- ment our first commentary.

The most important changes relate to the following:

  • Defining the scope of the act
  • Defining terms, including significant market power
  • Defining abusive practices
  • Establishing the requirements for supplier-customer contracts​

​​​Defining the scope of the act

The material scope of the ASMP

The Amendment expands on  the  material  scope  of  the ASMP so that it now not only regulates the abuse of significant market power in relation to purchasing food for resale, but also in relation to the provision of services relating to this purchase and sale.

In reality, the new legislation will affect all relations between suppliers and customers that involve the supply  of food. Thus, it will now regulate, e.g. the provision of marketing or logistics services in relation to the purchase and resale of food.

Jurisdiction of the ASMP

The Amendment also expressly defines the jurisdiction of the ASMP. In accordance with the amended Section 1(2) of the ASMP, any abuse of significant market power that occurs abroad will also be reviewed and assessed     in accordance with the provisions of the ASMP if it affects or could affect the Czech Republic.

Hence  the  Amendment  introduces  the  rule  of  effect  to the application of rules contained in the ASMP in line with the competition  law  model. According  to  this  rule,  it is not decisive where the act takes place, but whether this act has an effect on the Czech Republic. In practice, this means that the Competition Office could consider as   a breach of the ASMP the actions of parent companies who conclude contracts abroad under foreign legislation, where the subject matter of these contracts would be, among other things, regulation of the purchase of food  and related services in the Czech Republic. Thus, under the ASMP, an agreed retroactive bonus that was not connected to quantity would be prohibited even on the international level. Even specific logistics or marketing terms between parent companies could be subject to regulation under the ASMP.

Definition of terms

The Amendment also specifically defines certain terms. The most important of these are customer, purchasing alliance and food. In addition, the Amendment modifies  the definition of significant market power.

Customer is defined as “an entrepreneur or purchasing alliance, provided that they purchase food for the purpose of resale or accept or provide services relating to the purchase of food. A customer should also be an entity that carries out such purchase or services for anothercustomer under a mandate type contract.”

This change should address any circumvention of law associated with a customer purchasing food through an intermediary. Under  the current  version  of  the  ASMP, the Competition Office cannot hold these intermediaries liable (according to an explanatory report, the Competition Office has encountered this practice in the past with customers). The market power of intermediaries would be treated together with the market power of customers on whose behalf the activity is carried out.

In connection with the amended definition of the term customer, the Amendment also introduces the term purchasing alliance. This is defined as “a grouping of customers, regardless of whether it has a legal personality, established under a contract or other legal act, which provides cooperation among customers in relation to the purchase of food for the purpose of resale.”

Thus, a purchasing alliance is understood as any form of cooperation between customers, regardless  of  whether  or not it is a legal entity. As for the general nature of the definition, we believe that the term will be interpreted quite widely by the Competition Office.

Under the Amendment, a purchasing alliance is liable to the same extent as customers. In addition, the members  of the alliance guarantee jointly and severally the payment of penalties imposed on the purchasing alliance.

Food is understood as “any substance or product, whether processed, partially processed or unprocessed, intended  to be, or reasonably expected to be ingested by humans.”

The definition of the term food was taken from a European regulation (Regulation 178/2002/EC). Certain types of goods are explicitly excluded from the term food, such as animal feed, cosmetics (under Council Directive 76/768/ EEC), medicinal products (under Council Directives 65/65/ EEC and 92/73/EEC), or tobacco and tobacco products (under Council Directive 89/622/EEC).

Thus, after the Amendment comes into effect, the goods regulated under the ASMP will be more precisely  defined.

The Amendment has also modified the actual definition of significant market power as follows: “Significant market power is such a position of a customer, the result of which the customer may implement, without reasonable cause, an advantage vis-à-vis suppliers in relation to the purchase of food or the acceptance or provision of services relating to the purchase or sale of food.”

Thus, the new definition seems to have established an absolute concept of significant market power. According to this concept, market power should be assessed for specific  customer  regardless  of  its  individual  suppliers.

The hitherto valid assumption that a customer whose turnover in the Czech Republic reaches CZK 5 billion possesses   significant   market   power   remains    intact.

However, the Amendment specifies in more detail that turnover is calculated for the last complete 12-month period and only with respect to the sale of  food  and related services. If the customer  is  a  controlled  entity, the turnover of the controlling entity is calculated into the amount of the turnover. In the case of a purchasing alliance, the turnover of all members of the alliance is calculated.

The concept of significant market power will no longer depend on the conditions of coherence and substantial distortion of competition. This means that each individual abuse of significant market power is punishable, not only systematic abuse. Acts that meet the formal characteristics of abuse of significant market power but have a negligible impact on competition will now also be punishable.

However,  in  this  respect,  reference  should  be  made  to the newly introduced prioritisation rule (compare Section 5(2)), according to which the Competition Office defers unjustified cases.  When  assessing  justification, the Competition Office  should  look  at  the  seriousness  of the assessed act, the nature of the act, the manner      of carrying it out, and the number of  affected  entities.  This involves provisions reflecting a similar power of the Competition Office in relation  to  investigations  carried  out in accordance with the Act no. 143/2001 Sb., on the protection of competition (the “APC”). As for application of these provisions in the practice of the APC, the Competition Office issued its own interpretive rules that specify and clarify its applicability in practice. It is not  clear at  this  time  whether  the  Competition  Office  will  also  adopt  the interpretive rules in  relation  to  prioritisation  under  the ASMP.

Definition of abusive practices

The general principle of abuse of  significant  market power remains unchanged. Under Section 4(1) of the ASMP, the abuse of significant market power is prohibited. However, the individual rules and principles  for abuse of significant market power are now explicitly contained in the wording of the ASMP. Thus, the current annexes 1 to 6, which were notorious for their poor quality, are to be repealed.

The newly adopted rules are of a more general nature

– the former approximately 80 rules in the annexes to the ASMP are now contained in eleven special points explicitly set out in Section 4(2) of the ASMP. Hence, the abuse    of significant market power is considered in particular to be:

a) Negotiating  or applying contractual terms that create  a substantial imbalance in the rights and obligations of the parties;

b) Negotiating or acquiring any payment or other consideration for which a service or other compensation was not provided or which is an inadequate or disproportionate value of the actually provided compensation;

c) Applying or acquiring any payment or discount whose amount, subject matter, and scope of the provided compensation  for  this  payment  or  discount   were not negotiated in writing prior to supply of the goods   or provision of the services to which the payment or discount applies;

d) Negotiating or applying pricing terms, the result of which the invoice for payment of the purchase price   for supplying food does not contain the final amount   of the purchase price after all agreed  discounts  on  the purchase price, with the exception of quantity discounts agreed in advance;

e) Negotiating or applying payments or other compensa- tion for the acceptance of food for sale;

f) Negotiating or applying a payment period for the purchase price of food that is longer than  30  days  after issuing the invoice;                                          

g) Negotiating or applying rights for the return of purchased food, with the exception of a gross breach of contract;

h) Requesting from a supplier compensation of sanctions imposed by the inspection authority without the supplier being at fault;

i) Discriminating against a supplier consisting of nego- tiating or applying different contractual terms for the purchase or sale of services with the related purchase or sale of food for comparable consideration, without reasonable grounds for the breach;

j) Conducting an audit or other  form  of  inspection  of  the  supplier  by  the  customer,  or  a  person  or entity authorised by the customer, at the supplier’s expense, including requesting analyses of food at the supplier’s expense; or

k) Not respecting the results of the official food inspec- tions conducted by the state inspection authority by  the customer.

The rules under points a to c consolidate the obligations and  prohibitions  of  customers  previously  regulated  in Annex 5 (points 1 and 2) of the ASMP. However, the provisions are formulated in a more general fashion and contain some indefinite legal terms (e.g. “significant imbalance” or “inadequate or disproportionate value”).  This fact could lead to a reduction in the legal certainty of customers and also to extensive interpretation of the law by the Competition Office.

In our opinion, the greatest impact on business will be the rule under point d, concerning the possibility to apply retroactive discounts. Considering that the amended wording  of  the  ASMP  prohibits   (with   the   exception  of quantity discounts) a change in the invoice price retrospectively, there is a risk that  retroactive  bonuses  not relating to a quantity discount could be deemed in contradiction with Section 4(2d). Thus, the result of this new rule could be a completely fundamental  change in  the purchasing policies of most retail chain stores in the Czech Republic.

The provisions of point e are an amended version of the previous ban on collecting the listing fee before issuing  an order. However, the prohibition is now general  and does not relate to the moment of issuing the order, as was previously the case.

Point f contains the previously enshrined obligation relating to maximum payment periods for invoices, the breach of which was also the subject matter of a punitive decision of the Competition Office. The question remains whether it is not a redundant provision since the issue      of payment periods for invoices is now taken up in other legal regulations, for example, the Civil Code.

Point g prohibits “returns”. This ban was  contained  in  the previous regulation, however, it is now consolidated into one provision, and instead of the term “demonstrated defects and claims”, the term “gross breach of contract” is used.

As for requesting from a supplier compensation of sanctions imposed on customers by the supervisory authority (point h), we consider “without the supplier being at fault” to be problematic. It is very difficult  to  request from a customer that it exclude the case of the supplier’s fault. Thus, the question remains who determines whether the fault occurs on the side of the supplier or the customer. This provision will most likely be interpreted against the customer.

The rule under point I is similar to the one contained in the APC for cases of abuse of a dominant position in the form of discrimination. Therefore, it can be assumed that the most problematic from the standpoint of applying this provision will be demonstrating “different terms for comparable consideration”. The concurrence of consideration  does  not only involve objectively measurable criteria, such as quantity or weight, but also quality. Thus, assessing the comparability of consideration when providing services relating to the sale of food could be problematic.

Another significant change to the current wording of the ASMP concerns audits regarding production under a retail- er’s own brand provided that it accepts the liability of the producer and performs supervision at its own expense (see point j). The subject matter of this provision is the de facto ban on allowing a customer to carry out audits or supervi- sion at its own expense. The ban is formulated in a gener- al manner, and its justification is not even taken up in the explanatory report. Hence, the Amendment now does not prohibit carrying out audits at the customer’s own expense, despite the provision  leaving open  the issue of whether   it can be considered an unreasonable restriction of the contractual freedom of parties in a business   relationship.

We consider the rule under point k to be redundant. We believe that the provision is identical to the legal regulation of state supervision under the Act no. 110/1997 Sb., Food Act, which protects the same public interest. In the event  of a conflict in laws, it will be necessary to decide which    of them has priority when ruling on the same infringement.

Requirements for customer-supplier contracts

The requirements for contracts are now regulated separately in the new Section 3a of the ASMP. It follows from the provision that contracts concluded by a customer having significant market power and its supplier must    be made in writing and, in addition to the principal parts, must contain:

a)The method of paying the purchase price and the payment period, the discount on the purchase price    or the method of determining the discount, if provided (the payment period for the purchase price must not  be longer than 30 days after the day of delivery of the invoice), the amount of all financial consideration of  the supplier, the sum of which must not exceed 3 % of the annual sales of the supplier for the last complete accounting period  of  12  months  for  food  supplied  to individual customer during the year in which the financial consideration occurred;

b)The period or the method for determining this period for supplying the subject matter of the purchase and determination of its quantity for the established period or determination of the quantity of the individual supplies of the subject matter of the purchase;

c)If services  relating to the purchase or sale of food    are accepted or provided, the manner of cooperation during  their  acceptance   or   provision   containing the subject matter, scope, manner, and period of performance, the price, or the method for determining the price;

d)The period of guaranteed validity of the purchase price, which may not exceed three months from the date of the first supply of food associated with the negotiated purchase price; and

e)The manner of assigning claims, which are governed by the relevant provisions of the Civil Code.

The most disputed provision of the Amendment is the introduction of the 3 % limit for the provision of financial consideration of the supplier under Section 3a, point a.

Considering the vague nature of the term “all financial consideration of the supplier”, it is not clear which consideration the total 3 % limit applies to. This logically causes uneasiness for customers, since the financial consideration of suppliers is a significant part of revenues for customers as well as for suppliers who are interested  in promoting their products through services offered to the customers. However, it is not clear why the 3 % limit was introduced, i.e. why it should be established under law.

The vagueness of the provisions could, nevertheless, have a significant impact since  sanctions  could  be   imposed on competitors with significant market power for breach- ing this provision. In this respect, it is at least disputable whether the 3 % limit complies with the basic requirements arising from constitutional order for the “quality of law”. As follows from the established decision-making practices of the European Court of Human Rights, each legal regulation referring to the intervention of public authorities in funda- mental rights must be formulated with a sufficient level of clarity and accuracy in order to allow recipients to modify their behaviour and with a reasonable degree of proba- bility to predict when the public authorities could impose sanctions on them. Imposing any sanctions that, according to the Competition Office, would be in contradiction with the 3 % limit requirement could be highly disputable from the constitutional standpoint. However, the final response to this issue cannot be submitted until the Constitutional Court reviews the conformity of the ASMP with the constitu- tional order of the Czech Republic.

According to the cited provision, a contract must contain, among other things, (i) the amount of the discount on the purchase price or the method of determining the discount and (ii) the amount of all financial consideration of the supplier, whose sum may not exceed 3 %. Therefore, from the fact that the discount and financial consideration are two independent elements of the provision, it would be possible to infer in our opinion that a discount is different than financial consideration.  Unfortunately,  at  this  time, it is not easy to predict how the Competition Office will interpret the 3 % limit in practice.

A substantial requirement  of  written  contracts  should now be determining the quantity for the established period or determining the quantity of individual orders for the subject matter of  the  purchase  (compare   point b). A question that arises in this context is whether the Competition Office will consider electronic orders of the customer sent to the supplier via its electronic system as   a written form of the order, even in situations where these orders are not confirmed in practice by the suppliers in many cases.

Another important new development is the obligation  under point e of the cited provision. Under the Civil Code, a claim may be assigned without the debtor’s consent. Thus, the intention of legislators is clear – to deny customers the opportunity to block the assignment of claims that a supplier has against them.

Conclusion

The Amendment brings positive and negative  changes. We consider one of the most positive changes to be more precise definitions of customer and food. Unfortunately, in this case, the negatives prevail.

First of all, the introduction of an absolute concept for market power is disputable. As a result, the  customer  may be considered as a customer with significant market power even with respect to entities that have much greater financial backing and stronger economic and bargaining power. The question is how the Competition Office will behave towards a supplier in  a  dominant  position  and the  negotiations  between  the supplier  and its customer,

i.e. a retail chain store with significant market power, will fulfil the definition of abuse of a dominant position by the supplier as well as abuse of the significant market power  of the customer, i.e. a specific retail chain store. We, nevertheless, are concerned that the  Competition Office  is leaning more towards declaring the abuse of significant market power since demonstrating this offence will be easier after the Amendment comes into effect than the abuse of a dominant position.

Cancelling the terms for coherence and substantial distortion of competition is also dangerous. Eliminating these guarantees could lead to unreasonable overuse of the ASMP. This, among other things, impedes the capacity of the Competition Office, which could be detrimental to investigations of infringements (cartel agreements and abuse of dominance), which should be the  priority  of every competition authority.

These negatives are worsened even further by the fact  that the Amendment introduces a relatively large quantity of vague legal terms (see for example “without reasonable cause”, “substantial imbalance in the rights and obligations of the parties”, “inadequate or disproportionate value of the actually provided compensation”) and difficult to interpret obligations (see in particular the 3 % limit for the supplier’s consideration). These terms follow from the legislator’s intention to eliminate provisions with very concrete types  of behaviour and replace them with more general rules. However, in this case, there is a significant reduction in legal  certainty on both sides of the relationship since it   will not be clear for the customers or the suppliers what conduct is in accordance with the ASMP and what is   not.

The actual impact of the Amendment may only be assessed after the Competition Office decides how to apply the ASMP. Hopefully, it will act in a sensible manner. However, it can be assumed now that the Amendment could lead to circumstances that were not intended by    the legislator, e.g. fundamental changes to the basic principles of customers’ purchasing policies.