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.
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.