On August 31 2016 proceedings were initiated for a popular initiative calling for amendments to the Federal Constitution and competition law. The initiative requested changes to the Cartel Act in order to enforce the possibility of non-discriminatory procurement of goods and services abroad by Swiss purchasers on the basis of the introduction of the concept of 'relative market dominance'. The so-called 'fair-price initiative' is backed by various consumer, hotel, gastronomy and tourism associations. A popular initiative is a direct democracy measure which allows Swiss citizens to vote directly on issues brought forward by other citizens, and which is eligible to be voted on if 100,000 signatures supporting the initiative are collected by March 20 2018. Should this be the case, it will be the first time that Swiss citizens will get to vote directly on matters relating to competition law issues and principles.
The reason for the fair-price initiative is the strength of the Swiss franc compared to the euro and the corresponding currency advantage of buying products outside Switzerland. Since 2009 the value of the euro against the Swiss franc has depreciated by about 40%. According to the associations behind the initiative, prices for many goods and products purchased in the European Union and sold within Switzerland have not reflected this reduction of the currency exchange rate sufficiently. This has led to political accusations that international producers of goods and services are imposing surcharges on goods and products in Switzerland in order to profit from the high purchasing power of Swiss consumers.
Since 2011 the Competition Authority(1) has made several attempts to handle the alleged price surcharge through investigations and at the legislative level in Parliament, resulting in various proposals for reforming the competition law framework to include legal measures against cross-border price differentiation. The fair-price initiative is an additional attempt to introduce measures in this regard and would, if approved by the Swiss electorate, provide for legal provisions on a constitutional and legislative level, which – according to the opinion of the associations behind the initiative – should act against the alleged discriminatory pricing.
The fair-price initiative calls for the amendment of Article 96 of the Constitution of the Swiss Confederation to require the confederation to legislate that:
- non-discriminatory procurement of goods and services abroad is ensured; and
- distortion of competition, which is caused by unilateral behaviour of dominant undertakings, is prevented.
Further, the fair-price initiative requires that the implementing statutes of the constitutional amendments apply the following principles:
- Introduction of the concept of relative market dominance (ie, a concept of dominance that is applicable to undertakings on which other purchasing undertakings are dependent, in such a manner that these purchasers have no other adequate or reasonable possibilities to switch to other suppliers).
- Extension of the scope of applicability of the legal provisions relating to dominant undertakings to include relative market dominant undertakings – essentially, this means that relative market dominant companies would also have to adhere to all rules applicable to dominant companies.
- Defining as abusive behaviour those actions by which dominant as well as relative market dominant companies, without justification based on objective grounds, restrict possibilities for purchasers to buy goods or services which are offered both in Switzerland and abroad, in the country of their choice and at the prices charged in that country – this would likely be enforced by prohibiting a refusal to supply in the foreign country at the prices applied in the said country. However, price differences are permitted if they do not have anti-competitive goals as their object and do not lead to distortions of competition.
- No direct penalties against relative market dominant companies if found to have practiced unlawful behaviour – this was likely included in order to alleviate the concern that the new rules would not be sufficiently foreseeable for affected companies and that the risk of penalties in such a situation would be problematic. Nevertheless, administrative orders can be issued and relative market dominant companies can be sued in a civil court for such abuses.
- Admissibility of reimport restrictions with regard to goods exported from Switzerland if these goods are to be resold without further processing – this essentially serves to prevent products manufactured in Switzerland and sold at lower prices abroad from being reimported at these prices. Presumably, this rule was included in order to ensure that Swiss-based manufacturers are less likely to oppose the initiative.
- Ensuring non-discriminatory online purchasing by means of the law against unfair competition.
The strength of the Swiss franc against the euro leads to certain differences between the Swiss and – in particular – German price levels. However, it remains unclear whether the perceived price differences are due mainly to price differentiation by the producers themselves or whether it is the high costs of doing business and the significantly higher wages in Switzerland, as well as barriers to cross-border trade (eg, different rules and regulations relating to goods and services) that contribute to or even justify these differences.
Further, the fair-price initiative will raise a significant number of concerns relating to its enforcement, as well as its consequences and justification:
- Its remains highly uncertain whether the fair-price initiative – insofar as it tries to tackle cross-border price differentiation – can be enforced against companies active outside the territory of Switzerland. The investigation and enforcement of a decision by the Competition Authority will likely not be possible outside Switzerland. Therefore, the initiative will mainly affect companies in Switzerland, including companies with a subsidiary in Switzerland.
- In many cases, a geographic price differentiation is not per se problematic, but is the consequence of different levels of costs, demand and competition. Price differentiation can even lead to a more efficient allocation of goods and increased welfare compared to a situation in which prices would be the same globally. A good example of this are regulated prices or goods which are protected against competition from imports from outside Switzerland (mainly agricultural goods) in order to maintain higher prices in Switzerland.
- The initiative would lead to preferential treatment of Swiss exporting companies and discrimination of foreign companies importing goods to Switzerland, since the proposed measures would allow only Swiss companies exporting goods abroad to restrict reimports back into Switzerland. In effect, Swiss companies selling products at lower prices abroad would be permitted to practice cross-border price differentiation, whereas foreign companies exporting goods into Switzerland will be prohibited from applying different prices despite different cost and competition situations.
- The effects of the fair-price initiative on the overall price level may be limited. In particular, the initiative does not provide for any obligations of Swiss retailers to pass on lower purchasing prices. In addition, the initiative does not deal with state-imposed import barriers or administrated prices. In addition, Swiss manufacturers will likely have to cope with increased competition from lower-priced imports, putting them at a competitive disadvantage. Ultimately, it is doubtful whether the initiative will have an overall positive effect on the Swiss economy.
- The fair-price initiative will have effects beyond large multi-national companies. Due to the definition of 'relative market dominance', it is highly likely that medium-sized and national companies will also be considered to be relatively market dominant. This may significantly increase the compliance costs and expenditures of such companies, given that the effects of the fair-price initiative would not be limited to just price differentiation or imports. All rebate schemes and behaviour relating to contract termination, product development and pricing would also have to be in line with competition law rules.
For further information on this topic please contact Amalie Wijesundera or David Mamane at Schellenberg Wittmer by telephone (+41 44 215 5252) or email ([email protected] or [email protected]). The Schellenberg Wittmer website can be accessed at www.swlegal.ch.
(1) In 2013 the Secretariat of the Competition Commission concluded a preliminary investigation into the passing on of foreign exchange rate benefits and held that there were no indications that price differences are caused by unlawful restraints of competition. The market survey had shown that currency exchange rates affected only approximately 50% of the costs of retail companies doing business in Switzerland and that price factors such as high marketing costs, high wages and high rents also play a significant role in the pricing structure of goods and services. Accordingly, the secretariat found no grounds for opening proceedings against retail companies selling consumer goods in Switzerland (RPW 2013/4, page 488 et seq).
Dominic Wälchli, trainee lawyer, assisted in the preparation of this update.