New French legislation, the so-called "Sapin II" Law will have a significant impact on distribution agreements signed by suppliers, wholesalers, or retailers in the marketing of products or the supply of services that have an effect in France. The Law entered into force December 11, 2016, when the French Constitutional Court approved the relevant provisions. This Law significantly increases fines for certain infringements, prohibits certain practices, and adjusts the establishment of payment terms and the prior obligation to annually agree on the terms and conditions of commercial relationships (the so-called "single agreement").

Increase in fines. The Law significantly increases fines imposed for certain infringements set out under Title IV of the French Commercial Code (the FCC). First, the maximum fine for violation of the rules on standard terms and conditions, the establishment of payment terms, and penalties for late payments (Article L. 441-6 of the FCC) is increased from EUR 375,000 to EUR 2 million. Second, the maximum fine for violation of rules governing the prohibition of abusive practices (Article L. 442-6 of the FCC) is increased from EUR 2 million to EUR 5 million. Courts are likely to apply these fines to infringements committed as of December 11, 2016, even for agreements signed before this date, as they will consider that the effective violation of the law, such as non-compliance with payment terms, occurred after the entry into force of the Law.

In addition, French law used to provide that the imposition of several administrative fines on the same legal person engaged in anticompetitive practices could not exceed a maximum threshold. The Law has now removed the mention of the maximum, which means that the cap may now be exceeded if several administrative fines are imposed on one entity.

Additional abusive practices. The Law brings two changes to Article L.442-6-I of the FCC, which prohibits abusive practices that may occur during commercial partnerships. First, Article L.442-6-I-1° condemns practices such as "obtaining, or seeking to obtain, from a trading partner any advantage unrelated to a commercial service effectively rendered or which is clearly disproportionate to the value of the service rendered." The Law has extended this provision to international distributor organizations (e.g., international purchasing groups). Second, two additional abusive practices are introduced at Article L.442-6: the imposition of a price revision clause (including the possibility for parties to sign single agreements every two or three years) based on price indices that are not directly linked to the contractual goods or services; and the imposition of a clause submitting (or attempting to submit) a commercial partner to penalties for late delivery in case of unexpected events ("force majeure").

Extension of the time period covered by single agreements. In accordance with Article L.441-7-I, parties granting commercial services are required to sign the so-called single agreement described above. This agreement may either be a self-contained document or a framework document. In the past, French law required a yearly signature before March 1, which was burdensome as it required yearly negotiations on these terms and conditions that would apply for one year. The Law now provides for a signing of this single agreement for two or three years. In addition, the Law imposes that the agreement sets out the conditions under which prices will be revised (e.g., public price index) during them. This change is applicable to agreements signed as of January 1, 2017.

Derogation to payment terms. Article L.441-6 limits parties' freedom when setting payment terms as the maximum term that may be provided is 60 days from the invoice date. The Law introduces a derogation of 90 days from the date of invoice for goods that are to be exported outside of the European Union. This derogation will not apply to purchases made by "significant companies." Although one may regret that the term "significant companies" is not defined in the Law, it is likely to cover significant undertakings within the meaning of the decree n° 2008-1354, i.e. undertakings (i) that have at least 5,000 employees and (ii) that achieve a turnover exceeding EUR 1.5 billion or have a balance sheet exceeding EUR 2 billion.

Implications

Several aspects of this Law are welcome. In particular, the possibility for parties providing commercial services of signing a single agreement every two to three years under Article L. 441-7 simplifies the formalistic process that entailed the yearly signing of a single agreement. These yearly negotiations were particularly burdensome as they prevented parties from planning their investments sufficiently in advance and from deciding on business plans for several years. This rule was therefore not tailored for contractual relationships that required significant investments by one of the parties (e.g., franchise agreements or selective distribution agreements). The legislative reports of the French government pointed out the concern of the growing power of large-scale distribution entities during negotiations; this seems to indicate that the purpose of this legal obligation is not to hamper contractual negotiations in other industries.

However, the increase in the level of fines for violation of restrictive practices demonstrates the French government's willingness to hit hard on companies benefiting from favorable commercial terms. Suppliers as well as retailers should ensure full compliance with these rules before signing and implementing their distribution agreements. Although fines rarely reach that cap, authorities and courts do not think twice before pursuing infringements of these rules.