In response to concerns over so-called unfair trading practices (UTPs) between businesses arising from significant imbalances of economic power, the European Commission has for years devoted much attention to the functioning of the food supply chain. Despite these efforts, actual enforcement actions and legislative developments unfolded predominantly on the Member State level. On April 12, however, the Commission may have regained the initiative, as it presented a proposal for a directive that aims to tackle UTPs in business-to-business relationships in the food supply chain. This blog post highlights interesting elements from this proposal, explores its development and its objectives and shares some first critical observations.
The narrow scope of the proposal: better some than none?
Although the proposal has been launched as a plan to tackle UTPs in the food supply chain, the actual scope of the proposal is rather narrow. The proposed directive covers only a selection of UTPs which occur specifically in relation to the sales of food products by a supplier that is a small and medium-sized enterprise (SME) to a buyer that is not an SME. The notion of suppliers is not limited to small and medium-sized agricultural producers – even though their market position has attracted most attention and the message that they will be predominantly protected by this proposal has been strongly put out there by the Commission –, but it also includes their producer organisations (e.g. cooperatives) as well as any other SME in the food supply chain, including manufacturers and distributors.
In line with a minimum harmonisation approach, the proposed directive would introduce a common minimum standard from which the Member States can deviate to incorporate stricter rules on UTPs. Rather than presenting a general prohibition clause, it lists a selection of prohibited UTPs. This selection can be divided into two categories. The first category prohibits, without any exception:
- late payments for perishable food products (by proposing stricter payment terms than the Late Payment Directive, which is applicable to all sectors of the economy);
- last minute order cancellations, again specifically for perishable food products;
- unilateral or retroactive changes to contracts; and
- provisions that determine that a suppliers pays for the buyer’s wastage of food products, when caused by a factor outside the supplier’s control.
In addition to this, a second category prohibits four practices in principle, unless they were agreed in clear and unambiguous terms at the conclusion of the supply agreement. These practices are:
- a buyer returning unsold food products to a supplier;
- a buyer charging a supplier payment as a condition for the stocking, displaying or listing food products of the supplier;
- a supplier paying for the promotion of food products sold by the buyer; and
- a supplier paying for the marketing of food products by the buyer.
To enforce these new rules, each Member State will have to designate a public authority. Instead of establishing a new authority, the Commission notes the possibility of choosing an existing enforcement body like the national competition authority as the competent authority, which will also make it possible to realise economies of scope. Authorities are able to initiate stand-alone investigations as well as investigations following complaints. Complaints can be filed confidentially by an individual complainant with the authority, but (associations of) producer organisations are also able to file a complaint, either in their own right as a contract partner or as a representative of their SME members. If the authority finds an infringement, it will have the power to impose “effective, proportionate and dissuasive” fines and, in order to ensure a deterrent effect, to publish the decisions taken. Finally, to promote cooperation between the national enforcement authorities and to facilitate the exchange of best practices, the Commission will facilitate annual meetings and create a website.
Market power and the food supply chain: new proposal, but old love
This proposal can be placed in a long line of legislative initiatives introduced in response to concerns over abusive practices, which in the eyes of the legislator could not be tackled by the existing competition rules, often due to the absence of dominance or an appreciable effect on competition. As a supply chain with traditionally high concentration ratios at some levels but no actual (near-)monopolies, debates on the limits of ‘general’ competition law have often focused on the food supply chain. Almost a century ago, the Packers and Stockyards Act of 1921 was already introduced in the U.S. in response to worries that five large meat packers had engaged in certain practices that negatively affected producers and consumers but, nonetheless, could not be effectively resolved by the 1890 Sherman Act and the 1914 Clayton Act. On this side of the Atlantic, derogations from the EU competition and state aid rules for the agricultural sector have been granted under the Common Agricultural Policy (CAP). Their aim was to achieve specific objectives other than those set out by EU competition policy since the Treaty of Rome, which established the European Economic Community, and continue to exist to this day.
Moreover, most EU Member States have implemented specific rules on UTPs, some of those specifically aimed at the food supply chain, as is the case in Croatia, the Czech Republic, Hungary, Italy, Latvia, Lithuania, Poland, Slovakia and Spain. Meanwhile, some other Member States have put the topic of UTPs on their agendas as well, such as Belgium (a legislative proposal by an MP) and the Netherlands (the coalition agreement of the current government). In addition, many voluntary industry initiatives stating codes of conduct have also been introduced in Member States like the UK and Belgium.
Alongside these developments the Commission has not been inactive. Already in 2010, it set up a High Level Forum for a Better Functioning Food Supply Chain, which helped to launch a voluntary code of conduct, the Supply Chain Initiative’s (SCI) Principles of Good Practice, in 2013. Other subsequent initiatives included the establishment of the Agricultural Markets Task Force in 2016, and the launch of an inception impact assessment and a public consultation on the improvement of the food supply chain in 2017.
The proposal’s objectives and the CAP: where does it come from, where does it go?
One could see, hence, that the European Commission has not rushed with designing this proposal. Serving as the basic justification to tackle UTPs, the Commission highlighted that they can have a profound impact on the functioning of a market, because they can result in the misallocation of resources and (disproportional) exclusionary conduct, at the expense of agricultural producers. In essence, the necessity of the proposed directive follows from the following factors.
Existing rules, such as general (contract) law provisions, and self-regulatory initiatives are not able to resolve this, mainly due to the so-called “fear factor”, referring to a weaker party (typically, an SME) in a commercial relationship fearing that initiating litigation or filing a complaint may lead the stronger party to terminate the commercial relationship or impose other reprisals. Moreover, divergence of Member States’ regulatory approaches to UTPs is considered undesirable, because it may lead to differences in the conditions of competition for operators across the EU. Finally, public enforcement requires improvement, as coordination between Member States’ enforcement authorities is at present non-existent.
By introducing provisions and mechanisms specifically aimed at the above issues, the proposal aims to promote competition on fair(er) terms, which, according to the Commission, will contribute to the overall efficiency of the supply chain.
If adopted and implemented, the proposed directive would be the first to introduce common EU rules on UTPs between businesses, apart from the Late Payments Directive and the Directive on misleading and comparative advertising, which applies to B2C and B2B relations. This is remarkable in itself, as EU law has a prominent, if not leading, role in many adjacent areas of law and policy, such as consumer law, competition law and agricultural policy. It is in fact in the latter that the Commission found its legal basis for the proposal. With reference to one of the CAP’s objectives, listed in Article 39 TFEU, the Commission states that the common rules on UTPs are necessary to ensure a fair standard of living for the agricultural community, since UTPs threaten the profitability of agricultural producers. Strangely enough, the directive would also protect non-agricultural producer SMEs active in the food supply chain. According to the Commission, this is necessary, because agricultural producers and their associations may suffer indirect negative effects through UTPs occurring downstream in the food supply chain.
Some observations and the next steps for the proposal
The proposal seems to mark a beginning, not an end, for the Commission’s quest to tackle UTPs in the food supply chain. In line with its minimum-harmonising approach, it does not aim to resolve all UTPs occurring between all operators in the entire food supply chain, but rather tries to set a common minimum level of protection for selling SMEs active in the food supply chain. That does not mean, however, that some aspects of the proposal cannot be called into question. Although minimum harmonisation may trigger gold-plating and allows national legislators to take local market conditions into account, the proposal will certainly not achieve one of its objectives, that is, to combat the divergence of regulatory approaches across the EU. Then again, Regulation 1/2003 also allows Member States to adopt stricter national competition laws with regard to abuses of dominance.
Moreover, one could question whether the proposal will actually be able to resolve the second category of UTPs. What will prevent a firm in a superior bargaining position from presenting an SME with the grey-listed terms in a “clear and unambiguous” manner with a ‘take it or leave it’ stance, leaving an SME with no option but to accept those terms? Should these provisions not still considered to be harmful to SMEs active in the food supply chain? After all, those provisions may cause a significant imbalance in the parties‘ rights and obligations arising under a contract between a buyer and a selling SME, to the detriment of the latter. If so, the Directive on unfair terms in consumer contracts can perhaps provide inspiration. This Directive determines that non-individually negotiated contractual terms, which includes terms that have been drafted in advance (think of pre-formulated standard contracts), are deemed unfair, if they cause such a significant imbalance in the parties‘ rights and obligations.
The confidential complaints procedure, on the other hand, looks promising. It would provide an effective remedy to limit the fear factor. Current mechanisms like the SCI receive very few complaints, despite many stakeholders claiming the widespread occurrence of UTPs, suggesting that the fear factor is real.
If one would regard this proposal as just merely the beginning with regard to common rules on UTPs between businesses, then what is to be expected in the (near) future? Broadly speaking, it should not be a surprise if the existing rules were to be extended to other UTPs, other segments of the food supply chain or perhaps even other sectors. For example, why not include the purchases of SME agricultural producers? Are we not seeing the same imbalances of economic power arising upstream? Should not (many) other UTPs also be included, as they too may have a profound impact on the functioning of the food supply chain? And can one not think of other sectors that face similar concerns, in which competition law and contract law may not suffice as remedies?
Either way, this Commission’s proposal has been submitted to the European Parliament and the Council. Both institutions have not stood back from the discussions on UTPs and, in fact, called on the Commission – through a resolution and conclusions, resp. – to submit a proposal. The proposal is therefore unlikely to fall victim to neglect. It will be interesting to see whether the co-legislators consider the proposal to be a step in the right direction to prevent SMEs active in the food supply chain from remaining at the bottom of the food chain.