Will the new EU Directive on unfair trading practices in the food supply chain have any impact on the existing legislation in CEE?

2020 | roadmap

Unfair trading practices ("UTPs") in business-to-business relationships in the food supply chain have been in the spotlight of the European Commission ("Commission") since late 2008. As a result, the new Directive on unfair trading practices in the food supply chain (the "Directive") was adopted in spring 20191. Its aim is to protect weaker suppliers against stronger buyers. Several EU Member States (many of them in CEE) already have UTP legislation in place, which is enforced to varying degrees. In terms of enforcement and strictness, the Czech legislation, closely followed by Slovakia's, can be considered a pioneer in the UTP legislative area. With the Directive introducing a minimum standard of protection for food suppliers – and allowing Member States to adopt or maintain national rules that go beyond the UTPs listed in the Directive – the question of whether the Directive will bring any significant changes arises. What can be expected from its implementation in relation to these two jurisdictions?

Protection of weaker suppliers against stronger buyers remains the common denominator

There is a general understanding at the EU and national levels that asymmetry in bargaining power may lead to the imposition of UTPs on suppliers. In preparing for the Directive, the Commission argued that due to suppliersꞌ weaker position, they are often de facto forced to accept unfair practices to continue selling their products and maintain commercial relations with buyers in the supply chain. Such behaviour was on the Czech and Slovak legislators' radar before the adoption of the Directive, with the Czech UTP legislation being in force from 20122 and Slovakia's from 20133. The common denominator of all the legislation in place today, however, is the provision of mandatory rules that outlaw certain UTPs. A brief comparison of the respective UTP rules follows below.

Scope of application: Who is protected and against whom?

EU: Suppliers of food products are protected against possible unfair behaviour engaged in by economically stronger buyers or groups of buyers at various levels of the distribution chain (processors and intermediaries). This "step approach" (also referred to as the relative concept) is based on group turnover figures reflecting the different bargaining powers of the suppliers and buyers. The Directive aims to protect only those suppliers who due to a weak bargaining position require such protection. The Directive introduces five turnover thresholds. A micro enterprise with turnover of less than EUR 2m is protected against buyers with turnover exceeding EUR 2m. Small enterprises with turnover above EUR 2m and not exceeding EUR 10m are protected against buyers with turnover higher than EUR 10m. Medium-sized enterprises with turnover above EUR 10m but not exceeding EUR 50m are protected against buyers with turnover higher than EUR 50m. The Directive also provides two more thresholds (not exceeding EUR 150m and EUR 350m). The protective effect thus covers suppliers with turnover of up to EUR 350m.

CZ: The applicable Czech UTP legislation protects food product suppliers, irrespective of their market power or turnover. It prohibits buyers of food products from abusing their market power. The applicable laws set a rebuttable presumption that a distributor of food products (i.e. a wholesaler or retailer) enjoys significant market power if its annual turnover from the sale of food products exceeds CZK 5bln (approx. EUR 200m).

SK: Suppliers and buyers of food products are both protected against UTPs under applicable Slovak UTP legislation. Unlike the Czech or EU legislation, the turnovers and/or related market power of either parties are irrelevant. The Slovak legislation aims to safeguard a fair balance in business-to-business relationships between the parties in general. Nevertheless, it places slightly more obligations and limitations on food retailers. This allows the conclusion that food suppliers are generally considered the weaker party in such business relationships.

What is prohibited?
EU:
The Directive does not prohibit unfair trading practices in general but targets 15 specific unfair trading practices which were identified as the most damaging. In doing so, it distinguishes between "black" and "grey" practices. The following black unfair trading practices are prohibited irrespective of the circumstances:

  1. late payments (later than 30 days after the end of the agreed delivery period or the date on which the payment is due for perishable products, or later than 60 days for non-perishable products);
  2. last-minute order cancellations;
  3. unilaterally changing the terms of the supply agreement;
  4. requiring payments from the supplier that are not related to the sale of the products;
  5. requiring the supplier to pay for the deterioration or loss of the products on the buyer's premises;
  6. refusing to enter into a written agreement;
  7. unlawfully acquiring or using the supplier's trade secrets;
  8. threatening to carry out acts of commercial retaliation; and
  9. requiring compensation from the supplier for the cost of investigating customer complaints when there is no negligence or fault on the supplier's part.

On the other hand, the following grey practices are allowed if the supplier and the buyer agree on them beforehand in a clear and unambiguous manner:

  1. returning the unsold products to the supplier without paying;
  2. charging payment as a condition for displaying or listing the supplier's products;
  3. requiring the supplier to bear the costs of discounts on products sold by the buyer as part of a promotion (unless the buyer, prior to the promotion, specifies the period of promotion and the expected quantity of products to be ordered at the discounted price);
  4. requiring the supplier to pay for advertising by the buyer;
  5. requiring the supplier to pay for marketing by the buyer; and
  6. charging the supplier for staff to fit out premises used for the sale of the products.

CZ: The Czech UTP legislation includes a general clause prohibiting any sort of abuse of significant market power by retailers vis-à-vis the suppliers, together with an open list of prohibited UTPs. The Czech legislation is generally stricter than the Directive, already covering several of the practices blacklisted under the Directive. Other practices listed under the Directive could be summarised under the general clause or other practices specifically covered by the Czech UTP legislation, such as the prohibition on negotiating and requiring payments or other consideration for which a service or other consideration was not provided, but also which is inadequate or disproportionate to the value of the actually provided consideration.

SK: The Slovak UTP legislation in general aims to copy the Czech one. It also introduced a general clause under which practices other than those specifically listed might be deemed unfair if they deviate from the usual fair behaviour in business-to-business relationships. In addition, the Slovak legislation includes an open list of UTPs which already covers most of the UTPs listed under the Directive and even goes beyond it. 

Enforcement
EU:
The Directive states that each Member State must designate one or more authorities to ensure the prohibition of UTPs. Suppliers affected by a prohibited UTP must be able to address complaints to these enforcement authorities. The supplier can ask for its identity to be protected.

The enforcement authorities' powers more or less equal those of the competition authorities, i.e. they have the power to conduct investigations, require buyers and suppliers to provide information, carry out on-site inspections, require buyers to terminate prohibited UTPs, impose fines and publish their decisions.

CZ: The Czech Competition Authority is responsible for enforcing the UTP legislation. It is already vested with all powers required by the Directive and well known for its strict enforcement policy. Abuse of significant market power can lead to fines of up to 10 % of annual (net) turnover in the preceding business year. The CCA has followed its antitrust fining guidelines so far when setting fines.4

SK: UTPs are sanctionable by a fine of up to EUR 500,000. Enforcement lies with the Ministry of Agriculture. Like the Czech legislation, it is in line with minimum requirements set by the Directive.

Comment
The Directive allows EU Member States to adopt or maintain national rules that go beyond the UTPs listed in the Directive. Clearly, the respective Czech and Slovak UTP rules in force go beyond the minimum standards set by the Directive.

The implementation of the Directive could be an opportunity to review the oft-criticised national UTP legislation, which is said to be too vague, strict and irrational from a business point of view (in view of the absolute concept of market power under the Czech UTP rules or the annual cap on financial performances in return for marketing or promotion services provided by buyers to suppliers under both the Czech and Slovak UTP rules).

Nevertheless, various Czech and Slovak stakeholders have already said that they do not see the Directive as mitigating the current legislation. The changes to national legislation are thus expected to be minimal (e.g. the scope of buyers most likely will be expanded). Participants in business-to-business relationships in the food supply chain will therefore have to continue duly observing compliance with national UTP rules.

1Directive No. 2019/633 on unfair trading practices in business-to-business relationships in the agricultural and food supply chain. EU Member States must implement the Directive in their national laws by May 2021 and apply it six months later.
2Act No. 395/2009 Coll., on Significant Market Power in the Sale of Agricultural and Food Products and Abuse thereof.
3Act No. 91/2019 Coll., on Inappropriate Conditions in Food Trade and on Amendments to Certain Acts.
4The Czech Competition Authority has issued four decisions this year alone, the latest being in October, when it fined MAKRO approximately EUR 1.9m for violating UTP legislation by concluding contracts with certain food suppliers in 2016 – 2018. These included payment obligations on the part of the food suppliers to MAKRO for logistics and marketing services related to the use of delivery services and reservation of business space. The total amount of these payments exceeded the statutory allowance of 3 % of the supplier's annual sales. In addition, the terms of the so-called delivery service were not sufficiently specified in the contracts.