COMPETITION • FRENCH LAW • RESTRICTIVE PRACTICES
French law prohibits resale below cost, since the Law of 2 July 1963, for at least two reasons. On the one hand, it offers a distorted image of competition to consumers, because the merchant is seeking to give credence to the idea that he is offering low prices, when his objective is to appropriate customers from his competitors. On the other, resale below cost does not necessarily benefit consumers, as often the reduction is accompanied by hefty price hikes on other products. For these reasons, Article L. 442-5 (former Art. L. 442-2) of the Commercial Code now prohibits all traders from reselling or advertising the resale of a product at a price lower than its actual purchase price.
Like the OECD, which advocates its abolition because of its lack of effectiveness, EU law seems to be unfavorable to a general ban on resale below cost when it is aimed at protecting consumers. In two rulings under Directive No 2005/29 on unfair commercial practices, the Court of Justice declared contrary to EU law the Belgian and Spanish legislation, which are very close to French law, which introduced a general ban on offering for sale or selling goods at a loss with exemptions that do not meet the unfairness criteria set out in the directive. The solution would be capable of application under French law only if, at least in part, it pursued the objective of protecting consumers, which is a matter of debate. Whatever the solution to this question, this tort has clearly fallen into disuse: for many years now, few decisions have been handed down on the basis of former Article L. 442-2.
The prohibition concerns “any trader” without distinction. All operators who buy to resell are subject to the regulation on resale below cost, including importers, wholesalers and retailers. On the other hand, production and service activities are excluded from the scope of the prohibition, although they are subject to the prohibition on abusively low prices (Commercial Code, Art. L. 420-5) or predatory pricing constituting an abuse of a dominant position (Art. L. 420-2). The nature of end user has no bearing on the classification: it may be a consumer, a trader/professional or a company in the same group.
The prohibition applies to all products resold or offered for resale as is, i.e. without having undergone any transformation. Any intervention by intermediaries must thus be exclusive of any transformation. The transformation must be effective. Certain operations such as cutting or slicing are most certainly a transformation. On the other hand, there is room for doubt with regard to defrosting or repackaging. In the same way, according to the Administration, the simple addition of a smart card to a cell phone by a reseller constitutes a significant transformation of the product meaning that it is not classified as resale as is.
Offering goods for sale below cost is where the selling price is lower than the actual purchase price. This refers not to the average purchase price from suppliers but the purchase price per lot. Where there is a combination of sale of product/provision of service, this is an inseparable whole, even if for advertising reasons prices have been artificially apportioned separately. Finally, the threshold for resale at a loss must be calculated on the basis of an actual, not projected, purchase price, i.e. determined on the basis of extrapolations from the increase in sales between a central purchasing agency and its suppliers over the past year. The actual purchase price is the net per-unit price appearing on the invoice minus the total of all other financial benefits (AAF – “autres avantages financiers“) granted by the vendor, (remuneration for marketing services and rebates not included in the invoice) expressed as a percentage of the net unit price of the product, plus sales taxes, specific taxes relating to the resale and the price of transport. The resale below cost threshold does not include associated costs invoiced to customers by the operator, such as shipping or preparation, if it is not established that they correspond to services that are inseparable from the sale of the product. In addition, Article L. 442-5, paragraph 3 of the Commercial Code allows wholesalers to sell to retailers with a coefficient of 0.9 to allow them to compete with the large-scale distribution chains. Contrary to the hopes of certain parliamentarians, “cash and carry” wholesalers can benefit from this provision in order to avoid additional complications. This coefficient benefits “the wholesaler who distributes products or services exclusively to professionals who are independent and who exercise the activity of final retail seller, processor or service provider”. Independent, according to the law, means “any undertaking freely able to determine its commercial policy having no capital links or affiliation with the wholesaler”. Such is not the case for the members of a central purchasing body when the interrelationship created by the affiliation contract largely exceeds the obligations between a wholesaler and its clients and deprives the latter of any commercial independence.
The EGalim Law of 30 October 2018 authorized the government to legislate by way of ordinance before 1 March 2019 to raise by 10% the resale below cost threshold for foodstuffs and products intended for pet feed, resold as is to the consumer, for a period of two years. According to Article 2 of the ordinance, “the actual purchase price […] shall be multiplied by a factor of 1.10 for foodstuffs and products intended for pets resold ‘as is’ to the consumer”. This increase is limited to food products and products intended for use in pet food. It is intended to ensure better negotiating terms for suppliers, so as to ease the pressure on their own suppliers’ prices. The effective date of the new resale below cost threshold was set at 1 February 2019 by Decree No 2018-1304 of 28 December 2018.
Seven exceptions to the prohibition have been laid down by the legislator. This list is exhaustive:
– alignment exception, which allows the distributor of food products marketed in a store with a sales area of less than 300 square meters and non-food products marketed in a store with a sales area of less than 1,000 square meters, to align its resale price with the price legally charged for the same products by another trader in the same area of activity;
– seasonal products – the products must be “markedly” seasonal. Resale below cost can only occur at the end of the sales season or in the interval between two sales seasons;
– resale below cost of products that no longer meet the general demand due to changes in fashion or the emergence of technical improvements;
– resale below cost of products with identical characteristics, where products have been re-supplied at a lower price, the actual purchase price being then replaced by the price resulting from the new purchase invoice;
– voluntary or forced sales in cases of discontinuation or change of a commercial activity;
– resale below cost of perishable products in danger of rapid deterioration, provided that the reduced price offer is not the subject of any advertising or publicity outside the point of sale;
– resale below cost of discounted products as referred in Article L. 310-3 of the Commercial Code.
Both resale below cost and the announcement of such sales are sanctioned. Individuals may be fined up to EUR 75,000 or half the advertising expenses, if applicable; the examining magistrate or the court hearing the case may order the cessation of the advertisement, either at the request of the Public Prosecutor’s Office or ex officio. In addition, the person accused of resale below cost may have to face publication and posting of the decision against it. Companies can be fined a maximum fine of five times that provided for physical persons under Article 131-38 of the Criminal Code. They may also be required to halt the advertising campaign and/or publicize the ruling finding them guilty (Article L. 442-5, III). Resale below cost may also be subject to the settlement procedure provided for in Articles L. 470-4-1 and R. 470-5 et seq. of the Commercial Code. Finally, the criminal liability of resale below cost does not preclude the bringing of an action for unfair competition, since it is a means of eliminating competitors from the market and constitutes a culpable violation of a legal requirement.
