As we know only too well, the road to hell is paved with good intentions and even the best intentions can lead to the worst results. The French National Assembly has illustrated this with the unanimous adoption by the Committee on Economic Affairs on 6 April 2016 of a proposal for a law to “loosen the legislative definition of the situation of economic dependence”.
As usual, the legislator wanted to do good; the National Assembly was concerned by the growing economic imbalance between the big retail chains and their suppliers, reflected by the squeezing of suppliers’ margins to fund the price war between retail chains. New partnerships between centralized purchasing and listing bodies strained negotiations in 2015 and the situation for operators worsened in 2016.
Parliament’s response was to try to strengthen the effectiveness of the law of abuse of economic dependence, as the Competition Authority had advised in its Opinion of 31 March 2015 relating to cooperation agreements of the centralized purchasing and listing offices in the food retail sector. The draft legislation tabled was almost a verbatim copy of the recommendations in the Opinion.
France is faced with yet another regulation, which would prohibit for the whole of the French economy any abuse of economic dependence likely to affect the functioning or the structure of competition “in the short or medium term”. Currently, the tort of abuse of economic dependence, which is punishable by a Competition Authority fine of up to 10% of the turnover of the group to which the offending company belongs, assumes the existence of an effect on the functioning or the structure of competition. In the future, that effect would no longer need to occur at the time of the abuse but « in the short or medium term”.
Up to now, the courts have been very tough on those seeking to establish abuse of economic dependence and very often dismissed claims of a situation of dependence if the supplier was unable to prove its lack of alternative buyers or if it deliberately concentrated sales on one distributor alone. In order to overturn this rule of case-law, the new law would also allow a finding of a situation of economic dependence where « on the one hand, the termination of the commercial relationship between the supplier and the distributor could jeopardize the continuation of the supplier’s activity [and] on the other, the supplier does not have an alternative solution to said commercial relationship able to be implemented within a reasonable time. »
If this law were adopted, a large number of suppliers with established relationships with major distributors, in particular SMEs, would find themselves, ipso facto, in a situation of economic dependence, which would also extend beyond relations with the mass retail sector.
The green light given to the draft law at the committee stage has provoked strong reactions, not only by distributors but mostly by suppliers who fear that they will be the ones to ultimately suffer.
Distributors may in effect decide to end relations with suppliers likely to be dependent in order to avoid the risk of big fines and damages awards in cases where an abuse of dependence is alleged against them (see Le Monde article entitled “Unnatural alliance between SMEs and hypermarkets – Manufacturers and retail chains challenge text purporting to redefine abuse of economic dependence”).
The solutions advocated by the Competition Authority and the Committee on Economic Affairs were clearly not sufficiently discussed with the principal players beforehand, which is unfortunately all too often the case.
This ill-conceived draft should be abandoned right away in the interests of the French economy and of suppliers – which it insists on protecting against their will – since it produces inefficiency, legal uncertainty and perverse effects.
It is counterproductive to adopt a piece of legislation which is of general application to the whole of the economy and highly restrictive in order to address a specific issue pertaining to the relations between the large retail chains and their suppliers. The provision will create difficulties in other sectors without solving the problem it is intended to address. The same old mistake, which has been repeated for twenty years, is back again. The difficult relations between retail distribution chains and suppliers need to be handled preferably by specific actions in the courts or before the Competition Authority, not through legislation, particularly when that legislation is of general application.
2. Ill-conceived and source of legal uncertainty
The National Assembly wanted to moderate the provision by targeting effects on competition in the short or medium term, in contrast with the general approach of the laws on anticompetitive practices. For administrative fines – which can be very high – to be legitimately imposed against an undertaking, the infringement of competition law must be clear. For that reason, the laws on anticompetitive practices will sanction practices whether past or present by assessing their object or actual effect or, exceptionally, their object or potential effect if it can be established immediately. Only the merger control regulations, where there are no fines except in cases of non-compliance with the notification obligation or the duty to provide complete information, adopt a resolutely prospective approach in the short or medium term.
By subjecting the imposition of a very large fine to random analysis, the contested provision creates unacceptable legal uncertainty in a state governed by the rule of law.
3. Numerous perverse effects
Manufacturers and SMEs are rightly concerned about distributors ending relations with certain suppliers before the adoption of the law in order to avoid placing themselves in a situation of abuse of dependence.
However, this proven risk will not disappear by magic on the date the law enters into force. On the contrary, operators in a position of strength will, by giving sufficient prior notice if they are prudent, seek to terminate relations with partners likely to be or to become dependent, permanently and in all sectors of the economy.
Far from protecting dependent operators, this inadequately conceived and badly coordinated text weakens the situation of the very businesses it sought to protect and will close markets to them. But, all is not lost: the public authorities still have time to go back and address the concerns of the key stakeholders.
Professor of Law at Université Panthéon-Assas (Paris II)
Attorney at Law (Paris Bar) Vogel &Vogel
 Cécile Prud’homme – Alliance contre nature entre PME et hypermarchés, Industriels et grande distribution s’opposent à un texte visant à redéfinir l’abus de dépendance économique (Le Monde, 16 April 2016, p. 6).