The new economic regulations (NRE)

2. REGULATION OF COMPETITION After 13 years of application of competition law, founded on the ordinance of 1 December 1986, it was necessary to examine whether the system in force made it possible to carry out its mission of regulating the proper functioning of the market. It appeared that it was appropriate to strengthen the effectiveness of the fight against anticompetitive practices and to adapt merger control to market developments. Moreover, the trade and distribution conference (assises du commerce et de la distribution) of 13 January last highlighted that it was necessary to put an end to certain excesses in the relations between suppliers and distributors. With this in view, the bill comprises three axes for better regulation of competition: 1. moralise commercial practices: the change in the balance of power between producers and distributors has led to an imbalance in commercial relations and even to the imposition of one-sided or abusive contracts placing producers, and notably the smallest of them, in situations of economic dependence that prevent them from competing on equal terms or even from competing at all, without any benefit being passed on to the consumer. - To restore “commercial civic-mindedness”, the government has chosen a preventive mechanism with the creation of a commission on commercial practices and contractual relations between suppliers and distributors. It will in particular be responsible for following the development of distribution and of the relations between producers and distributors and for drawing up reference frameworks defining good commercial practice. - The bill also includes a repressive axis to establish and penalise abuses: these will first be more clearly defined so as to enable the civil judge to better grasp them in order to ensure redress and penalties. Redress and penalties for abuse of economic dependence will no longer require the market to be affected but simply the contractual relationship between the supplier and the distributor. - Lastly, with the aim of ensuring the effectiveness of the law, it is provided that the minister, guarantor of economic public order, may, even in the absence of the victim from the proceedings, request, in addition to the cessation of the practices, the annulment of the clauses and contracts on which they are based and compensation for the harm suffered. In addition, the minister will be able to ask the judge to penalise the disturbance of economic public order by imposing a civil fine. 2) Fight more effectively against anticompetitive practices: - To ensure better effectiveness of the law, it is important to strengthen the means of detecting and establishing facts, given the practical difficulties encountered in this area: this involves lightening the procedures for investigating practices currently being committed and introducing a leniency mechanism which has proved its worth in other countries and at Community level and which allows companies that so wish to contribute their cooperation to the clean-up of markets and to the fight against secret cartels. - Strengthening the effectiveness of penalties involves measures intended to counter companies' strategies consisting in minimising the turnover used as the reference for calculating penalties and a raising of the level of possible penalties, in particular for companies that have repeated their practices. 3) Control mergers more systematically and in a more transparent manner The current system is hard to read and not very transparent and harmonisation with the Community mechanism had become necessary. The bill consequently aims to: - establish a systematic and readable procedure with mandatory notification above thresholds defined in an objective manner (turnover) - put in place a faster procedure for simple operations and grant the maximum guarantees for the operations raising the most delicate questions, presupposing a referral for an opinion to the Competition Council (Conseil de la concurrence). - improve transparency: the market must be informed of operations in progress while preserving the business secrecy of the companies concerned. Market players will be able to present their observations. MORALISE COMMERCIAL PRACTICES Put in place a commission on commercial practices and contractual relations to draw up codes of good conduct At the meetings of the working groups preparing the trade and distribution conference of 13 January 2000, the professionals had recommended addressing certain abusive behaviours through a contractual approach and defining codes of good conduct. The improvements made by the bill A commission on commercial practices and contractual relations between suppliers and distributors is created. It is composed on a joint basis of representatives of producers and distributors as well as magistrates and qualified persons. It is entrusted with a mission of observation, analysis and reflection. It follows the development of distribution and of the relations between producers and distributors and draws up, in association with the operators, reference frameworks defining good commercial practice. In addition, it publishes recommendations and opinions as well as an annual report. These provisions are inserted in Title IV of the ordinance of 1 December 1986 relating to transparency and restrictive competition practices. Better establish and penalise abuses through an improved definition of them 1) The situation existing before the bill and its imperfections Article 36 of the ordinance of 1 December 1986 as amended by the law of 1 July 1996 defined as abusive only the following practices: Discriminatory sales or purchasing practices (article 36-1); Obtaining an advantage prior to any placing of an order without attaching to it a commitment to a proportionate purchase volume (article 36-3); Obtaining an advantage derogating from the general terms of sale under threat of delisting (article 36-4); Abrupt termination of established commercial relations without written notice (article 36-5). In recent years, new practices have developed which have led to suppliers bearing costs borne by distributors, notably on the occasion of mergers of brands or conversions of establishments. In addition, payments of money by suppliers without consideration have increased, often dressed up under the term “commercial cooperation” when no service is rendered by the distributor. These practices are generally the expression of abuses of economic dependence which article 8-2 of the 1986 ordinance, under the supervision of the Competition Council, has not so far made it possible to penalise effectively because proof that the market was affected was difficult to establish. The existing mechanism must therefore be strengthened by giving a better definition of abuses in order to enable the civil judge to better grasp them. Moreover, the civil or commercial judge must be enabled to redress and penalise abuses of dependence or of buying power insofar as they affect the contractual relationship between a supplier and a distributor. 2) The improvements made by the bill The NRE law makes it possible, on the one hand, to clarify the definition of discriminatory practices and to include in it the practices consisting in soliciting an advantage under commercial cooperation without a service actually being rendered in return, as well as the “bride's basket” (corbeilles de la mariée) (right of access to listing after the merger of two distributors). The law makes it possible, on the other hand, for operators who are victims of abuse of dependence or of buying power, as well as for the minister responsible for the economy, guarantor of economic public order, to bring the matter before the civil or commercial judge for compensation of the harm caused by these practices and to penalise those responsible, without running up against the requirements in terms of the market being affected under article 8-2 of the 1986 ordinance. In addition, the law affirms the nullity of the clauses and contracts on which the retroactivity of commercial cooperation agreements or of back margins (marges arrières), and the right of access to listing, are based. Lastly, the law provides that the notice period provided for in article 36-5, which must be observed in the event of abrupt termination of pre-established commercial relations, may be defined by inter-professional agreements or by decree and by product category. Better establish and penalise abuses by widening the minister's powers 1) The situation existing before the bill and its imperfections The imbalance in supplier-distributor relations dissuades companies that are victims of abusive practices from taking action for compensation of the harm they have suffered and leads the minister responsible for the economy, guarantor of economic public order, to bring such conduct before the civil judge. The minister derives this power from the terms of article 36 of the 1986 ordinance and may act in summary proceedings (référé) and/or on the merits to obtain compensation for the harm caused to economic public order by the abusive practices and the cessation of those practices. However, case law has denied the minister the possibility of obtaining, by way of restoration of the previous state of affairs, the annulment of the contracts or clauses on which the practices in question are based and the reimbursement of the sums unduly paid that follows from it. As a result the minister's action has become ineffective since he is now recognised as having only the possibility of requesting the cessation of the practices in dispute, even though the decision ordering such cessation is generally issued after the practices have ceased. 2) The improvements made by the bill The NRE law gives the minister the power, even in the absence from the proceedings of the victim of the abusive practices, to request, in addition to the cessation of these practices, the annulment of the clauses and contracts on which they are based and compensation for the harm suffered. In addition, the minister may ask the judge to penalise the disturbance of economic public order by imposing a civil fine. FIGHT MORE EFFECTIVELY AGAINST ANTICOMPETITIVE PRACTICES Improve the effectiveness of penalties 1) The situation existing before the bill and its imperfections The financial penalties imposed by the Competition Council must be proportionate to the gravity of the facts complained of, to the extent of the damage caused to the economy and to the situation of the company or body penalised. The maximum amount of these penalties is currently set by reference to the turnover achieved in France in the last financial year closed at the time of the Council's decision. Certain companies thus take advantage of the length of the procedure to “empty” the company concerned of most of its turnover and to reduce the basis of the penalty. In addition, the structure of certain economic groups, split into several dozens or hundreds of subsidiaries, has the consequence that the companies formally responsible for the infringements are penalised on the basis of a reduced turnover, whereas the infringements are often conceived and implemented at the level of the group itself. The practice of the Competition Council in this area has led it to impose only very low penalties and, as a result, penalties that are not very dissuasive. This is particularly the case in the area of public procurement, where large groups have already been penalised on several occasions. 2) The improvements made by the bill To defeat such strategies and strengthen the dissuasive nature of penalties, the bill raises the ceiling of penalties from 5% to 10% of worldwide turnover and not only French turnover as at present. A provision is also introduced allowing the Council to use as turnover not only that of the company that would remain solely responsible for the infringement, but the consolidated turnover of the group to which it belongs. It will also be able to choose the turnover of one of the years between those preceding the anticompetitive practices and the one preceding its decision. More generally, the Competition Council is encouraged to take account of the repetition of anticompetitive practices by increasing the amount of penalties. Strengthen the effectiveness of the fight against anticompetitive practices 1) The situation existing before the bill and its imperfections With the gradual acclimatisation of companies to competition law and to investigation techniques (certain companies organise training for their employees to prepare them for competition investigations and warn them about the retention and communication of documents), evidence of secret cartel practices is harder to gather and can be gathered only through the use of effective powers such as those allowed by searches and seizures authorised by a judge. As this evidence is destroyed by companies as soon as the cartels are no longer active, the search is successful only if the investigation takes place very quickly, and if possible at the time when the concerted practices are under way. 2) The improvements made by the bill The Achilles heel of the fight against anticompetitive practices lies in the detection and establishment of facts. The bill aims to respond to the practical difficulties encountered in this area. In order to strengthen the means of intervention and thereby improve the effectiveness of competition law, it specifies in particular that when it comes to conducting an investigation to establish infringements currently being committed, the application for authorisation submitted to the judge may take a lightened form, given the urgency. It sets time limits for challenges relating to the conduct of search and seizure operations, which will prevent such challenges from arising, as is possible and frequent today, after the merits of the case have been judged. With a view to encouraging operators to contribute to the clean-up of markets and to the fight against secret cartels, the bill introduces a leniency mechanism, which has proved its worth beyond our borders, notably at Community level and in the United States. This flexible mechanism will offer sufficient guarantees to be attractive to companies wishing to cooperate with investigating bodies or the Competition Council.