French Finance Law: Prohibition of Resale at a Loss - Competition & Free Trade, Exams of Public Relations

Download French Finance Law: Prohibition of Resale at a Loss - Competition & Free Trade and more Exams Public Relations in PDF only on Docsity! KECK AND MITHOUARD REPORT FOR THE HEARING in Joined Cases C-267/91 and C-268/91 * I — Facts A — Legislative background 1. Resale at a loss is prohibited under para­ graphs I and II of Article 1 of Finance Law No 63-628 of 2 July 1963, as amended by Article 32 of Order No 86-1243 of 1 Decem­ ber 1986. The text of that provision is as fol­ lows: 'Article One I — Any trader reselling a product in an unaltered state at a price lower than its actual purchase price shall be liable to a fine of FF 5 000 to 100 000. The actual purchase price shall be presumed to be the price on the invoice, plus turnover tax, specific charges relating to the resale and, where appropriate, the cost of transport. II — The above provisions shall not apply: to perishable goods from the time when their condition may deteriorate; to voluntary or enforced sales following the cessation or changing of a commercial activ­ ity; to products whose sale is of a marked sea­ sonal nature, towards the end of the selling season and during the period between two selling seasons; to products which are no longer in public demand owing to changes in fashion or to the appearance of technical improvements; to products which are restocked or which could be restocked at a reduced level, the actual purchase price then being replaced by the price on the new invoice or by the value of the new stock; to products whose resale price is aligned on the price lawfully charged for the same prod­ ucts by another trader in the same area of activity.' B — Background to the dispute 2. According to the orders for reference, towards the end of 1989 officials of the " Language of the case: French. I - 6099 REPORT FOR THE HEARING — CASES C-267/91 AND C-268/91 French Directorate for Competition and the Prevention of Fraud drew up a report in which they found that litre bottles of 'Picon Bière' (21% vol) and 'Sati Rouge' coffee were being sold at a loss at 'Hypermarché CORA SA' at Mundolsheim (France) and 'Hypermarché Rond Point COOP ' at Gei- spolsheim (France) respectively. 3. On the basis of those reports the Pro­ cureur de la Republique (Public Prosecutor) brought a prosecution against each of the managers of the two hypermarkets on the grounds that, at Mundolsheim, from 3 November 1989 to 10 November 1989 they resold in an unaltered state 1 264 bottles of 'Picon Bière' at the unit price of FF 44.35, namely a unit price which was lower than the actual purchase price of FF 48.27, including taxes, when the limit fixed for resale at a loss was FF 46.222, and from 15 to 17 December 1989 at Gei- spolsheim resold 544 kg of 'Sati Rouge' cof­ fee in an unaltered state at a price lower than the actual purchase price by selling batches of four 250 gramme packets at FF 20 when the actual purchase price per kilogramme was FF 25.132. 4. Before the Tribunal de Grande Instance, Strasbourg, the accused stated, in particular, that the prohibition of resale at a loss is: — contrary to Article 30 of the EEC Treaty, — liable, under certain conditions, to fall within the scope of Article 85 of that treaty, — incompatible with the principles of the free movement of persons, services, and capital, establishment of free competition, of non-discrimination and more particu­ larly with Articles 3 and 7 of the Treaty, because, firstly, the prohibition makes only resale at a loss an offence and exempts from the scope of the prohibition the manufac­ turer, who is free to sell on the market the product which he manufactures, processes or improves and, secondly, it distorts compe­ tition, especially in a frontier zone, between traders on the basis of their nationality and place of establishment. C — The preliminary questions 5. By the judgments of 27 June 1991 the Tri­ bunal de Grande Instance decided to stay the proceedings and refer the following two identical questions to the Court of Justice for a preliminary ruling: 'Is the prohibition in France of resale at a loss under Article 32 of Order No 86- 1243 of 1 December 1986 compatible with the principles of the free movement of goods, services and capital, free competition in the Common Market and non­ discrimination on grounds of nationality laid down in the Treaty of 25 March 1957 estab­ lishing the EEC, and more particularly in Articles 3 and 7 thereof, since the French legislation is liable to distort competition: (a) firstly, because it makes only resale at a loss an offence and exempts from the I-6100 KECK AND MITHOUARD de Dijon·) [1979] ECR 649, 193/80 Commis­ sion v Italy [1981] ECR 3019, 174/82 Sandoz [1983] ECR 2445) the Court defined in broad terms the concept of a measure having equivalent effect by stating, firstly, that in the absence of common rules on the production and marketing of the product at issue to replace divergent national rules, Member States retain the power to regulate every­ thing relating to the production, distribution and consumption of the product and, sec­ ondly, that the restrictions resulting from disparities between the national laws relating to the marketing of products, where the national measure is applied without distinc­ tion to domestic and imported products, must be accepted only in so far as those pro­ visions may be recognized as being necessary in order to satisfy imperative requirements of consumer protection, the protection of public health and the environment and fair trading. The accused in the main proceedings con­ sider that the French legislation prohibiting resale at a loss constitutes a measure applica­ ble without distinction to domestic and imported products and having dispropor­ tionate restrictive effects. The Court has not balked at bringing that type of commercial legislation within the scope of Article 30 of the Treaty. In that respect, the accused in the main proceedings refer to the judgments in Cases 286/81 Oosthoek's Uitgevers­ maatschappij [1982] ECR 4575, 382/87 Buet and Another v Ministère Public [1989] ECR 1235, C-145/88 Torfaen Borough Council v B&Q [1989] ECR 3851 and C-312/89 Conforama and Others [1991] ECR 1-1021. The fact that the events giving rise to the present cases took place in a frontier zone bordering on the Federal Republic of Germany, where resale at a loss is not pro­ hibited, serves to demonstrate that a foreign trader hesitates to establish himself in France where he must renounce an efficient and proven marketing technique for acquiring and retaining new customers. That prohibi­ tion thus protects French traders from for­ eign competition on prices which would be of benefit to the consumer. The dissuasive nature of the prohibition of resale at a loss with respect to foreign producers is made all the more acute owing to the fact that it only applies to resale and that most foreign trad­ ers are resellers. Furthermore, a foreign trader must, if he were to establish himself in France, familiarize himself with the changes in French case-law relating to the prohibi­ tion of resale at a loss. Moreover, he could be discouraged by the subtleties of the legisla­ tion at issue and its application by the courts. The accused in the main proceedings con­ clude that the prohibition of the resale at a loss affects the marketing of a product and, therefore, comes within the scope of Article 30 the Treaty. 15. Finally, the accused in the main proceed­ ings consider that the barriers to trade cre­ ated by the prohibition of resale at a loss cannot be justified by imperative require­ ments. Among the imperative requirements laid down by the Court only consumer pro­ tection and fair trading can be invoked in the present cases. It is difficult to see in what way the con­ sumer, whose interest lies in obtaining the best price, is protected by the prohibition of I-6103 REPORT FOR THE HEARING — CASES C-267/91 AND C-268/91 resale at a loss. Such resale lowers prices. Consumer protection, if such were judged necessary in relation to resale at a loss, could be achieved, for example, by means of suit­ able labelling. In that respect, to make the prohibition of resale at a loss an offence is disproportionate. In that context, the accused in the main proceedings refer to the judgments in Cases 94/82 De Kikvorsch [1983] ECR 947, 274/87 Commission v Ger­ many [1989] ECR 229 and C-362/88 GB- INNO-BM [1990] ECR 1-667. Neither does fair trading justify prohibition of resale at a loss. Indeed, the trader cannot afford the luxury, at the risk of being forced out of the market, of reselling permanently and massively at a loss. Resale at a loss can only be seen as a specific commercial promo­ tion strategy analogous to sale at cost, which is authorized in France. Fair trading would not be jeopardized by resale at a loss. On the contrary, the facts show that prohibition of this form of sale has led to reprehensible price-freezing practices arising from the con­ tractually imposed obligation not to resell at a loss, breach of which entailed the loss of a rebate due at the end of the financial year, which was only definitively acquired at the end of the year and on condition that the distributor did not resell at a loss. Finally, the accused in the main proceedings consider that the alleged imperative require­ ments justifying the prohibition of resale at a loss are already seriously put in doubt by the exceptions to that prohibition provided for by the French legislation. If resale at a loss were inimical to consumer protection, excep­ tion to the alignment would not be justified either. Fair trading is also called into ques­ tion by the possibility of reselling at a loss where prices are aligned on the prices law­ fully charged for the same products by another trader. The exceptions to the prohi­ bition of resale at a loss imply that this type of resale has some positive points. 16. The accused in the main proceedings propose that the question put to the Court be answered as follows: 'Article 30 of the EEC Treaty is to be inter­ preted as meaning that it precludes legisla­ tion of a Member State which prohibits resale of goods at a loss'. 17. The French Government observes in limine that it is relevant to consider the French legislation prohibiting sales at a loss in the light of the Treaty and not to compare the regime applicable to resellers with that applicable to manufacturers. The fact that a regime is applied to a category of traders in a different situation does not constitute dis­ crimination or a restriction on competition within the meaning of the Treaty. There is no competition between manufacturers and resellers since their economic activity is dif­ ferent. Moreover, the argument to the effect that discrimination on grounds of nationality would be created has no legal basis. Even if other Member States do not prohibit resale at a loss, the fact remains that two traders established in France are subject to the same I-6104 KECK AND MITHOUARD law irrespective of their nationality. Citing the judgments in Cases 229/83 Leclerc v An Blé Vert [1985] ECR 1 and 231/83 Cullet v Leclerc [1985] ECR 305, and referring to Articles 3 and 7 of the EEC Treaty, men­ tioned in the preliminary questions, the French Government considers that the com­ patibility of the French legislation with Arti­ cle 30 of the Treaty and with the rules of Community competition law should be examined. 18. According to the French Government, the prohibition in France of resale at a loss does not constitute a measure having an effect equivalent to a quantitative restriction. In the light of the definition given of such a measure at paragraph 5 of the judgment in Dassonville, above, and having regard to Article 3 of Directive 70/50/EEC, above, the French Government points out that the pro­ hibition on resale at a loss applies without distinction to domestic and imported prod­ ucts and does not prescribe a definite amount for the sale of a product but lays down only a principle applicable when the price of the product is determined. Such leg­ islation does not undermine the comparative advantage of an imported product which is cheaper than a domestic product; conversely, it does not fix maximum prices rendering it impossible to market in France a product imported at a high price or burdened with the cost of transport and packaging. Further­ more, the Court stated in its judgment in Case 82/77 Openbaar Ministerie of The Netherlands v Van Tiggele [1978] ECR 25 that legislation prohibiting resale at a loss was compatible with Article 30. 19. According to the French Government, the prohibition of resale at a loss docs not conflict with the competition rules laid down in the Treaty despite the fact that, in the present state of Community law and in the absence of Community harmonization of commercial legislation, some distortion may occur within the limited area of frontier zones. Although the competition rules laid down in the Treaty and in the measures implementing it are applicable to national legislation (see the judgment in Case 231/83, above), the prohibition of resale at a loss does not have as its aim or object to restrict competition. Rather, such a prohibition preserves fair trading by combatting an unfair competitive practice. Such a trading practice could enable a trader to corner a market and acquire arti­ ficially a body of customers and, once that objective was attained, to sell at the normal price or even higher. Moreover, the loss sus­ tained by the trader would be compensated by the margins on other products. As the present case before the Court shows, the prohibition of resale at a loss may create distortions in frontier zones between French distributors and the distributors of the neighbouring country where resale at a loss is permitted. Although it is difficult to quan­ tify the detrimental effect, it docs not seem to the French Government that such distor­ tion can exert any influence on the patterns of intra-Community trade. The French Gov­ ernment points out that it is consistent case- law that there has to be an appreciable effect on intra-Community trade before the Court will, on the basis of the provisions of the Treaty concerning competition, find fault with a legislative provision. I-6105 REPORT FOR THE HEARING — CASES C-267/91 AND C-26S/91 27. The Commission adds that the prohibi­ tion of resale at a loss, as a measure applica­ ble without distinction to domestic and imported products, may be justified, in the absence of Community rules, if it is neces­ sary in order to satisfy imperative require­ ments in conformity with public-interest objectives pursued by the Treaty and where the barriers to trade do not appear excessive in relation to the objective which it is sought to attain. The fact that the prohibition does not apply at the stage of manufacture does not mean that that legislation is not applied without distinction since it concerns two dif­ ferent situations at two successive stages of the economic process, and since that differ­ entiated treatment is not based on the origin of the product or the trader, but on the dif­ ference which exists between the production stage and the marketing stage. One of the reasons for the prohibition of resale at a loss is its incompatibility with the establishment of healthy competition and the absence of any real advantage for consumers as a whole, as the loss is offset by the mar­ gins on other products. 28. However, in the opinion of the Commis­ sion, neither consumer protection nor fair trading may justify the prohibition of resale at a loss. It is indeed not certain that the trader would recover the loss by the margins on other products. On the other hand, the consumer could find an obvious economic advantage in profiting from such sales at low prices, and it is not established that the consumer is misled by the fact that the fall in price of one product could possibly be offset by an increase in the prices of other products, as the consumer is in a position to compare the price of products charged by different trad­ ers. In any event, if such a risk were estab­ lished, an answer to it could be found by means less restrictive of the free movement of goods, and consisting in an obligation to give the consumer sufficient information about the conditions of resale at a loss. Nor would fair trading be jeopardized by resale at a loss. Thus, a trader could choose, on logical economic grounds, to penetrate a given market by charging temporarily prices with no profit margin, but which would allow him to publicize himself and from which he would reap long-term benefits to compensate for the early losses. Likewise, a distributor could choose to base his strategy on the sale of a product at a low price, if that would allow him to make an overall profit. Resale at a loss is only contrary to fair trad­ ing if it is carried out in the context of anti­ competitive practices. 29. In conclusion, the Commission proposes that the Court give the following answers to the questions raised: '(1) Articles 3(f), 7, 48, 52, 58, 59, 60, 85 and 86 of the EEC Treaty must be inter­ preted as meaning that they do not pre­ clude the application of national legisla­ tion prohibiting traders from reselling a product in an unaltered state at a price lower than its purchase price. I-6108 KECK AN'D MITHOUARD (2) Articles 30 and 36 of the EEC Treaty must be interpreted as meaning that they preclude the application to goods imported from another Member State of national legislation prohibiting traders from reselling a product in an unaltered state at a price lower than its purchase price.' G. F. Mancini Judge-Rapporteur I -6109