Unfair Trading Practices in the Food Supply Chain: Regulating Right?

Our forthcoming article focuses on the regulation of unfair trading practices (‘UTPs’) in the food supply chain. This topic has been on the EU’s policy agenda since 2009 when the European Commission published a first communication on the subject. Following calls of the European Parliament, the Council, and the European Economic and Social Committee, the European Commission submitted on 12 April 2018 a Proposal for a directive on unfair trading practices in B2B relationships in the food supply chain (‘the Proposal’). On 19 December 2018, the EU institutions reached an agreement on the Directive (‘the final Proposal’), which will be put to a vote in the European Parliament and the Council. This post briefly discusses the original and final Proposals (when referring to both: ‘the Proposal’) as well as the amendments proposed to the original Proposal and shares a number of critical observations.

Diversity in the regulatory framework of Member States and the resulting imbalances in competition are cited as the main reasons for justifying regulatory action at the EU level. Unlike unfair B2C commercial practices, regulation of B2B UTPs has hardly been harmonised. Some Member States have extended competition law provisions or have introduced specific legislation. The scope of Member States’ provisions often differ as well, as the rules can be cross-sectoral or sectoral, and they may apply to the entire food supply chain or only specific actors. Either way, the Proposal relies on the in practice well-established but in the literature highly contested rationale to tackle regulatory diversity between the Member States in the area of business-to-business UTPs.

The original Proposal, aimed to introduce a common standard of protection across the EU that consisted of a short list of specific prohibited UTPs against small and medium-sized enterprises (‘SMEs’) by non-SME buyers of food products. Four of these practices are per se prohibitions, focusing on late payments and last minute order cancellations in the case of perishable products as well as unilateral and retroactive contract changes, and the imposition of food wastage payments. The other listed practices–returning unsold food products to suppliers, charging for stocking, displaying, or listing, and suppliers paying for promotions and marketing of buyers–are prohibited unless parties have not agreed on their use in clear and unambiguous terms at the time of conclusion of the supply agreement.

Article 43(2) TFEU is the exclusive legal basis of the Proposal. According to this provision, the European Parliament and the Council shall establish the common organisation of agricultural markets on the one hand and other provisions ‘necessary for the pursuit of the objectives of the common agricultural policy’ on the other. The Commission argues that the proposal is specifically “necessary” in order ‘to ensure a fair standard of living for the agricultural community, in particular by increasing the individual earnings of persons engaged in agriculture’ within the meaning of Article 39(1)(b) TFEU.

The Proposal also establishes minimum enforcement requirements applying to national competent authorities (eg, a competition authority). These include inter alia Member States’ requirement to designate an enforcement authority, specific substantive rules on the complaints procedure, and a coordination mechanism enabling the exchange of data and providing a forum for the exchange of best practices. In case of violations, the designated authority may impose effective, proportionate, and dissuasive fines.

Some Members of the European Parliament (‘MEPs’), however, argued for a significant expansion of the Proposal’s scope. Most remarkably, the Agriculture Committee voted to include all actors in the food supply chain, meaning not only small and medium-sized producers but also large buyers. In addition, the Agriculture Committee extended the list of prohibited UTPs. Subsequently, this position was approved by the other MEPs.

Ultimately, the EU institutions reached a compromise on 19 December 2018 after several rounds of negotiations. Although at the time of writing not all details of the final agreement are clear yet, the main points of the outcome have been made public. Interestingly, the final Proposal differs from the original one in three ways. Firstly, the final Proposal does not only protect SMEs but also mid-range enterprises, which are producers with an annual turnover below 350 million euros. Regardless of this threshold, Member States may still introduce a higher scope (above 350 million euros) in their national legislation or take further measures. The scope of the Proposal is further expanded, as it would also apply to agricultural and food products as well as services to some extent. Moreover, the list of problematic UTPs has been enlarged. In addition to the per se prohibitions of the original Proposal, the misuse of confidential information and the retaliation or threat of retaliation against the supplier are also completely prohibited, while last minute order cancellations are banned regardless of perishable nature of the concerned products.

Although the Proposal (and the suggested amendments) pursues noble goals, we argue that it has a number of important flaws and shortcomings.

First, a major problem of the Proposal is the vulnerability of its legal basis. The scope of the proposal embraces the entire food sector, and should therefore arguably not be exclusively based on the provisions of the common agriculture policy providing that its objective is ‘to ensure a fair standard of living for the agricultural community’. It is questionable whether it is permissible to use a legal base from a sector that is exempt from overall competition law (Art. 42 TFEU) in order to also regulate competition in non-exempt sectors of the food supply chain.

Second, solid empirical evidence on the prevalence of UTPs is lacking. In particular, the absence of evidence differentiated between the various food sectors, different links of the food supply chain, and on cross-border aspects of UTPs is worrisome. The Commission heavily relies on the claim that UTP-related costs are likely to be systematically passed back along the food supply chain to farmers (the so-called ‘trickle-down effect’). This effect, however, is not well substantiated. The Impact Assessment relies on a few case studies, but recognises that there is little empirical evidence going beyond these case studies which makes it difficult to establish the overall harm caused by UTPs. Hence, there is no compelling evidence that the envisaged UTP rules are appropriate, let alone proportionate, to the achievement of the CAP objective pursued (ie, the protection of farmer’s income).

Third, a major regulation design choice is the omission of general clauses and the fact that only certain specific UTPs are prohibited. General clauses are at work in the framework of the Unfair Commercial Practices Directive, in combination with a list of specific unfair practices. Above all, it is unclear on which ground the specific UTPs that are listed were selected.

Fourth, the Proposal shows traction in its enforcement structure, as its rationale to protect SMEs is hard to reconcile with the expansion of the scope to mid-range enterprises. The Proposal creates a public enforcement approach, facilitating enforcement by public authorities as opposed to private enforcement between participants in the supply chain. The reliance on public law enforcement is notable, as in business-to-business relations, businesses remain the major driver to enforce fair competition. The reason for deviating from this ‘traditional’ approach is the so-called ‘fear factor’, where businesses do not engage in litigation, because they fear to be excluded from future transactions with a buyer. While such a ‘fear factor’ has been shown in relationships between SME and bigger market players, it is questionable if this rationale still holds true with the Proposal’s widened scope to also cover mid-range enterprises in the supply chain.

The Proposal still needs to be formally adopted. Following this final agreement, the European Parliament and the Council will still have to vote on the final Proposal. If adopted, Member States will have to transpose the Directive into their national law. With regard to the original Proposal, we were concerned about some aspects, including (1) its legal basis, (2) its weak underlying empirical foundations, (3) the selection of specific prohibited practices, and (4) its enforcement structure. Most of these concerns have not been addressed in the negotiations, and are thus not reflected in the final Proposal. Hence, we consider it justified to remain critical of the future development of regulation of UTPs.

Hanna Schebesta is Assistant Professor of Law, Wageningen University (The Netherlands)

Tom Verdonk is a PhD Candidate at the Institute for Consumer, Competition & Market at KU Leuven (Belgium)

Kai Purnhagen is Associate Professor of Law, Wageningen University (The Netherlands)

Bert Keirsbilck is Associate Professor of European Economic Law, KU Leuven (Belgium)