Merger control – BLOG

On 11 June 2013, the European Commission adopted a proposal for a directive on damages actions for breaches of competition law (to which we have added our remarks), as well as other instruments of a less legally binding nature  – communications, recommendation, practical guide – qui aiming to ensure a horizontally homogeneous appraoch to collective redress in the EU without harmonizing national mechanisms.

The Commission lays down the foundations of “private enforcement” within the EU. The proposed directive comes in the wake of the adoption by the Commission of a Green Paper, in 2005, on damages actions for breaches of EC rules on restrictive agreemetns and abuses of dominant position, and a White Paper on the same issue in 2008, both of which contained developments on collective redress, and comes about after a massive public consultation in 2011 on the subject of “collective redress”, which is understood as a mechanism by which, for reasons of procedural economy and effectiveness of enforcement, individual claims relative to the same infringement – including cease and desist actions –  can be brought together in a single damages action. Hopwever, the proposal for a directive does nto require Member States to set up collective redress mechanisms for the enforcement of Articles 101 and 102 TFEU.

The application of the European competition rules by the Commission and the national authorities is commonly referred to as “public enforcement”. Due to their direct effect, Articles 101 and 102 TFEU create rights and obligations for individuals that are enforceable by the Member States’ national courts. This concerns the implementation of the rules of competition in the private sphere and is referred to as “private enforcement”. Since 2001 (Case C-453-99 Courage and Crehan, Judgment of 20 September 2001, ECR p. I-6297), the Court of Justice has considered that under EU law any individual can claim compensation from such harm suffered. In practice however, most victims of abuses of dominant position or cartels are not always in a position to assert their right to compensation whether individually or collectively. The aims of the directive are thus to optimize the interaction between the public and private enforcement of competition law and to remove the obstacles to effective compensation – aims which are clearly to be welcomed.

1. A proposal for private enforcement which does not compromise the effectiveness of either the leniency programs or settlement procedures.

The Commission’s central premise is that the right to compensation guaranteed by the EU can find itself at odds with the application of competition law by the public strand and that, in that case, the full effectiveness of public enforcement should be maintained at all costs, a specific example being where the victim of an infringement wishes to have access to information that a national competition authority has obtain within the context of a leniency program. That issue has become a source of legal uncertainty since the Pfleiderer ruling (Case C-360/09 Pfleiderer, Judgment of 14 June 2011, ECR p. I-5161) in which it was held that in the absence of any EU rules on the matter, it is for the national court to decide on the basis of national law and on a case-by-case basis whether to allow the disclosure of documents, including leniency documents, to the victims of an infringement.

Like the approach adopted in Directive 2004/48/EC on the enforcement of intellectual property rights, the proposed directive imposes limits on the disclosure of evidence by ensuring that in all Member States there is a minimum level of effective access to the evidence needed by claimants and/or defendants to prove their antitrust damages claim and/or a related defense. This is a welcome approach as it reduces the legal uncertainty generated by the Pfeifderer judgment.

• National courts will be able to order undertakings to disclose evidence when victims are asserting their claim to damages.
• Moreover, the finding by national competition authorities of an infringement will automatically constitute proof of the existence of the infringement before all the courts of the Member States.

The proposed directive avoids overly broad and costly disclosure obligations that could create undue burdens for the parties involved and risks of abuses.

Although not a question of discouraging leniency applications, we do feel that it would have been better to give greater support to the victims of competition infringements, rather than the perpetrators, even if they have repented. Indeed, experience shows that damages actions by victims of anticompetitive practices are excessively difficult in practice. A statistical study of recent French decisions shows that such actions are successful in less than half of cases, and that even in the event of success, awards are on average 10% lower than the amounts claimed. As private enforcement actions have the advantage of being brought by motivated private parties this can however act as a significant deterrent to potential infringers. Hindering such actions under the pretext of protecting companies guilty of anticompetitive practices because they have applied for leniency is a question of equity and procedural effectiveness which should force the issue in favor of much greater access to evidence for victims.

This is not the case now as with regard to the disclosure of evidence in a competition authority’s file, the proposal imposes absolute protection for statements made by the companies for the purposes of their leniency applications as well as for settlement procedures. Similarly, the proposal provides for temporary protection for documents that the parties have specifically prepared for the purpose of public enforcement proceedings until the competition authority has closed its proceedings (e.g. the party’s replies to the authority’s request for information) or that the competition authority has drawn up in the course of its proceedings (e.g. a Statement of Objections). Documents which fall outside those categories can be disclosed by court order at any time. However, such global disclosure requests for documents should normally be deemed by the court as disproportionate and not complying with the requesting party’s duty to specify categories of evidence as precisely and narrowly as possible.

2. A proposal for a directive ensuring the effective exercise of the victim’s right to full compensation for harm caused by infringements

The purpose of the proposal is to guarantee the full effect of the prohibitions laid down in Articles 101 and 102 TFEU by ensuring compensation for all legal or natural persons– whether consumers, undertakings or public authorities  – who are victims of infringements of those articles. The scope of application of the directive relates to both individual and collective damages actions for such infringements. As we have seen, the proposal for a directive does not require Member States to set up collective redress mechanisms for the purposes of implementing Articles 101 and 102.

The directive also proposes that the national rules concerning limitation periods for damages claims allow victims sufficient time (at least five years) to bring an action after they became aware of the infringement, the harm it caused and the identity of the infringer.

The proposed directive is based on joint and several liability of the perpetrators of the infringement but provides for a limitation of the liability of those benefiting from immunity from fines, which thankfully, is not absolute as immunity recipients remain fully liable as last-resort debtors if the injured parties are unable to obtain full compensation from the other infringers.

Injured parties must be able to seek compensation not only for the actual loss suffered (damnum emergens) but also for the gain of which they have been deprived (loss of profit or lucrum cessans). To assist victims of infringements of Article 101 TFUE in quantifying their damage, and taking into account that 9 out of 10 cartels indeed cause an illegal overcharge, the proposed directive provides for a rebuttable presumption with regard to the existence of harm resulting from a cartel. The directive also contains non-binding guidance – a Communication and a Practical Guide – on quantifying harm in actions for damages based on breaches of Article 101 or 102 TFEU to make it easier for national courts to quantify harm in such actions.

Lastly, with a view to setting up collective redress mechanisms, the Commission has put in place certain safeguards in order to avoid the excesses of US-style class actions too often used with the aim of bringing down law-abiding companies by seeking to damage their reputation or placing excessive financial burdens on them. For those reasons, its guiding principle is full compensation and the possibility to “opt-in” in order to: avoid lawsuits initiated by the instigator of a collective action, as in the US, in the name of all the claimants affected where when the latter have not expressly requested that such action be taken; to exclude punitive damages, contingency fees and pre-trial discovery.

Conclusion : Only very few victims of infringements of Articles 101 and 102 TFEU are currently able to obtain compensation. The reasons are many but are mainly due to the absence of suitable national rules governing damages actions or, on the contrary, to the disparity in national laws resulting in inequalities for both the victim and the party responsible for the anticompetitive practices, and to the legal insecurities specific to competition law. The unequal implementation of the right to damages guaranteed under EU law is likely to confer a competitive advantage on companies having infringed Article 101 or 102, but which do not have their registered office in one of the Member States with “favorable” legislation is or which do not operate in one of those Member States. On the other hand, this unequal situation discourages the exercise of the right of establishment and the right to supply of goods or perform services in Member States where the right to compensation implemented more effectively. These differences in the liability rules are damaging to competition and appreciably distort the proper performance of the internal market. It is therefore a very a good thing that the European institutions have finally sought to facilitate access to justice and allow victims of harm to obtain compensation including in cases of mass claims because of the violation of the competition rules. However, the proposal for a directive remains somewhat half-hearted in that it is overly protective of the interests of leniency recipients to the detriment of those of the victims of damage. A proper balance between “public enforcement” and “private enforcement” has not been achieved. “Public enforcement” still take has priority the basis of the premise which it is superior law to “private enforcement”. Furthermore, even though there has been no scientific study to demonstrate it, the theory is that if leniency applicants did not have high level of protection against damages actions, the number of leniency applications would fall considerably. Lastly, no measure has been provided to reduce the “public enforcement” sanction taking into account the possibility of a double sanction through the strengthening of “private enforcement”.

In a judgment rendered on 27 June 2013, the European Court of Justice ruled against the Commission’s claim of failure to fulfill obligations against the French State for a new tax it had levied in violation of Directive 2002/20/EC (the “Authorization Directive”). The directive harmonized the authorization conditions for the provision of electronic communications services in the territories of the Member States and provided that charges levied for such authorizations should be limited to covering the actual administrative costs for those activities.

In the Albacom case (Judgment of 18 September 2003, Case C-292/01), the Court of Justice held that the directive limited the fiscal autonomy of the Member States by prohibiting them from introducing charges due by reason of the holding of a license, since “the common framework of general authorizations and individual licenses for telecommunications services […] would be rendered redundant if Member States were free to establish the financial charges to be borne by undertakings in the sector”. The Court therefore held that a turnover tax imposed by the Italian State on all undertakings holding individual authorizations for the provision of telecommunications services was contrary to the directive..

The telecoms tax, introduced in France to offset the loss of revenue related to the public channels ceasing to broadcast advertisements after 8 p.m., is broadly comparable to the Italian tax in that it is imposed on all companies holding a general authorization (i.e. those having made a preliminary declaration to the telecom regulator ARCEP), and that it is based on turnover.

But on 27 June 2013 and against all expectations, the Court of Justice set aside the Albacom ruling on the grounds that, contrary to the Italian legislation, the French law provides for some exemptions and abatements (e.g. the tax is not payable where turnover is less than EUR 5 million) and the trigger for the charge is not the holding of an authorization but relates to the activity of providing electronic communications services to users in France. The Court thus ruled that the tax falls outside the scope of application of the directive.

This outcome is highly debatable. The setting aside of the Albacom case law, which related to a similar tax, and the distinction made by the Court between a tax due because of the holding of an authorization and a tax due because of the exercise of telecom activities appear artificial and baseless. With the harmonization of conditions for issuing authorizations and for taxes imposed for such activities, the objective of the directive is clearly to ensure that telecom operators can freely exercise their activity through the removal of obstacles, particularly financial ones, to the provision of those services. The interpretation of the Court of Justice disregards that objective and makes it very easy for Member States to circumvent the prohibition on introducing a charge (not intended to cover administrative costs) related to the holding of an authorization to provide telecommunications services.

This is a much-discussed question. The simplistic answer is to consider that there is a monopoly on auto body parts and, as it is fashionable to advocate the suppression of all monopolies, a commonly heard view is that intellectual property rights should be removed for those parts in order to bring prices down. By taking the time to properly consider the issue, it is clear that this simplistic reasoning is completely invalid.

Critics of industrial property rights often conceal the fundamental reason for protection under the law, which is : to temporarily prevent the copying of innovative creations and to allow a fair return on investments for inventors or designers, to compensate them for their creative efforts and the risks taken by allowing them to reap the benefits of their innovation and encourage them to continue innovating with the assurance of the protection against the copying of their work by persons having invested no effort whatsoever in their creation, and to ensure a certain  level of competitive fairness by not rewarding mere copiers to the detriment of innovators. This justification also applies to the design of vehicle body parts: the design of cars, trucks, motorcycles etc. comes about through the creative effort of designers and it is normal that creators, and the massive investments made by them in the creation of new models with no guarantee of success, should have the opportunity to reap the rewards of those investments and benefit from the profits of the sale of the model and the replacement parts needed for reparations to it.

1. The arguments used by proponents of the withdrawal of design right protection for body parts are wrong

The main arguments opposing design right protection of body parts are the following:

• Protection is legitimate for models as a whole as it would not in this case produce anticompetitive effects insofar as each car brand is subject to a high level of competition for finished products, but becomes illegitimate for spare body parts because in this case the manufacturers are shielded as they hold a monopoly for each part and do not have to face competition from others.
• Practice shows that the prices of visible parts are higher in countries with protection and are subject to sharper increases in countries with protection than in those without, creating a terrible loss of wellbeing for consumers and society as a whole, requiring the withdrawal of design right protection for parts, as is the case in many countries, Germany in particular, where there is no longer any more de facto design right protection of body parts.

This argument is in fact a juxtaposition of unsubstantiated assertions, which can be refuted when they are examined in light of the facts and the law.

1. A negation of the fundamental premise of intellectual property

According to the first strand of that argument, protection is illegitimate because the originator of the parts would not face competition and would have a monopoly which could be abused. This amounts to a negation of all intellectual property law. By definition, the holder of an intellectual property right is guaranteed a temporary monopoly to exploit the result of his/her invention. Such a monopoly can often relate to an entire product market. An example of this would be patents on medicines – frequently the monopoly conferred on the patent rightholder of the medicine in question covers the whole of the market. We can cite the Dobutrex decision of the French Competition Council (now Competition Authority) in which it was found that by reason of its specific attributes, and the lack of margin for maneuver of purchasers who are required to respect medical prescriptions and price differences with the most similar products, Dobutrex was not substitutable with any other drug. This has been the finding for numerous patented drugs such as Isoflurane, Cefuroxime or Ciclosporine. It is thus not rare that by conferring an exploitation monopoly on a product, a patent also confers an exploitation monopoly on a market in the absence of competing products for the duration of the protection. However, this situation does not under any circumstances constitute a cause for the loss of the benefit of the protection right. The right is not granted on condition of the maintaining of strong direct competition on the protected product. Claiming the opposite to be true amounts to denying the substantive law and would mean depriving many patented products of any protection.

This first strand also contains a second fundamental error; it implicitly postulates that the holder of design rights on a replacement body part would, ipso facto, have an absolute monopoly and would necessarily abuse it however it saw fit. This implies that a dominant position is reprehensible per se and automatically abusive whereas in competition law, only the abuse of a dominant position is sanctioned, not the dominant position itself. An empirical study of the market does not support this analysis but rather contains many elements against it: French car manufacturers whose design rights are under attack have not made abnormal profits – on the contrary customers are very attentive when buying vehicles with regard to spare parts and maintenance prices and will easily turn their backs on a brand if they are overpriced; auto journals specialized in car sales and the presentation of new models also publish rankings in terms of maintenance and repair costs by brand; insurance companies regularly inform their clients of the costs of parts by brand and their data is often taken up by the general and the specialized press; lastly, manufacturers run the risk of vehicle owners having their vehicles repaired outside of authorized networks if prices are too high and face competition from used spare parts.  This first strand of the argument of the abolitionists is therefore totally wrong, both legally and factually.

In addition, it does not address the fundamental justification of the protection of body parts including replacement parts:

• Why should a copier having made no investment or created any new product be allowed to unduly reap the rewards of the creative effort, investment, and risk incurred by the innovator of the design?  – No answer.
• Why should the originator be deprived of turnover legitimately gained due to for his/her innovation on the primary product market and the secondary market? – No answer.

2. No link between price and protection of design rights 

The second strand of the argument goes like this: the price of visible spare parts are higher in countries where designs are protected and are subject to bigger increases than in other countries.

Comparisons both in terms of level of prices and evolution of prices between the various EU Members States according to whether they protect vehicle body parts do not corroborate the allegations of higher price levels or bigger increases in protected countries – in fact quite the opposite is true.

Pricing policies of spare parts are not developed according to the existence of industrial property rights in any one country or another. They are based on a European reference frame adapted to the economic situation of each country, with quite wide harmonization of prices of spare parts in Europe. The comparisons between the various markets using an assortment of spare parts show that the protected countries are not the most expensive. This is certainly logical insofar as the distribution centers of spare parts in protected countries can offset their costs through greater volumes. Likewise, there is no correlation or causal link between protection and level of price increases. A statistical table claiming the contrary published in the press and taken from the Opinion issued by the Competition Authority is incorrect as the Authority, in its public consultation document, first compared Eurostat data between various European countries which was non-comparable as it did not relate to the same facts, and secondly it essentially compared do-it-yourself purchases, which are marginal, whereas a true comparison of price increases of spare parts and after-sales services shows that any increase in France is lower than in a number of non-protected countries.

3. Design rights exist in all the major industrialized countries

Final strand of the argument: in many countries, especially Germany, design right protection for car body parts no longer exist in practice.

It is inaccurate to claim that the protection of car body parts is a French exception: 16 EU Member States – i.e. 60 % – afford visible spare parts industrial design right protection. Germany has a system of protection which is enforced against copiers and counterfeit resellers. The German federal government has also recently pointed out the existence of this protection and the wish of the German government to keep it. In response to a request for the withdrawal of design right protection in Germany from the ZDK (German Federation for Motor Trades and Repairs), the German Chancellery declared that the German federal government had  “no reason to review its position“, that it is continuing to refuse the proposal of a more flexible European directive (including provision for a repairs clause which would remove protection from visible spare parts) and that “Germany, alongside France, the Czech Republic, Sweden and Romania are amongst the countries which would refuse this proposal for a directive”.

They are not alone – all the major countries competing with Europe: USA, Japan, Korea and the BRIC countries (Brazil, Russia, India and China) protect car body parts under design rights.

2. The repeal of design right protection for car body parts is counter-productive

Currently there is no reason to repeal design right protection, which is legitimate and useful and no negative effect on prices has been shown to exist either in terms of absolute value or rate, especially given that most European countries and all the large industrialized countries at the global level protect auto body parts under industrial design rights.

Those in favor of the repeal of this protection and the introduction of a right to copy expect that through such a measure a fall in prices and greater purchasing power which can be attributed to the demand for other goods and services will arise. This expectation is without basis: consumers will not gain from the repeal of design right protection but there will be considerable counter-productive effects at a time when, on the contrary, all economists agree that innovation is the only source of wealth in Europe and that new designs should be strongly encouraged.

1. It is unrealistic to expect a fall in the cost of collision repairs and ultimately, the reduction of insurance premiums from the withdrawal of design right protection

​The only consequence of the removal of design-right protection, which is to the detriment of creators and to the profit of copiers, would – for a limited number of the best-selling references, as they are the only ones of interest to copiers – be to create two sources of supply, the brand’s channel and the copier’s channel.Copying 6 – 7 % of references of parts in effect allows copiers to compete with manufacturers for 80% of parts in terms of turnover. The immediate consequence of this would be to cause a fall in volumes sold by the manufacturers, putting them in the position of having to continue to produce and distribute low volume parts which are the least profitable and to compete with the copiers for the high volume parts without being able to make good their investments with the same volume as before. This would inevitably lead to a rise in the price of the least in-demand parts to compensate at the global market level for the expected fall for the parts in competition with copiers. In addition, cheaper copied body parts would not necessarily be to the ultimate benefit of consumers or lead to a reduction in their insurance premiums. In effect, in order for the primarily Asian copiers to compete with original parts manufacturers and their equipment suppliers, whose factories produce large volumes, can only be in terms of difference in costs or in quality. Very often, competitiveness is obtained through producing parts of a lower quality, and this has repeatedly been noted for adaptable parts. The price difference of the part will then be invalidated in terms of the time required and higher assembly costs due to the lower quality and level of adaptability of those parts. Lastly, we certainly cannot be sure that any residual and marginal cost difference will be passed on from wholesalers to repairers and from repairers to insurance companies (which in France pay most of the cost of collision repairs), nor that it would be passed on by insurance companies to their clients through a reduction of their insurance premiums (note that the overall cost of protected parts is marginal to the cost of car insurance – under 10% – and, given that insurance companies have over the last few years been losing revenue from investments, they are not in a situation where they are able to pass on cost savings). It is also interesting to note that it is in the UK, the country which pioneered the liberalization of designs from IP protection, where the cost of insurance premiums has increased the most. In short, it is illusory to think that purchasing power will be increased due to a hypothetical fall in collision repair costs and insurance premiums.

2. On the other hand, the removal of design right protection will clearly generate a loss of activity, jobs, exports and tax revenues in France and Europe

Partisans of the demand-led economy always neglect to take into account the effects of supply. In this instance, not only can nothing be expected in terms of positive effects on the demand side, but a removal of auto body parts design protection would be catastrophic on the supply side. What will in fact be the result if that happens? First of all, because of competition on the best-selling models, the turnover for manufacturers’ body parts and their networks would fall sharply. An estimated loss of annual turnover in France of EUR 230 million for French manufacturers and EUR 400 million including their distribution networks, would ensue. You do not have to be an expert to realize what a major error of industrial policy this would be, causing loss of competitiveness and profitability for French industry at a time when the country is facing unprecedented economic challenges. The consequence of this decrease in activity will be a rise in activity in Asia, China and in Taiwan mainly and will create jobs and activity in Asia. On the other hand, it will generate a reduction of activity, loss of jobs, and lower tax revenues in France and Europe. Taking only the example of the two French manufacturers who would lose EUR 230 million of turnover a year, it should be borne in mind that 71 % of visible spare parts stocked and distributed on the French market are produced in France and 96 % in Europe. The withdrawal of design protection would reduce production and activity in France and Europe. Job losses have been quantified at 2200 for the whole of the industrial sector in France including 500 direct employees of the French manufacturers. This drop in activity will not be offset by an appreciable rise of the turnover of French or European equipment suppliers. Indeed, sheet-metal parts are currently produced almost exclusively by the manufacturers themselves and not by original equipment manufacturers. Manufacturers have a competitive advantage and benefit from an advance which it would be virtually impossible for French and European OEMs – who do not manufacture them yet – to catch up with. Manufacturers in effect dispose of production lines producing far greater quantities than those of the equipment manufacturers who would like to produce sheet-metal parts. Only Asian producers with very low costs producing lower quality parts would be able to compete with the manufacturers as regards sheet-metal parts. Therefore nothing can be expected on that score from the French and European OEMs.

Apart from sheet-metal parts, the suppression of design protection will not generate any increase in sales of other parts such as windscreens, lights, rear view mirrors or bumpers, which are already produced by equipment manufacturers. Although they would be authorized to sell their parts directly to independent resellers instead of supplying them to manufacturers. Because of the constant fall in demand principally due to the decrease in the number of accidents, there will be no increase in volume but rather it is likely that volumes will decrease due to competition from Asian suppliers.

Conclusion:

It is clear that the withdrawal of industrial design right protection for car body parts is completely unjustified and would be counter-productive. The Competition Authority’s Opinion issued on 8 October 2012 recommending the progressive removal of protection was the object of much criticism, not only from manufacturers and the networks, but also from many academic lawyers and economists having commented on the opinion. The Automobile Club Association has recently declared its opposition to the removal of design right protection from body parts.

In light of the absence of any justification for the removal of design protection and the clearly distorted effects to which it would give rise, the French government’s recent clear responses against the withdrawal of protection in four successive ministerial replies (Ministerial Replies to questions No 6923, 20990, 479 and 14795, published in National Assembly Official Journal of 9 April 2013, page 3946 and National Assembly Official Journal of 14 May 2013, page 5110) are to be welcomed. The government rightly considers that the benefits of the suppression of design right protection are “difficult to quantify” and that they “must be weighed up against the consequences it will have on employment and industry”. The government, which pointed out the commitments made by French manufacturers in terms of jobs, investments and prices, favors cooperation between manufacturers and equipment manufacturers and recycling.

This position is reasonable and is certainly preferable to the removal of design right protection for body parts at a time when a government commission has been given the task of studying suitable ways of promoting the development of design in France.

The Commission has been asked by an MEP to provide information on the compliance with EU law of the specific French regulations requiring that bicycles be imported fully assembled …

A French measure, Decree No 95-937 of 24 August 1995, with a protectionist effect is currently under scrutiny. It prohibits the sale in France of bicycles that are not fully assembled when shipped whereas there is no such prohibition in other EU Member States. The consequence of the measure – which fortunately is now being called into question – is to restrict online sales of bicycles which have been partially disassembled. The measure is harmful for online sales of bicycles as their partial disassembly is necessary to avoid shipping packages that are too large and to ensure secure packing of the goods during transport (fully assembled bicycles can move around inside large packages during transport and risk being damaged).

The issue, already subject to debate, was revived this summer by MEP Franziska Brantner, a Green Party member who alerted the Commission to the controversial national rules and asked for a review of the compatibility of the restriction with EU law.

On 17 September 2013 the Commission, represented by Commissioner Tajani, answered the parliamentary question posed:

“The Commission received a complaint against France and is thus aware of the obstacles to the free movement of goods resulting from the national rules quoted by the Honourable Member and which particularly affect retailers in other Member States.

1. The Commission believes that modifications should be introduced to Decree No 95-937 in order to remove the current obstacles to trade falling within the scope of Art. 34 TFEU.
2. The Commission has contacted the French authorities on this issue and is awaiting their reply.”

The Commission’s answer is encouraging and constitutes a first step towards restoring the freedom of movement guaranteed by the Treaty in the bicycle sector.

Comparative advertising has been permitted in France in the case law since 1980 (implicitly at first in a judgment handed down on 19 October 1983 and explicitly thereafter after a landmark decision of the Court of Cassation on 22 July 1986). That new case law eventually led to the adoption of the Law of 18 January 1992, which is now codified in Articles L. 121-8 to L. 121-14 of the French Consumer Code and expressly authorizes comparative advertising. More recently, France has transposed into national law the European directive on comparative advertising by the Ordinance of 23 August 2001 which further liberalized the rules in particular by removing the obligation placed on advertisers to disclose the comparative advertisement, before running it, to the competitors concerned by its content

However, in practice, comparative advertising is still a highly dangerous practice. The courts have sanctioned numerous companies for it and ultimately few are prepared to take the risk. Why is this and what precautions should be taken if attacked for comparative advertising?

Comparative advertising covers any advertising which explicitly or by implication identifies a competitor or goods or services offered by a competitor. Although European law wises to promote comparative advertising, the truth is that any advertiser hoping to inform consumers by comparing itself to them will very frequently be exposed to legal action and a high risk of losing in the courts. The reasons for this are legal and sociological.

Under positive law, comparative advertising is subject to fairly strict conditions:

·         it must not be misleading;

·         it must compare goods or services meeting the same needs or having the same objective;

·         it must objectively compare one or more essential, pertinent, verifiable and representative characteristics of these goods or services;

·         it must not be disparaging;

·         it must neither be parasitic nor lead to confusion.

Taking account of that combination of legal constraints, it is no wonder that comparative advertisements are so rarely seen. It is estimated that in France and Europe they represent fewer than 3% campaigns, compared with 7% in the USA, especially in light of the fact that the courts tend to apply those conditions rigorously and that competitors will not hesitate in bringing summary or fast-track proceedings to ensure that any crossing of the strict boundaries of comparative advertising is penalized.

Although in France and in Europe we should not go to the extremes found in some very liberal countries in respect of comparative advertising, a more relaxed regime would be welcome insofar as comparative advertising fosters the interests of consumers and promotes competition and the development of new entrants. Too much rigidity in the matter hinders economic development.

With that in mind, advertisers wishing to carry out comparative advertising must be cautious and should:

1.  Have any such project examined by their legal department and company lawyers. Lawyers should play devil’s advocate and imagine in what way the comparative advertisement in question could be challenged. The imaginations of communications departments will have to be kept in check and employees should be warned of the consequences of non-compliance with the act.

2.  Use a narrow version of comparative advertising in order to limit the scope for criticism.

3. Assert the lack of legitimate interest in bringing proceedings for competitors who purport to have an advertisement prohibited, when they carry out the same practice themselves. If a competitor makes use of a particular advertising concept, he cannot then claim that a comparison of the very concept he is promoting in his own ads is without value.

4. Highlight in an objective manner the advantages of the various products being compared.

5. Prepare a documented file to be able, if and when necessary, to justify the veracity of the claims made.

6. Be very careful not to disparage competitors. Of course, the point of comparative advertising is to compare products or services, so stating that a competitor charges high or excessive prices would not constitute disparagement. On the other hand, it is prohibited to suggest that a competitor is charging usurious prices (ECJ, Case C-44-01 Pippig Augenoptik GmbH & Co. KG [2003], point 78).

7. In the case of an interim relief application, assert the absence of any “manifestly unlawful disturbance” related to a comparative advertisement which has run over a long period (or that of a competitor). The manifestly unlawful disturbance is the element that must cease immediately. It therefore would seem contrary to the requirements for interim applications to allow such action for an ad that has been running over several months.

8. Take into account any technical delays for the withdrawal of contentious advertisements. In the event of a dispute, it should be recognized that the implementation of an order for the withdrawal or modification can be required within a very short period of time and be subject to penalties for non-compliance. It is therefore important to be prepared to quickly modify the advertisements and to be able to replace them within the given time-limit. Where penalties are imposed, it is important to make every effort to comply with the decision and to be in a position to justify such compliance to the court with a view to having the penalty reduced pending its dismissal

On 22 October 2013, the Court of Cassation handed down a new judgment confirming its position in respect of compensation awarded for termination of established commercial relations without reasonable notice without evidence of any prejudice having been suffered.

The judgment is important in that it confirms the (highly contestable) position of the Court of Cassation to award compensation for lack of a reasonable period of notice as a lump-sum payment based on loss of margin which would have been achieved in the months for which the plaintiff was deprived of notice. This is assessed according to previous results, regardless of whether any actual harm has been suffered.

The Court of Cassation thus continues in its erroneous interpretation of Article L442-6,I,5° of the Commercial Code and businesses therefore need to be extra-vigilant when deciding to terminate or not to renew ongoing contracts.

Three other judgments rendered on the same day by the commercial chamber of the Court of Cassation on the termination of established commercial relationships confirm the traditional case law insofar as:

·         the notice period to be taken into account is not the period originally granted in the contract, but the effective notice period (which may be longer e.g. because an extension of the notice period was granted or the relationship was pursued further): this is a reasonable solution  although in total contradiction with the principle of not taking into account any event subsequent to the notification of termination when assessing the harm to be compensated;

·         the contractual notice period must comply with the statutory notice period;

·         the launch of a call for tender constitutes the point when the notice period starts to run.

Cass. com., 22 octobre 2013, LawLex201300001552JBJ

The battle between those for and those against design right protection for auto body parts which has been developing over the last couple of years in France has recently moved to Brussels and to the European Parliament in Strasbourg.

The initial version of the report on the Cars 2020 Plan included a proposal to remove design protection for spare body parts. The final version of the report ultimately renounced this idea preferring to carry out a more in-depth review of the different national regulations.

This is a welcome turn of events. We have on several occasions in this blog expressed our view that the removal of design right protection for car body parts makes no sense at all. At a time when France and Europe are experiencing unprecedented commercial competition on a global scale, the removal of one of the main components of non-price competitiveness in the industry would be suicidal and absurd. It is therefore a good thing that the report of the European Parliament has not fallen into step with the currently prevalent demagoguery regarding car body parts.

Since the reform of the LME law of 2 August 2008, under Article L 442-6, I, 2° traders are prohibited from subjecting or attempting to subject a trading partner to obligations that create a significant imbalance in the rights and obligations of the parties. As a counterbalance to the freedom of negotiation granted to economic operators by the repeal of the per seprohibition of discriminatory practices and the relaxation of the prohibition of below cost reselling, the legislature has strengthened the control of abuses particularly through the sanctioning of unfair terms between traders.

Five years on, the provision on significant imbalance has clearly still not found its equilibrium. Even though it is only rarely applied to business relations under the general law, the authorities frequently use it when taking measures against the big retail groups, which do admittedly impose rather draconian terms on their suppliers. An analysis of all those actions shows that the rules on unfair terms always give rise to problems of implementation, which have not as yet been definitively resolved, and to wide differences of interpretation depending on which court is hearing the case. The fact that there has been no ruling settling the matter by the Court of Cassation has generated a spate of conflicting decisions in the case law in respect of the principal issues under debate. General Counsel and their lawyers need to know what these issues are if they intend to rely on the law to challenge a contractual imbalance, or, on the other hand, to defeat an action based on significant imbalance.

1.         Can an action for significant imbalance apply to ongoing contracts?

This is, in a number of cases, the first question facing parties in situations where they are tied by an old contract concluded prior to the enactment of the LME law of 2 August 2008. The plaintiff, wishing the provision to be applied to ongoing contracts, will assert that the legislation in question is a public policy provision and must be applied in respect of injury occurring after the entry into force of the law. His adversary on the other hand will rely on Article 2 of the Civil Code, which states that “Legislation provides only for the future; it has no retrospective operation” and on the fact that, according to the case law, “the effects of contracts concluded prior to the new law, even though they continue after that law [has been implemented], are still governed by the law in force when they were concluded” (Court of Cassation, civil division, 3 July 1919, No 77-552; Court of Cassation, civil division, 30 Jan. 2001, No 98-15158).

The case law reiterates that the public policy aspect of the new law does not justify its immediate application to the future effects of current contracts and this has been applied by a number of courts with regard to Article L. 442-6, I, 2° of the Commercial Code (CA Paris, September 26, 2013, RG 11/09146;  CA Paris, February 23, 2012, RG 08/15137; CA Nancy, 31 May 2012, RG 09/01110; Commercial Court, Paris, 9 Feb 2012, RG 2010024988; CEPC (Commission for the Examination  of Commercial Practices), Opinion No 13/03 of 10 April 2013). It will be for the Court of Cassation to come down on the side of one party or the other as both have arguments in support of their claim.

2.         Should each clause be analyzed individually or is the overall balance of the contract more important?

Here too, the Court of Cassation has not yet issued a ruling on the issue.

A large number of decisions handed down in application of Article L. 442-6, I, 2° of the Commercial Code are based on a clause by clause analysis and more precisely on the criterion of the lack of reciprocity of rights and obligations of the parties. But some courts analyze the contract in its entirety and evaluate whether certain clauses are not likely to compensate for the imbalance resulting from other clauses (CA Paris, 4 July 2013, RG 12-07651, LawLex201300001139 JBJ).

One approach, which brings together two trends, considers that the balance must in principle be assessed in the light of the contract as a whole but that a truly unbalanced clause can, in itself, result in liability under the provision (CA Paris, 11 September 2013, LawLex201300001296JBJ).

3.         Must the concept of imbalance be assessed in the light of the consumer law   criteria?

The Conseil Constitutionnel (Constitutional Council), when called upon to rule on an application for a priority preliminary ruling on the issue of constitutionality relating to the measure appeared to infer that it must (Constitutional Council, 13 January 2011, LawLex201100003908JBJ). A ruling of the Paris Commercial Court clearly chooses this approach (Commercial Court Paris, 24 September 2013, LawLex201300001405JBJ). However, others will argue that, on the contrary, Article L. 442-6, I, 2° constitutes an autonomous case of liability which cannot be assimilated with or limited to the concept prevailing under consumer law.

4.         Can the determination of the selling price be controlled by the court on the basis of significant imbalance?

If we accept that the concept of significant imbalance must be assessed with regard to the consumer law criteria, the courts should not have the power to make an assessment of the adequacy of price or remuneration for the service rendered, insofar as this is prohibited by paragraph 2 of Article L. 132-1 of the Consumer Code. However, the commercial courts have nevertheless analyzed price adjustments clauses under Article L. 442-6, I, 2° (Commercial Court, Lille, 7 September 2011, No 11-17911, LawLex201300001296JBJ) and the Paris Court of Appeal has accepted the principle while at the same time ruling out the possibility in respect of the case before it (CA Paris, 23 May 2013, RG 12-01166, LawLex20130000862 JBJ).

5.         Is a finding of significant imbalance enough for the rule to apply or must there also be proof of an element of constraint?

This question has also given rise to debate. Some courts have held that the review of the significant imbalance is subject both to the existence of obligations creating an imbalance in the contractual rights and obligations and by the existence of an element of coercion (Commercial Court, Paris, 24 September 2013, LawLex 201300001405JBJ). Others have argued that subjecting or attempting to subject a trading partner to obligations creating a significant imbalance does not result as much from the exercise of overwhelming pressure or coercion as from the existence of an uneven balance of economic power between the parties, which gives rise to the dependence of one of them (CA Paris, 18 September 2013, LawLex201300001527 JBJ).

Given the state of affairs, it is fairly clear that the current law is not settled and each of these questions will no doubt give rise to contradictory debates until the Court of Cassation has declared itself on the question, and probably also afterwards.

This situation is inherent in the very general nature of the legislation which leaves room for interpretation and debate, whereas other law systems having established a system of rules for unfair terms between traders, such as German law, have opted for a very precise categorization of the conditions of significant imbalance.