Price fixing: a franchise network sanctioned by the French Competition Authority

Decision No. 21-D-24 of the French Competition Authority dated October 12, 2021 concerning practices implemented in the sector of the distribution of soccer leisure equipment

The imposition, by the supplier, of resale prices of products or services to its distributors (e.g. franchisees) is an anti-competitive practice prohibited both by European law (Article 101§1 of the Treaty on the Functioning of the European Union) and by French law (Article L.420-1 of the French Commercial Code). It is also a restrictive practice sanctioned by a fine of up to Euros 75,000 under French law (article L.442-6 of the Commercial Code).

With rare exceptions (such as the launch of a new product or a short-term low-price campaign, for example), imposing a resale price on a distributor is therefore illegal.

Suppliers may nevertheless, without incurring sanctions, recommend resale prices to their resellers or members or impose maximum prices.

At the end of 2021, the French Competition Authority had rendered a decision on the ground of article L.420-1 of the French Commercial Code, relating to a price fixing practice that had taken place within a franchise network.

In the case at stake, Espace Foot, a franchisor specializing in the sale of soccer-related products, had included a clause in its franchise agreements requiring them to comply with the pricing policy defined by the franchisor.

The disputed clause stated that: "in the spirit of protecting the brand image, the Franchisor will communicate the sales prices, and the Franchisee will apply the communicated prices. The Franchisee will comply with the laws and decrees regulating prices."

During the investigation of the case, several franchisees stated that they were applying the pricing strategy and the prices that were communicated to them. It was also noted by the Competition Authority that the franchisor had imposed a financial penalty on one of its franchisees for non-compliance with the pricing policy, and that, as a threat, the entire network had been informed of this penalty.

The practice ceased in 2018, when franchisees signed the network's new standard agreement, which stipulated that: "the franchisee is an independent trader. As such, he freely determines his sales prices and has control over his margins (...)".

The franchisor requested the settlement procedure, which allows the Authority to set a range within which the sanction would fall. The financial penalty imposed (Euros 25,000) was determined based on various criteria: the seriousness of the infringement (in particular, the fact that the entire network had implemented it), the damage to the economy (very limited in this case due to Espace Foot's small market share) and the circumstances specific to Espace Foot (which had corrected its practice in its more recent agreements).

This decision follows the one rendered by the French Competition Authority in December 2020, in which Damman Frères had been sanctioned for a similar practice, which consisted in “recommending" prices but sanctioning distributors who did not apply them (Decision No. 20-D-20 dated December 3, 2020 relating to practices implemented in the high-end tea sector).

These decisions confirm the attention that the Competition Authority still pays to these price fixing practices (which are however more and more seldom today) and invite the franchisor to be prudent, despite the temptation to standardize the prices within the network.

It is also interesting to note that in this decision rendered in October 2021, the Authority referred to the notion of "damage to the economy", even though this criterion has been replaced, in the Authority's new statement on sanctions of July 2021, by the criterion of the duration of the infringement.

Loyalty of proof and admissibility of a mystery shopper's testimonial
Court of Cassation, November 10, 2021, No. 20-14669 and No. 20-14670

In accordance with the principle of fairness in the administration of evidence, evidence obtained unfairly by means of trickery or stratagem is declared inadmissible in civil and commercial matters.

Thus, for example, recording a telephone conversation without the person speaking being informed constitutes an unfair practice making its production as evidence inadmissible (Court of Cassation, plenary assembly, January 7, 2011, No. 09-14316 and No. 09-14667).

Similarly, the operation carried out by a company sending a fictitious customer to a competitor's premises in order to acquire a product and establish the violation of an exclusivity is also contrary to the principle of fairness of evidence (Court of Cassation, Commercial Chamber November 18, 2008, No 07-13365).

The Court of Cassation confirmed its position in two rulings dated November 10, 2021.

In these two cases, a professional association having as a mission, inter alia, to moralize and defend the ethics of the opticians' profession had organized mystery shoppers' visits to various optical stores to denounce practices consisting in falsifying invoices by increasing the price of lenses and decreasing the price of eyeglass frames so that the amount covered by mutual insurance companies would be higher.

Relying on the certificates of these mystery shoppers, the professional association summoned two opticians to cease these acts of unfair competition and to pay damages for having damaged the global interest of the profession.

The Lyon and Paris Courts of Appeal rejected the professional association’s claim and declared that the certificates produced were inadmissible.

The professional association then appealed the decision before the Court of Cassation.

After recalling the principle according to which "evidence obtained by a stratagem characterized by a set-up, a staging, a clandestine operation is unfair", the Court of Cassation dismissed the appeals on the ground that the certificates had been drawn up by mystery shoppers paid by a company specializing "in the recruitment of this type of service providers, to carry out an unreal scenario which had been dictated", that they had already drawn up certificates for the benefit of this professional association in other cases and that this was such as to cast doubt on their "complete neutrality in the establishment of the testimonies produced".

Similarly, the Court of Cassation noted that the mystery shoppers had "immediately drawn the opticians' attention to the amounts of reimbursement of lenses and eyeglass frames by the insurance company, which led to believe that the opticians had been incited to act fraudulently, as the reimbursement of products by the insurance company could only be perceived by them as a determining factor for making the sale".

The solution is clear: any inducement to act fraudulently excludes loyalty and is therefore prohibited.

These rulings are interesting for franchisors, who frequently use mystery shoppers. This process, whose intrinsic legality is not contested by the Court of Cassation, must be used with caution. Mystery shoppers' findings should thus lead to warnings sent to the franchisee with a possibility to cure the identified breaches and followed by counter-visits, rather than to immediate sanctions.

Determination of the law applicable to a distribution agreement in the absence of an express choice by the parties
Court of Cassation, 1st civil chamber, September 29, 2021, No. 20-18954

Do the provisions of article L.442-1, II of the French Commercial Code (former article L.442-6, I, 5° of the French Commercial Code), which prohibit the abrupt termination of established business relationships, constitute an overriding mandatory rule?

Over the years, several courts had clearly ruled in favour of this classification (for example: Lyon Court of Appeal, April 30, 2008, No. 06/04689; Grenoble Court of Appeal, September 5, 2013, No. 10/02122).

As for the Paris Court of Appeal, which now has exclusive jurisdiction to hear disputes based on these provisions of the Commercial Code, the 4th chamber of the 5th division had clearly admitted the classification as overriding mandatory rule in 2019 (Paris Court of Appeal, 5th division, 4th chamber, January 9, 2019, No. 18/09522).

However, more recently, in 2020 and 2021, the 5th and 16th chambers of the same division of the Paris Court of Appeal rejected this classification (Paris Court of Appeal, 5th division, 16th chamber, June 3, 2020, No.19/03758; Paris Court of Appeal, 5th division, 5th chamber, March 11, 2021, No. 18/03112).

The position of the Court of Cassation on this issue is therefore highly awaited to put an end to this uncertainty, especially since the Court of Cassation has recently recognized another restrictive commercial practice - the submission to a significant imbalance between the rights and obligations of professional parties (Article L.442-1, I, 2° of the Commercial Code) - as an overriding mandatory rule (Court of Cassation, Commercial Chamber, July 8, 2020, No. 17-31536).

The case submitted to the Court of cassation in the decision rendered on September 29, 2021 could have been an opportunity to clarify this issue.

In this case, a French supplier and its Algerian distributor, who had been doing business since 1977, had decided to formalize their business relationship in 2010 by entering into a distribution agreement. This agreement was however silent on the law applicable to their relationship.

Following termination of the agreement on April 1, 2016 by the French supplier with a notice period of 6 months, the Algerian distributor sued its former supplier before the Commercial Court of Paris claiming the application of French law in order to obtain compensation for the abrupt termination of an established business relationship on the basis of former Article L.442-6, I, 5° of the Commercial Code (now Article L.442-6, II), but also an indemnity for the damage suffered as a result of this termination on the basis of Articles L.134-1 and L.134-12 of the Commercial Code applicable to commercial agents. The Algerian distributor argued that the commercial relationship with its French supplier was of a mixed nature, partly a commercial agency and partly a classic distribution relationship.

The Paris Court of Appeal agreed to make a distinction between the agency part of the relationship and the distribution part.

For the classification as a commercial agency agreement, the Court applied the Hague Convention of March 14, 1978 on the Law Applicable to Agency, in order to retain, on the basis of its article 5, the existence of a tacit choice of law by the parties in favour of French law on the basis of a body of corroborating evidence (clause attributing jurisdiction to French courts, use of the French language in the agreement, signature of the agreement in France, etc.).

With respect to the classification as a distribution agreement, the Court of Appeal developed a reasoning in two steps, firstly by refusing to classify the rules governing abrupt termination of established business relationship as an overriding mandatory rule, and then by retaining the existence of a tacit choice of law by the parties in favour of French law, relying on the same indications, both on the basis of the Rome I Regulation on the law applicable to contractual obligations and on the basis of the Rome II Regulation on the law applicable to non-contractual obligations.

In its ruling dated September 29, 2021, the Court of Cassation confirmed that French law was applicable to the dispute. However, it did so only in light of article 5 of the Hague Convention of March 14, 1978 and article 3§1 of the Rome I Regulation, without taking position on the refusal of the Paris Court of Appeal to classify article L.442-6, I, 5° of the Commercial Code as an overriding mandatory rule.

While it is true that the French supplier's appeal had surprisingly not raised this question, the Court of Cassation could have taken up the opportunity of the questions of classification submitted to it to rule on this issue of major importance.

However, even if this decision is not as far-reaching as one might have hoped, it still contains some interesting lessons.

The criteria for identifying a tacit choice of law by the parties to an international agreement have indeed been clarified.

In particular, the Court of cassation admitted that the inclusion of a choice of law clause in general terms and conditions of sale could be taken into account as an indication of the parties’ intent to choose the same law for the framework agreement.

In addition, the Court of Cassation validated the identification of the tacit choice of law, with regard to the distribution part of the relationship, solely on the basis of the Rome I Regulation (without referring to the Rome II Regulation contrary to what the Paris Court of Appeal had done), which confirms the alignment of the Court of cassation’s case law with the Granarolo decision of the Court of Justice of the European Union (CJEU, July 14, 2016, C-196/15, Granarolo).