France: Modernising the economy

Author: | Published: 1 Oct 2009
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In collaboration with Sarah Darmon

The French Law on the Modernisation of the Economy (LME), which came into force on August 6 2008, and its executive Order dated November 13 2008, bring important changes to French competition and distribution law, of which any foreign company doing business in France should be aware.

The authors of the LME aimed to develop competition and encourage the development of enterprise in order to promote French economic growth, and to improve employment and consumers' purchasing power.

A strengthened Authority

The LME created a new strengthened Competition Authority, which replaces the Competition Council and transferred the decision-making power with regard to merger control from the Minister of Economy to this new entity. In addition, the competition investigation procedure was amended by the Executive Order (ordonnance) dated November 13 2008. Finally, the LME modified the thresholds and time periods applicable to mergers, and made micro-anticompetitive practices subject to the control of the Minister of Economy as provided by the Executive Order.

The new Competition Authority centralises most of the powers that used to be shared between the Competition Council and the Ministry of Economy. It became effective upon the Government's adoption of an Executive Order on November 13 2008.

The Competition Authority benefits from wider powers in the merger-control field than the Competition Council. In this respect, the Competition Authority, rather than the French Ministry of Economy's services, receives notifications of concentrations and investigates proposed mergers, both in Stage I (initial investigation) and in Stage II (in-depth investigation).

The Ministry of Economy will only retain a subsidiary role regarding: (i) in depth merger investigations: within five business days following a Stage I clearance decision by the Competition Authority, the Ministry of Economy may request that the Competition Authority opens a Stage II and undertakes an in-depth investigation on the concentration; and (ii) reviews, on the grounds of public interest, of a transaction that has already been subject to an in-depth investigation and authorised or prohibited, by the Competition Authority, within twenty-five business days of the notification to the Ministry of the Authority's Stage II decision.

According to the LME, the Ministry of the Economy may exercise this right of contestation "for general interest purposes other than the protection of competition and which may, if applicable, compensate the harm to competition resulting from the transaction". As examples of general interest purposes, the LME mentions industrial development, international competitiveness and the creation or preservation of employment.

A last point of reform of the LME is the creation of an investigation service within the Competition Authority, which will act in collaboration with the investigation service of the Minister of Economy.

Competition investigation

Prior to the Executive Order, the Competition Authority had been criticised for failing to distinguish its investigation activities from its decision-making role. The Executive Order has responded to this criticism by separating these two aspects of its work.

As a result, the Chief Case Handler (Rapporteur Général), head of the investigation services of the Competition Authority, is now vested with some of the duties formerly granted to the head of the Competition Authority.

It is up to the Chief Case Handler to decide whether the simplified procedure should be followed or not. In addition, contrary to the situation existing prior to the Executive Order, the Competition Authority may no longer undertake investigations on its own initiative: this power is now vested in the Chief Case Handler who may recommend that the Competition Authority undertake an investigation into anti-competitive practices (Article L462-5 of the Commercial Code).

Finally, the Chief Case Handler's duties include management of requests for procedural time extensions as well as requests for application of the provisions regarding business secrets and of access to the case file.

Decision-making powers

Article L464-8 of the French Commercial Code provides for the possibility, for the President of the Competition Authority, to appeal to the Supreme Court (Cour de cassation) a Court of Appeal decision that has cancelled or reformed a decision of the Competition Authority. Before the Executive Order, only the Minister of Economy was granted this possibility.

Reinforcing powers

Investigators are now authorised, during investigations, to carry out hearings of "the occupant of the premises or his or her representative so as to obtain useful information or explanations for the purposes of the investigation". Previously, the Law did not mention any such power of the investigators and as a result those investigators that were willing to achieve their investigation as fast as possible did not ask for any explanations on the documents they were planning to seize.

So now the investigators will be able to carry out real and serious interrogations of company officers or their representatives while benefiting from the surprise of the investigation. More caution will thus be required from company officers.

In addition, when an undertaking or an organism does not reply at all, or replies after the requested delay, to summons or to a request of information or communication of documents from the investigators, the Competition Authority is entitled, at the request of the Chief Case Handler, to deliver an injunction with a penalty payment limited to 5% of the average daily turnover for each day's delay.

Article L464-2 V paragraph two provides that the undertaking that obstructed the investigations by providing incorrect or incomplete information or by communicating incomplete or misleading documents may be ordered by the Competition Authority at the request of the Chief Case Handler to pay a fine of up to 1% of the worldwide turnover without tax.

Regarding the rights of the entity under investigation, these have been increased both at the stage of investigation and with regard to any subsequent proceedings.

Concerning the investigations, the new Article L450-4 of the Commercial Code provides, first, that the judicial authorisation to conduct inspections and seize documents given by the freedoms and custody judge (Juge des libertés et de la détention) to the European Commission, the Minister of Economy or the Chief Case Handler's requests to initiate inspections must "mention the ability, for the occupant of the premises or its representatives, to be assisted by the counsel of their choice".

This represents an improvement in the rights of enterprises that were refused the benefit of a counsel by the Cour de cassation, which did not wish to hinder the speed of investigations and used to justify its position by the presence of a police agent on the premises [supposed] to ensure the validity of the operations.

However, Article L450-4 provides that "the exercise of the possibility does not entail the suspension of the search and the seizure". It results from this provision that such hearings may be held outside the presence of the company's counsel if the latter is unable to go immediately to the premises.

Secondly, Article L450-4 paragraph six states that the judicial authorisation to conduct inspections and seize documents given by the freedoms and custody judge is now subject to appeal before the chief justice (premier president) of the competent Court of Appeal on a non-suspensive basis within a period of 10 days from the notification of this authorisation and not only to a review by the French Supreme Court (Cour de cassation), as used to be the case. This solution complies with the Ravon case, decided by the European Court of Human Rights on February 21 2008, which stated that the possibility to subject the judicial authorisation only to a review by the French Supreme Court did not comply with Article 61 of the European Convention on Human Rights, which provides a right to a fair trial, since this appeal does not allow any review of the factual elements on which the authorisation relies but only the elements of law. The Law of May 12 2009 specifies that only the public prosecutor and the person subject to the inspections and seizures are entitled to lodge this appeal.

Article L450-4 paragraph 12 also allows the undertaking to contest the conduct of the inspections and seizures before the chief justice of the Court of Appeal, on a non-suspensive basis, within a period of 10 days from the delivery or reception of the minutes and inventory or, where the defendant is not the object of the inspections and seizures, from the date of the reception by the defendant of the notification of the minutes and inventory. The Law of May 12 2009 specifies that not only the public prosecutor and the person subject to the inspections and seizures are entitled to lodge this type of appeal but also any person summoned on the basis of documents seized during these operations. The judicial decision of the chief justice can be appealed before the Supreme Court.

Concerning the proceedings, new guarantees for entities under investigation lie in the prescription period and in the creation of a hearing officer position.

The Executive Order of November 13 2008 states, as already was the case under ex-Article L462-7 that "facts dating back more than five years may not be referred to the Competition Authority if no attempt has been made to investigate, establish or punish them". Please note that a new paragraph two provides that the actions interruptive of the prescription of the public prosecution mentioned in Article L420-6 are also interruptive of the prescription before the Competition Authority. However, a new paragraph three states that an action shall not be brought before the Competition Authority if a period of 10 years has expired since the end of the anticompetitive practices regardless of any interruption of the prescription periods. This limitation brings a new guarantee and more security to the undertakings.

Finally, the LME, created, in Article L461-4, the position of a hearing officer within the Competition Authority, whose task will be to collect, "as the case may be, the comments of the challenged and filing parties concerning the manner in which the procedures affecting them are carried out once the statement of objections is sent" [and to] transmit "a report to the chairman evaluating these comments and proposing, if necessary, any measure that will enhance the ability of the parties to exercise their rights".

However, unfortunately, the hearing officer is not expected to participate in the Authority's hearings, unlike officers in the European Commission.

Modifying merger thresholds

The time period for mergers are now expressed in business days (instead of calendar days) and equal 25 working days for phase I and 65 working days for phase II.

However, these time periods may be suspended at the request of the parties "on an ad hoc basis, such as in order to finalise commitments", and at the Authority's initiative in the case of a delay in the provision of certain information.

In addition, specific turnover thresholds (€75 million and €15 million instead of €150 million and €50 million for the general thresholds), may apply when the parties to the merger are active in the area of retail or in overseas territories.

Micro-anticompetitive practices

The Executive Order of November 13 2008 (Article L464-9 of the Commercial Code) provides for the right of the Minister of Economy to settle or order measures regarding micro-anticompetitive practices. Such practices will be subject to the control of the Minister where: (i) the combined turnover in France of all the undertakings involved does not exceed €100 million; (ii) the turnover of each of the undertakings in France does not exceed €50 million; and (iii) the practices do not fall within the scope of Articles 81 and 82 of the EC Treaty.

If the parties agree to a settlement, the amount of any fine imposed will not exceed €75 million or 5% of the parties' latest turnover achieved in France, if this amount is lower.

Timely compliance with the obligations resulting from the injunction or the acceptance of a settlement puts an end to any actions brought before the Competition Authority regarding the same facts. The Minister of Economy cannot suggest a settlement nor order an injunction when the same facts have previously been the object of a referral to the Competition Authority by an entity mentioned in Article L462-1.

If the parties refuse to settle or do not comply with the injunction orders or with the obligations resulting from the acceptance of the settlement, the Minister may refer the case to the Competition Authority.

Distribution law

The most notable changes brought by the LME in distribution law are the reduction of payment periods in order to support small and medium companies, the abolition of the prohibition of discrimination between distributors and the reduction of the back margins.

The LME (Article L441-6 paragraph nine of the Commercial Code) provides that the payment period shall not extend beyond 45 days from the end of the month or 60 days from the invoice date, this being applicable to agreements entered into after January 1 2009. This reform is intended to bring payment terms in France in line with the European average and to support small and medium companies.

Such maximum time limit may be increased by means of inter-professional agreements which must have been entered into before March 1 2009 but this possibility is very strictly regulated and such agreements must end at the latest on January 1 2012. Around 40 of them were concluded in different sectors such as toys industry, paper industry, edition of books, jewellery and so on.

Pursuant to Article L442-6 I 7 of the Commercial Code, imposing payment terms that do not comply with the new ceiling for contractual payment terms or which are obviously abusive or requesting the creditor, without any objective reason, to defer the date of issue of the invoice, may be sanctioned by a civil fine which shall not exceed €2 million but which may "be raised to three times the amount of the sums unduly paid".

Article L442-6 I 7 was considered by the DGCCRF (French government agency responsible for Competition Policy, Consumer Affairs and Fraud Control) to be a matter of international public order which implies that it will apply to international agreements whatever the law contractually chosen by the parties.

Finally, the interest rate for late payment penalties is also amended. These penalties may not be contractually fixed at less than three times the legal interest rate and, in the absence of a specific contractual provision, their rate shall be equal to the European Central Bank refinancing rate increased by 10 points.

Discrimination between distributors

One of the LME's main contributions was to introduce the principle of freely negotiable prices between suppliers and distributors. Previously, discrimination with respect to prices and terms and conditions was prohibited unless economically justified by effective consideration.

If a seller offers different terms of sale, in particular different prices, to various purchasers in the same position, this will no longer give rise to any claim for damages or any civil fine. However, the LME introduced some limits to the freedom of negotiation of prices and terms and conditions.

First, the LME added new prohibited restrictive behaviours to those already contained in Article L442-6 of the Commercial Code. It is now forbidden to impose, or attempt to impose, obligations creating a significant imbalance in the rights and obligations of the parties. In addition, obtaining or attempting to obtain conditions that are manifestly abusive with respect to prices, payment terms, conditions of sale or services, by threatening to totally or partially terminate commercial relations is prohibited. Finally, English clauses providing that a party will automatically benefit from the most favourable terms granted to its competitors by the other party are now null and void.

Second, the LME increased the level of civil sanctions applicable to restrictive behaviours listed in Article L442-6 of the Commercial Code, which may not exceed €2 million, to "be raised to three times the amount of the sums unduly paid".

Reduction of the back margins

The principle stated by Article L441-7 of the Commercial Code, of a single agreement between a supplier and its client to be entered into before 1st March of each year, remains.

However, article L.441-7, paragraph five now specifies that "obligations aimed at promoting business relations between a supplier and a distributor or service provider [...] contribute to the determination of the agreed price", which implies, according to the DGCCRF, that such obligations will now be deducted from the supplier's invoice and will no longer be the subject of an invoice issued by the distributor. This implies a reduction of the back margins for services rendered and is part of the general policy of the Government aimed at reducing prices for the benefit of the consumers.

As part of this policy, one must note that the Chatel Act, of January 3 2008, stated that the resale at a loss threshold below which a distributor may not sell without committing an offence is now at the triple net which is defined as "the net unit price listed on the purchase invoice, less the amount of all other financial benefits granted by the vendor expressed as a percentage of the net unit price for the product, plus turnover taxes, specific taxes pertaining to the resale and the cost of transport" (Article L.442-2 of the Commercial Code).

About the author

Jean-Christophe Grall is the founding and managing partner of MG Avocats – Grall & Associés. He has been a litigator and an antitrust practitioner for more 20 years and has handled a broad range of complex litigations and transactions.
Contact information

Jean-Christophe Grall
MG Avocats – Grall & Associés

156, boulevard Haussmann
75008 Paris — France
Tel: +33(1) 53 57 31 70
Fax: +33(1) 47 20 90 40

About the author

Thomas Lamy joined MG Avocats – Grall & Associés in 2001 and has been a partner at the firm since December 2004. He has been practicing French and EU competition and distribution law for 11 years. Jean-Christophe Grall and Thomas Lamy both regularly provide antitrust and distribution law advice in French and UE matters.
Contact information

Thomas Lamy
MG Avocats – Grall & Associés

156, boulevard Haussmann
75008 Paris — France
Tel: +33(1) 53 57 31 70
Fax: +33(1) 47 20 90 40