Sales at a loss

The discussion as to whether or not a prohibition on selling at a loss is in conflict with the Unfair Commercial Practices Directive (Directive of 11 May 2005 concerning unfair business-to-consumer commercial practices in the internal market) and can be maintained is not limited to the Belgian market, but is also being held in Spain. It is not surprising  that the European Court of Justice was asked to give a judgment on the Spanish prohibition of selling at a loss, just like on the Belgian regulation.

In its judgment of 19 October 2017, the European Court of Justice ruled that the Spanish provisions concerning sales at a loss were in conflict with the Unfair Commercial Practices Directive.

Although this judgment refers to the Spanish regulations, there are a number of similarities with the Belgian provisions. The judgment could already give an indication on how the Court might assess the current Belgian prohibition should this be submitted to the Court again.

After all, it cannot yet be said with certainty that, in spite of the limited intervention of the legislator, the Belgian prohibition of selling at a loss would survive a new assessment of the European Court of Justice.

1. The Court’s 2013 decision on the Belgian prohibition 

As a reminder, on 7 March 2013, the European Court of Justice decided that the Belgian prohibition of selling at a loss did not comply with the Unfair Commercial Practices Directive.

This directive prohibits a number of commercial practices and is aimed at protecting consumers. In our country, this directive had been transposed into the Market Practices and Consumer Protection Act (hereinafter MPCPA), now Book VI Economic Law Code (hereinafter ELC), Market Practices and Consumer Protection, which also contains the provision regarding sales at a loss.

In its decision, the Court of Justice stated that the old Section 101 of the MPCPA, which contained the prohibition of selling at a loss (meanwhile Section VI.116 ELC), was contrary to the Directive because it precludes a national provision, which provides for a general prohibition of selling goods at a loss in so far as that provision pursues objectives relating to consumer protection.

The Court therefore states that as soon as a law intends to protect consumers, a general prohibition of selling  at a loss is not in accordance with the Unfair Commercial Practices Directive. In other words, if a legal provision is solely aimed at regulating the conduct of businesses among themselves, without taking consumers into account, this provision falls in principle beyond the scope of the Directive, and the Court cannot check this with the Directive.

This has also proved to be the strategy of the Belgian legislator. The Explanatory Memorandum of the MPCPA stated that this prohibition prevents small companies from being driven out of the market, which is also in the consumers’ interests. The prohibition therefore had a dual function, on the one hand it was intended to protect small businesses against large businesses and it also served the consumers’ interests.

When replacing the MPCPA with book VI ELC, the legislator attempted to keep this regulation away from the scope of the Directive merely by changing the reason for its existence in the Explanatory Memorandum. The legislator clarifies that the prohibition, although the content has almost not changed (except for the determination of the reference price, where a volume discount can now be taken into account), no longer has the intention to protect consumers but only to ensure the existence of healthy and loyal competition between businesses.

Although this appears to be to some extent a transparent attempt to exclude the assessment of the prohibition of selling at a loss from the jurisdiction of the Court of Justice, the Court has not yet given a decision on it.

2. The decision on the Spanish regulation

The decision of 19 October 2017 regarding the Spanish regulation could perhaps already provide an insight into how the Court would assess the current Belgian regulation if it were to be submitted once more to the Court.

After all, the Spanish regulation turns out not to differ so much from the Belgian provisions. The question that can then be asked is whether the Belgian regulation contained in Sections VI.116 and VI.117 ELC can be maintained.

In Spain the situation is as follows. The prohibition of selling at a loss is laid down in Retail Trade Regulation Act 7/1996 (LOCM). In the Explanatory Memorandum, it is stipulated that, in addition to consumer protection, this Act is intended inter alia to help restore the balance between large and small retail establishments and, in particular, to maintain free and fair competition. This Act also explicitly stipulates that the prohibition also applies to organizations involved in wholesale trade. Just like in Belgian law, Spanish law has a number of exceptions for, inter alia, sales or perishable products. The transposition of the Unfair Commercial Practices Directive into Spanish law left these provisions unchanged.

The sale at a loss that gave rise to this judgment was about the sale of products by a wholesaler to supermarkets and local shops (and not to consumers). The Spanish government imposed a fine on the wholesaler. The sanction was based on various considerations, including consumer protection.

The wholesaler lodged an appeal against this sanction since he considered that his actions had not caused any harm to the consumer and that the Spanish regulations were contrary to EU law.

The Spanish Court then referred a number of questions to the European Court of Justice for a preliminary ruling. The Court had to deal with the question whether the Unfair Commercial Practices Directive precludes a national regulation, which contains a general prohibition on offering for sale or selling goods at a loss and which lays down grounds of derogation from that prohibition that are based on criteria not appearing in that Directive.

Initially, the Spanish government had argued that the European Court of Justice was not competent to assess Spanish legislation against the Unfair Commercial Practices Directive. After all, the Directive applies only to commercial practices with regard to consumers and not to unfair commercial practices in a B2B relationship. Since the sale at a loss took place between business parties, it falls outside the application of the Directive and therefore outside the margin of discretion of the Court of Justice.

However, this was not followed by the Court. The legal provision prohibiting sales at a loss extends to both wholesalers and retailers. The consequences of the interpretation of the Directive by the Court of Justice are therefore the same in both sales situations, which means that the Court has jurisdiction to deal with the questions.

3. Consequences for the Belgian prohibition  

This reasoning could make sure that the Court could also declare itself competent to decide again on the Belgian prohibition. After all, Sections VI.116 and VI.117 ELC are applicable both in B2B relationships and in sales to consumers. No distinction is made. This therefore means that the Court would still have jurisdiction to assess these provisions against the Unfair Commercial Practices Directive.

As far as the regulation itself is concerned, the Court refers in its judgment to its 2013 decision in the Belgian case and reiterates that the Unfair Commercial Practices Directive precludes a national provision, which contains a general prohibition on offering for sale or selling goods at a loss, without it being necessary to determine, having regard to the facts of each particular case, whether the commercial transaction at issue is unfair in the light of the criteria set out in the Directive and without the Court having a margin of discretion and provided that the provision aims at protecting the consumer.

When examining the purpose of the Spanish Retail Trade Regulation Act LOCM, the Court finds that it  also aims at consumer protection. This is also the case when wholesale businesses sell to retailers as these transactions affect the consumer.

In the preparatory work of the MPCPA of 6 April 2010 (as mentioned earlier, the predecessor of book VI ELC), it is explicitly stated that the prohibition was inter alia motivated to prevent decoy practices with respect to consumers. Moreover, the legislator was inspired by the retail practices where the consumer receives more services, such as personalized information about alternatives and where the legislator wishes to avoid that the wholesale distribution takes the consumer away from the smaller specialist shops. The legislator literally states that the consumer has every interest in the maintaining of such alternative distribution channels.

This might well be correct but it does not change the fact that it will be the Court of Justice, which will assess  whether a prohibition of selling at a loss is good or not good for consumers. The deletion of this paragraph from the explanatory memorandum does not necessarily render the Court incompetent since the prohibition itself does not distinguish between practices towards consumers and non-consumers.

Just like the Belgian prohibition, the Spanish prohibition existed before the Unfair Commercial Practices Directive. The Spanish prohibition also has a broader purpose than consumer protection. It serves to help restore the balance between large and small retail establishments and, in particular, to maintain free and fair competition. The sale sanctioned by the Spanish government was in a B2B relationship. Nevertheless, the Court states that it is competent to check the regulations with the Unfair Commercial Practices Directive, just because it also targets sales situations in respect of consumers.

In its specific assessment, the Court finds that the Spanish prohibition is more stringent than allowed by the Unfair Commercial Practices Directive, and that therefore a general prohibition on offering for sale or selling goods at a loss, with the exceptions not being based on criteria that are not included in the Directive, are contrary to the Directive. The same can still be said about the Belgian prohibition.

4. Conclusion

It will therefore have to be seen whether the Spanish legislator will implement substantive adaptations or rather follow the example of the Belgian legislator and merely amend the Explanatory Memorandum of the Spanish Retail Trade Regulation Act LOCM.

The key question in that case is whether this will be sufficient to still be able to maintain the prohibition and keep it outside the Court's assessment. We look forward to the following request for a  preliminary ruling on this subject, in which the Court will again and hopefully definitively decide on it.