Unfair Trading Practices I. Issues

Jean-Marie Codron INRA/MOISA, Montpellier

ENPARD Program

Introduction and mapping of the discussion

While European countries (and later on the European Union) have long cared for the use of restrictive competition practices in the food sector, their concern for the use of UTPs in bilateral relationships is more recent; especially in the FFV sector

The EC's interest in UTPs in the food sector can be traced to the 2009 food price spikes. • An EC Retail Market Monitoring Report published in 2010 identified the lack

of rules addressing UTPs and the lack of enforcement as one of the major problems of the retail sector

The European concern for UTPs in the FFV sector is more recent (motion of the European Parliament, 19 may 2015) • considers that unfair trading practices and the pressure exerted on producers,

whether or not they are associated, by the large retail chains, are the main obstacle to F&V farmers earning a decent income;

• points out that the weakness of their position is compounded by the fact that their products are perishable

Introduction and mapping of the discussion

In june 2016, the European Parliament • Reports that the initiatives taken so far have not been effective and calls for

more action, more legislation at the EU level to tackle UTPs… especially when it comes to minimizing the so-called fear factor (june 2016)

• at the same time, acknowledges that the UK Groceries Supply Code of Practice (GSCOP) working well, recommends an extension of the code at the EU level

The aim of our presentation is to give insights into how those two approaches

(regulatory and voluntary) may be considered as complements or substitutes At stake is • the economic viability of small shippers who play by the rules • Consumers'ability to obtain the best quality produce at the lowest possible prices

Introduction and mapping of the discussion

To that purpose, we raise the following points

Why are FFV a specific case for UTP's ? What is unfair in the FFV SC according to EU, France, UK,

USA/NAFTA ? Differences in the structural/behavioral environments of

these UTPs Differences in the Institutional environments of these UTPs

? Regulatory vs voluntary approaches

I. Why are FFV a specific case for UTP's: non standard nature of the product

Processed, packaged, branded, industrial products are homogeneous and have characteristics that are well informed; only two of the four main hypotheses of the pure and perfect

competition theory are not verified: large number of suppliers and buyers, barriers to entry

As a result, the focus for UTPs in the standard/packaged/branded food sector is on size asymetry and the resulting imbalance of bargaining power In the FFV SC, the focus has to be slightly different: unfairness is now, not only driven by size asymetry but also by the non standard nature of the product

I. Why are FFV a specific case for UTP's:

FFV specificities

Most FFV feature high heterogeneity and uncertainty regarding the characteristics of the product and the process of production due to Product perishability, Climatic uncertainty, Diversity of origins, High measurement costs (safety and organoleptic characteristics)

Market structural characteristics add to produce characteristics to increase the difficulty to manage such a SC Supermarket buyers at the central level don't have the possibility of diverting

to other markets (hence the limited amount of goods that can be purchased forward

Demanding consumers as regards to low prices but also product quality (organoleptic and safety attributes), service quality (consistent supply, diversity), bulk vs packaged FFV

I. Why are FFV a specific case for UTP's:

Consequences on the SC

Resulting characteristics of the supply chain Price volatility: one of the few food sectors where prices are changing daily Difficulty to standardize product quality Little consumer-identifiable branding Consumer preferences for non packaged FFV (at least in Southern Europe)

Resulting characteristics for retailer management Difficulty to manage the FFV department store Need for flexibility: purchase centralization is not optimal ; sourcing

through local wholesalers or directly to local growers remain an alternative Oral contracts are dominant, full written (legal) contracts are still the

exception Weaker bargaining power of the retailer, which results in less unfairness in the relationship between growers and retailers

I. Why are FFV a specific case for UTP's: what kind of enforcement ?

In the FFV case, the monopsony power of the retailer is mitigated by the issue of "imperfect information" given the nature of the good and the high measurement costs (price, quality), No legal contract can be written, except for the general conditions

of sales. Informal agreements based on long term relationships are

nonetheless necessary to provide quality and consistency The specific terms of the transaction (volumes, price, quality,

timing…) are private information that have to be assessed by way of expertise and enforced by private mechanisms (trust, reputation, private arbitration).

Regulatory measures are limited to practices that can be easily observed and verified (delay of payment, price display…)

What is unfair in the food SC according to EU ?

FFV are not tackled separately in the discussions of the European Parliament about UTPs in the food sector (see for instance the June 7 2016 resolution of the EP on UTPs in the food SC) Four key categories of UTPs that an effective regulatory framework should target have been identified (by EU): one party should not unduly or unfairly shift its own costs or entrepreneurial risks

to the other party; like overhead costs (opening of a new supermarket..) or handling costs

one party should not ask the other party for advantages or benefits of any kind without performing a service related to the advantage or benefit asked;

one party should not make unilateral and/or retroactive changes to a contract, unless the contract specifically allows for it under fair conditions;

there should be no unfair termination of a contractual relationship or unjustified threat of termination of a contractual relationship.

The two last categories assume the existence of a formal contract

II. What is unfair in the FFV SC in France ? Regulatory measures adressing UTPs

France has a relatively long story of regulatory measures on UTPs in the FFV sector • which dates back to the late 90's with the short-lived attempt of double price posting at

the retail level

UTPs that are yearly surveyed by the government Delays of payment: legal obligation to pay within the 45 days after the emission of a

(weekly) consolidated invoice Contractualization introduced by LMA (2010); updated in 2014 (Loi Hamon alias loi avenir

or consumption law): The goal is to improve the balance of power between the producer and the buyer written contracts are mandatory at the first buyer level of the producer : cooperative,

private shipper or retailer in case of direct sourcing from the producer; Contracts must include volumes and quality, terms of price fixation, modalities of

delivery, invoicing and payment, adjustment of the contract, termination of the contract; moreover they must have a duration of 3 years

In the current state, a very limited number of contracts has been signed.

II. What is unfair in the FFV SC in France ? Regulatory measures adressing UTPs

Price after sales (transfer of commercial risk) Forbidden but still existing and economically justified for long distance transport or during

periods of oversupply (total prohibition would mean the lack of transaction) All transport of FFV have to be accompanied by a document notifying the sales conditions

Slotting fees or equivalent fees Discounts are allowed by regulation to pay for a service that has been provided by the retailer

(examples are promotion in a catalogue, privileged localization in the store, animation…); Slotting fees, transfer of retailer overhead costs (like contribution to a new store of the chain)

are not considered as a service and are thus forbidden. In France, those forbidden discounts are referred as 3R (Remise, Rabais, Ristourne); they have

developed for packaged goods since the prohibition of sales at a loss in 1996 (only France) but are now forbidden

producers still informally complain about the existence of 3R in the fresh produce transaction, although they are not optimal as a pricing strategy for the retailer Several characteristics of the produce industry limit the growth of such fees: the

seasonality of supply, perishability, lack of identifiable brands, lack of seller power, relative scarcity of new products

However, producers do not sue, fearing retaliation

II. What is unfair in the FFV SC in France ? Regulatory measures adressing UTPs

UTPs that are "less" surveyed by the government Most likely because they are much less easier to enforce Default of quality, non compliance with quantity

In the fresh produce sector, discounts are also allowed by regulation in case of non compliance of the product that has been delivered (quality default or missing quantity)

To avoid subjectivism, criteria for quality non compliance have to be precisely defined by an agreement of the two parties (Producers and Retailers organizations).

Abusive discounts have been reported by producers but not transmitted to a commercial court, most likely because of the need of expertise to arbitrate such conflicts

II. What is unfair in the FFV SC in France ? Regulatory measures adressing UTPs

UTPs that are not included in the annual survey (cont) Loss leaders

Members of the European Parliament stressed that selling production costs and large scale retailers misusing FFV as loss leaders threatens the sustainability of European production.

Sales at a loss forbidden excepted during sales periods or for perishable products. These exceptions are economically justified by the fact that otherwise, the loss would be greater

Price display out of the stores, Retailers have abused this exception (to the loss leader regulatory measure), by

advertizing prices below the cost for FFV in their promotional catalogues. Producers are not happy with such display in advance, given price high

volatility…since they loose money if the current price is higher than the price agreed in advance; conversely, the retailer will renegotiate the price if the current price has fallen below the agreed price

One regulatory measure that has been passed is the prohibition of posting prices more than three days before the application of the price and the obligation to write the conditions in a contract (or by default, to abide by the interbranch agreement).

France Violation of reguatory measures DGCCRF 2014 and 2015 surveys

.

Perishable Agricultural Commodities Act

What is PACA?

Fosters trading practices in the marketing of fresh and

frozen fruits and vegetables in interstate and foreign

commerce.

Prohibits unfair and fraudulent practices and provides a

means of enforcing contracts.

Protects produce firms against financial losses stemming

from other traders who engage in unfair business practices.

Under the PACA, anyone buying or selling commercial

quantities of fruit and vegetables must be licensed by

the USDA.

Fruit & Vegetable Dispute Resolution Corporation (DRC)

What is DRC?

A tri-lateral commercial organization based on the AMS

Perishable Agricultural Commodities Act (PACA)

• Provides the North American produce industry with the

tri-national policies, standards and services necessary

for resolving disputes in a timely and cost effective

manner

Designed to build on existing services in the U.S. and fill a

gap for international and domestic transactions in Canada

and Mexico

AMS Associate Administrator holds position on board

Fruit & Vegetable Dispute Resolution Corporation (DRC)

Top 10 Reasons to Join DRC

1. Single system for fair and ethical trading practices across

North America

2. Deals with condition, contract, and payment disputes

3. Alternative to expensive litigation

4. Affordable and expedited solutions for most claims

5. Binding and enforceable decisions

6. Bad actors identified to the membership and the trade

7. New business alliance opportunities

8. Reasonable fees for service

9. Overcomes deficiencies in the Canadian Licensing and

Arbitration Program

10. Complements PACA

0

5

10

15

20

25

30

Disputes on contracts Disputes on prices Failure to pay Quality issues

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mb

er o

f ca

ses

Source: Pavez, 2103 based on DRC´s arbitration decision records

Reasons of disputes

(Arbitration decisions from 2009 to 2011)

II. Overview of the main UTP in the US/NAFTA FFV trade

Out of the 44 arbitration decisions over the 2009–2011 period, 57% concerned quality issues (Pavez, 2013 based on DRC data).

II. Overview of the main UTP in the US/NAFTA FFV trade:

Quality issues normally arise from two situations:

divergences between the product’s grade (standards); and,

poor condition upon arrival (e.g. decay and bruising due to deficiencies in transportation or shipment (damage due to temperature, inappropriate handling and delays).

Shipper alleges the full amount remains due and unpaid. Receiver is entitled to recover its damages resulting from a breach in quality

USA vs CAN 2010 18741

Lettuce

The warranty of suitable shipping condition was breached by shipper. Receiver initially rejected the load but subsequently agreed to handle the load for the shipper's account (consignment). Shipper did not accept the extremely low prices

USA vs CAN 2010

Onions

II. Overview of the main UTP in the US/NAFTA FFV trade:

Disputes on contracts arise from confusion or Insufficient evidence on:

– The type of contract agreed (i.e. consignment or sale)

– Decision rights on the product (reselling the product, store, return, dumping in case of damage).

– Unilateral change of contract conditions

There is no evidence of the type of contract the parties agreed and dispute on the price settlement. Therefore the arbitrator resorted to PACA Law "when there are no detailed accountings of the buyer’s sales in “Open” or “Price After Sales” transactions, it is customary to calculate the amount due based on market prices reported by the USDA’s Market News Service".

USA vs CAN 2009

Mixed Vegetables

The product arrived with condition problems. Receiver decides to change from sale contract to consignment. Shipper did not accept.

USA vs CAN 2009

Broccoli

21

Closed Files

111 Arbitrations

Average # Days – 196

Average Value - $12,162

574 Without Arbitration

Average # Days – 47

Average Value - $4,218

3rd Annual NAAMIC Workshop – Calgary, Alberta – June 1, 2006

II. USA vs France: Differences in UTPs

USA France

paymentdefault(excessivedelayorpartial)

basicconcern;needsinterpretationonacasebycasestudy

basicconcern;interpretationbypublicagencyisnoteasy;

qualitydefaults majorcauseofconflict;assesmentonthebaseofgradesrecommendedinthecodeofpractice

discountforqualitynoncomplianceisallowedbyregulation;howeveritmustbebasedoncriteriadefinedbyaninterbranchagreement

slottingfeesand

otherequivalentfees

notforbidden;category

management/captaincyaccepted;nopaymentforbetterpositionningunlessinrelationtopromotion

forbiddenbutretailersintroduce

newtechniques(NIP)tobypassthelegislation

contracts oralagreementsarenotforbidden

mandatoryforoperatorsbuyingfromproducers;however,producersarenotobligedtoacceptit

contractterms precisionisrecommendedtoavoidconfusionandconflicts

mandatoryforbasictermsifcontractisimplemented;

contractchange mustbedecidedjointly mustbedecidedjointlycontracttermination

mustbedecidedjointly mustbedecidedjointly

II. USA vs France: Differences in UTPs

USA Franceinvoicing

mustcontainaminimumofinformation(price,quantity,quality);

pricing mustbewrittenattheshippinglevelonthedeliverydocument;priceaftersaleisforbidden(buttoleratedinsomecases)

lossleader forbiddenexceptinconditionsdefinedbytheInterfelagreement

pricedisplayoutofthestore

forbiddenexceptduringashortperiod(2daysbefore,5daysafterapromotion)

priceregulation possibleduringoversupplyperiodsretailermarginregulation

onavoluntarybasisduringoversupplyperiodsattherequestofthegovernment

III. Differences in structural/marketing environment of UTPs

The following national characteristics have to be considered to tackle the UTPs issues Sovereign Institutional structures

• Propensity to state intervention • Justice: Common law vs civil law (comercial law, contract law)

Production structures (grower size) Retailing structures

• (level of concentration) • Supermarket's market share; alternative channels • Supermarket sourcing behavior (centralisation vs local delegation)

Consumer behavior: preferences as regards to packaging Market structures: local production and international trade

• Domestic market vs export market • National production vs imports

IV. Differences in institutional environments of UTPs

USA/NAFTA/UK FranceTypeofapproach(dominant)

Voluntaryscheme(privateaction)

Regulatoryapproach(commandandcontroltype)

Support By-law,Codeofpractices RegulatorymeasuresUTPsdiscovery Complainant(industry

player)'sactionRegulatoryagency'saction(annualsurvey)

Whoinvestigates? Arbitrator,adjudicatorwithindustryexperts

Publicagencyafterconsultationoftheorganizationsofindustryplayers

Typeofsanction DamagereparationDe-listing(loosinglicense)

Warnings,penaltiesofdifferentlevels(administrative,penal)

Assessmentofthelevelofthesanction

Lawyerwithhelpofexperts

Penalties'scalefixedbylaw;someinterpretationofthepublicagency

Advantages Flexibility,casebycasestudy,expensive

Costlessforindustry,publicmoney

Drawbacks Dependsontherateofadhesion(membership)

Rigidity,interpretationisdifficult

UK Groceries Supply Code of Practice/Adjudicator

Not FFV specific Code Code: put in place by the Competition Commission in 2009. Adjudicator (arbitrator): • Set up to ensure that supermarkets treat their suppliers lawfully and fairly • formally established in june 2013; with power to investigate end of 2013 • Responsible for monitoring, encouraging and enforcing the Code • Investigates complaints from retailers'suppliers, arbitrates disputes • Sanctions: recommandations, publicizing, deciding fines if repeated violation Mandatory for the top 10 retailers; Only deals with UTPs of those retailers with their direct suppliers

UK Groceries Supply Code of Practice Contents

1. Principle of fair dealing : wo distinction of formal or informal agreements 2. Variation of Supply Agreements and terms of supply 3. Changes to supply chain procedures 4. No delay in Payments; in accordance with the agreement and in any case, within a reasonable

time after supplier's invoice 5. No obligation to contribute to marketing costs unless provided in the agreement 6. No Payments for shrinkage 7. Payments for Wastage : must not require unless due to the negligence of that supplier and the

agreement says explicitly what is negligence and the basis of such payment is set out in the agreement

8. Limited circumstances for Payments as a condition of being a Supplier 9. Compensation for forecasting errors 11. No tying of third party goods and services for Payment 12. No Payments for better positioning of goods unless in relation to Promotions 13. Promotions 14. Due care to be taken when ordering for Promotions 15. No unjustified payment for consumer complaints 16. Duties in relation to De-listing 17. Senior Buyer

UK Groceries Supply Code of Practice/Adjudicator

Main features Covers a limited set of UTPs; does not cover price setting Does not particularly address small farmers, since it is only for direct

suppliers of the top ten retailers Does not address specifically FFV companies

It is a mix of the two contrasted approaches (voluntary and regulatory) Regulatory : mandatory for top 10 retailers; enforcement by a public body Voluntary: adhesion is required to benefit from this intermediation; the Code of

practices mostly refers to the terms of the bilateral agreement (Common Law contracts' specificity); for instance No obligation to contribute to marketing costs (unless provided in the

agreement) Payments for Wastage: must not require unless due to the negligence of that

supplier and the agreement says explicitly what is negligence and the basis of such payment is set out in the agreement

Thank you for your attention

Jean-Marie Codron INRA/MOISA, Montpellier

ENPARD Program