The Constitutional Court lifted the restriction limiting payments of large chain suppliers for marketing

In its ruling file no. Pl. ÚS 30/16 the Constitutional Court annulled the long-controversial Section 3 (a) of the Act on Significant Market Power in the Sale of Agricultural and Food Products and its Misuse.

The law generally stipulates that customers with significant market power (i.e. typically large food chains with annual turnover from food sales exceeding CZK 5 billion) will be banned from enforcing an advantage over suppliers without a justified reason in connection with the purchase of food.

Until now, the amendment required that the contract between a customer with significant market power and its supplier also contain the exact amount of all the supplier’s monetary payments, the total amount of which may not exceed 3% of the supplier’s annual sales for the last 12 months of the given year.

In practice, it is common for a customer to provide related services to suppliers in connection with the purchase of their food. These include, for example, marketing, advertising, choice of location of goods, etc. Therefore, both parties had to deal with a set limit for the volume of such services, which did not always correspond to the parties’ actual intention. Before the annulment of the limit, the supplier could spend a maximum of 3% per year to support sales, whether it wanted it to do so or not.

The provision was valid for about four years. Although the primary purpose of introducing a limit was to improve suppliers’ bargaining power vis-à-vis large chains and to reduce unfair practices (by large customers) by enforcing the “purchase” of ancillary services in connection with the purchase of goods, the restrictions were often counterproductive and perpetuated unnecessary market distortions. Violations could be sanctioned by fines of up to 10% of net turnover. On the other hand, the limit did not apply to services not directly related to the purchase and sale of food (e.g. quantity bonuses), but what such services belonged to (or do not fall within the limit) and under what conditions had to be constantly monitored.

The Constitutional Court has now declared the 3% limit unconstitutional and annulled it for violation of freedom to conduct a business, stating that: “It is not a reasonable means of achieving the objective, as it forces the supplier-customer relationship to negotiate a fixed limit of all supplier performance for related customer services, the maximum amount cannot be determined in advance.”

In our opinion the decision is very reasonable. Other provisions of the law, including the level of sanctions, remain unchanged. The principle of prohibiting the misuse of the position of a customer with significant market power is maintained.

In our opinion, the change could lead to a more adequate setting of relations between suppliers and customers. Among other things, the precise limit did not allow for sufficient flexibility to address fluctuations in demand for marketing services during the year and rather hindered the effective allocation of resources to support sales reflecting the changing needs of customers, economic preferences of suppliers or current customer opportunities. In fact, the law, the purpose of which was to protect weaker suppliers, could have had the opposite effect.

Although the current regulation to some extent prevented chains from insisting on “mandatory” additional services, it left aside the fact that many smaller, local or farm suppliers cannot do without strong marketing support. Hence despite good intentions, the restriction could also burden suppliers and artificially influence the final offer for end consumers.

In the few years since it was implemented, parties have learned to work properly with the limit. We will see what the current release will bring.

If you are interested in more information or are wondering how this change may affect you, or if you have your own experience that you would like to share, please do not hesitate to contact us.

You can reach Veronika Chrobok, Pavel Fára or your contact person in our office.

This document is only a general communication and is not legal advice in a specific matter.

 

 

 

 

 

 

 

 

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