Below you will find the topics of the newsletter:
EUROPEAN UNION ARTICLES
Author: Roxana Kruse (Senior Associate, CMS Brussels)
Retail alliances lead to increased buyer power. EU competition law takes a liberal stance to-wards such alliances based on the traditional theory that increased buyer power usually leads to lower prices and better products or services for consumers as long as there is still enough competition among buyers on their downstream selling markets that will force them to pass on better prices to consumers. However, this traditional view is about to change, and additional aspects are being discussed to assess the competitive effects of retail alliances. This includes e.g. the risk of market tipping and the issue of reduced innovation of choice.
Consequently, a recent report issued by the EU Commission's DG AGRI and JRC does not only show retail alliances in a good light. The report is based on the presentations and discussions at expert workshop on "The role of national and international retail alliances in the agricultural and food supply chain"1 that was held by DG AGRI.
The report concludes that there is a possibility of increased retail consolidation and anti-competitive practices applied by retail alliances. Possible benefits that such alliances can provide might be off-set by the potential harm inflicted on suppliers. The report suggests that a closer investigation of retail alliances and their behaviour may be warranted and concludes that an increased attention and orientation in guidelines by competition authorities may be desirable.
This is not the first time in recent years that retail alliances have been under scrutiny. In fact, the report by DG AGRI is the outcome of a discussion that started in 2018 preceding the adoption of the UTP Directive, in which members of the European Parliament even favoured a prohibition of retail alliances. This proposal did not make it through the Trilogue Negotiations with the Council and European Commission. However, the European Parliament demanded a report to get better insight on retail alliances and their activities, which are still relatively unknown and not well researched even though retail alliances have been around for a long time.
In addition, the Commission's DG COMP is currently revising its guidelines on horizontal restraints which include a section on the assessment of buying groups. During the public consultation, the Commission received dissenting opinions concerning this section. While some stakeholders clearly favour an even more liberal stance towards buying groups, a growing number of other stakeholders have expressed their doubts as to the appropriateness of the existing rules. They are calling for a more nuanced assessment, in particular concerning the large European retail alliances that combine the market leaders in several EU Member States2.
The DG AGRI report reflects the current discussions between the different players in the agricultural and food supply chain, competition authorities and other experts. It also draws a few conclusions that might shape the future discussions about retail alliances.
It suggests that the impact retail alliances might have on retail competition depends on several factors such as the type of alliances, the pricing scheme and the market structure, and especially the level of concentration on the downstream market. While retail alliances may generate efficiencies, certain types of retail alliances can increase the risk of collusion and the exchange of commercially sensitive information (e.g. when their members are competing on the down-stream market). This is also shown by a recent example of antitrust proceedings conducted by the EU Commission. Following on-premises inspections, which took place in February 2017 and May 2019, the EU Commission opened an investigation in November 2019 into the possible collusion of Casino and Intermarché. The Commission is concerned that the retailers went beyond the purpose of their buying alliance and engaged in anti-competitive conduct – allegedly coordinating their activities on the development of their shop networks and their pricing policy towards consumers. The Commission acknowledged that retail alliances can be beneficial but also stated that alliances can give rise to competition concerns when retailers collude on their retail sales activities: "Market developments in recent years, such as the growth in number of alliances and the changes in partners in alliances, have enhanced the opportunities and risks of such collusion."3 The proceedings are still ongoing and the outcome of the investigation open, but it shows that the Commission will not turn a blind eye on potentially collusive behaviour by members of a retail alliance.
The DG AGRI report also points out that while an improved bargaining position and an in-crease in buyer power can lead to lower prices, the likelihood of passing on better prices to consumers greatly depends on the type on contract and the degree of competition on the downstream market. It suggests that retail alliances can potentially be harmful to smaller retailers and that negative effects on competition (such as the waterbed effect and spiral effect) need to be further substantiated by more economic evidence.
The report also dedicates a section to analysing the potential impact on the upstream market. It suggests that suppliers may benefit from pooling purchasing volumes and reduced transaction costs. However, the report also points out that retail alliances can negatively affect suppliers. Establishing retail alliances can reduce the outside options for suppliers, which makes it difficult to re-allocate goods in the event of a conflict or threats of delistings. There are reported cases of coordinated delisting threats and unfair practices which may harm players on the upstream market. Regarding innovation and product variety, the report points out that retail alliances can have a negative impact when retailers from different countries join a retail alliance and are forced to select the same supplier.
The impact of purchasing agreements on product variety is also under scrutiny in France where the French competition authority expressed concerns that joint purchasing agreements be-tween Auchan, Casino, Metro and Schiever concerning private label products may decrease the level of competition between brands and may weaken suppliers which could result in a reduced ability to invest and innovate, among other reasons, due to unfavourable terms and low profitability of contracts for suppliers. 4 The retailers under investigation have submitted commitments to the French competition authority which accepts comments until 24 July. 5 A decision is expected by September.6
Finally, the report concludes that retail alliances may generate efficiencies and facilitate market expansion for suppliers, but suppliers will face stronger buyer power and smaller retailers might be excluded which would finally drive concentration and subsequently could lead to market tipping. In the end, the report calls for a case by case analysis and asks for increased attention and orientation in guidelines regarding the potential harm to upstream suppliers, but it does not see the need to amend existing competition law tools.
It remains to be seen whether the Commission will follow the recommendation of the report and provide more guidance on how to assess the impact of retail alliances, especially on the upstream market. However, it will be difficult for the Commission to ignore the concerns identified by the report.
 The report can be accessed here
 All information and submissions can be found here
 The proposed commitments can be found here
On 20 May 2020, the EU Commission published its new sustainability strategy " Farm to Fork" for a more environmentally friendly food production. It is part of the European Green Deal and, according to the Commission, aims at goals as big as reducing dependency on pesticides and antimicrobials, reducing excess fertilisation, increasing organic farming, improving animal welfare, and reversing biodiversity loss, all of those being the key points of the policies set down in the Strategy. The Commission will make a legislative proposal for a framework for a sustainable food system before the end of 2023.
II. Key elements
Mandatory front-of-pack nutrition label
The Strategy foresees a proposal for a harmonised mandatory Europe-wide front-of-pack (FOP) nutrition label emerging in the fourth quarter of 2022 as well as a proposal for a sustainable food labeling framework to empower consumers to make sustainable food choices. The proposal is scheduled for 2024.
A nutrition label is obviously not new: Under the EU Food Information Regulation (EU) No. 1169/2011, a nutrition declaration on the packaging of pre-packed foods has been obligatory already since December 2016. However, this mandatory nutrition declaration can be – and in practice mostly is – provided on the back of a packaging. Article 30 (3) of the Regulation only provides for a voluntary overview of the main elements front of pack (e.g. the energy value alone or the energy value together with the amounts of fat, saturates, sugars and salt), in order to help consumers to see at a glance the essential nutrition information when purchasing foods. Most front of pack schemes are based on nutrient profiling criteria that may be simple nutrient thresholds. Famous example is the Nutri-score, also known as the 5-Colour Nutrition label or 5-CNL, first selected by the French government in March 2017 and since then adopted by several companies in other countries.
The Commission wants to make a front of pack nutrition label compulsory. However, it is yet to be decided which scheme will be introduced.
Animal welfare labeling
The Commission will also revise the animal welfare legislation, including on animal transport and the slaughter of animals, considering options for animal welfare labeling to better transmit value through the food chain. The overall goal of the policy in this area is to make it easier for consumers to identify and choose welfare-friendly products, and thereby give an economic incentive to producers to improve the welfare of animals.
While voluntary welfare labeling schemes already exist, there is no harmonised system of animal welfare standards for labeling purposes yet. There is only one EU-wide system of compulsory labeling on animal welfare for table eggs. The new Commission's strategy is oriented towards the development of an instrument to better inform consumers on animal welfare friendly products that could be used by both producers and retailers, ensuring a transparency to consumers without overflowing them with information on the label. In many Member States, there already exist initiatives for a voluntary animal welfare label. However, the details of a possible EU-standardized animal welfare label remain to be determined.
The Commission's objective of making healthy food cheaper and 'unhealthy' food, especially meat, more expensive is likely to be the most far-reaching measure: Tax incentives are supposed to drive the transition to a sustainable food system and encourage consumers to choose sustainable and healthy diets. The Commission’s proposal on VAT rates, bluntly known as "meat tax" (currently being discussed in the Council), aims to allow Member States to make more targeted use of rates, for instance to support organic fruit and vegetables.
Besides the labeling and tax initiatives, the Commission's Strategy aims to take action to reduce the use and risk of chemical pesticides and the use of fertilizer by 2030. The Commission will also propose action to reduce the sales of antimicrobials for farmed animals and in aquaculture by 50% by 2030.
A further aspect of the Farm to Fork Strategy is the support of organic farming: The Commission will present action to boost the development of EU organic farming with the aim to achieve 25% of total farmland under organic farming by 2030. It will also take measures to facilitate the registration of seed varieties, including for organic farming and to enable easier market access for traditional and locally-adapted varieties in order to ensure seed security and diversity. The Commission is also aiming to revise the food contact materials legislation to improve food safety and public health. Further main goals are reducing the use of hazardous chemicals, support the use of innovative and sustainable packaging solutions using environmentally-friendly, re-usable and recyclable materials, and contributing to food waste reduction.
It is obvious that the EU has recognised the trend towards sustainability. However, the concrete implementation of the new strategy has not yet been finally determined. In particular, it remains to be seen whether the Commission will actually make adequate proposals for a "meat tax", and which labeling scheme it will consider appropriate for adding value to the already existing mandatory nutritional declaration. It will be a challenge to agree on a front of pack nutrition label that is at the same time not taking too much space, understandable, and showing at a glance the contribution of the food to one's daily diet without being too subjective in view of different eating habits and preferences.
Information of the European Commission's Farm to For Strategy can be found here: https://ec.europa.eu/food/farm2fork_en
Authors: Heike Blank (Partner, CMS Cologne), Jonas Kiefer (Associate, CMS Cologne), Paola Ghezzi (Partner, CMS Rome), Jan Zarzycki (Associate, CMS Warsaw), Eszter Csapó (Senior Associate, Budapest), Virginie Coursiere-Pluntz (Counsel, CMS Paris), Camille Peraudeau (Associate, CMS Paris)
Back in 2017, Jean-Claude Juncker announced in his State of the Union Address that he cannot accept ‘that in some parts of Europe, in Central and Eastern Europe, people are sold food of lower quality than in other countries, despite the packaging and branding being identical.’ Three years later, a respective EU Directive came into force, with effect not only on foodstuffs, but on all consumer goods. On this basis, ‘dual quality’ will be banned in all Member States from 2022. But there are exceptions.
A. The new EU provisons
With the ‘New Deal for Consumers’, the European Commission has presented a package of new provisions on consumer protection. This legislative package includes a new provision on ‘dual qualities’ of consumer goods. In concrete terms, the so-called UCP Directive (Unfair Commercial Practices Directive 2005/29/EC) will be amended. Art. 6 (2) UCP Directive is extended by a new subparagraph (c). As misleading and thus inadmissible is now also qualified:
‘(c) any marketing of a good, in one Member State, as being identical to a good marketed in other Member States, while that good has significantly different composition or characteristics, unless justified by legitimate and objective factors.’
There is a clear approach: Goods traded as identical in the internal market should no longer show any differences. Anyone buying a product in Spain should receive the very same product in Sweden – with the same ingredients and in the same quality. However, it is questionable which requirements are imposed on ‘significantly’ different compositions or characteristics. Equally vague is the exception concerning 'legitimate and objective factors'. In this respect, it is stated in the recitals:
‘Competent authorities should assess and address on a case- by-case basis such practices in accordance with Directive 2005/29/EC, as amended by this Directive. In undertaking its assessment the competent authority should take into account whether such differentiation is easily identifiable by consumers, a trader’s right to adapt goods of the same brand for different geographical markets due to legitimate and objective factors, such as national law, availability or seasonality of raw materials or voluntary strategies to improve access to healthy and nutritious food as well as the traders’ right to offer goods of the same brand in packages of different weight or volume in different geographical markets.’ (cf. recital 53 of the Consumer Protection Enforcement Directive 2019/2161)
Therefore, ‘dual quality’ can still be justified and a product may continue to exist in different versions within the EU. However, this is tied to high requirements. According to the recitals, for example, the availability of certain primary products can justify the fact that the percentages of an ingredient in Sweden are lower than those in Spain, or that even two different ingredients are used. However, the wording of the provision and the recitals clearly indicate that this must always be assessed on a case-by-case basis.
B. Deadline for implementation and date of application
The Directive introducing the new provision on 'dual quality' already came into force on January 7, 2020. But the new provision is not applicable yet: As with every EU Directive, its provisions must first be implemented in national laws. By November 28, 2021, the Member States must adopt the provisions necessary to comply with the Directive. These provisions must then be applied from May 28, 2022.
In other words: At the latest from May 28, 2022, producers and retailers must comply with the with the new provisions on ‘dual quality’.
In Germany, unfair commercial practices are part of the German Unfair Competition Act (UWG) with the consequence that no authorities, but competitors and consumer and competitors associations monitor compliance with these requirements.
It is not yet known when and how Germany will introduce an implementing provision. However, it is likely that a respective provision will be incorporated into Sec. 5 of the UWG as another example of 'Misleading Commercial Acts'. It is orally reported that a first draft of the bill will be published in the next weeks and that it is likely that the wording of the Directive will be adopted in the German UWG (more or less) word for word. German Parliament will most likely not pass the law before summer of 2021.
D. Implementation in Poland (Jan Zarzycki)
In 2019, the Polish consumer protection authority announced that the provision implementing the dual quality rules will be introduced into the Polish Act on combating unfair commercial practices. Apart from consumers and competitors, the authority will also be entitled to challenge wrongdoing in the case of dual quality products.
It is not yet known when Poland will introduce the implementing legislation (no official timeframe has been presented for its introduction into Polish law), and the final wording of such legislation has not yet been communicated. It is likely, however, that it will reflect the wording of the EU provision.
D. Implementation in Italy (Paola Ghezzi)
So far, there aren’t official information or even rumors about the implementation of the Directive in Italy. However, since dual quality provisions of the Directive are quite detailed, future implementing provisions will very likely reflect the legal framework set out by the Directive.
In Italy, rules on unfair and deceptive commercial practices are provided by the Consumer Code. The Competition Authority has the power to intervene with respect to conducts of traders involved in unfair commercial practices and may prohibit the continuation of any unfair commercial practices as well as eliminate their effects. To this end, the Authority may avail itself of the investigative and executive powers as well as the power to issue administrative fines up to EUR 100.000.
E. Implementation in Hungary (Eszter Csapó)
Hungary already implemented the regulation on dual quality by an amendment to the Food Chain Act (Act XLVI of 2008 on the food chain and the official supervision thereof) with the effect of August 1, 2020.
According to the new rules, if a food marketed in Hungary is identical to a food marketed in another Member State, the producer (or in the case of non-domestic food, the first marketer in Hungary) shall be responsible for ensuring that the food marketed in Hungary does not differ significantly in composition or characteristics from the food marketed in another Member State, unless justified by legitimate and objective reasons. Legitimate and objective reasons shall be in particular, if the difference in the composition or characteristics of the food product as defined in an implementing decree is due to
Though the wording of the UCP Directive uses the word ‘good’ in relation to the ban of dual quality, the Hungarian legislator intentionally used the word ‘food’ instead of ‘good’ and as such narrowed down the scope of products concerned by the ban on dual quality. Another national specific is that the amendment expressly specifies the businesses responsible for the compliance with the ban on dual quality. As per the amendment, a Ministerial Decree will be issued to explicitly address and detail the requirements to the exception of ‘legitimate and objective reasons’, the such legislation has not adopted yet.
F. Implementation in France (Virginie Coursiere-Pluntz, Camille Peraudeau)
To this date, transposition into French law is still under discussion, and sets out the following:
The consumer enforcement landscape across the EU is fast becoming one of increased regulation, investigation and enforcement - often testing the boundaries of consumer law. This is bad news for consumer-facing businesses. As well as action by enforcers in their own Member States, businesses now face the threat of investigation and enforcement processes initiated by other Member States or the European Commission. Recent changes have also paved the way for the introduction (by May 2022) of fines at the maximum level of at least 4% of annual turnover, radically altering the risk profile for consumer law compliance.
In these unprecedented times where consumer-facing businesses are under significant pressure just to survive, increased regulation and enforcement is not what they need. However, given the political pressure to deliver on the developing enforcement regime at the Member State and EU level, consumer-facing businesses are going to face increased enforcement action, with the threat of GDPR-size fines. Businesses therefore need to prepare, knowing that with the right legal team behind them, they should not to be afraid to challenge investigation and enforcement actions coming their way.
The Consumer Protection Cooperation Regime
The Consumer Protection Cooperation Network (“CPC Network”) was set up in 2007 with the aim of protecting consumers’ interests in EU and EEA countries. It is made up of national authorities across Member States with responsibility for enforcing EU consumer protection laws. Historically, the CPC Network provided a group for these regulators to co-operate, but there was limited ability for one Member State to require another Member State to take any meaningful consumer enforcement action. The new Consumer Protection Cooperation Regulation (EU 2017/2394) (the “New CPC Regulation”) came into force earlier this year and seeks to revamp the CPC Network BY providing wider scope and new powers, and putting in place stronger coordinated mechanisms to investigate and tackle widespread infringements of consumer law across the EU.
The New CPC Regulation maintains the concept of mutual assistance in collating information and evidence, but now gives Member States a new power to require other Member States to take enforcement action. Such power arises where harm is caused (or is likely to be caused) to consumers in the requesting Member State, where the relevant offending act or omission took place in the second Member State, or where the relevant trader is established or has relevant assets (or evidence) there.
In addition, the New CPC Regulation gives both the Commission and Member States powers to require relevant (other) Member States to take co-ordinated investigation and enforcement action at the national level where there is a “reasonable suspicion” that one of the following is taking place:
1. Widespread Infringement – infringement of EU consumer law that affects at least two Member States; or
2. Widespread Infringement with a Union Dimension - infringement that affects at least two thirds of Member States and at least two thirds of the EU population.
This will have significant impact across the EU as there will be many businesses that provide products and services to more than two Member States and there will also be many large businesses providing products and services into two thirds of the EU population.
The New CPC Regulation does provide some bases upon which a Member State can refuse to take action, but these are limited. They fall into three broad categories:
1. the relevant infringement has not occurred (or the impact is negligible) in the Member State in question, so no action is necessary;
2. enforcement action is already being taken; or
3. commitments to address the infringement have already been agreed and accepted.
GDPR – style fines of at least 4% of turnover
The more radical impact of the New CPC Regulation is that it paves the way for substantial, pan-EU fines for consumer law breaches where there is EU-wide infringement following the implementation of the so-called Omnibus Directive (EU 2019/2161).
The New CPC Regulation requires Member States to impose penalties on traders responsible for Widespread Infringement or Widespread Infringement with a Community Dimension. The Omnibus Directive then goes further in specifying that (from May 2022) such penalties must include the ability to impose fines for certain consumer law breaches (whether through administrative procedures or legal proceedings) which at the maximum level must be at least 4% of the trader’s annual turnover in the Member State or Member States concerned. Where information on turnover is not available, the maximum fine must be at least EUR 2 million. Member States can therefore implement a maximum fine at any level above 4% of the trader’s annual turnover in the relevant Member State or States; the new Regulation has no ceiling on the maximum level of fine.
This new regime will completely transform the risk profile of consumer law compliance in much the same way that the GDPR did to the data protection realm. Given the significant sharpening of the regulators’ teeth, consumer facing businesses operating across the EU should be keeping a close watch on developments both at the Member State and EU level, getting their houses in order to avoid the regulator’s bite, and where this can’t be avoided - be prepared to fight back.
> Back to top
Author: Daphne Brunkhorst (Associate, CMS Brussels)
Last year AB InBev, the world's largest beer company, was fined EUR 200 million for restricting cross-border sales of its Jupiler beer from the Netherlands into Belgium.1 This year NBCUniversal was fined EUR 14.3 million for restricting sales of licensed film merchandise products across Europe.2 These cases illustrate once again the Commission's readiness to apply strict standards in order to ensure free and undistorted trade in the Common Market.
What are territorial supply constraints (TSCs)?
TSCs are commonly understood as any limitations imposed by a supplier which hinder the reseller in selling the contract goods or services in another country. From the Commission's perspective any such conduct allows segmentation of the market, undermines the idea of a Common Market and could subsequently result in different prices for consumers in different countries.
How do they infringe competition law?
TSCs may infringe EU competition law if they are part of an agreement or concerted practice between a supplier and a reseller. Obviously, this includes direct measures that ban imports or exports, such as clauses that prohibit out-of-territory sales. Further, indirect measures are covered, such as obligations to notify foreign sales and pay remuneration for them, higher purchase prices for products that are ultimately sold outside the territory (dual pricing), the withdrawal of commercial benefits for products sold outside certain territories and/or the agreement to refer orders from foreign countries to other resellers and/or the supplier.
Any such agreements or concerted practices are strictly prohibited unless they only aim at limiting active selling into territories which have been allocated exclusively to another reseller or reserved to the supplier.3
Dominant suppliers4 must also pay special attention. For dominant companies even preventing active selling into other exclusive reseller's territories or the supplier's own territories might be prohibited.
In addition, dominant companies need to be aware that any unilateral business conduct on their part might be qualified as abusive. Examples of such unilateral conduct would be limiting volume, refusing to supply or (threatening to) raise prices in order to prevent parallel trade. AB InBev is a prime example that other kinds of behaviour could also constitute an abuse of a dominant position if they are implemented as a strategy to prevent exports from a low-priced country to a high-priced country. Amongst other things, AB InBev had changed the wording on the packaging of its Jupiler beer that it sold into the Netherlands to make it less attractive or even impossible to sell in Belgium. According to the Commission's findings, AB InBev. had, e.g., removed French language labels and changed the design and size of the cans in order to avoid reimports into the Belgian market.
At the moment, the EU Commission is investigating a case against another FMCG supplier for alleged TSCs. This case concerns Mondelez, and according to public sources, the Commission alleges that Mondelez agreed with wholesalers in Austria not to resell the contract goods in the domestic market but to export the goods to other countries. This case is interesting since it also appears that the Commission learned about the matter due to civil court proceedings in Austria initiated by wholesalers against Mondelez which had decided to terminate the cooper-ation with the wholesalers.
In addition, the EU Commission's DG GROW is currently exploring going beyond the exist-ing competition rules. It has commissioned a study on TSCs that is to focus on "the gap left by competition rules"5. The object of the study is to provide information on the scale and nature of TSCs, in particular the extent to which they are present in the market and what type of TSCs are used most often. Further, it aims to measure the impact of TSCs on the Single Mar-ket, also taking into account the consumer perspective. This new initiative follows another project by DG GROW which already introduced new rules for b2c operations in 2018 in the context of the new rules on geo-blocking6. At the beginning of this year retailers, wholesalers and suppliers already had the chance to participate in an online-survey concerning TSCs in the context of b2b business operations.7 Results of the study have not been published yet.8 It re-mains to be seen whether it will ultimately lead to new regulations. If so, it appears likely that the Commission will try to prevent unilateral and/or intra-group business strategies that aim at keeping different pricing levels in different countries.
 EU Commission, Decision, A.40134, 13.05.19
 EU Commission, Decision, A.40433, 30.01.19
 Art. 4 (b) Commission Regulation (EU) No 330/2010
 As a rule of thumb, an undertaking is possibly dominant if its market share in the relevant product and geo-graphic market exceeds 40 %.
 Regulation (EU) 2018/302 of 28 February 2018
 Last checked 30.06.20
China published the first Civil Code on 28 May 2020, which will take effect from 1 January 2021. It is a wide-ranging legislative package that includes strengthening protection of consumer rights. Many consumer protection requirements that used to be scattered in different regulations have now been included in the Civil Code. This indicates the legislator’s intention to fill gaps and uncertainties existing in the current consumer protection regime.
One example is that the Civil Code specifically allows consumers to claim for punitive damages if they have been injured by defective products under certain circumstances. According to Article 1207 of the new Civil Code, where a manufacturer or a seller
(1) knowingly manufactures or sells defective products (“Circumstance I”); or
(2) fails to take effective remedial measures, which may include stopping the sales, giving warnings, and recalling the products timely after any defects are identified (“Circumstance II”);
and thereby causes death or serious personal injuries to any person victim, the victim may claim for punitive damages.
I. Punitive damages under Circumstance I
Before the issuance of the Civil Code, Article 47 of the PRC Tort Liability Law had already allowed a victim to claim for punitive damages under Circumstance I. However, in practice, courts usually had taken a very conservative attitude in granting punitive damages. Among the very few published case decisions, we see local courts have been struggling with
(1) how to decide the subjective factor of “knowingly”;
In one case decided by a local Chongqing court (“Chongqing Case”), the electricity leakage of a shower water heater caused the death of the plaintiff’s son. The heater did not bear the required quality certificate or any identification mark of the manufacturer. The court decided that the lack of such certification and manufacturer information constitutes a defect of the heater. As the seller had failed to conduct a reasonable check but instead sold the heater directly to a consumer, the seller shall be considered as “knowingly” selling defective products and thus shall pay punitive damages to the plaintiff. However, this court did not go further to analyse whether the same test applies only to apparent defects (such as a lack of quality certificate) or only to sellers.
In another case decided by a local Hubei court, the plaintiff was seriously injured by a firecracker because the firecracker had a shorter ignition time, which constituted a defect as decided by a testing institution. The plaintiff’s claim for punitive damages from the manufacturer was not supported by the court. Instead, the court decided that there was no sufficient evidence providing that the manufacturer had manufactured the defective firecracker while knowing that the firecracker had a short ignition time. A manufacturer shall not be deemed as knowingly manufacturing defective products simply because the products turn out to be defective after being manufactured.
Meanwhile, the firecracker concerned was also found to be lacking a backup fuse during the testing, which is a clear requirement provided under the applicable product quality standards. However, since the lack of a backup fuse was not the cause of the injury, the court did not go further to analyse whether such a clear violation of standards constitutes the manufacturer knowingly manufacturing defective products.
(2) how to decide the amount of the punitive damages
Currently, there is no clear guidance setting out how the amount of punitive damages shall be decided.
According to Article 55 of the PRC Consumer Protection Law, if a manufacturer or a seller knowingly provides defective products to consumers, and thereby causes death or serious personal injury, the victim can claim for punitive damages not exceeding twice of the actual loss suffered. However, this standard applies only to transactions with consumers (e.g. in B2C business).
In practice, this standard is not always followed by local courts either. For example, in the Chongqing Case, the plaintiff was granted a compensation of around RMB 600,000 to cover the loss suffered. But the punitive damages granted was only RMB 50,000, which is far less than the maximum amount available under Article 55 (i.e. RMB 1.2 million).
There are academic discussions in this regard, which suggest courts to focus on the following aspects when deciding the amount of punitive damages: the defendant’s degree of fault; the financial status of the defendant, the illegal income gained by the defendant from the defective products, and the overall social impact (e.g. whether a huge amount of punitive damages will entice “professional” plaintiffs and thus disturb the normal business order). However, all these discussions remain at the academic level.
With the restatement of punitive damages under Circumstance I in the Civil Code, more implementation rules and judicial interpretations are expected to be published to provide clearer guidance to support local courts in deciding whether and how to grant punitive damages. There is a possibility that local courts may gradually take a less conservative attitude in the future. To avoid punitive damages with potentially significant amounts, manufacturers and sellers supplying products to the Chinese market are recommended to take conformity assessments on a regular basis, in order to ensure that their products satisfy all the applicable Chinese standards concerning quality, certification, packaging and labelling.
II. Punitive damages under Circumstance II
Punitive damages under Circumstance II are newly introduced by the Civil Code. In particular, the provision that a failure to recall defective products may trigger punitive damages has been considered as a highlight of the Civil Code from the consumer protection perspective.
Before the issuance of the Civil Code, China had established the legal frameworks governing the recall of a few types of special products, mainly including 3C products (i.e. those requiring the China Compulsory Certificate), automotive vehicles, drugs, medical devices, food, children toys, railway special equipment and a limited categories of consumer products. In practice, the recall of such defective products is typically ordered by and under the supervision of Chinese market supervisory authorities, as part of their enforcement actions. A failure to recall will usually result in administrative punishments.
We have rarely seen any civil litigation initiated by victims suffering from such selected types of defective products to request a recall or damages resulting from the manufacturers’ or the sellers’ failure to recall. Now, the new Civil Code provisions seem to suggest a possibility for victims suffering from any types of defective products to do so via a civil litigation.
In our opinion, without a well-established class litigation regime under Chinese civil procedure law, the actual feasibility of requesting manufacturers or sellers to recall defective products or claiming for punitive damages when they fail to do so may be low in practice.
However, the existence of such a possibility under the Civil Code constitutes a contingent risk. Compared with the market supervisory authorities who have relatively limited administrative resources, the general consumers have a much broader capacity to monitor defective products circulated in the market, in particular when they have incentives to do so (e.g. obtaining the punitive damages). Thus, manufacturers and sellers acting on the Chinese market may have to pay more attention to continuously improving their product quality management, and they should be prepared for recalling defective products and taking other necessary remedial measures in time, during the entire life cycle of their products.
Author: Nathalie Petrignet (Partner, CMS Paris)
In a press release published on 12 May 2020, the DGCCRF (Direction Générale de la concurrence, de la consommation et de la repression des fraudes) announced easing food products labelling rules due to the Coronavirus epidemic.
Indeed, given the market tensions linked to the health crisis, food sector operators are likely to face supply difficulties leading them to have to slightly modify their initial recipes, without the possibility of quickly correcting their labelling. To help operators cope with these constraints in such an emergency context, the DGCCRF has therefore admitted the possibility of not making any changes to their labels.
Companies wishing to benefit from this tolerance should directly reach out to their usual contacts at the DGCCRF, who will assess requests for exemptions on a case-by-case basis.
However, such flexibility only applies to information that is not related to the safety of the product and does not justify any deviation that could induce a risk for consumers, particularly for allergic consumers. Similarly, any modification which results in depriving a product of essential information on its quality or proper use is not permitted.
In order to ensure that consumers have ongoing access to information on products whose recipes have had to be modified, the DGCCRF has implemented, for Internet users, a website listing all the food products that have been subject to a labelling exemption, in complete transparency: https://www.economie.gouv.fr/dgccrf/la-dgccrf-vous-informe-des-derogations-detiquetage-consenties-aux-operateurs-du-secteur.
Consumers who wish to know whether the products on this list which they have acquired or are in the process of acquiring belong to a batch concerned by the derogation are invited to contact the consumer service indicated on their packaging.
No less than 235 product references have been concerned to date. Such list will be regularly updated according to the derogations granted by the DGCCRF services.
Given the uncertain times we are experiencing, it is highly likely that such exceptional measures will be renewed in the current context of a second wave of the coronavirus or other epidemics leading to a state of emergency and deteriorated supplies.
On 17 April 2020, as an effect of market practices around coronavirus (COVID-19), Turkey established the Unfair Pricing Assessment Board (the "Board"), the creation of which was included in the Law Relating to the Reduction of the Effects of Covid-19 on Economic and Social Life and Amendments to Certain Laws No. 7244 (“Law No. 7244”). Specifically, the Board was mandated to prevent unfair price increases, discourage stockpiling by market players and ensure the healthy functioning of the free market. It was created through an addendum by Law No. 7244 to the Law on Regulation of Retail Trade No. 6585 (“Retail Trade Law”).
The Board can establish regulations against stockpiling and excessive price fixing by manufacturers, suppliers and retailers, and can impose administrative fines. The Board can also conduct inspections when deemed necessary and can take any other appropriate measures.
The Board's mandate is to combat the adverse effects of unfair pricing and stockpiling activities, which are not included in the scope of the Act on the Protection of Competition No. 4054 (“Competition Act”). Accordingly, Article 6 of the Competition Act prohibits undertakings from abusing dominant positions in the market to fix excessive prices. Undertakings that are not in a dominant position, however, were not subject to the restrictions set forth by the Competition Act. Law No. 7244 changed this by expanding the legal scope and requiring the scrutiny of all manufacturers, suppliers and retailers in addition to dominant players.
As per amendments made to Article 18 of the Retail Trade Law, the Board is entitled to impose administrative fines of between TRY 10,000 and TRY 100,000 against manufacturers, suppliers and retailers carrying out excessive pricing. In addition, the Board can implement an administrative fine of up to TRY 500,000 against market players that create shortages, engage in activities preventing consumers from accessing goods and disrupt market equilibrium and free competition.
Accordingly, on 28 May 2020 secondary legislation, namely the Regulation on the Unfair Pricing Assessment Board (the "Regulation") that determines the Board’s formation, duties, operational procedures and principles, secretariat services and all other matters was published in the Official Gazette numbered 31138.
As per the Regulation, it is regulated that the Board will only operate in the event of a state of emergency, a natural disaster, economic fluctuation, and other emergency situations. In addition, unfair price increase is defined as an excessive and unfair increase in the price of goods and services that are necessary to meet the basic needs of the public during a state of emergency, natural disaster or other emergencies.
Accordingly, the Board is authorized to (i) take necessary precautions to protect the market balance and customers against unfair price increases and stockpiling activities and to ensure the application of these precautions, (ii) conduct an inspection or instruct others to conduct an inspection of unfair price increases and stockpiling activities, (iii) decide when to apply administrative fines and to ensure the application of such fines, (iv) determine the principles and rules regarding unfair price increases and stockpiling activities, (v) carry out other duties given by the Turkish Ministry of Trade ("Ministry").
Furthermore, complaints regarding unfair activities can be submitted to the Ministry via (i) a petition, (ii) the online complaint system or (iii) other electronic application methods. These complaints must include information as to the complainant and the enterprise (teşebbüs) subject to the complaint and relevant evidential documents or photos, if any. The enterprise subject to the complaint will be given at least ten (10) days to prepare a defense starting from the beginning of the inspection. This period can be extended ten (10) more days for one time only.
When determining the administrative fine; the level of the act committed (işlenen fiilin ağırlığı), the type, size and sector of the enterprise and whether an administrative fine has been already issued on the same subject shall be taken into consideration. Accordingly, as mentioned above, an administrative fine of (i) TRY 10,000 to TRY 100,000 shall be applied in cases of unfair price increases; and (ii) TRY 50,000 TL to TRY 500,000 in cases of stockpiling activities shall be applied to the respective enterprises.
The Board is entitled to oversee the activities of all manufacturers, suppliers and retailers regarding unfair pricing and stockpiling, and to impose administrative fines when necessary. Consequently, it is advisable for all market players to take the Board's updates into consideration and to adapt their business strategies accordingly.
Author: Parisa Ghatey-Fard (Associate, CMS London)
Since 2002, UK businesses have been able to protect their designs by virtue of both UK and EU design rights, conferring parallel but slightly differing forms of protection. This article considers the implications for both UK and European businesses who own EU design rights which currently cover the UK and what happens to these design rights when the UK leaves the EU (Brexit) – currently forecast for 31 December 2020 at 11pm UK time (“Exit Day”). We run through the scenarios for Registered Community Designs (RCDs), Community Unregistered Designs (CUDs) and for International Design Registrations designating the EU (IDRs), and provide practical guidance, below.
Registered design rights
(I) Registered Community Designs and International Design Registrations – Automatic Cloning on Exit Day
On Exit Day, RCDs and IDRs designating the EU will no longer confer any protection in the UK (or other UK owned territories such as the Channel Islands and Gibraltar). The remainder of the RCD and IDR retains its full protection for the rest of the EU.
In the UK, a new so-called UK comparable (or re-registered design) will come into existence on Exit Day. This will happen automatically and at no cost to the rights holder. This new design right will be identical to the RCD/IDR designating the EU but limited to the UK territory. RCDs and IDRs registered on Exit Day will be re-registered as national UK design registrations.
The UK comparable design will be treated as if the design had originally been filed as a UK design right.
Owners of RCDs and IDRs who do not wish to retain re-registered design protection in the UK via the UK comparable design may be able to opt out of UK re-registered design protection.
UK businesses can continue to seek RCD and IDR protection by filing new RCDs and IDRs designating the EU, and non-UK businesses can continue to seek UK national design right protection by filing a new UK design application.
(II) Community Design Applications and pending International Design Applications designating the EU – New applications required post Exit Day
On Exit Day, Community Design Applications and pending International Design Applications designating the EU will no longer cover the territory of the UK. They will proceed in relation to the territory of the remainder of the EU, only.
If registered design protection is required in the UK, then a new UK design application must be filed with the UK Intellectual Property Office (UKIPO). Provided that this national design application is filed within 9 months of Exit Day and is identical to the Community Design Application/International Design Application designating the EU, it is possible to claim the priority/filing date of the (corresponding) Community Design Application/International Design Application designating the EU. The usual UK application fees will be payable.
Unregistered design rights
Although Community Unregistered Design Rights only have a term of 3 years (as opposed to up to 15 years for UK unregistered design rights), CUDs have been a useful tool for fashion and luxury brand owners in their fight against plagiarists and counterfeiters.
On Exit Day, CUDs will no longer confer any protection across the UK. The “EU” CUD will retain its full protection for the rest of the EU. In addition, CUDs may cease to apply to designs first shown or marketed in the UK. This is because EU case law is unsettled on whether the disclosure must take place physically within the territory of an EU member state, or whether it is sufficient for that disclosure to become known to the circles specialised in the sector concerned in the EU. In particular, the German Supreme Court, referring to Art. 11 and Art. 110a of the Council Regulation (EC) No. 6/2002 has taken a restrictive view, which would limit protection to disclosures taking place within an EU member state. As things stand, it is unlikely that designs first shown at a UK trade show (such as London Fashion Week) will attract CUD protection after Brexit.
However, scope of protection of the CUD is part of the ongoing Free Trade Agreement negotiations between the UK and the EU. In the UK, a new so-called UK continuing unregistered design right (UK CUD) will come into existence on Exit Day. This will happen automatically and at no cost to the rights holder. This design right is identical to the EU CUD right but limited to the UK territory.
Unregistered UK national design rights provided for in the Copyright Design and Protection Act 1988 will remain unchanged but given the Act’s restricted scope and exclusion of surface decoration, this may be less helpful to designers seeking protection for their collection and may pose an additional existential threat to the UK’s position as a leader within the fashion world including potentially making UK trade events such as London Fashion Week even less popular as a consequence.
Without clarification from EU courts on the territorial requirements for CUD protection, and unless the UK and the EU come to an agreement, it is unsafe for British businesses to assume that a launch in the UK – no matter how high-profile – will satisfy the “making available within the Community” test to confer CUD protection for a British design after Brexit.
(I) Supplementary unregistered design (SUD)
To mitigate the loss of CUDs, the UK government has introduced a new Supplementary unregistered design (SUD). The protection afforded by the SUD will be similar to that conferred by the CUD save that its geographical scope of protection will be limited to the UK. Specifically, SUD protection would require the design to have been “first made available in the UK”.
(II) Important points to note relating to unregistered designs
Possible fall-back strategies for securing both UK and EU protection for unregistered designs include (i) live screening of UK-based launch events at locations within the EU, or vice versa; and (ii) real-time live streams of UK launch events that are accessed and viewed by EU industry representatives, or conversely, live streaming of EU launch events in the UK. In an ideal world, designers should aim to gather clear evidence to demonstrate that their launch event was in fact attended or viewed by people from the relevant trade circles operating in the UK or EU (as applicable). This will allow them to argue that their designs were “first made available” in the relevant territory at their launch event.
However, a disclosure in the UK that is likely to come to the attention of the relevant commercial sector operating within the EU is likely to destroy the novelty of a British design, making it ineligible for CUD. This could deter many British and international designers from showing their new collections at UK trade shows, if this would jeopardise their right to CUD. The uncertainty places the UK at a significant disadvantage to its continental neighbours and threatens the UK’s status as a hub for European design innovation. Designers therefore currently and unless there is an agreement between the UK and EU, face a difficult choice between launching in the UK (and risking the loss of CUD protection) or launching in the EU, potentially forfeiting their right to SUD. In view of this uncertainty, designers should urgently review their launch strategies in the lead-up to Brexit.
Moreover, if the ‘first made available’ rule was applied strictly to require a disclosure physically within the borders of the UK or the EU, both rights could never apply to the same design. British designers would have to choose one or the other. Even if this rule was relaxed – and it was always sufficient for the design to have ‘become known’ to the relevant trade circles in the relevant territory – designers would still face a new evidential burden to be able to claim both rights.
Can copyright bridge the Brexit gap?
The Court of Justice of the EU (“CJEU”) recent decision in Cofemel (C-683/17) has broadened the type of designs which can be protected and provides a ray of hope for UK fashion businesses.
The CJEU held that there were only two requirements for copyright protection under Directive 2001/29/EC (the “InfoSoc Directive”):
a. there must be ‘something original in the sense that it is an intellectual creation of its author’; and
b. for there to be a ‘work’ the subject matter must be expressed in a manner which makes it identifiable with sufficient precision and objectivity.
As a result of the judgment, Member States are precluded from imposing additional requirements such as artistic or aesthetic appeal (read more about Cofemel here). As far as designs and other “objects” protected by copyright are concerned, the judgment confirms that copyright protection is available to designers simply upon fulfilling the requirement of “originality”. Nothing more is required. This is welcome news to many designers (albeit not all) who were previously constrained by the artistic/aesthetic value of their creations.
In the recent decision of Response Clothing Ltd v. The Ediburgh Woollen Mill Ltd, the Intellectual Property Court (IPEC, a specialist IP Court in the UK) turned to EU law and the interpretation given of it by the CJEU in Cofemel. The Court confirmed that conformity with EU law means any requirement of aesthetic appeal must be excluded.
While according to the Withdrawal Agreement existing CJEU case law continues to have binding, or precedent status, it is not clear to what extent (if any) CJEU case law such as Cofemel will be binding on the UK courts post-Brexit. It may be the case that the law around subsistence of copyright protection in the UK may diverge from that established under EU law after Exit Day, with the possibility of designers seeking to protect their designs in the UK being held to a higher standard than they would be in the EU and the impact this may have for the innovation of new works and designs in the UK.
However, the expansion of copyright protection within the EU is helpful since it may provide the only means of protection within the EU for a UK business, while they can rely on the new SUD for protection within the UK (see here for the full judgment: https://www.bailii.org/cgi-bin/format.cgi?doc=/ew/cases/EWHC/IPEC/2020/148.html&query=(cofemel)).