French law considers that resale at a loss is incompatible with the establishment of healthy competition and that it does not yield into any advantage for consumers, hence its prohibition. In fact, the loss incurred on items which are sold at a loss is most often offset by the profit made on others.
This is why, article L 442-5, I-§1 of the French Commercial Code prohibits the resale of any “product in its unaltered state at a price lower than its actual purchase price”.
The prohibition to resell unaltered goods at a loss exists in France since 1963. The methods of determining the threshold of resale at a loss has however been modified on several occasions, namely by Circular of 8 December 2005.
I. Is the French prohibition of resale at a loss incompatible with the law of the European Union?
- The French prohibition of resale at a loss and the principle of free movement of goods
According to the European Court of Justice, the prohibition of resale at a loss is not incompatible with the principle of free movement of goods provided for in article 28 of the EC Treaty (now article 34 of the Treaty on the Functioning of the European Union) (decision of the ECJ of 24-11-1993).
- The prohibition by French law of resale at a loss and illegal distribution agreements and abuse of dominant position
The French Supreme Court has ruled that the prohibition of resale at a loss established in France is not contrary to the provisions of articles 81 and 82 of the EC Treaty (now articles 101 and 102 of the Treaty on the Functioning of the European Union), which relate to illegal distribution agreements and abuse of dominant position.
- The French prohibition of resale at a loss and unfair consumer practices
The Court of Justice of the European Union has ruled that Directive 2005/29/EC of May 11, 2005 concerning unfair business-to-consumer commercial practices precludes a national regulation whose purpose is to protect consumers (in this case, the Belgian regulation) from generally prohibiting the sale of goods at a loss (decision of the CJEU of 7-3-2013, Case 343/12).
According to the CJEU:
- the practice of selling at a loss constitutes a commercial practice within the meaning of the directive when its objective is to attract consumers into the store and to induce them to make purchases;
- the directive, which fully harmonizes the rules on unfair commercial practices, sets out the criteria for determining whether a practice is unfair and contains an exhaustive list of practices that are deemed unfair in all circumstances; the member states may not therefore adopt measures that are more restrictive than those defined by the directive, even in order to better protect consumers; this is the case with the Belgian legislation, which establishes the principle of prohibiting sales at a loss, even though such a practice is not included in the list set out in the directive ;
- as a result, sales below cost cannot be prohibited “in all circumstances” but only after a specific analysis has been carried out to establish that they are unfair in the light of the criteria set out in articles 5 to 9 of the directive (practice contrary to the requirements of professional diligence and substantially altering the economic behavior of the average consumer, as such a practice may be misleading or aggressive).
The above decision of the Court of Justice of the European Union states that a member state cannot prohibit “per se” the practice of resale at a loss, but only after careful examination of the circumstances surrounding such sale, which must be contrary to the provisions of the directive and constitute a misleading or aggressive commercial practice.
The above decision appears therefore transposable as regards the French prohibition of resale at a loss. It should be noted however that the above decision of the Court of Justice of the European Union was rendered as regards business-to-consumer practices, whereas the French prohibition of resale at a loss is general and applies in both business-to-business and business-to-consumer relations.
The French Supreme Court has already ruled that the practice of resale at a loss between professionals does not fall within the scope of the Directive of May 11, 2005 (Cass. com. 22-11-2017, Case n°16-18.028).
II. Scope of the French prohibition of resale at a loss
Article L 442-5, I-§1 of the French Commercial Code prohibits the resale of any “product in its unaltered state at a price lower than its actual purchase price”.
The French prohibition of resale at a loss applies therefore only to products sold “as is”, that is, in their unaltered state, to the exclusion of products which have been processed.
Furthermore, for the offence of resale at a loss to occur, there must be a prior purchase, and a subsequent resale. By contrast, it is indifferent whether the purchase and resale occur simultaneously or not.
The prohibition of resale at a loss applies in principle only to products and not to services. The French Supreme Court has however applied the provisions of article L 442-2 to services in a case where the provision of services was “economically linked” to a sales contract. In this case, the Court assessed the existence of the offence of resale at a loss by taking into consideration the overall cost of the transaction (French Supreme Court, Criminal chamber, 7-5-2002).
It is also prohibited to advertise the resale of a product in its original state at a price lower than its actual purchase price (C. com. art. L 442-5, I-al. 1). Advertising campaigns announcing resale prices at a loss are therefore prohibited.
The scope of the prohibition of resale of goods at a loss is not to be limited to resale to consumers. French law “makes no distinction between operators and incriminates any trader who resells a product as is at a price lower than its purchase price” (French supreme court, criminal chamber 21-6-1993).
The resale of products at a loss by a wholesaler purchaser to its distribution subsidiaries is therefore also punishable.
To establish whether or not a product is resold at a loss, the resale price must be compared to the so-called “effective purchase price”, which contains complex parameters.
According to article L. 442-5 of the French Commercial Code, “The effective purchase price is the net unit price appearing on the purchase invoice, reduced by the amount of all other financial advantages granted by the seller expressed as a percentage of the net unit price of the product and increased by the taxes on turnover, the specific taxes relating to this resale and the price of transport.
The effective purchase price is multiplied by a coefficient of 0.9 for wholesalers who distribute products or services exclusively to professionals who are independent of the wholesaler and who are engaged in the activity of retailer, processor or final service provider. An independent business is one that is free to determine its own commercial policy and has no capital link or affiliation with the wholesaler.”
III. Exceptions to the prohibition on resale at a loss
According to article L. 442-5, II of the French Commercial Code, the prohibition to resell at a loss does not apply:
1° to voluntary or forced sales motivated by the cessation or change of a commercial activity;
2° to products whose sale has a marked seasonal character, during the final period of the sales season and in the interval between two sales seasons;
3° to products that no longer meet the general demand because of the evolution of fashion or the appearance of technical improvements;
4° to products, with identical characteristics, whose replenishment was carried out in decrease, the effective price of purchase being then replaced by the price resulting from the new invoice of purchase;
5° to food products marketed in a store with a sales area of less than 300 square meters and to non-food products marketed in a store with a sales area of less than 1,000 square meters, whose resale price is aligned with the price legally charged for the same products by another merchant in the same area of activity;
6° Provided that the offer of a reduced price is not advertised or announced outside the sales outlet, to perishable products from the moment they are threatened by rapid deterioration;
7° to the discounted products mentioned in article L. 310-3.
IV. Sanctions provided for by French law upon Resale at a Loss
According to article L442-5 I of the French Commercial Code “The fact, for any trader, of reselling or announcing the resale of a product in the state at a price lower than its effective purchase price is punished by a fine of 75 000 €. This fine can be increased to half of the advertising expenses in the case where an advertisement, whatever the support, mentions a price lower than the effective purchase price. The cessation of the advertisement may be ordered under the conditions provided for in Article L. 121-3 of the Consumer Code.
Violations of the provisions of article L 442-5 of the Commercial Code are investigated and recorded by French Inspectors of Competition, Consumer Affairs and Fraud Control, who may order the cessation of any unlawful conduct. In addition, the sanctions provided for by article L. 442-5, I of the French commercial code may be imposed.
Furthermore, competing resellers may also sue for damages. The illegal practice of resale at a loss also constitutes an act of unfair competition. It therefore entitles the victims to take legal action to obtain the cessation of such resale, indemnity for damage suffered and the publication of the decision of condemnation. A supplier was also authorized in summary proceedings to have a resale at a loss of its products cease, such resale being found to be prejudicial to the image of the supplier and to have created suspicion among its other distributors as to the existence of preferential conditions between the supplier and the reseller at a loss (French Supreme Court, 20-6-1995).
