French draft act of modernisation of the economy (« LME »)

A short summary may be helpful:

– French distribution law was modified in 2005 (Chatel Act), mainly the legal reform had the purpose to partially reduce the bottom resale price (price under which no reseller can sell product, except for limited period of end-of-season sale) by deducting a part of discounts and service remunerations from the purchase price ; all T&Cs of sale, price list, discounts and services rendered by the distributor to the supplier had to be stipulated in an Annual Unique Agreement entered into by March each year ; 

– Chatel Act voted in January 3, 2005, deeply lowed bottom resale price allowing deducting all discounts and service remunerations from the purchase price.

The draft act has been debated before French Parliament since May 27, 2008. Vote is supposed to occur at end of June.

I. Purpose of the Act.

The draft act aims at increasing employment level (50 000 jobs more per year) in France and increase growth of the economy of 0.3 % additional per year.

II. Focus.

– Simplify the companies organization, and favor the small companies set-up (title I of the draft act) ;

– Increase competition on the market (title II) ;

– Strengthen French market appeal (title III) ;

– Increase the financing capacity of French economy (title IV).

III. Focus on distribution law reform (supplier/distributor relations).

– Payment term reduction

– Negotiable T&Cs and prices (deletion of the principle of non discrimination, pursuant to which a supplier has to propose same conditions of sale and pricing to distributor having the same qualities)

– Reinforcing sanctions for violation of the distribution law regulation

– New Competition Authorities

1) Capped payment terms:

Payment terms should be limited to 45 day end-of-month or 60 days from billing date (Article L. 441-6 of French commercial code).

To date, no payment term limit is provided: when no provision regarding payment term is stipulated, payment term is deemed 30 days from delivery of goods or service receipt.

Some derogation is contemplated in particular:

– For objective and specific economical reasons (some sectors) ;

– Progressive reduction.

Main issues to be solved are: (i) longer payment terms required by administrative entities and (ii) inventories turnover which are over 45 or 60 days for certain distributors.

This being said, one should note that any violation of these projected new principles could make the distributor held liable for abusive provisions.

? Heavier late payment penalties.

Late payment penalties would be increase from 1.5 to 3 times the French legal interest.

2) Negotiable T&Cs and pricing.

To date, a supplier may not propose discriminatory conditions and price to distributors from the same category and offering same advantages in the purchase of the products or services: this is the non-discrimination prohibition principle.

This provision will be deleted (Article L.442-6 I 1 a) of French Commercial Code) : may be held liable any manufacturer who practices with a contracting party, or obtains prices, payment terms, sale or service T&Cs, discriminatory and with no effective consideration with the effect to have the contracting party advantage or disadvantaged in the competition on the market ».

The T&Cs of sale or service shall still be available to any contracting party who require them. The T&Cs of sale or service may still differ from a category of purchasing party to another.

However, supplier and purchase should be allowed to negotiate specific pricing conditions.

The draft act aims at prohibiting any preferred client provision.

Limit is supposed to be abusive discrimination.

The possibility to negotiate specific conditions of sale and service will still remain.

LME contemplates another modification : any remuneration to the distributor by the supplier for services which are not rendered with the purpose to improve the sale of the products by the distributor to his clients (namely « other services » under French law, such as statistics, catalogs, supplier selection…) should appear on the supplier’s invoice and no longer on the distributor’s invoice.

One may fear some issues with respect to tax and accounting rules and practices. One may also fear that the supplier may be held liable for services paid to the distributor while the distributor does not effectively render such services.

No change is contemplated concerning the Annual Unique Agreement.

3) Penalties for violation of Article L.442-6

The draft act stipulates that minimum penalties should be 2 million euros but no more that three times the amount of remuneration paid for services (commercial cooperation or « other services » which would be false or not effectively rendered.

4) New competition authority

To date, French organization is broadly the following: DGCCRF (controlling and investigation administration for distribution and competition law violations), Council of the Competition (Conseil de la Concurrence, having jurisdiction over any anti-competitive practice matter notably), Ministry of the Economy for anti-trust, and judicial commercial courts…

Government proposes to set up a unique Competition Authority.

Frédéric Fournier
Associé