European Union: The Food Sector – The Competitive Environment May Be To Blame

Originally published 25 June 2010

Keywords: competition, food sector, Lisbon Treaty, National Market Organisation, farmers, abuse of dominance, anti-competitive agreements,

There is an unprecedented focus by the competition authorities in Europe on the food sector, and this sector is being subjected to a root and branch review. Large processed food suppliers and retailers are likely to be a particular focus of attention. As recent interventions to the banking, insurance and pharmaceutical sectors demonstrate, the EU Commission has a habit of eventually obtaining change through legislation, guidelines or compromises from the industry, when it perceives there to be market failures and when there is Member State (political) support. In the ever increasing cooperation between competition authorities around the world, it is perhaps no coincidence that attention is also being focused on this sector by the USA's Department of Justice and Department of Agriculture.

EU officials have indicated that the Competition rules may be adapted to take account of the particularities of the food sector. Who will win and who will lose as a result of these adaptations is an open point, and each of the stakeholders will seek to ensure their positions are protected and promoted as much as possible, through legal and economic arguments, and political advocacy.

In this legal update we identify the key competition issues that the EU will likely address. Section 1 provides the background and the reasons why the food sector has become the subject of competition focus in the EU and elsewhere. Section 2 describes the current competition rules. Section 3 identifies the competition issues that the EU will likely address. Finally, section 4 provides commentary and points that corporations may wish in particular to consider.

1. Background

EU communications identify an increasingly expressed view that there are market failures in the food sector. Examples given of such failures are that farmers are obtaining a decreasing share of the wealth generated by the sector, that there are inequalities between small entities dealing with and reliant on large entities, that prices are not transparent, and that the regulatory framework and rules surrounding the food sector are contributing to these failures.

With 16% of the average EU household's budget spent on food and beverages, the food sector is politically significant. In September 2007 consumer organisations in Italy staged a national protest at the ever rising price of pasta. The sector also attracts political attention for reasons other than competition, such as the mad cow disease in Europe, or the long running disputes over genetically modified food.

On the back of expressed concerns about the market failures and with high food prices being experienced in the EU, the Commission issued in 2008 a communication entitled Tackling the challenge of rising food prices - Directions for EU action1. Then in October 2009 the Commission published a report together with six accompanying papers, under the title Better Functioning Food Supply Chain2. A Mayer Brown review of actions taken by the National Competition Authorities (the "NCAs")3 of the EU Member States identifies that since January 2008 there have been just under 40 investigations or industry studies into the food sector. The Commission plans to publish an impact assessment in 2010, namely a document with practical policy, legislative or enforcement priority implications.

It is perhaps no coincidence that in May 2009 in the USA the Department of Justice and the Department of Agriculture announced a series of high profile workshops on competitiveness issues relating to the food sector scheduled to take place throughout 2010. Christine Varney, the US Assistant Attorney General for Antitrust noted at the announcement of these meetings that the sector has some unique antitrust considerations and she also noted the unprecedented nature of the workshops. Both for the EU and the USA there are several cross-government departmental initiatives being undertaken to devise appropriate remedies for correcting alleged market failures.

2. The Current Rules

The food sector is subject to the EU's competition rules with, however, a special regime applicable to "agricultural products". Under the Lisbon Treaty4 agricultural products are defined5, namely by a list of products forming Annex 1 to the Lisbon Treaty. The rules on competition apply to production of and trade in agricultural products only to the extent determined by the European Parliament and the Council6.

The European Parliament and the Council have determined the application of the competition rules to the production of and trade in agricultural products through a regulation first adopted in 1962 but updated through a replacing regulation in 2006 (the "Regulation")7. Under the Regulation, subject to three exceptions, the EU's competition rules apply to the production of, or trade in, agricultural products8.

a. The First Exception – Art. 39

The competition rules that prohibit agreements, decisions or concerted practices - namely Article 101 of the Lisbon Treaty - do not apply to agreements, decisions or concerted practices that are necessary for the attainment of the objectives set out in Article 39 of the Lisbon Treaty. Article 39(1) states that the objectives of the common agricultural policy shall be:

  1. to increase agricultural productivity;
  2. to ensure a fair standard of living for the agricultural community;
  3. to stabilise markets;
  4. to assure the availability of supplies;
  5. to ensure that supplies reach consumers at reasonable prices.

In working out the common agricultural policy and the special methods for its application, Article 39(2) states that account shall be taken of:

  1. the particular nature of agricultural activity, which results from the social structure of agriculture and from structural and natural disparities between the various agricultural regions;
  2. the need to effect the appropriate adjustments by degrees;
  3. the fact that in the Member States agriculture constitutes a sector closely linked with the economy as a whole.

b. The Second Exception – National Market Organisation

The competition rules that prohibit agreements, decisions or concerted practices do not apply to agreements, decisions or concerted practices that form an integral part of a national market organisation. This second element of the exception harkens back to the Treaty of Rome 1957, which established the European Economic Community, and which had a stated goal of replacing any national market organisations in this sector by organisations common to all the Member States. Most national organisations for agricultural products were replaced by 1967 and this exception has not been the subject of a competition case since 19889.

c. The Third Exception – Farmers

The competition rules that prohibit agreements, decisions or concerted practices do not apply to agreements, decisions or concerted practices of farmers, farmers' associations or associations of such associations belonging to a single Member State. This exception applies only to agricultural products or to the use of joint facilities relating to agricultural products, unless the agreement relates to an obligation to charge identical prices or the Commission finds that competition is excluded or the objectives of Article 39 are jeopardised.

In the light of the above Lisbon Treaty Articles and the Regulation the application of the EU competition rules may be summarised as follows:

APPLICABILITY OF THE EU COMPETITION PROHIBITIONS

 

Agricultural Products

Any Other Food Products

To the production of or trade in...

Abuse of dominance

Anti-competitive agreements unless:

  • Art. 39 Lisbon Treaty
  • National market Organisation
  • Farmers

Abuse of dominance

Anti-competitive agreements

Any other activity related to...

Abuse of dominance

Anti-competitive Agreements

Abuse of dominance

Anti-competitive agreements

3. The Issues To Be Addressed

From the documentation identified in section 1 above, as well as speeches and commentaries by officials, the following issues have been raised. Not all of them are solely or even mainly competition issues. What priority will be given to them by the EU is not clear at present, although where current action is being taken, this is indicated below.

In relation to sectors within the food industry, the EU has identified the fruit, vegetables and fish markets as a focus for its attention. In addition, there is to be focus on the dairy, poultry, crop and livestock sectors10. The Milk and Dairy sector has been investigated by the NCAs in Bulgaria, France, Germany, Greece, Lithuania and the UK. It is also the subject of a High Level Expert Group on Milk, set-up by the Commission, which is to report in June 2010.

  • Prices

    The Commission has identified many elements related to how prices are settled, transparency and movement. An example is to determine how markets work at the various levels from product to end distribution, and whether competition is active, given the Commission considers that at times prices for farmers have been low yet processed food producers/resellers are selling at high prices. A related issue is the varied levels of profit margin.

    Another example for consideration identified by the Commission is that prices have been 'sticky' and this has been blamed on market structure and different regulatory frameworks surrounding the food sector. Consideration has even extended to the effect and operation of agricultural derivatives markets, with concerns about adverse market effects due to speculation.

    Resale price maintenance has been the subject of investigation in France (chocolate), Denmark (flour), Poland (ice-cream) and Germany (coffee, chocolate). This will be a difficult subject for the Commission. On the one hand, it is commonly consumer products that are involved, so consumers feel the disadvantages, and there will be political pressure to continue to ensure that resale price maintenance is always prohibited. On the other hand, the Commission has recently expressly accepted that resale price maintenance can generate efficiencies outweighing the anti-competitive effects11. This recognition by the Commission is a nod towards the Leegin12judgment in the USA, in which the US Supreme Court held that vertical agreements to fix minimum resale prices are no longer per se violations of Section 1 of the Sherman Antitrust Act.
  • Market Concentration

    Consideration will be given to the level of concentration, with the comment by the Commission that there might be an over-concentration of the market at the processed food producer and retailer levels, whilst at the farmer level it is atomised. The Commission suggests it may seek to encourage consolidation at this level, including promotion and encouragement of farmer organisations.

    Related to market concentration and more specifically market power, issues have been raised about the existence of buyer power or unavoidable trading partners and of the effects of leading brands13.

    Abuse of dominance in the processed food supplier sector has been the subject of investigation in Denmark, France, Hungary, Portugal and Sweden.
  • Commercial Practices

    Consideration will be given to joint commercialisation, tying and bundling, joint purchasing agreements (buying alliances) and private labels. Mixed into this will be issues that are not strictly within the ambit of EU competition law, although they can be considered within the jurisprudence of unfair competition law. One such issue is inequality of bargaining power and thus unfair contractual terms and conditions in vertical supply agreements.

    An example of the focus in this area is in the Czech Republic, where on 1 February 2010 there came into effect Act No. 395/2009 on Significant Market Power in the Sale of Agricultural and Food Products and Its Abuse. This Act has as its target the retail sector, because it is considered that the food sector in the Czech Republic has become increasingly dominated by supermarket chains.
  • Regulatory Structure and Competition Law

    The interface between agricultural policy and rules, and competition rules in particular relating to horizontal agreements will be considered. The EU noted in its 2009 report14 that price stickiness has been blamed on market structure and different regulatory frameworks surrounding food markets.

4. Commentary and Points for Consideration

The Commissioner for agriculture, Dacian Ciolos, remarked at a conference entitled What future for Milk? organised by DG Agriculture and Rural Development in Brussels on 26 March 2010, that he foresaw there would be sectoral adaptations of EU competition law, potentially on an area by area basis (e.g. milk, wine etc.). An example given by the Commissioner was that organisations could be permitted to be larger in the market than would normally be permitted by competition law. The Commissioner's comment was reflected by Paul Csiszár, head of unit E, DG COMP, when he stated at the same conference that competition policy is dynamic and it must adapt, and this friendly attitude is further reflected in a document produced by DG COMP for the above conference, entitled How EU Competition Policy Helps Dairy Farmers In Europe.

There will be a policy debate concerning the correct inter-relationship between competition law, regulation, and trade. The food sector in the EU and elsewhere is the subject of intervention by the State, which means that the competition rules are affected. Such intervention also affects international trade in products. Given the EU is the world's biggest importer and exporter of agricultural products, trade has a direct impact on the state of competition within the EU. Whilst the likely centre of this debate will be regulation given that the common agricultural policy is due to be reformed by 2013, the EU's WTO obligations and priorities circumscribe the EU's room for manoeuvre.

For three reasons there will be a very strong role for the NCAs. First, EU competition law applies only if there is an effect on trade between Member States. If there is no such effect, then only national competition law can be applied and then only by the NCAs. Second, the Commission has identified that the NCAs may well be better placed given that the particular actors may have a strong national character. As identified in section 1 of this note, Mayer Brown's analysis identifies that since January 2008 there have been just under 40 investigations or industry studies into the food sector by the NCAs. There is no reason to consider that this level of activity by the NCAs would not continue, with coordination of activities by the EU and the NCAs through the European Competition Network. Third, although obvious, market definition will be a key element to consideration of EU competition law to the food sector, a point underlined by Paul Csiszár at the What future for Milk? conference. Many primary food markets are largely national, or smaller, and the natural competition enforcer for such markets is likely to be the NCAs.

The milk and dairy sector will be a focus of attention. The Commission's High Level Expert Group on Milk is expected to publish its report in June 201015 and the outcomes are likely to have impacts far beyond the milk and dairy sector. The extent and manner by which farmers can legitimately jointly act, in particular to jointly sell product, could be of particular attention.

Buyer power will be a keenly debated issue. There will be particular focus on the retail sector. There may be a widening of the traditional competition debate16, given comments in the Commission's working paper The interface between EU competition policy and the Common Agricultural Policy (CAP): Competition rules applicable to cooperation agreements between farmers in the dairy sector17. In that paper the Commission suggests that buyer power may lead to lower consumer welfare levels if sale's prices are below costs. In addition, the Commission speculates that buyer power at the retailer level may lead to concentration at that level, and that might lead to upstream concentration, the ultimate effect of which could be a lowering of consumer welfare, when measured according to price, diversity and quality. The Commission will be aware that any developments in thinking it seeks on this subject in relation to the food sector will have wider implications for non-food retailing, and buyer power generally.

The debate about unfair terms and conditions in the context of inequality of bargaining power could lead to a mixed application of the laws of those Member States that have unfair competition laws and competition law. This is particularly likely for those NCAs, such as the UK's Office of Fair Trading that are responsible for competition law and consumer protection laws or unfair trading laws. This intermixing could lead to suggested changes in the emphasis of the underlying goals of competition law, and thus in the interpretation and application of competition law.

The EU has considered this subject within an invited closed group, undertaking studies and obtaining third party input from the High Level Group on the Competitiveness of the Agro-Food Industry, which it set up in 2008, and is composed of representatives of the Commission, Member States, as well as from industry, civil society and trade associations. There was recently a broader public engagement and dialogue when the Commission organised a workshop in March 2010 entitled What future for Milk? Public consultation on any white or green papers, and proposed legislative changes is foreseen. In the USA, consideration of the subject has commenced with a series of public debates18.

Corporations not a member of the EU's High Level Group may wish to make their views known on issues that are of concern to them, or that the Commission may focus on. This suggestion is particularly relevant for those corporations active in areas of the food sector which might inherently have (perceived) structural issues, because the Commission could decide that there should be a pro-active and more forceful application of competition law. As Commissioner Almunia, the Commissioner for Competition, noted in a recent speech on competition and regulation, "...the competition rules work best when market abuse is occasional. When markets are structurally prone to abuse, ex ante regulation is needed"19.

Related legal updates: Antitrust Enforcement in US Agriculture Markets: The Obama Administration Plants Seeds for Increased Enforcement http://www.mayerbrown.com/publications/article.asp?id=8043&nid=6

Footnotes

1. COM (2008) 321 final.

2. COM (2009) 591 and accompanying papers: SEC (2009) 1445 to 1450.

3. Review limited to publicly available information.

4. Formally expressed this is the Treaty on the Functioning of the European Union (the "TFEU"). All Lisbon Treaty references in this legal update are to the consolidated version, click here.

5. TFEU art 38(1) and (3).

6. TFEU art. 42.

7. Council Regulation (EC) No 1184/2006 of 24 July 2006 applying certain rules of competition to the production of, and trade in, agricultural products. OJ L214/7 of 4.8.2006. The Regulation has been amended by Council Regulation (EC) No 1234/2007.

8. Technically, there are currently two identical competition regimes. One is contained in the Regulation and applies to agricultural products as identified in Annex 1 of the Lisbon Treaty, except for those products identified in Article 1(1) and (3) of Council Regulation (EC) No 1234/2007. This latter regulation applies the same competition rules to those excepted list of products.

9. New Potatoes – OJ [1988] l59/25.

10. These last four sectors have also been identified for particular attention by the USA's DOJ and DOA.

11. See Commission Notice, Guidelines on Vertical Restraints, 10.5.2010, SEC (2010) 411, paragraphs 225 et seq.

12. Leegin Creative Leather Products, Inc. v. PSKS, Inc.

13. In the USA there is a particular focus, which does not appear to have arisen yet in the EU, of the power of seed companies in relation to farmers and alleged negative effects this has ultimately for consumers. See, for example, the white paper issued by the American Antitrust Institute on 23 October 2009, Transgenic Seed Platforms: Competition Between a Rock and a Hard Place?

14. Supra, footnote 2.

15. The milk and dairy sector was the subject of one of the first ex-officio opinions issued by the French Competition Authority, in which it made a number of recommendations for a better more centralised organisation of this sector and remarked that certain current practices were probably anti-competitive - Opinion n° 09-A-48 of 2 October 2009 relative to the operation of the dairy sector.

16. Buyer power in the grocery retail sector has been the subject of investigation under the EU's mergers regime, for example, Case No. COMP/M.1684 Carrefour/Promodés.

17. 16.02.2010.

18. Click here for the link to the relevant page on the DOJ's website.

19. SPEECH/10/312 - 14 June 2010 - Click here.

Learn more about our Antitrust & Competition practice.

Visit us at www.mayerbrown.com.

Copyright 2010. Mayer Brown LLP, Mayer Brown International LLP, Mayer Brown JSM and/or Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. All rights reserved.

Mayer Brown is a global legal services organization comprising legal practices that are separate entities (the Mayer Brown Practices). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; Mayer Brown JSM, a Hong Kong partnership, and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions