FRENCH “EGALIM 3″ LAW: NEW REQUIREMENTS APPLICABLE TO DISTRIBUTORS AND SUPPLIERS OF FMCG

The « Descrozaille » law dated 30 March 2023, n°2023-221 (aka « Egalim 3 ») introduces several new provisions into the French Commercial Code aimed at strengthening the balance in commercial relations between suppliers and distributors. Several of these provisions amend the regime applicable to fast moving consumer goods (FMCG), by extending the scope of application of certain provisions relating to food products to consumer goods, initially set out by the earlier enacted and so-called “Egalim 1” and “Egalim 2” laws.

FMCG are defined in Article L.441-4 of the French Commercial Code as « non-durable products that are consumed with high frequency and recurrence« . These include alcoholic beverages, hygiene, cleaning and beauty products, certain paper products and batteries, according to Article D.441-1 of the same Code.

Control of promotions

From March 1^st, 2024, promotions applied to consumer goods will be limited to (i) 34% of the selling price to the consumer, per product; and (ii) 25% in sales volume or of the forecast total annual turnover negotiated and determined by the parties in their agreement (Article 2 and 7 of the Egalim 3 Law).

This already existing mechanism in the form of an experiment for food products, has been extended until 15 April 2026. The framework provided for food products had been defined in guidelines issued by the DGCCRF, and an update of these guidelines would make it possible to specify the conditions of application to FMCG.

The « line by line » principle and the prohibition of abusive discrimination

From April 1^st, 2023, in application of the « line by line » principle, distributors and suppliers will have to detail in their annual agreement the reciprocal obligations (and any price reduction counterpart) to which they have committed themselves at the end of the commercial negotiations, as well as their respective unit prices (Article L.441-4 III of the French Commercial Code ; article 3 of the Egalim 3 Law).

This principle is strengthened by the extension of the prohibition on abusive discrimination from food products to consumer goods (abusive commercial practice), which requires that any difference in treatment (including prices, payment terms, conditions of sale or purchase) creating a competitive disadvantage or advantage for one partner compared with other trading partners in the same situation, must be objectively justified by real consideration (Article L.442-1 of the French Commercial Code). The line-by-line principle ensures compliance with this obligation.

Failure to comply with this principle may entail the author of the practice, liable in tort, to a civil fine of up to 5% of the turnover achieved in France (Article L.442-4 of the French Commercial Code).

Mandatory obligation of good faith during negotiations

From April 1^st, 2023, the yearly negotiations of the distribution agreements must be governed by the principle of good faith (Article L. 441-4, IV of the French Commercial Code). This principle is already a matter of public policy. Failure to comply with this provision, which has now been upgraded to the status of a restrictive practice (as regards Consumer goods), is punishable by a fine up to a maximum of €375.000 for legal entities.

In addition, it is now considered a restrictive practice to « fail to conduct commercial negotiations in good faith in accordance with article L. 441-4, with the result that a contract is not concluded by the deadline«  (Article L. 442-1, I, 5° of the French Commercial Code). The author of the practice is liable to a civil fine up to 5% of turnover, excluding tax, achieved in France (Article L.442-4 of the French Commercial Code).

Consequences of the failure to find an agreement
by the legal deadline of March 1^st

In the event of failure of the supplier and the distributor to reach an agreement on March 1^st, deadline (applicable for the first time in 2024 for the yearly negotiations of distribution agreements), the legislator has introduced a three-year experimental system to remedy the legal uncertainty caused by the absence of an agreement.

Firstly, if no agreement has been reached by March 1^st, the supplier can choose between two options:
 

• immediately terminate the commercial relationship, without risking being convicted on the grounds of the sudden termination of commercial relationship (Art. L.442-1, II of the French Commercial Code);
• request from the distributor the application of a notice period in accordance with Article L.442-1, II of the French Commercial Code: reasonable notice period regarding the commercial relationship and by fixing a price that « takes into account the economic conditions of the market« .

Secondly, the parties may choose to jointly submit the issue to the mediator (for agricultural trade relations or for companies) to attempt to reach an agreement before April 1^st, which provides the conditions for a notice period in accordance with Article L.442-1, II of the French Commercial Code (duration and price). Two scenarios are envisaged:

• if an agreement is reached, the price agreed by the parties will apply retroactively to orders placed from March 1^st, until the end of the notice period;
• in the event of disagreement, the supplier may still exercise one of the above two options.

In addition, Article L.442-1, II of the French Commercial Code relating to the sudden termination of commercial relationship has been amended to specify that the price applicable during the notice period must now « take into consideration the economic conditions of the market on which the parties operate« , such as inflation and the increased cost of raw materials. This amendment applies to any sector and any product or service.

The penalty for failing to sign the agreement by the deadline of March 1^st, for Consumer goods has been increased to the sum of €200.000 (for an individual) and €1.000.000 euros (for a legal entity). These amounts may be doubled in the case of recurrence (Article L.441-6, paragraph 3 of the French Commercial Code).

Key takeaways
 

• From March 1^st, 2024, all promotions applied by Consumer good’s distributors and suppliers will be limited to 34% of the consumer selling price per product and 25% of their sales volume or of the forecast total annual turnover;
• Distributors and suppliers of Consumer goods must justify and detail in their agreement their reciprocal obligations and their unit price, in case of failing they may be held liable for abusive and discriminatory commercial practices;
• Failure to comply with the principle of good faith in the conduct of commercial negotiations relating to Consumer goods now constitutes a restrictive competition practice;
• In case of failure to find an agreement at the date of the legal deadline of March, the supplier has the choice either to terminate immediately the relationship, or to request a notice period in accordance with Article L.442-1, II of the French Commercial Code, and seeking to reach an agreement with the distributor, through a mediator, before 1^st April, which provides the length of the notice period and the resale price of the products.

What Altaïr Avocats can do for you
 

• Drafting and negotiating annual agreements, including FMCG;
• Compliance of agreements with the new provisions of the “Egalim 3” Law;
• Pre-litigation negotiations at the end of agreements or commercial relationships, particularly with regard to restrictive competition practices and the deadline of March 1^st;
• Compliance of commercial and pricing policies with respect to pricing transparency rules;
• Assistance and advice in the context of litigation before judicial and administrative authorities with regard to restrictive practices of competition.