On 23 May 2024, the European Commission (the Commission) imposed a €337.5 million fine on foodstuffs company Mondelez for restricting parallel trade. This fine is in keeping with a trend of increased focus on restrictions on interstate trade. Food company AB Inbev was fined €200 million for a similar offence in 2019 already.
At the same time, the Dutch government – in cooperation with seven other Member States – came up with a proposal for new legislation to further curb territorial supply restrictions. According to those Member States, there should be a blanket ban on “discrimination based on the place of establishment” at EU level. The hindering of parallel trade is therefore a hot topic. We address the latest developments in this blog.
In practice, different designations are used for similar practices, including the restriction or hindering of parallel trade, interstate trade, and grey import or territorial supply constraints. We will use the term ‘hindering of parallel trade’ in this blog.
Background: hindering of parallel trade in breach of competition law
Buyers (traders or retailers) usually try to source their products in Member States where prices are low in order to then sell them in Member States where prices are higher (arbitrage). Under normal circumstances, this leads to price drops in countries where prices are high. The hindering of parallel trade may lead to the preservation of price differences, but may also be justified because it takes advantage of the differences in purchasing power between countries. Price discrimination in a B2B relationship is not prohibited itself. The European Court of Justice ruled in its Parker judgment already that a unilateral pricing policy of a non-dominant supplier is permissible also if it may lead to the preservation and protection of the various national markets.
However, the hindering of parallel trade is prohibited under certain circumstances. Unilateral action by a dominant supplier may breach the prohibition on abuse of a dominant position (Article 102 TFEU). If the hindering of parallel trade is part of a distribution agreement, for instance, it may be in breach of the cartel prohibition (Article 101 TFEU). The authorities regard such practices as one of the most serious forms of anti-competitive behaviour.
Mondelez fined €337.5 million for hindering parallel trade
On 23 May 2024, the Commission imposed a €337.5 million fine on Mondelez, one of the world’s largest producers of chocolate, biscuits and coffee products, known for brands such as Milka, Côte d’Or, Toblerone, Oreo, Ritz and TUC, among others. Mondelez acknowledged the breaches in exchange for a 15% reduction of the fine.
According to the Commission, Mondelez breached European competition law by (i) engaging in anti-competitive agreements and/or concerted practices to restrict the cross-border trade in its products (Article 101 TFEU); and (ii) abusing its dominant position in certain national markets for the sale of chocolate bars (Article 102 TFEU).
- Cartel prohibition (Article 101 TFEU)
The Commission established 22 breaches of the cartel prohibition in the period between 2006 and 2020. In summary, they involved two types of practices in breach of the cartel prohibition. First, Mondelez restricted the territories or customers to which seven major retailers were allowed to resell Mondelez products. One case, for instance, involved a provision instructing a trader to charge a higher price when reselling to customers abroad. Second, ten exclusive distributors were prohibited from responding – without Mondelez’s prior consent – to sales requests from customers in other Member States (known as passive sales).
- Abuse of dominant position (Article 102 TFEU)
The Commission also established a breach of the prohibition on abuse of a dominant position in the period between 2015 and 2019. First, it consisted of Mondelez refusing to supply chocolate bars to a trader in Germany in order to prevent resales in Austria, Belgium, Bulgaria and Romania, because higher resale prices were charged in those countries. Second, the supply of chocolate bars to a Dutch retailer was stopped in order to prevent their resale in Belgium, where Mondelez sold its products at a higher price.
The Commission concluded that these practices had the effect of preventing traders from freely selling Mondelez products within the EU (artificial market sharing). According to the Commission, the purpose of these practices is to prevent cross-border trade from leading to price reductions in countries with higher prices.
AB Inbev fined €200 million in 2019 for similar breach
The Commission fined AB Inbev €200 million in 2019 for a breach of the prohibition on abuse of a dominant position. AB Inbev is the world’s largest brewer and the parent company of well-known beer brands such as Budweiser, Hertog Jan and Jupiler. AB Inbev acknowledged the breach in exchange for a 15% reduction of the fine.
According to the Commission, AB Inbev abused its dominant position on the Belgian beer market by hindering the import of cheaper Jupiler beer from the Netherlands into Belgium. As a result of the import barrier, among other things, the price of Jupiler beer in Belgium was kept artificially high, meaning that Belgian consumers had to pay more than Dutch consumers.
The Commission ruled that AB Inbev had a dominant position on the Belgian market. Its most popular beer brand in Belgium (Jupiler) alone, for instance, accounted for 40% of the Belgian market at the time. According to the Commission, AB Inbev abused this dominant position by using a deliberate strategy to make it difficult for Belgian supermarkets to buy cheaper Jupiler beer in the Netherlands. This strategy consisted of the following practices:
- AB Inbev changed the packaging – including the language – of some of its Jupiler beer supplied to the Netherlands, making it harder to sell that beer in Belgium;
- AB Inbev limited the volume of Jupiler beer delivered to a wholesaler in the Netherlands;
- AB Inbev refused to supply certain products (important to Belgian retailers) unless retailers agreed to restrict imports from the Netherlands; and
- AB Inbev was willing to give a Dutch retailer certain promotions only if that retailer did not offer customers (consumers) in Belgium the same promotions.
Member States call for new legislation to curb the hindering of parallel trade
In an interview by Het Financieele Dagblad, Cyriel Ruers referred to the hindering of parallel trade as “a hot topic in Europe”, since measures to curb such hindering have been philosophised about for some time already. A case in point is the letter to the Lower House from the Minister of Economic Affairs and Climate Policy dated 27 November 2023. In that letter, the Minister – following a report by Ecorys – called for putting the hindering of parallel trade on the agenda at EU level.
Although the hindering of parallel trade may already be in breach of competition law, in practice it is often difficult to prove the existence of unlawful hindering, since such arrangements are often not recorded in writing in an agreement, making it difficult to prove breach of the cartel prohibition. The same applies to proving abuse of a dominant position by a dominant company. This requires a long and extensive investigation, whereby the high burden of proof rests on the trader. It furthermore follows from the Parker judgment referred to above that a unilateral pricing strategy by a non-dominant company is permissible.
Partly for this reason, the Ministry of Economic Affairs – on the same day on which the Commission fined Mondelez – came up with a proposal to curb the hindering of parallel trade. The proposal is a joint action of eight Member States, namely the Netherlands, Belgium, Denmark, Greece, Croatia, Luxembourg, Slovakia and the Czech Republic.
The proposal involves a prohibition on discrimination based on the place of establishment in B2B trade and is meant to complement the “competition-law route” to tackle the hindering of parallel trade at the front end. It is not yet known what exactly the prohibition will look like, but a ban on “discriminating against businesses such as retailers based on their place of establishment”, combined with a shifting of the burden of proof “to the supplier/manufacturer”, is being considered.
Drafting new legislation imposing such a prohibition will not be easy. As Cyriel Ruers explained in an interview with Global Competition Review, shifting the burden of proof is “quite a drastic measure” that could conflict with the presumption of innocence. Moreover, new legislation to prohibit the hindering of parallel trade should be preceded by a more fundamental debate on the potential pro-competitive effects of price discrimination highlighted in economic literature.
More information on agreements between suppliers and distributors is provided in our other blogs. Information on dawn raids by ACM or the European Commission can be found at invalacm.nl.
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