On July 9th 2015, the Bulgarian Parliament adopted a package of measures aiming to combat unfair business-to-business trading practices in the retail supply chain. In parallel to modifications in food distribution regulations, the legislators also approved an amendment to the Protection of Competition Act (“PCA”), introducing new rules prohibiting “abuse of superior bargaining position”. According to the legislative amendment, the existence of “superior bargaining position” (“SBP”) should be established upon assessment of the structure of the relevant market and the specific relations between the undertakings concerned, taking into account the nature of their activities and difference in scale of operations, the availability of alternative business partners, including presence of alternative sources of supply, distribution channels and/or customers. The specific criteria for SBP analysis and precision of the forms of abusive behaviour should to be devised by the national competition authority (the Commission on Protection of Competition, or the “CPC”) in a special methodology. The new prohibition covers any act or failure to act of an undertaking with “superior bargaining position” (“SBP”), which contradicts good faith business practices and harms or threatens the legitimate interests of the weaker contractual party and the consumers. In case it finds that a violation was committed, the CPC would be empowered to impose fines ranging from BGN 10,000 (approx. EUR 5,000) up to 10% of the aggregate annual sales of the undertaking concerned in the affected product group for the preceding year (or up to BGN 50,000 in the absence of turnover from such sales).
REASONS BEHIND THE NEW REGULATION
According to the motives to the legislative amendment, its objectives are to limit unfair trading practices (“UTP”) along the chain of production, supply and distribution of fast moving consumer goods. The 2013 Green Paper of the European Commission on unfair trading practices in the business-to-business food and non-food supply chain in Europe (COM/2013/037) was cited on a number of occasions throughout the legislative process. The Bulgarian legislator concluded that UTPs can represent a threat to the competitive environment where they are imposed by one of the undertakings concerned upon the other by abusing its superior bargaining position. The negative effect of bargaining power and the resulting economic dependence is transaction and relation specific – it depends on the specific circumstances of the case and differs with each contractual partner. Since the problems with dependence are not (primarily) rooted in the general market position of the undertaking enjoying SBP, the legislator decided to adopt the term “superior bargaining position” instead of “significant market power”, which was used in the original drafts of the bill. One of the reasons for the change of language was to avoid the danger of overlapping with the existing regulations against abuse of dominance. While a position of “dominance” indicates a certain degree of independence from other market players and is therefore comparatively universal (in the sense that it is related to market structure and not based on a specific contractual relation), bargaining power is more context specific since it designates an asymmetry in the relationship between two particular undertakings. Thus for example one and the same undertaking can exercise pressure over one of its suppliers, while at the same time being victim of the unavoidable instructions of another stronger supplier. In this respect it should be noted that the PCA contains several different types of rules. On the one hand, its Chapters III and IV lay down the antitrust prohibitions against coordinated behaviour and abusive unilateral conduct, which protect the general public interest and aim to resolve problems related to concerted practices and market structure that have negative impact on consumer welfare. On the other hand, Chapter VII provides the rules against unfair competition, addressing the actions of undertakings, which infringe upon good faith business practices and harm or threaten the legitimate interests of competitors. The existing antitrust regulation in Bulgaria is a verbatim reproduction of EU level rules, as laid down in the Treaty on the functioning of the European Union (in particular Art. 101 and Art. 102). And according to the prevailing opinion, antitrust law should not be concerned with particular outcomes of contractual negotiations between parties unless such terms would have the effect of harming the competitive process and thereby reduce consumer welfare – in contrast to harming only the interests of particular competitors. Antitrust rules are meant to protect public interests and enhance consumer welfare. Therefore, in dominance cases the alleged abuse will only constitute a breach of the relevant legal provisions when it is likely to result in consumer harm. On the contrary, the negative impact of abuse of economic dependence is suffered primarily by the weaker contractual partner (at least in the short run), as a result of which the respective prohibitions would serve to protect primarily the individual interests of the affected private parties. Because of this significant difference in the focus of application, rules on dominance are not fit to address deficiencies resulting from asymmetry in bargaining power. However, supporters of the new regulation argued that UTPs are not completely unrelated to competition law (in the broader context encompassing both antitrust and unfair competition). A party enjoying a SBP over another party may obtain unfair advantage by making use of that position, restraining the independent business activities of the weaker party and forcing it to accept disadvantages that it would not have agreed upon if there were alternatives and competition was working properly. Only in this specific situation it can be argued that imposition of UTPs by undertakings with SBP prevents weak parties from competing freely and independently. Weaker parties, on whom unjustified burden is imposed, would be in more disadvantageous position in terms of possibilities to compete. On the other hand, the party imposing the burden would be in a more advantageous position with respect to its competitors because it would have received a benefit which is not accessible under normal market conditions. If the difference between bargaining positions is significant enough to restrict the autonomy of decision making of one party, and if the other party takes advantage of this gap to put the weaker party at a disadvantage, the weaker party’s independence is undermined and fair transaction order is also disturbed. Thus abuse of dependence can be regarded as a form of unfair competition in vertical relations between non-competitors. Nevertheless, it should be noted that full equality between the parties to a contractual relationship is almost impossible in reality. It is completely normal that one of the parties has a stronger position and this situation should not qualify as a violation of competition law by itself. In fact, it is quite possible that certain contractual terms and practices that reduce the benefit of one of the parties could ultimately benefit consumers, if the stronger party passes the advantages “extorted” from the weaker party down the supply chain – for example, a reduction of procurement prices contributing to reduction of retail prices should not be regarded as a violation. In order to distinguish pro-competitive and natural cases of lack of balance in bargaining power from those cases where inequality leads to anti-competitive result, the application of the new rules is limited to situations where the negative effect of the UTPs in the long run would also harm consumers. One of the original legislative drafts proposed restricting the application of the new regulation only to abuse exercised over suppliers. However, this proposal was dismissed and did not become part of the adopted version of the law since it was noted that „victims“ of UTPs can be undertakings on all levels of the supply chain – raw material producers, processing and manufacturing businesses, and distributors on all levels of trade. Moreover, a situation of economic dependence can appear in both directions of a particular relationship, thus both the supplier and the client can suffer from undue influence. It was ultimately decided that the introduction of a uniform regulation, aiming to prevent all forms of abuse and UTPs along the entire supply chain, in all directions, would make the broadest contribution towards the improvement of market environment and thus have positive impact on all market players.
The new rules on abuse of SBP mirror existing regulations dealing with unfair competition and (to some extent) rules on unfair terms in consumer contracts. The rationale behind the newly introduced provisions is to expand the scope of the existing “fair play” rules to cover also vertical B2B relationships. Moreover, in long-term contractual relations characterized by a significant imbalance in the bargaining positions of the parties some undertakings may indeed be in the same position as end consumers vis-à-vis their contractual counterpart and should therefore be granted some protection against the risk of exploitation. According to the adopted amendment, a violation would be present where the following requirements are satisfied cumulatively: (i) existence of a contractual relationship between two independent undertakings; (ii) imbalance in bargaining positions; (iii) conduct of the party with SBP, which is inconsistent with good faith business practices; (iv) potential or effective harm for the weaker party, which in the long-run is likely to result in consumer harm; and (v) absence of adequate alternatives for the weaker party. All forms of “unfair coercive” conduct without economically objective justification are now prohibited, including in particular unjustified refusal to supply or purchase goods or services, subjecting a contractual partner to unjustified or discriminatory obligations or trading conditions, and unjustified severance of established business relations. The assessment of “fairness” should be made on a case-by-case basis, taking into account the context and history of relations between the specific parties. Existence of SBP should be determined by analysing the structure of the relevant market and the specific relationship between the undertakings concerned. Indicative factors include, among others, the degree of dependence between the two undertakings, the nature and difference in their scale of business operations, the existence of alternative supply/distribution channels and probability of finding an alternative trading partner. The legislator entrusted the CPC with the task to develop specific criteria for SBP analysis in a special methodology that should be adopted within 3 months as of entry into force of the PCA amendment. Since the new rules against SBP abuses (regarded as a form of “unfair competition” in vertical relations) aim to protect private interests, principal responsibility for their enforcement should be assumed by the affected private parties. Nevertheless, the competition authority would also be entitled to open proceedings on self-approach (sua sponte). The CPC will review complaints under the new PCA Chapter VIIa following the standard procedure applied for unfair competition cases. In this respect it should be noted that the PCA provides for separate procedural routes for implementation of different substantive rules. The common framework for antitrust investigations – covering both alleged prohibited agreements and abuse of dominant position – is set forth in PCA Chapter IX, while proceedings for review of complaints alleging unfair competition violations are governed by Chapter XII. The most important difference is that in antitrust investigations the CPC acts both as a public prosecutor and as a deciding authority and has complete control over the case – it cannot be terminated by the private parties even where the original petitioner and respondent – alleged perpetrator reach a settlement with respect to all disputed issues. Proceedings under an unfair competition complaint, on the other hand, have adversarial character and follow closely standard civil action procedure. Two distinct sides are formed: (i) petitioner – the aggrieved party, and (ii) respondent – the alleged perpetrator, while the CPC’s function is limited to independent verification of the factual allegations of the disputing parties (i.e. it acts as a quasi-judiciary tribunal). The petitioner may withdraw the complaint at any time without stating any grounds, causing automatic termination of the proceedings. As noted in the beginning, the PCA amendment was devised and passed through the Parliament as part of the package of “laws against the commercial chains”. However, the new rules regulating abuse of SBP are sufficiently broad to encompass any industry and every business in Bulgaria. The amendment was not accompanied by impact analysis and its effect on different sectors of the economy is yet to be seen.