Grappling with with sales at a loss

In recent times, Spanish law has seen its fair share of back and forth on sales at a loss as a consequence of different events, which has forced a change in the law governing the commercial practice of offering products and services below their acquisition price or cost.

Traditionally, two pieces of legislation regulate sales at a loss in Spain: article 17 of Spanish Act 3/1991, of January 10, on Unfair Competition Ley de Competencia Desleal, “LCD”) and, Spanish Act 7/1996, of January 15, on Retail Trade ( Ley de Ordenación del Comercio Minorista, “LOCM”).

While the Unfair Competition Act protects the freedom to fix prices, with sales at a loss only being considered unfair when the sale can cause consumers to be deceived or mistaken, disparages the image of a product or third-party establishment or is part of a strategy to remove a competitor from the market, the LOCM established a general prohibition to sell at a loss in retail, unless the limited exceptions apply (essentially, cut-price sales, sales through liquidation or sales of perishable goods).

However, the general prohibition on selling at a loss described in the LOCM was found to be contrary to EU law in the CJEU ruling of October 19, 2017, which held that it imposed additional restrictions to those set out in EC Directive 2005/29 on unfair commercial practices (the “Directive”), according to which sales at a loss can be prohibited only when they are considered unfair under the criteria in sections 5 to 9 of the Directive itself. The CJEU concluded that “Member States cannot, when establishing criteria different from Article 5 of the Directive on Unfair Commercial Practices, adopt more restrictive measures than those defined in that same Directive.”

This judicial decision spurred the need to approve Royal Decree-Law 20/2018, of December 7, on urgent measures to boost the economic competitiveness of the trade and industry sectors in Spain, amending article 14, inter alia, of the LOCM to adapt it to the requirements of the CJEU and of the Directive. Under the new wording, sales at a loss regulated by the LOCM will only be prohibited when they are considered unfair based on the Directive criteria, i.e., in the same cases as under the Unfair Competition Act, and when the commercial practice can  affect consumers’ economic behavior.

The latest development is the recently approved Royal Decree-Law 5/2020, of February 25, adopting specific urgent measures on agriculture and foodstuffs, arising from the agricultural sector’s complaints about the prices at which it is forced to sell its products. The Decree-Law covers a series of measures to avoid products from being sold below cost so, though tangentially, it also addresses the issue of sales at a loss, in the sense that, as the main change in the food chain, it forces every operator to pay for products at a price that is the same as or greater than the cost of production incurred by the operator immediatelt before it, thus preserving this added value.

Certain sectors now question whether this new legislation is in line with CJEU rulings on sales at a loss.

Although it is true that the wording is in conflict with the principle of freedom to fix prices that, except in expressly excluded situations, was protected by the Directive, it is this Directive that applies to relations between businesses and consumers and not those between businesses at the different links in the food chain, which are regulated by the Royal Decree-Law. However, we must remember that, as the CJEU indicated in its ruling, its competence to judge the validity of the LOCM in a factual scenario that only affected professionals arose from “the prohibition provided under article 14 of the LOCM applying in the same way to sales between wholesalers and retailers than to sales between retailers and consumers.”

This does not seem to be the case with Royal Decree-Law 5/2020. However, since prices for customers in the agricultural sector may be directly affected to a greater or lesser extent, we cannot rule out that the CJEU’s interpretation may be extended to this case.

The controversy is served. We will have to wait and see how this new law is applied and what implications arise from it.

Author: Jean-Yves Teindas