The new highs for the Croatian Competition Agency in the field of unfair trading practices

Recently, the Croatian Competition Agency (AZTN) published its decision on a new fine of HRK 1,300,000 (approx. EUR 173,000) imposed against SPAR Hrvatska for violating the Act on the Prohibition of Unfair Trading Practices in the Business-to-Business Food Supply Chain (UTP Act). This is so far the highest fine rendered by the AZTN in the area of unfair trading practices, and it sets an important example for the future.

Following written notices regarding SPAR’s violations of the rules on sale of products below the purchase price including VAT, the AZTN initiated an administrative procedure against SPAR in July 2020, which was finalized after only a year. During the investigation, the AZTN determined that SPAR indeed was selling three products (flour, cappuccino and chicken) below purchase price including VAT. However, during a written and oral defence, SPAR argued that the AZTN should apply principles ne bis in idem and res iudicata because the Zagreb Misdemeanour Court acquitted SPAR for selling cappuccino and chicken below purchase price including VAT in accordance with the Croatian Trade Act. Consequently, the AZTN has amended the subject of administrative procedure and has focused on the sale of flour.

Pursuant to the investigation, the AZTN determined that, in the period of a few days (from 9 November to 11 November 2018), SPAR had violated the UTP Act by selling discounted flour to all loyalty members for additional loyalty discount. SPAR argued that during the mentioned period it also sold flour above the purchase price including VAT, thus it should be concluded that sale below purchase price including VAT was an exception and not regular business for SPAR. The AZTN agreed that the sale of discounted flour or the sale of flour with only loyalty discount alone does not amount to a violation of the UTP Act; however, it is undisputed that when loyalty discount was applied to already discounted flour that the price was below purchase price including VAT. Moreover, it was determined that out of 215 receipts in relevant period, the total of 211 of receipts (i.e., 98.14%) show that 98.55% of flour was sold below purchase price including VAT. Consequently, the AZTN qualified such violation of the UTP Act as extremely severe.

Even though SPAR requested that the lack of intention to continuously sell flour below purchase price including VAT be taken as mitigating factor, the AZTN rejected the request. Moreover, the AZTN rejected SPAR’s claim that there was no harm to the supplier (because the violation occurred for such a short time), by explaining that the harm to the supplier is actually covered by the very purpose of prohibiting the sale of products below the purchase price including VAT. When determining the penalty, the AZTN did not find any aggravating factors, while it did consider following factors as mitigating: the shortness of violation, SPAR’s good cooperation with the AZTN, violation was limited to only one product, and the sale was made only to loyalty members and not all end consumers.

Most interestingly, as a mitigating factor the AZTN took into account the fact that violation occurred within the first year of the UTP Act’s implementation. The AZTN explained that SPAR did not have sufficient understanding/knowledge about how to implement a new loyalty programme so that it would be in accordance with the UTP Act. While “lack of knowledge” played in favour of SPAR, AZTN’s reasoning could be interpreted that in the future, the AZTN would not look so “kindly” on loyalty programmes that violate the UTP Act, regardless of amendments to the UTP Act that entered into force only this year. Thus, when making changes in your business model, it is important to consider not only the new and amended rules under the UTP Act, but also prior AZTN practices.

While some would argue that the fine of HRK 1,300,000 (approx. EUR 173,000) is too excessive in this case, such fine is not so surprising when one takes into consideration AZTN’s previous practice (e.g., the fine of HRK 1,100,000 (approx. EUR 146,500) against Kaufland Hrvatska for various breaches of the UTP Act such as failure to define defining the term of the agreement and charging fees which must not be borne by suppliers). Moreover, the sole and the main purpose of penalties under the UTP Act is to establish and ensure fair trading practices that protect participants in the supply chain by punishing and deterring perpetrators of infringements. Since the UTP Act was first implemented, the AZTN has taken its role of enforcer seriously and has been continuously active in supervising companies in the food supply chain. By the end of 2020, the AZTN had initiated more than 230 proceedings related to UTPs, more than 40 of which led to proceedings against companies for the violations of the UTP Act. In 2020 alone, the AZTN rendered fines in the total amount of HRK 1,600,000 (approx. EUR 213,000). If decision against SPAR is any indication, we can expect an even more interesting statistic for 2021. This is especially considering the amendments to the UTP Act which are yet to be complied with by the businesses.