When the power is with you #V: Serving the SMPA

Whether you are a supplier or a buyer, you will certainly be happy if your goods sell well with end customers. And only few activities help this more than the correctly set marketing support. Particularly at the retail level, it is common for advertising or promotions to be arranged by the buyers, based on an agreement with the supplier. It will probably not surprise you that in connection with the purchase of agricultural and food products by buyers with significant market power, the setting up of these activities, or services in general, is also subject to the rules laid down in the Significant Market Power Act (SMPA). And this is the subject of our new article.

The regulation of services related to the sale of food and agricultural products (“related services”) is not new in the SMPA, although the amendment to the SMPA has introduced some new requirements. Services are regulated in the SMPA in two directions. Firstly, a buyer with significant market power is obliged to negotiate the terms and conditions of their provision or receipt in a written contract with each supplier of agricultural and food products in relation to whom it has such significant market power. Furthermore, the SMPA stipulates the circumstances under which setting up the provision of related services may constitute an unfair trading practice. 

Although the SMPA amendment has entailed several changes, it primarily extended the group of persons affected by the obligations. So, whether you just want to review the rules you already apply or learn something new, the following text is for you. 

Service as an element of the contract 

Under the SMPA, the agreed services must always be defined and specified in writing in a contract that must be concluded between the buyer with significant market power and the supplier before the services are provided or any supplies of food and agricultural products start. However, the legislation does not only apply to services provided by the buyer, but also to those received, i.e. those offered by the supplier.

Specifically, the SMPA requires that related services be described, first and foremost in terms of their subject matter and scope - i.e., what the services consist of and in what volume they will be provided (e.g., it may refer to the scope within a certain period). The price, or the method of determining it (e.g., the formula according to which it will be determined), is also an essential element. As in the case of supplies of goods, a description of the price payment method (typically by bank transfer) is also required here. The new element is then to specify “a cost estimate and the basis on which the buyer with significant market power has arrived at that estimate (see below[1])”. The purpose of these requirements is to identify other mutual payments (in particular expenses) so that the supplier can get an idea of how these other arrangements will change the expected income from its own sale of the goods. The aim is thus to ensure the mutual benefit of receiving and providing related services.

What services are involved? 

In practice, we most often come across the aforementioned provision of marketing and promotional services by the buyer to the supplier. Buyers with significant market power offer their suppliers product placement in an advertising leaflet or the organisation of a promotional campaign focusing on the food or agricultural products supplied. The offer of on-line advertising or secondary display in store aisles is not exceptional either. We can therefore imagine that, especially at the higher levels of the supplier-buyer relations (the processor purchases from the primary producer), the obligations in question will not need to be addressed as often, as these types of services are not provided.

However, related services may also be of a different nature. Buyers normally arrange for their suppliers activities relating to the transport or distribution of purchased goods or services of a financial nature (e.g. in the form of the early payment discount). The services may also include advice on the correct setting of sale (launching new products, evaluating trends and development opportunities, analyses), including the provision of the buyer’s own sales data (e.g., information on how many of the buyer’s goods have been sold in each store). However, third party services that the buyer arranges for the supplier in connection with the sale of the supplier's products may also be imputed to the buyer. These include, for example, engagement in a specific settlement system used by the buyer or a global data sharing network service (GDSN system). 

On the other hand, electricity, water, and heat supplies or rent payments are not considered as related services.

Of course, the supplier can also provide related services to the buyer, e.g., additional activities in the store (ensuring a full shelf at all times). As also stated by the Office for the Protection of Competition itself in its opinion[2], in relation to the extension of the scope of the SMPA to the entire food supply chain, developments in the existing range of commonly provided related services should be expected (e.g. cleaning services could be added). 

Voluntary nature, proportionality and non-discrimination... 

If you are asking what the buyer should avoid when providing related services, the answer should be sought in the SMPA provisions on unfair trading practices. First of all, the actual provision of the service to the supplier should be voluntary - the supplier should not be forced to use it. Possible enforcement of the use of a certain accounting service from a sister company or involvement in a certain fee-based mutual settlement system has been investigated by the Office in the past as a specific form of the so-called “listing fee[3]”. Following the SMPA amendment, such conduct can be classified under several types of unfair trading practices[4].

Furthermore, the value of the performance (i.e., payment) for the services provided must be proportionate, i.e., adequate to the value of the service provided. In particular, the service should not be a fictitious item, e.g., used to settle the mutual financial balance of the contractual partners. The pursuit of an activity should make business relations between the buyer and the supplier easier, and its provision should be needed and beneficial. It is therefore essential that the supplier is convinced of the benefits and value of the service provided.

A final important condition is that the negotiation or provision of services must be carried out in a non-discriminatory manner. The price of related services should be determined according to their actual value and not with regard to whom they are provided to. Buyers are thus obliged to provide services under the same conditions in the same situations. 

What about the costs? 

As mentioned above, the SMPA amendment has not entailed many fundamental changes in relation to the provision of related services. However, one of them worries also the buyers, who were subject to the SMPA also in the past. Effective from 2023, a buyer with significant market power is obliged to specify in a contract with its suppliers a cost estimate together with the basis on which it was calculated. As confirmed by the Office in its opinion[5], this obligation indeed only applies to services on the side of buyers.  

Like most other changes to the SMPA, this one also relates to the adoption of the so-called UTP Directive[6] and, like many others, this obligation has also been transposed to the Czech legislation in a stricter wording. Where the Directive laid down a rule to provide cost calculations and cost estimates upon the supplier’s request, the SMPA introduces an obligation to provide them mandatory in each case. Problems have been encountered in particular in the interpretation of this provision by the Office, which envisaged a relatively detailed analysis of cost items (including an indication of personnel costs in the form of the amount of remuneration of personnel allocated to the service in question). 

However, we are writing this article at a time when this approach has been reconsidered on the basis of comments from the professional community. The Office took into account in particular the difficulty of conducting such analyses as well as the problematic nature of sharing sensitive commercial information. 

The Office will therefore accept a cost estimate, e.g., by reference to a list price, where the basis in question may be a market survey prepared by the buyer for this purpose. However, it is necessary that a buyer with significant market power is able to provide the Office with more detailed information on the cost of the service if requested. 

While there are still many open issues, we perceive that this is a step in the right direction. In any case, we are ready to help you with any practical issue concerning the services. 

WHAT TO REMEMBER?

• If the buyer has significant market power in relation to the supplier, the services provided between them are also subject to the rules of the SMPA, in particular the requirement to be in writing and to define the subject matter and scope of the service.
• For services provided to the supplier by the buyer, an estimate of the costs and the basis on which the buyer arrived at that estimate must also be provided.
• The services provided by the buyer to the supplier must comply with the requirements of being voluntary, proportionate and non-discriminatory. In this context, caution is also required when engaging suppliers in broader collaborative schemes using third parties.  

AND WHAT'S NEXT?

Next time, we will look at discounts and the conditions for their application from the perspective of the SMPA and the view of the Office.