Supplements to the Sale of Products in the Light of Unfair Competition Rules in Bulgaria

         I. INSIDE AND OUTSIDE THE BULGARIAN LEGAL FRAMEWORK ON COMPETITION AND UNFAIR COMPETITION

Legal framework

Art. 36 of the Bulgarian Protection of Competition Act (PCA) is titled “unfair soliciting of clients”. It is a part of the unfair competition rules in Bulgarian law and contains four paragraphs providing for four different prohibitions. One of these prohibitions relates to supplements offered or given upon the sale of a product.

Art. 36 (2) of the Bulgarian Protection of Competition Act (PCA) provides for the following prohibition:

“The offering or giving of supplements for free or at a fictitious price of another good or service, upon the sale of goods or services shall be prohibited save for: advertising objects of insignificant value and clear identification of the advertiser; goods or services which according to standard commercial practice are attributes to the sold goods or services; goods or services as a discount upon sale in large quantities.”

Outside the Bulgarian legal framework

Further to the legal framework the Bulgarian Commission on Protection of Competition (CPC – the advertising authority in Bulgaria) has adopted two general decisions (ie not on a particular case) whereby CPC explains what it understands by “advertising object of insignificant value” and “goods or services as a discount upon sale in large quantities. Those acts of the Bulgarian CPC are not legislation per se, however, they seem to be followed also by the court and adhered to by Bulgarian lawyers.

Other important points from the decision making practice of CPC relate to the nature of the supplement and availability of the supplement to each buyer of the main product.

Advertising object of insignificant value in Bulgaria

According to CPC advertising objects of insignificant value are: (i) ‘advertising objects’ if they contain a clear indication of the advertiser; and (ii) ‘of insignificant value’ if they are no more than 10% of the product (goods or services) to which they are offered as supplements.

Products (goods and services as a discount upon sale in large quantities

According to CPC products offered as a discount must be of the same type as the main product. For instance, salt may not be offered as a natural rebate (discount) to the sale of sugar, because salt is different from sugar.

Nature of the supplement

According to CPC the supplement must be of such a nature that it is liable to distort the consumer demand. The assessment of the nature is entirely factual and is made by CPC on a case-by-case basis. There are no criteria to serve as guidance. The following instances may be extracted from the decision making practice of CPC: (i) a book given as a free supplement upon the sale of a newspaper; (ii) one bottle of oil or 1kg of sugar offered as a supplement to 1 ton of wood; (iii) a pint of beer offered as a supplement to a set of three beers in a package.

Availability of the supplement

A couple of times CPC has noted that in order for there to be a supplement it must be available to every buyer of the main product. If that is not the case, there is no supplement for the purposes of Art. 36 (2) of PCA.

Protection of consumer demand

CPC has expressly emphasized that the main purpose of Art. 36, para 2 of PCA is to prevent distortion of consumer demand as consumers may be incited to purchase a product not because of its qualities but because together with the main product they may receive a supplement which is free or at a fictitious price.

         II. PROBLEMS WITH ART. 36 (2) OF PCA

Art. 36 (2) of PCA is one of the most unclear provisions of the unfair competition rules. Two of the main issues it raises are the following:

        • is it and should it be applicable to business-to-consumer (B2C) relations only or does it also comprehend purely B2B relations; and
        • can a producer or a wholesaler be held liable under Art. 36, para 2 of PCA if no direct sale to consumers is involved?

Art. 36, para 2 of PCA and B2C and B2B relations

One of the most unclear aspects of the application of Art. 36 (2) of PCA is whether it applies only to relations where purchases by consumers are involved, ie business-to-consumer relations (B2C) or it may apply to a higher level in the distribution chain where purely business-to-business (B2B) relations subsist (eg producer-wholesaler relations).

It seems entirely logical that the prohibition of Art. 36 (2) of PCA should apply only to B2C relations, ie only where consumer purchases taka place. Consumers normally purchase products from final retailers (although as an exception a consumer may purchase products directly from a wholesaler or a producer). It also seems economically and legally inadequate to apply the prohibition in the context of B2B relations (eg a producer and wholesaler or a wholesaler and retailer, etc.):

        • first of all, CPC has undoubtedly noted that the main purpose of this prohibition is to protect consumer demand and prevent its distortion. According to the Bulgarian Competition Authority – CPC the distortion is in that consumers are induced to purchase a product not because of its qualities but because of the supplement thereto. Such distortion may occur only where purchases by consumers are possible, ie in the B2C relations and not in B2B relations;
        • also, consumer demand and commercial demand are qualitatively and quantitatively different. In other words, the motivation of the trader (eg a wholesaler) to make a purchase is qualitatively and quantitatively different from the motivation of the consumer). A trader seeks to satisfy commercial/industrial needs, so to say, while in contrast to that a consumer, who is an individual, tries to meet their and their family’s everyday needs. In addition to that by definition the trader is a professional while the consumer is not – and it is difficult and even naive to think that a professional would risk purchasing industrial volumes of poor quality products only because of a certain supplement that may be offered alongside. By definition the professional “knows better than that”;
        • the prerequisites for the distortion of consumer demand and therefore for the application of the prohibition under Art. 36 (2) of PCA are: (i) the offering or giving of a supplement; and (ii) its price (ie for free or at a fictitious price);
        • therefore, according to CPC consumer demand may be distorted provided that consumers are directly involved in the purchase, because it is the consumer who needs to purchase the product and receive the supplement (for free or at a fictitious price);
        • B2B relations (eg a wholesaler selling to a retailer) do not involve any consumers, therefore in those relations no consumer may purchase a product and receive a supplement. Those relations are regulated by competition rules on vertical agreements and dominant position (inter alia bundling and tying);
        • another example of how inadequate is to apply the prohibition to B2B relations is the understanding of CPC that discounts (natural rebates) upon sales in large quantities are only possible where the natural rebate is of the same type as the main product (eg a toothbrush + a toothbrush instead of a toothbrush and a tooth-paste). Very often traders offer natural rebates upon the sale of their products, and very often the products that are offered as a natural rebate are not of the same type as the main product, eg seeds and chemical substances for their treatment; a main product with accessories, etc. Insofar as the competition rules regarding tying and bundling are not infringed, those are standard business practices which are perfectly normal and acceptable. Consumer demand has nothing to do with such cases, all the more where the products subject to the business transaction do not reach the consumer level at all. Furthermore, commercial discounts are essentially different from those offered to consumers.

All of the above points still remain unattended by CPC.

Possible liability in the absence of direct relations with consumers

Another unclear question that has never been visited by CPC is whether, a producer or a wholesaler may be liable under Art. 36 (2) of PCA although they have no direct relations with consumers. A producer, for instance, releases a package which comprises two products and is intended for final consumers. The products of the package are also available individually to consumers. One of the products in the package is labeled “for free” or “gift”. The package moves down the distribution chain and reaches final consumers in its original form, ie as originally produced. The only thing that changes is the price of the package downstream.

In that case the retail prices (for consumers) of both the package and the individual products are determined by the final retailer. The producer may not control the resale prices of the package and individual products, otherwise that would be a resale price maintenance (RPM) for competition purposes.

The final retailer sells the package at the individual price of one of the products outside the package, ie the other product remains free and therefore possible to be considered as a free supplement.

The producer has labeled that one of the products is free/gift. At the retail level the price of the package is such that indeed one of the products turns out to be free/gift to consumers as compared to the individual prices of the products offered by the final retailer outside the package.

The question is – despite the fact that the producer may not control the retail prices, may the producer in the case be held liable under Art. 36 (2) of PCA as the retailer simply resells the package in its original form, ie one of the products is labeled and therefore offered for free/gift by the producer itself and not by the retailer?

To make things even more complicated, the following scenarios are possible: (i) what if all other final retailers (save for one) sold the package at the aggregate price of both products outside the package (despite the fact that one of them was labeled as free/gift by the producer); (ii) would it matter if the producer did not label one of the products as free/gift, however, the final retailer on its own decided to offer a retail price for the package at which one of the products inside the package would be free/gift as compared to the individual prices of the same products offered by that retailer outside the package; etc.

That and a number of other questions, not referred hereinabove, remain unclear in the decision making practice of CPC.


 

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