Champagne producers agree to reduce harvest, is this legal under EU competition law?

Author: Fay Kartner, article representing personal views of the author.

Champagne producers agreed to reduce harvest in order to decrease production and raise prices. As a result, for consumers their glass of champagne during New Year’s Eve and other festivities might be more expensive this year. Due to the Corona crisis, the demand for champagne has – unsurprisingly – declined severely. Farmers wanted to produce a large number of grapes, but wine producers wanted to reduce the harvest. Just before harvest started, an agreement was made. Maximum of 230 million bottles will be produces, a fifth less than last year. The rest of the grapes will be destroyed or sold. The Champagne Comité explained the plan. However, there is still a quantity of champagne left from last year so it is questionable whether prices will rise.

Is this normal freedom to conduct a business, or is this prohibited by EU competition rules?

Is your champagne more costly due to COVID19? Is this legal?

There are several rules to prevent businesses behaving in an anti-competitive way, the so-called anti-trust legislation. In this case there is not one but a collection of businesses that agree to cooperate which might lead to the formation of a cartel. Article 101 of the Treaty on the Functioning of the European Union (TFEU) regulates agreements between businesses that might lead to the formation of a cartel. In order for such agreements to be considered illegal, several requirements need to be met.

The parties involved have to be considered undertakings and there has to be an agreement to limit competition. The champagne producers fall within the definition of undertakings (or perhaps an association of undertakings) because they produce champagne as an economic activity (in this case, to make a profit). The champagne producers agree to limit or control production. It is not necessary that the agreement is actually written down on paper, it is enough that it can be proven that the parties intended to be bound by the agreement. In this case, it can be seen that the restriction on output was the object of the agreement, in other words: it was the entire goal of the agreement.

So, we have an agreement between undertakings which is liable to restrict competition and thus falls within the definition of Article 101 TFEU.[1] In principle, Article 101 forbids agreements restricting competition, although of course there are exceptions (Craig & De Burca 2015; Whish & Bailey 2012).

There are exceptions to the rule of Article 101(1) TFEU. Apart from a number of EU regulations, Article 101(3) TFEU provides a justification for some categories of agreements limiting competition. However, the conditions for the exception are strict. The restriction on competition needs to be necessary to improve production or distribution, or technical or economic progress. Moreover, consumers need to benefit, and competition may not be eliminated for a substantial part. (There are also a number of specific exemptions in EU regulations, for example a large part of vertical agreements between businesses at the same level of the supply chain. When looking at the current situation, no such block exemption seems to be applicable here).

Is Article 101(3) applicable here, so can the agreement between the champagne producers be justified under EU competition law? There is, in this case, no improvement of production or distribution or technical progress known. Maybe economic progress, although purely higher prices cannot be seen as such, since the consumer suffers from them. Consumers are not allowed a fair share of the benefit. The champagne makers would thus have to show, for example, that the reduction of harvest is necessary to improve the quality of the product or, the economic situation as a whole. With the information which is known now, it seems unlikely that one of these objectives will be applicable.

Of course, it is very regrettable that many sectors of the economy have suffered deeply as a result of the COVID19 crisis. Moreover, it might seem unfair that some sectors – such as wine producers, and maybe especially champagne producers – have suffered more than others.

However, a violation of the EU competition rules, or a specific exemption to be made by the Commission, does not seem an appropriate solution to the problem.

It is also not likely that the agreement is so small that it falls outside the scope of EU law.,

Many governments have specific aid schemes in place for various sectors of the economy. It would be more appropriate for the champagne producers to see if they can apply for a state aid scheme provided by the French government or by the EU. Such schemes would have to comply with the EU State Aid rules in order to protect fair competition and in certain cases be notified to the commission. Thus, there is in many cases a priori check if the scheme complies with EU law. In the current situation, the producers risk their agreement being void, and a large fine – although it is not yet known whether the Commission will be more lenient in times of a crisis. It still remains to be seen whether the Commission will enforce competition law directly in such cases. Probably not since consumers might pay higher prices, which will lead to more severe problems if many sectors of the economy act in the same way. It is up to national governments and the EU to debate adequate compensation measures for sectors which suffered deeply from the COVID19 crisis, but sectors making agreements themselves about restricting production or fixing prizes is likely to distort competition too severely in already difficult economic times. The agreement thus seems not to comply with EU competition law.

[1] 1. The following shall be prohibited as incompatible with the internal market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the internal market, and in particular those which:

(a) directly or indirectly fix purchase or selling prices or any other trading conditions;

(b) limit or control production, markets, technical development, or investment;

(c) share markets or sources of supply;

(d) apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;

(e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.

2. Any agreements or decisions prohibited pursuant to this Article shall be automatically void.

3. The provisions of paragraph 1 may, however, be declared inapplicable in the case of:

– any agreement or category of agreements between undertakings,

– any decision or category of decisions by associations of undertakings,

– any concerted practice or category of concerted practices,

which contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit, and which does not:

(a) impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives;

(b) afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question.

Leave a Reply