Report for the Hearing delivered in Case 169/87
I — Facts and procedure
The fixing of the retail price of manufactured tobacco has already been considered by the Court in its judgment of 21 June 1983 in Case 90/82 (Commission v French Republic [1983] ECR 2011). It followed from that judgment that the French legislation, according to which the retail prices of manufactured tobacco were fixed by order of the Minister for Economic Affairs and Finance, was contrary to the provisions of Council Directive 72/464/EEC of 19 December 1972 on taxes other than turnover taxes which affect the consumption of manufactured tobacco (Official Journal, English Special Edition 1972 (31 December), L 303, p.1), according to which those prices are to be fixed by the manufacturers or importers, subject only to the application of general legislation intended to curb the rise in prices.
Following discussions between the French authorities and the Commission as a result of that judgment, on 24 January 1985 the French Minister for Economic Affairs, Finance and the Budget published a notice concerning the procedure for fixing the retail prices of manufactured tobacco which left the legislation in force unchanged but specified the manner and procedure according to which that legislation would henceforth be implemented in order to reconcile the freedom to determine retail prices with the requirements of the price control system that had been in force in France since 1945. That notice provided:
Paragraph 2 (c) of the notice provided for a consultation procedure between the manufacturers and importers and the French authorities, prior to the fixing of the retail prices.
The Commission, to which the notice had been submitted before its publication, considered that the notice enabled the French authorities to confirm the retail prices notified by the manufacturers or importers in accordance with the conditions laid down by Directive 72/464/EEC and by Articles 30 and 37 of the EEC Treaty. The prices were therefore imposed, pursuant to a concept defined by agreement between the Council and the Commission in the Council's minutes concerning the adoption of the directive.
However, that interpretation of the notice did not tally with that of the French authorities, for shortly after its publication the Commission received complaints from producers or importers whose notifications of new retail prices had not been confirmed by the Minister, for reasons connected with a general policy intended to curb the rise in prices.
In the ensuing correspondence between the Commission and the French authorities, the latter maintained that their conduct was justified since it was prompted by the requirement of exercising control over rising prices and that a general system of price controls had never been regarded as incompatible with the Community legislation. On 28 July 1986 the Commission addressed a reasoned opinion to the Government of the French Republic. The French authorities replied that the French Republic had not failed to fulfil its obligations under the EEC Treaty. Nevertheless, they expressed their readiness to accept in 1987 and in 1988 rates of increase that were higher than the rate of inflation so as gradually to close the gap which had arisen between retail prices and production costs.
On 1 December 1986 an order was adopted which abolished the general system of price controls in France as from 1 January 1987 and introduced freedom of prices and of competition for all goods, with the exception of pharmaceutical products, books and tobacco products, and public services such as gas. In the case of tobacco, the French Government informed the Commission that the liberalization of tobacco prices would be carried out gradually and would not be completed until 1989.
The Commission took the view that the French Government was still in breach of Community law; by application lodged at the Court Registry on 5 June 1987 it therefore brought an action against the French Republic pursuant to Article 169 of the EEC Treaty.
By order of 11 November 1987 the Court granted the Kingdom of the Netherlands leave to intervene in the proceedings in support of the Commission's conclusions.
On hearing the report of the Judge-Rapporteur and the views of the Advocate General, the Court decided to open the oral procedure without any preparatory inquiry. However, it asked the parties certain questions, to which they replied within the time-limits set by the Court.
II — Conclusions of the parties
The Commission of the European Communities claims that the Court should:
The Kingdom of the Netherlands, intervening in support of the Commission's conclusions, claims that the Court should:
The French Republic contends that the Court should:
III — Submissions and arguments of the parties
1. Infringement of Article 5 (1) of Directive 72/464/EEC
The Commission points out in the first place that Article 5 (1) of Council Directive 72/464/EEC permits manufacturers and importers to determine freely the maximum retail selling prices for each of their products and lays down as the sole restriction on that freedom that Member States are entitled to apply national legislation on price controls or the observance of imposed prices.
However, as the Court has held (judgment of 16 November 1977 in Case 13/77 Inno v ATAB [1977] ECR 2115; judgment of 21 June 1983 in Case 90/82 Commission v French Republic, cited above), neither price controls nor the observance of imposed prices (an expression which is to be understood as meaning prices fixed by producers or importers and possibly approved by the State) may be interpreted in such a way as to neutralize the principle that prices may be freely determined.
The freedom to fix retail selling prices constitutes the premiss chosen by the Community legislature as a basis for the existing and future rules concerning consumption duties on tobacco. The incorporation of that freedom in a provision of Community law is particularly important since the risks of public interference are substantial in view of the existence of production and distribution monopolies and the multiplier effect of proportional excise duties. The balance which the Community directive seeks to establish between proportional taxation and specific taxation presupposes that the State adopts a neutral position and does not interfere with regard to the basic premiss, that is to say the freedom of producers or importers to determine prices.
France cannot rely on the general character of the price control provisions which it applies to imports of manufactured tobacco, since imported products in general are not subject to price control legislation and were not subject thereto at the time at which the general pricing rules were in force, which affected only the import and distribution margins of imported products. Public interference with regard to the fixing of retail prices is permitted by the directive only under a general system of price controls. It should be pointed out in that connection that the adjustments of the central rates within the European Monetary System were decided upon on the basis of a general assessment of the economic situation in the different Member States and by reference to the equally general character of the anticipated consequences. In those circumstances, to shield prices from the consequences of the adjustments would be tantamount to avoiding the consequences already taken into consideration when the decisions concerning those adjustments were adopted.
The policy of price controls applied by France to manufactured tobacco cannot be regarded as part of that country's general policy of price controls since the general increase in prices was appreciably greater than the increase in selling prices obtained by producers and importers of manufactured tobacco, even though tobacco prices were increased on two occasions by derogation from the general system of price controls. Even the fact, emphasized by the French Government, that the prices of new products may be freely fixed, only throws into relief the absence of a general policy of controls in the manufactured tobacco sector. Furthermore, it must be borne in mind that newly-marketed products account for only a tiny portion of imports (0.5% in 1983) and that any increase in the price initially fixed for those products is also subject to controls.
Finally, the abolition of the general system of price controls on 1 January 1987 deprived the maintenance of price controls on manufactured tobacco of any justification, since no exception to the general liberalization can be considered necessary in a sector in which price competition is very vigorous and in which neither a de facto monopoly nor difficulties of supply exist.
The Commission goes on to point out that the arguments advanced by the French Republic in order to justify its lack of progress in amending its legislation, namely the constraints imposed by the repeal of old legislation, the specific nature of the products in question, the requirements of the fight against tobacco abuse and the need to ensure substantial tax revenues, are either irreconcilable with the consistent case-law of the Court or were specifically rejected by the Court in its abovementioned judgment of 21 June 1983.
Nor is it possible to accept the French Government's statement that manufacturers or importers are in any event free to fix their selling price to wholesalers. In reality that selling price is only the difference between two amounts, the retail price on the one hand and the distributor's margin and taxes on the other, all of which are fixed by the French authorities. It is therefore impossible for traders to determine that price freely.
In conclusion, after pointing out that the infringement in question lies not in the wording of the notice of 24 January 1985, which was communicated to it before being published, but in the manner in which it is interpreted by the French authorities, the Commission draws attention to the importance of proper implementation of Community directives within the time-limits laid down.
The Government of the Netherlands points out that the French provisions on price controls for manufactured tobacco which the Court held to be incompatible with Community law in its judgment of 21 June 1983 have not been amended in any way since that date. Indeed, the findings made in that judgment are even more appropriate after the general liberalization of prices from 1 January 1987 onwards. As for the notice of 24 January 1985, it must be emphasized that it merely provides for consultation between producers and importers and the French authorities with regard to the fixing of prices but does not entail any changes in the statutory powers which permit the Minister to fix the retail prices at the level which he considers appropriate. Apart from that, the notice causes confusion and uncertainty inasmuch as it does not provide, for instance, for a solution where the parties do not reach agreement during the consultation procedure.
The Government of the French Republic explains that the general freezing of prices which was in force in France in 1982 was replaced at the end of that year by a system of price restriction which was in its turn gradually made more flexible and then abolished in sectors in which competition between undertakings was satisfactory and had the effect of regulating price trends, making specific control measures no longer necessary. Although competition in the manufactured tobacco sector was unsatisfactory, it was not excluded from those developments. Moreover, the transition to a new set of rules in that sector was accomplished on the basis of a procedure laid down in consultation with the Commission. That procedure forms part of a scheme for the gradual liberalization of prices which was strictly adhered to by the French Government in the manufactured tobacco sector, even though the general price control mechanism was still in force. Progress towards a gradual liberalization of prices was thus planned in accordance with an officially announced timetable which set reasonable time-limits for the final abandonment of the system of controls, regard being had to the risk of a resurgence of inflation and to the general state of the French economy. As the French Government has stated on several occasions, all interference with the setting of prices for manufactured tobacco should cease in 1989.
In the light of the foregoing, the French Government challenges the Commission's assertion that the French authorities cannot rely on the general nature of the price control legislation applied to manufactured tobacco because since 1 January 1987 there have been no price controls for other products. The general rules on price restrictions do not hinder the implementation of a price liberalization policy gradually extending to all sectors of the economy. That general policy of gradually liberalizing prices with due regard to the need to combat inflation — a policy which was already applied in other sectors — was simply implemented in the manufactured tobacco sector as well. Just as the system of price controls introduced in 1945 did not preclude a gradual relaxation of the rules on the fixing of prices prior to their liberalization, the legislation on tobacco did not prevent the initiation of a process which must, within a reasonable period, lead to the same outcome.
In conclusion, although before 1 January 1987, the date on which price restrictions were abolished, the provisions on the control of the retail prices of manufactured tobacco undoubtedly formed part of the overall policy of price controls, it cannot be stated that after that date there was no longer a general price policy. On the contrary, the general price policy already applied in other sectors of the economy was transposed to the tobacco sector and a programme of gradual liberalization of prices similar to that used in the other sectors was implemented.
Total freedom with regard to the fixing of prices, which should be attained on the basis of that programme, constitutes the final limb of a mechanism which already enables producers and importers:
With regard to the selling prices, it must be emphasized that the French authorities in no way interfere with the fixing of the wholesaler-importer distribution margin and that consequently the apportionment between the selling price and the wholesaler-importer margin is the result of negotiations between the parties.
The selling price is the balance which the producer receives after the amount of the wholesaler-importer distribution margin has been deducted from the difference between the retail price on the one hand and the retail distribution margin and taxes on the other. It is indisputable that the wholesaler-importer margin is freely negotiated between the parties.
As for newly marketed products, which account for a large share of the market, their prices have been fixed freely for some considerable time. If freedom to fix prices is restricted, that is the result of concerted action by the undertakings themselves. The Commission's figure of 0.5% of the volume of imports for manufactured tobacco newly marketed in 1983 is meaningless in itself since a new product does not, by definition, have a share of the market when it is launched. However, it may be noted that cigarette brands placed on the market since 1983 which are still marketed account at present for 20% of sales of light cigarettes in France.
The French authorities emphasize that the liberalization of prices since 1 January 1987 could not be extended in the short term to manufactured tobacco prices — although the government intends to extend the benefit of liberalization to the tobacco sector — in view of the restrictions imposed by progress towards the gradual liberalization of tobacco prices and the repeal of previous legislation. They point out that, in the first place, they were justified in extending to the tobacco sector the general price control mechanism and that, secondly, they endeavoured to take account of the judgment of 21 June 1983 by publishing the notice of 24 January 1985 and implementing, in accordance with the undertakings given, a mechanism for correcting certain price disparities which may have arisen in the past.
Moreover, the French Government denies that the French authorities wrongly refused to authorize the price increases sought by the manufacturers or importers of manufactured tobacco. The examples given by the Commission relate either to a request made in 1982 when a general price freeze was in force or to requests made in 1984 to which the French Government replied by complying with the notice of 24 January 1985, which was adopted as a result of a consultation procedure with the Commission, and with the general price restriction policy which was applicable at the time. In that connection, the French Government also points out that those requests were made by all the importers in the same circumstances and on the same date, and submits that the Commission is not justified in bringing an action against the French Republic for failure to fulfil its obligations since the Commission has not taken the necessary steps to ensure that the competition rules of the Treaty are complied with by certain undertakings operating on the tobacco market.
2. The alleged infringement of Article 30 of the EEC Treaty
The Commission considers that the French system of price controls for manufactured tobacco is incompatible with Article 30 of the Treaty inasmuch as it places the disposal of imported products at a disadvantage, because it takes account only of the state of the French market and does not permit producers from other Member States to pass on increases in production costs in their selling prices in France. The effects of the system are particularly serious since the — substantial — losses of the sole French producer, Seita, are automatically covered by the budget of the French State.
In support of its conclusions, the Commission has submitted statistics which are intended to show that as a result of the French provisions in force producers from abroad have been unable to adjust their selling prices as necessary in order to reflect changes in their production costs, having regard to the fall in the value of the French franc and the increase in the value of the German and Netherlands currencies. In order to maintain or enlarge their share of the French market, foreign traders were obliged to deduct from their profit margin the loss of earnings in national currency resulting from the fall in the value of the French franc, whilst if prices were freely determined they would have had a choice whether or not to increase them on the basis of an economic appraisal of the situation. The fact that they were deprived of that choice is manifestly unlikely to encourage those producers to increase their activity on the French market.
Although it is true that the value of imports on the French market rose from 16 to 52% between 1976 and 1986, it is equally true that the increase is largely attributable to the higher prices of imported products and that the volume of imports increased only from 36.3 to 43.4% between 1983 and 1987. The growth of imports does not in any event constitute proof that Article 30 has been complied with. There is no evidence to support the conclusion that if the Treaty had been complied with the share of the market held by Community exporters would not have been greater.
Nor is it possible to argue, as the French Government does, that the deficit of the sole French producer is the result not of an inadequate level of prices but of a constant reduction of its market share owing to a change in consumer tastes. It is clear from Seita's financial report for the 1985 financial year that its losses are attributable, amongst other things, to a modest increase in selling prices which was insufficient to cover the increase in manufacturing costs.
The Government of the Kingdom of the Netherlands points out that more than fourfifths of retail prices in France are determined by law and cannot therefore be altered by the manufacturer or the importer. The sum which a foreign manufacturer receives in return for his products at the French border is therefore more or less equal to 18% of the retail price. That clearly demonstrates that under the French pricing system an increase in the retail price decided upon by the competent authorities is reflected only to a minor extent in the manufacturer's selling price. If, moreover, it is borne in mind that under the French system retail prices are at present fixed at a level lower than that which manufacturers consider desirable or necessary for their business, it is quite clear that manufacturers are unable to pass on to a sufficient extent in their selling prices any increases in their production costs. Any possibility of competition with regard to retail prices is thus restricted and the free movement of goods is hindered.
The Government of the French Republic argues that the French rules on price controls, which are applicable to domestic and imported products alike, were not such as to render the disposal of those products more difficult. That is borne out by the fact that between 1976 and 1986 the opening up of the French market to products from abroad was particularly significant.
If the value of the products is taken as a basis, it is possible to discern between 1976 and 1986 an average growth in imports of 16% per annum, compared with the negligible growth, amounting to 1.4% per annum, of the French market in cigarettes as a whole.
The Commission's argument to the effect that the increase in the volume of imports was modest and that their substantial increase in value is attributable primarily to the higher prices of imported products is contradictory. If it is true that the increase in volume was modest, then it follows, contrary to the Commission's contentions, that there were very substantial increases in the prices of imported products. Moreover, if it is borne in mind that products from abroad have always been more expensive than French products, always in comparable proportions, a sharp increase in the percentage value of imports can be explained only by a sharp increase in their volume.
The argument that in the absence of a general price control mechanism in France the rate of penetration of products from abroad would have been higher is not relevant. In the first place, that is a subjective statement in support of which no evidence has ever been produced, and secondly it must be emphasized that it is precisely a brusque application of tariff adjustment as advocated by the Commission that would, had it been implemented, have reduced consumption of tobacco affected by the increase in prices, owing to the strong elasticity of demand in response to prices.
The fact that the rate of growth in the volume of imports, whilst increasing in the period from 1983 to 1987, has now slackened is not a consequence of the French system of price controls but can be explained in part by the worldwide stagnation of the manufactured tobacco market and in part by the introduction on the French market of new domestic products which have found favour with consumers. A falling-off in imports as a result of more effective competition from domestic products can in no circumstances be regarded as the result of a measure having an effect equivalent to a quantitative restriction.
With regard to Seita, it must be emphasized that the losses sustained by that undertaking, whose range of products even 10 years ago was drawn almost exclusively from brown tobacco, were the result of the appreciable and growing change in customer taste away from products of that type.
Finally, the French Government considers that the documents and statistics available show that imported products have achieved a breakthrough on the French market, that changes in production costs were not such as to be incapable of being passed on in selling prices and that there is agreement between producers to keep the level of prices artificially high.
3. The alleged failure to comply with the Court's judgment of 21 June 1983
The Commission claims that although the notice of 24 January 1985 could indeed constitute a legal instrument making it possible to observe the requirements of the Treaty as set out in the abovementioned judgment, it did not prevent either the prices notified by the producers or importers from being subjected to control measures lacking the generally applicable character required by Article 5 of the directive or the importation of manufactured tobacco to the French market from being rendered more difficult. An infringement of Community law must also cease in practice. The process initiated by the French Government in order to achieve a system of total freedom of prices in 1989 is incapable of remedying the infringement if it is borne in mind that the time-limit for compliance by the Member States with Directive 72/464/EEC expired on 1 July 1973 and that the Court's judgment declaring that the French system of price controls for manufactured tobacco was incompatible with Community law was delivered on 21 June 1983. In addition the financial adjustment carried out by the French Government between 1983 and 1987 was still 15% behind schedule on 14 September 1987.
The French Government contends that various measures have been adopted in order to comply with the Court's judgment of 21 June 1983. In that regard it refers to the publication of the notice of 24 January 1985, a series of price increases which made it possible to cover the increase in production costs and all the effects of the alteration of exchange parities and to make up in part for the delay which occurred in 1983 and, finally, the express undertaking to liberalize prices fully in 1989. It cannot accept the charge of infringing Article 171 of the Treaty, since the procedure for complying with the judgment, in the preparation of which the Commission was involved, has to a large extent been initiated and is about to be completed within a reasonable period. The existence of a strict price control policy in France when the judgment of 21 June 1983 was delivered is the reason why it was impossible to adopt appropriate measures without delay, as required by the Commission. Subsequently, a more flexible policy of price controls was initiated with the adoption of important measures such as the notice of 24 January 1985. Finally, there has been no delay with regard to the tariff adjustment and, moreover, several producers have waived their right to apply authorized price increases.
IV — The parties' answers to questions put by the Court
The Commission and the Government of the French Republic indicated what discussions had taken place between them after 1 December 1987 in order to ensure a satisfactory extension of freedom of prices to manufactured tobacco.
The French Government also pointed out that the liberalization of prices has been a gradual process, carried out sector by sector, starting with activities in which competition between undertakings was sufficient to ensure moderate changes. The order of 1 December 1986, whilst confirming a liberalization process which was already under way, did not put an end to the period of adjustment of the price system in the various sectors. Certain sectors have, on a provisional basis, been kept under the system of price controls and are systematically examined by the conseil de la concurrence (Competition Board) in order to assess the expediency of liberalizing them, on the basis of an objective analysis of the functioning of the market. At the same time, consideration of price systems based on measures other than the order in question have been undertaken, also with a view to a possible return to freedom of prices.
With regard to the reasons for the maintenance of the system of price controls for manufactured tobacco, the French Government points out that gradual liberalization was, in its view, necessary in order to avoid the risk of inflation, given the manifest intention of all foreign producers to raise prices to an appreciable extent as soon as possible, in order to ensure moderation in any event with regard to price changes in a sector such as that of manufactured tobacco which is not characterized by vigorous competition and, finally, in order to monitor changes in tax revenue which, in that sector, is directly proportional to the retail price of manufactured tobacco.
1 Language of the Case: French.