I. About This Article
Large retailers play an important role in the modern economy. They connect producers, suppliers and final consumers, create broad sales networks and often determine the conditions under which a product enters the market.
However, because of this position, large retailers often have strong bargaining power in their relationships with suppliers. In practice, this may take the form of demanding additional fees, unjustified return of goods, delayed payments, forced price reductions, shifting operational costs to suppliers or other conduct that places small and medium-sized suppliers in an unequal position.
Regulation of large retailers is not only a classic issue of competition law. It concerns fair trading relationships, protection of suppliers, preservation of a healthy competitive environment and balancing the power that large retail chains often have.
In this article, we discuss the experience of Lithuania, South Korea and Japan in regulating large retailers. The article will help you understand how different countries protect suppliers from unfair conduct by large retail chains, what types of practices are prohibited and what may be important for Georgia when considering similar regulation.
The article is based on comparative legal analysis of Lithuanian, South Korean and Japanese legislation on large retail trading relationships, principles of competition law and TB Legal’s practical experience in competition and business law.
II. Why Is Regulation of Large Retailers Important?
Large retailers are often not ordinary buyers. They represent a key route to market for many suppliers. If a producer or distributor wants to reach a broad consumer base, it often needs to cooperate with a large retail chain.
In such a situation, a large retailer may have significant bargaining advantage. A supplier is often dependent on that chain because a large part of the market sale of its product is connected to that channel.
The problem arises when this advantage is used to impose conditions that are unfair, do not correspond to normal trading practice and shift to the supplier a cost or risk that is connected with the retailer’s own commercial activity.
For example, a large retailer may require a supplier to pay an additional fee for product listing, accept unjustified return of goods, finance renovation costs of retail premises, reduce the price of goods already supplied or agree to unjustified postponement of payment.
Such conduct may be particularly burdensome for small and medium-sized suppliers. This is why some countries have special legislation applicable to large retailers, aimed not only at protecting competition, but also at ensuring fairness in trading relationships.
III. The Lithuanian Model – Control of Retailers with Significant Market Power
Since 2009, Lithuania has had a special law prohibiting unfair actions by large retailers with significant market power.
The purpose of this law is to place the market power of large retailers within certain legal limits and balance it against the interests of suppliers.
Under the Lithuanian model, attention is focused on retailers that have particular economic influence due to the number of retail outlets, retail space and annual turnover. When determining whether a specific entity qualifies as a large retailer, the number of outlets under its management, total retail area and annual turnover are relevant.
The logic of Lithuanian regulation is the following: if a retailer is so strong by its scale that it has significant bargaining power in relation to suppliers, its conduct should fall within a special legal framework.
The law prohibits conduct that, contrary to fair trading practices, shifts the operational risks of a large retailer to the supplier or restricts the supplier’s ability to act freely on the market.
For example, prohibited conduct may include imposing additional fees on a supplier in exchange for allowing a product into the retail network, shifting the retailer’s losses or operational costs to the supplier and similar practices.
IV. Sanctions and Enforcement in Lithuania
Enforcement has particular importance in the Lithuanian model. Violation of the law may result in monetary fines and additional measures, such as imposing specific obligations or requiring the termination of unfair conduct.
The Lithuanian Competition Council is responsible for enforcing this law. Suppliers whose interests are harmed by the conduct of a large retailer have the right to apply to the authority. Associations representing suppliers’ interests may also file applications.
In addition, the competition authority may initiate an investigation on its own initiative if there is an appropriate basis.
This model shows that regulation of large retailers does not depend only on a private dispute. The state may also intervene where imbalance of power in a trading relationship creates a risk for a fair market environment.
V. The South Korean Model – Control of Superior Bargaining Position
In South Korea, large-scale retail trading relationships are regulated by a special law aimed at balanced protection of the economic welfare of large retailers, suppliers and tenants of retail space.
One important element of the South Korean approach is the concept of superior bargaining position. The law does not automatically apply to every relationship. It is necessary to assess whether the large retailer appears to be in a superior position compared with the supplier.
When determining this position, the structure of the distribution market, consumer-side circumstances, the degree of supplier dependence on the large retailer and other factors may be taken into account.
South Korean regulation pays particular attention to the principle of good faith. A large retailer is required to conduct the relationship fairly and not use its economic advantage to the detriment of the supplier.
The law also establishes a special payment rule. A large retailer must pay the supplier the amount due within a defined period after the sale of the goods. In case of delay, an obligation to pay interest may also arise.
VI. What Conduct Is Prohibited in South Korea?
The South Korean model contains a broad list of prohibited practices.
Prohibited conduct may include unjustified refusal to receive goods, return of goods, forced imposition of exclusive conditions, requests for information related to the supplier’s management activities and other conduct that places the supplier in an unequal position.
The South Korean model is also interesting because it provides mechanisms for resolving disputes through mediation. This is important because a dispute between a large retailer and a supplier does not always need to become a heavy administrative or court proceeding. Mediation may provide a faster and more practical way to restore a fair balance.
Enforcement is carried out by the Korea Fair Trade Commission. It may initiate an investigation both on the basis of an application and on its own initiative.
The sanctions system is relatively complex. The Commission may require termination of the violation, alignment of activity with the law and imposition of a monetary fine.
VII. The Japanese Model – Prohibition of Unfair Trade Practices
In Japan, regulation of large retailers is distributed across several legal acts. The main framework is connected with the legislation prohibiting private monopolization and promoting free trade, on the basis of which unfair trade practices by large retailers toward suppliers are defined.
The Japanese approach is particularly interesting because of its detailed list of prohibited practices.
A large retailer is prohibited from returning goods fully or partially without a pre-defined contractual basis, demanding a price reduction for goods already supplied, forcing the supplier to provide goods at a price disadvantageous to the supplier, refusing to accept ordered products and engaging in similar conduct.
It is also prohibited to force a supplier to purchase products designated by the retailer unless this is directly connected with the activities of the parties.
The Japanese model also pays attention to situations where a large retailer forces the supplier’s employees to assist in retail sales, unless this is based on pre-defined and fair conditions.
A particularly important mechanism protects the supplier if it reports a possible violation by the retailer to the Fair Trade Commission. A large retailer is prohibited from taking retaliatory action against the supplier, such as reducing the volume of trade or terminating the contract merely because the supplier provided information to the relevant authority.
VIII. Sanctions and Damages in Japan
The Japan Fair Trade Commission may require a large retailer to take specific action, remove or add specific provisions to a contract, terminate unfair practices and take other corrective measures.
A financial penalty may also be imposed. Before applying a sanction, the Commission must hear the parties, and the final decision must be reasoned.
When determining the fine, the seriousness and duration of the violation, as well as other relevant circumstances, must be taken into account.
An important element of the Japanese model is compensation for damages. A large retailer is obliged to compensate the supplier for damage caused as a result of its unfair conduct.
This approach shows that the aim of regulation is not only public sanction. It is also directed at restoring the private interests of the harmed supplier.
IX. What Common Logic Connects These Three Models?
The Lithuanian, South Korean and Japanese models differ in their technical details, but they are united by a common logic.
In all three models, the legislator recognizes that a large retailer may have such economic power in relation to suppliers that a special legal framework is required.
In all three systems, the purpose of regulation is to prevent a strong retail chain from shifting its own operational risks or costs to the weaker party.
Another common element is that attention is paid not only to classic dominance, but also to bargaining power. This is particularly important because a retailer may not be dominant in the classic competition law sense, but may still have significant advantage in a specific relationship with a supplier.
For this reason, special regulation of large retailers often complements competition law. It protects relationships where classic antitrust instruments are not always sufficient.
X. What Importance May This Experience Have for Georgia?
In Georgia, the relationship between large retail chains and suppliers is a practically important issue. For small and medium-sized suppliers, cooperation with large retail chains is often one of the main ways to access the market.
If a large retailer uses a strong bargaining position in such a relationship and imposes unfair conditions on the supplier, this may affect not only the specific supplier, but also the structure of the market as a whole.
Foreign experience may be important for Georgia in several directions.
First, it may be possible to define special criteria for large retailers — for example, based on turnover, retail space, number of outlets or market influence.
Second, it may be possible to establish a clear list of prohibited unfair practices. This would allow businesses to know in advance which practices are permitted and which are not.
Third, an enforcement mechanism is important. If regulation exists, there must be an effective authority with the power to investigate cases, request information, impose sanctions and require termination of unlawful conduct.
Fourth, protection of suppliers from retaliatory actions is important. If a supplier applies to a public authority, it should not face the risk of contract termination, reduction of orders or other unfair response.
XI. Why Is This Issue Important for Competition Law?
Regulation of large retailers is closely connected with competition law.
On the one hand, this issue may overlap with abuse of dominant position if a large retailer holds a dominant position on the relevant market.
On the other hand, special regulation may apply even where classic dominance does not exist, but the retailer has clear bargaining advantage in a specific relationship.
Therefore, regulation of large retail trading relationships may be considered an expanded practical dimension of competition law. It protects the fair functioning of the market and prevents practices that may push small and medium-sized suppliers out of the market or hinder their development.
For more information about competition law matters, see our service page: Competition Law Services in Georgia.
XII. How TB Legal Can Help
TB Legal assists businesses with assessing legal risks connected with large retailers, suppliers and distribution networks.
Our services include analysis of supply agreements, identification of unfair trading terms, assessment of competition law risks, legal analysis of distribution models, negotiation support and, where necessary, preparation of legal positions before relevant authorities.
Our approach combines contract law, competition law and business law analysis. This is particularly important where a supplier depends on a large retail network or where a trading agreement contains additional fees, return rights, price-change rights, exclusivity or other sensitive terms.
If your company is a supplier, distributor or retail chain and you need legal assessment of a trading relationship, TB Legal can help you identify risks and create a legally secure structure.
XIII. Conclusion
Regulation of large retailers is an important issue for fair trading relationships and protection of a competitive market.
The experience of Lithuania, South Korea and Japan shows that the conduct of strong retail chains often requires a special legal framework, especially where suppliers are economically dependent on them.
The purpose of such regulation is not to restrict large retail businesses as such. The purpose is to maintain balance — on the one hand, effective functioning of retail chains, and on the other hand, protection of suppliers from unfair and economically harmful practices.
For Georgia, this issue is particularly interesting because, as the retail sector develops, the legal importance of relationships between suppliers and large retail chains is increasing.
Contact TB Legal if you need legal assessment of an agreement with a large retailer or supplier. We will help you assess legal risks in the trading relationship and protect your business interests.
XIV. Sources Used
This article is based on the following sources:
- Lithuanian legislation prohibiting unfair practices by large retailers.
- South Korean legislation on fair relationships in the large-scale retail sector.
- Japanese legislation prohibiting private monopolization and promoting free trade.
- TB Legal’s practical experience in competition, contract and business law.
Disclaimer
This article has been prepared for general informational purposes only and does not constitute individual legal advice or a legal opinion. Legal assessment of large retailers, suppliers, distribution or supply agreements may differ depending on the specific market, the economic power of the parties, contractual terms, trading practice and the relevant regulatory environment.
Before making a decision in a specific matter, it is recommended to obtain individual legal advice from a qualified lawyer.
