COMMUNICATION FROM THE COMMISSION on sales promotions in the Internal Market

1. Executive Summary

Sales promotions are key tools to market goods and services They cover discounts of all forms; premium offers, free gifts, promotional contests and promotional games and they are a key multi-faceted tool that can be adjusted to various circumstances: to break into new markets with innovative products ; to encourage customer loyalty; to stimulate short-term competitive actions ; to rapidly respond to lost sales; and to efficiently manage stocks.

Their design, execution and communication accounted for well over one million jobs in the European Union last year. Investment in nine of the Member States was estimated to total over 40 billion Euro.

Sales promotions are essential to the development of cross-border trade in products and services within the Internal Market. This is particularly true of small innovative SMEs in their own development of viable niche markets. These firms are key in the achievement of service innovation and sustainable growth so clearly set in the Lisbon Council's strategic goal for becoming the most competitive and dynamic knowledge-based economy in the world. The Union thus urgently needs a regulatory framework for the efficient cross-border use and commercial communication of sales promotions.

The results of a large scale survey in 1996 clearly demonstrated that cross-border sales promotions were rare given the legal uncertainty and the wide divergences between national regulations in this field, which were, in addition, often out-dated and needed modernisation. Companies seeking to use these highly effective marketing tools across borders were plagued with legal uncertainty and legal risks.

In its follow-up Communication of 1998, the Commission identified sales promotions as a priority area in its Commercial Communications policy. Based on the two and a half year analysis by a group of experts from the Member States the differences in national regulations relating to sales promotions were identified. On the basis of this work and by applying the principle of proportionality, the Commission was able to distinguish between those areas where mutual recognition could be applied and those where targeted harmonisation was necessary.

As the Commission announced in its recently adopted services strategy, the Commission is bringing forward a proposal in the form of a Regulation to remove the identified Internal Market barriers. The Regulation establishes a clear, modern and legally secure regulatory environment that will facilitate cross-border activity and the commercial communication of sales promotions. It pinpoints those areas requiring harmonisation whilst specifying provisions that will update existing national provisions by offering enhanced levels of consumer protection, protection of minors and protection of public health.

The Regulation is being proposed at the same time as the Commission is proposing a green paper on consumer protection. The two proposals are complementary in that the regulation represents a targeted action in the field of sales promotions which ensures a high level of protection of public interest objectives including consumer protection. The Regulation would co-exist with the proposals that could follow the consultation process launched by the green Paper.

This approach is consistent with the Commission's aim of improving the quality of regulation. This proposal aims at establishing directly and uniformly applicable rules throughout the European Union and seeks to remove uncertainty arising from different national interpretations and implementations of provisions.

The proposal responds to the need for transparency in trade and in communication with potential clients. This will encourage better information and improve cross-border redress.

2. Scope and objective

Sales promotions are used across industry to market goods and services [1]. As with all commercial communications [2], they are key to the development of cross-border trade of goods and services. If a company cannot communicate efficiently across national borders and attract customers' awareness to its products or services it will not be able to exploit the benefits of the Internal Market. Moreover, without such cross-border commercial communications, customers' purchasing options will be limited to the offers of domestic operators and they will therefore not benefit from the increased choice and competition offered by the Internal Market.

[1] The scope of the proposal covers all forms of cross-border communication of sales promotions. The particularities of communications of sales promotions that make them relatively attractive to advertisers and direct-marketers compared with other commercial communication services were set out in the Commission's services Working Document that accompanied the Green paper on "Commercial communications in the Internal Market": COM(96) 192 final. 18.05.96. This and other key documents can be found at:

[2] Commercial communications consist of any form of communication designed to promote, directly or indirectly, the goods, services of image of a company, organisation or person pursuing a commercial, industrial or craft activity or exercising a regulated profession.

Eight forms of sales promotions are to be distinguished, viz.; (i) simple price reductions, (ii) quantity discounts, (iii) coupons and vouchers, (iv) free gifts ; i.e. gifts offered unconditional on sale, (v) premiums considered to be offers other than discounts which are provided to the consumer once the latter has ordered or bought the promoted product or service, (vi) promotional contests involving questions to consumers, the answer to which require certain skills, (vii) promotional games where the winner is designated by chance and where no payment is required to participate and (viii) promotional games where the winner is designated by chance and where no payment nor obligation to buy is required to participate.

It is difficult to quantify the scale of sales promotions activities at Community level given that they are used by such a broad scope of sectors and are designed and executed both in-house and by independent agencies. Nevertheless, a recent survey across nine Member States [3] indicates that a million people in those countries were employed in the design and execution of sales promotions in 2000 and that this amounted to a total expenditure of just over 40 billion euro.

[3] Survey undertaken by the European Federation for Sales Promotions covering Belgium, Denmark, France, Germany, Ireland, Italy, the Netherlands, Spain and the United Kingdom.

In line with the conclusions of the Lisbon Council, which stressed the importance of services in terms of generators of growth and employment, this proposal aims to facilitate the use of a key type of commercial communications within the Internal Market.

Sales promotions are regulated differently across the Member States in particular to ensure consumer protection and the protection against unfair competition. The differences in these regulations lead to restrictions to the use and communication of sales promotions across borders within the Internal Market. In order to assess the impact of such restrictions and the need for correcting measures, the Commission put in place a framework policy for the development of an Internal Market for commercial communications. The current proposal results from the application of this policy to the field of sales promotions.

The Commission first suggested the need for a policy for commercial communications in its 1996 Green Paper [4] and, following strong support from the European Parliament [5], this policy was put in place by the Commission's follow-up Communication [6] in 1998.

[4] See footnote (i).

[5] Resolution on the Commission Green Paper on Commercial Communications in the Internal Market (COM(96)0192 - C4-0365/96) adopted on 15.07.97. ref : A4 - 0219/1997

[6] The follow-up to the Green paper on Commercial Communications in the Internal Market: Communication from the Commission. COM(1998) 121 final.

Prior to the launch of this policy the Commission undertook an extensive survey of interested parties [7]to identify a number of priority areas which should be addressed. These were listed in the follow-up Communication of 1998. The same Communication set up an Expert Group of representatives from the Member States which was to consider these Internal Market barriers and assess where mutual recognition could be applied. The issue that was cited most often by respondents as requiring urgent attention by this Expert Group related to the application of national unfair competition and consumer protection laws to the cross-border communication of sales promotions.

[7] See the 1996 Green Paper.

Furthermore, at the time of the adoption of the common position of the e-commerce directive [8], a joint declaration by the Commission and the Council called for further horizontal initiatives (covering both on-line and off-line commercial communication services) to be proposed rapidly to account for the need to protect against unfair competition and to protect consumers with respect to cross-border communications of sales promotions [9].

[8] Directive 2000/31/EC of the European Parliament and of the Council of 8 June 2000 on certain legal aspects of information society services, in particular electronic commerce, in the Internal Market (Directive on electronic commerce). All language versions of the Directive can be downloaded from: http://europa.eu.int/comm/internal_market/en/media/eleccomm/index.htm

[9] This joint Commission-Council declaration stated:

The Commission therefore decided to submit to the Expert Group for consideration perceived restrictions to the cross-border communication of sales promotions within the Internal Market. Meanwhile, it also received a number of infringement complaints in this field which highlight persisting Internal Market obstacles and the need for Community action to remove them. The issue of sales promotions was discussed over a period of two and a half years by the Expert Group [10]. Three Expert Group opinions were adopted and rendered public by the Commission (see Analytical Report, Section 2) [11].

[10] See Analytical Report, Section 5 for a list of the Expert Group members.

[11] The regulation of discounts, defined as (i) simple price reductions, (ii) quantity discounts and (iii) coupons and vouchers, and the application of the principle of mutual recognition was considered at the first four meetings of the Expert Group and the Group's first opinion was published in June 1999. The opinion on the regulation of free gift and premium offers, respectively defined as (i) gifts offered unconditional on sale and (ii) offers other than discounts which are provided to the consumer once the latter has ordered or bought the promoted product or service was published in August 2000 and the final opinion on the regulation of commercial communications consisting of promotional competitions and games with a view to achieve the optimal functioning of the Internal Market was published in January 2001. For the latter issue, promotional contests and games were divided into three different categories: Category 1: Promotional contests involve questions to consumers, the solution of which require certain skills; Category 2: "Promotional games are where the winner is designated by chance and where no payment is required to participate"; and Category 3: "Promotional games are where the winner is designated by chance and where no payment nor obligation to buy is required to participate."

The approach adopted by the Commission in 1998 and applied in the field of sales promotions sought to ensure that Community action in this field would be focussed on recognised problem areas, based on detailed information and discussions [12], transparent (thanks to reliance on a recognised methodology [13]) and therefore targeted. The outcome was due to take the form of stream-lined, targeted and rapidly enforceable action based on a mix of targeted harmonisation and mutual recognition. The current proposal is the first to result from this policy.

[12] The Member States (often represented by their enforcement authorities) have been involved through their participation in the Expert Group and interested parties have been informed through the publication of the opinions of the Expert Group in the newsletter Commercial Communications . The latter is distributed free of charge to consumer associations and is now self-financing. Information on this newsletter can be obtained from Information on this publication can be obtained from The Editor, Commercial Communications, 111 Whitchurch Road, Tavistock, PL19 9BQ, UK. Tel: 00 44 1822 618628 Fax: 00 44 1822 618629 e-mail: asi@dial.pipex.com

[13] As adopted in the Commission's Communication in 1998.

3. Necessity for Community action

In addition to the political call by both the European Parliament and the Council for the Commission to act in this field with its adopted policy, the work of the Expert Group demonstrated in a more vivid manner the lack of an Internal Market regulatory framework for sales promotions. It revealed the extent of the divergences between the regulations of the Member States [14]. The three opinions adopted by the Expert Group demonstrate that different groups of Member States' Experts have different preferences not only on how, but even on whether, to resolve the restrictions to cross-border trade that result as a consequence of the divergent regulations imposed on commercial communications of sales promotions.

[14] See the Analytical Report Section 1 presents the regulatory tables adopted by the Expert Group.

The compilation and analysis of the regulatory tables adopted by the Expert Group revealed that the divergences in the national regulations and their impact on the Internal Market were far greater than the Commission had initially envisaged: a relatively narrowly defined set of regulations were giving rise to a multiplicity of Internal Market barriers to a wide range of businesses.

A wide variety of services are affected

The diverging regulations on sales promotions affected a wide host of businesses and not those solely involved in their design and communication.

In addition to sales promotion design and advertising agencies being unable to export their services to the restricted markets, different types of media services (radio and press) risked falling foul to such restrictions as soon as they crossed borders. Cross-border media planning and sales services would also be restricted. Moreover, the cross-border provision or establishment of national direct marketing operations into or within restricted markets could prove to be totally uneconomic. Types of retail services could be prevented from expanding across Member States (e.g. "discounters"). The commercial relationships between retailers and manufacturers were totally altered by differences in such regulations given that resellers contracts with manufacturers often focus on the use of sales promotions. Businesses that had developed sophisticated customer relations services in order to be competitive (through loyalty card schemes etc.) were faced with the requirement of a total change in their business model when seeking to enter a market where sales promotions regulations prohibited such schemes.

A multiplicity of Internal Market barriers persist

There are various types of effects arising from the identified Internal Market barriers. These have been confirmed by a number of complaints from interested parties requesting the Commission to bring infringement proceedings against Member States.

As regards the freedom of establishment, different types of regulations of sales promotions restrict certain forms of business models which rely on establishing an economic activity in each Member State. For example, new-entrant retailers, wishing to establish in another Member State and whose marketing strategy relies on a loyalty card, will be prevented by laws banning, or restricting values, of premiums. Likewise, new-entrant small and medium sized manufacturers offering attractive premiums to enter a market with their innovative products, will be prevented from doing so in a Member State that bans such sales promotions.

As regards restrictions to the import of services, it appears that national authorities tend to apply their laws to all commercial communications of sales promotions received within their territories notwithstanding whether they are supplied by domestic firms or, by non-domestic, but EU established enterprises. For example, direct marketing companies who rely on the use of sales promotions are finding it impossible to enter certain European markets because of restrictions on premium offers.

As regards restrictions to the export of services, certain forms of regulations on sales promotions will prevent companies in the Member State in question from offering attractive sales promotions to consumers in other Member States. For example, companies in a country where a "two for the price of one" offer is prohibited will not be able to compete on an equivalent footing in a neighbouring Member State where such discounts are allowed.

As regards distortions in competition, certain general bans on types of sales promotions may give rise to appreciable distortions of competition. For example, the fact that premiums are prohibited in some Member States and authorised in others prevents certain businesses, notably in the area of direct marketing, from entering these markets, with considerable repercussions on the competitive conditions for undertakings associated with such operations.

As regards the free movement of goods. Restrictions on the use and communication of sales promotions can also result in Internal Market barriers for goods benefiting form such marketing tools. This is particularly important for small companies seeking to enter inot the markets of other Member States who have to rely on sales promotions to compete against well-established and recognised national incumbents and brands.

Complexity of certain regulations leads to legal uncertainty which severely impacts upon operators and consumers when they provide or receive commercial communications carrying sales promotions from other Member States. The extent of this legal uncertainty and its impact on non-national operators are heightened by the manner that many national regulations are based on very general concepts which, although refined over time by national jurisprudence, are interpreted differently from one Member State to another. For example: How is a Belgian company, if subjected to Italian law when trading into Italy, supposed to interpret whether its coupon offer constitutes an "incentive to buy"-; How would a French company offering a free gift into Germany determine, if subjected to German law, whether its method of presentation would give rise to an "exaggerated" attraction of potential customers-

Redress problems are of some concern given that a majority of the Expert Group made the application of the principle of mutual recognition subject to a sufficiently developed system of cross-border redress. A questionnaire distributed by the Commission's services revealed that the only developed form of cross-border redress that is to be found within the EU in this field at the current time is primarily of a self-regulatory nature. Many Experts reported that national Courts do not even record whether individual cases are of a cross-border or purely domestic nature.

The existing fragmented regulatory framework in this area creates considerable legal uncertainty and represents a major disincentive to communicate and trade across borders within the European economy. It may well explain why cross-border consumer demand in the European Union remains marginal

The specific impact of these barriers on small and medium-sized companies has been identified. Certain identified legislation such as bans on particular forms of sales promotions affect significantly small and medium sized firms. Such bans will either lead to a shift by all promoters (i) to other forms of promotions (where other forms sales of promotions are not limited) and/or (ii) to other forms of commercial communication campaigns. In the latter case larger operators will be placed in a favourable position because mass media advertising campaigns rely on brand development and recognition which are less affordable for SMEs. In the former situation the focus of sales promotions budgets onto a more limited number of sales promotion instruments will risk that larger companies will be able to consistently offer more attractive sales promotions than their smaller competitors.

Three types of provisions are necessary

These Internal Market barriers were assessed in order to determine how they could be removed. This assessment was undertaken according to the methodology set out in the Communication adopted in 1998 by the Commission [15] and strongly supported by the European Parliament [16]. The latter insisted that the proportionality assessment be relied on in a systematic manner [17]. The outcome of this assessment [18] leads to the conclusion that three types of provisions have to be established at Community level.

[15] See footnote (vi)

[16] Report on the communication from the Commission to the Council, the European Parliament and the Economic and Social Committee on the follow-up to the Green paper on Commercial Communications in the Internal Market (COM(98)0121 - C4-0252/98) Committee on Economic and Monetary Affairs and Industrial Policy. PE 228.224/fin. 15 December 1998 A4-0503/98

[17] In its resolution the Parliament noted that it:

[18] This has consisted of:

Harmonisation of certain provisions concerning the use and communication of sales promotions. For those national rules whose restrictive effects on cross-border activities are considered to be proportionate to the pursued public interest objectives, it is necessary to provide full harmonisation in particular in order to ensure effective protection for European consumers. The harmonisation of transparency provisions and targeted bans results in less restrictive alternative measures that replace too broad and disproportionate bans. This allows for increased transparency and increased consumer choice by opening up cross-border opportunities for sales promotions.

The replacement of certain restrictions. Those national rules whose restrictive effects on cross-border activities were found to be disproportionate and counter-productive for the relevant public interest objectives they involved, require to be replaced with the less restrictive targeted harmonisation measures noted above. The mere application of mutual recognition would not suffice given that the analysis revealed the need not only to ensure the freedom to import services but also to ensure the freedom of establishment, the export of services and the removal of appreciable distortions of competition. Without such targeted harmonisation it would be impossible to establish a genuine level playing field.

The application of mutual recognition. Finally, the assessment has shown that the remaining national requirements relating to sales promotions, according to the case law of the Court, cannot be used to restrict services emanating from other Member States. Furthermore, they should not result in restrictions on the free movement of goods benefiting from sales promotions.

4. Issues to be addressed

4.1. Restrictions requiring harmonisation

Transparency provisions relating to discounts, premiums, promotional contests and games

The Commission's analysis has shown that transparency provisions relating to discounts vary significantly in detail but are all targeted at the same recognised public interest objective of consumer protection (See Analytical Report, Section 3.1). All these rules seek to protect the consumer by ensuring that the discount is "real" and presented in such a manner that the consumer can take an informed decision as to whether or not the relevant discount makes it worthwhile to purchase the promoted product or service.

Transparency provisions are deemed to be proportionate according to the analysis. There is, therefore, a need to harmonise them in a detailed manner in order to avoid legal uncertainty resulting from reliance on general transparency terms that could be subject to differing national interpretations and jurisprudence. It was precisely because of a lack of precision of existing national transparency provisions that certain Member States' Experts were not willing to accept the application of mutual recognition without harmonisation.

The differing national transparency provisions relating to premiums (See Analytical report, Section 3.2) also justify harmonisation in order to ensure legal security and to allow consumers to make informed decisions. Harmonised provisions should include references to the value of the premium, conditions for receiving it and duration of the offer.

Similarly, in the field of promotional contests and games, transparency provisions concerning the nature of prizes, terms and conditions for entry into the contest or game, the chances of winning, the precise rules, judging criteria and the duration of the offer need to be harmonised in order to ensure that the consumer is presented with this information in a uniform manner (see Analytical Report, Section 3.3).

Information requirements for sales below costs

When discounts result in sales below costs the Commission's analysis has demonstrated that specific transparency conditions are required. It has been shown that bans on sales below cost as such are counter-productive (see Analytical report Section 3.4) and that the protection against unfair competition and consumer protection can be achieved in a more effective and proportionate manner by imposing specific information requirements.

To protect against market destabilising practices, there is a need for suppliers to be informed ex-ante, in conformity with contractual terms, of the possibility that their goods or services are to be sold on at a loss by a reseller . By being informed in this way suppliers who are concerned that such operations could undermine their brand equity or give the impression that their products or services are of inferior quality can set conditions in their initial supply contracts to prevent such outcomes or simply refuse to enter into contract with the relevant resellers.

Furthermore, to ensure that consumers can properly compare the economic value of products and services, an obligation to identify that a product or service is being discounted to such a point that it is resulting in a sale below cost is necessary. This ensures that consumers understand that the economic value of the product or service is greater than the discounted price that they are being offered to purchase it. Moreover, this transparent presentation of below cost sales will facilitate the application of competition policy rules against predatory pricing in that it will be easier to detect systematic operations of this type that could reflect the abuse of a dominant position by a reseller.

Protection of children and minors

A large number of Member States' Experts called for harmonisation of restrictions on sales promotions for particular categories of promoted products that could harm the health of children. A number also called for harmonisation of other types of restrictions on the use of certain forms of sales promotions when addressing children.

Provision seeking to protect children from releasing personal data without parental consent. The analysis revealed a specific risk that children needed to be protected against. This is the collection of personal data that children might be willing to offer to enter free promotional contests and games without realising that these data were valuable and would be used for commercial purposes. Ensuring that children were made aware (i.e. via parental consent) that they were not entering such contests for "free" but rather were doing so by giving away their (and possibly their parents') personal data seem essential to avoid an abuse of their relatively lower level of discernment [19]. Harmonisation of specific transparency provisions concerning sales promotions offered to children is therefore required.

[19] See section on restrictions in promotional contests and games in the next section of this Communication.

Restrictions regarding sales promotions aimed at unattended children. Application of the proportionality assessment revealed that bans on the direct reception by unattended children of free samples that could harm their health were proportionate (see Analytical Report, Section 3.11). The relevant national provisions therefore need to be harmonised at European level.

Bans of free gifts of alcoholic beverages to protect minors. A few Member States' Experts called for total bans of the communication and offer of sales promotions for alcoholic beverages whereas others called for partial bans for such promotions when aimed at minors. All such calls were based on the objective to protect public health. The Council has recently adopted a Recommendation [20] on the drinking of alcohol by children and adolescents which notes that the problem to be addressed is regular heavy drinking and binge drinking which adversely affects physical and mental health. Young people are pointed out as being particularly vulnerable in this context and, moreover, as not always having sufficient experience, or guidance, to enable them to accurately evaluate potential risks associated with the consumption of alcohol. The Recommendation signals that Member States wish to encourage, through co-operation with manufacturers and retailers, the development of codes of conduct including a ban on the offer of free samples of alcohol to young people. This provision is aimed at preventing young people from being incited to drink alcoholic beverages. It also seeks to ensure that adolescents are not incited to consume the product in an abusive manner (in sponsored night-club events etc.) where free drinks could be on offer. The analysis shows that such bans on the offer of free gifts consisting of alcoholic beverages to minors are proportionate and require to be applied in a uniform manner across the Member States.

[20] Council recommendation "Drinking of alcohol by children and adolescents" - COM (2000) 736 final The final proposal of these recommendations is available at :

Facilitating extra-judicial redress

The Experts were unanimous in pointing out that the application of mutual recognition could not be effective given the lack of developed cross-border redress systems. This not only concerns the important issue of effective protection of consumers but also the development of cross-border activities with sales promotions since the resulting lack of customer confidence will always undermine cross-border demand. In view of the need to ensure legal certainty and consumer trust in this field and given the identified absence of affordable and accessible cross-border judicial redress systems, there is a recognised need to facilitate European cross-border out of court redress.

The proposal therefore contains a number of standard provisions to facilitate out of court redress. First, it places the burden of proof on the promoters of sales promotions to provide evidence to the relevant court or administrative body that their sales promotions were compatible with the information requirements set out in the proposal. Secondly, a complaints address will have to be provided, free of charge, to the consumer and initial complaints made by a consumer in writing including by electronic means (e.g. e-mail) will have to be responded to in a specified delay of not more than six weeks in written form and in the language that the consumer was solicited in. This ensures that in the event of a problem where the consumer wishes to take action against a promoter of a sales promotion he will always have written proof of the promoter's position to trigger such action (including failure to reply). Third, to avoid that help-lines associated with specific sales promotions are either not operational or offered to earn revenue (premium rate lines) the proposal imposes that these should be operational and free of charge. Finally, the proposal imposes that the promoter publicises ADR mechanisms and codes of conduct that he subscribes to as well as makes available to customers the details of these systems and codes if requested to do so.

These redress provisions intend to add to consumer protection by minimising the costs and difficulties that consumers may face when seeking redress against an illegal or misleading sales promotion.

4.2. Restrictions requiring to be replaced by less restrictive measures

This second set of restrictions to cross-border activities was revealed by the analysis to have been clearly disproportionate and counter-productive for the relevant public interest objectives. The harmonisation of the first set of provisions listed above which will lead to strengthened transparency and targeted bans allowing for a more modern approach and improved levels of protection will replace this second set of restrictions in order to allow not only the import of services but also freedom of establishment, the export of services and to remove appreciable distortions of competition.

Bans on sales promotions

Bans on premiums. A number of Member States ban premiums. The key justification for this is protection against unfair competition. It is assumed that the customer will be given the impression that the premium product or service offered with the purchased product/service is of very limited market value. As a consequence, the argument continues, customers will be reluctant to purchase such products or services at a later date and the relevant premium product or service market will therefore be "destabilised" such that businesses in this market will be harmed. This reasoning is not convincing given the business realities that underlie premiums. In particular it should be noted that:

- If customers believe that premiums are worthless they would never be resorted to by business since they would not have any promotional "pulling" power.

- Products or services that are offered as premiums are bought from suppliers by the promoter. If suppliers believed that by selling their products and services to these promoters they would undermine their own market then they would be unlikely to enter into any such contracts.

The ECJ in 1982 [21] examined a restriction consisting of a national ban on premiums. . This restriction was subsequently liberalised by the relevant national legislator in 1997. The Expert from the relevant Member State has explained that this decision to liberalise was taken precisely because the restriction was found to be impeding competition and consumer choice [22].

[21] Case 286/81 Oosthoek's Uitgeversmaatschappij BV. Judgement of the Court of 15 December 1982.

[22] To quote: "Given the accelerating economic trend towards branch diversification and parallelism since the 1970s, however, these requirements were more of an obstacle to competition than a protection for economic operators against competition distortion. The Act meant that specialist traders in particular were less able to react quickly and effectively to gift campaigns launched by, for example, chain stores with an extensive range at their disposal. The protection intended by the Act thus had the opposite effect. Quite apart from the fact that consumers nowadays can be seen as fully-functioning and responsible market operators, they have access through product and price information, e.g. via offers from other traders, to ample information enabling them to assess the real value of a gift. Moreover, there are traders who compete on the grounds of other aspects (price, service and guarantee) than gifts, and it appears that consumers take part in gift campaigns in full knowledge of the facts."

Bans on sales below cost. A number of the national Experts called for there to be a harmonised European ban on sales below cost (defined as a sale at a price below an net invoice price inclusive of carriage, insurance and other delivery costs as well as tax) [23]) arguing that, with the exception of sales resulting from businesses going into liquidity, such sales by resellers "destabilise" the market. It is claimed that customers are led to believe that the sold products are worthless and therefore the producers of those products consequently will find it difficult to sell them at a viable price. Furthermore, as for discounts, it is claimed that large retailers, who have sufficient lines of products to cross-subsidise such offers systematically, abuse their dominant positions in the retail market and drive out smaller competitors through such campaigns. The proportionality analysis suggests (see Analytical Report, Section 3.4) that the risk of such abuse and market destabilisation could be avoided by less restrictive measures. Among the reasons why sales at a loss do not automatically lead to a destabilisation of the market for the relevant product the most significant is that:

[23] This definition is consistent with national provisions in this field , e.g. in France and in Ireland. Jurisprudence in the field of predatory pricing suggests that such a definition would indeed mark a threshold below which risk of abuse of dominant positions may become apparent. Case C-62/86 AKZO Chemie BV v Commission of the European Communities 3 July 1991. In this case the Court considers that prices below average variable costs (that is to say, those which vary depending on the quantities produced) if applied by a dominant player represent abuse of a dominant position. This is because each sale generates a loss, namely the total amount of the fixed costs (that is to say, those which remain constant regardless of the quantities produced) and therefore such an operation simply seeks to eliminate a competitor. In contrast, prices below average total costs, that is to say, fixed costs plus variable costs, but above average variable costs (which would be equivalent to the definition noted above for a reseller), must be regarded as abusive only if they are determined as part of a plan for eliminating a competitor. Such prices when applied systematically can drive from the market undertakings which are perhaps as efficient as the dominant undertaking but which because of their smaller financial resources, are incapable of withstanding the competition waged against them. It follows that it is once discounts result in a price that is below this cost level that the risk of anti-competitive behaviour by a dominant player arises.

- the objective of any such sales promotion is to incite potential customers to try out a retail service at a certain moment in time. As a result an effective sale below cost must be temporary to obtain its objective. If the sale is continuous, i.e. systematic, a potential customer will not feel the urgency to go to that particular retail outlet and the objective will not be met.

- retailers using loss-leader discounts to attract customers into their shops need to offer them on well-identified, innovative or branded products. It is precisely the large manufacturers of branded products that are best able to resist the leverage of the retailers and to negotiate contractual terms that prohibit or restrict the sale at a loss. In addition, it is important to note in this respect that the fact that a retailer sells at a loss does not mean that the manufacturer makes a loss.

- sales at a loss are not limited to large retail operators. On the contrary, they can be used effectively by small specialist competitors to launch new products and services in the repeat purchase market or for stock-clearance purposes; they are (as for discounts) less costly promotional services than the alternative development of recognisable brands using mass media advertising.

- bans on sales below cost are difficult to enforce because they are easy to circumvent. A reseller who vis-à-vis his supplier is in a dominant position because of, for example, an exclusive high-volume supply contract, can circumvent a legal ban on sales below cost by imposing for a short period an invoice purchase price that is not economic for him. Indeed such bans can be counterproductive since they reduce transparency in the final market place and as a consequence can incite destabilisation of the latter.

It follows that as long as the sales below cost are transparent, any risk of abuse of a dominant position should be managed by efficient application of competition rules rather than through such disproportionate bans. There is therefore a need to replace such ineffective bans on sales below cost with reinforced transparency provisions that will improve the quality of protection for the supplier.

To prevent harmful effects on suppliers or manufacturers, the latter will often stipulate contractual terms pertaining to them. Accordingly, a transparency condition obliging resellers, subject to such contractual terms, to inform their suppliers that they are to undertake a sale below cost would be more effective than a ban to ensure fair trade between the relevant market players. Likewise, to avoid suggesting to a customer that he is buying a product or service at a viable (and therefore sustainable) price when there is a sale at a loss, the potential customer should be made aware of the real value of the good or service. The promoter should therefore be obliged to indicate in the relevant commercial communication whether such a sale represents a sale at a loss. This obligation will also assist in the enforcement of anti-trust law since it will facilitate detection of systematic sales below cost that could be attributed to the abuse of a dominant position. Such transparency conditions are more appropriate and less restrictive than bans, which in addition are difficult to enforce.

Bans on making participation in promotional games subject to purchase. Member States apply strict provisions regarding promotional games of chance as opposed to promotional contests. In particular, some Member States' rules require them to be free to enter without participation being based on purchase of a certain product or service. These restrictions are claimed to be necessary to protect consumers against buying products or services that they do not need simply in order to enter the game. Since prize attribution in promotional contests is based primarily on skills rather than chance, these restrictions are not applied to promotional contests.

The notion that consumers will buy several units of the promoted product or service to be able to enter a game and to win a prize seems untenable given the odds of winning such prizes. [24] The economics of such promotional games call for a mixture of skills and chance. The restrictions to free entry only for promotional games of "chance" which are not applied to promotional contests primarily based on "skill" are therefore difficult to enforce since there is a grey zone between the two categories of promotions. The restrictions are therefore inefficient since they are easy to circumvent by offering promotional contests that are, in fact, largely determined by chance.

[24] Advocate General Tesauro pointed out in his opinion on the Familiapress case, which was not contested by the subsequent judgement (see footnote (xxvii));

Furthermore, as long as the winnings/odds ratio is easy to calculate because of appropriate transparency provisions, the restrictions can be considered as disproportionate. They should be replaced with more appropriate and effective transparency requirements, which allow the consumer to make an informal decision to enter a game in full knowledge of the participation conditions and the winnings/odds ratio.

Bans on the communication of sales promotions. In order to justify restrictions in communicating sales promotions in any media outside of the point of sale, a minority of the Expert Group members invoked the need to protect consumers against excessive incitements to buy. However, the proportionality analysis (see Analytical Report, Section 3.16) found that, since in-store sales promotions are generally allowed in all Member States, bans on commercial communications of sales promotion were likely to increase in-store impulse buying. If an offer of a sales promotion is communicated outside of a shop, the consumer may check between different offers by different retailers before choosing to visit a particular retailer and benefit from a specific offer. If on the other hand, he or she is offered the sales promotion only on entering the shop then she or he has already committed time and expense to visit that particular shop and is therefore less likely to undertake more comparisons prior to purchase. This works in favour of multiple line retailers against specialist retailers since the former can expect more frequent visits from consumers because of the convenience factor (in terms of reduced time to shop) associated with their offer of a broader range of products.

Such restrictions therefore have a counter-productive effect both in terms of consumer protection and protection against unfair competition. They also obviously represent major barriers to new non-domestic entrants seeking to enter into a market. The proportionality assessment has therefore indicated that such a ban on outdoor commercial communications of sales promotions should be replaced by detailed transparency provisions.

Limitations on the value of a sales promotion

A number of Member States limit the value of discounts and free gifts. In so doing they invoke both public interest objectives of consumer protection and the protection against unfair competition.

Limitations on the level of discounts. An upper limit on the value of discounts is fixed in certain Member States primarily to protect against unfair competition. These Member States argue that only larger operators can offer high values of discounts thanks to the greater leverage that they can exert over suppliers or because, as retailers, they can cross-subsidise lines of products that they offer. In some Member States this limit is set at a particular value, in others it is fixed at sales below cost that are prohibited irrespective of whether or not they can be linked to the abuse of a dominant position. The proportionality analysis has shown (see Analytical Report, Section 3.5) that as long as transparency requirements were met such value restrictions were disproportionate and should be replaced with targeted information requirements.

Limitations on the value of free gifts. Free gifts are gifts provided to the consumer unconditional on purchase. They are paid for by retailers or other promoters in order to promote a particular good or service. They can take the form of samples or token gifts distributed at a promotional event for a particular product or service. Certain Member States impose value limits on such gifts. They argue that this is necessary to ensure that the market for the relevant products is not "destabilised" since customers might consider them to be worthless. For the same reasons as those presented above for restrictions on discounts and sales below cost, such restrictions have been found to be inappropriate by the analysis and indeed to be counter-productive to their aim of protecting against abuses of dominant positions. The proportionality analysis has shown (see Analytical Report, Section 3.5) that as long as transparency requirements were met such value restrictions were disproportionate and should be replaced with targeted information requirements.

Limitations on the value of premiums. Premiums are distinguished from discounts because they constitute a different product or service from that which is being promoted. They also differ from free gifts since they are conditional on purchase (i.e. the consumer does not receive the premium unless he or she purchases or makes a commitment to purchase the promoted product or service). Certain Member States set maximum value limits on premiums. The public interest objectives that such restrictions invoke are consumer protection and protection against unfair competition. For the former, it is sometimes suggested that the consumer may be subjected to too attractive an offer such that he or she buys the promoted product or service solely to be able to benefit from the premium. This reasoning is unfounded since the premium must be of lower value than the product or service promoted, otherwise the sales promotion will not be viable. It would also seem logical to assume [25] that if other forms of sales promotions (e.g. discounts or free gifts) are not restricted value restrictions on premiums do not achieve their aim, which is to protect consumers from an "overtly attractive" effect. If there are value restrictions only for premiums, marketing budgets will concentrate on offering other forms of sales promotions that will become even more attractive (e.g. levels of discounts will be offered which are higher than those that would have been offered if a mix of discounts and premiums could have been relied upon). The value restriction on premiums will therefore have a counter-productive effect from the perspective of consumer protection (see Analytical Report, Section 3.4).

[25] Advocate General Tesauro took this line in his opinion delivered on 13 March 1997 which was not contested by the subsequent judgement. Vereinigte Familiapress Zeitungsverlags- und vertriebs GmbH v Heinrich Bauer Verlag. Reference for a preliminary ruling: Handelsgericht Wien - Austria. Measures having equivalent effect - Distribution of periodicals - Prize competitions - National prohibition. Case C-368/95.ECR 1997 page I-3689

As for unfair competition, as long as premiums are communicated in a transparent fashion and their value can be properly evaluated, the claimed effect of "destabilising the market" will not arise. Indeed premiums are key marketing tools for SMEs and specialist retailers (see section above on bans on premiums). Such value restrictions are therefore shown to be disproportionate where targeted information requirements are foreseen.

Limitations on the value of prizes in promotional contests and games of chance. Promotional contests and games of chance are distinguished by the fact that, in the former, results and prize attribution are considered to be largely determined by the participants using their skills whereas, in the latter, they are randomly determined by chance. Certain Member States restrict the value of prizes attributed in all such contests and games for reasons of consumer protection. As for free entry to such games (see above), they argue that prize value limits are required to prevent the consumer from purchasing the promoted product or service solely in order to participate in the game. The limitation on maximum value of prizes is seeking to meet not only the public interest of consumer protection but also to protect against unfair competition on the assumption that the largest players in a market will be able to offer the most valuable prizes. Finally, the protection of culture and sports is indirectly raised to justify value limits for such promotions to prevent competition with State lotteries that are prime sources of income for national cultural and sports projects. The proportionality analysis (see Analytical Report, Section 3.14) has demonstrated that these restrictions have to be considered as disproportionate. Unlike premiums, the value of the prize as such will probably exceed the value of the promoted product or service. However, if the value of the prize is multiplied by the estimated or announced odds of winning, the true value of the "offer" will again be found to be below the cost of the promoted product or service. Otherwise the sales promotion would not be viable. Thus, for the same reasons as for premiums, the argument that consumers will buy a product in order solely to enter a promotional game is shown to be invalid as long as transparency provisions ensure that the consumer is able to assess the value of the sales promotion. Such value limits must therefore be replaced with detailed information requirements allowing for customers to appreciate the real worth of the relevant prize(s) given the associated chances of winning the relevant promotional contest or game.

Limitations on discounts preceding seasonal sales periods

A few Member States ban discounts for a specified period prior to seasonal sales. Both consumer protection and the protection against unfair competition are invoked to justify these bans. These bans are held to allow consumers to distinguish clearly between the pre-sales period (with no advertised discounts) and the seasonal sales periods (with considerable discounts). However, application of the proportionality assessment (see Analytical Report, Section 3.9) indicates that such bans increase the risk of inflated prices prior to the sales period and incite anti-competitive behaviour by large operators. In particular, the risk that small manufacturers and retailers are disadvantaged by such restrictions may result in reduced consumer choice, less competitive prices in general and artificially inflated discounts during sales periods. Furthermore, these restrictions can be circumvented thanks to exceptions for local trade fairs etc. It follows that they are counterproductive to protecting their invoked public interest objectives and should be replaced by clear transparency provisions on discounts.

Prior-authorisation for sales promotions or any other requirement having equivalent effect

Certain forms of sales promotions are subject to prior-authorisation in a few Member States (see Analytical Report, Section 3.10). Such prior-authorisation acts as a major barrier to cross-border communication of sales promotions. The application for authorisation can add very significant costs to a campaign. This is likely to disadvantage any new entrant that will have to be able to afford a burdensome administrative procedure outside its country of establishment.

Together with tax collection, consumer protection against fraudulent schemes seems to be the main purposes for authorisation requirements. National experts have also invoked protection against unfair competition by suggesting that these pre-authorisations are applied to grant exemptions from general prohibitions on certain types of sales promotions in order to allow domestic firms to compete on the international market where such promotions are allowed. However, to the extent that such applications for the granting of exemptions can only be put forward by nationally established operators, they are incompatible with the EC Treaty.

Furthermore, there are less disproportionate ways of ensuring that tax revenues can be collected. Finally, detailed transparency requirements with effective redress possibilities represent a more efficient approach to ensuring that consumers are protected. . These schemes represent unnecessary market entry barriers that should be replaced by clear transparency provisions.

4.3. Restrictions requiring the application of mutual recognition

This third set of restrictions consist of barriers to the free movement of services coming from other Member States, which were found by the analysis to be clearly disproportionate to the extent that effective transparency requirements are imposed. The assessment has shown that these restrictions may be maintained at national level as long as they are not applied to restrict imports of services. They must therefore be made subject to the principle of mutual recognition.

Restrictions resulting from the application of a general clause on good market behaviour. In line with the methodology applied by the Expert Group it was accepted that mutual recognition should be applied in this area. This does not prejudice the outcome of the Green Paper and any future Community consideration of fair trading clauses.

Restrictions on value limits of sales promotions offered to minors. A minority of Experts called for harmonisation of restrictions on value limits for promotions offered to minors. The argument for such restrictions was that such promotions give rise to a greater incitement to purchase the promoted product or service by minors because of their relatively lower discernment of the commercial nature of such promotions. The proportionality assessment demonstrated that lowering the values of offers to children to very low levels resulted in their replacement by free to enter games and competitions with no prizes by large branded manufacturers. This did not therefore represent a proportionate outcome (see Analytical Report, Section 3.13).

Restrictions on the use of sales promotions to promote media. Some Member States justify restrictions on the use of certain sales promotions by particular media by the need to protect against unfair competition and to protect pluralism. However, these restrictions were again shown by the proportionality analysis (see Analytical Report, Section 3.17) to be inefficient and disproportionate. The reasons are that these promotional tools are:

1. more affordable for small operators than other forms of commercial communications as a result SMEs competitive positions with their larger rivals are adversely affected by these restrictions;

2. easily substituted by other forms of sales promotions which were found to be allowed in the relevant Member State with the result that they can easily be circumvented and therefore do not meet their objective; and

3. if restricted for one media and not another, will actually lead to discrimination between media that decreases media pluralism.

Restrictions regarding the use of sales promotions for non-prescribed pharmaceutical products. A number of Member States go beyond the Community acquis in the field of pharmaceuticals advertising [26] and ban sales promotion for non-prescribed pharmaceutical products in order to protect small pharmacists from unfair competition They invoke the need to maintain adequacy of supply by small pharmacists for public health purposes. This leads to a situation in Europe where in some Member States sales promotions (although restricted) can be offered to promote non-prescribed pharmaceuticals whereas in others such promotional activity is banned. Nevertheless, the analysis shows (see Analytical Report, Section 3.19) that further restrictions on sales promotions for such products over and above those set by the Community acquis are not appropriate. This is also reflected in the Television Without Frontiers and electronic commerce directives, both of which imposed mutual recognition for commercial communications in general and made no exception for pharmaceuticals.

[26] Council Directive 92/28/EEC of 31 March 1992 on the advertising of medicinal products for human use, OJ L 113 , 30/04/1992 p. 13-18

The proportionality analysis demonstrated that those restrictions that resulted from different levels of restrictions on sales promotions for non-prescribed drugs across Member States add to, rather than protect against, unfair competition. In view of the existing Community acquis, it is therefore shown to be appropriate to impose mutual recognition on such sales promotions for such products at European level.

Restrictions relating to other sectors. A number of Experts raised the existence of other sectoral restrictions on the use, value (for books) and communication of sales promotions calling for harmonisation of such restrictions. In some cases national restrictions were not identified. In others the identified restrictions were identical to the horizontal ones that have been referred to above and shown to be disproportionate to meeting the invoked public interest objectives of consumer protection and the protection against unfair competition. The relevant explanations and analyses are provided in the Analytical Report, Sections 3.20, 3.21, 3.23, 3.24 and 3.25. In all such cases therefore mutual recognition should be applied such that these restrictions cannot be imposed on incoming sales promotions from other Member States.

As regards commercial communication of sales promotions for tobacco products those are already addressed in the proposed Directive on advertising and sponsorship of tobacco products [27] and therefore it is not necessary to include a specific provision on this issue in this proposal. Article 2(b) of the proposed Directive on advertising and sponsorship of tobacco products defines advertising as "any form of commercial communications with the aim or direct or indirect effect of promoting a tobacco product", in consequence the restrictions of article 3 and 4 of that proposed Directive extend to the vast majority of sales promotions.

[27] COM (2001) 283 final

The proposed measure must therefore incorporate the three types of actions identified above for each of the three types of identified restrictions.