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The Unfair Commercial Practices Directive and its General Prohibition

GIUSEPPE B ABBAMONTE1

1. INTRODUCTION

DIRECTIVE 2005/29/EC ON unfair commercial practices between business and consumers in the internal market (the ‘Directive’) was proposed by the Commission on 18 June 2003 and adopted by the European Parliament and Council almost two years later on 11 May 2005.2 The Member States, subject to some limited derogations, shall apply the

national measures implementing the directive by 12 December 2007.

The Directive represents the outcome of a long consultation process on the future of consumer policy which began with the publication by the Commission of the Green Paper on Consumer Protection in October 2001 (the ‘Green Paper’).3 The Green Paper made the case for a reform of the European legislation of consumer protection based on a framework directive prohibiting unfair commercial practices between business and consumers. The case for reform was that European consumers were not taking full

1The author is the head of the unit in the Health and Consumer Department of the European Commission dealing with the regulation of unfair commercial practices and other consumer protection legislation. This chapter was drafted following a meeting in Washington, DC, on 6–7 Oct 2005 where the author presented the newly adopted Unfair Commercial Practices Directive to the Federal Trade Commission. The chapter describes the structure, objectives and justification of the Directive in terms of better regulation, liberalisation of the Internal Market and consumer protection. It then analyses the main Articles of the Directive and briefly compares them with the corresponding provisions of the US Federal Statements on Deception and Unfairness. The views expressed are purely personal.

This chapter is largely based on the article ‘The Unfair Commercial Practices Directive: An Example of the new European Consumer Protection Approach’ by the same author [2006]

Columbia Journal of European Law (forthcoming).

2Directive 2005/29/EC of the European Parliament and of the Council, of 11 May 2005, concerning unfair business-to-consumer commercial practices in the internal market and amending Council Directive 84/450/EEC, Directives 97/7/EC, 98/27/EC and 2002/65/EC of the European Parliament and of the Council and Regulation (EC) 2006/2004 of the European Parliament and of the Council [2005] OJ 2005 L 149/22.

3Green Paper on Consumer Protection, 2 Oct 2001, COM(2001)531 final.

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advantage of the Internal Market.4 There was strong evidence that the Internal Market was more a reality for business-to-business transactions. By contrast, a European business-to-consumer market was far from achieved. One of the primary reasons for such failure was a lack of consumer confidence in cross-border transactions.

In the Green Paper, the Commission noted that, in general, there were significant differences in the regulation of consumer protection by the Member

States.5 For example, some Member States6 had a general legal principle of fair trading or good and honest business practices (ie the general clause) supported by specific rules (eg on misleading advertising). Others7 did not have such a general principle but only specific rules.

The Commission found that there was a causal link between this regulatory fragmentation and the lack of consumer confidence in the Internal Market.8 It argued that these differences would make the regulatory environment very unpredictable for consumers and strengthen their belief that they could not rely on the same level of protection when dealing with foreign traders. The argument for reform was even easier to make for businesses. Legal fragmentation created significant Internal Market barriers for business by increasing their compliance and research costs.

Specific examples of such barriers were the ban on certain forms of advertising to children in Sweden9 and the ban on door-step selling in Luxembourg.10 A more general and, therefore, more serious obstacle derived from the fact that the courts and enforcement agencies of certain Member States applied different benchmarks to assess whether a commercial practice was unfair. This was especially true for the assessment of misleading advertising.11 In a number of cases, the advertiser was asked to remove the product from the market of the consumer because certain aspects of the

4Ibid.

5Ibid.

6Eg Sweden, Finland, Denmark and Belgium.

7Eg the UK, Italy, Ireland and France.

8Green paper on Consumer Protection, above n 4, at para 3.1.

9In Sweden certain forms of advertising cannot be directed to children. Since 1983, the Market Court has banned, on the basis of Art 4 of the Marketing Act (ie the general clause) direct advertising addressed to children under the age of 16, see eg MD (Marknads-domstol) 1983:16, MD 1999:26. One of the reasons for the ban is that children lack legal competence and may therefore not enter into a purchase agreement without the consent of a parent or guardian. Moreover, under the Swedish Radio and TV Act (1996:844), Chap. VII, ss 4 and 7(3), JB: § 4 ‘[a]dvertising during a TV broadcast may not have as its objective capturing the attention of children under 12 years of age’.

10In its law of 16 July 1987 on ‘Door-step selling and itinerary trade’, Luxemburg banned door-step selling in its territory, making use of the minimum clause in the Door-step selling Directive: see Art 8 of Council Directive 85/57/EEC, of 20 Dec 1985, to protect the consumer in respect of contracts negotiated away from business premises [2005] OJ L 372/31.

11The courts of certain Member States, disregarding the case law of the Court of Justice, did not apply the average consumer test (see section on general clause below).

The UCPD and its General Prohibition 13

packaging12 or the name of the product13 were considered misleading to the consumers in that country. It is worth noting that, in many of these cases, the advertisers were the European subsidiaries of American companies that were legitimately marketing products in the same way in the United States and other Member States.

These barriers raised obstacles to the free movement of goods and to the freedom to provide services and thus generated distortions of competition.

As a result, the elimination of these obstacles and distortions justified a regulatory initiative under Article 95 of the Treaty.14 The Directive was preceded by an impact assessment,15 which was one of the first ever carried out by the Commission in accordance with the EU better regulation principles. One of the legislative options considered in the assessment was a framework directive establishing general rules for judging unfair commercial practices. The impact assessment reiterated the first findings of the Commission that justified the proposal in terms of better regulation and completion of the Internal Market. It confirmed that a framework directive would be the best tool for getting rid of the abovementioned Internal Market barriers.

In order to understand the innovations introduced by the Directive, one must recall that, before this Directive, the EU had largely followed a vertical approach, based on minimum harmonisation, in regulating consumer

12Case C–99/01 Linhart & Biffl v Unabhängiger Verwaltungssenat [2002] ECR I–09375. In this case the administrative chamber of Vienna had found that the statement ‘dermatologically tested’ on the packaging of Colgate products (shampoo and soap) was misleading. This was because the absence of explicit references to the content and outcome of the medical assessment to which the products were subject could give consumers the erroneous impression that these products had curative effects. The products with the statement had been lawfully marketed in other member States.

13Eg Case C–220/98 Estée Lauder v Lancaster (‘Lifting’) [2000] ECR I–00117. Estée Lauder had asked for the removal from the German market of a cosmetic product whose name incorporated the word ‘lifting’, as this the term could mislead consumers. Consumers could get the impression that the use of the product would obtain results comparable to surgical lifting. Also in this case the product had been lawfully marketed with that labelling in other Member States. See also Case C–315/92 Verband Sozialer Wettbewerb v Clinique et Estée Lauder (‘Clinique’), [1994] ECR I–00317. Clinique had been asked to withdraw its cosmetic products from the German market as the name ‘Clinique’ could mislead consumers as to the curative effects of the products. Clinique products were lawfully marketed in all the other Member States.

14These are the conditions that need to be met for a Directive to be adopted under Art 95 EC. On these conditions, see Case C–376/98 Germany v European Parliament and Council of the EU [2000] ECR I–08419, at para 95, on advertising and sponsorship of tobacco products.

15Commission Staff Working Paper, Extended Impact Assessment, of 18 June 2003, on the Directive of the European Parliament and of the Council concerning unfair business- to-consumer commercial practices in the internal market and amending Council Directive 84/450/EEC, Directives 97/7/EC, 98/27/EC of the European Parliament and of the Council, SEC(2003)724. The impact assessment is a process by which the Commission analyses ex ante the economic, social and environmental impacts of its main actions.

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protection. With few exceptions, most of the existing directives regulate consumer rights in relation to specific products (eg timeshare and package travel) or specific selling modes (distance selling and door-step selling). This approach led to a number of problems. First, given its specificity, sectoral legislation often contains prescriptive provisions that can easily be circumvented by dishonest but creative traders. They may design their contract terms and selling methods so that they escape the regulations and elude the consumer protection afforded by them. A typical example is that of quasitimeshare products, which are timeshares designed to avoid the Timeshare Directive by specifying a contract duration of less than three years, the minimum duration necessary to fall within the scope of the Directive. The risk of too-specific sectoral legislation is that it may constantly run a step behind market developments and rapidly become obsolete.

Secondly, different regulations of different selling modes may lead to fragmentation and generate confusion. As a result, consumers can enjoy different rights, or the modalities for the exercise of these rights may vary, depending on whether consumers buy a product or a service and on the selling method employed by the trader.16 These differences are often not justified on economic or legal grounds. Moreover, given that most of the existing Directives contain a minimum harmonisation clause,17 there may still be regulatory differences between the Member States which generate fragmentation and legal uncertainty in the fields harmonised by these Directives.

A third problem derives from the fact that, as indicated above, these sectoral regulations regulate the product (ie the rights for consumers in relation to a certain product), but do not regulate the practice (ie how the product is actually marketed and sold to the consumer). Most of the problems experienced by consumers are the result of unfair commercial practices carried out by dishonest traders. For example, aggressive pressure techniques after the sale, such as threatening telephone calls, may have the effect of dissuading consumers from exercising their rights of withdrawal.

For these reasons, the Directive moves away from the vertical, minimum harmonisation approach. It is a framework directive providing for full harmonisation. It applies to both goods and services, to all sectors and all marketing and selling methods. It takes a liberal approach: everything that

16Eg under the Distance Selling Directive the consumer has at least 7 working days in which to withdraw from the contract: see Art 6 of Directive 97/7/EC of the European Parliament and of the Council, of 20 May 1997, on the protection of consumers in respect of distance contracts [1997] OJ L 144/19; under the Door-step Selling Directive the consumer has at least 7 days to withdraw from the contract: see Art 5 of Directive 85/577/EEC, above n 11.

17Ie a provision enabling the Member States to adopt or maintain provisions which are more favourable to the consumer in the field covered by the Directive.