Legal framework

Legal framework for minimum pricing for alcohol

• Overview
• The health case for controlling the price of alcohol
• UK Competition law
• EU trade law
• ECJ Ruling on minimum pricing for tobacco

Overview

In a market economy like the UK, the prices of tradable commodities are generally determined on the basis of supply and demand, rather than being fixed by a public authority. In the UK and at an EU level, rules on free trade generally do not allow price fixing on the grounds that it is deemed ‘anti-competitive’ and, it is argued, leads to inefficiency in the market. However, it is important to note that the law allows exceptions to these rules. Intervention in the operation of a market can legally be justified in certain circumstances on the grounds of the protection of public health.

Article 30 EC Treaty:
The provisions of Articles 28 and 29 [relating to the free movement of goods within the EU single market] shall not preclude prohibitions or restrictions on imports, exports or goods in transit justified on the grounds of …the protection of health…. Such prohibitions and restrictions shall not, however, constitute a means of arbitrary discrimination or a disguised restriction on trade between Member States.

The health case for controlling the price of alcohol

Alcohol is a toxic and psychoactive substance that can lead to dependence. Its use is linked to over 60 types of disease, disability and injury. Over the past few decades, alcohol in Britain has become much more affordable, available and stronger. The amount of alcohol consumed by the population has more than doubled. Alcohol-related death rates have risen exponentially.

In the UK, alcohol is manufactured and retailed under licence and it is subject to specific taxation. Both these mechanisms recognise the fact that alcohol is no ordinary commodity. However, the liberalisation and globalisation of the production and trade in alcohol in recent years has led to a weakening of regulatory controls over distribution, advertising and promotion, and access to alcohol. In the UK increased competition between alcohol retailers has been associated with a year-on-year increase in the affordability of alcohol for the past 25 years. In 2008, alcohol was 75% more affordable than it was in 1980. Price competition in the UK alcohol market is fierce and some retailers have admitted to selling alcohol below-cost as a means of attracting more customers.

Controlling the price of alcohol is known to be one of the most effective and cost-effective ways of reducing the harm caused by alcohol. However, alcohol taxation by itself is not a guaranteed means of raising alcohol prices. The practices of below-cost selling and loss-leading demonstrate that producers and retailers can and do absorb the costs of tax increases. Minimum pricing for alcohol in conjunction with taxation can achieve health goals that raising alcohol taxes alone cannot by preventing the deep discounting of alcohol that some retailers engage in.

 

UK Competition Law

Fixing minimum prices for alcoholic drinks is possible under UK Competition law provided that minimum prices are imposed on licensees by law, or by a public body exercising public functions imposed on it by an enactment. This position has been confirmed by the Office of Fair Trading (OFT) in written advice to local authorities in England. The OFT, which monitors compliance with UK competition law, confirmed that “…where minimum prices are imposed at the sole instigation of a public authority such as the police or a local authority… there is unlikely to be agreement between undertakings that can be subject to a challenge under the Act.” [Competition Act 1998]

 

EU trade law

Compulsory prices unilaterally imposed by the state have sometimes been found compliant with EU competition law. However, EU trade law can go further than UK competition law because of the EU internal market. At the EU level, there is a single market in operation and treaties in place which enshrine the free flow of goods, services, labour and capital across all member states. The theory of competition underlies many Treaty provisions, for example the free movement of goods. If a system of price controls in one country are deemed to act as a barrier to trade to the rest of the countries within the EU, then they could be judged unlawful.

The European Court of Justice has stated that systems of price control, if applicable to domestic products and imported products alike, do not in themselves constitute measures having an effect equivalent to a quantitative restriction on trade, but may have such an effect when the prices are fixed at a level such that imported products are placed at a disadvantage compared to identical domestic products, either because they cannot profitably be marketed on the conditions laid down or because the competitive advantage conferred by lower cost prices is cancelled out. If prices set were deemed to disadvantage imported products thereby acting as a trade barrier, then there must be a public policy justification. EU trade law allows exceptions to the free movement of goods rule on the grounds of public health, provided it can be shown that the prices set did not constitute a disguised trade barrier (i.e. the real reason for setting prices is to achieve a health objective and not gain competitive advantage over other EU countries) and the measure was proportionate to addressing the particular health problem. Proportionality requires a measure to be necessary to achieve the objective, and that the objective cannot be achieved by any less trade-restrictive means.

Ruling of ECJ on minimum pricing for tobacco

In March 2010, the European Court of Justice (ECJ) ruled that setting a minimum price for tobacco products violated Council Directive 95/59 EC - the specific directive that covers tobacco taxation. Much has been made of this ruling and its relevance for minimum pricing of alcoholic beverages. However, it should be noted that:

1. The directive that covers tobacco taxation (95/59/EC) stipulates that manufacturers or importers of tobacco "shall be free to determine the maximum retail selling price" for their products. The setting of a minimum retail selling price for tobacco by public authorities has, in the view of the ECJ, the effect of limiting the freedom of producers and importers to determine their maximum retail selling prices since such prices cannot be any lower than the compulsory minimum price, and is therefore judged unlawful.

2. By contrast, the equivalent EU directive for alcohol (92/83/EC) does not say anything about retail prices for alcohol, being only about excise duties.

3. In the past year the European Commission has responded on two occasions to questions about the legality of minimum pricing for alcohol. Both times the Commission has stated that  Council Directive 92/83/EC (covering alcohol taxation) does not prohibit Member States from setting minimum retail prices for alcoholic beverages. The Commission has further stated that if pricing rules applied to all relevant traders operating within the national territory and if they affected in the same manner, in law and in fact, the marketing of domestic and imported products then such rules would not be contrary to the free movement of goods. If they did constitute an obstable to the free movement of goods then the pricing rules would need to be justified on public policy grounds. However, according to the Commission’s response it is important for Member States to consider the range of alternative measures that might have the same public health impact and which might be less restrictive to trade. They suggest that a minimum price level could equally be ensured by increasing the excise duties on alcohol.

On this point, there is arguably a case that taxation is not sufficient in the UK to achieve a minimum price. From the information we have on the pricing practices of major grocery retailers in the UK, we know that alcohol is frequently sold at at loss, with many promotional offers and periods throughout the year. An increase in alcohol taxation is not guaranteed to lead to an increase in alcohol prices all of the time. Whereas minimum pricing for alcohol is a fixed floor that cannot be undercut by loss-leading and below-cost selling. The evidence we have suggests minimum pricing for alcohol and taxation are complementary mechanisms, rather than being substitutable.