Category: Hungary

The Hungarian government is actively shaping the market and there are both positive and negative effects on many levels, according to Wolf Theiss Managing Partner Zoltan Faludi.

“Looking at the current investment climate, there are a few interesting matters of note,” Faludi begins. “The good news is that investors’ appetite is still positive and strong and we have noticed inbound investment coming along in a quite vibrant fashion, despite the after-effects of the COVID-19 pandemic and the ongoing war in Ukraine.” As he sees it, it’s all “a matter of balance between predictability and transparency, measuring the effects of governmental interference and activity in the short term against the long run.”

According to Faludi, the Hungarian government has taken quite an uncustomary approach to many business areas and sectors. “There is a discussion underway regarding the new concept of the Architecture Act, which intends to extend the scope of regulatory intervention over a wider range of construction materials,” he says. “This imposes quite a hit on building material manufacturers, especially when it comes to the potential export of their products. The increase of regulatory reach in this area impacts construction endeavors the most, increasing industry uncertainty.”

Furthermore, Faludi reports that there has been some friction with respect to the recently introduced tax on extra profits. “The new tax impacts a wide area of sectors, most so energy, banking, and pharmaceuticals. Questions of justifiability abound and, while there are some good reasons as to why it was introduced, its entering into effect did not resonate well with everyone.” Additionally, he says that the recent implementation of the FDI screening control mechanism has also created an air of uncertainty, to an extent. “The screening mechanism, while by no measure unprecedented, does appear to be somewhat overarching. For example, it is treating intra-EU and extra-EU investments the same, which might be, to an extent, more stringent than its original purpose.”

However, not all governmental interference causes friction, and Faludi reports a number of positives. “There have been a lot of subsidies targeting investors, primarily via cash incentives and favorable regulations,” he reports. “This has led to an uptick in business activities across sectors, primarily in automotive, which is a big ticket for the Hungarian economy.” Additionally, he says there is finally a plan for a new regime for investing in wind-powered renewable energy sources. “The last time we’ve seen a tender for wind power was in 2016, and things have been quiet since. However, recently, and within the auspices of the Hungarian Recovery and Resilience Plan, on-shore wind power sources are back in action,” he says. “At long last, in addition to solar subsidies, we will soon see a new regime targeting wind projects and allowing for more vibrant investments to take place.”

Finally, Faludi says that “looking at the big picture, investments are going strong and the climate outlook is rather positive. Investor appetite abounds and I hope that governmental interference won’t create any pushback.” He concludes by saying: “with many companies relocating their production centers to Hungary, brands like BMW setting up an electric car production facility, and further new production plants emerging in the high-tech sector, we are looking at good things to come.”

Probably even the chatbot ChatGPT would be “surprised” to see how many new articles, essays, blogposts, personal posts and videos discuss issues around AI, and specifically, generative AI.

In this blogpost we’re not going to try to fully explore the various legal aspects of AI. We want to focus on one narrow intersection: between generative AI tools and competition law. We’ll look at – or rather ask some initial questions – how each main area of competition law could be relevant to the business conduct of ChatGPT (or rather OpenAI Inc., the company behind the chatbot) and similar generative AI tools.

Anti-competitive agreements

The prohibition of anti-competitive agreements (in other words, the cartel prohibition) applies to all undertakings. This includes companies that provide generative AI services, like ChatGPT. They’re innovative services, but the companies involved (including managers and employees) are prohibited from engaging in any collusive conduct (eg concluding agreements on the fixing of prices, sharing markets or exchanging sensitive information).

Are there any specialities in the generative AI business in this respect? The following points merit special attention:

• Generative collusion: How and to what extent can competing generative AI tools “use” each other, learn from each other and engage in some kind of “interaction”? If one chatbot can access the public business conditions (including prices and terms) applicable for a competing chatbot, it can then suggest (or make) changes to its own business conditions. This can be seen as autonomous adaptation to market conditions, which should not raise concerns. But if this is done by most or all chatbots on the market, could the chatbots realise the advantages of cooperation as opposed to competition and come up with the same general terms and conditions or prices?
• Platform collusion: A chatbot could provide a platform for collusion for players in an entirely different market, especially if it can collect and disseminate data. For example, competitors in an industry could provide the chatbot with their current pricing, output or other sensitive data. Then it could get data about others by putting relevant questions to the chatbot. Is the chatbot liable – just like a well-known consultancy firm once was for organising secret physical meetings for the worldwide hydrogen peroxide cartel – as a contributor under EU competition law?
• Cross-shareholdings / cross-directorships: Many Big Tech companies and other investors have shares in various generative AI companies. These companies – which may be direct competitors – need to pay particular attention to erecting internal and external barriers to prevent the exchange of sensitive information (eg business plans, current / future pricing data). These compliance measures are essential to enable fully autonomous decision-making at each generative AI company and to secure a fully competitive landscape.
• Compliance: ChatGPT could also be an incredibly useful tool to foster competition law compliance. For example, by generating or reviewing simpler compliance documents for companies (eg drafting a new manual to handle dawn raids by competition authorities). A competition law expert should closely supervise this to ensure accuracy and completeness. Using AI for compliance is not a new phenomenon: DLA Piper has already been using its own AI tool, Aiscension, to quickly spot evidence of anti-competitive behaviour in large batches of documents (such as entire email boxes).

Abuse of dominance

Competition law also prohibits abuse of a dominant position. Could ChatGPT or other similar service providers be regarded as dominant, either individually or collectively?

ChatGPT is an extremely popular tool. It had more than 100 million users in February 2023. There are also major competitors to OpenAI’s new system – Google Bard, Facebook’s RoBERTa or and also innovative startups like Caldera Labs Inc.’s Cohere or AI21Labs’ WordTune.

• To provide a more nuanced view on possible abuse issues, we’d have to review the precise arena of competition for generative AI services, ie the relevant product and geographic market. ChatGPT itself answered this question:

ZO: What is the relevant market for ChatGPT under European competition law?

ChatGPT: As an artificial language model, ChatGPT could potentially be considered a provider of digital services, specifically in the field of natural language processing and generation. Therefore, the relevant market for ChatGPT under European competition law could be the market for digital services related to natural language processing and generation.

However, it is important to note that the relevant market for ChatGPT would ultimately depend on the specific products or services it offers, as well as the relevant geographic market in which it operates. Additionally, market definition is a fact-specific inquiry that requires a detailed analysis of the relevant product and geographic markets, as well as competition dynamics, which would need to be carried out by a competition law expert.

ChatGPT – although with clever disclaimers – appears to position itself as a provider of digital services, putting itself on the narrower market for natural language processing and generation. It’s been argued that ChatGPT could cause disruptive competition on a wider scale. It may put competitive pressure on the market of general internet search engines (such as Google Search).

For consumers it could be a substitute for – and may be even superior to – general search services.

• Although the market for natural language processing and generation is innovative, there are significant barriers to entry. For example, the exponentially increasing costs of training the large language models (LLMs) used by generative AI companies.
• A possible indication of dominance could be that generative AI services may also fall under a special regulation ­– Regulation 2022/1925/EU, known as the Digital Markets Act. It’s even possible the European Commission will classify companies providing generative AI services as “gatekeepers.” It could be argued they provide “core platform services” (like virtual assistants and search engines).

This shows the issue of possible dominance is certainly too early to call. But the relevant market players will have to be watched closely to ensure they remain open, innovative and competitive.

Merger control

Major tech players are already investing in various generative AI products, including ChatGPT. If these investments reach the level of control defined in most merger control regimes (eg majority of voting rights or a veto right on important business decisions), these transactions (as concentrations) could be scrutinised by antitrust authorities.

We’re not aware of any transactions notified to a major competition authority where generative AI was at the forefront of the competition assessment. But sooner or later merger control will also play a role in this field of the economy. Questions about the relevant market, and the possible concentration of the generative AI sector, will likely be highly important.

Unfair competition

A number of domestic laws (eg in Germany, Hungary) include overall prohibitions on unfair competition, outside the scope of the classic antitrust world. For example, the Hungarian Competition Act prohibits unfair competition in general. It also includes specific prohibitions such as the one relating to passing off (preventing one trader from misrepresenting goods or services as being the goods and services of another (competing) trader). And one on breaching business secrets.

• One issue with generative AI is that it’s extremely easy to produce text – intentionally or unintentionally – that resembles that of other companies or brands. ChatGPT (or, more plausibly, ChatGPT’s sister product DALL-E, the image generator) could be seen as a direct competitor to the artists or designers whose style it can mimic.

When ChatGPT produces a new text in the distinctive style of an artist, and if the text is then used by a company (eg as a slogan for a new commercial), it could harm the artist and cause a significant loss of business. This could be described as unfair competition in the form of passing off. Importantly, this prohibition could also apply even if, from an IP perspective, there’s no copyright infringement (eg because under copyright law, as opposed to specific works of art, style and stylistic elements are much more difficult to protect).

• Breach of business secrets is also an issue. Under EU law, trade secrets are defined by Directive 2016/943/EU as information that’s:
  • secret;
  • has commercial value because it is secret; and
  • has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.

EU law also prohibits the unlawful acquisition, use and disclosure of trade secrets. What if ChatGPT learned of a trade secret during its training (eg information made inadvertently available on the internet)? What if ChatGPT learned of a trade secret from new data being inputted into it (eg if a lawyer copy-pastes a client’s contract to have it reviewed for specific clauses)? What happens if ChatGPT then reveals the newly learned information or secrets to an interested third party? Arguably, such an “action” by ChatGPT could be a breach of the prohibitions and could constitute unfair competition.

By Zoltán Marosi, Co-Head of Competition and Antitrust, DLA Piper

If one looks around the internet these days, probably even the chatbot ChatGPT itself would be “surprised” to see how many new articles, essays, blogposts, personal posts and videos discuss a plethora of issues surrounding the use of artificial intelligence (AI), and specifically, generative AI.

 

In this blogpost we’re not going to try to fully explore the various legal aspects of AI. We want to focus on one narrow intersection: between generative AI tools and competition law. We’ll look at – or rather ask some initial questions – how each main area of competition law could be relevant to the business conduct of ChatGPT (or rather OpenAI Inc., the company behind the chatbot) and similar generative AI tools.

Anti-competitive agreements

The prohibition of anti-competitive agreements (in other words, the cartel prohibition) applies to all undertakings. This includes companies that provide generative AI services, like ChatGPT. They’re innovative services, but the companies involved (including managers and employees) are prohibited from engaging in any collusive conduct (eg concluding agreements on the fixing of prices, sharing markets or exchanging sensitive information).

Are there any specialities in the generative AI business in this respect? The following points merit special attention:

• Generative collusion: How and to what extent can competing generative AI tools “use” each other, learn from each other and engage in some kind of “interaction”? If one chatbot can access the public business conditions (including prices and terms) applicable for a competing chatbot, it can then suggest (or make) changes to its own business conditions. This can be seen as autonomous adaptation to market conditions, which should not raise concerns. But if this is done by most or all chatbots on the market, could the chatbots realise the advantages of cooperation as opposed to competition and come up with the same general terms and conditions or prices?
• Platform collusion: A chatbot could provide a platform for collusion for players in an entirely different market, especially if it can collect and disseminate data. For example, competitors in an industry could provide the chatbot with their current pricing, output or other sensitive data. Then it could get data about others by putting relevant questions to the chatbot. Is the chatbot liable – just like a well-known consultancy firm once was for organising secret physical meetings for the worldwide hydrogen peroxide cartel – as a contributor under EU competition law?
• Cross-shareholdings / cross-directorships: Many Big Tech companies and other investors have shares in various generative AI companies. These companies – which may be direct competitors – need to pay particular attention to erecting internal and external barriers to prevent the exchange of sensitive information (eg business plans, current / future pricing data). These compliance measures are essential to enable fully autonomous decision-making at each generative AI company and to secure a fully competitive landscape.
• Compliance: ChatGPT could also be an incredibly useful tool to foster competition law compliance. For example, by generating or reviewing simpler compliance documents for companies (eg drafting a new manual to handle dawn raids by competition authorities). A competition law expert should closely supervise this to ensure accuracy and completeness. Using AI for compliance is not a new phenomenon: DLA Piper has already been using its own AI tool, Aiscension, to quickly spot evidence of anti-competitive behaviour in large batches of documents (such as entire email boxes).

Abuse of dominance

Competition law also prohibits abuse of a dominant position. Could ChatGPT or other similar service providers be regarded as dominant, either individually or collectively?

ChatGPT is an extremely popular tool. It had more than 100 million users in February 2023. There are also major competitors to OpenAI’s new system – Google Bard, Facebook’s RoBERTa or and also innovative startups like Caldera Labs Inc.’s Cohere or AI21Labs’ WordTune.

• To provide a more nuanced view on possible abuse issues, we’d have to review the precise arena of competition for generative AI services, ie the relevant product and geographic market. ChatGPT itself answered this question:

ZO: What is the relevant market for ChatGPT under European competition law?

ChatGPT: As an artificial language model, ChatGPT could potentially be considered a provider of digital services, specifically in the field of natural language processing and generation. Therefore, the relevant market for ChatGPT under European competition law could be the market for digital services related to natural language processing and generation.

However, it is important to note that the relevant market for ChatGPT would ultimately depend on the specific products or services it offers, as well as the relevant geographic market in which it operates. Additionally, market definition is a fact-specific inquiry that requires a detailed analysis of the relevant product and geographic markets, as well as competition dynamics, which would need to be carried out by a competition law expert.

ChatGPT – although with clever disclaimers – appears to position itself as a provider of digital services, putting itself on the narrower market for natural language processing and generation. It’s been argued that ChatGPT could cause disruptive competition on a wider scale. It may put competitive pressure on the market of general internet search engines (such as Google Search).

For consumers it could be a substitute for – and may be even superior to – general search services.

• Although the market for natural language processing and generation is innovative, there are significant barriers to entry. For example, the exponentially increasing costs of training the large language models (LLMs) used by generative AI companies.
• A possible indication of dominance could be that generative AI services may also fall under a special regulation ­– Regulation 2022/1925/EU, known as the Digital Markets Act. It’s even possible the European Commission will classify companies providing generative AI services as “gatekeepers.” It could be argued they provide “core platform services” (like virtual assistants and search engines).

 This shows the issue of possible dominance is certainly too early to call. But the relevant market players will have to be watched closely to ensure they remain open, innovative and competitive.

Merger control

Major tech players are already investing in various generative AI products, including ChatGPT. If these investments reach the level of control defined in most merger control regimes (eg majority of voting rights or a veto right on important business decisions), these transactions (as concentrations) could be scrutinised by antitrust authorities.

We’re not aware of any transactions notified to a major competition authority where generative AI was at the forefront of the competition assessment. But sooner or later merger control will also play a role in this field of the economy. Questions about the relevant market, and the possible concentration of the generative AI sector, will likely be highly important.

Unfair competition

A number of domestic laws (eg in Germany, Hungary) include overall prohibitions on unfair competition, outside the scope of the classic antitrust world. For example, the Hungarian Competition Act prohibits unfair competition in general. It also includes specific prohibitions such as the one relating to passing off (preventing one trader from misrepresenting goods or services as being the goods and services of another (competing) trader). And one on breaching business secrets.

• One issue with generative AI is that it’s extremely easy to produce text – intentionally or unintentionally – that resembles that of other companies or brands. ChatGPT (or, more plausibly, ChatGPT’s sister product DALL-E, the image generator) could be seen as a direct competitor to the artists or designers whose style it can mimic.

When ChatGPT produces a new text in the distinctive style of an artist, and if the text is then used by a company (eg as a slogan for a new commercial), it could harm the artist and cause a significant loss of business. This could be described as unfair competition in the form of passing off. Importantly, this prohibition could also apply even if, from an IP perspective, there’s no copyright infringement (eg because under copyright law, as opposed to specific works of art, style and stylistic elements are much more difficult to protect).

• Breach of business secrets is also an issue. Under EU law, trade secrets are defined by Directive 2016/943/EU as information that’s:
  • secret;
  • has commercial value because it is secret; and
  • has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.

EU law also prohibits the unlawful acquisition, use and disclosure of trade secrets. What if ChatGPT learned of a trade secret during its training (eg information made inadvertently available on the internet)? What if ChatGPT learned of a trade secret from new data being inputted into it (eg if a lawyer copy-pastes a client’s contract to have it reviewed for specific clauses)? What happens if ChatGPT then reveals the newly learned information or secrets to an interested third party? Arguably, such an “action” by ChatGPT could be a breach of the prohibitions and could constitute unfair competition.

By Zoltán Marosi, Co-Head of Competition and Antitrust, DLA Piper

Schoenherr has advised Robert Bosch Investment Nederland on its acquisition of a minority stake in Hungarian thermo-technology company Kazantrade and the related asset deal that saw RBIN sell its Serbian thermo-technology business to Kazantrade’s Serbian subsidiary. Sole practitioner Zsolt Simanyi reportedly advised the Hungarian seller and target company.

Robert Bosch Investment Nederland offers electric drive, industrial hydraulics, and tightening technology products, as well as software development, engine management, and building technology.

The Schoenherr team included Hungary-based Partner Kinga Hetenyi, Counsel Anna Turi, Attorneys-at-Law Adrian Menczelesz, Dorottya Gindl, and Mark Kovacs, and Associates Zsofia Rideg and Balint Bodo, as well as Serbia-based Partners Luka Lopicic and Srdjana Petronijevic and Attorneys-at-Law Pavle Eric and Zoran Soljaga.

Editor’s Note: This article was updated on March 17, 2023, to correct a spelling error in Schoenherr’s team composition.

Schoenherr has advised both the lending group and the borrower on a deal that saw ODDO BHF and GLAS Trust Limited finance Afinum’s acquisition of the Christian Koenen Group. Germany’s Astera Legal and GLNS Rechtsanwaelte reportedly also advised the lenders and the borrower, respectively.

According to Schoenherr, “ODDO BHF is an independent Franco-German financial services group that emerged from the alliance of a French family-owned business built up by five generations of stockbrokers and a German bank specializing in Mittelstand companies. ODDO BHF acted as the lead mandated arranger for the lender group. The group of lenders appointed GLAS Trust Limited, a premier independent, non-creditor, conflict-free provider of loan agency and bond trustee, as security agent.”

Afinum is a Munich-based mid-cap investment firm. The “Christian Koenen Group is the global technology and European market leading specialist for developing and manufacturing high-precision premium stencils and screens for technical printing which are mission-critical tools in the chip/semiconductor component production, assembly of printed circuit boards (PCB), as well as in diverse electronic manufacturing and other printing processes (e.g., in MedTech),” an Afinum press statement informed.

Schoenherr’s team was led by Partner Gergely Szaloki and included Associate Balint Bodo.

Do employers have to pay for overtime if it was not expressly ordered by them? Can employers legally exclude in company documents the payment for overtime performed without their consent? In our article we examine these issues based on the case law of Hungarian labour courts.

A “grey zone” in Hungarian labour law

It goes without saying that if the employer orders overtime for the employees, it has to pay wage for the extra work, including the wage supplement. But what is the case wen employees work outside their working hours without the employer’s instructions to do so?

Is it overtime under Hungarian labour law if the employer does not expressly order extra work, but is aware of the work exceeding normal working hours, without raising any objection? If so, can the employer lawfully exclude payment for tacitly approved overtime in its documents, internal policies.

The Hungarian Labour Code (hereinafter “LC”) is based on the situation when the overtime is ordered by the employer expressly, the LC does not address the question of tacit approval.

However, this issue has arisen in front of Hungarian labour courts in the last decades.

Tacit approval in Hungarian case law

According to case law, it is also considered as overtime if the employee, in the absence of an express instruction from the employer, performs work in the manner expected or acknowledged by the employer during a period that would otherwise qualify as extraordinary working time, provided that the work is done in the interest of the employer, and it is necessary.

The labour court highlighted that the absence of an express instruction is irrelevant, in case the employer is i) aware of the extra work and ii) it is necessary and justified in the employer’s interest.

It is also worth noting that, based on the Hungarian judicial practice, overtime cannot be completely excluded even in case of employees with flexible working arrangement, e.g. executive employees, although it is much more difficult for such employees to prove their claim for overtime due to the lack of working time records.

Excluding tacit approval in company documents?

Given that overtime is possible without the employer ordering it, the next question is obvious: can the employer lawfully exclude tacit approval by stating that overtime cannot be performed without its express consent?

We once again rely on case law: in a precedent case, the court found that extra work cannot be considered as overtime if the employer had expressly instructed the employee not to perform it.

The question is whether the employer fulfils the “express instruction” by generally prohibiting the performance of overtime without the employer’s consent in the employment contract or in binding company policy, or the prohibition must be individual in each case, to avoid overtime payment.

In our opinion, the prohibition in a formal, general manner in company documents cannot exclude the tacit approval, if the employer does not prevent employees from working overtime in practice. Other interpretation would be against labour law principles, such as bona fide and the proper exercise of rights.

Conclusion

Summarizing the above, Hungarian labour law considers it overtime if the employer does not expressly order extra work, but he is aware of the work exceeding normal working hours and does not object to it, provided that the work is done in the interest of the employer.

The possibility of tacit approval cannot be generally excluded by the employer, the employer may only avoid overtime payment for extra work not ordered by him in case he instructed the employee in the specific case not to perform the work in question

By Peter Gritta Attorney-at-law, SmartLegal Schmidt & Partners

Gender equality in the workplace refers to the fair and equal treatment of individuals of different genders in all aspects of employment, including hiring, promotion, pay and job duties. Achieving gender equality is essential to creating a diverse, inclusive workplace that supports all employees.

This article provides a snapshot of the current situation in Hungary and a summary of the legal regulations and the available enforcement options.

Statistics

Earnings are the most debated aspect of inequality between women and men in the workplace. Every year Eurostat publishes the latest statistics on the gender pay gap. In 2020, women’s gross hourly earnings were 17.2% below those of men in Hungary.

Equal pay for equal work

While in recent years significant progress has been made toward gender equality, legal protections are still necessary to ensure that employers are held accountable for their actions and to provide a framework for addressing issues relating to gender discrimination. Equal pay for equal work is one of the legal principles used to eliminate the gender pay gap. This principle holds that individuals who perform the same job, or jobs that require similar skills, experience and education should receive the same pay, regardless of their gender.

Legal background

The Constitution of Hungary guarantees fundamental rights to all citizens without discrimination based on any characteristics and explicitly recognises the equal rights of women and men. However, the constitution does not expressly mention the prohibition of discrimination in earnings.

The Hungarian Labour Code, on the other hand, sets out the requirement of equal treatment in all aspects of employment, including remuneration. Specifically, the Labour Code mandates that the equal value of work for the principle of equal treatment shall be determined based on:

• the nature of the work performed;
• its quality and quantity;
• working conditions;
• the required vocational training;
• physical or intellectual efforts expended;
• experience;
• responsibilities; and
• labour market conditions.

Enforcing equal pay for equal work

By enshrining the principle of equal pay for equal work in law, Hungary has established a black letter law to reduce the gender pay gap. However, it is essential to recognise that more than written principles is needed to eliminate the disparities. Effective implementation and enforcement of these principles are equally important, and robust redress mechanisms must be established to ensure that employees do not earn less just because of their gender.

One of the ways Hungarian law – in line with the EU Equal Treatment Directive – helps to enforce this principle is by shifting the burden of proof in litigation. In cases of alleged breaches of equal treatment, the burden of proof is reversed compared with standard civil proceedings. This is because the person alleging discrimination is often in a disadvantaged position and may not have access to all the relevant evidence.

In Hungary, the employee must only prove the primary facts upon:

• suffering a disadvantage – in the case of gender pay gap, the disadvantage is the lower salary itself. To demonstrate the primary facts, it is enough for the employee to have hearsay knowledge for example; and
• having a protected characteristic – in the case of gender pay gap, the protected characteristic is the gender, or being a woman.

Therefore, the burden of proof is shifted to the employer, which is required to demonstrate that it did not engage in discriminatory behaviour, because there is no:

• difference between the salaries of different genders; or
• causal link between lower pay and the protected characteristic.

The employer must therefore show that the difference is due to objective reasons such as education or work experience.

When a male employee earns more than a female employee in the same job or does work of similar value, the employer has the burden of proving that there is a valid reason for the discrepancy in pay. If the employer cannot provide such evidence, the disadvantaged employee may be entitled to compensation for the loss of income suffered because of the pay gap.

That said, the above indicated rule of the Labour Code seems to provide leeway to employers, as they may justify differences in pay with different labour market conditions as an objective factor. While labour market conditions may indeed be different in certain sectors or geographical parts of the country and may therefore validly justify differences in pays, employers must validly support reference to such conditions and such conditions should not be used as grounds for justifying inequality.

Compliance rather than enforcement
While reversing the burden of proof and a stricter interpretation of objective criteria may help to hold employers accountable, it only facilitates ex-post reparation. Initiating litigation is not only a costly process, it can also take several years. This means that even if an employee is ultimately successful in their legal action, they may have already suffered significant harm due to the violation. Additionally, the time and resources required to pursue legal action can be a barrier for many employees, particularly those who may be most vulnerable to mistreatment in the workplace.

Given these challenges, a better approach is to focus on getting employers to comply with the law proactively. A proposed EU directive would prevent the gender pay gap in the workplace by increasing salary transparency. For example, the EU directive requires employers with at least 250 workers to make publicly available and accessible certain information, such as the pay gap between female and male workers in their organisation.

While some countries have already adopted similar policies and directives, Hungary currently has no such rules in place. In six countries that are part of the Organisation for Economic Co-operation and Development, there are consequences for private sector companies that fail to comply with pay auditing requirements, which may include financial penalties. These countries are:

• Finland;
• France;
• Iceland;
• Portugal;
• Spain; and
• Sweden.

Additionally, companies in these countries are obligated to share the results of their pay audits with their employees, the government, and/or the public, as part of their disclosure requirements.

Comment

The European Pillar of Social Rights action plan has set a goal to reduce the gender employment gap by at least 50% compared with 2019 by 2030.

Completely eliminating the pay gap between women and men is not statistically feasible. The pay gap is often due to the nature of specific positions rather than discriminatory practices by employers. Certain positions are typically filled by either males (eg, car mechanics) or females (eg, nurses), which skews aggregate statistics and does not accurately represent real discrimination.

However, it is important to strive for equal pay for equal work, regardless of gender. To achieve this aim, employers need to:

• review their pay practices;
• identify and address pay discrepancies; and
• ensure that pay decisions are based on objective and fair criteria.

The Hungarian legislature and judicial enforcement bodies can play an important role by creating and enforcing legislation that promotes pay transparency and fair pay practices beyond the already existing principles.

By Dániel Gera, Partner, Dóra Halmosi, Associate, Schoenherr

Being declared insolvent for an unpaid invoice in Hungary seems to be an exaggeration, yet it is a possible outcome in liquidation proceedings. What kind of standard of proof is applied by judges? Does the “beyond a reasonable doubt” standard, known in criminal proceedings applies? This article addresses this issue by analysing a recent decision of the Hungarian Supreme Court.

In Hungary liquidation procedure is a “popular weapon” in the hand of creditors to recover monetary claims as the Hungarian Liquidation Act provides that the debtor shall be declared insolvent if it has not paid or contested its contractual debt within 20 days of its due date, after the receipt of the creditor’s final written notice letter.

In the above case debtors can avoid liquidation only if they pay the creditor’s claim, that can be reclaimed in separate litigation afterwards. At the same time, in their application for liquidation creditors shall prove that the debtor had actual knowledge of the claim before receiving the final notice.

In a recent case, the question arose whether the above also applies when details of the claim were already indicated in the text of the contract between the parties.

The first and second instance courts found that the creditor shall warn the debtor of the existence and due date of its claim before sending the final notice letter, even if these details were laid down in a contract signed by the debtor. The second-instance court stressed that the debtor shall be aware of the claim and its due date “beyond reasonable doubt” before receiving the final notice letter.

According to the judges, the creditor had to state in its application how the debtor had been informed of the claim specified in the final notice letter, as it was in the creditor’s interest to prove this under the “burden of proof” principle specified in the Hungarian Civil Procedure Code (CPC).
However, the creditor intended to prove that the debtor had undoubtedly been made aware of the claim by a testimony of the debtor’s managing director, although such testimony cannot be considered as evidence under the CPC.

Losing the case on first and second instance, the creditor submitted a request for judicial review to the Supreme Court of Hungary. He argued that the debtor must be informed of the factual basis, title, amount, and time limit of the claim before sending the final notice letter. Consequently, it was irrelevant how these facts were communicated to the debtor, since the only relevant fact was that the debtor was actually aware of these circumstances due to the parties’ contract.

The Supreme Court pointed out that a contractually overdue debt does not in itself constitute the basis for the debtor’s insolvency under the Liquidation Act. Creditors should prove that debtors are aware of the due claim before receiving the final notice letter. This can be made by sending an invoice, or in the absence thereof, by sending a first notice letter to debtors. In this respect, the burden of proof is on creditors.

The Supreme Court pointed out that in the case at hand the creditor could not prove “beyond reasonable doubt” that the debtor was aware of the due claim, therefore the application was unfounded.

Based on the above, the Supreme Court reaffirmed that the principle of “free evaluation of evidence” applies to the first communication of the claim to the debtor.

However, when it comes to the standard of proof in liquidation proceedings, the Supreme Court confirmed the “beyond reasonable proof” standard applies in relation with the declaration of insolvency by the court.

Given that this decision has serious legal and business consequences for every company, it is legitimate that Hungarian courts apply a higher standard of proof, used in criminal proceedings than the usual lower standard applicable in civil or business litigation.

By Richard Schmidt, Managing Partner and Peter Korozs, Junior Associate, SmartLegal Schmidt & Partners

After the covid-19 pandemic, the EU economy is now being disrupted by the Russia-Ukraine conflict. The rising energy prices and disrupted supply chains have resulted in a further increase in inflation. According to the Hungarian Central Statistics Office, average inflation in Hungary was 24.5% in December 2022, the highest in the European Union. However, inflation of food products was even higher, reaching a staggering 44.8% year-on-year price increase by December 2022. This number is almost three times higher than the EU average.

If prices on a market seem to be too high, especially in comparison with neighbouring countries, this immediately raises the suspicions of the Hungarian Competition Authority (HCA) (for further details, see “Immediate changes to covid-19 rapid tests market as HCA publishes results of accelerated sectoral inquiry” and “Competition authority publishes results of the first accelerated sectoral inquiry into the national brick market“). The current situation with respect to the food sector is no different. In January 2023, the HCA announced that it would conduct a thorough investigation into the food sector through various proceedings. These proceedings have already started at high speed.

Accelerated sector inquiries into milk and dairy products and preserved food markets

The first proceeding released to the public was an accelerated sector inquiry into the markets of milk and dairy products, initiated on 20 January 2023. The price of milk increased by 52.1% in one year, while consumers had to pay 79.2% more for dairy products in December 2022 compared with the previous year. On 15 October 2021, the government introduced a price cap on milk with 2.8% fat, which remains applicable now. However, this has not stopped the prices of other milk and dairy products from increasing. These products are now the focus of the HCA’s investigation.

On 8 February 2023, a second accelerated sector inquiry was launched into the preserved food market (eg, canned and frozen food). This segment also observed significant price increases, as well as temporary deficits over the past year.

An accelerated sector inquiry can be initiated if rapid intervention is justified. In this case, the HCA suspected not only that the increase of input costs drove inflation sky high, but also aimed to investigate the reasons behind the suspected distortion of competition in the relevant sector. The HCA must prepare its draft report within 30 days (which may be extended two times by an additional one month each), instead of the ordinary one-to-two years. To speed up the proceeding, it can even conduct dawn raids to collect evidence. The HCA has resorted to this tool in this case: it conducted dawn raids at numerous companies at different levels of the distribution chain (eg, manufacturers, distributors, retailers and wholesalers) at the beginning of February 2023.

The companies are also obliged to reply to the HCA’s questions. Their replies cannot be untrue or misleading; otherwise, substantial procedural fines can be imposed on them.

Consultation with significant market players

The HCA has also initiated consultations with significant market players in the food production and retail sector to inquire about the market developments and to draw attention to the relevant provisions of competition law. The Hungarian watchdog also monitors international food inflation, as well as the enforcement proceedings initiated by other competition authorities in this sector.

The president of the HCA has noted that the HCA is carefully examining the various signals from consumers and market players. The HCA will not shy away from initiating more accelerated sector inquiries or other (eg, antitrust) proceedings in the near future.

Comment

As the investigations continue, companies at all levels of the food supply chain should be well prepared for the HCA appearing at their premises to conduct a dawn raid or approaching them in writing with a request for information. It is important for businesses to be aware of their rights and obligations during dawn raids. It may be too late to ask for help when the HCA’s officials have already visited the company, taken away documents to be used as evidence, or fined the company or its employees. There are effective prior compliance tools to prepare for such investigations.

Companies should also be on the lookout for the results included in the reports of the accelerated sectoral inquiries, as they include various recommendations on potential ways of increasing competition. These recommendations are usually followed quickly by the legislature or even the HCA itself, which can initiate various (eg, antitrust) proceedings.

By Anna Turi, Counsel, and Mark Kovacs, Attorney at Law, Schoenherr

Cytowski & Partners has advised LaunchHub Ventures and Emerge Education on leading a USD 5 million Series A round for Colossyan. The White Summers European Office in association with Weiszbart & Partners advised Colossyan.

Colossyan is a London-based company with Hungarian founders developing artificial intelligence video creation software.

According to Cytowski & Partners, “the financing of the company was supported by existing investors DayOne Capital, Oktogon Ventures, and APX. Launchub is a Bulgarian seed and Series A venture capital fund focusing on South Eastern Europe. Emerge Education is a European venture capital firm focusing on the education technology space.”

The Cytowski & Partners team included Partner Tytus Cytowski and Associate Eresi Tracy Uche.

The White Summers team included Budapest Managing Partner Tamas Weiszbart.