-
Alemania
Ban of Price Comparison Tools: anti-competitive and void?
1 agosto 2017
- Antitrust
- Contratos de distribución
- e-commerce
France is a great market for franchise networks where almost 2,000 networks are operated. It is one of the most successful scheme of developing business.
Franchisor must mainly respect French regulations on pre-disclosure information and French and EU competition regulations, among others rules. Although the control of the quality of its network and of its brand image is a very important and legitimate issue for franchisor, the latter cannot interfere too much in the day-to-day activity of the franchisees, since franchisees are independent businesses. Therefore relations between franchisors and franchisees are only based on commercial law and not on employment law. However, recent French rules will lead franchisors to implement some employment law rules with their franchisees and franchisees’ employees.
Foreign franchisors operating franchise networks in France must indeed know how to deal with the constraints incurred by the Employment Act (dated 08 August 2016) and its Decree (dated 04 May 2017), and effective as from May 07 2017, relating to the creation of an employee forum for the whole franchise network. Indeed this Social Dialogue Committee can impact deeply the organization of franchise networks.
First of all, only networks in which operators are bound by franchise agreements are concerned by the new social dialogue committee. Accordingly, trademark licensing and distribution contracts appear not to be included. Franchise agreements should be understood as sui generis contracts that are the sum of three separate agreements: a trademark licensing agreement, a know-how licensing agreement, and a commercial or technical assistance agreement. However, the Act of 08 august 2016 creates some confusion by stating that the franchise agreements concerned by this Social Dialogue Committee are the agreements “referred to in article L330-3 of the French Commercial Code”, although not only does that article not define what a franchise contract is, it may also apply to other contracts (exclusive distribution agreements) to determine whether the network fall into the scope of this Act.
Furthermore, according to the Act, only specific franchise agreements including “clauses that have an impact on work organisation and conditions in franchisee businesses” are concerned. The Act does not define such clauses although, on the one hand, whether a social dialogue committee is called for depends on identifying such clauses, and on the other hand, franchisees are in essence independent of the franchisor when organising and managing their business, including in employment matters. It will therefore be necessary to conduct an employment audit of all franchise agreements (for instance, what happens if a clause sets opening hours or defines a dress code?) to determine whether the network fall into the scope of this Act.
Finally, a Social Dialogue Committee is only called for in franchise networks employing at least 300 staff working (full-time) in France. It would seem that this does not include the franchisor’s employees or the employees of operators that are not bound to the network’s head by a franchise agreement (e.g., operators bound by a trademark licensing contract).
An implementation implying a long negotiation
Even where the legal requirements are met, franchisors are under no obligation to set up a Social Dialogue Committee spontaneously. However, once a trade union has called for an Social Dialogue Committee to be set up, the franchisor does have an obligation to take part actively in the negotiations initiated by that trade, to check with all the franchisees whether the number of employees in its network reaches the 300 threshold, and then to set up a “negotiation forum” made of representatives of employees (trade unions) and of employers (franchisor and franchisees) to negotiate an agreement creating and organizing the future Social Dialogue Committee.
The negotiations with trade unions and franchisees will end, within six months, in an agreement subject to the consent of franchisor, trade union(s) and at least of 30% of the franchisees (representing 30 % of the employees of the network). This agreement shall define the Social Dialogue Committee’s composition, how its members are designated, their term of office, the frequency of meetings, if and how many hours employees may dedicate to the committee, the material or financial means required for the committee to fulfill its purpose, and how running and meeting costs and representatives’ travel and subsistence expenses are handled, among other things. This last issue could be a major concern not only for franchisor but also for franchisees-employers. Failing to reach such agreement, the Decree imposes the creation of the Social Dialogue Committee with several strict and minimum provisions which could create unreasonable burden for the franchisor.
Once set up, internal rules define precisely how the Social Dialogue Committee is to function (required majorities, notices of meeting and referral, publication of debates, etc.).
Much ado about nothing?
The Social Dialogue Committee does not have the authority to investigate cases or to issue binding rulings, but the Social Dialogue Committee must be kept informed of franchisees joining or leaving the network and “of the franchisor’s decisions liable to impact the volume and structure of staff, working time, or the employment, work, and vocational training conditions of the franchisees’ employees”.
The Social Dialogue Committee may also make suggestions for improving such conditions throughout the network.
The impact of the Social Dialogue Committee is eventually rather limited, but franchisors have to master and control seriously the implementation of the rules in order to avoid loss of times and energy by their own franchisees and a disorganisation of its network.
If your business is related to France or you wish to develop your business in this direction, you need to be aware of one very specific provision with regards to the termination of a business relationship.
Article L. 442-6, I, 5° of the French Commercial Code protects a party to a contract who considers that the other party has terminated the existing business relationship in a sudden and abrupt way, thus causing her a damage.
This is a ‘public policy’ provision and therefore any contractual provision to the contrary will be unenforceable.
Initially, the lawmaker aimed to protect any business relationship between suppliers and major large-scale retailers delisting (ie, removing a supplier’s products that were referenced by a distributor) at the moment of contracts renegotiations or renewals.
Eventually, the article has been drafted in order to extend its scope to any business relationship, regardless of the status of the professionals involved and the nature of the commercial relationship.
The party who wishes to terminate the business relationship does not need to provide any justification for her actions but must send a sufficient prior notice to the other party.
The purpose is to allow the parties, and in particular the abandoned party, to anticipate the discharge of the contract, in particular in cases of economic dependency.
It is an accentuated obligation of loyalty.
There are only two cases strictly interpreted by case law in which the partner is exempted from sending a prior notice:
- an aggravated breach of a contractual obligation;
- a frustration or a force majeure.
There are two main requirements to be fulfilled in order to be able to invoke this provision in front of a judge – an established business relationship and an abrupt termination.
The judge will assess whether the requirements have been fulfilled on a case by case basis.
What does the term ‘established business relationship’ mean?
The most important criterion is the duration, whether a written contract exists or not.
A relationship may be considered as long-term whether there is a single contract or a few consecutive contracts.
If there is no contract in place, the judge will take into account the following criteria:
- the existence of a long-term established business relationship;
- the good faith of the parties;
- the frequency of the transactions and the importance and evolving of the turnover;
- any agreement on the prices applied and/or the discounts granted to the other party;
- any correspondence exchanged between the parties.
What does the term ‘abrupt termination’ mean?
The Courts consider the application of Article L442-6-I 5° if the termination is “unforeseeable, sudden and harsh”.
The termination must comply with the following three conditions in order to be considered as abrupt:
- with no prior notice or with insufficient prior notice;
- sudden;
- unpredictable.
To consider whether a prior notice is sufficient, a judge may consider the following criteria:
- the investments made by the victim of the termination;
- the business involved (eg seasonal fashion collections);
- a constant increase in turnover;
- the market recognition of the products sold by the victim and the difficulty of finding replacement products;
- the existence of a post-contractual non-compete undertaking ;
- the existence of exclusivity between the parties;
- the time period required for the victim to find other openings or refocus the business activity;
- the existence of any economic dependency for the victim.
The courts have decided that a partial termination may also be considered as abrupt in the following cases:
- an organisational change in the distribution structure of the supplier;
- a substantial decrease in trade flows;
- a change in pricing terms or an increase in prices without any prior notice sent by a supplier granting special prices to the buyers, or in general any unilateral and substantial change in the contract terms.
Whatever the justification for the termination, it is necessary to send a registered letter with an acknowledgment of receipt and ensure that the prior notice is sent sufficienlty in advance (some businesses have specific time periods applicable to them by law).
Compensation for a damage
The French Commercial Code provides for the award of damages in order to compensate a party for an abrupt termination of a business relationship.
The damages are calculated by multiplying the notice period which should have been applied by the average profit achieved prior to the termination. Such profit is evaluated based on the pre-tax gross margin that would have been achieved during the required notice period, had sufficient notice been given.
The courts may also award damages for incidental and consequential losses such as redundancy costs, losses of scheduled stocks, operational costs, certain unamortised investments and restructuring costs, indemnities paid to third parties or even image or reputational damage.
International law
The French supreme court competent in civil law (‘Cour de cassation’) considers that in cases where the decision to terminate the business relationship and the resulting damage take place in two different countries, it is a matter of torts and the applicable law will be the one of the country where the triggering event the most closely connected with the tort took place. Therefore the abrupt termination will be subject to French law if the business of the supplier is located in France.
However, the Court of Justice of the European Union (CJEU) has issued a preliminary ruling dated 14 July 2016 answering two questions submitted by the Paris Court of Appeal in a judgment dated 17 April 2015. A French company had been distributing in France the food products of an Italian company for the last 25 years, with no framework agreement or any exclusivity provision in place. The Italian company had terminated the business relationship with no prior notice. The French company issued proceedings against the Italian company in front of the French courts and invoked the abrupt termination of an established business relationship.
The Italian company opposed both the jurisdiction of the French courts and the legal ground for the action arguing that the Italian courts had jurisdiction as the action involved contract law and was therefore subject to the laws of the country where the commodities had been or should have been delivered, in this case Incoterm Ex-works departing from the plant in Italy.
The CJEU has considered that in case of a tacit contractual relationship and pursuant to European law, the liability will be based on contract law (in the same case, pursuant to French law, the liability will be based on torts). As a consequence, Article 5, 3° of the Regulation (EC) 44/2001, also known as Brussels I (which has been replaced by Regulation (EC) 1215/2012, also known as Brussels I bis) will not apply. Therefore, the competent judge will not be the one of the country where the damage occurred but the one of the country where the contractual obligation was being performed.
In addition and answering the second question submitted to it, the CJEU has considered that the contract is:
- a contract for the sale of goods if its purpose is the delivery of goods, in which case the competent jurisdiction will be the one of the country where the goods have been or should have been delivered; and
- a contract for services if its purpose is the provision of services, in which case the competent jurisdiction will be the one of the country where the services have been or should have been provided.
In this case, the Paris Court of Appeal will have to recharacherise the contractual relationship either as consecutive contracts for the sale of goods and deduct the jurisdiction of the Italian courts, or as a contract for services implying the participation of the distributor in the development and the distribution of the supplier’s goods and business strategy and deduct the jurisdiction of the French courts.
In summary, in case of an intra-Community dispute, the distributor who is the victim of an abrupt termination of an established business relationship cannot issue proceedings based on torts in front of a court in the country where the damage occurred if there is a tacit contractual relationship with the supplier. In order to determine the competent jurisdiction in such case, it is necessary to determine whether such tacit contractual relationship consists of a supply of goods or a provision of services.
The next judgment of the Paris Court of Appeal and those of the Cour de cassation to come need to be followed very closely.
To understand the regulation of commercial agency agreements in the US, it is helpful to remember the interplay between federal and state statutory and common law in the US legal system. Under the US Constitution, all power not specifically reserved for the federal government resides with the states. Federal law has exclusive jurisdiction only over certain types of cases (e.g., those involving federal laws, controversies between states and cases involving foreign governments), and share jurisdiction with the state courts in certain other areas (e.g., cases involving parties that reside in different states). In the vast majority of cases, however, state law has exclusive jurisdiction.
Commercial agency is regulated at the state level rather than by US federal law. Almost two-thirds of the US states have adopted specific legislation for commercial agency relationships with non-employees. Most state statutes regulating commercial agency relate to the relationship between a principal and an agent that solicits orders for the purchase of the principal’s products, mainly in wholesale rather than retail transactions (although state law often has special rules for agency relationships with respect to real estate transactions and insurance policies). Typically, state law in this area follows the common law definition of agency, which imputes a fiduciary duty upon the agent for the benefit of the principal to act on the principal’s behalf and subject to the principal’s control.
A second, overarching theme of note to understand the regulation of commercial agency agreements in the US is the primary importance of the doctrine of freedom of contract under state law jurisprudence. As the doctrine’s title suggests, as a matter of policy, courts interpreting a contract generally will seek to respect its terms. Exceptions exist where public policy requires otherwise (e.g., in the consumer or investor context, in cases of adherence contracts or where unconscionable terms are found to exist). As a result, state law generally contain few mandatory, substantive terms that are superimposed on the relationship between principal and agent in an agency arrangement. With certain exceptions (i.e., under certain state franchise regulation where the relationship is deemed to be a franchise under such law), the parties are generally free to contract as they wish in areas ranging from terms of payment to risk allocation to other commercial terms.
General Legal Provisions Applicable to Agency Agreements
As noted, commercial agency is mostly regulated at the state level in the US State laws on agency mainly address commissioned agency, and, where in force, is primarily aimed at ensuring that the principal timely pays the agent the commissions that are owed by imposing liability on the principal for a multiple (often two to four times) of unpaid commissions, as well as for reimbursement of the agent’s attorneys’ fees and costs incurred in collecting the unpaid amount. Other states further require that agency agreements satisfy certain formalities, including that they be in writing (under the so-called “Statute of Frauds” in force in most states) and that they contain specified information (i.e., how earned commissions will be calculated). A minority of states further impose substantive requirements, such as a minimum notice period for termination, the obligation to payment commissions on certain post-term shipments or those in process at expiration or termination of the agency agreement.
Formalities for the Creation of an Agency
New York law does not impose particular formalities for the creation of an agency relationship. In fact, under New York law, absent circumstances under which New York’s general Statute of Frauds rules apply as set forth in § 5-701 of the General Obligations Law, parties may be deemed to be in an agency relationship even without signing an agreement evidencing the agreement consideration or any writing which evidences their agreement. New York law does regulate the payment of sales commissions under New York labor law. New York labor law defines a sales representative as an independent contractor who solicits orders in New York for the wholesale purchase of a supplier’s product or is compensated entirely or partly by commission. However, New York labor law does not otherwise regulate meaningfully the actual sales representative relationship.
Agency Elements and Purpose
Under the law of New York and the majority of states, an “agent” is a person or entity who, by agreement with another called the “principal,” represents the principal in dealings with third persons or transacts business, manages some affair or does some service for the principal. The key elements of an agency are: (i) mutual consent of the parties; (ii) the agent’s fiduciary duties, and (iii) the principal’s control over the agent. A principal may act on a disclosed, undisclosed, or partially disclosed basis in dealing with third parties.
The purpose of an agency may be broadly defined, and ultimately a principal may appoint an agent to perform any act except those which by their nature require personal performance by the principal, violate public policy or are illegal.
A defining element of agency under New York law and the law of the majority of states is the principal’s control over the agent. Indeed, whether the principal will be bound by the agent’s acts will depend, in large part, on whether the agent had actual or apparent authority to act on behalf of the principal. Separate from the question whether an agent’s acts bind the principal is the question whether the agent’s actions create a permanent establishment of the principal under applicable rules of taxation and/or an employer-employee relationship under applicable employment law in the agent’s jurisdiction, thereby potentially subjecting the principal to onerous state and federal tax and employment law obligations.
Factors taken into account in whether the relationship could give rise to a permanent establishment include, among others, the degree to which the agent has the authority to bind the principal and whether the agent carries out a material portion of contract negotiation ultimately signed by the principal. Two of the many factors taken into account in determining whether such a relationship could be characterized as one of employment include whether the agent: (i) provides the services according to her own methods and (ii) is subject to the control of the principal (other than with respect to the results of the agent’s work). Both analyses are specific to fact and circumstances.
Appointment of Sub-agents
Under New York law and the law of the majority of states, a principal may authorize an agent to appoint another agent to act on the principal’s behalf. The second agent may be a subagent or a co-agent. A “subagent” is commonly defined as a person appointed by an agent to perform functions that the agent has consented to perform on behalf of the agent’s principal and for whose conduct the appointing agent is responsible to the principal. Thus, an agent who appoints a subagent delegates to the subagent power to act on behalf of the principal that the principal has conferred on the agent. Appointment of a subagent requires that the appointing agent have actual or apparent authority to do so, and it may be inferred in certain circumstances. As an example, in one case from New York, a claims adjuster hired by an insurance company (acting as agent of the insured) was held to be a subagent of the insured because it was common practice for insurance companies to retain adjusters to aid them to pursue insurance investigations.
With respect to subagents, we note that the relationship between an appointing agent and a subagent is also one of agency. A subagent acts subject to the control of the appointing agent, and the principal’s legal position is affected by action taken by the subagent as if the action had been taken by the appointing agent. As such, in most states, a subagent typically has two principals: the appointing agent and that agent’s principal. In New York and a limited number of other states, by contrast, the agency relation does not exist between the principal and a subagent. Under New York law, a subagent that has been appointed with proper authority will owe the principal the same duties as would the agent; however, for the subagent to have a fiduciary duty to that principal, the subagent must be aware of the identity of the ultimate principal. An agent may appoint a subagent only if the agent has actual or apparent authority to do so.
Rights and Obligations of the Agent
Generally, the following are the most important duties of the agent under state common law:
- Agent must not act outside of its express and implied authority.
- Agent must use care, competence and diligence in acting for the principal.
- Agent must obey the principal’s instructions as long as they are legal.
- Agent must avoid conduct which will damage the principal’s business.
- Agent must not act for an adverse party to a transaction with the principal.
- Agent cannot compete with the principal in the same business in which the agent acts in such capacity for the principal without the principal’s consent.
- Agent must provide the principal with information relevant to the marketing of the principal’s products.
- Agent must separate, account for and remit to the principal all collections for the principal’s account and other property of the principal.
- Agent must not receive compensation from any third party in connection with transactions or actions on which the agent is acting on behalf of the principal.
- Agent must maintain the confidentiality of, and not misuse, the principal’s confidential information.
The agent is subject to a general duty of good faith in the performance of its responsibilities and dealings carried out on behalf of the principal under an agency agreement. However, the agent’s duty generally will not override the specific terms provided for in the agreement between the parties. Under New York law, the agent owes the principal duties of loyalty, obedience and care. Under these duties, an agent cannot have interests in a transaction that is adverse to its principal (e.g., self-dealing or secret profits), the agent must obey all reasonable directions of the principal and the agent must carry out its agency with reasonable care (which includes a duty to notify the principal of all matters that come to the agent’s knowledge affecting the subject of the agency).
Rights and Obligations of the Principal
The following are the most important duties of the principal under state common law:
- Principals must promptly pay terminated agents the commissions that they are owed; in most states, failure to pay can result in penalties, including multiple-damages. Some states apply similar penalties to failures to pay commissions in a timely fashion during the term of the relationship; in contrast, a few states require that a commission be paid on transactions in the pipeline at the time of termination.
- Under the law of some states, an agency arrangement must be in writing, and certain formalities complied with, for the agency arrangement to be binding.
Generally under state law, principal and agent alike are required to act in good faith in performing their obligations in an agency relationship, subject to the express terms agreed to in the agency agreement. Additionally, under the law of some states, the principal is required to indemnify the agent against liabilities vis-à-vis third parties arising out of the performance of the agent’s duties, to compensate the agent reasonably for its services and to reimburse the agent for the reasonable expenses it incurred in carrying such service. New York law does not provide for any mandatory obligations by the principal in favor of the agent in this regard (New York courts having constantly held an agent’s right to indemnification from a principal is based on contract).
Exclusivity
State law generally does not contain mandatory provisions on exclusivity. Indirectly, certain rules (such as the Statute of Frauds under New York law that requires that exclusivity provisions be in writing if they will exceed one year) may apply. Otherwise, parties to a commercial agency arrangement generally may agree contractually on the terms of exclusivity, including whether: (i) to prohibit the agent from entering into agency arrangements with other principals covering the same subject matter within the same territory; (ii) to allow the principal to deal directly with customers located in the same territory without the agent’s involvement; (iii) to limit marketing and sales through the internet (including whether to prohibit the same through the principal’s website and/or whether the agent may do so through its own website); and (iv) a commission is due to the agent on sales made by the principal online to customers in the territory.
Remuneration
There are no specific federal or state regulations regarding commissions or stock consignments generally in commercial agency agreements. Generally, provisions regarding commissions, including the right to the same at and after contract termination or expiration, loss of commission rights and the right to inspect the principal’s books are provided for contractually. We do note an exception: in some US government contracts suppliers are required to certify that they are not paying commissions to non-employees. Furthermore, some federal funding of purchases by foreign buyers carry with them restrictions on commissions payable by the sellers.
Understanding the interplay between federal and state statutory and common law in the US legal system is important to understanding the regulation of exclusive distribution agreements in the US.
Under the US Constitution all power not specifically reserved for the federal government remains with the states. Federal law has exclusive jurisdiction only over certain types of cases (e.g., those involving federal laws, controversies between states and cases involving foreign governments), and share jurisdiction with the states courts in certain other areas (e.g., cases involving parties that reside in different states). In the vast majority of cases, however, state law has exclusive jurisdiction. Similarly, the doctrine of freedom of contract under US law also directly affects how distribution agreements are regulated in the US.
Furthermore, because a distributor is typically an unaffiliated third party acting on its own account rather than on behalf of the supplier as principal, distribution agreements are subject to greater regulation under US federal and state antitrust law. Such law, among other things, (i) regulates whether and the degree to which a supplier in a distribution arrangement may seek in a contract or otherwise to dictate the price at which the distributor will resell products supplied; (ii) imposes restrictions on suppliers that engage in “dual distribution” (selling product directly as well as through a distributor); and (iii) may limit the suppliers’ ability to sell product to different distributors at a different price. Antitrust law also regulates exclusivity and selective distribution arrangements, as well as distribution relationships in certain industries (e.g., federally: automobile manufacturers and petroleum; at the state level, heavy equipment, liquor and farm equipment industries). Furthermore, distribution agreements often may resemble franchise arrangements, subjecting those arrangements to extensive federal and state regulation.
Under the law of most states (including New York), exclusive distribution exists when a supplier grants a distributor exclusive rights to promote and sell the contract goods or services within a territory or to a specific group of customers. Exclusive rights in a distribution arrangement are often granted by the supplier for the distribution of high quality or technically complex products that require a relatively high level of expertise by the distributor, including staff that is specially training to sell the goods or specialized after-sales repair and maintenance or other services. Distribution agreements differ from commercial agency agreements in several respects. In contrast to a distributor, a commercial agent does not take title to product, does not hold inventory and typically has no contractual liability to the customer (including risk of customer non-payment). Conversely, a distributor, in line with the greater risk of its activities, typically can expect greater upside economically in terms of margins on resale relative to an agent’s profit through earned commissions.
Sub-distributors
Under the law of most states (including New York), a distributor may appoint sub-distributors absent any restrictions to the contrary in the agency agreement. Commercially, the appointment of a sub-distributor may have an adverse effect on the supplier by reducing the supplier’s control over its distribution channel activities or increasing the supplier’s potential liability exposure given the increased number of distributors whose actions may be attributed to the supplier. A supplier that does not manage properly the appointment of sub-distributors may also lose valuable product knowledge with respect to the distributed goods (particularly if the goods are novel or complex in nature). Advantages to sub-distributor appointments for the supplier may include a more effective overall marketing presence with enhanced local market knowledge, a broader geographic scope, a potentially lower costs as a result of the sub-distributors’ expertise and efficiencies, etc.
————————————-
Need help with your International Distribution Contracts?
Click the button below to Receive Support from our Expert Lawyers thanks to the Online Help Desk
————————————-
Rights and Obligations of the Exclusive Distributor
- Sales organization: suppliers are not required to establish sales organizations in exclusive distribution agreements.
- Sales’ target: there are no mandatory rules under federal law or state law (including New York) generally regarding sales targets in exclusive distribution agreements. However, such provisions are common in exclusive distribution agreements.
- Guaranteed minimum target: minimum sales requirements are common in exclusive distribution agreements. As a commercial matter, a supplier as a requirement to give, or maintain, exclusivity with one distributor, will seek through such requirements to ensure that economically the distributor is performing satisfactorily. Often failure to meet sales targets may entitle a supplier to rescind the exclusivity, terminate the agreement or reduce the portion of the territory to which the exclusivity applies. We note that minimum sales requirements in an exclusive distribution arrangement may, in certain cases, be subject to challenge under antitrust law as having an undue anticompetitive effect by preventing a distributor from purchasing products from a competitive supplier.
- Minimum stock: there are no mandatory rules in federal law or the law of the majority of states (including New York) regarding minimum stock. A supplier may seek to have the distributor agree, contractually, to maintain adequate levels of stock relative to market demands as well as to store the product properly.
- After-sales service: the parties to a distribution agreement are generally free to agree as they deem appropriate with respect to after-sale service regarding products.
- Resale Prices: the Exclusive Distributor is free to fix the resale prices. State law (including New York law) generally does not limit the ability of an exclusive distributor to fix resale prices. […] A supplier’s ability to set resale prices for distributors is subject to limitations under federal and state antitrust law. Many state antitrust laws (including New York’s) closely resemble the federal antitrust laws. However, differences exist such that certain conduct may be found not to violate federal antitrust law but still be found to violate state antitrust law (or vice versa). Because the distributor (contrary to an agent) is acting on its own behalf, an agreement between supplier and distributor to maintain certain prices (or if a distributor is deemed to have been coerced by the supplier to follow certain prices), may be a per se price-fixing violation under federal and state antitrust law. Under federal antitrust law, vertical price-fixing until 2007 had been illegal per se. This per se rule was overturned by the Supreme Court. Horizontal price fixing remains per se illegal under the Sherman Act (see below).
Rights and Obligations of the Supplier
- Exclusive Distributor undertaking to supply: generally, state statutes do not specifically provide that a supplier in a distribution relationship has a duty to supply specific levels of product to a distributor, with such obligations generally be established by contractual provision. However, a supplier does have an implied covenant of good faith and fair dealing toward the distributor under state law generally, which generally requires that a party to a commercial agreement not do anything which injures the right of the other to receive the benefits of the agreement). Under the foregoing, a supplier may be deemed to have an obligation to supply product to a distributor (or be found to have violated the implied covenant of good faith and fair dealing in the event that the supplier, although able, decided not to provide a distributor with product without any other contractual justification for not doing so). However, even where such a duty were found to exist, the quantity and frequency of product supply and other details often remain unclear. To avoid uncertainty, distributors often seek to have a specific provision included in the distribution agreement, providing at least for the supplier to be required to use some degree of effort (e.g., “best efforts,”, “reasonable best efforts” or “reasonable efforts”) to supply product responsive to distributor’s submitted purchase orders. On a related topic, generally a distributor typically is only required to inform the supplier of lower purchase estimates if the distributor undertakes to do so (or undertakes a more general obligation with respect to the market) in the distribution agreement. However, even if the supplier is not, under an exclusive distribution agreement, required to supply the distributor with product, the supplier may still be subject to a contractual or common law obligation not to sell to third parties in the territory. New York courts held that suppliers that make direct sales to customers in the territory under an exclusive distribution agreement have breached their duties to the exclusive distributor.
- Retention of title: typically, in sales transactions on credit in the US, title is passed at the moment of initial sale. The buyer typically grants the supplier a security interest in the goods purchased, which if proper perfected under state law, affords the supplier with a priority position relative to other creditors with respect to the products provided (inventory) in the event of non-payment and enforcement.
Construction defects warranty
The law of “products liability” in the US is based on the law of torts. Under New York law, in cases of where an end user is injured by a defective product which was sold by the distributor under a distribution agreement, the end user generally is able to sue the distributor and the supplier of the product under one or more of the following theories: (i) strict liability; (ii) negligence; or (iii) breach of warranty. The usual theory of recovery against a distributor is strict liability. Under a strict liability theory, a supplier or distributor that sells a defective product while engaged in its normal course of business shall be liable for injuries it causes to customers, regardless of privity, foreseeability or the exercise of due care. Product liability cases also are brought under breach of warranty claims. Breach of warranty claims can be based on express warranties (e.g., from advertisement or a product label) and on implied warranties (typically, warranties of merchantability and fitness for a particular purpose under the provisions of the Uniform Commercial Code as adopted by the states). Lastly, negligence claims brought by plaintiffs are based on the improper conduct of the defendant, whether supplier or distributor or other participant in the distribution chain, with respect to the manner of distribution or care of the product sold (examples include improper storage or transport).
Under New York law, exceptions based on misuse, neglect or abuse by the suing party generally apply as defenses against liability under theories of strict liability, negligence or breach of warranty.
The supplier and distributor can allocate third-party liabilities (e.g., potential losses to be paid to plaintiffs in a products liability law suit) and related attorneys fees as between themselves through warranty and other indemnification provisions. Parties to a distribution agreement in the US often seek to put in place such re-allocation provisions not only because of potential liability resulting from a final, unfavorable judgment, but also because of the sizeable legal fees that litigants in the US often incur. In this regard, we note that in the US litigation costs are generally born by all of the litigating parties and not by the losing party as is common in many other countries. Such provisions may include indemnification provisions relating to product liability or trademark infringement claims brought by third parties, limitations on liability provisions (based on monetary caps and exclusions as to the types of damages that may be recovered, such as consequential, punitive, special and indirect damages) and disclaimers in respect of express or implied warranties that may otherwise apply under state law applicable to the distribution agreement.
Exclusivity
Exclusive-dealing provisions – under which the distributor undertakes not to distribute competing products in the territory – are quite common in distribution agreements. However, although it is not easy for a plaintiff to prevail, such a provision may be subject to challenge as an unlawful restriction on competition under federal and state antitrust law, typically under the following federal antitrust laws: (i) section 1 of the Sherman Act, which prohibits contracts “in restraint of trade;”; (ii) section 2 of the Sherman Act, which prohibits “attempt[s] to monopolize” and monopolization; (iii) section 3 of the Clayton Antitrust Act of 1914 […], which prohibits exclusivity arrangements that may “substantially lessen competition” or tend to create a monopoly; and, finally, (iv) section 5 of the Federal Trade Commission Act […], which prohibits “[u]nfair methods of competition.” In deciding these cases, typically courts apply the “rule of reason analysis” under which the exclusive dealing arrangements is analyzed considering a host of factors, including: (a) the defendant’s market power; (b) the degree of foreclosure from the market and barriers to entry; (c) the duration of the contracts; (d) whether exclusivity has the potential to raise competitors’ costs; (e) the presence of actual or likely anticompetitive effects; and (f) legitimate business justifications.
The Court of Justice of the European Union (“CJEU”) has issued a new ruling on the international scope of the Commercial Agency Directive (86/653/EEC of 18 December 1986). The new decision is in line with the rulings of
- the CJEU in the Ingmar case (decision of 9 November 2000, C-381/98, goodwill indemnity mandatory where the agent acts within the EU) and Unamar (decision of 17 October 2013, C-184/12, as to whether national agency law is mandatory where exceeding the Commercial Agency Directive’s minimum protection) and
- the German Federal Supreme Court of 5 September 2012 (German agency law as mandatory law vis-à-vis suppliers in third countries with choice-of-court clause).
The question
Now, the CJEU had to decide whether a commercial agent acting in Turkey for a supplier based in Belgium could claim goodwill indemnity on the basis of the Commercial Agency Directive. More specifically, the question was whether the territorial scope of the Commercial Agency Directive was given where the commercial agent acts in a third country and the supplier within the EU – hence opposite to the Ingmar case.
The facts
According to the agency contract, Belgian law applied and the courts in Gent (Belgium) should be competent. Belgian law, transposing the Commercial Agency Directive, provides for a goodwill indemnity claim at termination of the contract (and, additionally, compensation for damages). However, the referring court considered that the Belgian Law on Commercial Agents of 1995 was self-restraining and would apply, in accordance with its Art. 27, only if the commercial agent acted in Belgium. Otherwise, general Belgian law would apply.
The decision
The CJEU decided that the parties may derogate from the Commercial Agency Directive if the agent acts in a third country (i.e. outside the EU). This has here been the case since the agent acted in Turkey.
The decision is particularly noteworthy because it – rather by the way – continues the CJEU’s Ingmar ruling under the Rome I Regulation (I.). In addition, it indirectly confirms sec. 92c of the German Commercial Code (II.) – which allows the parties to a commercial agent agreement governed by German law to deviate from the generally mandatory agency law if the commercial agent is acting outside the European Economic Area (“EEA”). Finally, it provides legal certainty for distribution outside the EEA and illustrates what may change after a Brexit as regards commercial agents acting in the United Kingdom (III.) – if the EU and the United Kingdom do not set up intertemporal arrangements for transition.
For details, please see the article by Benedikt Rohrßen, Zeitschrift für Vertriebsrecht 2017, 186 et seq. (“Ingmar reloaded – Handelsvertreter-Ausgleich bei umgekehrter Ingmar-Konstellation nicht international zwingend”).
Manufacturers of brand-name products typically aim to ensure the same level of quality of distribution throughout all distribution channels, offline and online. To achieve this aim, they provide criteria how to resell their products. With the increase of internet sales, the use of such criteria has been increasing as well.
A total ban of online sales to end consumers within the EU is, however, hardly valid because online sales are considered as passive sales (cf. Guidelines on Vertical Restraints 2010, para. 52). Restrictions below a total ban are, however, commonplace (for examples, see the post “eCommerce: restrictions on distributors in Germany”). Yet, it is still not clear how far such restrictions are permissible.
For example, the luxury perfume manufacturer Coty’s German subsidiary Coty Germany GmbH has set up a selective distribution network and its distributors may sell via the Internet, under the following conditions. They shall
- use their internet store as “electronic store window” of their brick and mortar store(s), thereby maintaining the products’ character as luxury goods, and
- abstain insofar from engaging third parties as such cooperation is externally visible.
The court of first instance decided that tsuch ban of sales via third party platforms was an unlawful restriction of competition under art. 101 Treaty on the Functioning of the European Union (“TFEU”), namely a hardcore restriction under article 4 lit. c Regulation (EU) No. 330/2010 (Vertical Block Exemptions Regulation or “VBER”). The court of second instance, however, does obviously not see the answer that clear. Instead, the court requested the Court of Justice of the European Union (CJEU) to give a preliminary ruling on how European antitrust rules have to be interpreted, namely article 101 TFEU and article 4 lit. b and c VBER (decision of 19.04.2016, ref. no. 11 U 96/14 [Kart]) – see the previous post “eCommerce: restrictions on distributors in Germany”.
On 30 March 2017, the hearing took place before the CJEU:
- Coty defended its platform ban, arguing it aimed at protecting the luxury image of brands such as Marc Jacobs, Calvin Klein or Chloe.
- France – seat of several luxury brands such as Louis Vuitton, Chanel and Christian Dior –supported Coty.
- The distributor instead argued that established platforms such as Amazon and eBay already sold various brand-name products, e.g. of L’Oréal. Accordingly, there was no reason for Coty to ban the resale via these marketplaces. Germany also supported this view by emphasizing the importance of online platforms for small and medium-sized enterprises (where, however, the share of distributors using online marketplaces is 62% much higher than in all other Member States, see the Staff Working Document, „Final report on the E-commerce Sector Inquiry“, para. 452).
- Luxembourg – the seat of Amazon – considers a general platform ban to be disproportionate and therefore as anti-competitive (cf. Reuters’ article here).
Interest in the outcome of the Coty case is widespread, as the active participation of the various EU Member States illustrates (in addition to the abovementioned countries, also Italy, Sweden, the Netherlands and Austria). Simply put, the question is whether owners of luxury brands may generally or at least partially ban the resale via internet on third-party platforms.
Indications on how the court may decide have just appeared on 26 July 2017, with the Advocate General giving his opinion. The Advocate General proposes that the CJEU answers the questions referred to the court as follows:
“(1) Selective distribution systems relating to the distribution of luxury and prestige products and mainly intended to preserve the ‘luxury image’ of those products are an aspect of competition which is compatible with Article 101(1) TFEU provided that resellers are chosen on the basis of objective criteria of a qualitative nature which are determined uniformly for all and applied in a non-discriminatory manner for all potential resellers, that the nature of the product in question, including the prestige image, requires selective distribution in order to preserve the quality of the product and to ensure that it is correctly used, and that the criteria established do not go beyond what is necessary.
(2) In order to determine whether a contractual clause incorporating a prohibition on authorised distributors of a distribution network making use in a discernible manner of third-party platforms for online sales is compatible with Article 101(1) TFEU, it is for the referring court to examine whether that contractual clause is dependent on the nature of the product, whether it is determined in a uniform fashion and applied without distinction and whether it goes beyond what is necessary.
(3 The prohibition imposed on the members of a selective distribution system who operate as retailers on the market from making use in a discernible manner of third undertakings for internet sales does not constitute a restriction of the retailer’s customers within the meaning of Article 4(b) of Commission Regulation (EU) No 330/2010 of 20 April 2010 on the application of Article 101(3) on the Treaty of the Functioning of the European Union to categories of vertical agreements and concerted practices.
(4) The prohibition imposed on the members of a selective distribution system, who operate as retailers on the market, from making use in a discernible manner of third undertakings for internet sales does not constitute a restriction of passive sales to end users within the meaning of Article 4(c) of Regulation No 330/2010.”
The Advocate General’s complete opinion can be found at CJEU’s website here.
The updated overview of the procedure can be found at CJEU’s website here.
Practical Conclusions
- The Coty case is extremely relevant to distribution in Europe because more than 70% of the world’s luxury items are sold here, many of them online now.
- The general ban to use price comparison tools shall be anti-competitive – according to the Bundeskartellamt, as confirmed by the Higher Regional Court of Düsseldorf on 5 April 2017. The last word is, however, still far from being said – see the post “Asics’ Distribution of Sporting Goods: Ban of Price Comparison Tools anti-competitive & void?!?”. Besides, also the Coty case’s outcome may influence how to see such bans.
- The Coty case is setting the course for future Internet sales. Depending on the decision of the CJEU, manufacturers of luxury or brand-name products can continue to ban the use of marketplaces like Amazon or eBay for the distribution of their products – or not any more or only under certain conditions. If the court follows the Advocate General’s conclusions, such platform bans appear possible, provided that the platform ban depends “on the nature of the product, whether it is determined in a uniform fashion and applied without distinction and whether it goes beyond what is necessary” (see above).
- For further trends in distribution online, see the EU Commission’s Final report on the E-commerce Sector Inquiry and details in the Staff Working Document, „Final report on the E-commerce Sector Inquiry“.
- For details on distribution networks and antitrust, please see my article „Plattformverbote im Selektivvertrieb – der EuGH-Vorlagebeschluss des OLG Frankfurt vom 19.4.2016“, in: Zeitschrift für Vertriebsrecht 2016, p. 278–283.
Manufacturers of brand-name products typically aim to ensure the same level of quality of distribution throughout all distribution channels. To achieve this aim, they provide criteria how to resell their products. With the increase of internet sales, the use of such criteria has been increasing as well.
Best example: Asics. Until 2010, the German subsidiary Asics Deutschland GmbH supplied its distributors in Germany without applying special criteria. In 2011, Asics launched a selective distribution system called «Distribution System 1.0«. It provided, inter alia, for a general ban on distributors to use price comparison tools in online sales:
«In addition, the authorized B … distributor is not supposed to … support the functionality of price-comparison tools by providing application-specific interfaces (» API») for these price comparison tools.» (translated]
The German Federal Antitrust Authority (“Bundeskartellamt”) has determined by decision of 26 August 2015 that the ban of price-comparison tools against distributors based in Germany was void because it infringed Article 101 (1) TFEU, sec. 1 Act on Restraints of Competition (see the 196-page decision here). Reason given was that such ban would primarily aim at controlling and limiting price competition at the expense of consumers. Asics, instead, filed a complaint before the Higher Regional Court of Düsseldorf to annul the Bundeskartellamt’s decision. Asics argued that this ban was a proportionate quality standard within its «Distribution System 1.0«, aiming at a uniform product presentation.
Now the Higher Regional Court of Düsseldorf on 5 April 2017 confirmed the Bundeskartellamt’s decision that within selective distribution systems the general ban to use price comparison tools was anti-competitive and therefore void (ref. no. VI-Kart 13/15 (V); see also the Bundeskartellamt’s press release in English):
- In particular, the ban of price comparison tools was not exempt from Art. 101 (1) TFEU by way of teleological interpretation (“Tatbestandsreduktion”). According to the court, it was not necessary in order to protect the quality and the product image of the Asics brand (same argumentation as the Higher Regional Court of Frankfurt in its judgment of 22.12.2015, ref. no. 11 U 84/14 regarding Deuter’s functional back-up bags; the Federal Supreme Court will, however, still decide on this, ref. no. KZR 3/16). The court declared that the ban was intended to restrict the buyers, arguing that distributors would be restricted in entering into a price competition with others. The presentation of products in price comparison tools would not damage the quality or brand of Asics products. It would neither give a «flea market impression«, ostensibly also not from the simultaneous presentation of used products. Also, the ban of price comparison tools would not solve the problem of «free-riding«. In any event, the general ban of price comparison tools was not necessary and therefore unlawful.
- The ban would also not be exempt under the Vertical Block Exemption Regulation. Instead, the court argued, the ban would limit passive sales (over the internet) to end customers, contrary to Art. 4 (c) Vertical Block Exemption Regulation (referring to the CJEU decision in the case of Pierre Fabre, 13 October 2011, ref. no. C-439/09). The “equivalence principle” (i.e. restrictions for offline as well as online sales should not be identical, but functionally equivalent) would not apply as there were no comparable functions to price comparison tools in the stationary trade.
- Finally, the ban would also not benefit from the individual exemption under art. 101 (3) TFEU (“efficiency defence”).
Conclusions:
- According to the Higher Regional Court of Düsseldorf, manufacturers might not generally prohibit their distributors from using price comparison tools. At the same time, the court also refused to grant leave to appeal against its decision – which, however, can be challenged separately by way of an appeal (sec. 74, 75 Act on Restraints of Competition).The future development of criteria limiting distributors in reselling online remains open, especially as (i) the Coty case is pending at the CJEU (see below) and (ii) the EU Commission in its sector enquiry into e-commerce currently appears to favour manufacturers of brand-name products (see below).
- The court has explicitly left open – arguing that they were not relevant for its decision – whether
- the ban of search engines is anti-competitive (para. 44 et seq. of the decision);
- the general ban of third-party platforms is anti-competitive (para. 7) – although Asics’ “Distribution System 1.0” also banned third-party platforms such as Amazon or eBay.
- Whether and how manufacturers of luxury or brand-name products can continue to ban their distributing via Amazon, eBay and other marketplaces in general in the future will likely be decided by the CJEU in the coming months – in the case of Coty (see our post “eCommerce: restrictions on distributors in Germany”) where a hearing has been just recently been held end of March 2017.
- Without prejudice to the Coty case, the EU Commission has however, in its sector enquiry into e-commerce of May 2017, declared that
- “marketplace bans do not generally amount to a de facto prohibition on selling online or restrict the effective use of the internet as a sales channel irrespective of the markets concerned …,
- the potential justification and efficiencies reported by manufacturers differ from one product to another …”,
- (absolute) marketplace bans should not be considered as hardcore restrictions within the meaning of Article 4(b) and Article 4(c) of the VBER…,
- the Commission or a national competition authority may decide to withdraw the protection of the VBER in particular cases when justified by the market situation”
(41–43 Final Report on the e-commerce sector inquiry).
Hence, on the basis of the EU Commission’s most recent position, there is room for arguments and creative contract drafting since even general marketplace bans can be compatible with the EU competition rules. However, the courts may see this differently in the single case. Therefore, especially the CJEU with its Coty case (see above) will likely bring more clarity for future online distribution.
Companies can sell their products worldwide directly – through branches, subsidiaries or e-commerce – or indirectly – through agents, distributors, franchisees or commission agents.
The German Federal Court of Justice now ruled for the first time that commission agents may also claim indemnity at terminination of their contract (decision of 21 July 2016, ref. no. I ZR 229/15).
What are Commission Agents?
Commission agents are self-employed business persons who are constantly entrusted with the task of concluding transactions in their own name for the account of another company, i.e. the supplier. They differ from distributors insofar as distributors buy and sell products on their own behalf and consequently bear distribution risks themselves (for details, see the Legalmondo post on Distribution Agreements in Germany and the Legalmondo post on “German” Distributor Indemnity – How to avoid it).
What is new for Commission Agents?
The Federal Court of Justice has clarified that – as is settled case law for distributors – also Commission Agents can claim indemnity at termination if two analogy requirements are met, namely if the commission agent
- (i) is integrated into the supplier’s sales organization like a commercial agent; and
- (ii) has to provide the customer data to the supplier so that the supplier continues to derive substantial benefits from the business with such customers after termination of the contract.
With regard to the second requirement (provision of customer data), the Federal Court points out that the prerequisite is – as a general rule – fulfilled because statutory law obliges the commission agent to provide the customer data (sec. 384 para. 2 German Commercial Code). As a result, the customers “belong” to the supplier by law, without any specific contractual obligation.
If distribution concerns “anonymous mass business” (i.e. where customers pay cash and the sales intermediary does not know customer names because of any CRM measures), it may be impossible for the commission agent to provide respective customer data. In such case, it shall according to the Federal Court suffice if the commission agent provides data «on the sale process per se» – so that the supplier can estimate which type of goods is in demand where (quite different from the requirements regarding distribution of high-quality products such as cars, fashion or electronics).
Can the parties contract out?
Yes, the obligation to provide customer data can be contracted out. Nevertheless, indemnity claims can currently not 100% safely excluded by doing so because the Federal Court leaves explicitly open whether commission agents may also claim indemnity if the supplier has the mere factual chance to use the customer data. Hence, to be on the safe side, one has to exclude also the chance to use the data (see “Practical information” below).
What about franchisees?
As regards franchisees as sales intermediaries, the Federal Court confirms that mere factual continuity of the customer base does not suffice to result into an indemnity claim (thus confirming the decision against the franchisee of the traditional bakery chain “Kamps” of 5 February 2015, ref. no. VII ZR 315/13).
Practical tips
The provisions protecting self-employed commercial agents may apply analogously to commission agents.
As regards existing agreements under German law: if the two analogy requirements are met, indemnity claims at termination are quite likely.
As regards future agreements under German law:
- In general, the claim for indemnity can likely be avoided by excluding the commission agent’s obligation to provide the customer data. Such exclusion should, however, be clearly formulated. Alternatively – or, to be on the safe side, additionally –, the supplier may oblige himself to block and or delete the customer data at terminaton of the contract with the commission agent.
- Alternatively, the right to indemnity can be avoided by choosing another law and jurisdiction (taking into account the risk that the “German” indemnity claim might nevertheless be applied by as overriding mandatory provision in the sense of Article 9 of the Rome I Regulation).
- Finally, if the commission agent acts outside the European Economic Area, the indemnity claim can be excluded by a simple waiver (according to analogue application of sec. 92c German Commercial Code).
The Milestone EU-Mercosur Trade Deal
- Contratos de distribución
- Inversiones extranjeras
-
Argentina -
Brasil -
Italia -
Uruguay
Germany – To which product category do Cannabidiol spray products belong?
- Contratos de distribución
- Derecho Farmacéutico
-
Alemania
España – ¿Puede un influencer ser considerado “agente comercial”?
- Agencia
- Contratos de distribución
-
España
España – El derecho de información del agente tras la conclusión de su contrato
- Contratos de distribución
-
España
France: Ambush marketing and the Paris 2024 Olympic Games
- Contratos de distribución
- Patentes y Marcas
-
Francia
Europa 
France: Ambush marketing and the Paris 2024 Olympic Games
- Contratos de distribución
- Patentes y Marcas
-
Francia
France: Review and renegotiation of price in case of costs increase
- Contratos
- Contratos de distribución
-
Francia
France | Pre-contractual disclosure in distribution and franchise agreements
- Contratos de distribución
- Franquicia
-
Francia
France: control by the supplier of online resales by its distributors
- Contratos de distribución
-
Francia
France – Terms of payment in an international agreement
- Derecho Societario
- Contratos de distribución
-
Francia
France – ECJ extends the protection of commercial agents and their right to termination indemnity
- Agencia
- Contratos de distribución
-
Francia
Contacta con Benedikt
Distribution through Commission Agents – Indemnity in the End!
28 abril 2017
-
Alemania
- Contratos de distribución
France is a great market for franchise networks where almost 2,000 networks are operated. It is one of the most successful scheme of developing business.
Franchisor must mainly respect French regulations on pre-disclosure information and French and EU competition regulations, among others rules. Although the control of the quality of its network and of its brand image is a very important and legitimate issue for franchisor, the latter cannot interfere too much in the day-to-day activity of the franchisees, since franchisees are independent businesses. Therefore relations between franchisors and franchisees are only based on commercial law and not on employment law. However, recent French rules will lead franchisors to implement some employment law rules with their franchisees and franchisees’ employees.
Foreign franchisors operating franchise networks in France must indeed know how to deal with the constraints incurred by the Employment Act (dated 08 August 2016) and its Decree (dated 04 May 2017), and effective as from May 07 2017, relating to the creation of an employee forum for the whole franchise network. Indeed this Social Dialogue Committee can impact deeply the organization of franchise networks.
First of all, only networks in which operators are bound by franchise agreements are concerned by the new social dialogue committee. Accordingly, trademark licensing and distribution contracts appear not to be included. Franchise agreements should be understood as sui generis contracts that are the sum of three separate agreements: a trademark licensing agreement, a know-how licensing agreement, and a commercial or technical assistance agreement. However, the Act of 08 august 2016 creates some confusion by stating that the franchise agreements concerned by this Social Dialogue Committee are the agreements “referred to in article L330-3 of the French Commercial Code”, although not only does that article not define what a franchise contract is, it may also apply to other contracts (exclusive distribution agreements) to determine whether the network fall into the scope of this Act.
Furthermore, according to the Act, only specific franchise agreements including “clauses that have an impact on work organisation and conditions in franchisee businesses” are concerned. The Act does not define such clauses although, on the one hand, whether a social dialogue committee is called for depends on identifying such clauses, and on the other hand, franchisees are in essence independent of the franchisor when organising and managing their business, including in employment matters. It will therefore be necessary to conduct an employment audit of all franchise agreements (for instance, what happens if a clause sets opening hours or defines a dress code?) to determine whether the network fall into the scope of this Act.
Finally, a Social Dialogue Committee is only called for in franchise networks employing at least 300 staff working (full-time) in France. It would seem that this does not include the franchisor’s employees or the employees of operators that are not bound to the network’s head by a franchise agreement (e.g., operators bound by a trademark licensing contract).
An implementation implying a long negotiation
Even where the legal requirements are met, franchisors are under no obligation to set up a Social Dialogue Committee spontaneously. However, once a trade union has called for an Social Dialogue Committee to be set up, the franchisor does have an obligation to take part actively in the negotiations initiated by that trade, to check with all the franchisees whether the number of employees in its network reaches the 300 threshold, and then to set up a “negotiation forum” made of representatives of employees (trade unions) and of employers (franchisor and franchisees) to negotiate an agreement creating and organizing the future Social Dialogue Committee.
The negotiations with trade unions and franchisees will end, within six months, in an agreement subject to the consent of franchisor, trade union(s) and at least of 30% of the franchisees (representing 30 % of the employees of the network). This agreement shall define the Social Dialogue Committee’s composition, how its members are designated, their term of office, the frequency of meetings, if and how many hours employees may dedicate to the committee, the material or financial means required for the committee to fulfill its purpose, and how running and meeting costs and representatives’ travel and subsistence expenses are handled, among other things. This last issue could be a major concern not only for franchisor but also for franchisees-employers. Failing to reach such agreement, the Decree imposes the creation of the Social Dialogue Committee with several strict and minimum provisions which could create unreasonable burden for the franchisor.
Once set up, internal rules define precisely how the Social Dialogue Committee is to function (required majorities, notices of meeting and referral, publication of debates, etc.).
Much ado about nothing?
The Social Dialogue Committee does not have the authority to investigate cases or to issue binding rulings, but the Social Dialogue Committee must be kept informed of franchisees joining or leaving the network and “of the franchisor’s decisions liable to impact the volume and structure of staff, working time, or the employment, work, and vocational training conditions of the franchisees’ employees”.
The Social Dialogue Committee may also make suggestions for improving such conditions throughout the network.
The impact of the Social Dialogue Committee is eventually rather limited, but franchisors have to master and control seriously the implementation of the rules in order to avoid loss of times and energy by their own franchisees and a disorganisation of its network.
If your business is related to France or you wish to develop your business in this direction, you need to be aware of one very specific provision with regards to the termination of a business relationship.
Article L. 442-6, I, 5° of the French Commercial Code protects a party to a contract who considers that the other party has terminated the existing business relationship in a sudden and abrupt way, thus causing her a damage.
This is a ‘public policy’ provision and therefore any contractual provision to the contrary will be unenforceable.
Initially, the lawmaker aimed to protect any business relationship between suppliers and major large-scale retailers delisting (ie, removing a supplier’s products that were referenced by a distributor) at the moment of contracts renegotiations or renewals.
Eventually, the article has been drafted in order to extend its scope to any business relationship, regardless of the status of the professionals involved and the nature of the commercial relationship.
The party who wishes to terminate the business relationship does not need to provide any justification for her actions but must send a sufficient prior notice to the other party.
The purpose is to allow the parties, and in particular the abandoned party, to anticipate the discharge of the contract, in particular in cases of economic dependency.
It is an accentuated obligation of loyalty.
There are only two cases strictly interpreted by case law in which the partner is exempted from sending a prior notice:
- an aggravated breach of a contractual obligation;
- a frustration or a force majeure.
There are two main requirements to be fulfilled in order to be able to invoke this provision in front of a judge – an established business relationship and an abrupt termination.
The judge will assess whether the requirements have been fulfilled on a case by case basis.
What does the term ‘established business relationship’ mean?
The most important criterion is the duration, whether a written contract exists or not.
A relationship may be considered as long-term whether there is a single contract or a few consecutive contracts.
If there is no contract in place, the judge will take into account the following criteria:
- the existence of a long-term established business relationship;
- the good faith of the parties;
- the frequency of the transactions and the importance and evolving of the turnover;
- any agreement on the prices applied and/or the discounts granted to the other party;
- any correspondence exchanged between the parties.
What does the term ‘abrupt termination’ mean?
The Courts consider the application of Article L442-6-I 5° if the termination is “unforeseeable, sudden and harsh”.
The termination must comply with the following three conditions in order to be considered as abrupt:
- with no prior notice or with insufficient prior notice;
- sudden;
- unpredictable.
To consider whether a prior notice is sufficient, a judge may consider the following criteria:
- the investments made by the victim of the termination;
- the business involved (eg seasonal fashion collections);
- a constant increase in turnover;
- the market recognition of the products sold by the victim and the difficulty of finding replacement products;
- the existence of a post-contractual non-compete undertaking ;
- the existence of exclusivity between the parties;
- the time period required for the victim to find other openings or refocus the business activity;
- the existence of any economic dependency for the victim.
The courts have decided that a partial termination may also be considered as abrupt in the following cases:
- an organisational change in the distribution structure of the supplier;
- a substantial decrease in trade flows;
- a change in pricing terms or an increase in prices without any prior notice sent by a supplier granting special prices to the buyers, or in general any unilateral and substantial change in the contract terms.
Whatever the justification for the termination, it is necessary to send a registered letter with an acknowledgment of receipt and ensure that the prior notice is sent sufficienlty in advance (some businesses have specific time periods applicable to them by law).
Compensation for a damage
The French Commercial Code provides for the award of damages in order to compensate a party for an abrupt termination of a business relationship.
The damages are calculated by multiplying the notice period which should have been applied by the average profit achieved prior to the termination. Such profit is evaluated based on the pre-tax gross margin that would have been achieved during the required notice period, had sufficient notice been given.
The courts may also award damages for incidental and consequential losses such as redundancy costs, losses of scheduled stocks, operational costs, certain unamortised investments and restructuring costs, indemnities paid to third parties or even image or reputational damage.
International law
The French supreme court competent in civil law (‘Cour de cassation’) considers that in cases where the decision to terminate the business relationship and the resulting damage take place in two different countries, it is a matter of torts and the applicable law will be the one of the country where the triggering event the most closely connected with the tort took place. Therefore the abrupt termination will be subject to French law if the business of the supplier is located in France.
However, the Court of Justice of the European Union (CJEU) has issued a preliminary ruling dated 14 July 2016 answering two questions submitted by the Paris Court of Appeal in a judgment dated 17 April 2015. A French company had been distributing in France the food products of an Italian company for the last 25 years, with no framework agreement or any exclusivity provision in place. The Italian company had terminated the business relationship with no prior notice. The French company issued proceedings against the Italian company in front of the French courts and invoked the abrupt termination of an established business relationship.
The Italian company opposed both the jurisdiction of the French courts and the legal ground for the action arguing that the Italian courts had jurisdiction as the action involved contract law and was therefore subject to the laws of the country where the commodities had been or should have been delivered, in this case Incoterm Ex-works departing from the plant in Italy.
The CJEU has considered that in case of a tacit contractual relationship and pursuant to European law, the liability will be based on contract law (in the same case, pursuant to French law, the liability will be based on torts). As a consequence, Article 5, 3° of the Regulation (EC) 44/2001, also known as Brussels I (which has been replaced by Regulation (EC) 1215/2012, also known as Brussels I bis) will not apply. Therefore, the competent judge will not be the one of the country where the damage occurred but the one of the country where the contractual obligation was being performed.
In addition and answering the second question submitted to it, the CJEU has considered that the contract is:
- a contract for the sale of goods if its purpose is the delivery of goods, in which case the competent jurisdiction will be the one of the country where the goods have been or should have been delivered; and
- a contract for services if its purpose is the provision of services, in which case the competent jurisdiction will be the one of the country where the services have been or should have been provided.
In this case, the Paris Court of Appeal will have to recharacherise the contractual relationship either as consecutive contracts for the sale of goods and deduct the jurisdiction of the Italian courts, or as a contract for services implying the participation of the distributor in the development and the distribution of the supplier’s goods and business strategy and deduct the jurisdiction of the French courts.
In summary, in case of an intra-Community dispute, the distributor who is the victim of an abrupt termination of an established business relationship cannot issue proceedings based on torts in front of a court in the country where the damage occurred if there is a tacit contractual relationship with the supplier. In order to determine the competent jurisdiction in such case, it is necessary to determine whether such tacit contractual relationship consists of a supply of goods or a provision of services.
The next judgment of the Paris Court of Appeal and those of the Cour de cassation to come need to be followed very closely.
To understand the regulation of commercial agency agreements in the US, it is helpful to remember the interplay between federal and state statutory and common law in the US legal system. Under the US Constitution, all power not specifically reserved for the federal government resides with the states. Federal law has exclusive jurisdiction only over certain types of cases (e.g., those involving federal laws, controversies between states and cases involving foreign governments), and share jurisdiction with the state courts in certain other areas (e.g., cases involving parties that reside in different states). In the vast majority of cases, however, state law has exclusive jurisdiction.
Commercial agency is regulated at the state level rather than by US federal law. Almost two-thirds of the US states have adopted specific legislation for commercial agency relationships with non-employees. Most state statutes regulating commercial agency relate to the relationship between a principal and an agent that solicits orders for the purchase of the principal’s products, mainly in wholesale rather than retail transactions (although state law often has special rules for agency relationships with respect to real estate transactions and insurance policies). Typically, state law in this area follows the common law definition of agency, which imputes a fiduciary duty upon the agent for the benefit of the principal to act on the principal’s behalf and subject to the principal’s control.
A second, overarching theme of note to understand the regulation of commercial agency agreements in the US is the primary importance of the doctrine of freedom of contract under state law jurisprudence. As the doctrine’s title suggests, as a matter of policy, courts interpreting a contract generally will seek to respect its terms. Exceptions exist where public policy requires otherwise (e.g., in the consumer or investor context, in cases of adherence contracts or where unconscionable terms are found to exist). As a result, state law generally contain few mandatory, substantive terms that are superimposed on the relationship between principal and agent in an agency arrangement. With certain exceptions (i.e., under certain state franchise regulation where the relationship is deemed to be a franchise under such law), the parties are generally free to contract as they wish in areas ranging from terms of payment to risk allocation to other commercial terms.
General Legal Provisions Applicable to Agency Agreements
As noted, commercial agency is mostly regulated at the state level in the US State laws on agency mainly address commissioned agency, and, where in force, is primarily aimed at ensuring that the principal timely pays the agent the commissions that are owed by imposing liability on the principal for a multiple (often two to four times) of unpaid commissions, as well as for reimbursement of the agent’s attorneys’ fees and costs incurred in collecting the unpaid amount. Other states further require that agency agreements satisfy certain formalities, including that they be in writing (under the so-called “Statute of Frauds” in force in most states) and that they contain specified information (i.e., how earned commissions will be calculated). A minority of states further impose substantive requirements, such as a minimum notice period for termination, the obligation to payment commissions on certain post-term shipments or those in process at expiration or termination of the agency agreement.
Formalities for the Creation of an Agency
New York law does not impose particular formalities for the creation of an agency relationship. In fact, under New York law, absent circumstances under which New York’s general Statute of Frauds rules apply as set forth in § 5-701 of the General Obligations Law, parties may be deemed to be in an agency relationship even without signing an agreement evidencing the agreement consideration or any writing which evidences their agreement. New York law does regulate the payment of sales commissions under New York labor law. New York labor law defines a sales representative as an independent contractor who solicits orders in New York for the wholesale purchase of a supplier’s product or is compensated entirely or partly by commission. However, New York labor law does not otherwise regulate meaningfully the actual sales representative relationship.
Agency Elements and Purpose
Under the law of New York and the majority of states, an “agent” is a person or entity who, by agreement with another called the “principal,” represents the principal in dealings with third persons or transacts business, manages some affair or does some service for the principal. The key elements of an agency are: (i) mutual consent of the parties; (ii) the agent’s fiduciary duties, and (iii) the principal’s control over the agent. A principal may act on a disclosed, undisclosed, or partially disclosed basis in dealing with third parties.
The purpose of an agency may be broadly defined, and ultimately a principal may appoint an agent to perform any act except those which by their nature require personal performance by the principal, violate public policy or are illegal.
A defining element of agency under New York law and the law of the majority of states is the principal’s control over the agent. Indeed, whether the principal will be bound by the agent’s acts will depend, in large part, on whether the agent had actual or apparent authority to act on behalf of the principal. Separate from the question whether an agent’s acts bind the principal is the question whether the agent’s actions create a permanent establishment of the principal under applicable rules of taxation and/or an employer-employee relationship under applicable employment law in the agent’s jurisdiction, thereby potentially subjecting the principal to onerous state and federal tax and employment law obligations.
Factors taken into account in whether the relationship could give rise to a permanent establishment include, among others, the degree to which the agent has the authority to bind the principal and whether the agent carries out a material portion of contract negotiation ultimately signed by the principal. Two of the many factors taken into account in determining whether such a relationship could be characterized as one of employment include whether the agent: (i) provides the services according to her own methods and (ii) is subject to the control of the principal (other than with respect to the results of the agent’s work). Both analyses are specific to fact and circumstances.
Appointment of Sub-agents
Under New York law and the law of the majority of states, a principal may authorize an agent to appoint another agent to act on the principal’s behalf. The second agent may be a subagent or a co-agent. A “subagent” is commonly defined as a person appointed by an agent to perform functions that the agent has consented to perform on behalf of the agent’s principal and for whose conduct the appointing agent is responsible to the principal. Thus, an agent who appoints a subagent delegates to the subagent power to act on behalf of the principal that the principal has conferred on the agent. Appointment of a subagent requires that the appointing agent have actual or apparent authority to do so, and it may be inferred in certain circumstances. As an example, in one case from New York, a claims adjuster hired by an insurance company (acting as agent of the insured) was held to be a subagent of the insured because it was common practice for insurance companies to retain adjusters to aid them to pursue insurance investigations.
With respect to subagents, we note that the relationship between an appointing agent and a subagent is also one of agency. A subagent acts subject to the control of the appointing agent, and the principal’s legal position is affected by action taken by the subagent as if the action had been taken by the appointing agent. As such, in most states, a subagent typically has two principals: the appointing agent and that agent’s principal. In New York and a limited number of other states, by contrast, the agency relation does not exist between the principal and a subagent. Under New York law, a subagent that has been appointed with proper authority will owe the principal the same duties as would the agent; however, for the subagent to have a fiduciary duty to that principal, the subagent must be aware of the identity of the ultimate principal. An agent may appoint a subagent only if the agent has actual or apparent authority to do so.
Rights and Obligations of the Agent
Generally, the following are the most important duties of the agent under state common law:
- Agent must not act outside of its express and implied authority.
- Agent must use care, competence and diligence in acting for the principal.
- Agent must obey the principal’s instructions as long as they are legal.
- Agent must avoid conduct which will damage the principal’s business.
- Agent must not act for an adverse party to a transaction with the principal.
- Agent cannot compete with the principal in the same business in which the agent acts in such capacity for the principal without the principal’s consent.
- Agent must provide the principal with information relevant to the marketing of the principal’s products.
- Agent must separate, account for and remit to the principal all collections for the principal’s account and other property of the principal.
- Agent must not receive compensation from any third party in connection with transactions or actions on which the agent is acting on behalf of the principal.
- Agent must maintain the confidentiality of, and not misuse, the principal’s confidential information.
The agent is subject to a general duty of good faith in the performance of its responsibilities and dealings carried out on behalf of the principal under an agency agreement. However, the agent’s duty generally will not override the specific terms provided for in the agreement between the parties. Under New York law, the agent owes the principal duties of loyalty, obedience and care. Under these duties, an agent cannot have interests in a transaction that is adverse to its principal (e.g., self-dealing or secret profits), the agent must obey all reasonable directions of the principal and the agent must carry out its agency with reasonable care (which includes a duty to notify the principal of all matters that come to the agent’s knowledge affecting the subject of the agency).
Rights and Obligations of the Principal
The following are the most important duties of the principal under state common law:
- Principals must promptly pay terminated agents the commissions that they are owed; in most states, failure to pay can result in penalties, including multiple-damages. Some states apply similar penalties to failures to pay commissions in a timely fashion during the term of the relationship; in contrast, a few states require that a commission be paid on transactions in the pipeline at the time of termination.
- Under the law of some states, an agency arrangement must be in writing, and certain formalities complied with, for the agency arrangement to be binding.
Generally under state law, principal and agent alike are required to act in good faith in performing their obligations in an agency relationship, subject to the express terms agreed to in the agency agreement. Additionally, under the law of some states, the principal is required to indemnify the agent against liabilities vis-à-vis third parties arising out of the performance of the agent’s duties, to compensate the agent reasonably for its services and to reimburse the agent for the reasonable expenses it incurred in carrying such service. New York law does not provide for any mandatory obligations by the principal in favor of the agent in this regard (New York courts having constantly held an agent’s right to indemnification from a principal is based on contract).
Exclusivity
State law generally does not contain mandatory provisions on exclusivity. Indirectly, certain rules (such as the Statute of Frauds under New York law that requires that exclusivity provisions be in writing if they will exceed one year) may apply. Otherwise, parties to a commercial agency arrangement generally may agree contractually on the terms of exclusivity, including whether: (i) to prohibit the agent from entering into agency arrangements with other principals covering the same subject matter within the same territory; (ii) to allow the principal to deal directly with customers located in the same territory without the agent’s involvement; (iii) to limit marketing and sales through the internet (including whether to prohibit the same through the principal’s website and/or whether the agent may do so through its own website); and (iv) a commission is due to the agent on sales made by the principal online to customers in the territory.
Remuneration
There are no specific federal or state regulations regarding commissions or stock consignments generally in commercial agency agreements. Generally, provisions regarding commissions, including the right to the same at and after contract termination or expiration, loss of commission rights and the right to inspect the principal’s books are provided for contractually. We do note an exception: in some US government contracts suppliers are required to certify that they are not paying commissions to non-employees. Furthermore, some federal funding of purchases by foreign buyers carry with them restrictions on commissions payable by the sellers.
Understanding the interplay between federal and state statutory and common law in the US legal system is important to understanding the regulation of exclusive distribution agreements in the US.
Under the US Constitution all power not specifically reserved for the federal government remains with the states. Federal law has exclusive jurisdiction only over certain types of cases (e.g., those involving federal laws, controversies between states and cases involving foreign governments), and share jurisdiction with the states courts in certain other areas (e.g., cases involving parties that reside in different states). In the vast majority of cases, however, state law has exclusive jurisdiction. Similarly, the doctrine of freedom of contract under US law also directly affects how distribution agreements are regulated in the US.
Furthermore, because a distributor is typically an unaffiliated third party acting on its own account rather than on behalf of the supplier as principal, distribution agreements are subject to greater regulation under US federal and state antitrust law. Such law, among other things, (i) regulates whether and the degree to which a supplier in a distribution arrangement may seek in a contract or otherwise to dictate the price at which the distributor will resell products supplied; (ii) imposes restrictions on suppliers that engage in “dual distribution” (selling product directly as well as through a distributor); and (iii) may limit the suppliers’ ability to sell product to different distributors at a different price. Antitrust law also regulates exclusivity and selective distribution arrangements, as well as distribution relationships in certain industries (e.g., federally: automobile manufacturers and petroleum; at the state level, heavy equipment, liquor and farm equipment industries). Furthermore, distribution agreements often may resemble franchise arrangements, subjecting those arrangements to extensive federal and state regulation.
Under the law of most states (including New York), exclusive distribution exists when a supplier grants a distributor exclusive rights to promote and sell the contract goods or services within a territory or to a specific group of customers. Exclusive rights in a distribution arrangement are often granted by the supplier for the distribution of high quality or technically complex products that require a relatively high level of expertise by the distributor, including staff that is specially training to sell the goods or specialized after-sales repair and maintenance or other services. Distribution agreements differ from commercial agency agreements in several respects. In contrast to a distributor, a commercial agent does not take title to product, does not hold inventory and typically has no contractual liability to the customer (including risk of customer non-payment). Conversely, a distributor, in line with the greater risk of its activities, typically can expect greater upside economically in terms of margins on resale relative to an agent’s profit through earned commissions.
Sub-distributors
Under the law of most states (including New York), a distributor may appoint sub-distributors absent any restrictions to the contrary in the agency agreement. Commercially, the appointment of a sub-distributor may have an adverse effect on the supplier by reducing the supplier’s control over its distribution channel activities or increasing the supplier’s potential liability exposure given the increased number of distributors whose actions may be attributed to the supplier. A supplier that does not manage properly the appointment of sub-distributors may also lose valuable product knowledge with respect to the distributed goods (particularly if the goods are novel or complex in nature). Advantages to sub-distributor appointments for the supplier may include a more effective overall marketing presence with enhanced local market knowledge, a broader geographic scope, a potentially lower costs as a result of the sub-distributors’ expertise and efficiencies, etc.
————————————-
Need help with your International Distribution Contracts?
Click the button below to Receive Support from our Expert Lawyers thanks to the Online Help Desk
————————————-
Rights and Obligations of the Exclusive Distributor
- Sales organization: suppliers are not required to establish sales organizations in exclusive distribution agreements.
- Sales’ target: there are no mandatory rules under federal law or state law (including New York) generally regarding sales targets in exclusive distribution agreements. However, such provisions are common in exclusive distribution agreements.
- Guaranteed minimum target: minimum sales requirements are common in exclusive distribution agreements. As a commercial matter, a supplier as a requirement to give, or maintain, exclusivity with one distributor, will seek through such requirements to ensure that economically the distributor is performing satisfactorily. Often failure to meet sales targets may entitle a supplier to rescind the exclusivity, terminate the agreement or reduce the portion of the territory to which the exclusivity applies. We note that minimum sales requirements in an exclusive distribution arrangement may, in certain cases, be subject to challenge under antitrust law as having an undue anticompetitive effect by preventing a distributor from purchasing products from a competitive supplier.
- Minimum stock: there are no mandatory rules in federal law or the law of the majority of states (including New York) regarding minimum stock. A supplier may seek to have the distributor agree, contractually, to maintain adequate levels of stock relative to market demands as well as to store the product properly.
- After-sales service: the parties to a distribution agreement are generally free to agree as they deem appropriate with respect to after-sale service regarding products.
- Resale Prices: the Exclusive Distributor is free to fix the resale prices. State law (including New York law) generally does not limit the ability of an exclusive distributor to fix resale prices. […] A supplier’s ability to set resale prices for distributors is subject to limitations under federal and state antitrust law. Many state antitrust laws (including New York’s) closely resemble the federal antitrust laws. However, differences exist such that certain conduct may be found not to violate federal antitrust law but still be found to violate state antitrust law (or vice versa). Because the distributor (contrary to an agent) is acting on its own behalf, an agreement between supplier and distributor to maintain certain prices (or if a distributor is deemed to have been coerced by the supplier to follow certain prices), may be a per se price-fixing violation under federal and state antitrust law. Under federal antitrust law, vertical price-fixing until 2007 had been illegal per se. This per se rule was overturned by the Supreme Court. Horizontal price fixing remains per se illegal under the Sherman Act (see below).
Rights and Obligations of the Supplier
- Exclusive Distributor undertaking to supply: generally, state statutes do not specifically provide that a supplier in a distribution relationship has a duty to supply specific levels of product to a distributor, with such obligations generally be established by contractual provision. However, a supplier does have an implied covenant of good faith and fair dealing toward the distributor under state law generally, which generally requires that a party to a commercial agreement not do anything which injures the right of the other to receive the benefits of the agreement). Under the foregoing, a supplier may be deemed to have an obligation to supply product to a distributor (or be found to have violated the implied covenant of good faith and fair dealing in the event that the supplier, although able, decided not to provide a distributor with product without any other contractual justification for not doing so). However, even where such a duty were found to exist, the quantity and frequency of product supply and other details often remain unclear. To avoid uncertainty, distributors often seek to have a specific provision included in the distribution agreement, providing at least for the supplier to be required to use some degree of effort (e.g., “best efforts,”, “reasonable best efforts” or “reasonable efforts”) to supply product responsive to distributor’s submitted purchase orders. On a related topic, generally a distributor typically is only required to inform the supplier of lower purchase estimates if the distributor undertakes to do so (or undertakes a more general obligation with respect to the market) in the distribution agreement. However, even if the supplier is not, under an exclusive distribution agreement, required to supply the distributor with product, the supplier may still be subject to a contractual or common law obligation not to sell to third parties in the territory. New York courts held that suppliers that make direct sales to customers in the territory under an exclusive distribution agreement have breached their duties to the exclusive distributor.
- Retention of title: typically, in sales transactions on credit in the US, title is passed at the moment of initial sale. The buyer typically grants the supplier a security interest in the goods purchased, which if proper perfected under state law, affords the supplier with a priority position relative to other creditors with respect to the products provided (inventory) in the event of non-payment and enforcement.
Construction defects warranty
The law of “products liability” in the US is based on the law of torts. Under New York law, in cases of where an end user is injured by a defective product which was sold by the distributor under a distribution agreement, the end user generally is able to sue the distributor and the supplier of the product under one or more of the following theories: (i) strict liability; (ii) negligence; or (iii) breach of warranty. The usual theory of recovery against a distributor is strict liability. Under a strict liability theory, a supplier or distributor that sells a defective product while engaged in its normal course of business shall be liable for injuries it causes to customers, regardless of privity, foreseeability or the exercise of due care. Product liability cases also are brought under breach of warranty claims. Breach of warranty claims can be based on express warranties (e.g., from advertisement or a product label) and on implied warranties (typically, warranties of merchantability and fitness for a particular purpose under the provisions of the Uniform Commercial Code as adopted by the states). Lastly, negligence claims brought by plaintiffs are based on the improper conduct of the defendant, whether supplier or distributor or other participant in the distribution chain, with respect to the manner of distribution or care of the product sold (examples include improper storage or transport).
Under New York law, exceptions based on misuse, neglect or abuse by the suing party generally apply as defenses against liability under theories of strict liability, negligence or breach of warranty.
The supplier and distributor can allocate third-party liabilities (e.g., potential losses to be paid to plaintiffs in a products liability law suit) and related attorneys fees as between themselves through warranty and other indemnification provisions. Parties to a distribution agreement in the US often seek to put in place such re-allocation provisions not only because of potential liability resulting from a final, unfavorable judgment, but also because of the sizeable legal fees that litigants in the US often incur. In this regard, we note that in the US litigation costs are generally born by all of the litigating parties and not by the losing party as is common in many other countries. Such provisions may include indemnification provisions relating to product liability or trademark infringement claims brought by third parties, limitations on liability provisions (based on monetary caps and exclusions as to the types of damages that may be recovered, such as consequential, punitive, special and indirect damages) and disclaimers in respect of express or implied warranties that may otherwise apply under state law applicable to the distribution agreement.
Exclusivity
Exclusive-dealing provisions – under which the distributor undertakes not to distribute competing products in the territory – are quite common in distribution agreements. However, although it is not easy for a plaintiff to prevail, such a provision may be subject to challenge as an unlawful restriction on competition under federal and state antitrust law, typically under the following federal antitrust laws: (i) section 1 of the Sherman Act, which prohibits contracts “in restraint of trade;”; (ii) section 2 of the Sherman Act, which prohibits “attempt[s] to monopolize” and monopolization; (iii) section 3 of the Clayton Antitrust Act of 1914 […], which prohibits exclusivity arrangements that may “substantially lessen competition” or tend to create a monopoly; and, finally, (iv) section 5 of the Federal Trade Commission Act […], which prohibits “[u]nfair methods of competition.” In deciding these cases, typically courts apply the “rule of reason analysis” under which the exclusive dealing arrangements is analyzed considering a host of factors, including: (a) the defendant’s market power; (b) the degree of foreclosure from the market and barriers to entry; (c) the duration of the contracts; (d) whether exclusivity has the potential to raise competitors’ costs; (e) the presence of actual or likely anticompetitive effects; and (f) legitimate business justifications.
The Court of Justice of the European Union (“CJEU”) has issued a new ruling on the international scope of the Commercial Agency Directive (86/653/EEC of 18 December 1986). The new decision is in line with the rulings of
- the CJEU in the Ingmar case (decision of 9 November 2000, C-381/98, goodwill indemnity mandatory where the agent acts within the EU) and Unamar (decision of 17 October 2013, C-184/12, as to whether national agency law is mandatory where exceeding the Commercial Agency Directive’s minimum protection) and
- the German Federal Supreme Court of 5 September 2012 (German agency law as mandatory law vis-à-vis suppliers in third countries with choice-of-court clause).
The question
Now, the CJEU had to decide whether a commercial agent acting in Turkey for a supplier based in Belgium could claim goodwill indemnity on the basis of the Commercial Agency Directive. More specifically, the question was whether the territorial scope of the Commercial Agency Directive was given where the commercial agent acts in a third country and the supplier within the EU – hence opposite to the Ingmar case.
The facts
According to the agency contract, Belgian law applied and the courts in Gent (Belgium) should be competent. Belgian law, transposing the Commercial Agency Directive, provides for a goodwill indemnity claim at termination of the contract (and, additionally, compensation for damages). However, the referring court considered that the Belgian Law on Commercial Agents of 1995 was self-restraining and would apply, in accordance with its Art. 27, only if the commercial agent acted in Belgium. Otherwise, general Belgian law would apply.
The decision
The CJEU decided that the parties may derogate from the Commercial Agency Directive if the agent acts in a third country (i.e. outside the EU). This has here been the case since the agent acted in Turkey.
The decision is particularly noteworthy because it – rather by the way – continues the CJEU’s Ingmar ruling under the Rome I Regulation (I.). In addition, it indirectly confirms sec. 92c of the German Commercial Code (II.) – which allows the parties to a commercial agent agreement governed by German law to deviate from the generally mandatory agency law if the commercial agent is acting outside the European Economic Area (“EEA”). Finally, it provides legal certainty for distribution outside the EEA and illustrates what may change after a Brexit as regards commercial agents acting in the United Kingdom (III.) – if the EU and the United Kingdom do not set up intertemporal arrangements for transition.
For details, please see the article by Benedikt Rohrßen, Zeitschrift für Vertriebsrecht 2017, 186 et seq. (“Ingmar reloaded – Handelsvertreter-Ausgleich bei umgekehrter Ingmar-Konstellation nicht international zwingend”).
Manufacturers of brand-name products typically aim to ensure the same level of quality of distribution throughout all distribution channels, offline and online. To achieve this aim, they provide criteria how to resell their products. With the increase of internet sales, the use of such criteria has been increasing as well.
A total ban of online sales to end consumers within the EU is, however, hardly valid because online sales are considered as passive sales (cf. Guidelines on Vertical Restraints 2010, para. 52). Restrictions below a total ban are, however, commonplace (for examples, see the post “eCommerce: restrictions on distributors in Germany”). Yet, it is still not clear how far such restrictions are permissible.
For example, the luxury perfume manufacturer Coty’s German subsidiary Coty Germany GmbH has set up a selective distribution network and its distributors may sell via the Internet, under the following conditions. They shall
- use their internet store as “electronic store window” of their brick and mortar store(s), thereby maintaining the products’ character as luxury goods, and
- abstain insofar from engaging third parties as such cooperation is externally visible.
The court of first instance decided that tsuch ban of sales via third party platforms was an unlawful restriction of competition under art. 101 Treaty on the Functioning of the European Union (“TFEU”), namely a hardcore restriction under article 4 lit. c Regulation (EU) No. 330/2010 (Vertical Block Exemptions Regulation or “VBER”). The court of second instance, however, does obviously not see the answer that clear. Instead, the court requested the Court of Justice of the European Union (CJEU) to give a preliminary ruling on how European antitrust rules have to be interpreted, namely article 101 TFEU and article 4 lit. b and c VBER (decision of 19.04.2016, ref. no. 11 U 96/14 [Kart]) – see the previous post “eCommerce: restrictions on distributors in Germany”.
On 30 March 2017, the hearing took place before the CJEU:
- Coty defended its platform ban, arguing it aimed at protecting the luxury image of brands such as Marc Jacobs, Calvin Klein or Chloe.
- France – seat of several luxury brands such as Louis Vuitton, Chanel and Christian Dior –supported Coty.
- The distributor instead argued that established platforms such as Amazon and eBay already sold various brand-name products, e.g. of L’Oréal. Accordingly, there was no reason for Coty to ban the resale via these marketplaces. Germany also supported this view by emphasizing the importance of online platforms for small and medium-sized enterprises (where, however, the share of distributors using online marketplaces is 62% much higher than in all other Member States, see the Staff Working Document, „Final report on the E-commerce Sector Inquiry“, para. 452).
- Luxembourg – the seat of Amazon – considers a general platform ban to be disproportionate and therefore as anti-competitive (cf. Reuters’ article here).
Interest in the outcome of the Coty case is widespread, as the active participation of the various EU Member States illustrates (in addition to the abovementioned countries, also Italy, Sweden, the Netherlands and Austria). Simply put, the question is whether owners of luxury brands may generally or at least partially ban the resale via internet on third-party platforms.
Indications on how the court may decide have just appeared on 26 July 2017, with the Advocate General giving his opinion. The Advocate General proposes that the CJEU answers the questions referred to the court as follows:
“(1) Selective distribution systems relating to the distribution of luxury and prestige products and mainly intended to preserve the ‘luxury image’ of those products are an aspect of competition which is compatible with Article 101(1) TFEU provided that resellers are chosen on the basis of objective criteria of a qualitative nature which are determined uniformly for all and applied in a non-discriminatory manner for all potential resellers, that the nature of the product in question, including the prestige image, requires selective distribution in order to preserve the quality of the product and to ensure that it is correctly used, and that the criteria established do not go beyond what is necessary.
(2) In order to determine whether a contractual clause incorporating a prohibition on authorised distributors of a distribution network making use in a discernible manner of third-party platforms for online sales is compatible with Article 101(1) TFEU, it is for the referring court to examine whether that contractual clause is dependent on the nature of the product, whether it is determined in a uniform fashion and applied without distinction and whether it goes beyond what is necessary.
(3 The prohibition imposed on the members of a selective distribution system who operate as retailers on the market from making use in a discernible manner of third undertakings for internet sales does not constitute a restriction of the retailer’s customers within the meaning of Article 4(b) of Commission Regulation (EU) No 330/2010 of 20 April 2010 on the application of Article 101(3) on the Treaty of the Functioning of the European Union to categories of vertical agreements and concerted practices.
(4) The prohibition imposed on the members of a selective distribution system, who operate as retailers on the market, from making use in a discernible manner of third undertakings for internet sales does not constitute a restriction of passive sales to end users within the meaning of Article 4(c) of Regulation No 330/2010.”
The Advocate General’s complete opinion can be found at CJEU’s website here.
The updated overview of the procedure can be found at CJEU’s website here.
Practical Conclusions
- The Coty case is extremely relevant to distribution in Europe because more than 70% of the world’s luxury items are sold here, many of them online now.
- The general ban to use price comparison tools shall be anti-competitive – according to the Bundeskartellamt, as confirmed by the Higher Regional Court of Düsseldorf on 5 April 2017. The last word is, however, still far from being said – see the post “Asics’ Distribution of Sporting Goods: Ban of Price Comparison Tools anti-competitive & void?!?”. Besides, also the Coty case’s outcome may influence how to see such bans.
- The Coty case is setting the course for future Internet sales. Depending on the decision of the CJEU, manufacturers of luxury or brand-name products can continue to ban the use of marketplaces like Amazon or eBay for the distribution of their products – or not any more or only under certain conditions. If the court follows the Advocate General’s conclusions, such platform bans appear possible, provided that the platform ban depends “on the nature of the product, whether it is determined in a uniform fashion and applied without distinction and whether it goes beyond what is necessary” (see above).
- For further trends in distribution online, see the EU Commission’s Final report on the E-commerce Sector Inquiry and details in the Staff Working Document, „Final report on the E-commerce Sector Inquiry“.
- For details on distribution networks and antitrust, please see my article „Plattformverbote im Selektivvertrieb – der EuGH-Vorlagebeschluss des OLG Frankfurt vom 19.4.2016“, in: Zeitschrift für Vertriebsrecht 2016, p. 278–283.
Manufacturers of brand-name products typically aim to ensure the same level of quality of distribution throughout all distribution channels. To achieve this aim, they provide criteria how to resell their products. With the increase of internet sales, the use of such criteria has been increasing as well.
Best example: Asics. Until 2010, the German subsidiary Asics Deutschland GmbH supplied its distributors in Germany without applying special criteria. In 2011, Asics launched a selective distribution system called «Distribution System 1.0«. It provided, inter alia, for a general ban on distributors to use price comparison tools in online sales:
«In addition, the authorized B … distributor is not supposed to … support the functionality of price-comparison tools by providing application-specific interfaces (» API») for these price comparison tools.» (translated]
The German Federal Antitrust Authority (“Bundeskartellamt”) has determined by decision of 26 August 2015 that the ban of price-comparison tools against distributors based in Germany was void because it infringed Article 101 (1) TFEU, sec. 1 Act on Restraints of Competition (see the 196-page decision here). Reason given was that such ban would primarily aim at controlling and limiting price competition at the expense of consumers. Asics, instead, filed a complaint before the Higher Regional Court of Düsseldorf to annul the Bundeskartellamt’s decision. Asics argued that this ban was a proportionate quality standard within its «Distribution System 1.0«, aiming at a uniform product presentation.
Now the Higher Regional Court of Düsseldorf on 5 April 2017 confirmed the Bundeskartellamt’s decision that within selective distribution systems the general ban to use price comparison tools was anti-competitive and therefore void (ref. no. VI-Kart 13/15 (V); see also the Bundeskartellamt’s press release in English):
- In particular, the ban of price comparison tools was not exempt from Art. 101 (1) TFEU by way of teleological interpretation (“Tatbestandsreduktion”). According to the court, it was not necessary in order to protect the quality and the product image of the Asics brand (same argumentation as the Higher Regional Court of Frankfurt in its judgment of 22.12.2015, ref. no. 11 U 84/14 regarding Deuter’s functional back-up bags; the Federal Supreme Court will, however, still decide on this, ref. no. KZR 3/16). The court declared that the ban was intended to restrict the buyers, arguing that distributors would be restricted in entering into a price competition with others. The presentation of products in price comparison tools would not damage the quality or brand of Asics products. It would neither give a «flea market impression«, ostensibly also not from the simultaneous presentation of used products. Also, the ban of price comparison tools would not solve the problem of «free-riding«. In any event, the general ban of price comparison tools was not necessary and therefore unlawful.
- The ban would also not be exempt under the Vertical Block Exemption Regulation. Instead, the court argued, the ban would limit passive sales (over the internet) to end customers, contrary to Art. 4 (c) Vertical Block Exemption Regulation (referring to the CJEU decision in the case of Pierre Fabre, 13 October 2011, ref. no. C-439/09). The “equivalence principle” (i.e. restrictions for offline as well as online sales should not be identical, but functionally equivalent) would not apply as there were no comparable functions to price comparison tools in the stationary trade.
- Finally, the ban would also not benefit from the individual exemption under art. 101 (3) TFEU (“efficiency defence”).
Conclusions:
- According to the Higher Regional Court of Düsseldorf, manufacturers might not generally prohibit their distributors from using price comparison tools. At the same time, the court also refused to grant leave to appeal against its decision – which, however, can be challenged separately by way of an appeal (sec. 74, 75 Act on Restraints of Competition).The future development of criteria limiting distributors in reselling online remains open, especially as (i) the Coty case is pending at the CJEU (see below) and (ii) the EU Commission in its sector enquiry into e-commerce currently appears to favour manufacturers of brand-name products (see below).
- The court has explicitly left open – arguing that they were not relevant for its decision – whether
- the ban of search engines is anti-competitive (para. 44 et seq. of the decision);
- the general ban of third-party platforms is anti-competitive (para. 7) – although Asics’ “Distribution System 1.0” also banned third-party platforms such as Amazon or eBay.
- Whether and how manufacturers of luxury or brand-name products can continue to ban their distributing via Amazon, eBay and other marketplaces in general in the future will likely be decided by the CJEU in the coming months – in the case of Coty (see our post “eCommerce: restrictions on distributors in Germany”) where a hearing has been just recently been held end of March 2017.
- Without prejudice to the Coty case, the EU Commission has however, in its sector enquiry into e-commerce of May 2017, declared that
- “marketplace bans do not generally amount to a de facto prohibition on selling online or restrict the effective use of the internet as a sales channel irrespective of the markets concerned …,
- the potential justification and efficiencies reported by manufacturers differ from one product to another …”,
- (absolute) marketplace bans should not be considered as hardcore restrictions within the meaning of Article 4(b) and Article 4(c) of the VBER…,
- the Commission or a national competition authority may decide to withdraw the protection of the VBER in particular cases when justified by the market situation”
(41–43 Final Report on the e-commerce sector inquiry).
Hence, on the basis of the EU Commission’s most recent position, there is room for arguments and creative contract drafting since even general marketplace bans can be compatible with the EU competition rules. However, the courts may see this differently in the single case. Therefore, especially the CJEU with its Coty case (see above) will likely bring more clarity for future online distribution.
Companies can sell their products worldwide directly – through branches, subsidiaries or e-commerce – or indirectly – through agents, distributors, franchisees or commission agents.
The German Federal Court of Justice now ruled for the first time that commission agents may also claim indemnity at terminination of their contract (decision of 21 July 2016, ref. no. I ZR 229/15).
What are Commission Agents?
Commission agents are self-employed business persons who are constantly entrusted with the task of concluding transactions in their own name for the account of another company, i.e. the supplier. They differ from distributors insofar as distributors buy and sell products on their own behalf and consequently bear distribution risks themselves (for details, see the Legalmondo post on Distribution Agreements in Germany and the Legalmondo post on “German” Distributor Indemnity – How to avoid it).
What is new for Commission Agents?
The Federal Court of Justice has clarified that – as is settled case law for distributors – also Commission Agents can claim indemnity at termination if two analogy requirements are met, namely if the commission agent
- (i) is integrated into the supplier’s sales organization like a commercial agent; and
- (ii) has to provide the customer data to the supplier so that the supplier continues to derive substantial benefits from the business with such customers after termination of the contract.
With regard to the second requirement (provision of customer data), the Federal Court points out that the prerequisite is – as a general rule – fulfilled because statutory law obliges the commission agent to provide the customer data (sec. 384 para. 2 German Commercial Code). As a result, the customers “belong” to the supplier by law, without any specific contractual obligation.
If distribution concerns “anonymous mass business” (i.e. where customers pay cash and the sales intermediary does not know customer names because of any CRM measures), it may be impossible for the commission agent to provide respective customer data. In such case, it shall according to the Federal Court suffice if the commission agent provides data «on the sale process per se» – so that the supplier can estimate which type of goods is in demand where (quite different from the requirements regarding distribution of high-quality products such as cars, fashion or electronics).
Can the parties contract out?
Yes, the obligation to provide customer data can be contracted out. Nevertheless, indemnity claims can currently not 100% safely excluded by doing so because the Federal Court leaves explicitly open whether commission agents may also claim indemnity if the supplier has the mere factual chance to use the customer data. Hence, to be on the safe side, one has to exclude also the chance to use the data (see “Practical information” below).
What about franchisees?
As regards franchisees as sales intermediaries, the Federal Court confirms that mere factual continuity of the customer base does not suffice to result into an indemnity claim (thus confirming the decision against the franchisee of the traditional bakery chain “Kamps” of 5 February 2015, ref. no. VII ZR 315/13).
Practical tips
The provisions protecting self-employed commercial agents may apply analogously to commission agents.
As regards existing agreements under German law: if the two analogy requirements are met, indemnity claims at termination are quite likely.
As regards future agreements under German law:
- In general, the claim for indemnity can likely be avoided by excluding the commission agent’s obligation to provide the customer data. Such exclusion should, however, be clearly formulated. Alternatively – or, to be on the safe side, additionally –, the supplier may oblige himself to block and or delete the customer data at terminaton of the contract with the commission agent.
- Alternatively, the right to indemnity can be avoided by choosing another law and jurisdiction (taking into account the risk that the “German” indemnity claim might nevertheless be applied by as overriding mandatory provision in the sense of Article 9 of the Rome I Regulation).
- Finally, if the commission agent acts outside the European Economic Area, the indemnity claim can be excluded by a simple waiver (according to analogue application of sec. 92c German Commercial Code).