Germany – Termination of distribution agreements: Can dealers claim delivery anyway?

24 mai 2018

  • Allemagne
  • Distribution

Not what you would expect 

When can you terminate, how should you terminate, and how much are you exposed?!

The outcomes of termination of a business relationship with an Israeli counterpart in Israel arise again and again as a question in many disputes between International corporations and Israeli counterparts, such as distributors or franchisees.

This is mainly because Israeli law does not include specific laws regulating or regarding distribution or franchising or other kinds of business ventures (except a relatively new agency law – referring in a limited manner to specific kinds of agency only) – and thus disputes in said regards are determined based on the general principles of contract law, the contractual and factual bases – obviously resulting in considerable uncertainty as to specific matters.

However, substantial case law, such as in the matter of Johnson & Johnson International that ended up paying compensation in the equivalent to over 1.5 Million US$, indicates the basics and threshold of what can be expected in such disputes, and, if implemented wisely, may assist in planning the disengagement or termination of a business relationship, in a manner that would be the least costly for the terminating party and minimize its exposure to a lawsuit.

In many cases, domestic parties invest many years and/or fortunes, in order to penetrate the domestic market with the foreign service or products, and to promote sales in the subject region, for the benefit of both the international corporation and the domestic party.

Nevertheless, often the international corporation decides for various reasons (such as establishing an « in-house » operation » in the target location or substituting the distributor/franchisee) to terminate the oral or written contractual relationship.

What are the legal foundations involved in such termination as per due notice of termination and corresponding compensation – if at all?

Generally, this issue arises in cases in which the contract does not specify a period of the business relationship, and, as a principle of law, contracts may be terminated by reasonable notice and subject to the fundamental good faith principle.

Contracts are not perceived as binding upon the parties indefinitely. The question is always what is the reasonable time for termination notice, and is the termination done in good faith (which is always a tricky and vague issue). Compensation is commonly awarded in accordance with what the courts find as the due notice period that may also entail compensation for damages related to said breach.

As always, there are exceptions, such as breach of trust toward the manufacturer/franchisor, that may have great impact on any due notice obligations, as far as justification for immediate termination that can be deemed immune to breach of due notice or good faith obligations.

The truth is the reasonability of the due notice varies from case to case!

However, Israeli case law is extremely sensitive to the actual reasoning of termination and how genuine it is, as opposed to asserting a tactical breach argument in an attempt to « justify » avoiding a due notice period or adequate compensation.

In this respect, in many cases simple « non-satisfaction » was denied as a legitimate argument for breach of contract, while safeguarding the freedom of contracts and the right to terminate an ongoing contract with due notice and good faith.

There are various common parameters referred to in the case law, to determine the adequate time of due notice, including, for instance, the magnitude of investment; the time required for rearrangement of business towards the new situation (including time required to find an alternative supplier product which can be marketed); the magnitude of the product/service out of the entire distributor’s business, etc.

Time and again, although not as binding rule, the due notice period seems to be in the range of around 12 months, as a balance between the right of termination and the reasonable time for rearranging the business in light of the termination. There were, however, cases in which due notice for termination was deemed as short as three months and as long as two years – but these are rather exceptional.

Another guiding point in the case law is the factor of exclusivity or non-exclusivity, as well as the concept that the longer the business relationship, the less the distributor/franchisee may expect compensation/reimbursement for investment – based on the concept that he has enjoyed the fruits of the investment.

The outcome of not providing such adequate due notice might result in actual compensation reflecting the loss of profit of the business in the last year before the termination, or for the whole term the court finds a due notice was in place, or, in cases of bad faith, even a longer period reflecting the damages.

In conclusion, given the legal regime in Israel, such exposure might be extremely considerable for any international or foreign business. It would, therefore, be vital and as a consequence of real value to plan the strategy of disengagement/termination of the business with the domestic counterpart in Israel, in advance and prior to executing it, and there are, indeed, adequate and wise strategies that may be implemented for the best result.

It is often the case – in practice – that an ongoing commercial relationship builds slowly over time through a series of sales agreements, without the parties ever signing an actual distribution agreement to set down their respective rights and responsibilities.

At first blush this might appear to be a good thing: one can sidestep being bound, especially long-term, to the other party. But on closer scrutiny the solution becomes problematic, especially for anyone operating internationally.

One of the key issues that arises when an international contractual arrangement is not in writing, is identifying the court with jurisdiction over any dispute arising therefrom. In the European Union, the issue is resolved by the provisions of Regulation 1215/2012 (“Brussels I recast”). Pursuant to Article 7 of the Regulation, as an alternative to the defendant’s courts, jurisdiction in a contractual dispute may lie with the court in the place of performance of the obligation in question. Next to this general rule are two criteria to identify the “place of performance”, differentiated according to the type of contract at issue. For a contract for goods, it is the place of delivery for the goods; in a contract for services, it is the place where the services are provided.   

Thus, to identify the court with jurisdiction, it is crucial that a contract fall under one of these categories: goods or services.

No doubt this distinction is quite simple in many circumstances. In the case of a distribution agreement, or of a commercial concession agreement, the issue may become thorny.

The European Court of Justice has analysed this issue on a number of occasions, most recently in their judgement of 8 March 2018 (Case no. C-64/17) following the request for a preliminary ruling from a Portuguese Court of Appeal. The parties to the action were a Portuguese distributor, a company called Lusavouga, and a Belgian company called Saey Home & Garden, that produced articles for the home and garden, including a line of products branded “Barbecook”.

Following Saey’s decision to break off the commercial relationship – notice of which was sent in an email dated 17 July 2014 – Lusavouga brought action in Portugal seeking compensation for the unexpected termination of the agreement, and goodwill indemnity. Saey raised a plea of lack of jurisdiction of the Portuguese court, citing their general conditions of sale (mentioned in their invoices) which required that a Court in Belgium be competent for dispute resolution.

The facts thus presented two issues to be resolved in light of the Brussels I recast Regulation: deciding whether a jurisdiction clause in a vendor’s general terms and conditions pursuant to Art. 25 of the Regulation shall apply, and, if not, choosing the court with jurisdiction under Art. 7 of the Regulation.

Shall a jurisdiction clause contained within a vendor’s general terms and conditions apply to a distribution relationship?

The supplier company apparently considered their course of dealing with the Portuguese retailer nothing more than a concatenation of individual sales of goods, governed by their general terms and conditions. Consequently, they argued that any dispute arising from the relationship should be subject to the jurisdiction clause identifying Belgium as the court with jurisdiction under those terms and conditions.

Thus, a determination was needed on whether, under these facts, there was a valid prorogation of jurisdiction under Article 25, paragraph 1 of Regulation 1215/2012.

The Court of Justice has long opined that if the jurisdiction clause is included in the general contract conditions drafted by one of the parties, the contract signed by the other party must contain an express reference to those general conditions in order to ensure the real consent thereto by the parties (judgement of 14 December 1976, Estasis Salotti di Colzani, case no. 24/76; judgement of 16 March 1999, Castelletti, case no. C-159/97; judgement of 7 July 2016, Höszig, case no. C-225/15). Moreover, to be valid, the clause must involve a particular legal relationship (judgement of 20 April 2016, Profit Investment SIM, case no. C-366/13).

In the instant case, the referring court found it self-evident that the legal relationship at bar was a commercial concession agreement entered into for the purpose of distributing Saey products in Spain, a contract that was not evidenced in writing.

From this perspective, it is clear that the general conditions contained in the Saey invoices could have no bearing on the commercial concession agreement: assuming Lusavouga’s consent had been proven, the selection of Belgium as the forum would have applied if anything to the individual sales agreements, but not to those duties arising from the separate distribution agreement.

What, then, would be the court with jurisdiction for the duties arising from the commercial concession agreement?

Absent any jurisdiction clause, the issue would be decided under Art. 7, point 1 of Regulation 1215/2012, under which it becomes imperative to establish whether a contract is for goods or for services.

The “provision of services” has been defined by the Court of Justice as an activity, not mere omissions, undertaken in return for remuneration (judgement of 23 April 2009, Falco, case no. C-533/07).

With the judgements in Corman Collins of 19 December 2013 (case no. C-9/12), and Granarolo of 14 July 2016 (case no. C-196/15), the Court held that in a typical distribution agreement, the dealer renders a service, in that they are involved in increasing the distribution of supplier’s product, and receives in consideration therefor a competitive advantage, access to advertising platforms, know-how, or payment facilities. In light of such elements, the contract relationship should be deemed one for services. If on the other hand the commercial relationship is limited to a concatenation of agreements, each for the purpose of a delivery and pickup of merchandise, then what we have is not a typical distribution agreement, and the contractual relationship shall be construed as one for the sale of goods.

Once the contract has been categorised as one for services, one must then determine “the place where, under the contract, the services are provided”. The Court specifies that such location shall be understood as the member state of the place of the main provision of services, as it follows from the provisions of the contract  or – as in the case at issue – the actual performance of the same. Only where it is impossible to identify such location shall the domicile of the party rendering the service be used.

From the referring court’s description of the contractual relationship, and from the Court of Justice’s understanding of the distributor’s performance of services, it would be logical to find that the principal location for performance of services was Spain, where Lusavouga “was involved in increasing the distribution of products” of Saey.

It is clear that neither the manufacturer nor the distributor would ever have intended such a result, and they might have avoided it being chosen for them by reducing their agreement in writing, including a jurisdiction clause therein.

By the same token, viewed from the outside, the Portuguese judges’ apparent conviction that the situation was one of an actual dealership contract would leave ample room for debate. After all, a number of elements would lead to the opposite conclusion. However, even in terms of that aspect, the absence of a written contract left room for interpretation that might lead to unforeseen – and perhaps rather risky – consequences.

In conclusion, the wisdom of setting down the terms and conditions of a sales distribution agreement in writing appears clear. This is not only because one can avoid those ambiguities we have described above, but also because it specifies other important clauses stipulated by the parties that should not be left to chance: exclusivity of area, if any, or with respect to specific sales channels, the contract period and termination notice, any duties to promote the product, control over end-user personal data, and the possibility of, and methods for, any online sales of products.

Agreements restricting competition are prohibited as anticompetitive agreements by Article 101 TFEU unless the agreement’s impact on trade or competition is not appreciable (cf. the EU Court of Justice in the Expedia case, C-226/11, judgment of 13 December 2012). Whether an agreement constitutes an appreciable restriction of competition or is in the « safe harbour » can be assessed according to the European Commission’s De Minimis Notice. Accordingly, an agreement is particularly appreciable if its object is to restrict competition. This applies in particular to so-called hardcore restrictions, such as vertical price maintenance (or resale price maintenance = “RPM”).

Regarding a special offer for dietary products, the German Higher Regional Court of Celle surprisingly took a different view and decided that even resale price maintenance could be considered non-appreciable and thus falling outside the ban of anticompetitive business practices under Article 101 TFEU (judgment of 07.04.2016, Case 13 U 124/15 [Kart]). In this case, the manufacturer made a special offer to a group of its customers (pharmacies) with a special purchase discount: once, for a limited period and limited to a maximum quantity. In return, the customers should commit themselves to « present the product clearly… and not fall below a resale price of EUR 15.95« .

The Hanover Regional Court had instead seen the agreement as an unlawful resale price maintenance (judgment of 25 August 2015, Case 18 O 91/15) – and now the German Federal Court confirmed the same: the minimum prices specified here within the advertising campaign appreciably restrict competition and are thus banned as anticompetitive business practice under Article 101 TFEU (judgment of 17 October 2017, Case KZR 59/16). This corresponds to the case law of the EU Court of Justice in the Expedia case (see above) and the German Federal Court with regard to the sales requirement « one bar extra «  (i.e. without extra charge compared to the usual package size) of the Italian confectionery manufacturer Ferrero (judgment of 08.04.2003, Case KZR 3/02) – because the latter explicitly concerns « the scope for price increases resulting from the increased contents of the package » – not, however, the retailer’s decision to set prices freely downwards.

Practical tips

Vertical price fixing is generally prohibited, whereas providing a manufacturer’s suggested retail price (MSRP, also “recommended retail price”) and maximum selling prices are allowed – this is briefly the principle of German and European antitrust law on pricing frameworks. Furthermore, recommended retail prices and maximum selling prices (“MSP”) are subject to the restriction that they  » they do not amount to a fixed or minimum sale price as a result of pressure from, or incentives offered by, any of the parties” (Article 4 lit. a Vertical Block Exemptions Regulation). That means:

  • the manufacturer or supplier may provide guidance,
  • however, the reseller may set his sales prices freely.

Exceptions may apply – in addition to the RPM on the price of books or in the case of specialisation agreements – by way of the efficiency defence under Article 101 (3) TFEU in individual cases, e.g.

  • in the introductory period when launching new products on the market, or
  • in the case of short-term special offers if accompanied by a corresponding increase in efficiency, for example by investing the higher margin into better customer advice, which benefits all customers and Resale Price Maintenance prevents retailers who do not offer the customer advice from free riding (cf. EU Guidelines on Vertical Restraints, para. 225).

Such actions, however, require excellent preparation because manufacturers can only set resale prices for very short periods if they can convincingly demonstrate efficiency gains such as preventing free-riders.

In the case of fixed prices, the competition authorities quickly become sensitive. For example, fines for vertical price maintenance have recently been imposed again in Germany. In this respect, special care must be taken particularly in distribution and sales agreements.

  1. Correspondingly, each company’s sales team should continue following the previous case law on recommended retail prices, maximum selling prices and discount campaigns. Guidance for the practice is provided by

Geoblocking is a discriminatory practice preventing customers (mainly on-line customers) from accessing and/or purchasing products or services from a website located in another member State, because of the nationality of the customer or his place of residence or establishment.

The EU Regulation no. 2018/302 of 28 February 2018 on addressing unjustified geoblocking and other forms of discrimination based on customers’ nationality, place of residence or place of establishment within the internal market will enter into force on 2 December 2018.

The current situation

The EU Commission carried out a « mystery shopping » survey on over 10 000 e-commerce websites in the EU. The geoblocking figures are quite high! 63% of the websites do not let shoppers to buy from another EU country (even 86% for electric household appliances and 79% for electronics and computer hardware).

The survey shows also that 92% of on-line retailers require customers to register on their website and to provide them with e-mail address, physical address and telephone number. The registration is denied most of the time because of a foreign delivery address for 27% of the websites. Almost half of the websites give no information about the place of delivery while shopping on the website although this information on delivery restrictions has to be provided in due time during the shopping process. At the end, according to this EC survey, only 37% of the websites truly allow e-shoppers to freely buy on-line from another EU country (without restriction as regards place of establishment, place of delivery and mean of payment).

On the other side, only 50% of European customers buy products from on-line shops based in another EU member State while the value and the volume of e-commerce, globally speaking increase thoroughly year after year, but only on a domestic scope not throughout Europe.

On 23 June 2017, the European Council asked for a real implementation of the Digital Single Market strategy in all its elements including cross border partial delivery, consumer protection and prohibition of undue geoblocking.

The lack of the current legal frameworks

The service directive (n°2006/123/CE) and article 101 of the TFUE address already the discrimination practices based on nationality or place or residence or establishment.

According to article 20 (2) of the service directive, the EU member States must ensure that professionals do not treat customers differently based on their place of residence or establishment or nationality (unless objective exception). On the other side, EU competition law on vertical restraints (article 101 TFUE and the block exemption regulation and its guidelines) considers restrictions on passive sales as hard core restrictions violating EU competition rules. However, both set of rules (service directive and competition law framework) appear not to be fully effective in practice.

With this respect, the recent report of the European commission about the competition enquiry in the e-commerce sector shows, among others, that geoblocking was used at a large scale within the European e-commerce sector.

The aim of the geoblocking regulation

The goal of the geoblocking regulation is to prevent professionals from implementing direct or indirect discrimination based on the nationality, the place of residence or the place of establishment of their customers when dealing with cross border e-commerce transactions.

The scope of the geoblocking regulations

The new Regulation will only apply to online sales between businesses and end-user consumers or businesses.

The new Regulation will apply to websites operated within the European Union or to websites operated outside the European Union but proposing goods or services to customers established throughout in the European Union.

What are the new rules of management of an e-commerce website?

„As regards the access to the website

Under the Regulation, a business may neither block nor restrict, through the use of technological measures, access to their online interfaces for reasons related to nationality, place of residence or place of establishment of an internet user. However, businesses are authorized to redirect customers to a different website than the one they were trying to access provided the customer expressly agrees thereto and can still easily visit the website version they originally tried to access.

„As regards the terms and conditions of sales of the website

The Regulation forbids businesses from applying different general conditions of access to goods or services according to a customer’s nationality or place of residence or place of establishment (as identified by their IP address in particular) in the following three cases:

  • where the goods sold by the business are delivered in a different member state to which the business offers delivery (or where the goods are collected at a location jointly agreed upon by the business and the customer);
  • where the business offers electronically supplied services such as cloud, data storage, hosting services etc. (but not services offering access to copyright-protected content such as streaming or online-gaming services);
  • where the business supplies services received by the customer in a country in which the business also operates (such as car rental and hotel accommodation services or ticketing services for sporting or cultural events).

„ As regards the means of payment on the website

The Regulation forbids businesses from applying different conditions for payment transactions to accepted means of payment for reasons related to a customer’s nationality, place of residence or place of establishment, or to the location of the payment account or the place of establishment of the payment service provider (provided that authentication requirements are fulfilled and that payment transactions are made in a currency accepted by the business).

What are the impacts of this regulation on e-retailers?

Although formally excluded from the scope of the Regulation, relations between suppliers and distributors or wholesalers will still be impacted by it since provisions of agreements between businesses under which distributors undertake not to make passive sales (e.g., by blocking or restricting access to a website) for reasons related to a customer’s nationality, place of residence or place of establishment “shall be automatically void”.

The geoblocking regulation therefore impacts distributors twofold: first, directly in their relations with customers (end-user consumers or user-businesses), and second, indirectly in regard to their obligations under the exclusive distribution agreement.

The geoblocking regulation shall have to be coordinated with the existing competition law framework, especially the guidelines on vertical restraints which set up specific rules applying to on-line sales. On-line sales are likened to passive sales. The guidelines mention four examples of practices aiming to indirectly guarantee territorial protection which are prohibited when supplier and exclusive distributor agree:

  • that the exclusive distributor shall prevent customers in another territory from visiting their website or shall automatically refer them to the supplier’s or other distributors’ websites,
  • that the exclusive distributor shall terminate an online sale if the purchaser’s credit card data show that the purchaser is not from the exclusive distributor’s exclusive territory,
  • to limit the share of sales made by the exclusive distributor through the internet (but the contract may provide for minimum offline targets in absolute terms and for online sales to remain coherent compared to offline sales).
  • that the exclusive distributor shall pay a higher price for goods intended for sale on the internet than for goods intended for sale offline.

Manufacturers will have to decide whether they adopt a unique European gateway website or multiple local commercial offers, it being known that price differentiation is still possible per category of clients.

Indeed, the new Regulation does not oblige the e-retailers to harmonize their price policies, they must only allow EU consumers to access freely and easily to any version of their website. Likewise, this Regulation does not oblige e-retailers to ship products all over Europe, but just allow EU consumers to purchase goods from whichever website they want and to arrange the shipment themselves, if need be.

Finally on a more contractual level, it is not very clear yet how the new geoblocking rules could impact directly or indirectly the conflict of law rules applicable to consumer contracts, as per the Rome I regulation especially when the consumer will be allowed to handover the product purchased on a foreign website in the country of this website (which imply no specific delivery in the country where the consumer is established).

Therefore B2C general terms and conditions of websites would need to be reviewed and adapted on both marketing and legal sides.

Once convinced of the utility of mediation as a method of resolving conflicts between franchisor and franchisee and taken the decision to include a clause in the contracts that provides for it, the last step would be what elements should be taken into account when drafting it.

  1. The previous negotiation. It seems advisable that both parties grant themselves the possibility of trying to solve the problem with a previous formal negotiation. Mediation does not exclude the previous attempt made by the interested parties or their lawyers; however, it seems advisable to contractually provide a suitable end according to the circumstances. Experience shows that lengthening this phase too long may result in the conflict becoming more complicated and even more difficult to approach mediation.
  2. The clause may also provide for the place where the mediation will take place. Again at this point the parties are free. It is convenient that this is accurate indicating the concrete city.
  3. The language in which the mediation will be developed is the a faculty of the parties. There will be no difficulty in mediations in which both parties use the same language, but it is very convenient in contracts with parties that have different languages, or that belong to regions or countries with different co-official languages. The drafting or signing of the contract in a specific language does not presuppose that this must be the language of the mediation. It is an element to be taken into account also when requesting a mediator who can use that language in the chosen mediation institution.
  4. The procedure can also be decided by the parties. In particular, the number of sessions, the maximum expected duration, the participation of advisors, etc. Keep in mind that the greater or lesser regulation will allow to avoid future conflicts in this respect, although it will also imply a greater limit to the freedom of the parties that, nevertheless, will remain free to modify the agreement by mutual consent.
  5. The term of the mediation can also be contemplated. This would allow, for example, to prevent mediation from being extended only for purely procedural strategic purposes or to gather information from the other party before starting a procedure, etc. The professional mediators, however, are able to identify these manoeuvres, also having the power to put an end to mediation in those cases.
  6. Choosing the mediator or the mediation institution is an important choice. The parties can agree on who will be their mediator, indicate in the contract the elements to choose it, or submit directly to a Mediation Institution so that it is the one who designates it according to its own rules. These decisions can be alternatives (that is, that the parties agree on the mediator and, in case of lack of agreement, submit to an institution that names it), or they can be unique. The designation of an Institution requires that it has a sufficient guarantee of stability (avoid designating short-term institutions or without much future guarantee), with a sufficient panel of mediators depending on the characteristics of the mediation (language, competence, experience) and that allows the necessary flexibility for its operation.
  7. Finally, it is convenient that the clause includes an alternative way in case the mediation does not succeed either because the parties do not reach an agreement, or because they withdraw from the mediation. It is important to recall that mediation does not close the doors to the conflict be resolved by recourse to ordinary jurisdiction or arbitration. And in terms of specialized arbitration in distribution contracts, the IDArb (https://www.idiproject.com/content/idarb-idi-arbitration-project) is an excellent option.

On the topic of the importance of Mediation in Distribution Agreements, you can check out the recording our webinar “Mediation in International Conflicts”

« Rimowa owner terminates all distributor agreements in Europe » – headlined the leading German business newspaper “Handelsblatt” on 19 March 2018. The reason for termination is that Rimowa, the well-known manufacturer of high quality branded cases – after 2011 now again in 2018 – redesigns its distribution network: Rimowa aims at raising its quality selection criteria again, away from selling its products in the old-fashioned shop, to a modern shopping experience.

In principle, manufacturers can freely design and develop their distribution system according to their marketing strategy and any changing needs. Likewise, they are in principle free to choose the number and name of their sales intermediaries (distributors/dealers, franchisees, agents, etc.). They are in principle also free to switch to selective distribution, with the aim of aligning the distribution of their products with certain criteria (in particular: regarding the quality of distribution), thus possibly also reducing the number of distributors. However, as an exception, distributors may force the manufacturer to supply them anyway – namely if the manufacturer has a significant market power. In such a case, an obligation to contract with a distributor, resulting in an obligation to deliver may follow from the prohibition of discrimination (laid down in sec. 19 para. 1, 2 no. 1, 20 German Act against Restraints of Competition).

This issue becomes especially practically relevant if a manufacturer redesigns its distribution network – just like Rimowa did before and now does again. Rimowa switched to selective distribution in 2011/2012 (for the advantages of selective distribution and possible restrictions of distribution, see the Legalmondo article here). To redesign its distribution network, Rimowa terminated the former distributor agreements and offered to conclude new ones – according to which the distributors newly committed themselves to present the goods in a certain way and buy and use Rimowa’s shop-in-shop system. According to Rimowa, the appearance of a former distributor did not correspond to the new business concept and the new marketing strategy, which is why the parties could not agree on concluding a new agreement. Thereupon, the distributor filed an action, aiming at the conclusion of a new dealer contract and thus delivery of his shops.

The District Court of Munich denied the claim (decision of 09.09.2014, ref. no. 1 HKO 7249/13), the Higher Regional Court of Munich, however, affirmed such claim (decision of 17.09.2015, ref. no. U 3886/14 Kart) – arguing that the manufacturer had a leading position in the relevant « market for high-priced and high-quality suitcases » or, conversely, that the distributor had a dependency if and because the manufacturer’s suitcases could not be replaced by equivalent others. Such dependency would in particular be indicated through a high distribution rate (i.e. the manufacturer supplied a large number of comparable distributors) as well as the unique design and the associated high recognition value. Now, the Federal Court of Justice overturned the judgment and remanded for a new trial (decision of 12.12.2017, ref. no. KZR 50/15). Reason: the distributor’s assortment-related dependency (“Spitzenstellungsabhängigkeit” as special case of “Sortimentsbedingte Abhängigkeit”) on the manufacturer was not sufficiently proven. Although a high distribution rate was regularly decisive, it might be less meaningful in qualitative selective distribution systems as the present one. Decisive for redesigning distribution systems:

« If a supplier chooses to switch to a qualitative selective distribution system at a certain point in time, an assortment-related dependency is regularly indicated by a high distribution rate in the period before. » (Para. 19)

The manufacturer can especially bring forward two arguments against such alleged assortment-related dependency, namely that

(i) the number of distributors the manufacturer himself supplied with his products is much lower than the total number of distributors that offered his products (i.e. including those buying the products from other sources), and that

(ii) the distribution rate is to be determined on the basis of those distributors who are comparable to the distributor demanding access to the distribution system and delivery (para. 27) – as the German Federal Court previously stated in terms of designer upholstery (decision of 09.05.2000, ref. no. KZR 28/98, p. 12 et seq.).

Practical conclusions

  1. “There is nothing more constant than change”: When redesigning the distribution system, carefully consider if you want / need transitional arrangements – or better leave them out. One very good reason to leave them out: they might make it more difficult to exclude unwanted distributors. Thus, in the Rimowa case, the Higher Regional Court Munich rejected the manufacturer’s objection that the distributor’s business model « aimed at bargain hunters » – arguing that the manufacturer gave other distributors time of « 12 months after conclusion of the agreement » to fulfil the new qualitative criteria.
  2. For qualitative criteria (also: requirements / specifications) in Internet sales, please see the other articles on Legalmondo, especially on platform bans and price comparison bans.

It is not only since the days of the Internet that brand manufacturers have had to contend with the fact that original products are offered outside of their authorized sales channels. The problem has since been significantly exacerbated, however. The relevant products are also referred to as gray market products.

The internal market of the European Economic Area makes it possible to exploit certain price advantages – that is, purchasing in one Member State at a price that is lower than in other Member States and selling to the end customer while passing on (or not passing on) the purchasing advantage. This is made possible by the “exhaustion regime”, according to which the sale of products, which at one time were made available in the European Economic Area with the copyright holder’s consent, cannot be prohibited.

Brand manufacturers’ attempts to counter this issue by means of distribution systems may be an effective instrument, but only if all distribution partners adhere to it. If a distribution partner pulls out, trademark owners (at least in Germany) are initially required to contact their distribution partner who is acting contrary to the contract. That is difficult when the distribution channel of the products in question cannot be traced by security systems (such as SKU numbers) beyond any doubt. A right to information against a third party generally does not exist. Thus, neither the distribution system itself nor the suspicion that the products are not of EU origin may be used easily to justify a right to information in selective or exclusive distribution. The Federal Court of Justice, for example, sees no reason to deviate from the exhaustion doctrine when implementing a selective distribution system (Federal Court of Justice, 1 ZR 63/04). In the case of a selective or exclusive distribution system (Federal Court of Justice, I AR 52/10), the burden of proof is reversed. Accordingly, it is initially the brand manufacturer itself that is responsible for providing evidence for its allegation of a non-EU product.

Exceptions are only made where, for example, the SKU numbers were modified, since this makes clarification difficult. In such cases, trademark infringement and at the same time breach of competition law are given by way of exception and it is not possible for the dealer to invoke exhaustion (Federal Court of Justice I ZR 1/98). The deliberate misleading of the authorized dealer by a third party to breach the contract is also recognized as an exception (Federal Court of Justice I ZR 96/04), which regularly is not verifiable, however.

By the way, the sensational December 2017 Coty decision of the Court of Justice of the European Union (CJEU C-230/16) (here you can find more: https://www.legalmondo.com/2017/12/eu-court-justice-allows-online-sales-restrictions-coty-case/) has not changed this basic presumption, either. In its Coty decision, the CJEU in the end confirms the exhaustion priority also and particularly for luxury products by referring to existing case law (specifically ECJ C-59/08).

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There are, however, more options available. As confirmed by the ECJ (ECJ, C-337/95), an exemption from the exhaustion principle already applies when the type of sale may be designed to damage the reputation of the trademark. In the Court’s opinion, this applies to the sale of products at discounters, if such a sale damages the reputation of the products to an extent that their luxurious image and quality is called into question (ECJ, C-59/08). This applies, on the one hand, if other products are sold in the immediate “neighborhood” to the branded product, without meeting the same quality requirements (ECJ, C-337/95) or if the advertising methods are unsuitable (ECJ, C-63/97). Hamburg Regional Court, for example, found that the use of photographs that are unsuitable and detrimental to the luxury image of a brand justifies a prohibition claim (at least with respect to use of the photos) (Hamburg Regional Court, 315 O 339/13). The Federal Court of Justice saw improper handling of the brand in an erroneous and negligent labeling of products (Federal Court of Justice, I ZR 72/11).

Düsseldorf Higher Regional Court has now also followed these CJEU guidelines by prohibiting the sale of high-priced cosmetic products, which are distributed in the framework of a strictly regulated selective distribution system, at a discounter (Düsseldorf Higher Regional Court, I-20 U 113/17). The Court explicitly referenced the CJEU, by repeating its principles and then applying them in the case of the discounter:

“The permanent and extensive sale of the cosmetic products at issue on the online platform www…de is suitable to significantly impair the image of the application brands. The way in which the products are presented there draws the application brands into the mundane and ordinary. As the relevant public is used to from the multitude of Respondent’s conventional self-service department stores, the offering on www…de of everyday products is frequently dominated in the form of particularly low priced own labels, such as Z.’s own label “O.” Respondent’s motto applies here as well. The assortment ranges from food to electronics, household goods, clothing to cosmetics. Since Respondent’s online presence was merged with that of the company “B” that it had acquired, it is moreover not only Respondent that offers its goods for sale on the platform, but also third parties may market goods via the online platform. The portal is designed to be functional and oriented toward products that are on sale. Customers are able to collect PAYBACK points with each purchase and may make use of financing. In some cases, goods are advertised at “instead of prices” and red letters indicate in attention-getting manner what percentage customers will save compared to the original prices. Product consultation does not take place.”

By offering luxury products at random alongside every-day and mass products without any kind of prominent presentation and becoming affordable through financing options, the products would be placed on a level with the other items offered, thereby significantly affecting the prestige value of the products. For this reason, Düsseldorf Higher Regional Court pronounced a complete ban on distribution for the online platform and the department stores.

Conclusion:

Even if the Düsseldorf Higher Regional Court’s decision is not to be considered revolutionary in light of existing CJEU case law, it certainly ensures some impetus in proceeding against gray market dealers, since national courts are now no longer facing the “uncomfortable” hurdle of applying CJEU case law, but rather in the customary fairway of national case law. In principle, Düsseldorf Higher Regional Court case law may not be understood as a blank check, however. Even Düsseldorf Higher Regional Court did not allow a general ban, but rather weighed individually whether the distribution in its concrete form could be prohibited. In the future, it will also be important to work out what in particular will determine the extent of the ban.

The author of this post is Ilja Czernik.

We have seen in a previous post the advantages of mediation as an alternative dispute resolution method in franchise agreements. From there, what recommendations could we give to make better use of mediation? Although we will have to adapt them to each specific case, the following points could be very useful:

  1. Specifically foresee in the contract a mediation clause as an alternative dispute resolution method. Although the franchisee and franchisor can agree to mediate once the conflict arises without having reflected it in the contract, it will surely be more complicated to do so when both have already initiated the discrepancies. It is preferable, therefore, to do it before: it places the parties in a better predisposition, they will be able to choose the procedure in a better way, as well as the institution, the mediator, the formalities, etc.
  2. If the parties have agreed on a mediation agreement, this may be initiated at the request of only one of them, without having to re-reach an agreement.
  3. The mediation clause is also recommended, because once an application for the initiation of mediation has been agreed upon, the limitations period of the legal actions will be suspended until the termination of the mediation.
  4. By virtue of this agreement and having initiated the mediation, the courts will not be able to hear such controversies during the time in which the mediation takes place, provided that the interested party invokes it.
  5. In the clause, it is convenient to foresee some elements, such as what issues may be the subject of mediation (all or only some of them), the need or not of a previous negotiation, adequate deadlines to avoid that this procedure can be used to delay other ways, the applicable law to mediation and to the agreement reached with it, the competent jurisdiction for the adoption of precautionary measures, where appropriate, or the jurisdiction or arbitration to settle the dispute in case of failure of mediation.
  6. It is true that one of the principles of mediation is its voluntary nature. However, the existence of the clause and being obliged to attend at least one informative session before initiating any judicial procedure can convince of its advantages even the most reticent party.
  7. Include the mediation as an alternative dispute resolution method within the pre-contractual information that the franchisor must deliver to potential franchisees. Although the Spanish norm does not seem to expressly demand that reference be made, this seems an optimal moment to show transparency and the will to solve possible problems in an agile manner. It also predisposes the good understanding, cooperation and good faith of the franchised brand before the beginning of relations.
  8. Appropriately select the mediation institution to which to refer in case of conflict or foreseeing the best way to choose the most appropriate mediator. Currently there are many institutions or professionals that offer guarantees of impartiality. It may be relevant that it is a mediator with specific training, who facilitates the communication and confidence of the parties and, insofar as possible, who can fully understand the nature of the franchise. There are institutions in Spain such as the Signum Foundation (http://fundacionsignum.org/) or MediaICAM of the Madrid Bar Association (https://mediacion.icam.es) that can be good choices.

On the topic of the importance of Mediation in Distribution Agreements, you can check out the recording our webinar “Mediation in International Conflicts”

Benedikt Rohrssen

Domaines d'intervention

  • Agence
  • Distribution
  • e-commerce
  • Franchise
  • Investissements
Contact Benedikt

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    Germany – Distribution of original products and gray market

    22 mai 2018

    • Allemagne
    • Distribution

    Not what you would expect 

    When can you terminate, how should you terminate, and how much are you exposed?!

    The outcomes of termination of a business relationship with an Israeli counterpart in Israel arise again and again as a question in many disputes between International corporations and Israeli counterparts, such as distributors or franchisees.

    This is mainly because Israeli law does not include specific laws regulating or regarding distribution or franchising or other kinds of business ventures (except a relatively new agency law – referring in a limited manner to specific kinds of agency only) – and thus disputes in said regards are determined based on the general principles of contract law, the contractual and factual bases – obviously resulting in considerable uncertainty as to specific matters.

    However, substantial case law, such as in the matter of Johnson & Johnson International that ended up paying compensation in the equivalent to over 1.5 Million US$, indicates the basics and threshold of what can be expected in such disputes, and, if implemented wisely, may assist in planning the disengagement or termination of a business relationship, in a manner that would be the least costly for the terminating party and minimize its exposure to a lawsuit.

    In many cases, domestic parties invest many years and/or fortunes, in order to penetrate the domestic market with the foreign service or products, and to promote sales in the subject region, for the benefit of both the international corporation and the domestic party.

    Nevertheless, often the international corporation decides for various reasons (such as establishing an « in-house » operation » in the target location or substituting the distributor/franchisee) to terminate the oral or written contractual relationship.

    What are the legal foundations involved in such termination as per due notice of termination and corresponding compensation – if at all?

    Generally, this issue arises in cases in which the contract does not specify a period of the business relationship, and, as a principle of law, contracts may be terminated by reasonable notice and subject to the fundamental good faith principle.

    Contracts are not perceived as binding upon the parties indefinitely. The question is always what is the reasonable time for termination notice, and is the termination done in good faith (which is always a tricky and vague issue). Compensation is commonly awarded in accordance with what the courts find as the due notice period that may also entail compensation for damages related to said breach.

    As always, there are exceptions, such as breach of trust toward the manufacturer/franchisor, that may have great impact on any due notice obligations, as far as justification for immediate termination that can be deemed immune to breach of due notice or good faith obligations.

    The truth is the reasonability of the due notice varies from case to case!

    However, Israeli case law is extremely sensitive to the actual reasoning of termination and how genuine it is, as opposed to asserting a tactical breach argument in an attempt to « justify » avoiding a due notice period or adequate compensation.

    In this respect, in many cases simple « non-satisfaction » was denied as a legitimate argument for breach of contract, while safeguarding the freedom of contracts and the right to terminate an ongoing contract with due notice and good faith.

    There are various common parameters referred to in the case law, to determine the adequate time of due notice, including, for instance, the magnitude of investment; the time required for rearrangement of business towards the new situation (including time required to find an alternative supplier product which can be marketed); the magnitude of the product/service out of the entire distributor’s business, etc.

    Time and again, although not as binding rule, the due notice period seems to be in the range of around 12 months, as a balance between the right of termination and the reasonable time for rearranging the business in light of the termination. There were, however, cases in which due notice for termination was deemed as short as three months and as long as two years – but these are rather exceptional.

    Another guiding point in the case law is the factor of exclusivity or non-exclusivity, as well as the concept that the longer the business relationship, the less the distributor/franchisee may expect compensation/reimbursement for investment – based on the concept that he has enjoyed the fruits of the investment.

    The outcome of not providing such adequate due notice might result in actual compensation reflecting the loss of profit of the business in the last year before the termination, or for the whole term the court finds a due notice was in place, or, in cases of bad faith, even a longer period reflecting the damages.

    In conclusion, given the legal regime in Israel, such exposure might be extremely considerable for any international or foreign business. It would, therefore, be vital and as a consequence of real value to plan the strategy of disengagement/termination of the business with the domestic counterpart in Israel, in advance and prior to executing it, and there are, indeed, adequate and wise strategies that may be implemented for the best result.

    It is often the case – in practice – that an ongoing commercial relationship builds slowly over time through a series of sales agreements, without the parties ever signing an actual distribution agreement to set down their respective rights and responsibilities.

    At first blush this might appear to be a good thing: one can sidestep being bound, especially long-term, to the other party. But on closer scrutiny the solution becomes problematic, especially for anyone operating internationally.

    One of the key issues that arises when an international contractual arrangement is not in writing, is identifying the court with jurisdiction over any dispute arising therefrom. In the European Union, the issue is resolved by the provisions of Regulation 1215/2012 (“Brussels I recast”). Pursuant to Article 7 of the Regulation, as an alternative to the defendant’s courts, jurisdiction in a contractual dispute may lie with the court in the place of performance of the obligation in question. Next to this general rule are two criteria to identify the “place of performance”, differentiated according to the type of contract at issue. For a contract for goods, it is the place of delivery for the goods; in a contract for services, it is the place where the services are provided.   

    Thus, to identify the court with jurisdiction, it is crucial that a contract fall under one of these categories: goods or services.

    No doubt this distinction is quite simple in many circumstances. In the case of a distribution agreement, or of a commercial concession agreement, the issue may become thorny.

    The European Court of Justice has analysed this issue on a number of occasions, most recently in their judgement of 8 March 2018 (Case no. C-64/17) following the request for a preliminary ruling from a Portuguese Court of Appeal. The parties to the action were a Portuguese distributor, a company called Lusavouga, and a Belgian company called Saey Home & Garden, that produced articles for the home and garden, including a line of products branded “Barbecook”.

    Following Saey’s decision to break off the commercial relationship – notice of which was sent in an email dated 17 July 2014 – Lusavouga brought action in Portugal seeking compensation for the unexpected termination of the agreement, and goodwill indemnity. Saey raised a plea of lack of jurisdiction of the Portuguese court, citing their general conditions of sale (mentioned in their invoices) which required that a Court in Belgium be competent for dispute resolution.

    The facts thus presented two issues to be resolved in light of the Brussels I recast Regulation: deciding whether a jurisdiction clause in a vendor’s general terms and conditions pursuant to Art. 25 of the Regulation shall apply, and, if not, choosing the court with jurisdiction under Art. 7 of the Regulation.

    Shall a jurisdiction clause contained within a vendor’s general terms and conditions apply to a distribution relationship?

    The supplier company apparently considered their course of dealing with the Portuguese retailer nothing more than a concatenation of individual sales of goods, governed by their general terms and conditions. Consequently, they argued that any dispute arising from the relationship should be subject to the jurisdiction clause identifying Belgium as the court with jurisdiction under those terms and conditions.

    Thus, a determination was needed on whether, under these facts, there was a valid prorogation of jurisdiction under Article 25, paragraph 1 of Regulation 1215/2012.

    The Court of Justice has long opined that if the jurisdiction clause is included in the general contract conditions drafted by one of the parties, the contract signed by the other party must contain an express reference to those general conditions in order to ensure the real consent thereto by the parties (judgement of 14 December 1976, Estasis Salotti di Colzani, case no. 24/76; judgement of 16 March 1999, Castelletti, case no. C-159/97; judgement of 7 July 2016, Höszig, case no. C-225/15). Moreover, to be valid, the clause must involve a particular legal relationship (judgement of 20 April 2016, Profit Investment SIM, case no. C-366/13).

    In the instant case, the referring court found it self-evident that the legal relationship at bar was a commercial concession agreement entered into for the purpose of distributing Saey products in Spain, a contract that was not evidenced in writing.

    From this perspective, it is clear that the general conditions contained in the Saey invoices could have no bearing on the commercial concession agreement: assuming Lusavouga’s consent had been proven, the selection of Belgium as the forum would have applied if anything to the individual sales agreements, but not to those duties arising from the separate distribution agreement.

    What, then, would be the court with jurisdiction for the duties arising from the commercial concession agreement?

    Absent any jurisdiction clause, the issue would be decided under Art. 7, point 1 of Regulation 1215/2012, under which it becomes imperative to establish whether a contract is for goods or for services.

    The “provision of services” has been defined by the Court of Justice as an activity, not mere omissions, undertaken in return for remuneration (judgement of 23 April 2009, Falco, case no. C-533/07).

    With the judgements in Corman Collins of 19 December 2013 (case no. C-9/12), and Granarolo of 14 July 2016 (case no. C-196/15), the Court held that in a typical distribution agreement, the dealer renders a service, in that they are involved in increasing the distribution of supplier’s product, and receives in consideration therefor a competitive advantage, access to advertising platforms, know-how, or payment facilities. In light of such elements, the contract relationship should be deemed one for services. If on the other hand the commercial relationship is limited to a concatenation of agreements, each for the purpose of a delivery and pickup of merchandise, then what we have is not a typical distribution agreement, and the contractual relationship shall be construed as one for the sale of goods.

    Once the contract has been categorised as one for services, one must then determine “the place where, under the contract, the services are provided”. The Court specifies that such location shall be understood as the member state of the place of the main provision of services, as it follows from the provisions of the contract  or – as in the case at issue – the actual performance of the same. Only where it is impossible to identify such location shall the domicile of the party rendering the service be used.

    From the referring court’s description of the contractual relationship, and from the Court of Justice’s understanding of the distributor’s performance of services, it would be logical to find that the principal location for performance of services was Spain, where Lusavouga “was involved in increasing the distribution of products” of Saey.

    It is clear that neither the manufacturer nor the distributor would ever have intended such a result, and they might have avoided it being chosen for them by reducing their agreement in writing, including a jurisdiction clause therein.

    By the same token, viewed from the outside, the Portuguese judges’ apparent conviction that the situation was one of an actual dealership contract would leave ample room for debate. After all, a number of elements would lead to the opposite conclusion. However, even in terms of that aspect, the absence of a written contract left room for interpretation that might lead to unforeseen – and perhaps rather risky – consequences.

    In conclusion, the wisdom of setting down the terms and conditions of a sales distribution agreement in writing appears clear. This is not only because one can avoid those ambiguities we have described above, but also because it specifies other important clauses stipulated by the parties that should not be left to chance: exclusivity of area, if any, or with respect to specific sales channels, the contract period and termination notice, any duties to promote the product, control over end-user personal data, and the possibility of, and methods for, any online sales of products.

    Agreements restricting competition are prohibited as anticompetitive agreements by Article 101 TFEU unless the agreement’s impact on trade or competition is not appreciable (cf. the EU Court of Justice in the Expedia case, C-226/11, judgment of 13 December 2012). Whether an agreement constitutes an appreciable restriction of competition or is in the « safe harbour » can be assessed according to the European Commission’s De Minimis Notice. Accordingly, an agreement is particularly appreciable if its object is to restrict competition. This applies in particular to so-called hardcore restrictions, such as vertical price maintenance (or resale price maintenance = “RPM”).

    Regarding a special offer for dietary products, the German Higher Regional Court of Celle surprisingly took a different view and decided that even resale price maintenance could be considered non-appreciable and thus falling outside the ban of anticompetitive business practices under Article 101 TFEU (judgment of 07.04.2016, Case 13 U 124/15 [Kart]). In this case, the manufacturer made a special offer to a group of its customers (pharmacies) with a special purchase discount: once, for a limited period and limited to a maximum quantity. In return, the customers should commit themselves to « present the product clearly… and not fall below a resale price of EUR 15.95« .

    The Hanover Regional Court had instead seen the agreement as an unlawful resale price maintenance (judgment of 25 August 2015, Case 18 O 91/15) – and now the German Federal Court confirmed the same: the minimum prices specified here within the advertising campaign appreciably restrict competition and are thus banned as anticompetitive business practice under Article 101 TFEU (judgment of 17 October 2017, Case KZR 59/16). This corresponds to the case law of the EU Court of Justice in the Expedia case (see above) and the German Federal Court with regard to the sales requirement « one bar extra «  (i.e. without extra charge compared to the usual package size) of the Italian confectionery manufacturer Ferrero (judgment of 08.04.2003, Case KZR 3/02) – because the latter explicitly concerns « the scope for price increases resulting from the increased contents of the package » – not, however, the retailer’s decision to set prices freely downwards.

    Practical tips

    Vertical price fixing is generally prohibited, whereas providing a manufacturer’s suggested retail price (MSRP, also “recommended retail price”) and maximum selling prices are allowed – this is briefly the principle of German and European antitrust law on pricing frameworks. Furthermore, recommended retail prices and maximum selling prices (“MSP”) are subject to the restriction that they  » they do not amount to a fixed or minimum sale price as a result of pressure from, or incentives offered by, any of the parties” (Article 4 lit. a Vertical Block Exemptions Regulation). That means:

    • the manufacturer or supplier may provide guidance,
    • however, the reseller may set his sales prices freely.

    Exceptions may apply – in addition to the RPM on the price of books or in the case of specialisation agreements – by way of the efficiency defence under Article 101 (3) TFEU in individual cases, e.g.

    • in the introductory period when launching new products on the market, or
    • in the case of short-term special offers if accompanied by a corresponding increase in efficiency, for example by investing the higher margin into better customer advice, which benefits all customers and Resale Price Maintenance prevents retailers who do not offer the customer advice from free riding (cf. EU Guidelines on Vertical Restraints, para. 225).

    Such actions, however, require excellent preparation because manufacturers can only set resale prices for very short periods if they can convincingly demonstrate efficiency gains such as preventing free-riders.

    In the case of fixed prices, the competition authorities quickly become sensitive. For example, fines for vertical price maintenance have recently been imposed again in Germany. In this respect, special care must be taken particularly in distribution and sales agreements.

    1. Correspondingly, each company’s sales team should continue following the previous case law on recommended retail prices, maximum selling prices and discount campaigns. Guidance for the practice is provided by

    Geoblocking is a discriminatory practice preventing customers (mainly on-line customers) from accessing and/or purchasing products or services from a website located in another member State, because of the nationality of the customer or his place of residence or establishment.

    The EU Regulation no. 2018/302 of 28 February 2018 on addressing unjustified geoblocking and other forms of discrimination based on customers’ nationality, place of residence or place of establishment within the internal market will enter into force on 2 December 2018.

    The current situation

    The EU Commission carried out a « mystery shopping » survey on over 10 000 e-commerce websites in the EU. The geoblocking figures are quite high! 63% of the websites do not let shoppers to buy from another EU country (even 86% for electric household appliances and 79% for electronics and computer hardware).

    The survey shows also that 92% of on-line retailers require customers to register on their website and to provide them with e-mail address, physical address and telephone number. The registration is denied most of the time because of a foreign delivery address for 27% of the websites. Almost half of the websites give no information about the place of delivery while shopping on the website although this information on delivery restrictions has to be provided in due time during the shopping process. At the end, according to this EC survey, only 37% of the websites truly allow e-shoppers to freely buy on-line from another EU country (without restriction as regards place of establishment, place of delivery and mean of payment).

    On the other side, only 50% of European customers buy products from on-line shops based in another EU member State while the value and the volume of e-commerce, globally speaking increase thoroughly year after year, but only on a domestic scope not throughout Europe.

    On 23 June 2017, the European Council asked for a real implementation of the Digital Single Market strategy in all its elements including cross border partial delivery, consumer protection and prohibition of undue geoblocking.

    The lack of the current legal frameworks

    The service directive (n°2006/123/CE) and article 101 of the TFUE address already the discrimination practices based on nationality or place or residence or establishment.

    According to article 20 (2) of the service directive, the EU member States must ensure that professionals do not treat customers differently based on their place of residence or establishment or nationality (unless objective exception). On the other side, EU competition law on vertical restraints (article 101 TFUE and the block exemption regulation and its guidelines) considers restrictions on passive sales as hard core restrictions violating EU competition rules. However, both set of rules (service directive and competition law framework) appear not to be fully effective in practice.

    With this respect, the recent report of the European commission about the competition enquiry in the e-commerce sector shows, among others, that geoblocking was used at a large scale within the European e-commerce sector.

    The aim of the geoblocking regulation

    The goal of the geoblocking regulation is to prevent professionals from implementing direct or indirect discrimination based on the nationality, the place of residence or the place of establishment of their customers when dealing with cross border e-commerce transactions.

    The scope of the geoblocking regulations

    The new Regulation will only apply to online sales between businesses and end-user consumers or businesses.

    The new Regulation will apply to websites operated within the European Union or to websites operated outside the European Union but proposing goods or services to customers established throughout in the European Union.

    What are the new rules of management of an e-commerce website?

    „As regards the access to the website

    Under the Regulation, a business may neither block nor restrict, through the use of technological measures, access to their online interfaces for reasons related to nationality, place of residence or place of establishment of an internet user. However, businesses are authorized to redirect customers to a different website than the one they were trying to access provided the customer expressly agrees thereto and can still easily visit the website version they originally tried to access.

    „As regards the terms and conditions of sales of the website

    The Regulation forbids businesses from applying different general conditions of access to goods or services according to a customer’s nationality or place of residence or place of establishment (as identified by their IP address in particular) in the following three cases:

    • where the goods sold by the business are delivered in a different member state to which the business offers delivery (or where the goods are collected at a location jointly agreed upon by the business and the customer);
    • where the business offers electronically supplied services such as cloud, data storage, hosting services etc. (but not services offering access to copyright-protected content such as streaming or online-gaming services);
    • where the business supplies services received by the customer in a country in which the business also operates (such as car rental and hotel accommodation services or ticketing services for sporting or cultural events).

    „ As regards the means of payment on the website

    The Regulation forbids businesses from applying different conditions for payment transactions to accepted means of payment for reasons related to a customer’s nationality, place of residence or place of establishment, or to the location of the payment account or the place of establishment of the payment service provider (provided that authentication requirements are fulfilled and that payment transactions are made in a currency accepted by the business).

    What are the impacts of this regulation on e-retailers?

    Although formally excluded from the scope of the Regulation, relations between suppliers and distributors or wholesalers will still be impacted by it since provisions of agreements between businesses under which distributors undertake not to make passive sales (e.g., by blocking or restricting access to a website) for reasons related to a customer’s nationality, place of residence or place of establishment “shall be automatically void”.

    The geoblocking regulation therefore impacts distributors twofold: first, directly in their relations with customers (end-user consumers or user-businesses), and second, indirectly in regard to their obligations under the exclusive distribution agreement.

    The geoblocking regulation shall have to be coordinated with the existing competition law framework, especially the guidelines on vertical restraints which set up specific rules applying to on-line sales. On-line sales are likened to passive sales. The guidelines mention four examples of practices aiming to indirectly guarantee territorial protection which are prohibited when supplier and exclusive distributor agree:

    • that the exclusive distributor shall prevent customers in another territory from visiting their website or shall automatically refer them to the supplier’s or other distributors’ websites,
    • that the exclusive distributor shall terminate an online sale if the purchaser’s credit card data show that the purchaser is not from the exclusive distributor’s exclusive territory,
    • to limit the share of sales made by the exclusive distributor through the internet (but the contract may provide for minimum offline targets in absolute terms and for online sales to remain coherent compared to offline sales).
    • that the exclusive distributor shall pay a higher price for goods intended for sale on the internet than for goods intended for sale offline.

    Manufacturers will have to decide whether they adopt a unique European gateway website or multiple local commercial offers, it being known that price differentiation is still possible per category of clients.

    Indeed, the new Regulation does not oblige the e-retailers to harmonize their price policies, they must only allow EU consumers to access freely and easily to any version of their website. Likewise, this Regulation does not oblige e-retailers to ship products all over Europe, but just allow EU consumers to purchase goods from whichever website they want and to arrange the shipment themselves, if need be.

    Finally on a more contractual level, it is not very clear yet how the new geoblocking rules could impact directly or indirectly the conflict of law rules applicable to consumer contracts, as per the Rome I regulation especially when the consumer will be allowed to handover the product purchased on a foreign website in the country of this website (which imply no specific delivery in the country where the consumer is established).

    Therefore B2C general terms and conditions of websites would need to be reviewed and adapted on both marketing and legal sides.

    Once convinced of the utility of mediation as a method of resolving conflicts between franchisor and franchisee and taken the decision to include a clause in the contracts that provides for it, the last step would be what elements should be taken into account when drafting it.

    1. The previous negotiation. It seems advisable that both parties grant themselves the possibility of trying to solve the problem with a previous formal negotiation. Mediation does not exclude the previous attempt made by the interested parties or their lawyers; however, it seems advisable to contractually provide a suitable end according to the circumstances. Experience shows that lengthening this phase too long may result in the conflict becoming more complicated and even more difficult to approach mediation.
    2. The clause may also provide for the place where the mediation will take place. Again at this point the parties are free. It is convenient that this is accurate indicating the concrete city.
    3. The language in which the mediation will be developed is the a faculty of the parties. There will be no difficulty in mediations in which both parties use the same language, but it is very convenient in contracts with parties that have different languages, or that belong to regions or countries with different co-official languages. The drafting or signing of the contract in a specific language does not presuppose that this must be the language of the mediation. It is an element to be taken into account also when requesting a mediator who can use that language in the chosen mediation institution.
    4. The procedure can also be decided by the parties. In particular, the number of sessions, the maximum expected duration, the participation of advisors, etc. Keep in mind that the greater or lesser regulation will allow to avoid future conflicts in this respect, although it will also imply a greater limit to the freedom of the parties that, nevertheless, will remain free to modify the agreement by mutual consent.
    5. The term of the mediation can also be contemplated. This would allow, for example, to prevent mediation from being extended only for purely procedural strategic purposes or to gather information from the other party before starting a procedure, etc. The professional mediators, however, are able to identify these manoeuvres, also having the power to put an end to mediation in those cases.
    6. Choosing the mediator or the mediation institution is an important choice. The parties can agree on who will be their mediator, indicate in the contract the elements to choose it, or submit directly to a Mediation Institution so that it is the one who designates it according to its own rules. These decisions can be alternatives (that is, that the parties agree on the mediator and, in case of lack of agreement, submit to an institution that names it), or they can be unique. The designation of an Institution requires that it has a sufficient guarantee of stability (avoid designating short-term institutions or without much future guarantee), with a sufficient panel of mediators depending on the characteristics of the mediation (language, competence, experience) and that allows the necessary flexibility for its operation.
    7. Finally, it is convenient that the clause includes an alternative way in case the mediation does not succeed either because the parties do not reach an agreement, or because they withdraw from the mediation. It is important to recall that mediation does not close the doors to the conflict be resolved by recourse to ordinary jurisdiction or arbitration. And in terms of specialized arbitration in distribution contracts, the IDArb (https://www.idiproject.com/content/idarb-idi-arbitration-project) is an excellent option.

    On the topic of the importance of Mediation in Distribution Agreements, you can check out the recording our webinar “Mediation in International Conflicts”

    « Rimowa owner terminates all distributor agreements in Europe » – headlined the leading German business newspaper “Handelsblatt” on 19 March 2018. The reason for termination is that Rimowa, the well-known manufacturer of high quality branded cases – after 2011 now again in 2018 – redesigns its distribution network: Rimowa aims at raising its quality selection criteria again, away from selling its products in the old-fashioned shop, to a modern shopping experience.

    In principle, manufacturers can freely design and develop their distribution system according to their marketing strategy and any changing needs. Likewise, they are in principle free to choose the number and name of their sales intermediaries (distributors/dealers, franchisees, agents, etc.). They are in principle also free to switch to selective distribution, with the aim of aligning the distribution of their products with certain criteria (in particular: regarding the quality of distribution), thus possibly also reducing the number of distributors. However, as an exception, distributors may force the manufacturer to supply them anyway – namely if the manufacturer has a significant market power. In such a case, an obligation to contract with a distributor, resulting in an obligation to deliver may follow from the prohibition of discrimination (laid down in sec. 19 para. 1, 2 no. 1, 20 German Act against Restraints of Competition).

    This issue becomes especially practically relevant if a manufacturer redesigns its distribution network – just like Rimowa did before and now does again. Rimowa switched to selective distribution in 2011/2012 (for the advantages of selective distribution and possible restrictions of distribution, see the Legalmondo article here). To redesign its distribution network, Rimowa terminated the former distributor agreements and offered to conclude new ones – according to which the distributors newly committed themselves to present the goods in a certain way and buy and use Rimowa’s shop-in-shop system. According to Rimowa, the appearance of a former distributor did not correspond to the new business concept and the new marketing strategy, which is why the parties could not agree on concluding a new agreement. Thereupon, the distributor filed an action, aiming at the conclusion of a new dealer contract and thus delivery of his shops.

    The District Court of Munich denied the claim (decision of 09.09.2014, ref. no. 1 HKO 7249/13), the Higher Regional Court of Munich, however, affirmed such claim (decision of 17.09.2015, ref. no. U 3886/14 Kart) – arguing that the manufacturer had a leading position in the relevant « market for high-priced and high-quality suitcases » or, conversely, that the distributor had a dependency if and because the manufacturer’s suitcases could not be replaced by equivalent others. Such dependency would in particular be indicated through a high distribution rate (i.e. the manufacturer supplied a large number of comparable distributors) as well as the unique design and the associated high recognition value. Now, the Federal Court of Justice overturned the judgment and remanded for a new trial (decision of 12.12.2017, ref. no. KZR 50/15). Reason: the distributor’s assortment-related dependency (“Spitzenstellungsabhängigkeit” as special case of “Sortimentsbedingte Abhängigkeit”) on the manufacturer was not sufficiently proven. Although a high distribution rate was regularly decisive, it might be less meaningful in qualitative selective distribution systems as the present one. Decisive for redesigning distribution systems:

    « If a supplier chooses to switch to a qualitative selective distribution system at a certain point in time, an assortment-related dependency is regularly indicated by a high distribution rate in the period before. » (Para. 19)

    The manufacturer can especially bring forward two arguments against such alleged assortment-related dependency, namely that

    (i) the number of distributors the manufacturer himself supplied with his products is much lower than the total number of distributors that offered his products (i.e. including those buying the products from other sources), and that

    (ii) the distribution rate is to be determined on the basis of those distributors who are comparable to the distributor demanding access to the distribution system and delivery (para. 27) – as the German Federal Court previously stated in terms of designer upholstery (decision of 09.05.2000, ref. no. KZR 28/98, p. 12 et seq.).

    Practical conclusions

    1. “There is nothing more constant than change”: When redesigning the distribution system, carefully consider if you want / need transitional arrangements – or better leave them out. One very good reason to leave them out: they might make it more difficult to exclude unwanted distributors. Thus, in the Rimowa case, the Higher Regional Court Munich rejected the manufacturer’s objection that the distributor’s business model « aimed at bargain hunters » – arguing that the manufacturer gave other distributors time of « 12 months after conclusion of the agreement » to fulfil the new qualitative criteria.
    2. For qualitative criteria (also: requirements / specifications) in Internet sales, please see the other articles on Legalmondo, especially on platform bans and price comparison bans.

    It is not only since the days of the Internet that brand manufacturers have had to contend with the fact that original products are offered outside of their authorized sales channels. The problem has since been significantly exacerbated, however. The relevant products are also referred to as gray market products.

    The internal market of the European Economic Area makes it possible to exploit certain price advantages – that is, purchasing in one Member State at a price that is lower than in other Member States and selling to the end customer while passing on (or not passing on) the purchasing advantage. This is made possible by the “exhaustion regime”, according to which the sale of products, which at one time were made available in the European Economic Area with the copyright holder’s consent, cannot be prohibited.

    Brand manufacturers’ attempts to counter this issue by means of distribution systems may be an effective instrument, but only if all distribution partners adhere to it. If a distribution partner pulls out, trademark owners (at least in Germany) are initially required to contact their distribution partner who is acting contrary to the contract. That is difficult when the distribution channel of the products in question cannot be traced by security systems (such as SKU numbers) beyond any doubt. A right to information against a third party generally does not exist. Thus, neither the distribution system itself nor the suspicion that the products are not of EU origin may be used easily to justify a right to information in selective or exclusive distribution. The Federal Court of Justice, for example, sees no reason to deviate from the exhaustion doctrine when implementing a selective distribution system (Federal Court of Justice, 1 ZR 63/04). In the case of a selective or exclusive distribution system (Federal Court of Justice, I AR 52/10), the burden of proof is reversed. Accordingly, it is initially the brand manufacturer itself that is responsible for providing evidence for its allegation of a non-EU product.

    Exceptions are only made where, for example, the SKU numbers were modified, since this makes clarification difficult. In such cases, trademark infringement and at the same time breach of competition law are given by way of exception and it is not possible for the dealer to invoke exhaustion (Federal Court of Justice I ZR 1/98). The deliberate misleading of the authorized dealer by a third party to breach the contract is also recognized as an exception (Federal Court of Justice I ZR 96/04), which regularly is not verifiable, however.

    By the way, the sensational December 2017 Coty decision of the Court of Justice of the European Union (CJEU C-230/16) (here you can find more: https://www.legalmondo.com/2017/12/eu-court-justice-allows-online-sales-restrictions-coty-case/) has not changed this basic presumption, either. In its Coty decision, the CJEU in the end confirms the exhaustion priority also and particularly for luxury products by referring to existing case law (specifically ECJ C-59/08).

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    There are, however, more options available. As confirmed by the ECJ (ECJ, C-337/95), an exemption from the exhaustion principle already applies when the type of sale may be designed to damage the reputation of the trademark. In the Court’s opinion, this applies to the sale of products at discounters, if such a sale damages the reputation of the products to an extent that their luxurious image and quality is called into question (ECJ, C-59/08). This applies, on the one hand, if other products are sold in the immediate “neighborhood” to the branded product, without meeting the same quality requirements (ECJ, C-337/95) or if the advertising methods are unsuitable (ECJ, C-63/97). Hamburg Regional Court, for example, found that the use of photographs that are unsuitable and detrimental to the luxury image of a brand justifies a prohibition claim (at least with respect to use of the photos) (Hamburg Regional Court, 315 O 339/13). The Federal Court of Justice saw improper handling of the brand in an erroneous and negligent labeling of products (Federal Court of Justice, I ZR 72/11).

    Düsseldorf Higher Regional Court has now also followed these CJEU guidelines by prohibiting the sale of high-priced cosmetic products, which are distributed in the framework of a strictly regulated selective distribution system, at a discounter (Düsseldorf Higher Regional Court, I-20 U 113/17). The Court explicitly referenced the CJEU, by repeating its principles and then applying them in the case of the discounter:

    “The permanent and extensive sale of the cosmetic products at issue on the online platform www…de is suitable to significantly impair the image of the application brands. The way in which the products are presented there draws the application brands into the mundane and ordinary. As the relevant public is used to from the multitude of Respondent’s conventional self-service department stores, the offering on www…de of everyday products is frequently dominated in the form of particularly low priced own labels, such as Z.’s own label “O.” Respondent’s motto applies here as well. The assortment ranges from food to electronics, household goods, clothing to cosmetics. Since Respondent’s online presence was merged with that of the company “B” that it had acquired, it is moreover not only Respondent that offers its goods for sale on the platform, but also third parties may market goods via the online platform. The portal is designed to be functional and oriented toward products that are on sale. Customers are able to collect PAYBACK points with each purchase and may make use of financing. In some cases, goods are advertised at “instead of prices” and red letters indicate in attention-getting manner what percentage customers will save compared to the original prices. Product consultation does not take place.”

    By offering luxury products at random alongside every-day and mass products without any kind of prominent presentation and becoming affordable through financing options, the products would be placed on a level with the other items offered, thereby significantly affecting the prestige value of the products. For this reason, Düsseldorf Higher Regional Court pronounced a complete ban on distribution for the online platform and the department stores.

    Conclusion:

    Even if the Düsseldorf Higher Regional Court’s decision is not to be considered revolutionary in light of existing CJEU case law, it certainly ensures some impetus in proceeding against gray market dealers, since national courts are now no longer facing the “uncomfortable” hurdle of applying CJEU case law, but rather in the customary fairway of national case law. In principle, Düsseldorf Higher Regional Court case law may not be understood as a blank check, however. Even Düsseldorf Higher Regional Court did not allow a general ban, but rather weighed individually whether the distribution in its concrete form could be prohibited. In the future, it will also be important to work out what in particular will determine the extent of the ban.

    The author of this post is Ilja Czernik.

    We have seen in a previous post the advantages of mediation as an alternative dispute resolution method in franchise agreements. From there, what recommendations could we give to make better use of mediation? Although we will have to adapt them to each specific case, the following points could be very useful:

    1. Specifically foresee in the contract a mediation clause as an alternative dispute resolution method. Although the franchisee and franchisor can agree to mediate once the conflict arises without having reflected it in the contract, it will surely be more complicated to do so when both have already initiated the discrepancies. It is preferable, therefore, to do it before: it places the parties in a better predisposition, they will be able to choose the procedure in a better way, as well as the institution, the mediator, the formalities, etc.
    2. If the parties have agreed on a mediation agreement, this may be initiated at the request of only one of them, without having to re-reach an agreement.
    3. The mediation clause is also recommended, because once an application for the initiation of mediation has been agreed upon, the limitations period of the legal actions will be suspended until the termination of the mediation.
    4. By virtue of this agreement and having initiated the mediation, the courts will not be able to hear such controversies during the time in which the mediation takes place, provided that the interested party invokes it.
    5. In the clause, it is convenient to foresee some elements, such as what issues may be the subject of mediation (all or only some of them), the need or not of a previous negotiation, adequate deadlines to avoid that this procedure can be used to delay other ways, the applicable law to mediation and to the agreement reached with it, the competent jurisdiction for the adoption of precautionary measures, where appropriate, or the jurisdiction or arbitration to settle the dispute in case of failure of mediation.
    6. It is true that one of the principles of mediation is its voluntary nature. However, the existence of the clause and being obliged to attend at least one informative session before initiating any judicial procedure can convince of its advantages even the most reticent party.
    7. Include the mediation as an alternative dispute resolution method within the pre-contractual information that the franchisor must deliver to potential franchisees. Although the Spanish norm does not seem to expressly demand that reference be made, this seems an optimal moment to show transparency and the will to solve possible problems in an agile manner. It also predisposes the good understanding, cooperation and good faith of the franchised brand before the beginning of relations.
    8. Appropriately select the mediation institution to which to refer in case of conflict or foreseeing the best way to choose the most appropriate mediator. Currently there are many institutions or professionals that offer guarantees of impartiality. It may be relevant that it is a mediator with specific training, who facilitates the communication and confidence of the parties and, insofar as possible, who can fully understand the nature of the franchise. There are institutions in Spain such as the Signum Foundation (http://fundacionsignum.org/) or MediaICAM of the Madrid Bar Association (https://mediacion.icam.es) that can be good choices.

    On the topic of the importance of Mediation in Distribution Agreements, you can check out the recording our webinar “Mediation in International Conflicts”