Commercial Agents – Indemnity for termination in trial period?

21 août 2018

  • Allemagne
  • Agence

On 1 January, the new Packaging Act (“Verpackungsgesetz”) will replace the existing Packaging Ordinance (“Verpackungsverordnung”). Non-compliance with the new rules may have very unpleasant consequences.

For those who sell packaged goods to end consumers in Germany it is high noon: they have to adapt to the new packaging law, which comes into force on January 1, 2019.

The main objective of the new law is that in the future all concerned parties will have to take responsibility and bear the costs of disposing their packaging. The legislator also wants to achieve the increase of the recycling rate of paper, plastic, metal or glass packaging, and to use as many readily recyclable materials as possible. Therefore, the fee that producers or distributors must pay for disposal will in future not only depend on the quantity and material type, but also more on the recyclability of the packaging.

Who is affected by this law?

Manufacturers, online dealers and distributors of packaged goods of all kinds.

Affected are all so-called initial distributors of packaging, which typically end up at the private end consumer. These can be manufacturers, online dealers and distributors of packaged goods of all kinds, whether food, electrical appliances or furniture.

All of them, if they place packaging on the market for the first time, must register with one of the dual systems already today and, depending on the quantity and material of the packaging waste, pay a participation fee to the German take-back system.

It is new from next year on that they additionally have to register with the Central Agency Packaging Register and specify the amount of waste.

This information will be publicly available. By doing so, the legislator wants to create transparency and ensure that all those who place « packaging » on the market fulfill their obligations.

Also new is that the fees, which so far have been simply calculated according to quantity and type of material, should in future also depend on how well a material can be recycled.

For example: Cardboard boxes, which usually consist of two-thirds of waste paper, are easily recyclable, as are aluminium cans, which can be reused to 100 percent. By contrast, the notorious coffee-to-go cups are not recyclable because they consist of a quasi-inseparable composite material.

How exactly the gradations will look is not yet certain, as the dual systems still work on the implementation.

Further innovations for beverage manufacturers and distributors

The law contains several other changes that are particularly important for beverage manufacturers and distributors. The compulsory deposit for disposable containers will be extended to include a few types of beverages that were previously exempted, such as carbonated fruit and vegetable nectars. A new duty has been introduced for retailers, who must point out « with clearly visible signs » on disposable and reusable beverage packaging.As from 1st of January 2019 companies must also file the so-called Declaration of Compliance (“Vollstaendigkeitserklaerung”) with the Central Agency Packaging Register and not anymore with the respective local Chamber of Industry and Commerce.

What is the Declaration of Compliance?

A Declaration of Compliance is a verification concerning the volumes of sales packaging placed into the market by a manufacturer / distributor within one calendar year.

The filing of the Declaration of Compliance, however, only affects larger manufacturers, since the de minimis limits are set quite high in this respect. For paper, cardboard or carton it is about 80 tons per year.

Pre-registration is already possible as from September 2018. It is important to note, however, that every company involved in the system must perform the registration and data reporting « personally », meaning that this process may not be transferred to third parties.

The respective database run by the Central Agency Packaging Register is called LUCID. Manufacturers, online dealers or initial distributors who preregister with LUCID will receive a provisional registration number, which will be sent to the Dual system with which they can sign a contract. There are currently nine companies offering this. Manufacturers who preregister in 2018 will automatically receive a registration confirmation from the Central Agency Packaging Register at the beginning of 2019. The registration including the indication of quantities is free and can be done online.

The Central Agency Packaging Register is also responsible to monitor compliance with the regulations. However, at the end of the day, everyone can check the respective compliance as LUCID is a transparent register and open to everyone to search the register for specific manufacturers and brands.

The law explains why this can have quite unpleasant consequences:

In case the registration is omitted, there is automatically a ban on distribution of the packaging and there is a threat of fines to be imposed which may range up to 100.000 €! Due to the publicity of the register, agents not complying with the law may have to expect that their goods will be discontinued in the German trade.

Still unclear issues

The definition of packaging covered by this law is not quite clear. Transport packaging such as that used by a manufacturer for delivery to the dealer and disposed of there, for example, is not affected by the obligation to participate at the system and the new registration obligation. This packaging does not end up at the private end consumer. But what about wine boxes, for example? They are often only transport packaging, but some customers may take a whole box of their favorite wine with them. In addition, hotels and restaurants, such as those supplied by a retailer, are considered by law to be private end consumers.

The author of this post is Olga Dimopoulou

Commercial agents are very suitable for expanding one’s business into new markets – especially for two reasons: First, because they generally have a good expertise of the market (especially if they reside in that country). Second, because their remuneration (“commission”) can be configurated completely profit-oriented (= remunerated only if they successfully negotiate a new transaction), and related to the turnover they generate.

Nevertheless, both the supplier and the commercial agent may feel the need for an initial period, in which both get to know each other, the product, the market and the customers as good as possible to subsequently evaluate how to proceed on that market. Therefore, they may agree on a trial period within which the commercial agency contract can be terminated more easily and sooner than without or after such trial period, e.g.:

“This Agreement shall come into effect on [●] and shall be in force for a trial period of [●] months (“Trial Period”) during which each Party can terminate the Agreement with [●] months written notice. After such Trial Period, the Agreement shall continue indefinitely, unless terminated according to the rules below.”

Even if the agency agreement is terminated within such trial period, however, the agent may be entitled to indemnity or compensation – as the Court of Justice of the EU just now confirmed (Case Conseils et mise en relations (CMR) SARL, decision of 19 April 2018, C-645/16).

The court basically argues with the wording, context and objective of the Commercial Agency Directive:

  • The Commercial Agency Directive also applies to ‘”trial periods”.
  • Ending a commercial agency contract – even within an agreed trial period – constitutes a “termination” of the agency contract, which triggers the claims for indemnity or compensation – because the commercial agency contract has already been definitively concluded (understanding contrary to French case law, e.g. Cour de Cassation, Case No. 14-17894).
  • Goodwill indemnity or compensation are not forfeited because termination within the trial period is not included in the exhaustive list of exceptions in Article 18 Commercial Agency Directive.
  • The parties may derogate from the commercial agent’s mandatory rights only from the end of the contract (Article 19 Commercial Agency Directive) because the Commercial Agency Directive aims to protect the commercial agent vis-à-vis the principal (recital 2 of the Commercial Agency Directive).

Practical tips

  1. Parties are free to agree on trial periods because it is covered by freedom of contract.
  2. At termination, the commercial agent is, as a matter of principle, entitled to an indemnity or compensation – to “indemnify the agent for his past services from which the principal will continue to benefit beyond the termination”, as the EU Court of Justice now put it. Whether the agent can claim indemnity or compensation depends on the law chosen by the parties (or, in absence of choice, by the law of the country where the commercial agent has his habitual residence).
  3. As far as the indemnity (payable e.g. according to German law) is concerned, its amount strongly depends on the commercial agent’s performance during the term of the contract – because the claim accrues if and to the extent that (i) the agent has brought the principal new customers or (ii) has significantly increased the business with existing customers and (iii) the principal continues to derive substantial benefits from such business, plus (iv) such indemnity must be equitable. As a maximum, the indemnity shall not exceed of the past five years’ average annual remuneration (including commissions and other payments). Such possible costs should therefore be included in one’s business planning before starting to distribute products or services through commercial agents.
  4. Throughout the EU, agency agreements are widespread in a vast variety of industries: roughly 740,000 commercial agents operate for 1.7 million companies and generate sales of EUR 260 billion. These figures from 2012 keep growing as indicate Eurostat’s data, reported by the European Commission in its Refit Evaluation. The EU Member States with the most commercial agents are Slovakia (35k) Czech Republic (42k), Germany (42k), France (50k), Spain (50k) and – by far – Italy (220k). If the agent operates outside the European Economic Area, Principals and commercial agents are free to derogate even from the otherwise mandatory Commercial Agency Directive, especially if German law is chosen. For details, please see the article “Commercial Agents outside the EEA – No Goodwill Indemnity (Ingmar reloaded)”.
  5. Alternatively, one can also do business through distributors or franchisees or other intermediaries – where, however, an indemnity may arise at well, especially vis-à-vis distributors. For details, see the article “German Distributor Indemnity – How to avoid it”.

Who is responsible for the information on food products distributed on the online food market?

The same rules as in the offline food market apply.

The main applicable law is EU Regulation 1169/2011, also called “The EU Food Information Regulation“. According to its Art. 8 par. 1 the food business operator responsible for the food information shall be the operator under whose name or business name the food is marketed (the “Marketer”).

In case that the operator is not established in the Union, the responsible person is the importer into the Union market.

According to Art. 8 par. 2 of the said Regulation, the Marketer shall ensure the presence and accuracy of the food information in accordance with the applicable EU food information law and also with the requirements of relevant national provisions.

Who bears the main responsibility as food business operator?

The main responsibility for food information is assigned to the food business operator under whose name or business name the foodstuff is marketed.

This applies though only to such information concerning foodstuff which is made available to the final consumer by means of a label, other accompanying material, or any other means including modern technology tools or verbal communication.

Normally, the food business operator is the person, who keeps foodstuff for sale and therefore places such products on the market. According to the EU Food Information Regulation in order to determine the responsibility, it is of decisive importance under whose name the foodstuff is placed on the final consumer market.

Thereby the main responsibility is not any more with the final seller, with the consequence that the responsibility of the retailer is reduced.

A manufacturer who places a foodstuff on the market is therefore the responsible person.

A retailer is not per se a responsible person for the information on the foodstuff. In case the retailer sells food products under a private/own brand, then the responsible person is the one whose name is on the label of the product.

Importers are responsible for the information on the foodstuff if the food business operator under whose name or business name the food is marketed is not domiciliated in the EU.

In case of re-imported foodstuff, the responsible person is the one under whose name and address the foodstuff is offered to the consumer.

In case of a direct delivery of food from a third state (non-EU-state) to a consumer, as this is the case in the online retail, then the importer is the food business operator responsible for the food information.

Up to which extent is the marketer responsible for the information on the food?

The marketer is responsible for the accurateness and the lawfulness of the information on the food product and has to comply with all relevant German and EU laws and regulations.

This concerns not only the provisions of the EU Food Information Regulation, but also other EU regulations on information, such as information obligations which apply only to certain foodstuffs, as well as labelling obligations for additives and so on.

Information which are non-obligatory shall not be misleading, ambiguous or misunderstanding and have to rely on scientific data.

The operator under whose name or business name the food is marketed is responsible for meeting those provisions.

Retailers who are not the operator under whose name the food is marketed do only have to meet a reduced responsibility according to Art. 8 per. 3 to 5 of the EU Food Information Regulation (“The Regulation”).

Who else is responsible?

Food business operators who are not marketers have a reduced responsibility (Art. 8 par. 3 to 5 of the Regulation).

Under certain prerequisites they are responsible for

– known or presumed deficits in labelling (Art. 8 par. 3 of the Regulation)

– any changes they make to food information accompanying a food (Art. 8 par. 4 of the Regulation),

– ensuring compliance with the requirements of food information law and relevant national (in this case German) provisions which are relevant to their activities and verifying that such requirements are met (Art. 8 par. 5 of the Regulation).

Which specific characteristics apply to the upstream trade levels, meaning in B2B relations?

In case of non-prepacked food, the obligations to inform are quite limited. Non-prepacked food is usually intended for the final consumer or for supply to mass caterers.

There is only the obligation to inform about allergen ingredients. The EU Member States are free though to extent the obligation of informing regarding non-prepacked food according to Art. 44 par. 1 b) of the Regulation.

Germany made use of this option in its “Preliminary Regulation for the Addendum of EU Provisions Concerning the Information of Consumers about the Manner of Labelling Allergen Products in Non-Prepacked Food” of 28.11.2014 (Vorläufige Lebensmittelinformations- Ergänzungsverordnung).

When trading with non-prepacked food in the upstream trading levels the information about the food doesn’t have to be mandatory on the product itself. Instead, this information can be given in the accompanying papers of the food product.

The author of this post is Olga Dimopoulou

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

There is no single piece of legislation setting out all the duties and obligations to which managing GmbH directors (“Geschaeftsfuehrer”) are subject. These duties are set out i.a. in the law on GmbHs (“GmbHG”), the Commercial Code (“HGB”), Insolvency Act (“InsO”), Civil Code (BGB), the Antitrust Law (GWB), environmental and tax laws. Furthermore, they are set out in the Articles of Association of the GmbH (“Gesellschaftsvertrag”), Shareholders’ resolutions, Internal rules for management and if applicable the Service agreements of the GmbH and the directors.

Directors will normally not be held accountable for acts and debts of the GmbH, for GmbHs are separate independent entities accountable in their own right. Directors will be held accountable for their own behaviour, however, and be required to pay money out of their own pockets by way of compensation for breach of duty or as a fine. They may be disqualified from holding office as director, or even imprisoned.

General Obligation of Diligent Management in Relation to the GmbH

Directors have a general obligation of diligent management, including in particular:

  • to use his / her best efforts to promote the purpose of the GmbH;
  • to control the company’s liquidity and financial position;
  • ensure the GmbH’s compliance with all applicable legal obligations;
  • not to compete with, or appropriate the business opportunities of the GmbH;
  • not to disclose confidential information belonging to the GmbH.

Directors must employ the diligence of an orderly businessperson. Pursuant to the “business judgment rule” the management is immunized from liability if and to the extent the management, making an entrepreneurial decision based on appropriate information, could reasonably assume to act in the best interest of the company.

Annual accounts

GmbH directors must ensure that the company keeps proper books and accounts showing clearly the financial position of the company. Failure to fulfil this obligation can lead to a fine or even a term of imprisonment of the director.

Contribution and Preservation of Share Capital

The GmbH must have a share capital of at least 25,000 EUR. Upon the formation of a GmbH or increase of its share capital, the director(s) must affirm to the commercial register that the subscriber(s) of the (increased) share capital paid in the amount of cash determined in the Articles of Association, i.e. that the full amounts due were fully paid in, not paid back and are entirely to the free disposition of the director(s). If incorrect statements were made, directors are liable to the company.

Section 30 para 1 GmbHG prohibits disbursing assets to shareholders without an adequate consideration, so-called unlawful repayments. For their determination, a “balance-sheet test” is decisive. This means, a payment is not unlawful, when:

  • the company’s counter-performance or restitution claim is fully-fledged and
  • the contract meets the cover imperative (payment of the market price).

If an unlawful repayment of share capital contributions has occurred, the other shareholders are proportionately liable for the refund owed to the company. The directors whose negligent or intentional acts caused the illegal repayment are in their turn liable to those shareholders required to refund the sum.

Duties in Relation to Shareholders

Each director is entitled to call shareholders’ meetings. Those are to be called – inter alia – if this appears to be required by the interest of the company.

Under German GmbH law, GmbH shareholders are entitled to instruct the director(s) of the company in detail through shareholders resolutions to act or not to act in a certain way. Directors must comply with those instructions unless they are illegal. A negligent or intentional violation of this obligation renders the directors liable to the GmbH for damages and may justify their dismissal for cause.

Obligations Arising From Insolvency, Over-Indebtedness and Loss

Insolvency and Over-Indebtedness

In case of over-indebtedness or insolvency, each director must file a petition for the institution of an insolvency petition without undue delay but no later than three weeks from the date on which the over-indebtedness was ascertained or the insolvency arose (Section 15a Insolvency Code). Directors negligently or intentionally failing to meet this obligation (in time or properly) commit a criminal offence punishable by up to 3 years imprisonment and are liable for damages to the company.

Loss

If a balance sheet of the company shows a loss of one half or more of its share capital, the directors must call a shareholder meeting without undue delay. Directors failing to do so are liable to the company and subject to criminal penalties.

Duties in Relation to Taxes and Social Insurance Contributions

Apart from the obligation to file tax returns and pay corporate, trade and sales tax, the company must withhold some taxes (income tax, capital gains/settlement tax). The tax laws impose on directors a direct responsibility for tax payments. In case of violation by intention or gross negligence, they are liable personally (Section 69 German Fiscal Code) and subject to administrative sanctions or criminal penalties. Similar obligations apply to statutory social insurance contributions.

Duties in Relation to Employees and the Environment

Directors must observe special laws for the protection of employees (ArbSchG) and environment (USchG). If failing to do so, directors are personally responsible.

Duties in Relation to Third Parties

Directors’ Liability for an Appropriate Organisation of the Company

Directors have the duty and responsibility to organise the company such that the life, health, property, and similar rights of third parties are not violated.

Directors’ Liability for their Company’s Contracts, and its Acts or Omissions

Such a liability arises e.g., if a director agrees to personally guarantee a contract and the company fails to perform. A director may also be personally liable for torts (i.e. civil wrongs, incl. negligence) authorised by him/her, committed by the GmbH.

Antitrust Issues

A company and its directors commit an administrative offence, punishable by up to 1,000,000 EUR, if they violate Art. 101 s. EC Treaty or provisions of the GWB. This encompasses e.g. agreements, having as effect the restriction of competition.

Disqualification as a Director

A GmbH director will be disqualified from the position as director if he/she is convicted for the commission of particular criminal offences like fraudulent bankruptcy, violation of the duty to keep books or delaying insolvency proceedings.

« 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.

10 practical aspects to consider for an adequate timing

Meanwhile similar legal standards apply in most industrialized countries if an employment relationship shall be terminated; however, in every jurisdiction some specifics still need to be considered. The following ten aspects may be a first general guideline for the termination of an employment contract in Germany, in particular regarding its timing.

  1. In some cases notice needs to be given within a two-week period

In case of gross misconduct an employer may be entitled to terminate an employment relationship forthwith. However, if notice of termination is not served to the employee within two weeks after acknowledgement of the respective facts, this right is forfeited.

  1. Notice has to be given in writing

The notice has to be signed by the legal representative of the employer and delivered to the employee. Neither a transmission by facsimile nor an email with a scanned copy is sufficient. If the representative is not on site, timing may become an essential aspect of the termination process.

  1. Ordinary dismissal may be prohibited by a collective bargaining agreement

Collective bargaining agreements often provide a ban on ordinary dismissal under certain circumstances (e.g. based on the age of the employee). A careful assessment of all applicable collective bargaining agreements before a termination is therefore indispensable.

  1. Insufficient information of the works councils may lead to an invalid termination

The establishment of a works council is not mandatory in Germany. However, if it is established, it needs to be notified and heard before every termination of an employment contract. The notification must contain a sufficient description of the grounds for the termination, otherwise the termination may be deemed invalid. Having been notified, the works council has one week (in some cases: three days) to object. Any termination before such term without consent of the works council would be deemed invalid as well. Timing may therefore become again an essential aspect of the termination process.

  1. General dismissal protection is related to seniority and size of the establishment

General dismissal protection is basically applicable in establishments with more than 10 employees. Exceptions may apply in favour of those employees whose employment relationships commenced already before 1st January 2004. In addition, the respective employee needs to have at least a seniority of six month. If these criteria are met, the termination has to be justified by operational reasons, misconduct or personal incapacity as set out in the Dismissal Protection Act.

  1. Some terminations may need prior permission

Irrespective of the application of the afore mentioned Dismissal Protection Act some kind of terminations (e.g. employees on parental leave) may need a special permission of the works council, the Labour Court or the respective public authority as applicable. These procedures may last from some days up to two years.

  1. There is no general claim for severance payment in case of an unfair dismissal

Aside from those agreed in termination agreements there is no general claim for severance payment in case of an unfair dismissal. In general, the statutory remedy will only be reinstatement and back pay. Only under certain circumstances each party may apply for the termination of the employment relationship and a severance payment in front of the Labour Court. However, in most of the cases parties end up in a voluntary termination agreement.

  1. Non-competes may lead to extensive payments and cannot be withdrawn forthwith unilaterally without cause

A binding covenant to non-compete leads to a compensation payment of at least 50 % of the former salary for every month of its duration. Even in case of a justified termination it may only be terminated with a notice period of one year. However, both parties may agree upon its immediate suspension in a termination agreement.

  1. Any termination agreement has to be in written form as well

Also a termination agreement needs to fulfil the same formal requirements as set out already above under point 2. Again, if the representative is not on site, timing may become an essential aspect of the bargaining process.

  1. The forfeiture clause of a termination agreement may not cover all claims 

Termination agreements often contain general forfeiture clauses at their end, covering also those potential claims which have not been explicitly mentioned or identified by the parties. However, some claims (e.g. pension claims) may not be covered by such a (general) forfeiture clause.

Please note that these ten aspects contain general information only. Further details as well as possible exceptions therefore need to be checked on a case-by-case basis by a professional advisor.

 

Tha author of this post is Alexander Lentz

Benedikt Rohrssen

Domaines d'intervention

  • Agence
  • Distribution
  • e-commerce
  • Franchise
  • Investissements
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    Germany – Information on food products distributed online

    14 août 2018

    • Allemagne
    • Droit Alimentaire

    On 1 January, the new Packaging Act (“Verpackungsgesetz”) will replace the existing Packaging Ordinance (“Verpackungsverordnung”). Non-compliance with the new rules may have very unpleasant consequences.

    For those who sell packaged goods to end consumers in Germany it is high noon: they have to adapt to the new packaging law, which comes into force on January 1, 2019.

    The main objective of the new law is that in the future all concerned parties will have to take responsibility and bear the costs of disposing their packaging. The legislator also wants to achieve the increase of the recycling rate of paper, plastic, metal or glass packaging, and to use as many readily recyclable materials as possible. Therefore, the fee that producers or distributors must pay for disposal will in future not only depend on the quantity and material type, but also more on the recyclability of the packaging.

    Who is affected by this law?

    Manufacturers, online dealers and distributors of packaged goods of all kinds.

    Affected are all so-called initial distributors of packaging, which typically end up at the private end consumer. These can be manufacturers, online dealers and distributors of packaged goods of all kinds, whether food, electrical appliances or furniture.

    All of them, if they place packaging on the market for the first time, must register with one of the dual systems already today and, depending on the quantity and material of the packaging waste, pay a participation fee to the German take-back system.

    It is new from next year on that they additionally have to register with the Central Agency Packaging Register and specify the amount of waste.

    This information will be publicly available. By doing so, the legislator wants to create transparency and ensure that all those who place « packaging » on the market fulfill their obligations.

    Also new is that the fees, which so far have been simply calculated according to quantity and type of material, should in future also depend on how well a material can be recycled.

    For example: Cardboard boxes, which usually consist of two-thirds of waste paper, are easily recyclable, as are aluminium cans, which can be reused to 100 percent. By contrast, the notorious coffee-to-go cups are not recyclable because they consist of a quasi-inseparable composite material.

    How exactly the gradations will look is not yet certain, as the dual systems still work on the implementation.

    Further innovations for beverage manufacturers and distributors

    The law contains several other changes that are particularly important for beverage manufacturers and distributors. The compulsory deposit for disposable containers will be extended to include a few types of beverages that were previously exempted, such as carbonated fruit and vegetable nectars. A new duty has been introduced for retailers, who must point out « with clearly visible signs » on disposable and reusable beverage packaging.As from 1st of January 2019 companies must also file the so-called Declaration of Compliance (“Vollstaendigkeitserklaerung”) with the Central Agency Packaging Register and not anymore with the respective local Chamber of Industry and Commerce.

    What is the Declaration of Compliance?

    A Declaration of Compliance is a verification concerning the volumes of sales packaging placed into the market by a manufacturer / distributor within one calendar year.

    The filing of the Declaration of Compliance, however, only affects larger manufacturers, since the de minimis limits are set quite high in this respect. For paper, cardboard or carton it is about 80 tons per year.

    Pre-registration is already possible as from September 2018. It is important to note, however, that every company involved in the system must perform the registration and data reporting « personally », meaning that this process may not be transferred to third parties.

    The respective database run by the Central Agency Packaging Register is called LUCID. Manufacturers, online dealers or initial distributors who preregister with LUCID will receive a provisional registration number, which will be sent to the Dual system with which they can sign a contract. There are currently nine companies offering this. Manufacturers who preregister in 2018 will automatically receive a registration confirmation from the Central Agency Packaging Register at the beginning of 2019. The registration including the indication of quantities is free and can be done online.

    The Central Agency Packaging Register is also responsible to monitor compliance with the regulations. However, at the end of the day, everyone can check the respective compliance as LUCID is a transparent register and open to everyone to search the register for specific manufacturers and brands.

    The law explains why this can have quite unpleasant consequences:

    In case the registration is omitted, there is automatically a ban on distribution of the packaging and there is a threat of fines to be imposed which may range up to 100.000 €! Due to the publicity of the register, agents not complying with the law may have to expect that their goods will be discontinued in the German trade.

    Still unclear issues

    The definition of packaging covered by this law is not quite clear. Transport packaging such as that used by a manufacturer for delivery to the dealer and disposed of there, for example, is not affected by the obligation to participate at the system and the new registration obligation. This packaging does not end up at the private end consumer. But what about wine boxes, for example? They are often only transport packaging, but some customers may take a whole box of their favorite wine with them. In addition, hotels and restaurants, such as those supplied by a retailer, are considered by law to be private end consumers.

    The author of this post is Olga Dimopoulou

    Commercial agents are very suitable for expanding one’s business into new markets – especially for two reasons: First, because they generally have a good expertise of the market (especially if they reside in that country). Second, because their remuneration (“commission”) can be configurated completely profit-oriented (= remunerated only if they successfully negotiate a new transaction), and related to the turnover they generate.

    Nevertheless, both the supplier and the commercial agent may feel the need for an initial period, in which both get to know each other, the product, the market and the customers as good as possible to subsequently evaluate how to proceed on that market. Therefore, they may agree on a trial period within which the commercial agency contract can be terminated more easily and sooner than without or after such trial period, e.g.:

    “This Agreement shall come into effect on [●] and shall be in force for a trial period of [●] months (“Trial Period”) during which each Party can terminate the Agreement with [●] months written notice. After such Trial Period, the Agreement shall continue indefinitely, unless terminated according to the rules below.”

    Even if the agency agreement is terminated within such trial period, however, the agent may be entitled to indemnity or compensation – as the Court of Justice of the EU just now confirmed (Case Conseils et mise en relations (CMR) SARL, decision of 19 April 2018, C-645/16).

    The court basically argues with the wording, context and objective of the Commercial Agency Directive:

    • The Commercial Agency Directive also applies to ‘”trial periods”.
    • Ending a commercial agency contract – even within an agreed trial period – constitutes a “termination” of the agency contract, which triggers the claims for indemnity or compensation – because the commercial agency contract has already been definitively concluded (understanding contrary to French case law, e.g. Cour de Cassation, Case No. 14-17894).
    • Goodwill indemnity or compensation are not forfeited because termination within the trial period is not included in the exhaustive list of exceptions in Article 18 Commercial Agency Directive.
    • The parties may derogate from the commercial agent’s mandatory rights only from the end of the contract (Article 19 Commercial Agency Directive) because the Commercial Agency Directive aims to protect the commercial agent vis-à-vis the principal (recital 2 of the Commercial Agency Directive).

    Practical tips

    1. Parties are free to agree on trial periods because it is covered by freedom of contract.
    2. At termination, the commercial agent is, as a matter of principle, entitled to an indemnity or compensation – to “indemnify the agent for his past services from which the principal will continue to benefit beyond the termination”, as the EU Court of Justice now put it. Whether the agent can claim indemnity or compensation depends on the law chosen by the parties (or, in absence of choice, by the law of the country where the commercial agent has his habitual residence).
    3. As far as the indemnity (payable e.g. according to German law) is concerned, its amount strongly depends on the commercial agent’s performance during the term of the contract – because the claim accrues if and to the extent that (i) the agent has brought the principal new customers or (ii) has significantly increased the business with existing customers and (iii) the principal continues to derive substantial benefits from such business, plus (iv) such indemnity must be equitable. As a maximum, the indemnity shall not exceed of the past five years’ average annual remuneration (including commissions and other payments). Such possible costs should therefore be included in one’s business planning before starting to distribute products or services through commercial agents.
    4. Throughout the EU, agency agreements are widespread in a vast variety of industries: roughly 740,000 commercial agents operate for 1.7 million companies and generate sales of EUR 260 billion. These figures from 2012 keep growing as indicate Eurostat’s data, reported by the European Commission in its Refit Evaluation. The EU Member States with the most commercial agents are Slovakia (35k) Czech Republic (42k), Germany (42k), France (50k), Spain (50k) and – by far – Italy (220k). If the agent operates outside the European Economic Area, Principals and commercial agents are free to derogate even from the otherwise mandatory Commercial Agency Directive, especially if German law is chosen. For details, please see the article “Commercial Agents outside the EEA – No Goodwill Indemnity (Ingmar reloaded)”.
    5. Alternatively, one can also do business through distributors or franchisees or other intermediaries – where, however, an indemnity may arise at well, especially vis-à-vis distributors. For details, see the article “German Distributor Indemnity – How to avoid it”.

    Who is responsible for the information on food products distributed on the online food market?

    The same rules as in the offline food market apply.

    The main applicable law is EU Regulation 1169/2011, also called “The EU Food Information Regulation“. According to its Art. 8 par. 1 the food business operator responsible for the food information shall be the operator under whose name or business name the food is marketed (the “Marketer”).

    In case that the operator is not established in the Union, the responsible person is the importer into the Union market.

    According to Art. 8 par. 2 of the said Regulation, the Marketer shall ensure the presence and accuracy of the food information in accordance with the applicable EU food information law and also with the requirements of relevant national provisions.

    Who bears the main responsibility as food business operator?

    The main responsibility for food information is assigned to the food business operator under whose name or business name the foodstuff is marketed.

    This applies though only to such information concerning foodstuff which is made available to the final consumer by means of a label, other accompanying material, or any other means including modern technology tools or verbal communication.

    Normally, the food business operator is the person, who keeps foodstuff for sale and therefore places such products on the market. According to the EU Food Information Regulation in order to determine the responsibility, it is of decisive importance under whose name the foodstuff is placed on the final consumer market.

    Thereby the main responsibility is not any more with the final seller, with the consequence that the responsibility of the retailer is reduced.

    A manufacturer who places a foodstuff on the market is therefore the responsible person.

    A retailer is not per se a responsible person for the information on the foodstuff. In case the retailer sells food products under a private/own brand, then the responsible person is the one whose name is on the label of the product.

    Importers are responsible for the information on the foodstuff if the food business operator under whose name or business name the food is marketed is not domiciliated in the EU.

    In case of re-imported foodstuff, the responsible person is the one under whose name and address the foodstuff is offered to the consumer.

    In case of a direct delivery of food from a third state (non-EU-state) to a consumer, as this is the case in the online retail, then the importer is the food business operator responsible for the food information.

    Up to which extent is the marketer responsible for the information on the food?

    The marketer is responsible for the accurateness and the lawfulness of the information on the food product and has to comply with all relevant German and EU laws and regulations.

    This concerns not only the provisions of the EU Food Information Regulation, but also other EU regulations on information, such as information obligations which apply only to certain foodstuffs, as well as labelling obligations for additives and so on.

    Information which are non-obligatory shall not be misleading, ambiguous or misunderstanding and have to rely on scientific data.

    The operator under whose name or business name the food is marketed is responsible for meeting those provisions.

    Retailers who are not the operator under whose name the food is marketed do only have to meet a reduced responsibility according to Art. 8 per. 3 to 5 of the EU Food Information Regulation (“The Regulation”).

    Who else is responsible?

    Food business operators who are not marketers have a reduced responsibility (Art. 8 par. 3 to 5 of the Regulation).

    Under certain prerequisites they are responsible for

    – known or presumed deficits in labelling (Art. 8 par. 3 of the Regulation)

    – any changes they make to food information accompanying a food (Art. 8 par. 4 of the Regulation),

    – ensuring compliance with the requirements of food information law and relevant national (in this case German) provisions which are relevant to their activities and verifying that such requirements are met (Art. 8 par. 5 of the Regulation).

    Which specific characteristics apply to the upstream trade levels, meaning in B2B relations?

    In case of non-prepacked food, the obligations to inform are quite limited. Non-prepacked food is usually intended for the final consumer or for supply to mass caterers.

    There is only the obligation to inform about allergen ingredients. The EU Member States are free though to extent the obligation of informing regarding non-prepacked food according to Art. 44 par. 1 b) of the Regulation.

    Germany made use of this option in its “Preliminary Regulation for the Addendum of EU Provisions Concerning the Information of Consumers about the Manner of Labelling Allergen Products in Non-Prepacked Food” of 28.11.2014 (Vorläufige Lebensmittelinformations- Ergänzungsverordnung).

    When trading with non-prepacked food in the upstream trading levels the information about the food doesn’t have to be mandatory on the product itself. Instead, this information can be given in the accompanying papers of the food product.

    The author of this post is Olga Dimopoulou

    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

    There is no single piece of legislation setting out all the duties and obligations to which managing GmbH directors (“Geschaeftsfuehrer”) are subject. These duties are set out i.a. in the law on GmbHs (“GmbHG”), the Commercial Code (“HGB”), Insolvency Act (“InsO”), Civil Code (BGB), the Antitrust Law (GWB), environmental and tax laws. Furthermore, they are set out in the Articles of Association of the GmbH (“Gesellschaftsvertrag”), Shareholders’ resolutions, Internal rules for management and if applicable the Service agreements of the GmbH and the directors.

    Directors will normally not be held accountable for acts and debts of the GmbH, for GmbHs are separate independent entities accountable in their own right. Directors will be held accountable for their own behaviour, however, and be required to pay money out of their own pockets by way of compensation for breach of duty or as a fine. They may be disqualified from holding office as director, or even imprisoned.

    General Obligation of Diligent Management in Relation to the GmbH

    Directors have a general obligation of diligent management, including in particular:

    • to use his / her best efforts to promote the purpose of the GmbH;
    • to control the company’s liquidity and financial position;
    • ensure the GmbH’s compliance with all applicable legal obligations;
    • not to compete with, or appropriate the business opportunities of the GmbH;
    • not to disclose confidential information belonging to the GmbH.

    Directors must employ the diligence of an orderly businessperson. Pursuant to the “business judgment rule” the management is immunized from liability if and to the extent the management, making an entrepreneurial decision based on appropriate information, could reasonably assume to act in the best interest of the company.

    Annual accounts

    GmbH directors must ensure that the company keeps proper books and accounts showing clearly the financial position of the company. Failure to fulfil this obligation can lead to a fine or even a term of imprisonment of the director.

    Contribution and Preservation of Share Capital

    The GmbH must have a share capital of at least 25,000 EUR. Upon the formation of a GmbH or increase of its share capital, the director(s) must affirm to the commercial register that the subscriber(s) of the (increased) share capital paid in the amount of cash determined in the Articles of Association, i.e. that the full amounts due were fully paid in, not paid back and are entirely to the free disposition of the director(s). If incorrect statements were made, directors are liable to the company.

    Section 30 para 1 GmbHG prohibits disbursing assets to shareholders without an adequate consideration, so-called unlawful repayments. For their determination, a “balance-sheet test” is decisive. This means, a payment is not unlawful, when:

    • the company’s counter-performance or restitution claim is fully-fledged and
    • the contract meets the cover imperative (payment of the market price).

    If an unlawful repayment of share capital contributions has occurred, the other shareholders are proportionately liable for the refund owed to the company. The directors whose negligent or intentional acts caused the illegal repayment are in their turn liable to those shareholders required to refund the sum.

    Duties in Relation to Shareholders

    Each director is entitled to call shareholders’ meetings. Those are to be called – inter alia – if this appears to be required by the interest of the company.

    Under German GmbH law, GmbH shareholders are entitled to instruct the director(s) of the company in detail through shareholders resolutions to act or not to act in a certain way. Directors must comply with those instructions unless they are illegal. A negligent or intentional violation of this obligation renders the directors liable to the GmbH for damages and may justify their dismissal for cause.

    Obligations Arising From Insolvency, Over-Indebtedness and Loss

    Insolvency and Over-Indebtedness

    In case of over-indebtedness or insolvency, each director must file a petition for the institution of an insolvency petition without undue delay but no later than three weeks from the date on which the over-indebtedness was ascertained or the insolvency arose (Section 15a Insolvency Code). Directors negligently or intentionally failing to meet this obligation (in time or properly) commit a criminal offence punishable by up to 3 years imprisonment and are liable for damages to the company.

    Loss

    If a balance sheet of the company shows a loss of one half or more of its share capital, the directors must call a shareholder meeting without undue delay. Directors failing to do so are liable to the company and subject to criminal penalties.

    Duties in Relation to Taxes and Social Insurance Contributions

    Apart from the obligation to file tax returns and pay corporate, trade and sales tax, the company must withhold some taxes (income tax, capital gains/settlement tax). The tax laws impose on directors a direct responsibility for tax payments. In case of violation by intention or gross negligence, they are liable personally (Section 69 German Fiscal Code) and subject to administrative sanctions or criminal penalties. Similar obligations apply to statutory social insurance contributions.

    Duties in Relation to Employees and the Environment

    Directors must observe special laws for the protection of employees (ArbSchG) and environment (USchG). If failing to do so, directors are personally responsible.

    Duties in Relation to Third Parties

    Directors’ Liability for an Appropriate Organisation of the Company

    Directors have the duty and responsibility to organise the company such that the life, health, property, and similar rights of third parties are not violated.

    Directors’ Liability for their Company’s Contracts, and its Acts or Omissions

    Such a liability arises e.g., if a director agrees to personally guarantee a contract and the company fails to perform. A director may also be personally liable for torts (i.e. civil wrongs, incl. negligence) authorised by him/her, committed by the GmbH.

    Antitrust Issues

    A company and its directors commit an administrative offence, punishable by up to 1,000,000 EUR, if they violate Art. 101 s. EC Treaty or provisions of the GWB. This encompasses e.g. agreements, having as effect the restriction of competition.

    Disqualification as a Director

    A GmbH director will be disqualified from the position as director if he/she is convicted for the commission of particular criminal offences like fraudulent bankruptcy, violation of the duty to keep books or delaying insolvency proceedings.

    « 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.

    10 practical aspects to consider for an adequate timing

    Meanwhile similar legal standards apply in most industrialized countries if an employment relationship shall be terminated; however, in every jurisdiction some specifics still need to be considered. The following ten aspects may be a first general guideline for the termination of an employment contract in Germany, in particular regarding its timing.

    1. In some cases notice needs to be given within a two-week period

    In case of gross misconduct an employer may be entitled to terminate an employment relationship forthwith. However, if notice of termination is not served to the employee within two weeks after acknowledgement of the respective facts, this right is forfeited.

    1. Notice has to be given in writing

    The notice has to be signed by the legal representative of the employer and delivered to the employee. Neither a transmission by facsimile nor an email with a scanned copy is sufficient. If the representative is not on site, timing may become an essential aspect of the termination process.

    1. Ordinary dismissal may be prohibited by a collective bargaining agreement

    Collective bargaining agreements often provide a ban on ordinary dismissal under certain circumstances (e.g. based on the age of the employee). A careful assessment of all applicable collective bargaining agreements before a termination is therefore indispensable.

    1. Insufficient information of the works councils may lead to an invalid termination

    The establishment of a works council is not mandatory in Germany. However, if it is established, it needs to be notified and heard before every termination of an employment contract. The notification must contain a sufficient description of the grounds for the termination, otherwise the termination may be deemed invalid. Having been notified, the works council has one week (in some cases: three days) to object. Any termination before such term without consent of the works council would be deemed invalid as well. Timing may therefore become again an essential aspect of the termination process.

    1. General dismissal protection is related to seniority and size of the establishment

    General dismissal protection is basically applicable in establishments with more than 10 employees. Exceptions may apply in favour of those employees whose employment relationships commenced already before 1st January 2004. In addition, the respective employee needs to have at least a seniority of six month. If these criteria are met, the termination has to be justified by operational reasons, misconduct or personal incapacity as set out in the Dismissal Protection Act.

    1. Some terminations may need prior permission

    Irrespective of the application of the afore mentioned Dismissal Protection Act some kind of terminations (e.g. employees on parental leave) may need a special permission of the works council, the Labour Court or the respective public authority as applicable. These procedures may last from some days up to two years.

    1. There is no general claim for severance payment in case of an unfair dismissal

    Aside from those agreed in termination agreements there is no general claim for severance payment in case of an unfair dismissal. In general, the statutory remedy will only be reinstatement and back pay. Only under certain circumstances each party may apply for the termination of the employment relationship and a severance payment in front of the Labour Court. However, in most of the cases parties end up in a voluntary termination agreement.

    1. Non-competes may lead to extensive payments and cannot be withdrawn forthwith unilaterally without cause

    A binding covenant to non-compete leads to a compensation payment of at least 50 % of the former salary for every month of its duration. Even in case of a justified termination it may only be terminated with a notice period of one year. However, both parties may agree upon its immediate suspension in a termination agreement.

    1. Any termination agreement has to be in written form as well

    Also a termination agreement needs to fulfil the same formal requirements as set out already above under point 2. Again, if the representative is not on site, timing may become an essential aspect of the bargaining process.

    1. The forfeiture clause of a termination agreement may not cover all claims 

    Termination agreements often contain general forfeiture clauses at their end, covering also those potential claims which have not been explicitly mentioned or identified by the parties. However, some claims (e.g. pension claims) may not be covered by such a (general) forfeiture clause.

    Please note that these ten aspects contain general information only. Further details as well as possible exceptions therefore need to be checked on a case-by-case basis by a professional advisor.

     

    Tha author of this post is Alexander Lentz