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International agency agreements under Italian law
12 февраля 2019
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According to the well-established jurisprudence of the Spanish Supreme Court, a distributor may be entitled to compensation for clientele if article 28 of the Agency Law is applied analogically (the «inspiring idea«). This compensation is calculated for the agent based on the remunerations received in the last five years.
In a distribution contract, however, there are no «remunerations» such as those received by the agent (commissions, fixed amounts or others), but «commercial margins» (differences between the purchase and resale price). The question is, then, what magnitude to consider for the clientele compensation in a distribution contract: either the «gross margin» (the aforementioned difference between the purchase price and the resale price), or the «net margin» (that same difference but deducing other expenses and taxes in which the distributor had incurred in).
The conclusion until now seemed to be to calculate the compensation of the distributor from his «gross margins» since this is a magnitude more comparable to the «remuneration» of the agent: other expenses and taxes of the distributor could not be deduced in the same way as in an agency contract neither expenses and taxes were deduced.
The Supreme Court (November 17, 1999) had pointed out that in order to calculate compensation for clients «it is more appropriate to consider it as a gross contribution, since with it the agent must cover all the disbursements of its commercial organization«. In addition, the «earnings obtained» «do not constitute remuneration in the same sense» (October 21, 2008), given that such «benefits«, «belong to the internal scope of the agent’s own organization» (March 12, 2012).
Recently, however, the judgment of the Supreme Court of March 1, 2017 (confirmed by another of May 19, 2017) considers that the determination of the amount of clientele compensation in a distribution contract cannot be based on the «gross margins» obtained by the distributor, but in the «net margin». To reach this conclusion, the Court refers to a judgment of the same court of 2016 and to others of 2010 and 2007.
Does this imply a change in the case-law? In my opinion, this reading that the Supreme makes is not correct. Let’s see why.
In the judgment of March 2017, the disjunctive between gross or net margin is mentioned in the Second Legal Argument and refers to the ruling of 2016.
In that judgment of 2016 it was said that although in another of 2010 it was not concluded whether the calculation had to be made on gross or net margins, in a previous one of 2007, it was admitted that what was similar to the remuneration of the agent was the net profit obtained by the distributor (profits once deduced expenses and taxes) and not the margin that is the difference between purchase and resale prices.
Now, in my opinion, in the judgment of March 2017 the Supreme Court is referring in last instance to the judgement 296/2007 for something that the latter did not say. In 2007, the Supreme Court did not quantify clientele compensation, but rather damages. More specifically, and after stating that «the compensation for customers must be requested clearly in the lawsuit, without confusion or ambiguity«, the Court concluded that the Chamber «must resolve what corresponds according to the terms in which the debate was raised…in the initial lawsuit. And since…an indemnity of damages was interested mainly based on the time that the relationship had lasted…the solution more adjusted to the jurisprudence of this Court…consists in fixing as indemnification of damages an amount equivalent to the net benefits that [were] obtained by the distribution of the products…during the year immediately prior to the termination of the contract«. Therefore, in that the judgment of 2007 the Court did not decide on clientele compensation, but on damages.
In this way, the conclusion reached in 2007 to calculate compensation for damages on net margins, was transferred without further analysis to 2016 but for the calculation of clientele compensation. This criterion is now reiterated in the judgments of 2017 almost automatically.
In my opinion, however, and despite the jurisprudential change, the thesis that should prevail is that in order to apply analogically clientele compensation in distribution contracts, the magnitude equivalent to the «remuneration» of the agent is the «gross margin» obtained by the distributor and not its «net margin»: it does not make much sense that if the analogy is applied to recognize the clientele compensation to a distributor, it is deducted from its gross margins amounts to reach its margin or net profit. The agent also has his expenses and also pays his taxes starting from his «remunerations» and nothing in Directive 86/653/EEC nor in the Agency Contract Act allows to deduce such magnitudes to calculate his clientele compensation. In my opinion, therefore, and in line with this, distributors should be equal: the magnitudes that could be compared should be the (gross) retributions of the agent with the (gross) margins of the distributor (i. e. the difference between purchase and resale price).
In conclusion, judgments of March 1 and May 19, 2017 insist on what I consider a prior mistake and generate additional confusion to an issue that has already been discussed: the analogical application of clientele compensation to the distribution contracts and the calculation method.
Updating Notice (January 27, 2020)
In a recent Order (“Auto”) of the Supreme Court of November 20, 2019 (ATS 12255/2019 of inadmissibility of an appeal), the Court has had occasion to return to this matter and to confirm the criteria of the last jurisprudence: that in the distribution contracts, the magnitude to consider to apply the analogy and calculate the goodwill indemnity are the “net margins”.
In this procedure, a distributor appealed the decision of the Provincial Court of Barcelona that recognized compensation based on net margins and not gross margins. Said distributor requested the Supreme Court to annul said judgment on the grounds that it was taken following the latest jurisprudence, erroneous according to previous one in the appellant’s opinion.
The Supreme Court, however, seems to confirm that, contrary to the thesis that I defended above in this Post, « there is no alleged error in the most recent jurisprudence in the analogical interpretation of art. 28.3 of the Agency Law for the distribution contract, nor, therefore, the need to review the most recent jurisprudence on the subject ». Consequently, if the Supreme Court does not review its latest jurisprudence and considers that the judgment that applied the net margins was acceptable, we must consider that the magnitude to be considered in the compensation for clientele in distribution contracts is that of the net margins and not gross margins
With this decision it seems (or just «its seems»?), therefore, that the Court settles the discussion that, however and in my opinion, will nevertheless continue to rise to numerous discussions.
Quick summary — Under Swiss law, a distributor may be entitled to a goodwill indemnity after termination of a distribution agreement. The Swiss Supreme Court has decided that the Swiss Code of Obligations, which provides commercial agents with an inalienable claim to a compensation for acquired customers at the end of the agency relationship, may be applied by analogy to distribution relationships under certain circumstances.
In Switzerland, distribution agreements are innominate contracts, i.e., agreements which are not specifically governed by the Swiss Code of Obligations («CO»). Distribution agreements are primarily governed by the general provisions of Swiss contract law. In addition to that, certain provisions of Swiss agency law (articles 418a et seqq. CO) may be applied by analogy to distribution relationships.
Particularly with regard to the consequences of a termination of a distribution agreement, the Swiss Supreme Court has decided in a leading case of 2008 (BGE 134 III 497) concerning an exclusive distribution agreement that article 418u CO may be applied by analogy to distribution agreements. Article 418u CO entitles commercial agents to a goodwill indemnity (sometimes also referred to as «compensation for clientele«) at the end of the agency relationship. The goodwill indemnity serves as a mean to compensate an agent for “surrendering” its customer base to the principal upon termination of the agency relationship.
The assessment whether a distributor is entitled to a goodwill indemnity consists of two stages: In a first stage, it is necessary to analyse whether the requirements stipulated by the Swiss Supreme Court for an analogous application of article 418u CO to the distribution relationship at stake are met. If so, it must be analysed, in a second stage, whether all requirements for a goodwill indemnity set forth in article 418u CO are fulfilled.
Application by analogy of article 418u CO to the distribution agreement
An analogous application of Article 418u CO to distribution agreements requires that the distributor is integrated to a large extent into the supplier’s distribution organisation. Because of such strong integration, distributors must find themselves in an agent-like position and dispose of only limited economic autonomy.
The following criteria indicate a strong integration into the supplier’s distribution organisation:
- The distributor must comply with minimum purchase obligations.
- The supplier has the right to unilaterally change prices and delivery terms.
- The supplier has the right to unilaterally terminate the manufacturing and distribution of productscovered by the agreement.
- The distributor must comply with minimum marketing expenditure obligations.
- The distributor is obliged to maintain minimum stocks of contract products.
- The distribution agreement imposes periodical reporting obligations (e.g., regarding achieved sales and activities of competitors) on the distributor.
- The supplier is entitled to inspect the distributor’s books and to conduct audits.
- The distributor is prohibited from continuing distributing the products following the end of the distribution relationship.
The more of these elements are present in a distribution agreement, the higher the chance that article 418u CO may be applied by analogy to the distribution relationship at stake. If, however, none or only a few of these elements exist, article 418u CO will most likely not be applicable and no goodwill indemnity will be due.
Requirements for an entitlement to a goodwill indemnity
In case an analogous application of article 418u CO can be affirmed, the assessment continues. It must then be analysed whether all requirements for a goodwill indemnity set forth in article 418u CO are met. In that second stage, the assessment resembles the test to be carried out for «normal» commercial agency relationships.
Applied by analogy to distribution relationships, article 418u CO entitles distributors to a goodwill indemnity in cases where four requirements are met:
- Considerable expansion of customer base by distributor
First, the distributor’s activities must have resulted in a «considerable expansion» of the supplier’s customer base. The distributor’s activities may not only include targeting specific customers, but also building up a new brand of the supplier.
Due to the limited case law available from the Swiss Supreme Court, there is legal uncertainty as to what «considerable expansion» means. Two elements seem to be predominant: on the one hand the absolute number of customers and on the other hand the turnover achieved with such customers. The customer base existing at the beginning of the distribution relationship must be compared to the customer base upon termination of the agreement. The difference must be positive.
- Supplier must continue benefitting from customer base
Second, considerable benefits must accrue to the supplier even after the end of the distribution relationship from business relations with customers acquired by the distributor. That second requirement includes two important aspects:
Firstly, the supplier must have access to the customer base, i.e., know who customers are. In agency relationships, this is usually not an issue since contracts are concluded between customers and the principal, who will therefore know about the identity of customers. In distribution relationships, however, knowledge of the supplier about the identity of customers regularly requires a disclosure of customer lists by the distributor, may it be during or at the end of the distribution relationship.
Secondly, there must be some loyalty of the customers towards the supplier, so that the supplier can continue doing business with such customers after termination of the distribution relationship. This is the case, e.g., if retailers acquired by a former wholesale distributor continue buying products directly from the supplier once the relationship with the wholesale distributor ended. Furthermore, a supplier may also continue benefitting from customers acquired by the distributor if it can make profitable after-sales business, e.g., by supplying consumables, spare parts and providing maintenance and repair services.
Swiss case law distinguishes between two different kinds of customers: personal customers and real customers. The former are linked to the distributor because of a special relationship of trust and will usually remain with the distributor once the distribution relationship comes to an end. The latter are attached to a brand or product and normally follow the supplier. In principle, only real customers may give rise to a goodwill indemnity.
The development of the supplier’s turnover after the end of a distribution relationship may serve as an indication for the loyalty of customers. A sharp downfall of the turnover and a need on the part of the supplier (or new distributor) to acquire new or re-acquire former customers suggests that customers are not loyal, so that no goodwill indemnity would be due.
- Equitability of goodwill indemnity
Third, a goodwill indemnity must not be inequitable. The following circumstances could render a goodwill indemnity inequitable:
- The distributor was able to achieve an extraordinarily high margin or received further remunerations that constitute a sufficient consideration for the value of customers passed on to the supplier.
- The distribution relationship lasted for a long time, so that the distributor already had ample opportunity to economically benefit from the acquired customers.
- In return for complying with a post-contractual non-compete obligation, the distributor receives a special compensation.
In any event, courts dispose of a considerable discretion when deciding whether a goodwill indemnity is equitable.
- Termination not caused by distributor
Fourth, the distribution relationship must not have ended for a reason attributable to the distributor.
This will notably be the case if the supplier has terminated the distribution agreement because of a reason attributable to the distributor, e.g., in case of a breach of contractual obligations or an insufficient performance by the distributor.
Furthermore, no goodwill indemnity will be due in case the distributor has terminated the distribution agreement itself, unless such termination is justified by reasons attributable to the supplier (e.g., a violation of the exclusivity granted to the distributor by the supplier).
A goodwill indemnity cannot only be due in case a distribution agreement for an indefinite period of time ended due to a notice of termination, but also in case of the expiry respectively non-renewal of a fixed-term distribution relationship.
Quantum of a goodwill indemnity
Where article 418u CO is applicable by analogy to a distribution relationship and all above-mentioned requirements for a goodwill indemnity are met, the indemnity payable to the distributor may amount up to the distributor’s net annual earnings from the distribution relationship, calculated as the average earnings of the last five years. Where the distribution relationship lasted shorter, the average earnings over the entire duration of the distribution relationship are decisive.
In order to calculate the net annual earnings, the distributor must deduct from the income obtained through the distribution relationship (e.g., gross margin, further remunerations etc.) any costs linked to its activities (e.g., marketing expenses, travel costs, salaries, rental fees etc.). A loss-making business cannot give rise to a goodwill indemnity.
In case a distributor marketed products from various suppliers, it must calculate the net annual earnings on a product-specific basis, i.e., limited to the products from the specific supplier. The distributor cannot calculate a goodwill indemnity on the basis of its business as a whole. Fixed costs must be allocated proportionally, to the extent that they cannot be assigned to a specific distribution relationship.
Mandatory nature of the entitlement to a goodwill indemnity
Suppliers regularly attempt to exclude goodwill indemnities in distribution agreements. However, if an analogous application of article 418u CO to the distribution agreement is justified and all requirements for a goodwill indemnity are met, the entitlement is mandatory and cannot be contractually excluded in advance. Any such provisions would be null and void.
Having said that, specific provisions in distribution agreements dealing with a goodwill indemnity, as, e.g., contractual provisions that address how the supplier shall compensate the distributor for acquired customers, still remain relevant. Such rules could render an entitlement to a goodwill indemnity inequitable.
Are insurers liable for breach of the GDPR on account of their appointed intermediaries?
Insurers acting out of their traditional borders through a local intermediary should choose carefully their intermediaries when distributing insurance products, and use any means at their disposal to control them properly. Distribution of insurance products through an intermediary can be a fast way to distribute insurance products and enter a territory with a minimum of investments. However, it implies a strict control of the intermediary’s activities.
The reason is that Insurers in FOS can be held jointly liable with the intermediary if this one violates personal data regulation and its obligations as set by the GDPR (Regulation 2016/679 of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data).
In a decision dated 18 July 2019 , the CNIL (Commission Nationale Informatique et Libertés), the French authority in charge of personal data protection rendered a decision against ACTIVE ASSURANCE, a French intermediary, for several breaches of the GDPR. The intermediary was found guilty and fined EUR 180,000 for failing to properly protect the personal data of its clients. Those were found easily accessible on the web by any technician well versed in data processing. Moreover, the personal access codes of the clients were too simple and therefore easily accessible by third parties.
Although in this particular case insurers were not fined by the CNIL, the GDPR considers that they can be jointly liable with the intermediary in case of breach of personal data. In particular, the controller is liable for any acts of the processor he has appointed, this one being considered as a sub-contractor (clauses 24 and 28 of the GDPR).
This illustrates the risks to distribute insurance products through an intermediary without controlling its activities. Acting through intermediaries, in particular for insurance companies acting from foreign EU countries in FOS under the EU Directive on freedom of insurance services (Directive 2016/97 of 20 January 2016 on insurance distribution) requires a strict control through enacting contractual dispositions whereas are defined:
- a clear distribution of the duties between insurer and distributor (who is controller/joint controller/processor ?) as regards technical means used for protecting personal data (who shall do/control what ?) and legal requirements (who must report to the authorities in case of breach of security/ who shall reply to requests from data owners?, etc.);
- the right of the insurer to audit the distributors’ technical means used for this protection at any time during the term of the contract. In addition to this, one should always keep in mind that this audit should be conducted efficiently by the insurer at regular times. As Napoleon rightly said: “You can govern from afar, but you can only administer closely”.
When should an agency agreement be considered “international”?
Pursuant to the international private rules applicable in Italy (Art.1 Reg. 593/08 “Rome I”) an agreement is deemed “international” in the presence of “situations involving a conflict of laws”.
The situations which more often involve a conflict of laws in agency agreements– making them “international” — are (i) the principal’s seat being located in a country different from the agent’s seat country; or (ii) the agreement being performed abroad, even when the principal’s and the agent’s seats are both located in the same country.
When does Italian law apply to an agency agreement?
Under the “Rome I” Regulation, in principle Italian law may apply to an international agency agreement (i) if it is chosen by the parties as the law governing the agreement (either expressly, or as otherwise allowed by Art.3); or (ii) absent any choice of law, when the agent has its residence or seat in Italy (according to the “residence” concept under Article 19).
What are the main regulations of agency agreements in Italy?
The substantial regulations of agency agreements in Italy, with particular regard to the principal-agent relationship, can be found mainly in articles from 1742 to 1753 of the Civil Code. Such rules have been repeatedly modified following the adoption of the Directive 653/86/EC.
What is the role of the collective bargaining agreements?
Since many years, collective bargaining agreements (CBAs) have also been regulating agency agreements. These are agreements made on a regular basis between the associations representing principals and agents in different sectors (manufacture, trade and several others).
From a legal effectiveness perspective, a distinction can be drawn between two types of CBAs, i.e. CBAs having the force of law (effective “erga omnes”) — whose rules are however quite broad and thus have a limited scope of application — and CBAs of a contractual nature (“di diritto comune”) that have been signed from time to time over the years, and are meant to bind only those principals and agents which are members of those associations.
In general, CBAs intend to implement the Civil Code rules and those of the Directive 653/86. However, contractual CBAs often deviate from those rules, and some deviations are substantial. For example, CBAs allow a principal to unilaterally modify the agent’s territory, the contractual products, the range of customers, the commission. CBAs determine in a partially different manner the duration of the notice period when indefinite term agreements are terminated. CBAs have their own calculation of the agent’s remuneration for the post-contractual non-competition covenant. CBAs have peculiar regulations concerning the termination indemnity.
With particular regard to the contract termination indemnity, there have been serious issues of compliance between the CBAs and the Directive 653/86/CE. Indeed, such issues still remain unsolved despite some rulings from the EUCJ, because the Italian courts’ constant jurisprudence keeps the CBAs’ indemnity provisions in force.
According to the majority of scholarly opinions and case law, CBAs’ geographical scope of application is limited to the Italian territory.
Therefore, CBAs automatically apply to agency agreements which are governed by Italian law and are performed by the agent in Italy; but – in case of contractual CBAs – subject to the further condition that both parties are members to associations that entered into such Agreements. According to some scholars, it is sufficient that the principal alone is a member of such an association.
Even in the absence of such cumulative conditions, however, contractual CBAs may nonetheless apply if they are expressly referred to in the agency agreement, or their provisions are constantly complied with by the parties.
What are the other main requirements in agency agreements?
The “Enasarco”
Enasarco is a private law Foundation with which agents in Italy must be registered by law.
The Enasarco Foundation mainly administers a supplementary pension fund for agents, and a termination indemnity fund, called “FIRR” (referring to the termination indemnity as calculated in accordance with the criteria set forth by the CBAs in the different sectors).
Typically, a principal in a “domestic” agency agreement registers the agent with the Enasarco and pays contributions to both the above funds on a regular basis throughout the whole term of the agency agreement.
However, while registration and contribution to the pension fund are always mandatory as they are provided for by the law, contributions to the FIRR are instead mandatory only for those agency agreements which are governed by contractual CBAs.
Which rules apply to international agency agreements?
As far as registration with the Enasarco is concerned, the law and regulatory provisions are not so clear. However, important clarifications were provided by the Ministry of Labor in 2013 answering to a specific question (19.11.13 n.32).
Making reference to the European legislation (EC Regulation n.883/2004 as amended by Regulation n. 987/2009) the Ministry stated that registration with the Enasarco is mandatory in the following cases:
- agents operating in the Italian territory, in the name and on behalf of Italian or foreign principals having a seat or an office in Italy;
- Italian or foreign agents operating in Italy in the name and/or on behalf of Italian or foreign principals with or without a seat or office in Italy;
- agents residing in Italy and performing a substantial part of their activities in Italy;
- agents not residing in Italy, but having their main center of interest in Italy;
- agents habitually operating in Italy, but performing their activity exclusively abroad for a period not exceeding 24 months.
The above-mentioned Regulations obviously do not apply to those agency agreements that are to be performed outside the EU. Therefore, it should be checked case by case whether any international treaties binding the parties’ countries provide for the application of the Italian social security legislation.
Chamber of Commerce and Register of Businesses
Anyone wanting to start a business as a commercial agent in Italy, must file a “SCIA” (Certified Notice of Business Start) with the Chamber of Commerce having local jurisdiction. The Chamber of Commerce then registers the agent with the Register of Businesses if the agent is organized as a business entity, otherwise it registers the agent with a special section of the “REA” (List of Business and Administrative Information) of the same Chamber (see Legislative Decree n.59 dated 26.3.2010, implementing the Directive 2006/123/EC “Services Directive”).
Such formalities have replaced the former registration to the agents’ roll (“ruolo agenti”) which was abolished by said law. The new law also provides for a number of other mandatory requirements for agents wishing to start an activity. Such requirements concern education, experience, clean criminal records, etc.
Although failure to comply with the new registration requirements does not affect the validity of the agency agreement, a principal should nevertheless check that the Italian agent is registered before appointing him, as this is a mandatory requirement anyway.
Venue for disputes (art.409 and following of the Civil Procedure Code)
Pursuant to Article 409 and following of the Civil Procedure Code, if the agent mainly performs its contractual duties as an individual even if independently (so-called “parasubordinato” i.e. “semi-subordinate” agent) — provided the agency agreement is governed by Italian laws and Italian courts have jurisdiction — any disputes arising from the agency agreement shall be submitted to the Labor Court in the district where the agent is domiciled (see article 413 of the CPC) and the court proceedings shall be conducted according to procedural rules similar to those applicable to employment-related disputes.
In principle, said rules shall apply when the agent enters into the agreement as an individual or sole entrepreneur, while according to the majority of scholars and jurisprudence they do not apply when the agent is a company.
Applying the rules above to the most common situations in international agency agreements
Let’s now try to apply the rules described until now to the most frequent situations in international agency agreements, keeping in mind that those below are simple examples, while in the “real world” one should carefully check the circumstances of each specific case.
- Italian principal and foreign agent — agreement to be performed abroad
Italian law: it governs the agreement if chosen by the parties, without prejudice to any public policy (internationally mandatory) rules in the country where the agent has its residence and performs, pursuant to the Rome I Regulation.
CBAs: they do not govern the agreement automatically (because the agent performs abroad) but only when they have been expressly referred to in the agreement, or de facto applied. This could happen more or less intentionally, for example when an Italian principal uses with foreign agents the same contract forms as with Italian agents, which usually include many references to the CBAs.
Enasarco: typically, there are no registration or contribution obligations in favor of a non-Italian agent whose residence is abroad and performing his contractual duties only abroad.
Chamber of Commerce: there is no obligation to register in the above circumstances.
Procedural rules (article 409 and following, CPC): if Italian courts are properly chosen as the jurisdiction for all disputes, a foreign agent even if being an individual or sole entrepreneur may not take advantage of this provision to move the case to the courts of his own country. This is because art.413 cpc is a domestic provision on venue which presupposes the agent’s seat to be in Italy. Further, the jurisdiction rules set forth by the EU legislation should prevail, as was ruled by the Italian Court of Cassation and stated by important scholars.
- Foreign principal and Italian agent – agreement to be performed in Italy
Italian law: it governs the agreement if chosen by the parties or, even in the absence of any choice, as an effect of the agent having his residence or seat in Italy.
CBAs: those having force of law (“erga omnes”) govern the agreement, whereas those having contractual nature are unlikely to apply automatically, as the foreign principal typically would not be a member to any of the Italian associations having signed a CBA. However, they might apply if referred to in the agreement or de facto applied.
Enasarco: a foreign principal shall register the Italian agent to the Enasarco. Failure to do so might imply penalties and/or damages claims from the agent. As a consequence of such registration, the principal will have to contribute to the social security fund, while he should not be obliged to contribute to the FIRR (fund for termination indemnity). However, a principal who makes regular contributions to the FIRR even when not due, might be considered as having impliedly accepted the CBAs as applicable to the agency agreement.
Chamber of Commerce: the Italian agent has to be registered with the Chamber of Commerce and therefore the principal should make sure that the agent has complied with this requirement before entering into the agreement.
Procedural rules (art.409 and following, CPC): if Italian courts have jurisdiction (whether by the parties’ choice or as the place of performance of the services pursuant to Regulation 1215/12) and the agent is an individual or a sole entrepreneur with a seat in Italy, these rules should apply.
- Italian principal and Italian agent– agreement to be performed abroad
Italian law: it governs the agreement if chosen by the parties, or, in the absence of any choice, if the agent has his residence or seat in Italy.
CBAs: they would not apply (as the agent performs abroad) unless expressly referred to in the agreement, or de facto applied.
Enasarco: according to the Ministry of Labor’s opinion, registration is mandatory when the agent, although being engaged to work abroad, has his residence and performs a substantial part of his business in Italy, or has in Italy his center of interest, or performs abroad for a period not exceeding 24 months, provided the EU Regulations apply. In case the agency agreement is to be performed in a non-EU country, it has to assessed from time to time whether registration is mandatory.
Chamber of Commerce: an agent having started his business and established as an entity in Italy is in principle obliged to register with the Chamber of Commerce.
Procedural Rules (articles 409 and following of the CPC): the rules apply if the agent is an Italian based individual or sole entrepreneur and the Italian jurisdiction is agreed upon.
- Foreign principal and foreign agent – agreement to be performed in Italy
Italian law: in principle, it governs the agreement only if chosen by the parties.
CBAs: if the agreement is governed by Italian law, the CBAs having force of law apply, while those having contractual value will not apply unless expressly referred to, or de facto applied.
Enasarco: according to the Ministry of Labor’s opinion, when EU Regulations apply, registration may be required from a foreign principal in favor of an agent residing abroad, if such agent operates in Italy or has his center of interest in Italy. Otherwise, a case by case analysis will be needed under the applicable laws.
Chamber of Commerce: in principle, an agent established as an entity abroad is not obliged to register in Italy. However, the issue could be more complex if the agent has a seat and performs his activity mainly in Italy. Such circumstances may also affect the determination of the law governing the agency agreement.
Procedural Rules (articles 409 and following of the CPC): absent any different choice, Italian courts might have jurisdiction as Italy is the place of performance of the services. However, the above-mentioned rules should not apply if the agent has no seat or residence in Italy.
Conclusive remarks
Hopefully this analysis, though not exhaustive, can help understanding the possible consequences of applying Italian law to an international agency agreement, and to make prudent choices when drafting the agreement. As always, we recommend not to rely on standard contract forms or precedents without having paid due attention to all the circumstances of each case.
“Luxury goods justify online sales bans” on third party platforms – as stated in the press release no. 30/2018 of the Higher Regional Court of Frankfurt of July 12, 2018. After the long-awaited Coty-ruling of the ECJ (see the article of December 2017, https://www.legalmondo.com/2017/12/eu-court-justice-allows-online-sales-restrictions-coty-case/), the Higher Regional Court of Frankfurt has now applied the ECJ’s guidelines to Coty’s ban of sales via third party platforms and declared it effective – which was actually expected (I). Other high-quality goods – also outside the luxury segment – can justify platforms bans as well – at least this was decided by the Court of Appeal of Hamburg with regard to an eBay ban (II.). The article ends with some practical conclusions (III.).
Luxury products justify platform bans
According to the judgment of the Frankfurt Court of Appeal, Coty can prohibit the distributor from selling its products via third party platforms. Based on Coty’s wording in the selective distribution agreement, however, any distributor is free to establish advertising cooperations with third party platforms, where customers are redirected to the distributor’s own online shop. According to the judgment, the online marketplace ban is already admissible under the EU Vertical Block Exemption Regulation, since it does not constitute a hardcore restriction. The distribution ban could possibly even be exempted from the cartel prohibition, in the field of selective distribution; in this case, it would only be doubtful whether the prohibition of all «sales cooperation with a third party platform, outwardly recognisable from others, regardless of its concrete structure, would be a reasonable mean for the intended aim» (translated text from the original German version), i.e. whether it would be proportionate or whether there would be other means, less interfering with the dealer’s competitiveness. This question was left open by the Court.
Also other high-quality goods may allow platform bans
The case decided by the Hamburg Higher Regional Court (decision of March 22, 2018, file no. 3 U 250/16) concerns a qualitative selective distribution system for food supplements and cosmetics, which runs via the so-called network marketing, as well as via internet. The distribution guidelines contain, among other things, specific indications regarding the distributor’s website, the contact possibilities for customers in accordance with the «principle of personal sales of goods» (since the distribution system aims to sell the product tailored to the customers’ personal needs based on personal advice), as well as the quality of information and the product presentation. The «distribution … via eBay and comparable e-commerce platforms» is expressly prohibited, as it does not meet the quality requirements, at least not «according to the current state» (translated text from the original German version).
The Court of First Instance considered the platform ban to be admissible (District Court of Hamburg, judgment of November 4, 2016, Case No. 315 O 396/15) – which has now been confirmed by the Higher Regional Court of Hamburg. This is because qualitative selective distribution systems are not only admissible for luxury goods and high-technology goods, but also for (other) high-quality goods, «if the goods sold are high-quality and the distribution is combined with parallel customer consulting and support services, with the aim, among other things, of illustrating to the customer an overall sophisticated, high-quality and upscale end product and building up or maintaining a specific product image» (translated text from the original German version).
Within such a selective distribution system for the distribution of food supplements and cosmetics, it could then be admissible “to prohibit the distribution partners, by means of suitable company guidelines, from selling those goods via a specific online sales platform, in order to preserve the product image and the related practice of customer-binding support, as well as to prevent product- and image-damaging business practices of single distribution partners as occurred and consequently pursued in the past” (translated text from the original German version).
The peculiarity here was that they were not «pure prestige products» and, moreover, the Hamburg Higher Regional Court did not limit itself to the – in view of the market shares readily feasible – verification that the platform under Article 2 of the Vertical Block Exemption Regulation was admissible. Rather, the Court vividly and precisely declined the so-called Metro criteria.
Practical conclusions
- The Internet remains a growth driver for consumer goods, as also the market data from the German Trade Association confirm: «E-commerce remains a growth driver«.
- At the same time, brand manufacturers in particular want growth to be regulated according to the rules of their distribution system and to their requirements. These include, especially for luxury and technically sophisticated products, as well as other products requiring intensive assistance, strict specifications regarding brand identity and advertising appearance (specifications regarding brick store clauses, marketplace bans) and the services to be offered (e.g. chat and / or hotline with information on availability).
- Manufacturers should check whether their platform bans comply with ECJ’s requirements or if they wish to impose platform bans – in selective, exclusive, franchise and open distribution.
- Who wants to take as little risk as possible, should remain cautious with platform bans outside the selective distribution of luxury goods. In its first reaction, also the Federal Cartel Authority (BKartA, short for “Bundeskartellamt”) declared that the Coty-ruling should apply exclusively to original luxury products: “#Brand manufacturers still have no carte blanche on #platform bans. First assessment: «Limited impact on our practice» (BKartA on Twitter, December 6, 2017). Nevertheless, the European Commission has now spoken against this: in its Competition Policy Brief of April 2018 («EU competition rules and marketplace bans: Where do we stand after the Coty judgment?), the European Commission states — rather incidentally – that the argumentation of the ECJ in the Coty case should also apply regardless of the luxury character of the distributed products:
„The arguments provided by the Court are valid irrespective of the product category concerned (i.e. luxury goods in the case at hand) and are equally applicable to non-luxury products. Whether a platform ban has the object of restricting the territory into which, or the customers to whom the distributor can sell the products or whether it limits the distributor’s passive sales can logically not depend on the nature of the product concerned.“
In fact, the ECJ has broadly defined «luxury goods» in its judgment: namely as goods whose quality is «not just the result of their material characteristics» but of intangible values – which is usually the case for branded goods (see the Coty-judgment of the ECJ of December 6, 2017, para. 25 and, with regard to «quality goods», the conclusion of the EU Advocate General of July 26, 2017, para. 92). Furthermore, the ECJ only requests that the goods be bought «also» because of their prestige character, not «alone» or «above all» because of it. In conclusion, a lot of aspects suggest that all brand manufacturers can include platform bans in their distribution agreements – at least in case of market shares up to max. 30%.
- Those who are not afraid of confrontations with dealers and antitrust authorities can definitely impose platform bans outside the selective distribution of luxury goods as well – or increasingly rely on premium products and luxury – such as at the perfumery chain Douglas (see the Süddeutsche Zeitung of March 8, 2018, p. 15: «Active and unconventional, Tina Müller ends discounts on Douglas and aims at luxury«).
- To ensure consistent quality of sales, specific quality targets are recommended, especially for online sales. The list of possible quality targets is very long. The specifications that have proven to be best practice concern in particular:
— the positioning as a retailer (platform, product range, communication)
— the design of the website (quality, look & feel, etc.)
— the content and product offer of the website,
— the processing of online purchases,
— the consulting and customer service, as well as
— the advertisement.
- It is also essential to note that manufacturers are not allowed to totally prohibit distributors from selling online; nor are sales requirements allowed to amount to such a total ban – as the Courts now see in the case of Ascis’ ban of price comparison engines (to this regard, see the following article from April 2018: https://www.legalmondo.com/2018/04/germany-ban-of-price-comparison-engines-and-advertising-on-third-party-platforms/).
- Further details can be found in German in the following Law Journals:
— Rohrßen, Vertriebsvorgaben im E-Commerce 2018: Praxisüberblick und Folgen des „Coty“-Urteils des EuGH, in: GRUR-Prax 2018, 39-41;
— Rohrßen, Internetvertrieb von Markenartikeln: Zulässigkeit von Plattform-verboten nach dem EuGH-Urteil Coty, in: DB 2018, 300-306;
— Rohrßen, Internetvertrieb: „Nicht Ideal(o)“ – Kombination aus Preissuchma-schinen-Verbot und Logo-Klausel, in: ZVertriebsR 2018, 120-123;
— Rohrßen, Internetvertrieb nach Coty – Von Markenware, Beauty und Luxus: Plattformverbote, Preisvergleichsmaschinen und Geoblocking, in: ZVertriebsR 2018, 277-285.
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
In a recent decision on the 24th of October 2018 (n°18-D-23), the French Competition Authority (Autorité de la Concurrence, aka AdlC) fined the Stihl company (leader in mechanized culture products) for his practices in his selective distribution network. Stihl managed to restrict the sale of its products by its authorized distributors on their own website and to prohibit them from marketing them on third-party platforms.
The ruling is considered by the AdlC as having «vocation to clarify the framework applicable in France for the different sectors and products, beyond the sole sector of the mechanized culture».
In this case the network implemented by the supplier was a selective distribution network. Therefore, AdlC’s position can only concern the implementation of a selective distribution network and is not applicable to an exclusive distribution network (see our Update Distribution/Competition, April 2018).
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The lawfulness of the selective distribution network
The Authority follows the traditional analysis of validity of a selective distribution network. First, it highlights that selection of resellers was based on objective criteria such as qualitative nature, applied in a uniform manner and without any discrimination.
Then, the Authority had to determine whether the qualitative criterion conditioning the lawfulness of the selective distribution system was fulfilled or not. The Authority has decided that the fact that products in question are of a delicate assembly and that some of them even present risks for safety of users, justifies setting up a network of selective distribution.
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The lawfulness of the ban on selling technical products on third-party platforms
The decision of the AdlC was especially expected on this point because it had to take into account rulings rendered by the CJEU and then by the Paris Court of Appeal in the Coty cases ((CJUE 6/12/17, affaire 230/16; Cour d’appel de Paris, pôle 5, ch 4, 28 février 2018, n° 16/02263). The question was: the right of suppliers to prohibit their authorized distributors from distributing their products on third-party platforms is limited to luxury goods only (the Coty hypothesis) or could be extended to include others products? The hypothesis of this extension had already been addressed by other courts in Europe and also by the Advocate General before the CJEU (see our Update Distribution/Competition, December 2017) and then by the European Commission.
In a nutshell the Authority extends the Coty case law to technical products whether they are dangerous or not.
First of all, the Authority notes that «prohibition to sell on platforms contributes to preserving the safety of consumers and to guaranteeing the brand image and the quality of the products concerned».
Then, the Authority checked whether this restriction did not go beyond what is necessary in regards to characteristics of products in question. It notes that in the case of third-party platforms, this restriction allows supplier to control that its distributors comply with requirements of distribution network.
Finally, the AdlC checked whether this prohibition was not disproportionate, and in this case, noted that there is no disproportion in so far as distribution on third-party marketplaces is not a main marketing channel for mechanized culture products.
This result (validation of the ban on the sale of products on third-party platforms) may allow many economic operators to believe legitimately that the scope of the Coty case law can be broad.
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Prohibition of restrictions on resale of products on distributors’ websites
However the AdlC has refused to approve the clause restricting resale of products by distributors on their own websites.
In this case, if customers of the distributors could place an order online, they had to, for products with a certain dangerous nature (such as chainsaw, pruner, brushcutter, etc.) either come to withdraw the product at a (physical) sell point owned by distributor or to be delivered by the distributor. Distributor had indeed underwritten a complete obligation to «put in hand» the machine, including the oral communication of usage instructions and a demonstration.
The AdlC decided that this obligation to put in hand was actually to cancel advantages attached to Internet selling and thus to prohibit purely and simply Internet selling. According to the Authority, this restriction went beyond what is necessary to preserve consumer’s health.
The AdlC had to determine whether this restriction was a restriction by object or effect. According to the Authority, the restriction at stake reduced the ability of distributors to sell products outside their usual customers catchment area, and as such should be characterized as a competitive restriction by object.
On possible exemptions issues, the Authority first rejects the possibility of category exemption within the meaning of the EU Block Exemption Regulation No 330/2010, the anti-competitive practice being comparable to a restriction characterized by passive sales within the meaning of Article 4, para. (c). Possibility of an individual exemption was also rejected by the Authority after examining any efficiency gains related to this «put in hand» obligation.
The Authority could have taken advantage of this particular case, to refine the Pierre Fabre / Bang & Olufsen case law and validate and update sales restrictions on the Internet when the proper nature or quality of products justifies such a restriction.
In summary, the marketing of products involving high technicality or which tend to be dangerous by using it:
- justifies the implementation of a selective distribution network;
- may be prohibited on third party platforms (if the selective distribution network is considered lawful);
- could not be restricted on the websites of authorized distributors of a lawful selective network, for lack of «efficiency gain» in favor of consumers, according to a very (too?) strict position of the AdlC.
On this last point, it will probably be necessary to wait for a clearer solution given by the Court of Appeal of Paris (in front of which a recourse is now pending) or the Court of Cassation.
Very frequently, different business settings present the opportunity to sign a Non-Disclosure Agreement (“NDA”) and a Memorandum of Understanding (“MoU”) or Letter of Intent (“LoI”), so much so that these three acronyms – NDA, MoU and Lol – are now commonly used, particularly throughout international negotiations.
However, often times, these contracts are used in an improper way and with different purposes than those for which they were established in international commercial praxis, with the result that they are either not useful because they do not effectively protect the parties’ interests, or are counterproductive.
We shall start by taking a look at the characteristics of the Non-Disclosure Agreement – NDA – and how it should be used.
What is a NDA?
The NDA is an agreement whose function is to protect the confidential information that the parties (generally identified, respectively as the “Disclosing Party” and the “Receiving Party”) intend sharing, in different possible scenarios: forwarding of information for a preliminary due diligence relating to an investment, the evaluation of commercial data for a distribution contract, technical specifications related to a certain product that is subject of transfer of technology etc.
The first step of the negotiations, in fact, often requires that different types of information whether technical, financial or commercial, are made available by one or both parties, and the need for this information to remain confidential (hereinafter the “Confidential Information”) during and after the conclusion of the negotiations.
NDA — Who are the parties?
Right from the recitals of the agreement, it is very important to correctly identify the parties obliged to safeguard the information and maintain its confidentiality, especially when group companies are involved, and where the interlocutors may be many and located in different countries. In such cases, it is advisable to oblige the Receiving Party to guarantee confidentiality by all the companies by means of a specific clause. It is also important that the agreement accurately indicates the people belonging to the Receiving Party’s organization (such as: employees, technical consultants, experts, collaborators, etc.) who have a right to access the information, if possible by signing a confidentiality agreement by all the people involved.
NDA — What is Confidential Information?
The use of recycled NDA templates, found on forms or proposed by the counterparty is certainly not a recommended practice, but unfortunately one that is very widespread. These templates are very often generic and include broad definitions of Confidential Information as well as very detailed lists which actually include all contents of a business activity, often including areas that are not applicable to the object of the activity being negotiated, or information that is actually not reserved.
The problem regarding these templates is that it is difficult, ex post, to verify whether certain information would have been included in the Confidential Information, for example either because it would be difficult to determine whether the Receiving Party would have already been in possession before the signing of the NDA, or because the information would not have been expressly mentioned in a clause that contains a very detailed list, but which does not include the individual piece of information that is of interest, or lastly because after the signing of the NDA, the Confidential Information would have been shared using non-secure and non-traceable procedures (for example as an email attachment).
The best way to proceed is that of identifying in a very specific way only the information that needs to be shared, listing the documents in an attachment to the NDA, thereafter making them available in a format that leaves no doubt regarding their confidentiality, for example by marking them with a watermark or stamp “Confidential under NDA”. Furthermore, a good praxis is to provide access to the Confidential Information only through a secure way (such as a reserved cloud , accessible only through an individual user name and password that is given to authorized people).
NDA — Prohibition from using the Confidential Information
Often times through the standard NDA templates, the Receiving Party is only obliged to maintain the Confidential Information reserved, without being prohibited from its use which – especially in cases of competitor companies – may be more dangerous than divulging the information: imagine technology development or patents based on data acquired, or the use of lists of clients or other commercial information. To highlight and strengthen this obligation it would be more correct to name the document Non-Disclosure and Non-Use Agreement (“NDNUA”).
NDA — Duration
The function of the NDA is to protect the Confidential Information for the entire time during which it needs to be shared between the Parties. It is therefore important to clearly indicate the last moment the information will be used and – in the event that the Receiving Party is in possession of a copy of the Confidential Information – ensure that the Receiving Party returns or destroys the documents and shall maintain the Information reserved and shall refrain from using the Information for a few months (better years) following the termination of the NDA.
Breach of the NDA
Attempting to quantify the damages resulting from a breach of the confidentiality clause is generally very complex: it may therefore be useful to provide for a penalty clause, that establishes a certain amount for the damage deriving from a contractual non-fulfilment. To this effect it is important to consider that the estimate of the penalty shall be reasonable in relation to the damage assumed to derive from the breach of confidentiality, and that different types of penalties can be established according to different cases of non-fulfilment (for example, registration or counterfeit of a patent through the use of shared technical information, or contact with certain business partners).
There is also another advantage inserting a penalty clause in the NDA: if during the negotiations the Receiving Party objects to the clause or requests it to be reduced, it may indicate a mental reservation of default, and in any case is symptomatic of a fear of having to pay this amount, which would have no reason to exist if the party intended abiding strictly to the contractual obligations.
NDA — Litigation, jurisdiction and applicable law
Even in this case there is an unfortunate practice, which is that of relegating this type of clause to the end of the agreement (concerning the so-called midnight clauses, to this effect you may refer to this post on legalmondo) and thus not dedicate enough attention to its contents, which may lead to adopting clauses that are completely wrong (or worse still, null).
In reality this is a very important provision, which leads to ensuring contractual enforcement and/or obtaining a judicial decision that may be executed in a rapid and effective way. There is no solution that applies to all cases and the individual negotiation need to be considered: for example in an NDA with a Chinese counterpart it may be counterproductive to choose the Italian jurisdiction and apply Italian law, given that in the event of non-fulfilment it is usually necessary to take legal action and enforce the judicial or arbitral decision in China (even with interim – urgent measures). It would therefore be more opportune, to draft an NDA with an English/Chinese bilingual text and provide for an arbitration in China, applying Chinese law.
NDA — Conclusion
The NDA is a fundamental tool to protect confidential information, and this can be achieved only if it is well drafted, taking into consideration the specific case at hand: it is advisable to refrain from the “do-it-yourself” and seek legal advice from a lawyer who knows how to draw up an NDA bearing in mind all the characteristics of this type of contract (type of negotiation, information to be shared, location of the parties and countries where the NDA will be executed).
The Milestone EU-Mercosur Trade Deal
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Germany – To which product category do Cannabidiol spray products belong?
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Spain — The agent’s right to information after the conclusion of his contract
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France: Ambush marketing and the Paris 2024 Olympic Games
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Spain — The agent’s right to information after the conclusion of his contract
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Spain — Is it possible to advance payment of customer indemnity in agency contracts?
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International debt recovery: risk prevention and best practices
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The importance of Mediation in Distribution Contracts
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EU Regulation 2019/1150 | Online intermediation services and Mediation
- Альтернативное разрешение споров
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Европа
Scrivi a Christian
Online distribution – Restrictions of online sales: latest decisions
13 января 2019
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Германия
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According to the well-established jurisprudence of the Spanish Supreme Court, a distributor may be entitled to compensation for clientele if article 28 of the Agency Law is applied analogically (the «inspiring idea«). This compensation is calculated for the agent based on the remunerations received in the last five years.
In a distribution contract, however, there are no «remunerations» such as those received by the agent (commissions, fixed amounts or others), but «commercial margins» (differences between the purchase and resale price). The question is, then, what magnitude to consider for the clientele compensation in a distribution contract: either the «gross margin» (the aforementioned difference between the purchase price and the resale price), or the «net margin» (that same difference but deducing other expenses and taxes in which the distributor had incurred in).
The conclusion until now seemed to be to calculate the compensation of the distributor from his «gross margins» since this is a magnitude more comparable to the «remuneration» of the agent: other expenses and taxes of the distributor could not be deduced in the same way as in an agency contract neither expenses and taxes were deduced.
The Supreme Court (November 17, 1999) had pointed out that in order to calculate compensation for clients «it is more appropriate to consider it as a gross contribution, since with it the agent must cover all the disbursements of its commercial organization«. In addition, the «earnings obtained» «do not constitute remuneration in the same sense» (October 21, 2008), given that such «benefits«, «belong to the internal scope of the agent’s own organization» (March 12, 2012).
Recently, however, the judgment of the Supreme Court of March 1, 2017 (confirmed by another of May 19, 2017) considers that the determination of the amount of clientele compensation in a distribution contract cannot be based on the «gross margins» obtained by the distributor, but in the «net margin». To reach this conclusion, the Court refers to a judgment of the same court of 2016 and to others of 2010 and 2007.
Does this imply a change in the case-law? In my opinion, this reading that the Supreme makes is not correct. Let’s see why.
In the judgment of March 2017, the disjunctive between gross or net margin is mentioned in the Second Legal Argument and refers to the ruling of 2016.
In that judgment of 2016 it was said that although in another of 2010 it was not concluded whether the calculation had to be made on gross or net margins, in a previous one of 2007, it was admitted that what was similar to the remuneration of the agent was the net profit obtained by the distributor (profits once deduced expenses and taxes) and not the margin that is the difference between purchase and resale prices.
Now, in my opinion, in the judgment of March 2017 the Supreme Court is referring in last instance to the judgement 296/2007 for something that the latter did not say. In 2007, the Supreme Court did not quantify clientele compensation, but rather damages. More specifically, and after stating that «the compensation for customers must be requested clearly in the lawsuit, without confusion or ambiguity«, the Court concluded that the Chamber «must resolve what corresponds according to the terms in which the debate was raised…in the initial lawsuit. And since…an indemnity of damages was interested mainly based on the time that the relationship had lasted…the solution more adjusted to the jurisprudence of this Court…consists in fixing as indemnification of damages an amount equivalent to the net benefits that [were] obtained by the distribution of the products…during the year immediately prior to the termination of the contract«. Therefore, in that the judgment of 2007 the Court did not decide on clientele compensation, but on damages.
In this way, the conclusion reached in 2007 to calculate compensation for damages on net margins, was transferred without further analysis to 2016 but for the calculation of clientele compensation. This criterion is now reiterated in the judgments of 2017 almost automatically.
In my opinion, however, and despite the jurisprudential change, the thesis that should prevail is that in order to apply analogically clientele compensation in distribution contracts, the magnitude equivalent to the «remuneration» of the agent is the «gross margin» obtained by the distributor and not its «net margin»: it does not make much sense that if the analogy is applied to recognize the clientele compensation to a distributor, it is deducted from its gross margins amounts to reach its margin or net profit. The agent also has his expenses and also pays his taxes starting from his «remunerations» and nothing in Directive 86/653/EEC nor in the Agency Contract Act allows to deduce such magnitudes to calculate his clientele compensation. In my opinion, therefore, and in line with this, distributors should be equal: the magnitudes that could be compared should be the (gross) retributions of the agent with the (gross) margins of the distributor (i. e. the difference between purchase and resale price).
In conclusion, judgments of March 1 and May 19, 2017 insist on what I consider a prior mistake and generate additional confusion to an issue that has already been discussed: the analogical application of clientele compensation to the distribution contracts and the calculation method.
Updating Notice (January 27, 2020)
In a recent Order (“Auto”) of the Supreme Court of November 20, 2019 (ATS 12255/2019 of inadmissibility of an appeal), the Court has had occasion to return to this matter and to confirm the criteria of the last jurisprudence: that in the distribution contracts, the magnitude to consider to apply the analogy and calculate the goodwill indemnity are the “net margins”.
In this procedure, a distributor appealed the decision of the Provincial Court of Barcelona that recognized compensation based on net margins and not gross margins. Said distributor requested the Supreme Court to annul said judgment on the grounds that it was taken following the latest jurisprudence, erroneous according to previous one in the appellant’s opinion.
The Supreme Court, however, seems to confirm that, contrary to the thesis that I defended above in this Post, « there is no alleged error in the most recent jurisprudence in the analogical interpretation of art. 28.3 of the Agency Law for the distribution contract, nor, therefore, the need to review the most recent jurisprudence on the subject ». Consequently, if the Supreme Court does not review its latest jurisprudence and considers that the judgment that applied the net margins was acceptable, we must consider that the magnitude to be considered in the compensation for clientele in distribution contracts is that of the net margins and not gross margins
With this decision it seems (or just «its seems»?), therefore, that the Court settles the discussion that, however and in my opinion, will nevertheless continue to rise to numerous discussions.
Quick summary — Under Swiss law, a distributor may be entitled to a goodwill indemnity after termination of a distribution agreement. The Swiss Supreme Court has decided that the Swiss Code of Obligations, which provides commercial agents with an inalienable claim to a compensation for acquired customers at the end of the agency relationship, may be applied by analogy to distribution relationships under certain circumstances.
In Switzerland, distribution agreements are innominate contracts, i.e., agreements which are not specifically governed by the Swiss Code of Obligations («CO»). Distribution agreements are primarily governed by the general provisions of Swiss contract law. In addition to that, certain provisions of Swiss agency law (articles 418a et seqq. CO) may be applied by analogy to distribution relationships.
Particularly with regard to the consequences of a termination of a distribution agreement, the Swiss Supreme Court has decided in a leading case of 2008 (BGE 134 III 497) concerning an exclusive distribution agreement that article 418u CO may be applied by analogy to distribution agreements. Article 418u CO entitles commercial agents to a goodwill indemnity (sometimes also referred to as «compensation for clientele«) at the end of the agency relationship. The goodwill indemnity serves as a mean to compensate an agent for “surrendering” its customer base to the principal upon termination of the agency relationship.
The assessment whether a distributor is entitled to a goodwill indemnity consists of two stages: In a first stage, it is necessary to analyse whether the requirements stipulated by the Swiss Supreme Court for an analogous application of article 418u CO to the distribution relationship at stake are met. If so, it must be analysed, in a second stage, whether all requirements for a goodwill indemnity set forth in article 418u CO are fulfilled.
Application by analogy of article 418u CO to the distribution agreement
An analogous application of Article 418u CO to distribution agreements requires that the distributor is integrated to a large extent into the supplier’s distribution organisation. Because of such strong integration, distributors must find themselves in an agent-like position and dispose of only limited economic autonomy.
The following criteria indicate a strong integration into the supplier’s distribution organisation:
- The distributor must comply with minimum purchase obligations.
- The supplier has the right to unilaterally change prices and delivery terms.
- The supplier has the right to unilaterally terminate the manufacturing and distribution of productscovered by the agreement.
- The distributor must comply with minimum marketing expenditure obligations.
- The distributor is obliged to maintain minimum stocks of contract products.
- The distribution agreement imposes periodical reporting obligations (e.g., regarding achieved sales and activities of competitors) on the distributor.
- The supplier is entitled to inspect the distributor’s books and to conduct audits.
- The distributor is prohibited from continuing distributing the products following the end of the distribution relationship.
The more of these elements are present in a distribution agreement, the higher the chance that article 418u CO may be applied by analogy to the distribution relationship at stake. If, however, none or only a few of these elements exist, article 418u CO will most likely not be applicable and no goodwill indemnity will be due.
Requirements for an entitlement to a goodwill indemnity
In case an analogous application of article 418u CO can be affirmed, the assessment continues. It must then be analysed whether all requirements for a goodwill indemnity set forth in article 418u CO are met. In that second stage, the assessment resembles the test to be carried out for «normal» commercial agency relationships.
Applied by analogy to distribution relationships, article 418u CO entitles distributors to a goodwill indemnity in cases where four requirements are met:
- Considerable expansion of customer base by distributor
First, the distributor’s activities must have resulted in a «considerable expansion» of the supplier’s customer base. The distributor’s activities may not only include targeting specific customers, but also building up a new brand of the supplier.
Due to the limited case law available from the Swiss Supreme Court, there is legal uncertainty as to what «considerable expansion» means. Two elements seem to be predominant: on the one hand the absolute number of customers and on the other hand the turnover achieved with such customers. The customer base existing at the beginning of the distribution relationship must be compared to the customer base upon termination of the agreement. The difference must be positive.
- Supplier must continue benefitting from customer base
Second, considerable benefits must accrue to the supplier even after the end of the distribution relationship from business relations with customers acquired by the distributor. That second requirement includes two important aspects:
Firstly, the supplier must have access to the customer base, i.e., know who customers are. In agency relationships, this is usually not an issue since contracts are concluded between customers and the principal, who will therefore know about the identity of customers. In distribution relationships, however, knowledge of the supplier about the identity of customers regularly requires a disclosure of customer lists by the distributor, may it be during or at the end of the distribution relationship.
Secondly, there must be some loyalty of the customers towards the supplier, so that the supplier can continue doing business with such customers after termination of the distribution relationship. This is the case, e.g., if retailers acquired by a former wholesale distributor continue buying products directly from the supplier once the relationship with the wholesale distributor ended. Furthermore, a supplier may also continue benefitting from customers acquired by the distributor if it can make profitable after-sales business, e.g., by supplying consumables, spare parts and providing maintenance and repair services.
Swiss case law distinguishes between two different kinds of customers: personal customers and real customers. The former are linked to the distributor because of a special relationship of trust and will usually remain with the distributor once the distribution relationship comes to an end. The latter are attached to a brand or product and normally follow the supplier. In principle, only real customers may give rise to a goodwill indemnity.
The development of the supplier’s turnover after the end of a distribution relationship may serve as an indication for the loyalty of customers. A sharp downfall of the turnover and a need on the part of the supplier (or new distributor) to acquire new or re-acquire former customers suggests that customers are not loyal, so that no goodwill indemnity would be due.
- Equitability of goodwill indemnity
Third, a goodwill indemnity must not be inequitable. The following circumstances could render a goodwill indemnity inequitable:
- The distributor was able to achieve an extraordinarily high margin or received further remunerations that constitute a sufficient consideration for the value of customers passed on to the supplier.
- The distribution relationship lasted for a long time, so that the distributor already had ample opportunity to economically benefit from the acquired customers.
- In return for complying with a post-contractual non-compete obligation, the distributor receives a special compensation.
In any event, courts dispose of a considerable discretion when deciding whether a goodwill indemnity is equitable.
- Termination not caused by distributor
Fourth, the distribution relationship must not have ended for a reason attributable to the distributor.
This will notably be the case if the supplier has terminated the distribution agreement because of a reason attributable to the distributor, e.g., in case of a breach of contractual obligations or an insufficient performance by the distributor.
Furthermore, no goodwill indemnity will be due in case the distributor has terminated the distribution agreement itself, unless such termination is justified by reasons attributable to the supplier (e.g., a violation of the exclusivity granted to the distributor by the supplier).
A goodwill indemnity cannot only be due in case a distribution agreement for an indefinite period of time ended due to a notice of termination, but also in case of the expiry respectively non-renewal of a fixed-term distribution relationship.
Quantum of a goodwill indemnity
Where article 418u CO is applicable by analogy to a distribution relationship and all above-mentioned requirements for a goodwill indemnity are met, the indemnity payable to the distributor may amount up to the distributor’s net annual earnings from the distribution relationship, calculated as the average earnings of the last five years. Where the distribution relationship lasted shorter, the average earnings over the entire duration of the distribution relationship are decisive.
In order to calculate the net annual earnings, the distributor must deduct from the income obtained through the distribution relationship (e.g., gross margin, further remunerations etc.) any costs linked to its activities (e.g., marketing expenses, travel costs, salaries, rental fees etc.). A loss-making business cannot give rise to a goodwill indemnity.
In case a distributor marketed products from various suppliers, it must calculate the net annual earnings on a product-specific basis, i.e., limited to the products from the specific supplier. The distributor cannot calculate a goodwill indemnity on the basis of its business as a whole. Fixed costs must be allocated proportionally, to the extent that they cannot be assigned to a specific distribution relationship.
Mandatory nature of the entitlement to a goodwill indemnity
Suppliers regularly attempt to exclude goodwill indemnities in distribution agreements. However, if an analogous application of article 418u CO to the distribution agreement is justified and all requirements for a goodwill indemnity are met, the entitlement is mandatory and cannot be contractually excluded in advance. Any such provisions would be null and void.
Having said that, specific provisions in distribution agreements dealing with a goodwill indemnity, as, e.g., contractual provisions that address how the supplier shall compensate the distributor for acquired customers, still remain relevant. Such rules could render an entitlement to a goodwill indemnity inequitable.
Are insurers liable for breach of the GDPR on account of their appointed intermediaries?
Insurers acting out of their traditional borders through a local intermediary should choose carefully their intermediaries when distributing insurance products, and use any means at their disposal to control them properly. Distribution of insurance products through an intermediary can be a fast way to distribute insurance products and enter a territory with a minimum of investments. However, it implies a strict control of the intermediary’s activities.
The reason is that Insurers in FOS can be held jointly liable with the intermediary if this one violates personal data regulation and its obligations as set by the GDPR (Regulation 2016/679 of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data).
In a decision dated 18 July 2019 , the CNIL (Commission Nationale Informatique et Libertés), the French authority in charge of personal data protection rendered a decision against ACTIVE ASSURANCE, a French intermediary, for several breaches of the GDPR. The intermediary was found guilty and fined EUR 180,000 for failing to properly protect the personal data of its clients. Those were found easily accessible on the web by any technician well versed in data processing. Moreover, the personal access codes of the clients were too simple and therefore easily accessible by third parties.
Although in this particular case insurers were not fined by the CNIL, the GDPR considers that they can be jointly liable with the intermediary in case of breach of personal data. In particular, the controller is liable for any acts of the processor he has appointed, this one being considered as a sub-contractor (clauses 24 and 28 of the GDPR).
This illustrates the risks to distribute insurance products through an intermediary without controlling its activities. Acting through intermediaries, in particular for insurance companies acting from foreign EU countries in FOS under the EU Directive on freedom of insurance services (Directive 2016/97 of 20 January 2016 on insurance distribution) requires a strict control through enacting contractual dispositions whereas are defined:
- a clear distribution of the duties between insurer and distributor (who is controller/joint controller/processor ?) as regards technical means used for protecting personal data (who shall do/control what ?) and legal requirements (who must report to the authorities in case of breach of security/ who shall reply to requests from data owners?, etc.);
- the right of the insurer to audit the distributors’ technical means used for this protection at any time during the term of the contract. In addition to this, one should always keep in mind that this audit should be conducted efficiently by the insurer at regular times. As Napoleon rightly said: “You can govern from afar, but you can only administer closely”.
When should an agency agreement be considered “international”?
Pursuant to the international private rules applicable in Italy (Art.1 Reg. 593/08 “Rome I”) an agreement is deemed “international” in the presence of “situations involving a conflict of laws”.
The situations which more often involve a conflict of laws in agency agreements– making them “international” — are (i) the principal’s seat being located in a country different from the agent’s seat country; or (ii) the agreement being performed abroad, even when the principal’s and the agent’s seats are both located in the same country.
When does Italian law apply to an agency agreement?
Under the “Rome I” Regulation, in principle Italian law may apply to an international agency agreement (i) if it is chosen by the parties as the law governing the agreement (either expressly, or as otherwise allowed by Art.3); or (ii) absent any choice of law, when the agent has its residence or seat in Italy (according to the “residence” concept under Article 19).
What are the main regulations of agency agreements in Italy?
The substantial regulations of agency agreements in Italy, with particular regard to the principal-agent relationship, can be found mainly in articles from 1742 to 1753 of the Civil Code. Such rules have been repeatedly modified following the adoption of the Directive 653/86/EC.
What is the role of the collective bargaining agreements?
Since many years, collective bargaining agreements (CBAs) have also been regulating agency agreements. These are agreements made on a regular basis between the associations representing principals and agents in different sectors (manufacture, trade and several others).
From a legal effectiveness perspective, a distinction can be drawn between two types of CBAs, i.e. CBAs having the force of law (effective “erga omnes”) — whose rules are however quite broad and thus have a limited scope of application — and CBAs of a contractual nature (“di diritto comune”) that have been signed from time to time over the years, and are meant to bind only those principals and agents which are members of those associations.
In general, CBAs intend to implement the Civil Code rules and those of the Directive 653/86. However, contractual CBAs often deviate from those rules, and some deviations are substantial. For example, CBAs allow a principal to unilaterally modify the agent’s territory, the contractual products, the range of customers, the commission. CBAs determine in a partially different manner the duration of the notice period when indefinite term agreements are terminated. CBAs have their own calculation of the agent’s remuneration for the post-contractual non-competition covenant. CBAs have peculiar regulations concerning the termination indemnity.
With particular regard to the contract termination indemnity, there have been serious issues of compliance between the CBAs and the Directive 653/86/CE. Indeed, such issues still remain unsolved despite some rulings from the EUCJ, because the Italian courts’ constant jurisprudence keeps the CBAs’ indemnity provisions in force.
According to the majority of scholarly opinions and case law, CBAs’ geographical scope of application is limited to the Italian territory.
Therefore, CBAs automatically apply to agency agreements which are governed by Italian law and are performed by the agent in Italy; but – in case of contractual CBAs – subject to the further condition that both parties are members to associations that entered into such Agreements. According to some scholars, it is sufficient that the principal alone is a member of such an association.
Even in the absence of such cumulative conditions, however, contractual CBAs may nonetheless apply if they are expressly referred to in the agency agreement, or their provisions are constantly complied with by the parties.
What are the other main requirements in agency agreements?
The “Enasarco”
Enasarco is a private law Foundation with which agents in Italy must be registered by law.
The Enasarco Foundation mainly administers a supplementary pension fund for agents, and a termination indemnity fund, called “FIRR” (referring to the termination indemnity as calculated in accordance with the criteria set forth by the CBAs in the different sectors).
Typically, a principal in a “domestic” agency agreement registers the agent with the Enasarco and pays contributions to both the above funds on a regular basis throughout the whole term of the agency agreement.
However, while registration and contribution to the pension fund are always mandatory as they are provided for by the law, contributions to the FIRR are instead mandatory only for those agency agreements which are governed by contractual CBAs.
Which rules apply to international agency agreements?
As far as registration with the Enasarco is concerned, the law and regulatory provisions are not so clear. However, important clarifications were provided by the Ministry of Labor in 2013 answering to a specific question (19.11.13 n.32).
Making reference to the European legislation (EC Regulation n.883/2004 as amended by Regulation n. 987/2009) the Ministry stated that registration with the Enasarco is mandatory in the following cases:
- agents operating in the Italian territory, in the name and on behalf of Italian or foreign principals having a seat or an office in Italy;
- Italian or foreign agents operating in Italy in the name and/or on behalf of Italian or foreign principals with or without a seat or office in Italy;
- agents residing in Italy and performing a substantial part of their activities in Italy;
- agents not residing in Italy, but having their main center of interest in Italy;
- agents habitually operating in Italy, but performing their activity exclusively abroad for a period not exceeding 24 months.
The above-mentioned Regulations obviously do not apply to those agency agreements that are to be performed outside the EU. Therefore, it should be checked case by case whether any international treaties binding the parties’ countries provide for the application of the Italian social security legislation.
Chamber of Commerce and Register of Businesses
Anyone wanting to start a business as a commercial agent in Italy, must file a “SCIA” (Certified Notice of Business Start) with the Chamber of Commerce having local jurisdiction. The Chamber of Commerce then registers the agent with the Register of Businesses if the agent is organized as a business entity, otherwise it registers the agent with a special section of the “REA” (List of Business and Administrative Information) of the same Chamber (see Legislative Decree n.59 dated 26.3.2010, implementing the Directive 2006/123/EC “Services Directive”).
Such formalities have replaced the former registration to the agents’ roll (“ruolo agenti”) which was abolished by said law. The new law also provides for a number of other mandatory requirements for agents wishing to start an activity. Such requirements concern education, experience, clean criminal records, etc.
Although failure to comply with the new registration requirements does not affect the validity of the agency agreement, a principal should nevertheless check that the Italian agent is registered before appointing him, as this is a mandatory requirement anyway.
Venue for disputes (art.409 and following of the Civil Procedure Code)
Pursuant to Article 409 and following of the Civil Procedure Code, if the agent mainly performs its contractual duties as an individual even if independently (so-called “parasubordinato” i.e. “semi-subordinate” agent) — provided the agency agreement is governed by Italian laws and Italian courts have jurisdiction — any disputes arising from the agency agreement shall be submitted to the Labor Court in the district where the agent is domiciled (see article 413 of the CPC) and the court proceedings shall be conducted according to procedural rules similar to those applicable to employment-related disputes.
In principle, said rules shall apply when the agent enters into the agreement as an individual or sole entrepreneur, while according to the majority of scholars and jurisprudence they do not apply when the agent is a company.
Applying the rules above to the most common situations in international agency agreements
Let’s now try to apply the rules described until now to the most frequent situations in international agency agreements, keeping in mind that those below are simple examples, while in the “real world” one should carefully check the circumstances of each specific case.
- Italian principal and foreign agent — agreement to be performed abroad
Italian law: it governs the agreement if chosen by the parties, without prejudice to any public policy (internationally mandatory) rules in the country where the agent has its residence and performs, pursuant to the Rome I Regulation.
CBAs: they do not govern the agreement automatically (because the agent performs abroad) but only when they have been expressly referred to in the agreement, or de facto applied. This could happen more or less intentionally, for example when an Italian principal uses with foreign agents the same contract forms as with Italian agents, which usually include many references to the CBAs.
Enasarco: typically, there are no registration or contribution obligations in favor of a non-Italian agent whose residence is abroad and performing his contractual duties only abroad.
Chamber of Commerce: there is no obligation to register in the above circumstances.
Procedural rules (article 409 and following, CPC): if Italian courts are properly chosen as the jurisdiction for all disputes, a foreign agent even if being an individual or sole entrepreneur may not take advantage of this provision to move the case to the courts of his own country. This is because art.413 cpc is a domestic provision on venue which presupposes the agent’s seat to be in Italy. Further, the jurisdiction rules set forth by the EU legislation should prevail, as was ruled by the Italian Court of Cassation and stated by important scholars.
- Foreign principal and Italian agent – agreement to be performed in Italy
Italian law: it governs the agreement if chosen by the parties or, even in the absence of any choice, as an effect of the agent having his residence or seat in Italy.
CBAs: those having force of law (“erga omnes”) govern the agreement, whereas those having contractual nature are unlikely to apply automatically, as the foreign principal typically would not be a member to any of the Italian associations having signed a CBA. However, they might apply if referred to in the agreement or de facto applied.
Enasarco: a foreign principal shall register the Italian agent to the Enasarco. Failure to do so might imply penalties and/or damages claims from the agent. As a consequence of such registration, the principal will have to contribute to the social security fund, while he should not be obliged to contribute to the FIRR (fund for termination indemnity). However, a principal who makes regular contributions to the FIRR even when not due, might be considered as having impliedly accepted the CBAs as applicable to the agency agreement.
Chamber of Commerce: the Italian agent has to be registered with the Chamber of Commerce and therefore the principal should make sure that the agent has complied with this requirement before entering into the agreement.
Procedural rules (art.409 and following, CPC): if Italian courts have jurisdiction (whether by the parties’ choice or as the place of performance of the services pursuant to Regulation 1215/12) and the agent is an individual or a sole entrepreneur with a seat in Italy, these rules should apply.
- Italian principal and Italian agent– agreement to be performed abroad
Italian law: it governs the agreement if chosen by the parties, or, in the absence of any choice, if the agent has his residence or seat in Italy.
CBAs: they would not apply (as the agent performs abroad) unless expressly referred to in the agreement, or de facto applied.
Enasarco: according to the Ministry of Labor’s opinion, registration is mandatory when the agent, although being engaged to work abroad, has his residence and performs a substantial part of his business in Italy, or has in Italy his center of interest, or performs abroad for a period not exceeding 24 months, provided the EU Regulations apply. In case the agency agreement is to be performed in a non-EU country, it has to assessed from time to time whether registration is mandatory.
Chamber of Commerce: an agent having started his business and established as an entity in Italy is in principle obliged to register with the Chamber of Commerce.
Procedural Rules (articles 409 and following of the CPC): the rules apply if the agent is an Italian based individual or sole entrepreneur and the Italian jurisdiction is agreed upon.
- Foreign principal and foreign agent – agreement to be performed in Italy
Italian law: in principle, it governs the agreement only if chosen by the parties.
CBAs: if the agreement is governed by Italian law, the CBAs having force of law apply, while those having contractual value will not apply unless expressly referred to, or de facto applied.
Enasarco: according to the Ministry of Labor’s opinion, when EU Regulations apply, registration may be required from a foreign principal in favor of an agent residing abroad, if such agent operates in Italy or has his center of interest in Italy. Otherwise, a case by case analysis will be needed under the applicable laws.
Chamber of Commerce: in principle, an agent established as an entity abroad is not obliged to register in Italy. However, the issue could be more complex if the agent has a seat and performs his activity mainly in Italy. Such circumstances may also affect the determination of the law governing the agency agreement.
Procedural Rules (articles 409 and following of the CPC): absent any different choice, Italian courts might have jurisdiction as Italy is the place of performance of the services. However, the above-mentioned rules should not apply if the agent has no seat or residence in Italy.
Conclusive remarks
Hopefully this analysis, though not exhaustive, can help understanding the possible consequences of applying Italian law to an international agency agreement, and to make prudent choices when drafting the agreement. As always, we recommend not to rely on standard contract forms or precedents without having paid due attention to all the circumstances of each case.
“Luxury goods justify online sales bans” on third party platforms – as stated in the press release no. 30/2018 of the Higher Regional Court of Frankfurt of July 12, 2018. After the long-awaited Coty-ruling of the ECJ (see the article of December 2017, https://www.legalmondo.com/2017/12/eu-court-justice-allows-online-sales-restrictions-coty-case/), the Higher Regional Court of Frankfurt has now applied the ECJ’s guidelines to Coty’s ban of sales via third party platforms and declared it effective – which was actually expected (I). Other high-quality goods – also outside the luxury segment – can justify platforms bans as well – at least this was decided by the Court of Appeal of Hamburg with regard to an eBay ban (II.). The article ends with some practical conclusions (III.).
Luxury products justify platform bans
According to the judgment of the Frankfurt Court of Appeal, Coty can prohibit the distributor from selling its products via third party platforms. Based on Coty’s wording in the selective distribution agreement, however, any distributor is free to establish advertising cooperations with third party platforms, where customers are redirected to the distributor’s own online shop. According to the judgment, the online marketplace ban is already admissible under the EU Vertical Block Exemption Regulation, since it does not constitute a hardcore restriction. The distribution ban could possibly even be exempted from the cartel prohibition, in the field of selective distribution; in this case, it would only be doubtful whether the prohibition of all «sales cooperation with a third party platform, outwardly recognisable from others, regardless of its concrete structure, would be a reasonable mean for the intended aim» (translated text from the original German version), i.e. whether it would be proportionate or whether there would be other means, less interfering with the dealer’s competitiveness. This question was left open by the Court.
Also other high-quality goods may allow platform bans
The case decided by the Hamburg Higher Regional Court (decision of March 22, 2018, file no. 3 U 250/16) concerns a qualitative selective distribution system for food supplements and cosmetics, which runs via the so-called network marketing, as well as via internet. The distribution guidelines contain, among other things, specific indications regarding the distributor’s website, the contact possibilities for customers in accordance with the «principle of personal sales of goods» (since the distribution system aims to sell the product tailored to the customers’ personal needs based on personal advice), as well as the quality of information and the product presentation. The «distribution … via eBay and comparable e-commerce platforms» is expressly prohibited, as it does not meet the quality requirements, at least not «according to the current state» (translated text from the original German version).
The Court of First Instance considered the platform ban to be admissible (District Court of Hamburg, judgment of November 4, 2016, Case No. 315 O 396/15) – which has now been confirmed by the Higher Regional Court of Hamburg. This is because qualitative selective distribution systems are not only admissible for luxury goods and high-technology goods, but also for (other) high-quality goods, «if the goods sold are high-quality and the distribution is combined with parallel customer consulting and support services, with the aim, among other things, of illustrating to the customer an overall sophisticated, high-quality and upscale end product and building up or maintaining a specific product image» (translated text from the original German version).
Within such a selective distribution system for the distribution of food supplements and cosmetics, it could then be admissible “to prohibit the distribution partners, by means of suitable company guidelines, from selling those goods via a specific online sales platform, in order to preserve the product image and the related practice of customer-binding support, as well as to prevent product- and image-damaging business practices of single distribution partners as occurred and consequently pursued in the past” (translated text from the original German version).
The peculiarity here was that they were not «pure prestige products» and, moreover, the Hamburg Higher Regional Court did not limit itself to the – in view of the market shares readily feasible – verification that the platform under Article 2 of the Vertical Block Exemption Regulation was admissible. Rather, the Court vividly and precisely declined the so-called Metro criteria.
Practical conclusions
- The Internet remains a growth driver for consumer goods, as also the market data from the German Trade Association confirm: «E-commerce remains a growth driver«.
- At the same time, brand manufacturers in particular want growth to be regulated according to the rules of their distribution system and to their requirements. These include, especially for luxury and technically sophisticated products, as well as other products requiring intensive assistance, strict specifications regarding brand identity and advertising appearance (specifications regarding brick store clauses, marketplace bans) and the services to be offered (e.g. chat and / or hotline with information on availability).
- Manufacturers should check whether their platform bans comply with ECJ’s requirements or if they wish to impose platform bans – in selective, exclusive, franchise and open distribution.
- Who wants to take as little risk as possible, should remain cautious with platform bans outside the selective distribution of luxury goods. In its first reaction, also the Federal Cartel Authority (BKartA, short for “Bundeskartellamt”) declared that the Coty-ruling should apply exclusively to original luxury products: “#Brand manufacturers still have no carte blanche on #platform bans. First assessment: «Limited impact on our practice» (BKartA on Twitter, December 6, 2017). Nevertheless, the European Commission has now spoken against this: in its Competition Policy Brief of April 2018 («EU competition rules and marketplace bans: Where do we stand after the Coty judgment?), the European Commission states — rather incidentally – that the argumentation of the ECJ in the Coty case should also apply regardless of the luxury character of the distributed products:
„The arguments provided by the Court are valid irrespective of the product category concerned (i.e. luxury goods in the case at hand) and are equally applicable to non-luxury products. Whether a platform ban has the object of restricting the territory into which, or the customers to whom the distributor can sell the products or whether it limits the distributor’s passive sales can logically not depend on the nature of the product concerned.“
In fact, the ECJ has broadly defined «luxury goods» in its judgment: namely as goods whose quality is «not just the result of their material characteristics» but of intangible values – which is usually the case for branded goods (see the Coty-judgment of the ECJ of December 6, 2017, para. 25 and, with regard to «quality goods», the conclusion of the EU Advocate General of July 26, 2017, para. 92). Furthermore, the ECJ only requests that the goods be bought «also» because of their prestige character, not «alone» or «above all» because of it. In conclusion, a lot of aspects suggest that all brand manufacturers can include platform bans in their distribution agreements – at least in case of market shares up to max. 30%.
- Those who are not afraid of confrontations with dealers and antitrust authorities can definitely impose platform bans outside the selective distribution of luxury goods as well – or increasingly rely on premium products and luxury – such as at the perfumery chain Douglas (see the Süddeutsche Zeitung of March 8, 2018, p. 15: «Active and unconventional, Tina Müller ends discounts on Douglas and aims at luxury«).
- To ensure consistent quality of sales, specific quality targets are recommended, especially for online sales. The list of possible quality targets is very long. The specifications that have proven to be best practice concern in particular:
— the positioning as a retailer (platform, product range, communication)
— the design of the website (quality, look & feel, etc.)
— the content and product offer of the website,
— the processing of online purchases,
— the consulting and customer service, as well as
— the advertisement.
- It is also essential to note that manufacturers are not allowed to totally prohibit distributors from selling online; nor are sales requirements allowed to amount to such a total ban – as the Courts now see in the case of Ascis’ ban of price comparison engines (to this regard, see the following article from April 2018: https://www.legalmondo.com/2018/04/germany-ban-of-price-comparison-engines-and-advertising-on-third-party-platforms/).
- Further details can be found in German in the following Law Journals:
— Rohrßen, Vertriebsvorgaben im E-Commerce 2018: Praxisüberblick und Folgen des „Coty“-Urteils des EuGH, in: GRUR-Prax 2018, 39-41;
— Rohrßen, Internetvertrieb von Markenartikeln: Zulässigkeit von Plattform-verboten nach dem EuGH-Urteil Coty, in: DB 2018, 300-306;
— Rohrßen, Internetvertrieb: „Nicht Ideal(o)“ – Kombination aus Preissuchma-schinen-Verbot und Logo-Klausel, in: ZVertriebsR 2018, 120-123;
— Rohrßen, Internetvertrieb nach Coty – Von Markenware, Beauty und Luxus: Plattformverbote, Preisvergleichsmaschinen und Geoblocking, in: ZVertriebsR 2018, 277-285.
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
In a recent decision on the 24th of October 2018 (n°18-D-23), the French Competition Authority (Autorité de la Concurrence, aka AdlC) fined the Stihl company (leader in mechanized culture products) for his practices in his selective distribution network. Stihl managed to restrict the sale of its products by its authorized distributors on their own website and to prohibit them from marketing them on third-party platforms.
The ruling is considered by the AdlC as having «vocation to clarify the framework applicable in France for the different sectors and products, beyond the sole sector of the mechanized culture».
In this case the network implemented by the supplier was a selective distribution network. Therefore, AdlC’s position can only concern the implementation of a selective distribution network and is not applicable to an exclusive distribution network (see our Update Distribution/Competition, April 2018).
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The lawfulness of the selective distribution network
The Authority follows the traditional analysis of validity of a selective distribution network. First, it highlights that selection of resellers was based on objective criteria such as qualitative nature, applied in a uniform manner and without any discrimination.
Then, the Authority had to determine whether the qualitative criterion conditioning the lawfulness of the selective distribution system was fulfilled or not. The Authority has decided that the fact that products in question are of a delicate assembly and that some of them even present risks for safety of users, justifies setting up a network of selective distribution.
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The lawfulness of the ban on selling technical products on third-party platforms
The decision of the AdlC was especially expected on this point because it had to take into account rulings rendered by the CJEU and then by the Paris Court of Appeal in the Coty cases ((CJUE 6/12/17, affaire 230/16; Cour d’appel de Paris, pôle 5, ch 4, 28 février 2018, n° 16/02263). The question was: the right of suppliers to prohibit their authorized distributors from distributing their products on third-party platforms is limited to luxury goods only (the Coty hypothesis) or could be extended to include others products? The hypothesis of this extension had already been addressed by other courts in Europe and also by the Advocate General before the CJEU (see our Update Distribution/Competition, December 2017) and then by the European Commission.
In a nutshell the Authority extends the Coty case law to technical products whether they are dangerous or not.
First of all, the Authority notes that «prohibition to sell on platforms contributes to preserving the safety of consumers and to guaranteeing the brand image and the quality of the products concerned».
Then, the Authority checked whether this restriction did not go beyond what is necessary in regards to characteristics of products in question. It notes that in the case of third-party platforms, this restriction allows supplier to control that its distributors comply with requirements of distribution network.
Finally, the AdlC checked whether this prohibition was not disproportionate, and in this case, noted that there is no disproportion in so far as distribution on third-party marketplaces is not a main marketing channel for mechanized culture products.
This result (validation of the ban on the sale of products on third-party platforms) may allow many economic operators to believe legitimately that the scope of the Coty case law can be broad.
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Prohibition of restrictions on resale of products on distributors’ websites
However the AdlC has refused to approve the clause restricting resale of products by distributors on their own websites.
In this case, if customers of the distributors could place an order online, they had to, for products with a certain dangerous nature (such as chainsaw, pruner, brushcutter, etc.) either come to withdraw the product at a (physical) sell point owned by distributor or to be delivered by the distributor. Distributor had indeed underwritten a complete obligation to «put in hand» the machine, including the oral communication of usage instructions and a demonstration.
The AdlC decided that this obligation to put in hand was actually to cancel advantages attached to Internet selling and thus to prohibit purely and simply Internet selling. According to the Authority, this restriction went beyond what is necessary to preserve consumer’s health.
The AdlC had to determine whether this restriction was a restriction by object or effect. According to the Authority, the restriction at stake reduced the ability of distributors to sell products outside their usual customers catchment area, and as such should be characterized as a competitive restriction by object.
On possible exemptions issues, the Authority first rejects the possibility of category exemption within the meaning of the EU Block Exemption Regulation No 330/2010, the anti-competitive practice being comparable to a restriction characterized by passive sales within the meaning of Article 4, para. (c). Possibility of an individual exemption was also rejected by the Authority after examining any efficiency gains related to this «put in hand» obligation.
The Authority could have taken advantage of this particular case, to refine the Pierre Fabre / Bang & Olufsen case law and validate and update sales restrictions on the Internet when the proper nature or quality of products justifies such a restriction.
In summary, the marketing of products involving high technicality or which tend to be dangerous by using it:
- justifies the implementation of a selective distribution network;
- may be prohibited on third party platforms (if the selective distribution network is considered lawful);
- could not be restricted on the websites of authorized distributors of a lawful selective network, for lack of «efficiency gain» in favor of consumers, according to a very (too?) strict position of the AdlC.
On this last point, it will probably be necessary to wait for a clearer solution given by the Court of Appeal of Paris (in front of which a recourse is now pending) or the Court of Cassation.
Very frequently, different business settings present the opportunity to sign a Non-Disclosure Agreement (“NDA”) and a Memorandum of Understanding (“MoU”) or Letter of Intent (“LoI”), so much so that these three acronyms – NDA, MoU and Lol – are now commonly used, particularly throughout international negotiations.
However, often times, these contracts are used in an improper way and with different purposes than those for which they were established in international commercial praxis, with the result that they are either not useful because they do not effectively protect the parties’ interests, or are counterproductive.
We shall start by taking a look at the characteristics of the Non-Disclosure Agreement – NDA – and how it should be used.
What is a NDA?
The NDA is an agreement whose function is to protect the confidential information that the parties (generally identified, respectively as the “Disclosing Party” and the “Receiving Party”) intend sharing, in different possible scenarios: forwarding of information for a preliminary due diligence relating to an investment, the evaluation of commercial data for a distribution contract, technical specifications related to a certain product that is subject of transfer of technology etc.
The first step of the negotiations, in fact, often requires that different types of information whether technical, financial or commercial, are made available by one or both parties, and the need for this information to remain confidential (hereinafter the “Confidential Information”) during and after the conclusion of the negotiations.
NDA — Who are the parties?
Right from the recitals of the agreement, it is very important to correctly identify the parties obliged to safeguard the information and maintain its confidentiality, especially when group companies are involved, and where the interlocutors may be many and located in different countries. In such cases, it is advisable to oblige the Receiving Party to guarantee confidentiality by all the companies by means of a specific clause. It is also important that the agreement accurately indicates the people belonging to the Receiving Party’s organization (such as: employees, technical consultants, experts, collaborators, etc.) who have a right to access the information, if possible by signing a confidentiality agreement by all the people involved.
NDA — What is Confidential Information?
The use of recycled NDA templates, found on forms or proposed by the counterparty is certainly not a recommended practice, but unfortunately one that is very widespread. These templates are very often generic and include broad definitions of Confidential Information as well as very detailed lists which actually include all contents of a business activity, often including areas that are not applicable to the object of the activity being negotiated, or information that is actually not reserved.
The problem regarding these templates is that it is difficult, ex post, to verify whether certain information would have been included in the Confidential Information, for example either because it would be difficult to determine whether the Receiving Party would have already been in possession before the signing of the NDA, or because the information would not have been expressly mentioned in a clause that contains a very detailed list, but which does not include the individual piece of information that is of interest, or lastly because after the signing of the NDA, the Confidential Information would have been shared using non-secure and non-traceable procedures (for example as an email attachment).
The best way to proceed is that of identifying in a very specific way only the information that needs to be shared, listing the documents in an attachment to the NDA, thereafter making them available in a format that leaves no doubt regarding their confidentiality, for example by marking them with a watermark or stamp “Confidential under NDA”. Furthermore, a good praxis is to provide access to the Confidential Information only through a secure way (such as a reserved cloud , accessible only through an individual user name and password that is given to authorized people).
NDA — Prohibition from using the Confidential Information
Often times through the standard NDA templates, the Receiving Party is only obliged to maintain the Confidential Information reserved, without being prohibited from its use which – especially in cases of competitor companies – may be more dangerous than divulging the information: imagine technology development or patents based on data acquired, or the use of lists of clients or other commercial information. To highlight and strengthen this obligation it would be more correct to name the document Non-Disclosure and Non-Use Agreement (“NDNUA”).
NDA — Duration
The function of the NDA is to protect the Confidential Information for the entire time during which it needs to be shared between the Parties. It is therefore important to clearly indicate the last moment the information will be used and – in the event that the Receiving Party is in possession of a copy of the Confidential Information – ensure that the Receiving Party returns or destroys the documents and shall maintain the Information reserved and shall refrain from using the Information for a few months (better years) following the termination of the NDA.
Breach of the NDA
Attempting to quantify the damages resulting from a breach of the confidentiality clause is generally very complex: it may therefore be useful to provide for a penalty clause, that establishes a certain amount for the damage deriving from a contractual non-fulfilment. To this effect it is important to consider that the estimate of the penalty shall be reasonable in relation to the damage assumed to derive from the breach of confidentiality, and that different types of penalties can be established according to different cases of non-fulfilment (for example, registration or counterfeit of a patent through the use of shared technical information, or contact with certain business partners).
There is also another advantage inserting a penalty clause in the NDA: if during the negotiations the Receiving Party objects to the clause or requests it to be reduced, it may indicate a mental reservation of default, and in any case is symptomatic of a fear of having to pay this amount, which would have no reason to exist if the party intended abiding strictly to the contractual obligations.
NDA — Litigation, jurisdiction and applicable law
Even in this case there is an unfortunate practice, which is that of relegating this type of clause to the end of the agreement (concerning the so-called midnight clauses, to this effect you may refer to this post on legalmondo) and thus not dedicate enough attention to its contents, which may lead to adopting clauses that are completely wrong (or worse still, null).
In reality this is a very important provision, which leads to ensuring contractual enforcement and/or obtaining a judicial decision that may be executed in a rapid and effective way. There is no solution that applies to all cases and the individual negotiation need to be considered: for example in an NDA with a Chinese counterpart it may be counterproductive to choose the Italian jurisdiction and apply Italian law, given that in the event of non-fulfilment it is usually necessary to take legal action and enforce the judicial or arbitral decision in China (even with interim – urgent measures). It would therefore be more opportune, to draft an NDA with an English/Chinese bilingual text and provide for an arbitration in China, applying Chinese law.
NDA — Conclusion
The NDA is a fundamental tool to protect confidential information, and this can be achieved only if it is well drafted, taking into consideration the specific case at hand: it is advisable to refrain from the “do-it-yourself” and seek legal advice from a lawyer who knows how to draw up an NDA bearing in mind all the characteristics of this type of contract (type of negotiation, information to be shared, location of the parties and countries where the NDA will be executed).
