Facts
Decision
Comment
The German Act against Unfair Competition contains catch-all provisions against competitive acts that are unconscionable or misleading. In particular, Sections 1 and 3 provide that competitors can take action if a competition act by an entrepreneur is unconscionable or misleading. As these provisions are developed by case law, in the past the courts have determined which competitive acts must be regarded as unconscionable or misleading. Such acts entitle competitors to obtain an injunction. The competitor may also claim damages if there is evidence that the entrepreneur is at fault.
With regards to a company owner's responsibility for its employees, Section 13(4) of the Act against Unfair Competition stipulates that company owners are responsible for infringements of the act committed by their employees and that in such cases an injunction can be obtained against the company owner. The owner will then have to use internal measures to ensure that its employees comply with the injunction. With regards to franchise relations, the Federal Supreme Court has ruled that on the basis of Section 13(4), an injunction can be obtained against a franchisor if the franchisee has infringed the Act against Unfair Competition. The underlying reason is that a normal franchisee is integrated in the franchisor's business organization and the franchisor has the opportunity, through the franchise agreement, to ensure that its franchisees respect their contractual and legal obligations. For example, this could be effected by means of a termination clause whereby the franchisor is entitled to terminate the franchise agreement if the franchisee does not comply with his contractual and legal obligations, especially in relation to the Act against Unfair Competition.
However, the question of whether a competitor would also be entitled to obtain damages from the franchisor in the case of a franchisee's infringement of the act remained unclear. As Section 13(4) only provides for an injunction, a claim for damages under the Act against Unfair Competition is only justified unless the franchisor is responsible for the infringement. In its judgment of April 6 2000 the Federal Supreme Court ruled that a claim for damages against the franchisor is not justified where an infringement is not committed by the franchisor itself, but only by a franchisee.
The defendant in this case runs a franchise system for the sale of computers and computer accessories. The plaintiff is a competitor of the defendant. In 1997 one of the defendant's franchisees commenced advertising measures which infringed the Act against Unfair Competition. As a result, the plaintiff sought an injunction and compensation from the franchisor. While the lower court ruled that both claims were legally justified, the Federal Supreme Court ruled that, at the least, the claim for compensation had to be dismissed.
The Federal Supreme Court ruled that the plaintiff's claim for an injunction could be based on Section 13(4) of the Act against Unfair Competition. However, the court rejected the claim for compensation, since the advertising measures under dispute were not those of the franchisor and since Section 13(4) establishes the franchisor's responsibility for the franchisee's behaviour only with respect to injunctions. The court found that a compensation claim could only be justified if the franchisor itself had caused the illegal advertising measures or if it was obliged to prevent its franchisees from infringing the Act against Unfair Competition. As the franchisor had not caused the advertising measures, the question of whether there is a general obligation for a franchisor to prevent its franchisees from infringing the act remained. The lower courts had accepted this obligation, ruling that a franchisor is obliged to stop illegal advertising measures taken by its franchisees. They held that since franchisors permit the franchisees to use their goodwill for business purposes, the franchisors must ensure that this goodwill is only used in a way that complies with the Act against Unfair Competition. This obligation should be independent from the individual structure and content of an agreement, and would be inherent in each franchise agreement. However, the Federal Supreme Court rejected this view, ruling that there is no general obligation for a franchisor to prevent its franchisees from infringing the act. Such an obligation would be too far-reaching and therefore cannot be justified. As a result, the Federal Supreme Court reversed the judgment of the lower courts and dismissed the plaintiff's claim for compensation.
The Federal Supreme Court's decision has clarified the extent of the franchisor's responsibility for its franchisees under the Act against Unfair Competition. Even if the franchisor is to some extent responsible for the market behaviour of its franchisees, its responsibility is limited when a competitor claims damages. Through its judgment the Federal Supreme Court has ensured that the financial burden resulting from misconduct rests with the law-breaching franchisee, and not with the franchisor. This view must be acknowledged as correct, since it takes account of the special relationship between the franchisor and the franchisee, where the franchisee is often free to decide how to behave on the market. Therefore, it would not be justified to lay all the responsibility for a franchisee's misconduct on the franchisor.
For further information on this topic please contact Karsten Metzlaff or Karl Rauser at Nörr Stiefenhofer Lutz by telephone (+49 30 20 94 20 00) or by fax (+49 30 20 94 20 94) or by email ([email protected] or [email protected]).