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Describe the significance of, and developments in, the automotive industry in the market.
If you click on ‘About’ on the website of the German Association of the Automotive Industry (VDA), the first sentence on this web page reads as follows: ‘Germany is where the automobile was invented.’
The automotive industry in Germany is obviously one of the most important drivers of the German economy in general. Automotive manufacturers (OEMs) such as Audi, BMW, Daimler, Porsche and Volkswagen, as well as the world’s largest and leading automotive suppliers such as Bosch, Continental and ZF, are headquartered in Germany with global operations and among the leading automotive companies worldwide. Also, some foreign automotive companies such as Ford, Hyundai, Kia and Opel have their European headquarters in Germany. Thus, the automotive industry is very important in Germany.
It is expected that the German automotive industry will continue to be one of the most important automotive drivers globally, as disruptions continue to take place and new entrants become part of ‘the future of mobility’. This is mainly for two reasons. First, by redefining their strategies, German automotive companies seem to have successfully adapted to the radically changing new automotive world. This includes developments in the four main areas: technology (including autonomous driving systems) electrification (ie, electric and electrified vehicles), connectivity (ie, connected vehicles) and transportation (including car-sharing concepts). Second, Germany also has a strong technology focus, which will allow Germany to play a substantial role and lead the development of autonomous and connected vehicles.
What is the regulatory framework for manufacture and distribution of automobiles and automobile parts, such as vehicle-type approval process as well as vehicle registration and insurance requirements?
Type approval is a prerequisite for the registration, sale and entry into service of vehicles and vehicle parts in Germany. Type approval is granted and monitored by the German Federal Motor Transport Authority and can be generally obtained under three different regulatory frameworks: the United Nations Economic Commission for Europe (UNECE), the EU and the German type approval frameworks.
The UNECE framework is based on an international agreement dated 20 March 1958 concerning the adoption of uniform technical prescriptions for wheeled vehicles, equipment and parts that can be fitted or used on wheeled vehicles and the conditions for reciprocal recognition of approvals granted on the basis of these prescriptions. This agreement comprises 138 technical regulations on safety and environmental subjects, but not all signatory states apply all technical regulations. Therefore, the applicability of UNECE regulations has to be determined on a case-by-case basis. The UNECE type approval framework and the EU type approval framework are currently being harmonised, but the process is ongoing and not yet finalised.
Within the EU, type approval regulations are harmonised and mutually recognised under the EU type approval framework. The German type approval framework is therefore only applicable if no EU harmonisation is in place. Thus, in practice, the most relevant regulatory framework in Germany is the EU type approval framework.
Under the EU type approval framework, Directive 2007/46/EC establishing a framework for the approval of motor vehicles and their trailers, and of systems, components and separate technical units intended for such vehicles (Directive 2007/46/EC) provides for administrative provisions and general technical requirements of vehicles and their parts, with a view to facilitating their registration, sale and entry into service within the EU. Directive 2007/46/EC is incorporated into German law by the Regulation on EU Type Approval (EG-FGV). Several separate EU directives and regulations lay down more specific technical requirements concerning the construction and functioning of vehicles. Examples of such regulations are Regulation (EC) 715/2007 on type approval of motor vehicles with respect to emissions from light passenger and commercial vehicles (Euro 5 and Euro 6) and on access to vehicle repair and maintenance information, and Regulation (EC) 661/2009 concerning type approval requirements for the general safety of motor vehicles, their trailers and systems, components and separate technical units intended therefor. Annex IV to Directive 2007/46 provides for an exhaustive list of all regulatory acts applicable to type approval.
Manufacturers are generally responsible for ensuring compliance with the type approval process and conformity of production of vehicles and their parts, whether or not the manufacturer is directly involved in all stages of construction.
The EU intends to reinforce market surveillance and is therefore currently adopting a successor to Directive 2007/46/EC.
Registration and insurance requirements
German law establishes certain registration and insurance obligations for the owner of a vehicle. Vehicles need to be registered before they may enter into service on German public roads. The competent authority for registration is the municipal administration authority of the owner’s place of residence or seat in case of a company.
Pursuant to the German Regulation on Registration of Vehicles (FZV), registration requires, among other things, compliance of the vehicle with an approved type. For EU type approved vehicles, this is demonstrated by a certificate of conformity. Pursuant to Directive 2007/46 and the EG-FGV, a manufacturer holding an EU type approval shall accompany each vehicle that belongs to the approved type with such certificate of conformity.
Registration further requires a compulsory insurance for civil liability in respect of the use of vehicles pursuant to Directive 2009/103/EC relating to insurance against civil liability in respect of the use of motor vehicles, and enforcement of the obligation to insure against such liability, the German Act on Compulsory Insurance and the FZV.
In addition, and depending on the individual case, registration requires further information on the owner of the vehicle and the vehicle itself, for example, tax and customs relevant information.
Development, manufacture and supply
How do automotive companies operating in your country generally structure their development, manufacture and supply issues? What are the usual contractual arrangements?
The automotive companies’ supply is usually organised in the form of a purchase order business with a contract structure that is typically implemented by automotive OEMs and similarly flows down the supply chain (ie, by tier 1 suppliers to tier 2 suppliers and so on). Such contract structure is characterised by a stepwise increase and concretisation of supply obligations. There are generally only limited purchase obligations as the automotive business is very much a customer demand-driven business, though this eventually depends on the contractual arrangements. For example, obligations to purchase a certain share of demand, which is typically forecast, are quite common.
The steps may typically begin with a non-binding tender or offer, followed by a formal or informal supplier validation and nomination with respect to certain components for specified vehicle platforms or ranges. The nomination or admission letter may include an initial development phase for the supplier to adapt to the customer’s requirements and specifications and ultimately aims to establish a supply relationship that lasts until the end of the series production of the relevant vehicle range. Within the framework of the nomination more specific purchase agreements are then concluded, which set out prices as well as volumes linked to demand - the latter usually being specified as the supplier’s expected percentage share in the customer’s overall demand within a given production period (eg, annually). Finally, the actual delivery of definite volumes is based on forecasts and short-range purchase orders that often provide for just-in-time delivery.
Usually, no comprehensive written framework agreements with negotiated legal terms are in place, but rather the supply relationships are largely based on the application of the OEM’s or higher-tier supplier’s general purchasing terms. These terms, especially those of German OEMs, are to a large extent (ie, with only minor deviations) based on the general purchasing terms of the VDA. OEMs usually also have rather extensive additional standardised contractual documents in place, such as a warranty, quality assurance, logistics and other side agreements. More detailed individual agreements are concluded, though, where the supply relationship includes joint development efforts or otherwise is of particular strategic importance (eg, joint ventures, cooperations).
With new entrants such as technology companies coming into the automotive market, concluding strategic cooperations is a particular trend in the automotive industry (see question 14). Also, traditional automotive rules are currently being challenged and redefined. For example, an obligation to supply spare parts for 15 years is something that technology companies can hardly accept.
How are vehicles usually distributed? Are there any special rules for importers, distributors, dealers (including dealer networks) or other distribution partners? How do automotive companies normally resolve restructuring or termination issues with their distribution partners?
The marketing of new vehicles usually takes place through a two-level distribution system. On the first level the OEM (or its national importer) has established a network of authorised dealers that - on the second level - market and sell the vehicles in their own name and for their own account to end customers. Alternatively, some OEMs have set up a three-level structure with an additional intermediary acting on the third level towards end customers, often in the form of an agency model. The contractual arrangements within the distribution chain vary (eg, regarding exclusivity, non-compete obligations, marketing obligations and branding requirements) and to that effect also the degree of integration of the intermediaries in the OEM’s distribution system vary.
Alternatively, or in addition to the above, some OEMs maintain a network of own-retail branches that sell directly to end customers without involving any third-party distribution intermediary. In other cases it is common for OEMs to reserve the right to make direct sales to high-volume or special customers, such as fleet customers. As a general trend, direct end customer relationships are becoming increasingly important for OEMs, in particular regarding the provision of connectivity and mobility services to end customers as well as offering vehicles via direct online sales.
Under German contract and distribution law, some special rules and principles may apply to distribution relationships, with certain particularities in the automotive industry. Some of these rules are mandatory (ie, they cannot be deviated from by contractual arrangement). The rules and principles are largely based on case law, and there are many court decisions that deal with and specifically take into account the customary distribution structures and other particularities in the automotive industry. The most important examples of special rules under German contract and distribution law are as follows:
- Mandatory minimum notice periods usually apply where the principal intends to terminate a distributorship. The length of the notice period depends on the circumstances of the specific case, taking into account, among others, the distributor’s economic dependency on the terminated business, the duration of the distribution agreement, the extent of exclusivity, the extent of investments made by the distributor and the existence of non-competition obligations. Minimum notice periods in the range of six to 12 months are not uncommon in this regard - for automotive distribution relationships the courts have even applied minimum notice periods of up to two years.
- The distributor can usually claim an indemnity ‘for loss of clientele’ upon termination of the distribution relationship. The exact calculation of the indemnity is rather complex and requires a detailed analysis of various criteria. As a matter of principle, the indemnity amounts to the value of the benefits that the principal after the termination continues to derive from the business developed by the distributor. The maximum indemnity is the amount calculated from the distributor’s average annual net margin with the relevant products over the last five years.
- Standard contract terms (such as model distribution agreements of OEMs) that are not individually negotiated by the parties are subject to judicial control according to the German law rules on standard terms (AGB-Recht). Under these rules standard contract terms are unenforceable if they are considered to result in an unreasonable disadvantage to the other party. The requirements to meet this reasonableness test have been specified by case law for different types of contract clauses. Rather strict requirements apply, for example, for limitation of liability and warranty clauses.
Mergers, acquisitions and joint ventures
Are there any particularities for M&A or JV transactions that companies should consider when preparing, negotiating or entering into a deal in the automotive industry?
Overall, there are no major differences between automotive M&A transactions in Germany and elsewhere in Europe.
There are, however, key features that warrant attention during the due diligence process and the negotiation of the transaction documents. Depending on the relevant business, areas that should be carefully reviewed include alternative sourcing and the reliability of customer and supplier relations, environmental issues, product liability (including insurance coverage), intellectual property rights and compliance or regulatory (including compliance with emission standards). Purchasers will regularly seek protection against risks in these sensitive areas through adequate representations and warranties and indemnities.
Furthermore, under German foreign investment law, the competent ministry may object - even after closing - to an acquisition of 25 per cent or more of a German entity by a non-EU/EFTA acquirer if the transaction could pose a threat to the German public safety and order. While there used to be an assumption that this only applies to key industries (eg, infrastructure, energy and defence) and this objection right was rarely exercised, the German government tends to take a broader view these days - in particular, in the case of Chinese acquirers. It is possible to apply for a non-objection certificate, which is deemed to be granted if no official investigation is initiated within one month of receipt of the application. The receipt of the certificate is regularly included as a closing condition in the sale and purchase agreement in ‘critical’ transactions.
Furthermore, the competitive environment for OEMs and suppliers has changed substantially. Nowadays, internet, IT and other technology providers such as Apple and Google increasingly qualify as competitors. This is particularly relevant in the context of non-compete clauses or permissible purchasers in the event a joint venture partner intends to exit the venture. In practice, this is often addressed by an enumeration of entities that qualify as competitors in addition to or instead of a generic definition.
Incentives and barriers to entry
Are there any incentives for investment in the automotive market? Are there barriers to entry into the market? What impact may new entrants into the market have on incumbents?
There are no special incentives for investment in the automotive market in Germany. There are rather indirect general incentives for investment in that, for example, Germany incentivises the purchase and use of electric vehicles through the payment of individual purchase premiums (referred to as environmental bonus) and the granting of individual tax advantages under the German Motor Vehicle Tax Act.
Likewise, there are no special barriers to entry into the automotive market in Germany. Instead, there are established rules such as special terms and conditions and certain common practices developed by traditional automotive players, which generally apply to the automotive market when companies that are new to the industry enter the automotive market and deal with automotive companies in Germany.
At the same time, new entrants into the automotive market challenge established rules and common practices by applying new or at least redefined rules and practices in a situation where mostly technology-driven disruptions take place in a rapidly changing automotive world.
Product safety and liability
Safety and environmental
What are the most relevant automotive-related product compliance safety and environmental regulations, and how are they enforced? Are there specific rules for product recalls?
Product compliance safety
Under German law, general product safety aspects are primarily governed by the German Product Safety Act (ProdSG). It implements the EU’s General Product Safety Directive 2001/95/EC (GPSD). However, while the GPSD only applies to consumer products (eg, to passenger cars, but generally not to B2B supply parts exclusively intended for the production of passenger cars by professional car manufacturers), the ProdSG generally applies to both consumer and non-consumer products.
Environmental aspects are primarily in the line with EU type approval requirements, particularly with Framework Directive 2007/46/EC, Regulation (EC) 715/2007 and Regulation (EC) 661/2009. Regulations are particularly codified in the EG-FGV.
Regarding enforcement in Germany, the competent market surveillance and product safety authority for motor vehicles and motor vehicle parts (including B2B supply parts) is the German Federal Motor Transport Authority (KBA). In addition, the KBA is the competent type approval authority. The KBA’s headquarters is based in Flensburg. It is a federal authority that is generally controlled by the German Federal Ministry of Transport and Digital Infrastructure. The KBA is structured into several departments with individual subject groups. Regarding product safety, subject group number 512 ‘Product Safety’ in department number 5 ‘Market Surveillance’ is generally in charge. As the competent enforcement authority in Germany, the KBA has also issued an official codex regarding the implementation and interpretation of the ProdSG (the KBA Codex). In doing so, the KBA’s intention was to provide car manufacturers and suppliers with additional guidance on certain product safety aspects, particularly on the KBA’s expectations towards automotive companies. Moreover, the KBA Codex outlines the KBA’s approach towards certain product safety issues including best practices and internal procedures.
Regarding the enforcement of the EU’s Rapid Exchange System for unsafe products (RAPEX), the competent German RAPEX contact point authority is the German Federal Institute for Occupational Safety and Health (BAuA). The BAuA’s headquarters is based in Dortmund, with branches in Berlin, Dresden and Chemnitz. It is a federal governmental research institution generally controlled by the German Federal Ministry of Labour and Social Affairs.
One of the most important features is the implementation and enforcement of the notification obligation. In Germany, notification aspects are generally in line with EU requirements, particularly with the GPSD. Section 6 paragraph 4 ProdSG implements the European authority notification obligation of article 5 paragraph 3 GPSD into German law. In doing so, the producer of a consumer product ‘shall immediately inform’ the KBA if it ‘knows or ought to know’ that the consumer product ‘poses risks to the consumer that are incompatible with the general safety requirement’.
The KBA generally decides on a case-by-case basis whether and what kinds of notifications or corrective actions are necessary and reasonable. In doing so, the KBA generally drafts a risk assessment pursuant to the RAPEX risk assessment guidelines in Commission Decision 2010/15/EU to assess potential product safety risks.
If deemed necessary due to the result of the risk assessment, the KBA generally has the power to order a corrective action (eg, a withdrawal or a recall as well as certain publications). However, depending on the respective case, the KBA often trusts the car manufacturer or supplier to voluntarily carry out a suitable corrective action. In doing so, the KBA often refrains from issuing a formal order but closely monitors the case, particularly by asking for update reports. However, there is a recent trend that indicates that the KBA is now taking a stricter view (ie, that the KBA is increasingly relying on formal recall orders instead of a company’s voluntary actions). This trend significantly increases a company’s legal risks in the event of a product crisis.
As a general rule, companies should consider a proactive and cooperative approach when it comes to the German authorities. Proactively approaching and properly cooperating with the authorities is often crucial to solve a product crisis as well as to reduce potential legal risks.
Many environmental regulations are harmonised on an EU level, but enforcement of such EU environmental regulations is generally done on a national level. As a general rule, non-compliance with environmental regulations in Germany will mainly entail withdrawal of relevant licences, mandatory corrective measures and administrative fines, though there may be specific, and even criminal, sanctions depending on the subject matter.
Please see the following examples for important automotive-related environmental regulations and, if applicable, their German implementation.
Regulation (EC) 715/2007 on type approval of motor vehicles with respect to emissions from light passenger and commercial vehicles (Euro 5 and Euro 6) and on access to vehicle repair and maintenance information and its implementing Regulation (EU) 2017/1151 establish common technical requirements for the type approval of vehicles with regard to their emissions and set out specific emissions limits. Potential sanctions for non-compliance in Germany include, for example, administrative fines, withdrawal of type approval, prohibitions on putting the relevant vehicles on the market, and order other appropriate measures (such as recalls). In the future, there may even be direct enforcement measures by EU authorities pursuant to a draft proposal for a new framework regulation on type approval published by the European Commission in January 2016.
Regulation (EC) 443/2009 setting emission performance standards for new passenger cars as part of the Community’s integrated approach to reduce carbon dioxide emissions from light-duty vehicles establishes mandatory carbon dioxide emissions reduction targets for new vehicles. These targets do not apply to individual vehicle models or manufacturers but relate to the entire European fleet average. It is not necessary for each individual manufacturer to comply with the European fleet value. However, each individual manufacturer is allocated a manufacturer-specific value depending on the products it sells. If a manufacturer’s average emissions levels are above this value, the manufacturer will have to pay an excess emissions premium. The more a manufacturer goes above the target, the higher the premium. A premium of €5 per vehicle registered will apply to the first g/km above the target, €15 for the second g/km, €25 for the third g/km, and €95 for each further g/km. From 2019 every g/km of excess will cost €95.
Directive 2000/53/EC on end-of-life vehicles, which is implemented into German law by the German Regulation on End-of-Life Vehicles, lays down measures that aim, as a first priority, to prevent waste from vehicles. In addition, they aim at to promote the reuse, recycling and other forms of recovery of end-of-life vehicles and their components so as to reduce the disposal of waste, as well as at the improvement in the environmental performance of all economic operators involved in the life cycle of vehicles and especially the operators directly involved in the treatment of end-of-life vehicles. The Regulation on End-of-Life Vehicles provides for administrative fines in the event of non-compliance with certain obligations.
Product liability and recall
Describe the significance of product liability law, and any key issues specifically relevant to the automotive industry. How relevant are class actions or other consumer litigation in product liability, product recall cases, or other contexts relating to the automotive industry?
Under German law, there are numerous provisions that generally allow product liability claims, particularly claims under contract or warranty, general tort law as well as strict product liability law.
In doing so, most consumer claims in the automotive industry are brought under the strict liability regime of the German Product Liability Act (ProdHaftG), implementing the European Product Liability Directive 85/374/EEC. In doing so, a ‘producer shall be liable for damages caused by a defect in his product’. A product is generally defective ‘when it does not provide the safety that a person is entitled to expect’. This test generally takes into account ‘all circumstances’, particularly ‘the presentation of the product, the use to which it could reasonably be expected that the product would be put and the time when the product was put into circulation’. Potential defects can particularly be linked to design, production and instruction aspects as well as certain product monitoring shortcomings. However, the burden of proof for the (alleged) defect, the damage and the causal relationship between defect and damage is generally upon the claimant. Besides, a producer’s liability is generally limited to €85 million per case (pursuant to section 10 ProdHaftG).
Please note that there is a great deal of automotive product liability case law in Germany. Many courts, including the German Federal Court of Justice, have ruled on alleged vehicle defects. In doing so, German courts are particularly deciding cases by appointing independent technical court experts to assess whether a vehicle - design, production and instruction alike - had a defect. The courts typically ask the technical expert to apply a state-of-the-art test (ie, taking into account the respective date when the vehicle was placed on the market).
Particularly in the event of a recall, there can be substantial follow-on litigation. To mitigate risks, it is crucial to take effective and sophisticated measures to prevent unnecessary risks (eg, by avoiding unnecessary acknowledgement or by creating an incorrect impression as to the scope and meaning of a recall).
Under German law, there is generally no class action system regarding consumer litigation in automotive product liability cases. Hence, lawsuits generally have to be brought individually before the respective courts.
However, the newly elected German government announced that it intends to establish a collective redress system - called Verbandsklage - to strengthen consumer protection rights. If passed, this collective redress system will generally allow certain consumer protection associations to file collective redress lawsuits against automakers. As a result, individual consumers will generally be able to approach automakers based on the outcome of the collective redress lawsuit. Therefore, automakers should closely monitor any developments and should ensure the implementation of proper defence mechanisms.
What competition and antitrust issues are specific to, or particularly relevant for, the automotive industry? Is follow-on litigation significant in competition cases?
The German competition authority (FCO) applies national competition law alongside European competition regulations, including EU Regulation 461/2010 on the application of EU competition law on categories of vertical agreements and concerted practices in the motor vehicle sector.
The European Commission’s decisions play an important role in securing and maintaining undistorted competition in the automotive sector in the EU and Germany on both the supply and the OEM level. Notably, in the past couple of years the Commission has investigated a number of car parts cartels and heavily fined OEM suppliers located all over the world for anticompetitive practices such as price fixing, bid rigging and the exchange of competitively sensitive information. These illegal practices concerned very different components such as alternators and starters, wire harnesses, parking heaters and automotive bearings. In addition, in July 2016, the Commission imposed fines of €2.93 billion on five European truck manufacturers for coordinating prices. This is the highest cartel fine the Commission has imposed so far. According to the findings of the Commission, the truck cartel existed for 14 years and was partly organised through the truck manufacturers’ German subsidiaries.
In parallel, the FCO has conducted several investigations in the automotive sector over the past few years. For example, in June and December 2015, the FCO sanctioned six automotive part manufacturers for agreeing to fix prices in relation to acoustically effective components (textiles such as flooring, car mats, etc). The manufacturers were fined a total of €90 million.
In 2015, the FCO also initiated proceedings against three car manufacturers for restricting cooperation between brand retailers and independent online agencies. The manufacturers had implemented ‘internet standards’ for the introduction of end customers to brand retailers via internet-based new car portals. The FCO found that such standards reduced cooperation between retailers and car portals and therefore restricted competition by reducing market transparency. The proceedings of the FCO were discontinued in December 2015 after the car manufacturers revised their clauses.
The cartel decisions of the European Commission and the FCO have led to several follow-on damages actions before the German courts. Germany is generally regarded as one of the major forums within the EU for competition law damages claims. Implementation of the EU Damages Directive 2014/104 through an amendment of the German Act against Restraints on Competition (ARC) was accepted by the government in September 2016. This will be a further boost to private enforcement, for example, through collective claims brought against cartelists in Germany, which could have the effect of increasing the overall amount of damages claimed. German media are already reporting that industry associations, professional claim funding companies and US class action law firms (which are starting to establish offices in Germany) are preparing damages claims against truck manufacturers and are seeking damages in excess of €100 billion.
Dispute resolution mechanisms
What kind of disputes have been experienced in the automotive industry, and how are they usually resolved? Are there any quick solutions along the supply chain available?
Apart from disputes concerning antitrust, insolvency and intellectual property matters (see questions 9, 11 and 12), disputes in the automotive industry arise regularly along the supply chain.
The most frequent disputes between customer and the supplier include:
- Claims for damages based on defects of the product developed and delivered by the supplier (section 434 et seq of the German Civil Code): these also include product liability claims when defects of the product affect the safe usage of the delivered product. These disputes are either settled at an early stage with a view to the strength of the business relationship or, failing that, are brought to court, less often to arbitration. As they are often decided by technical questions, some cases are settled by the parties based on the result of an independent expert opinion or an independent procedure of taking evidence performed by the court.
- Supply chain disruption cases where a supplier threatens to or actually implements a supply stop: these kinds of disputes have become more frequent in German courts in recent years. In times of complex supply chains, just-in-time/just-in-sequence production and single sourcing, customers in the automotive industry are highly dependent on on-time-delivery of parts. Even a short period of disruption of the supply chain can cause severe damages. While formerly an exception, German courts increasingly accept the need to act quickly in order to prevent significant damages that otherwise could often not be reclaimed by suppliers. Thus, in urgent cases it is possible to file for interim injunctions requesting continuation of the supply under the contractual terms. Straightforward cases are sometimes decided by the courts ex parte in a matter of days after the filing. In more complex cases a hearing of the defendant is sometimes necessary and a decision can take up to a few weeks.
- Disputes in connection with the termination of the supply contract: disputes often arise in scenarios where a customer wants to discontinue the business relationship with its supplier and switch production to a new supplier. These disputes centre on the term of the contract, termination rights and duties to compensate the supplier for frustrated investments. In this context, the customer sometimes switches to a new source for the supply of the product. The ‘old’ source sometimes regards its IP rights or trade secrets violated by the production or development of the alternate product. The new Trade Secrets Directive of the EU provides for some guidance in this context. Other disputes relate to the transfer of tools from the former to the new supplier. The punctual transfer of tools to a new supplier is often crucial for a smooth transition. Delays can cause severe damages for the customer. In urgent cases these disputes can also be resolved in interim proceedings seeking repossession of tooling.
What is the process for dealing with distressed suppliers in the automotive industry?
From a customer’s point of view there may be early warning signs of the distress of a supplier, such as the supplier’s request to shorten the term of payment or to increase the prices or from case to case a deterioration of the quality standard. If it is not possible to transfer the supply relationship to a second source, the customer of a distressed supplier may effectively be forced to renegotiate the relevant supply contracts in order (at least temporarily) to ensure continuous supply. In this case the customer should ask for a guarantee or comfort letter issued by the supplier’s parent company in order to limit the risk of non-performance. It should be kept in mind that actions of the distressed contracting party (ie, renegotiating existing supply contracts or the performance of contractual duties under the supply contract) could be subject to claw-back in a subsequent insolvency. The customer should seek legal advice in order to mitigate these risks.
If the supplier is no longer able to pay its debts as they fall due or if the entity is over-indebted in the terms of the German Insolvency Code the company’s management must file for the opening of insolvency proceedings without undue delay. The local insolvency court will then institute preliminary insolvency proceedings and usually appoint a preliminary insolvency administrator. During the preliminary insolvency proceedings, which last for about three months, the company’s business operations typically are continued. In order to facilitate that, the employees’ wages are paid by the employment agency (insolvency pay). During the preliminary proceedings any business correspondence should be addressed to both the company’s management and the preliminary insolvency administrator. It should be carefully reviewed whether payments must be made to an escrow account set up by the preliminary insolvency administrator and whether the court has ordered additional measures aimed at the protection of the insolvency estate. As regards existing contractual relationships the preliminary insolvency administrator may ask customers for payments in advance or other support in order to fund the business continuation. In this case it will be crucial to find a way to safeguard such payments.
After the preliminary insolvency proceedings the court will open (final) insolvency proceedings and appoint a (final) insolvency administrator. At this point in time the power of disposal transfers from the company’s management to the insolvency administrator, whose administration must always focus on what is best for the company’s creditors. Generally speaking, the insolvency administrator has the possibility to continue the company’s business and (later) restructure it by way of an insolvency plan or sell it to an investor (by way of an asset deal) or liquidate the company. If the company is liquidated the customer will have to transfer its business to a second source or - if that is not possible - think about acquiring the debtor’s business itself. If selling the debtor’s business to an investor is the most promising option from the insolvency administrator’s point of view the insolvency administrator will usually start a formal bidding process. Potential investors may then place offers for the assets they are interested in. Note that if the debtor’s business or a part thereof is transferred by way of an asset deal, according to German employment law the relevant employees (including the existing employment contracts) will be transferred to the investor too. However, the insolvency administrator has (limited) possibilities to influence how many and which employees will be transferred to the investor.
Intellectual property disputes
Are intellectual property disputes significant in the automotive industry? If so, how effectively is industrial intellectual property protected? Are intellectual property disputes easily resolved?
For most car manufacturers and auto suppliers, Germany is the venue of choice to enforce their IP rights against any type of infringement. The experience, reliability and efficiency of German IP courts are among the main reasons for this preference. Another reason is the rather broad scope of protection that German IP courts attach to all relevant IP rights at stake, be it patents, trademarks or designs. As a result, the amount of case law is high and constantly growing.
In the field of patents, plaintiffs appreciate that German patent judges are happy to handle difficult technical subject matter without needing a court expert. Plaintiffs like that infringement proceedings are fast (eg, six months from service to oral hearing in the Mannheim court) and relatively inexpensive due to procedural efficiency and that the German courts grant comparatively high damages. Two sorts of disputes are particularly common. First, many automotive suppliers take cases against their competitors to the German courts. This way, the German courts have recently dealt with cases regarding a large variety of components, including, for example, crank shaft bearings, turbo chargers, brake systems, brake pads, airbags, tyre repair kits, structural reinforcement, electrical connectors, ventilation, seats, air filters, side-impact protection, fuel feed valves, windshield wipers, engine immobilisers, driver assistance systems and mudguards. Second, there are an increasing number of attacks by non-practising entities against the car industry. The majority of these cases relate to the communication technology in the car.
Automotive-related litigation is particularly agile in the area of design law. Unlike in most other European countries, German design law allows design based infringement claims against unauthorised car parts - even if used for repair services. This peculiarity of German design law has triggered many successful actions by car manufacturers against any type of third-party car parts. Wheel rims, rear lights and radiator grilles are among the most common objects of design-based enforcement actions. Given the inability of the European Union to harmonise this area of design law, this specific option under German law is likely to remain available for the foreseeable future.
In the field of trademark law, many cases deal with the misuse of car brands for maintenance services offered by third parties. German IP courts have forced unauthorised service providers to limit the use of the brand to a significant degree. Such service providers must not use the manufacturer’s logo to advertise their offer. Rather, they are typically limited to the use of the car’s word mark. This makes advertising for unauthorised maintenance service much harder.
Another area of significant trademark litigation refers to accessories products and merchandising articles - such as keyrings, mugs, shirts and many other items. German IP courts try to close possible gaps of trademark registrations for such unrelated goods.
One area where German IP courts are hesitant to protect design or trademark rights against unauthorised forms of use relates to scale model replicas of original cars. In this area, German IP courts have developed a longstanding exception to the successful enforcement of car brands and designs for the benefit of all those who like to collect cars - but cannot afford the original.
Trade unions and work councils
Are there specific employment issues that automotive companies should be aware of, such as with trade unions and works councils?
The major sources of German employment law are federal laws, collective bargaining agreements, works council agreements and case law, the latter playing a key role. There is not one consolidated Labour Code; instead, minimum labour standards are laid down in separate laws on various labour-related issues. The legislation of the European Union as well as the jurisdiction of the European Court of Justice have increasingly affected German employment law in recent decades and will continue to do so.
Key provisions of German employment law that apply across all industries include the following:
- Statute provides for minimum standards regarding, inter alia, sick pay, annual leave and notice periods.
- The German social security system provides for mandatory insurance for employees in five areas: health, nursing care, unemployment, accidents at work and pension. With the exception of company pension schemes, the provision of further social security benefits is unusual.
- Employees working in operations with regularly more than 10 employees are protected against unfair dismissal after completion of a six-month period of employment. There is no statutory claim for severance pay for loss of employment; the amount of severance, if any, is subject to negotiation between the employer and the employee or, in the event of mass dismissals or similarly far-reaching operational changes, subject to a social plan concluded between the employer and the relevant works council (where applicable).
- There is a national minimum wage of currently €8.84 gross per hour.
Given the need for flexibility and just-in-time production on the one hand and the strictness of German employment laws on the other, the automotive industry in recent years has increasingly sought to work with freelancers, companies providing work and services and external staff provided by temporary work agencies. The ability to engage external staff has been significantly altered by a new law, which entered into force in April 2017. This law, inter alia, restricts the hiring period for agency temps to a maximum of 18 months. According to statute, collective bargaining agreements can provide for more flexibility, and the metal industry has made use of this option by extending the maximum hiring period to 48 months. Under certain circumstances, however, the hiring company may be obliged to offer unlimited employment contracts to agency temps after a hiring period of 24 months. The collective bargaining agreements of the metal industry also provide for premiums that companies need to pay to agency temps to comply with the recently amended equal pay legislation.
Generally speaking, the level of unionisation in the automotive industry is still fairly high compared with an average of less than 20 per cent across all German industries. The level of unionisation at large supplier companies and OEMs tends to be significantly higher than in small and medium-sized supplier companies where the relevant trade union of the metal industry (IG Metall) hardly plays a role.
The same can be said with regard to employee representation at an operational level. Most larger suppliers and OEMs will have works councils.
In Germany, employees are entitled to establish a works council in an operation with at least five employees over 18 years of age. Unlike in other European countries, however, there is no legal obligation to establish a works council after the operation has reached a certain size.
Where established, works councils have substantial co-determination rights in company decision-making regarding personnel, social and economic matters. In many instances, this means that an employer cannot introduce policies or implement material changes relevant to the workforce without the works council’s consent or without having gone through litigation or arbitration procedures. In view of the continued and ever increasing digitalisation and automation of the industry, the particular co-determination right concerning the introduction and application of technical equipment suitable to monitor employees’ conduct and performance will continue to gain in prominence.
The collective bargaining agreements of the metal industry apply only if the employer has joined the respective employers’ association and only if the employee is a member of IG Metall. Alternatively, or additionally, individual employment contracts may explicitly provide for the relevant collective bargaining agreements to apply, thereby making no distinction between union members and non-union members. Employers who do not apply collective bargaining agreements can be forced by the relevant union to do so through strikes.
The collective bargaining agreements of the industry provide for a regular weekly working time of 35 hours. Pursuant to new collective bargaining agreements that were agreed in early 2018, however, employers now benefit from enhanced options to agree a weekly working time of 40 hours with individual employees. In return, along with a 4.3 per cent wage increase from April 2018 and the introduction of an annual tariff supplement amounting to 27.5 per cent of a monthly salary as of 2019, the collective bargaining parties of the metal industry agreed far-reaching amendments to the existing working time regime in favour of employees. As of 2019 and subject to certain further conditions, full-time employees may reduce their weekly working time from the current 35 hours down to 28 hours for between six months and 24 months. Moreover, employees in particularly stressful private situations (eg, with family members in need of care) can opt for a release from work of up to two years by converting their tariff supplement into free time.
Several of the industry’s regional collective bargaining agreements provide for special protection against dismissal for older employees. In the Southwest, for example, employees who are 53 or older can only be dismissed for good cause provided that they have been employed by the company for at least three years. Further specifics and exceptions from this special protection against dismissal differ from district to district.
The newly formed German coalition government may introduce further legislatory changes relevant to the industry. In particular, further restrictions to the conclusion of limited-period employment contracts are envisaged. Moreover, the government plans to allow employers to introduce more flexible working time regimes via collective bargaining agreements and to grant employees the right to reduce their working time for a limited period of time. Legislation to implement these latter two changes may actually be modelled to some extent on the recent collective bargaining agreements of the metal industry.
What are the most important legal developments relating to automotive technological and mobility advances?
One of the most important legal developments relating to automotive technological and mobility advances is the question of legality of operating self-driving vehicles on public roads. More technology-friendly approaches are constantly under discussion. The amended Vienna Convention on Road Traffic (the Vienna Convention), to which Germany is a party, likely authorises the use of self-driving technology, but also likely still continues to require the presence of a human driver who can take control of the vehicle at any time. Also, amendments to UNECE regulations, in particular UNECE Regulation 79, are currently under discussion. However, even if automated vehicles will be eligible for approval, ‘drivers’ will likely be obliged to monitor the driving process constantly and remain prepared to deactivate or override the system at all times. In March 2017, the German Bundestag approved amendments to German statutory provisions to allow type approval of highly and fully automated (but not autonomous) vehicles, provided that manual controls to be operated by a human driver still exist.
As for testing of automated driving systems, several German statutory provisions already provide a legal basis for German authorities to grant specific exceptional permissions. In fact, a number of exceptional permissions have been granted in Germany for several years for tests with automated vehicles. On this basis, tests have been conducted on German roads in public traffic (eg, by Daimler, BMW, Audi, Bosch and Delphi) as well as by a number of research institutes and organisations. It seems that so far testing permissions for public road traffic granted by German authorities have been linked to the requirement of the existence of a driver who can reassume full control at any time.
Update and trends
Trends and new legislation
Are there other current legal developments, emerging trends or pending legislation relevant to the automotive industry that should be noted?
2015 and 2016 were characterised by the KBA and the German Parliament’s Committee of Inquiry’s investigations into emissions and potential failures by national authorities.
In 2017 and 2018, the KBA is still looking closely at the emissions of vehicles currently on the market. In addition, political and public awareness has increased, in particular due to a political and legal debate on the consequences of excess emissions (be it caused by generally insufficient emissions control, incompliant emissions control or just heavy traffic), which is currently being held in parallel. Several German cities are not compliant with emissions limit values under the European Air Quality Directive. Germany is therefore among the member states currently facing infringement procedures imitated by the Commission as well as actions initiated by non-government organisations in the national courts.
On 27 February 2018, the highest Federal Administrative Court has in this context accepted the legitimacy of driving bans for diesel vehicles in order to improve air quality, provided that such driving bans are implemented in a proportionate way. This judgment has led to a controversial public and political debate since driving bans for older vehicles would not only affect manufacturers, but in particular end customers. Whether, how and to what extent the competent authorities will finally issue driving bans remains to be seen, but the reputation of diesel vehicles has suffered significantly.
In parallel, 2017 brought important developments for the regulatory future of the automotive industry:
Regulation (EU) 2017/1151 of 1 June 2017 introduced and finalised real driving emissions (RDE) testing, a new laboratory test procedure, the Worldwide Harmonized Light Vehicles Test Cycle, as well as extensive disclosure requirements on emissions strategies for passenger cars.
On 7 December 2017, the European Parliament, the Council and the Commission reached a political agreement on a major overhaul of the European type-approval framework for motor vehicles. The new regulation will make vehicle testing more independent and increase surveillance of cars already in circulation. Once formally approved, the regulation will be directly applicable in all member states and is planned to become mandatory on 1 September 2020.
Regulation (EU) 2017/2400 of 12 December 2017 introduced new requirements to obtain more precise and comparable values on CO2 and fuel consumption for all types of heavy-duty vehicles.
These new developments are an important step to improve emissions legislation and render it more accessible. That said, application in practice faces significant challenges owing to remaining uncertainties and lack of clarity inherent in the introduction of new legislation and the legal and technical complexity of the topic.
It needs to be seen how the automotive industry in Germany and elsewhere will deal with the above challenges and what impact this will have on automotive technology such as electric vehicles.