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Direct distribution

Ownership structures

May a foreign supplier establish its own entity to import and distribute its products in your jurisdiction?

Yes. Specific restrictions may apply, however, if (foreign or domestic) investors do business in the defence, pharmaceutical or financial sectors.

May a foreign supplier be a partial owner with a local company of the importer of its products?

Yes. There is no specific investment legislation and no minimum percentage of German shareholders required.

What types of business entities are best suited for an importer owned by a foreign supplier? How are they formed? What laws govern them?

The types of business entities suited best are:

  • limited liability company (GmbH and UG);
  • stock corporation (AG); and
  • limited partnership (KG).

The criteria for choice of entity used are liability, taxation, financing, personal involvement and control, and flexibility. For larger companies, GmbH or AG are typically best suited. Their shareholders’ liability is limited to the respective share capital.

The minimum share capital varies between €50,000 (AG), €25,000 (GmbH) and €1 (for the GmbH-subtype, UG). The transfer of shares in a GmbH or UG typically has to be approved by the other shareholders and notarised, while shares in an AG are freely transferable. However, the GmbH is a more flexible and procedurally less demanding form of entity than the AG.

GmbH, UG and AG entities are formed by one or more founding shareholders, adopting the articles of association and appointing their managing directors plus, in the case of an AG, a supervisory board (of at least three members) in a notarial deed. They exist upon registration at the commercial register. Alternatively, a supplier may purchase an existing, inactive shelf company and, as an advantage, start operating immediately.

Partnerships are often preferred for tax reasons, especially the KG, which - for reasons of limiting liability - is often combined with a corporation as general partner (GmbH & Co KG or AG & Co KG). They require at least two partners.

The governing laws are as follows:

  • the Limited Liability Companies Act for the GmbH and UG;
  • the Stock Corporation Act for the AG; and
    • the German Civil Code (BGB) and the German Commercial Code (HGB) for partnerships.

Restrictions

Does your jurisdiction restrict foreign businesses from operating in the jurisdiction, or limit foreign investment in or ownership of domestic business entities?

Generally, no: foreign businesses operate under the same rules as domestic businesses. By way of exception, the Federal Ministry for Economy and Technology can restrict or prohibit acquisitions of or participations in domestic business entities by individuals or business entities seated outside the European Union, Iceland, Liechtenstein, Norway (together, the EEA) or Switzerland. Preconditions to this are:

  • the foreign investor acquires 25 per cent or more of voting rights in a German company; or
  • the acquisition endangers national public order or security (sections 55 to 59 of the Foreign Trade and Payments Ordinance). This may especially be the case if the domestic business entity acquired pertains to infrastructure sectors (telecommunications, power supply, trains, airports or hospitals).

Equity interests

May the foreign supplier own an equity interest in the local entity that distributes its products?

Yes. See question 4.

Tax considerations

What are the tax considerations for foreign suppliers and for the formation of an importer owned by a foreign supplier? What taxes are applicable to foreign businesses and individuals that operate in your jurisdiction or own interests in local businesses?

A foreign supplier especially has to consider:

  • whether the importer itself shall pay income tax, or the supplier as owner, or both; and
  • whether the supplier might be subject to double taxation (both in Germany and its state of origin) and whether it can be avoided.

To foreign businesses and individuals that operate in Germany, two levels of taxation apply:

  • the trade tax applies to all businesses and individuals in Germany and is paid on taxable earnings. As a local tax, its rate differs from municipality to municipality; and
  • the income tax depends on the business entity.

Corporations are subject to corporate income tax (15 per cent flat rate) and their shareholders to a tax on capital gain and dividends. The average overall tax burden for corporations in Germany is 30 per cent (corporate income tax and trade tax).

A partnership itself is not subject to income tax, but its partners are, to either corporate (if business entities) or personal (if individuals) income tax.

Individuals pay personal income tax. The tax rate increases with the income (to a maximum of 45 per cent at an income of €250,000), but trade tax payments can be set off against it. Special tax rates apply for dividends and capital gains.

For dividends, capital gains, interest payments and licence fees, withholding tax may apply. It amounts to 25 per cent of the capital gain distributed to the owning business (plus a further ‘solidarity surcharge’ of 5.5 per cent, added to the tax amount). These taxes may be refunded in case of double taxation if a respective treaty with the country of origin of the owning business exists.

Local distributors and commercial agents

Distribution structures

What distribution structures are available to a supplier?

Any conceivable distribution structure is available. Apart from manufacturing under a private label, trademark licensing and joint ventures, the following distribution structures are typically used:

  • In-house sales force, allowing direct influence on employees and an easy margin calculation, but generally entails high labour cost (including social security).
  • Self-employed commercial agents, who solicit customers and can (but do not have to) have the authority to conclude a contract on the supplier’s behalf. The supplier sells directly to the customers and bears the distribution risk, but may also control the margins. Contrary to employees, the agent’s remuneration (commission) can be exclusively profit-oriented (ie, remunerated only in case of successfully soliciting customers), and in relation to the turnover. Commercial agents have to provide detailed market reports. If the commercial agent acts in the European Union, protective agency law applies, including the indemnity claim (see questions 8 to 10).
  • Distributors, who buy and sell the products on their own behalf. Consequently, they bear distribution risks, and, in return, gain profit from the difference between purchase and resale price, while suppliers’ margins are rather low. The distributor is obliged to market and distribute the supplier’s products, and to safeguard the supplier’s interests. Distributors are less protected than commercial agents (for exceptions, see question 8).
  • Commission agents, who are midway between commercial agents and distributors. They sell products in their own name but for the supplier’s account. The supplier bears the sales risk, even if the commission agents have products in a consignment stock to which the supplier retains the title. The supplier can influence the commission agent without observing the strict antitrust law that applies to distributorship agreements.
  • Franchisees, who buy and sell products on their own behalf. The franchisee acquires licences of intellectual property rights (trademarks and know-how) from the supplier (franchisor) for using and distributing the products or services. The franchisee is entitled and obliged to design its shop according to the franchisor’s concept and corporate design, and use the management- and system-specific know-how. In return, the franchisee pays royalties. The franchisor has, in the beginning, to disclose the key risks and issues for running the franchise, and subsequently often provides assistance on know-how and business.

Legislation and regulators

What laws and government agencies regulate the relationship between a supplier and its distributor, agent or other representative? Are there industry self-regulatory constraints or other restrictions that may govern the distribution relationship?

Employment contracts

Employment contracts with the in-house sales force are governed by sections 611 to 630 BGB and several laws on employees’ protection.

Agency contracts

Agency contracts are governed by sections 84 to 92c HGB. The commercial agent is, like the employee, strongly protected, for example, by mandatory rules on:

  • minimum notice periods (see question 9);
  • commission payments (see question 32); and
  • goodwill indemnity (see question 10).

Distributorship contracts

Distributorship contracts are - as in most EU member states - not explicitly governed by statutory law. However, there is extensive case law, for example, on whether the supplier has to take back unsold products upon termination of the contract. Agency law applies by analogy if the distributor is:

  • integrated into the supplier’s sales organisation; and
  • obliged (due to agreement or factually) to forward customer data during or upon termination of the contract.

Further, distributorship contracts have to conform to antitrust law. Generally, the antitrust law of any affected market applies (article 6(3a) of the Rome II Regulation).

Franchise contracts

Franchise contracts are not explicitly governed by statutory law. They combine elements of licensing, sales and management of another’s affairs. Generally, agency law applies by analogy (see German Federal Court of Justice (BGH), decision of 17 July 2002).

Certain industry self-regulatory constraints exist, for example, in the automotive industry, where members of the European Automobile Manufacturers Association have agreed to a code of good practice.

Contract termination

Are there any restrictions on a supplier’s right to terminate a distribution relationship without cause if permitted by contract? Is any specific cause required to terminate a distribution relationship? Do the answers differ for a decision not to renew the distribution relationship when the contract term expires?

The supplier’s right to terminate without cause is restricted. No restriction applies to a decision not to renew the distribution relationship when the contract term expires, unless antitrust law in rare cases demands continued delivery.

Agency agreements can be terminated without cause if contractually agreed. However, mandatory notice periods have to be complied with, staggered pursuant to the contractual term (similar to article 15 (2) Commercial Agency Directive): from one month in the first, two months in the second, three months in the third, fourth and fifth year to six months after five years (section 89(1) HGB). The notice periods cannot be shortened and, in case of extension, the supplier’s notice period must not be shorter than the agent’s (section 89(2) HGB). A cause is only required if the agreement is terminated without a notice period (section 89a HGB). Such reason exists if the terminating party cannot reasonably be expected to continue the relationship until ordinary termination (considering all circumstances of the single case and weighing the interests of both parties).

Distributor agreements with an indefinite term can be terminated (sections 314, 573, 620(2) and 723 BGB); the notice period depends, however, on the single case, considering also the distributor’s investments. For example, one-year periods have been accepted in automotive distribution (BGH, decision of 21 February 1995, Citroën). In rare cases, antitrust law may demand a renewal of the relationship.

Franchise agreements can be terminated according to agency law (mutatis mutandis). However, longer periods can apply in specific cases, for example, if the franchisee made considerable investments due to the supplier’s product.

Is any mandatory compensation or indemnity required to be paid in the event of a termination without cause or otherwise?

The commercial agent is entitled to indemnity if the agent has brought new customers or has significantly increased the business volume with existing customers, which results in benefits for the principal, and if such payment of indemnity is equitable under the given circumstances (section 89b HGB). Indemnity is calculated on basis of the commission earned during the past 12 months of activity, earned with new customers, and existing customers towards whom the agent has substantially increased the sales. Indemnity is capped to a maximum of the past five years’ average annual commission (section 89b(2) HGB). The claim cannot be waived before termination, but is excluded if the agent has not notified the principal within one year following termination. Indemnity is not payable if:

  • the agent terminated the contract (unless justified by circumstances attributable to the principal or because of the agent’s age or illness);
  • the principal has terminated the contract because of default attributable to the agent (which would justify immediate termination for cause); or
  • the agent, with the principal’s agreement, assigns and transfers its rights and duties under the agency contract to another person.

Indemnity cannot be contracted out, unless the agent acts outside the EEA (section 92c HGB). This has been confirmed by the European Court of Justice in its latest ruling on the international scope of the Commercial Agency Directive (decision of 16 February 2017, Agro Foreign Trade & Agency Ltd/Petersime NV; cf. Rohrßen, ZVertriebsR 2017, 181 et seq). For details on the different levels of protection of commercial agents in various countries, see Rothermel, Internationales Kauf-, Liefer- und Vertriebsrecht, 2016, with country overviews in chapter H.

The distributor can claim indemnity only by analogue application of agency law (see question 8). The distributor’s indemnity can amount to the distributor’s average annual net margin. For a long time, it was disputed whether the distributor’s goodwill indemnity could be excluded under German law in advance when the distributor operates outside Germany, but within the EEA. The BGH has recently denied such exclusion, provided the preconditions for analogue application of agency law are given, arguing that agency law restrictions applied here as well by way of analogy, hence in the distributor’s favour (BGH, decision of 25 February 2016, Convection-reflow Soldering Systems).

The franchisee can likely claim indemnity based on analogue application of agency law, but this has not yet been ruled out (BGH, decision of 23 July 1997, Benetton). No indemnity, however, can be claimed where the franchise concerns anonymous bulk business and customers continue to be regular customers only de facto (BGH, decision of 5 February 2015).

The commission agent may also claim indemnity based on analogue application of agency law (BGH, decision of 21 July 2016, Thomas Philipps). The claim can probably be avoided, especially by excluding the commission agent’s obligation to transfer the customer base to the principal (for details, see Franke/Rohrßen, IHR 2017, 62-70).

Transfer of rights or ownership

Will your jurisdiction enforce a distribution contract provision prohibiting the transfer of the distribution rights to the supplier’s products, all or part of the ownership of the distributor or agent, or the distributor or agent’s business to a third party?

A provision that prohibits the transfer of distribution rights will be enforced (section 399 BGB). Distribution rights are not assignable without the supplier’s consent if the supplier has a reasonable interest in the distributor’s or agent’s personal performance (sections 613 and 664 BGB).

A transfer of ownership (change of control) cannot be hindered. However, the distributor can agree not to transfer ownership, and, in case of breach, the supplier is entitled to damages, including, if possible, re-transfer of ownership (section 137 BGB). In addition, the parties could agree on a termination right in case of change of control.

Regulation of the distribution relationship

Confidentiality agreements

Are there limitations on the extent to which your jurisdiction will enforce confidentiality provisions in distribution agreements?

Limitations exist, especially as regards the draft of standard business terms. Within such, confidentiality provisions shall clarify the scope of confidentiality (what, who, how long). Contractual penalties may only apply if the receiving party culpably broke confidentiality; the amount of penalty has to be reasonable (sections 310, 307 and 343 BGB and 348 HGB).

Competing products

Are restrictions on the distribution of competing products in distribution agreements enforceable, either during the term of the relationship or afterwards?

Non-compete obligations towards distributors and franchisees are enforceable if they conform to antitrust law. Generally, agreements that aim at or result in restraints of competition are prohibited by antitrust law, namely by the German Act Against Restraints of Competition (GWB) and articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU).

Unless agreements contain hard-core restrictions, a safe harbour is provided by the De Minimis Notice of 30 August 2014 and the Vertical Block Exemption Regulation No. 330/2010 (VBER). Agreements between non-competitors are safe if each party’s market share does not exceed 15 per cent on any relevant market affected.

If one party’s market share exceeds 15 per cent, but none exceeds 30 per cent, a non-compete obligation during the contractual term is valid if limited to five years at most. Where products are sold on premises owned by the supplier or leased by the supplier from third parties not connected with the buyer, the five-year maximum does not apply. However, the non-compete obligation cannot exceed the term for which the buyer is occupying the premises. After the contractual term, a non-compete obligation where one party’s market share exceeds 15 per cent, but none exceeds 30 per cent, is valid if it is necessary to protect know-how transferred to the distributor, and if limited to competing products, the concrete distributor’s premises, and a one-year term.

If one party’s market share exceeds 30 per cent, any restriction of competition, including non-compete obligations, can only benefit from the individual exemption under the strict criteria of article 101(3) TFEU (efficiency defence).

Non-compete obligations towards agents are enforceable. Antitrust law generally does not apply, provided that the principal bears the commercial and financial risks related to selling and purchasing the products or services (Guidelines on Vertical Restraints of 10 May 2010, paragraphs 12 et seq, 18 and 49). Special limits apply only to post-contractual non-compete obligations if concluded before termination. They must be limited to a two-year maximum, to the agent’s territory or customers, and to the contractual products or services. Further, they must be done in writing and delivered to the agent. The principal has to pay an indemnity for the non-compete obligation’s term (section 90a HGB).

Prices

May a supplier control the prices at which its distribution partner resells its products? If not, how are these restrictions enforced?

Generally, a supplier may not fix a resale price or price level at which its distributors or franchisees resell (except for suppliers that manufacture newspapers, magazines and books, section 30 GWB). An agreement or behaviour that aims at establishing such resale price maintenance is treated as a hard-core restriction and therefore generally void (see Guidelines on Vertical Restraints of 10 May 2010, paragraphs 48, 223). By way of exception, the supplier can plead the efficiency defence (eg, when introducing a new product or a coordinated short-term, low-price campaign). However, resale prices can be influenced by recommending resale prices or setting maximum resale prices (see question 15). As regards enforcement, see question 22.

Suppliers can control the price at which they sell the products or services via agents because the antitrust law restrictions do not apply (see question 13).

May a supplier influence resale prices in other ways, such as suggesting resale prices, establishing a minimum advertised price policy, announcing it will not deal with customers who do not follow its pricing policy, or otherwise?

Recommending resale prices or setting maximum resale prices is exempt from antitrust law if the parties’ market shares do not exceed 30 per cent (beyond, there is only room for the efficiency defence), and only if it does not result in a minimum or fixed sale price because of pressure or incentives from one party (article 101(1) TFEU and article 4(a) VBER).

Establishing a minimum advertised price policy is exempt if it works as mere recommendation. If, however, it results in minimum resale prices or a fixed or minimum price level, it can only be exempt under the efficiency defence.

By contrast, a supplier shall not announce it will not deal with distributors or franchisees that do not follow its pricing policy because it will be treated as fixing the selling prices (see question 14).

May a distribution contract specify that the supplier’s price to the distributor will be no higher than its lowest price to other customers?

A most-favoured nation or most-favoured customer clause is enforceable if agreed between non-competitors and if none of the parties’ market shares exceeds 30 per cent (beyond, there is only room for the efficiency defence).

Are there restrictions on a seller’s ability to charge different prices to different customers, based on location, type of customer, quantities purchased, or otherwise?

Generally, a seller can charge different prices to different customers because of freedom of contract. However, a seller:

  • may have to charge the same prices if it holds a dominant or similarly strong market position (sections 19 and 20GWB and article 102 TFEU); and
  • may generally not charge different prices on grounds of race or ethnic origin. The same goes for grounds of gender, religion, disability, age or sexual orientation if the respective sales contract is typically concluded with or without low importance of the buyer’s person, especially in ‘bulk business’. An exception exists if different treatment is based on objective grounds, especially where it serves to avoid threats, prevent damage, etc (sections 19 and 20 of the Anti-Discrimination Act).

Geographic and customer restrictions

May a supplier restrict the geographic areas or categories of customers to which its distribution partner resells? Are exclusive territories permitted? May a supplier reserve certain customers to itself? If not, how are the limitations on such conduct enforced? Is there a distinction between active sales efforts and passive sales that are not actively solicited, and how are those terms defined?

Whether measures restrict competition and are prohibited is to be determined by the antitrust law of the country in which the measures have an effect (‘effects doctrine’). Within the European Union or the EEA, a supplier may generally not restrict the territories in which or the customers to whom its distribution partner sells; such restrictions are generally prohibited and void (article 101(1)b, (2) TFEU; article 53 EEA Agreement). Exempt are, however, by reason of block exemption, restrictions of:

  • active sales into the exclusive territory or an exclusive customer group reserved to the supplier or another distribution partner;
  • sales to end users if the distribution partner operates at wholesale level;
  • sales from members of a selective distribution system to unauthorised distributors in the system’s territory; and
  • selling components, supplied for incorporation, to customers who would use them to manufacture the same kinds of products (article 4(b) VBER).

Active sales means actively approaching individual customers (eg, by direct, unsolicited mail, email or visits) or a customer group in a specific territory through promotions specifically targeted at that group. Passive sales means responding to unsolicited requests from individual customers, including general advertising that reaches customers in other exclusive territories or customer groups if done reasonably.

This also applies to the internet: sales via online stores may not, in principle, be excluded. A supplier may only, however, require its distribution partner to fulfil certain quality standards, especially in selective distribution (Guidelines on Vertical Restraints of 10 May 2010, paragraphs 51 and 54). The European Court of Justice has now shed further light on highly discussed details of internet resale restrictions within selective distribution systems, when deciding on the Higher Regional Court of Frankfurt’s request to give a preliminary ruling on how to interpret European antitrust rules, namely article 101 TFEU and article 4(b) and (c) VBER (decision of 19 April 2016, Coty Germany, file No. 11 U 96/14 (Kart)). According to the European Court of Justice’s decision of 6 December 2017 (Coty Germany, reference No. C-230/16), manufacturers of luxury products may stop the distributors within their selective distribution network from selling the goods via third-party platforms if such contractual clause meets the following three conditions: ‘(i) that clause has the objective of preserving the luxury image of the goods in question; (ii) it is laid down uniformly and not applied in a discriminatory fashion; and (iii) it is proportionate in the light of the objective pursued.’ If these ‘Metro’-criteria for selective distribution (leading back to the Metro case of 25 November 1977, reference No. 26/76) are not met, the clause may nevertheless benefit from an exemption under VBER by reason of article 101(3) TFEU because banning sales via third-party online platforms does not, at least according to the court, under a selective distribution system for luxury goods, constitute a hardcore restriction as listed in article 4 VBER, which would otherwise exclude applying the block exemption to the whole vertical agreement (cf. Guidelines on Vertical Restraints of 10 May 2010, paragraph 47). Especially, the third-party platform ban would not constitute a restriction of customers in terms of article 4(b) VBER, or a restriction of passive sales to end users in terms of article 4(c) VBER. The court left open whether this interpretation also applies for other than luxury goods and outside selective distribution - which will likely be in the centre of discussions now since the German competition authority declared immediately via Twitter on 6 December 2017:

The #ECJ has taken care to limit its findings to genuine luxury products. #Brandmanufacturers have not received carte blanche to issue blanket #platformbans. First assessment: Limited impact on our practice.

The European Commission disagrees: in its Competition Policy Brief of April 2018, the European Commission states - rather incidentally - that the European Court of Justice’s argumentation in the Coty case also applies irrespective of the luxury character of the products marketed:

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.

Accordingly - as analysed in this guide’s 2018 version - the European Court of Justice’s decision in the Coty case provides good abstract arguments that manufacturers of both luxury and other brand-name products may ban the sale via internet platforms - either according to the ‘Metro’-criteria or according to the VBER. In this regard, see, also the recent decision of the Higher Regional Court of Hamburg of 22 March 2018, which held that the ban the producer of food and cosmetics (ie, not luxury goods, but but products ‘qualitatively committed to a high (production) standard’) imposed on its own distributor to sell via third-party internet platforms was valid (for details see Rohrßen, ZVertriebsR 2018, 277-285 (281)).

With regard to resale restrictions, the EU Regulation on Geo-blocking (No. 2018/302) prohibits traders to discriminate against custumers within the European Union for reasons of nationality, place of residence or place of establishment with regard to the access to online interfaces (article 3) and to the application of general conditions of access to goods or services (article 4). Within the range of means of payment accepted, traders shall not apply different conditions for payment transactions based on nationality, place of residence, place of establishment of the costumer, location of the payment account, place of establishment of the payment service provider or place of issue of the payment instrument within the European Union (article 5). Where distribution agreements impose obligations to exercise any form of unjustified geo-blocking as laid down in articles 3, 4 and 5, such provisions shall be automatically void (article 6 (2)). The Regulation on Geo-blocking applies since 3 December 2018. Yet, article 6 (2) shall apply to the agreements on passive sales concluded before 2 March 2018 as from 23 March 2020 only (for details see Rothermel and Schulz, K&R 2018, 444-449; Rohrßen, ZVertriebsR 2018, 277-285 [283-284]).

Online sales

May a supplier restrict or prohibit e-commerce sales by its distribution partners?

Yes, a supplier may restrict e-commerce sales by its distribution partners (especially: distributors or franchisees) under German and EU antitrust law - observing the principle that suppliers may hardly impose a comprehensive prohibition on the online sale of goods (or services) because they are considered passive sales (cf. European Court of Justice, decision of 13 October 2011, Pierre Fabre, file No. C-439/09, reaffirmed in the case regarding Coty Germany, file No. C-230/16; Guidelines on Vertical Restraints of 10 May 2010, paragraph 52; in this regard see also the Asics decision of the BGH of 12.12.2017, which states that a general ban on the use of price comparison tools is void, while setting up guidelines for the use of such tools may be valid (see Rohrßen, ZVertriebsR 2018, 277-285 (282-283)). Restrictions below a total ban are commonplace, especially the prohibition of sales via third parties’ online platforms (especially ‘marketplaces’), the ban of pure online players by requiring the operation of brick and mortar shops (Guidelines on Vertical Restraints of 10 May 2010, paragraph 52(c)), or setting quality criteria for internet sales (regarding the domain name, the online store’s appearance, the language, the services provided, etc) - (for details, see Rohrßen, GRUR-Prax 2018, 39-41 and DB 2018, 300-306). Such restrictions within a selective distribution system are either allowed if they meet the ‘Metro’-criteria (see question 18) or can be exempt under the VBER - which requires that (i) supplier’s and buyer’s market shares do not exceed 30 per cent and (ii) that there are no hardcore restrictions listed in article 4 VBER or excluded restrictions under article 5 VBER.

A supplier may require that e-commerce sales by its distribution partners (not, however, by their customers) are not resold outside the distribution partner’s assigned territory, but only as regards active sales into the exclusive territory or an exclusive customer group reserved to the supplier or another distribution partner (see question 18) and only provided that the supplier’s and the distribution partner’s market shares do not exceed 30 per cent. Passive sales over the internet, that is, upon unsolicited requests from individual customers, can, in principle, not be restricted.

A supplier may require reports of e-commerce sales as a supplier may require reports on any other sales from its distribution partner.

Refusal to deal

Under what circumstances may a supplier refuse to deal with particular customers? May a supplier restrict its distributor’s ability to deal with particular customers?

A supplier may refuse to deal with customers because of freedom of contract, unless restrictions by antitrust or anti-discrimination law apply (see question 17).

A supplier may restrict its distributor’s ability to deal with particular customers only if an exemption from antitrust law is given (see question 18).

Competition concerns

Under which circumstances might a distribution or agency agreement be deemed a reportable transaction under merger control rules and require clearance by the competition authority? What standards would be used to evaluate such a transaction?

Typically, German or European rules on merger control do not apply to the conclusion of a distribution agreement because such agreement is a form of cooperation between companies different from merger or acquisition. By way of exception, the conclusion of a distribution agreement may be subject to merger control under:

  • German law if it is considered a ‘combination of undertakings enabling one or several undertakings to exercise directly or indirectly a material competitive influence on another undertaking’ (sections 37 et seq GWB). This combination shall, however, only exist if the parties are somehow affiliated; mere economic influence shall not suffice; and
  • European law if it results in gaining direct or indirect control of the whole or parts of one or more other undertakings, including by contract (article 3(1b) EC Merger Regulation 139/2004). This control may also exist because of mere economic dependencies (which is to be measured on all circumstances of the case).

Do your jurisdiction’s antitrust or competition laws constrain the relationship between suppliers and their distribution partners in any other ways? How are any such laws enforced and by which agencies? Can private parties bring actions under antitrust or competition laws? What remedies are available?

Generally, agreements that aim at or result in restraints of competition are prohibited by antitrust law (see question 13). Certain hardcore restrictions are generally prohibited, regardless of the parties’ market shares, for example, price fixing (see question 14), or restricting the geographic areas or categories of customers (see question 18). Other hard-core restrictions especially apply to selective distribution (eg, no restriction of cross-supplies between distributors within a selective distribution system).

Except for hard-core restrictions, a safe harbour is provided by the De Minimis Notice and VBER (see question 13). If, however, one of the parties’ market share exceeds 30 per cent, an agreement or concerted practice that restrains competition can only benefit from the efficiency defence of article 101(3) TFEU.

Antitrust law is mainly enforced by the authorities (the European Commission and the German Federal Cartel Office), especially through fines. However, it can also be enforced by private action, aiming to remove the infringement of antitrust law or achieve damages (sections 33 et seq GWB).

Parallel imports

Are there ways in which a distributor or agent can prevent parallel or ‘grey market’ imports into its territory of the supplier’s products?

A distributor or agent cannot directly prevent parallel imports. Instead, they can only demand from their supplier to use its rights, if existent, to prevent parallel imports. As a general rule, the trademark proprietor of a EU trademark is entitled to prevent all third parties not having his consent from using in the course of trade, in relation to goods or services, any sign identical or similar with the EU trademark (article 9 EU Trade Mark Regulation No. 2017/1001). However, such rights are exhausted ‘in relation to goods which have been put on the market in the European Economic Area under that trademark by the proprietor or with his consent’ (article 15 (1) EU Trade Mark Regulation). However, the rights are not exhausted if a legitimate reason to prohibit the grey market sales exists, namely because the use of the trademark threatens to damage the good’s reputation (as already decided by the Court of Justice of the EU, case C-337/95, Dior/Evora). A very recent court decision now confirms that this goes especially for the image of brands that have a luxury and prestige character, as reflected also through how they are advertised. The right to prevent such sales is, however, limited to cases with ‘a risk of damage to the reputation’, especially where the trademark used by the reseller ‘substantially damages’ the trademark reputation. The court found that the use of a distribution channel not complying with the selective distribution system caused such reputational damage to the reputation of the luxury cosmetics to be distributed, namely by presenting the products amid other, very standard products for daily use, low priced products and special deals, all not requiring any need for advice to the customers (Higher Regional Court of Düsseldorf, decision of 6 March 2018; details: Rohrßen and Tenkhoff, GRUR-Prax 2018, 235).

Advertising

What restrictions exist on the ability of a supplier or distributor to advertise and market the products it sells? May a supplier pass all or part of its cost of advertising on to its distribution partners or share in its cost of advertising?

When advertising and marketing products, they generally have to observe the Unfair Competition Act, avoid misleading advertising, adhere to the Ordinance obliging sellers to mark goods with prices, and further provisions that regulate market behaviour in the interest of market participants (eg, labelling of textiles or food products). The parties are free to agree on the cost of advertising.

Intellectual property

How may a supplier safeguard its intellectual property from infringement by its distribution partners and by third parties? Are technology-transfer agreements common?

A supplier may safeguard its IP by registering its patents, trademarks, utility models, and designs in the territory where the products shall be distributed now or in the future. Thus, the supplier can exert the respective rights in case of infringement. Besides, a supplier may stipulate indemnity clauses in their distributor contracts to cushion the consequences of possible infringements.

Technology-transfer agreements are common and governed by the Technology Transfer Block Exemption Regulation No. 316/2014.

Consumer protection

What consumer protection laws are relevant to a supplier or distributor?

Above all, consumer protection laws apply at the end of the distribution chain: between the seller and the buying consumer. Statutory law grants a two-year warranty that products are free from defects at the passing of risk. In case of a defect, the buyer is entitled to claim subsequent performance (remedy of the defect or delivery of a defect-free product), alternatively price reduction or withdrawal (all regardless of fault), and damages, provided that the seller has acted with fault (sections 437, 280 et seq BGB). Although fault is generally assumed by law, the seller can exculpate itself, especially if the seller has not manufactured the product. These consumer rights cannot be contracted out by the supplier (sections 474 and 475 BGB).

Each seller within the distribution chain is entitled to have recourse against its own supplier if the product has already been defective at the respective delivery (sections 478 and 479 BGB). In order to maintain these rights, however, the buyer (unless a consumer) has to check at the time of delivery whether the product is defective, and inform the seller accordingly (section 377 HGB).

In addition, special information duties towards consumers exist in:

  • over-the-phone sales (section 312a(1) BGB);
  • over-the-counter sales, except everyday sales (section 312a(2)2 BGB, article 246(2) Introductory Act to the Civil Code);
  • e-commerce (section 312j BGB); and
  • direct distribution off-premises and distance contracts (section 312d BGB).

Statutory law also limits the fees that the consumer shall pay for means of payment or consumer hotlines, etc (section 312a(3-5) BGB). Finally, the consumer has a right of withdrawal regarding distance and off-premises contracts (sections 312g and 355 BGB).

These consumer rights are similar throughout the European Union because they are influenced by the EU Directives 1999/44/EC on the sale of consumer goods and 2011/83/EU on consumer rights. Differences, however, exist, for example, as to whether certain rules also apply within B2B relationships (eg, as regards the seller’s obligation to give customers the opportunity to identify and correct input errors before placing their electronic orders).

Product recalls

Briefly describe any legal requirements regarding recalls of distributed products. May the distribution agreement delineate which party is responsible for carrying out and absorbing the cost of a recall?

Statutory law does not set any requirements. According to case law, a manufacturer must keep its products under surveillance and, when detecting risks for legally protected goods (such as healthcare products), adopt the necessary preventive measures. The extent and time of such measures depend on the single case, especially on the product at risk and the extent of possible damage (BGH, decision of 16 December 2008).

The distribution agreement can delineate which party is responsible for a recall and its costs. Individual agreements are not subject to specific limits. Standard business terms, however, are subject to a strict review in court: they can be unenforceable if they are incompatible with essential statutory principles, if they limit essential contractual rights and duties, or if they are surprising or ambiguous (sections 310(1), 307, 305c BGB). Therefore, such terms should consider who would typically be responsible for recall and costs, depending on the product (ready-made, or not, etc).

Warranties

To what extent may a supplier limit the warranties it provides to its distribution partners and to what extent can both limit the warranties provided to their downstream customers?

A supplier may limit the warranty rights granted by statutory law (see question 26) towards its distribution partners.

There are a few limits to individual agreements: they must not contradict statutory prohibitions (section 134 BGB) and public policy (section 138 BGB), and must not limit or exclude liability for wilful intent, fraudulently concealing defects, where a guarantee has been given, or according to product liability law (sections 202, 276, 444, 639 BGB). If the product has been found to be defective by the consumer, and the defect already existed when the supplier delivered it to its distribution partner, a limitation of warranty can only be enforced if the supplier provides another compensation of equal value (section 478(4) BGB).

In standard business terms, however, one may hardly deviate from statutory law - even in B2B contracts (sections 310(1) and 307 BGB). One may only:

  • modify the rules of subsequent performance (time, place, number of attempts);
  • exclude liability for slightly negligent breaches of non-cardinal duties; and
  • limit liability for slightly negligent breaches of cardinal duties to the typical damages foreseeable at conclusion of the contract.

The same goes for warranties provided to each downstream customer, unless the customer is a consumer because a consumer’s statutory rights cannot be contracted out (see question 26).

Data transfers

Are there restrictions on the exchange of information between a supplier and its distribution partners about the customers and end users of their products? Who owns such information and what data protection or privacy regulations are applicable?

The exchange of information about customers is restricted by the Federal Data Protection Act (BDSG), which implemented EU Directive 95/46/EC, repealed by Regulation (EU) 2016/679 (General Data Protection Regulation or GDPR). The collection, processing and use of information on customers are only allowed if permitted by law (eg, due to the performance of a contract) or with the customer’s consent (section 4 BDSG). Details on commercial collection and data storage for the purpose of transfer are laid down in sections 28 et seq BDSG.

The owner of customer information, if contained in a database, is the person who produced the database - provided that its assembly, verification or presentation required a substantial qualitative or quantitative investment (sections 87a et seq of the German Copyright Act).

As regards data transfer from the EEA to the United States, the Safe Harbour privacy principles for the protection of personal data transferred from an EU member state to the United States (Safe Harbour) do not apply anymore. Safe Harbour is invalid owing to the European Court of Justice’s Schrems decision (6 October 2015). Subsequently, the European Commission and the US government agreed on a new framework for the transatlantic transfer of personal data for commercial purposes. On 12 July 2016, the European Commission adopted the EU-US Privacy Shield. In practice, US companies have to (i) self-certify annually that they meet the requirements, (ii) display privacy policy in their e-stores, and (iii) reply promptly to complaints. If US companies are handling human resources data, they also have to cooperate and comply with European Data Protection Authorities. Details can be found, for example, on www.privacyshield.gov.

Employment issues

May a supplier approve or reject the individuals who manage the distribution partner’s business, or terminate the relationship if not satisfied with the management?

A supplier may generally approve or reject managers if the agent or distributor has to render the services in person (see question 11). However, the distribution partner is free to employ assistants, unless the parties have agreed on a respective ‘veto right’ for the supplier.

A supplier may terminate the relationship with notice (if of indefinite term, or agreed), or without notice, but for cause (see question 9). Termination for cause, however, requires a more concrete cause than ‘missing satisfaction’ with the management (unless individually agreed). What might suffice is if culpable mismanagement has resulted in a strong decrease in turnover.

Are there circumstances under which a distributor or agent would be treated as an employee of the supplier, and what are the consequences of such treatment? How can a supplier protect against responsibility for potential violations of labour and employment laws by its distribution partners?

An agent would be treated as a supplier’s employee if the agent does not act independently. An agent acts independently if the agent - according to the overall picture of contractual rules and factual activity - freely organises his or her activities and working time (section 84(1)2 HGB). This goes mutatis mutandis for other types of distribution partners.

Treatment as an employee in particular has the following consequences:

  • employee protection, for example, limited right of termination under the Dismissal Protection Act;
  • continued payment of salary during public holidays, illness and holidays;
  • minimum wage under the Minimum Wage Act of 11 August 2014;
  • obligation to pay contributions to social security;
  • income tax on salary;
  • adherence to worker participation and collective bargaining agreements if applicable; and
  • exclusive competence of labour courts if the employee has, during the last six months of activity, earned an average amount that does not exceed €1,000 per month.

A supplier generally does not need to protect against responsibility for potential violations of labour and employment laws because the supplier is not required to respond to such violations unless it has contributed to them. However, the supplier can advise the distribution partner in the distribution agreement of the partner’s sole responsibility.

Commission payments

Is the payment of commission to a commercial agent regulated?

Yes, the agent is entitled to:

  • ‘del credere commission’ if the agent assumes liability for fulfilment of contracts procured by the agent (section 86b HGB);
  • an advance on commission once the principal has performed its obligations (section 87a paragraph 1 HGB);
  • accounting within maximum periods of three months (section 87c(1) HGB);
  • commission irrespective of delivery and payment, unless the principal is not responsible for non-delivery (section 87a(3) HGB); and
  • request information, statements of account, an excerpt from the books, and inspection by an auditor (section 87c HGB).

These rules are mandatory and cannot be contracted out. Further details on the payment of commission (if not agreed otherwise) are set out in sections 86b et seq HGB. If a contract procured by the agent is partially not executed, the principal’s obligation to pay the commission depends on the concept of ‘reason for which the principal is to blame’ - as laid down in article 11 of the Commercial Agency Directive and recently interpreted by the European Court of Justice (decision of 17 May 2017, ERGO Poist’ovňa): In such a case, the agent may be required to refund a part of his commission, under the conditions that said partial amount is proportionate to the extent to which the contract has not been executed and that the non-execution is not due to a reason for which the principal is to blame (for details see Franke and Rohrßen, IWRZ 3/2018, 107-111).

Good faith and fair dealing

What good faith and fair dealing requirements apply to distribution relationships?

The parties to distribution relationships have to safeguard each other’s interests (sections 86, 86a and 90 HGB and section 242 BGB).

The agent is especially obliged to:

  • check customers’ creditworthiness;
  • inform the supplier immediately about any business procured;
  • keep confidential any information obtained during his or her activity; and
  • abstain from acting for the supplier’s competitors.

Similar obligations, except non-competition, apply also to distributors, commission agents and franchisees.

The supplier is obliged to assist and take care of its distribution partner, subject, however, to the supplier’s economic freedom.

Registration of agreements

Are there laws requiring that distribution agreements or intellectual property licence agreements be registered with or approved by any government agency?

No.

Anti-corruption rules

To what extent are anti-bribery or anti-corruption laws applicable to relationships between suppliers and their distribution partners?

German anti-bribery or anti-corruption laws may also apply to the relationship between a supplier and its distribution partner, especially to practices such as:

  • taking and giving bribes in commercial practice;
  • restricting competition in the context of public invitations to tender; or
  • taking or giving bribes to public officials - including inducing or assisting to such acts (sections 298 et seq, 333 et seq German Criminal Code).

Any underlying agreement to such practice can and typically will be declared void as a breach of law (section 138 BGB), for example, an agency agreement that aims at bringing about a bribe agreement with public officials (Higher Regional Court of Stuttgart, decision of 10 February 2010).

Prohibited and mandatory contractual provisions

Are there any other restrictions on provisions in distribution contracts or limitations on their enforceability? Are there any mandatory provisions? Are there any provisions that local law will deem included even if absent?

No (for mandatory provisions, see questions 7 to 10, and 32). The respective statutory law (see question 8) will apply, even if the contract remains silent.

Governing law and choice of forum

Choice of law

Are there restrictions on the parties’ contractual choice of a country’s law to govern a distribution contract?

Generally, the parties are free to choose the applicable law (article 3 of the Rome I Regulation). If, however, all elements relevant for the choice of law are located in another country than that of the chosen law, the choice of law shall not prejudice the provisions that cannot be derogated from by agreement (article 3(3) and (4) of the Rome I Regulation).

Moreover, overriding mandatory provisions of the forum’s law cannot be avoided by choosing another law. Similarly, the courts may also give effect to overriding mandatory provisions of the country where the contractual obligations have to be performed (see article 9 of the Rome I Regulation). Overriding mandatory rules are, for example, provisions of agency law. If, therefore, the agent acts within the European Union, the agent’s claim for goodwill indemnity (based on the EU Directive on self-employed commercial agents of 1986) cannot be contracted out - even if the parties choose a foreign law (see European Court of Justice, decision of 9 November 2000, Ingmar, concerning, however, the former Rome Convention on Law Applicable to Contractual Obligations of 1980). Arguments against applying the same principles under the Rome I Regulation exist, but there is currently no case law that favours that interpretation.

Choice of forum

Are there restrictions on the parties’ contractual choice of courts or arbitration tribunals, whether within or outside your jurisdiction, to resolve contractual disputes?

Generally, the parties are free to choose a court, especially if:

  • the other party resides in another EU member state, and the parties have chosen the court of an EU member state (article 25 of the Brussels Ia Regulation);
  • the other party resides in Iceland, Switzerland or Norway, and the parties have chosen the courts of one of these states or Germany (article 23 of the Lugano II Convention); or
  • both parties are merchants, legal persons under public law, or special assets under public law, or the other party resides outside Germany (section 38 of the Code of Civil Procedure, ZPO).

The parties may instead choose arbitration (sections 1029 et seq ZPO, article 1(2)d of the Brussels Ia Regulation and article 1(2)d of the Lugano II Convention).

However, the choice of court proceedings or arbitration can hardly avoid overriding mandatory provisions (question 37), as ruled by the Higher Regional Court in Munich (decision of 17 May 2006) and confirmed by the BGH (decision of 5 September 2012).

Dispute resolution procedures

What courts, procedures and remedies are available to suppliers and distribution partners to resolve disputes? Are foreign businesses restricted in their ability to make use of these courts and procedures? Can they expect fair treatment? To what extent can a litigant require disclosure of documents or testimony from an adverse party? What are the advantages and disadvantages to a foreign business of resolving disputes in your country’s courts?

Suppliers and distribution partners are free to use any means of dispute resolution, especially out-of-court negotiation, mediation, arbitration or litigation. Restrictions exist only insofar as overriding mandatory provisions cannot be avoided by means of dispute resolution (question 38). Suppliers and distribution partners can expect fair treatment in German courts as the judges are well trained, have been determined beforehand, and the parties are entitled to due process of law (articles 101 and 103 of the German Constitution). The advantages of resolving disputes in Germany are, inter alia, that court rulings are quite foreseeable and that court proceedings are fairly quick (8.2 months on average for proceedings in the district courts, according to the latest statistics).

Alternative dispute resolution

Will an agreement to mediate or arbitrate disputes be enforced in your jurisdiction? Are there any limitations on the terms of an agreement to arbitrate? What are the advantages and disadvantages for a foreign business of resolving disputes by arbitration in a dispute with a business partner in your country?

Yes, an agreement to mediate or arbitrate disputes will be enforced in Germany (sections 1029 et seq and section 278a ZPO). Arbitration may be disadvantageous if only small sums are concerned (the costs for German courts are typically lower than the costs for arbitration if the amount in dispute is less than €5 million). Typical advantages of arbitration are, however, that proceedings are confidential, lead to a final decision without the opportunity to appeal, and the award is enforceable in far more countries than court judgments (because of the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards).

Update and trends

Recent developments

Updates and trends

E-commerce

Within the EU’s Digital Single Market strategy, the EU intends to remove barriers, eg, by an initiative to simplify contractual rules in e-commerce throughout the EU to open up markets especially for small and medium-sized enterprises (see also the European Commission’s press release from 9 December 2015). In May 2016, the EU Commission published a whole e-commerce package, composed of three legislative proposals:

  • to address unjustified geo-blocking and other forms of discrimination on the grounds of nationality, residence or establishment;
  • on cross-border parcel delivery services to increase the transparency of prices and improve regulatory oversight; and
  • to strengthen enforcement of consumers’ rights and guidance to clarify, among others, what qualifies as an unfair commercial practice in the digital world.

On 20 November 2017, the European Parliament, the Council and the Commission reached a political agreement to end certain practices of geo-blocking, prohibiting ‘three specific situations where no justification and no objective criteria for a different treatment between customers from different EU member states are conceivable from the outset’, namely:

  • the sale of goods without physical delivery;
  • the sale of electronically supplied services; and
  • the sale of services provided in a specific physical location (European Commission, Press release of 20 November 2017).

Within two years of the entry into force of the new rules, the Commission will assess for the first time their impact on the internal market, in particular on certain electronically supplied services offering copyright protected content such as downloadable music, e-books, software and online games, as well as on transport and audiovisual services.

For further details, see question 18.

Franchising

There have been discussions about whether to set up statutory rules on franchising in Germany (starting with a petition to the German parliament in 2011). The discussion appears to be petering out on a national level; in December 2015, the Federal Office of Justice announced a one-year research project that shall provide a comparative study of disclosure requirements in countries such as the United States, France, Spain, Sweden and Belgium. Results are still pending. Whereas on a European level, the discussion is still ongoing: on 12 September 2017, the European Parliament adopted a resolution on the functioning of franchising in the retail sector, inter alia, calling on the Commission to introduce guidelines on franchising contract.

Major trends within distribution and retail

On 10 May 2017, the European Commission published the accompanying Staff Working Document, which set out the main findings of the e-commerce sector inquiry, showing, inter alia, three major trends within distribution and retail:

  • direct distribution: Over the past decade, many manufacturers started selling their products directly to consumers through their own online retail shops, thereby competing with their distributors;
  • selective distribution: Many manufacturers switched to selective distribution systems, selling their products only to pre-selected (authorised) resellers, thus providing manufacturers a greater control over their distribution networks; and
  • rise of contractual restrictions: Together with the rise of selective distribution, manufacturers tend to provide clear criteria to achieve and control the same level of distribution throughout the whole system, including (eg, marketplace (platform) bans, restrictions on the use of price comparison tools and bans of pure online players from distribution networks).

Cross and omni-channel distribution

There is an ongoing trend in distribution from single or multichannel distribution to cross or even omni-channel distribution. The trend is combining all channels to provide customers with a seamless shopping experience, integrating services such as:

  • click and collect;
  • click and reserve;
  • click and deliver; and
  • in-store touchpoints.

To avoid frictions within the distribution system, such omni-channel distribution strategy requires clear communication as well as stipulation between the supplier and its distribution partners regarding the use of online stores, social media, local mobile marketing and the coordination and integration of all these services (especially because restrictions on online sales have been under scrutiny by the antitrust authorities in recent times).