Commerce 4.0 and Digitalization – Legal issues when manufacturers and customers are bypassing commercial enterprises

Digitalization in commerce is accelerating the process of eliminating commercial enterprises by means of direct transactions. Can distributors, wholesalers and retailers protect themselves against being bypassed?

Manufacturers using distributors and dealers to sell their goods may use direct transactions to achieve higher prices from end customers. This makes it more attractive for companies to consider bypassing dealers. While this is not a new phenomenon, it is a trend that has been increasing for decades. Digitalization has led to increased market transparency and affordable sales opportunities. This and further technical development are driving this process, which is expected to accelerate further. The anticipated establishment of Commerce 4.0, understood as the completely automated conclusion of a purchase agreement between two machines, may be a final point. Third parties are entirely excluded in this case.

But do dealers have to accept being bypassed in this way, from a legal perspective?

Due to the principle of freedom of contract, the answer to this question is generally yes. Freedom of contract also includes the freedom to conclude a contract. In principle, people may choose with whom they do wish to enter into contracts and with whom they do not. In cases where manufacturers and distributors have close connections with each other, this may be different. A connection becomes a bond from which rights may arise. Thus, distributors can refer to supply rights and fiduciary duties of manufacturers, which may be contrary to manufacturers’ freedom to enter into contracts. Distribution agreements are usually entered into in writing, but sometimes also verbally or implicitly, in which case, however, they are not as easy to determine as such and to prove. They are characterized by mutual understanding of the parties, according to which the distributor will have a permanent obligation to try to sell the manufacturer’s products. In cases where there is no written contract, it must be derived from the actual cooperation whether this understanding existed.

If a distribution agreement exists, the manufacturer cannot end the business relationship all of a sudden. Instead, the manufacturer must then terminate the contract with a notice period of several months. Jurisdiction on the length of this period is not uniform. In many European countries, the statutory provisions on commercial agents are used as a reference. Depending on the length of the contractual cooperation, the notice period will then be up to six months. Primarily when the distributor had to make specific investments, which have not yet been amortized, a longer notice period will be accepted in many cases. If the manufacturer suddenly nevertheless ceases supplies, it will be liable for damages.

Another question is whether the manufacturer is permitted to set up a parallel structure during the ongoing contract, such as an online store, or whether it may grant end clients rights to print out products on a 3D printer that are also sold by the distributor. The legal basis for these issues has not yet been conclusively finalized, at least where German law is applicable. It is, however, important to establish whether a distributor was granted an exclusive sales right. In such event, direct sale may only be permissible in individual cases, for example, if customers expressly reject to be supplied by the distributor. Often, manufacturers add reservations in sales contracts to be permitted direct supply despite granting exclusivity, i.e., the right to supply clients themselves at all times or in certain defined cases. Since such direct supply may conflict with the manufacturer’s fiduciary duty to the distributor, it is questionable whether reservations of this kind are effective or whether it is required for their effectiveness to compensate the distributor appropriately for the relevant transactions. The German Federal Court of Justice has not yet ruled on this issue. Where no exclusivity was agreed, direct transactions are generally permissible, however. As so often, the following applies here as well: there is no principle without an exception. If the distributor has a position that closely resembles exclusivity based on the contractually provided or actual business practice and if it focuses its operations on the manufacturer’s interests, the outcome will probably look different. In that case, the manufacturer’s fiduciary duty may still result in an obligation to refrain from direct transactions or to pay compensation to the distributor.

Conclusion:

Depending on the configuration of the business relationship, distributors and dealers may be entitled to a claim to be supplied with products and, where applicable, also a claim not to be bypassed without compensation. These claims, however, only apply within a limited period, because all business relationships can be terminated. Distributors are therefore unable to refer to civil law to protect themselves against the structural change that is resulting from digitalization. As suggested by numerous studies, the long-term answers are therefore expected to lie in accepting other roles and in adapting the business model (assuming functions associated with advice, logistics, financing, etc.).