AUSTRIA
- What happens in the event of insolvency of the commercial agent or distributor?
CZECH REPUBLIC
- Consumer law - unfair commercial practices (gaps in the implementation of EU law)
FRANCE
- The prohibition on obtaining an advantage without consideration is compliant with the Constitution
- Withholding information at the pre-contractual stage on the status of the franchise network may lead to the annulment of the franchise agreement
GERMANY
- Is the franchisor obliged to share benefits the franchisor negotiated with suppliers?
NETHERLANDS
- The validity of a non-compete clause in a franchise agreement
SLOVAKIA
- Long-awaited Simplification of Slovakian Regulation of Contractual Relationships on the Horizon
UNITED KINGDOM
- Classic Coach Company: clash of sequential rights in a brand and post-Brexit divergence in UK/EU law
AUSTRIA
What happens in the event of insolvency of the commercial agent or distributor?
As a result of the current tense economic situation worldwide, insolvencies are increasing. Therefore, in the following we would like to outline the consequences of a distributor's insolvency on the contractual relationship with that distributor:
If a commercial agent or authorized dealer or any other distributor (hereinafter all together referred to as "distributors") become insolvent, the distribution agreement does not end automatically. Instead, the underlying agreement continues to be in force unchanged for the time being. A termination of the agreement by the principal / supplier / manufacturer is only permitted in very limited cases.
Even though Article 22 of the Austrian Law on commercial agents (“Handelsvertretergesetz”) lists the bankruptcy of the commercial agent as a cause which entitles the principal to terminate the agreement prematurely and with immediate effect, the more recent provisions of Articles 25a and 25b of the Austrian Insolvency Act (“Insolvenzordnung”) restrict this right substantially.
According to these provisions, contractual clauses which entitle the counterparty to terminate the agreement for good cause solely because insolvency proceedings were initiated with regard to the other party are generally inadmissible and void (with very few exceptions for some financial transactions such as certain options, transactions in listed commodities, securities lending et al.).
Furthermore, in cases in which the termination of the agreement (with or without cause) could jeopardize the continuation of the insolvent entity, during the first six months after the opening of insolvency proceedings, agreements may only be terminated for a good cause other than (i) the opening of insolvency proceedings per se, (ii) a deterioration of the debtor's economic situation, and (iii) default by the debtor in the fulfillment of receivables that became due before the opening of insolvency proceedings. These restrictions do not apply only where the termination of the contract is indispensable to avert serious personal or economic disadvantages of the (not insolvent) contracting party (and not to employment contracts and claims for disbursement of loans).
This applies to all contractual relationships, therefore for every kind of distribution agreement.
Agreements (contractual clauses) to the contrary are invalid as all these provisions are mandatory. Hence, early termination rights of the principal in the event of a distributor’s insolvency which are frequently included in agreements are not only inadmissible and void in Austria, but termination rights of “important” contracts are generally widely restricted during the first six months of insolvency proceedings.
The insolvency administrator, on the other hand, does have the right to terminate the agreement with immediate effect. He must therefore declare within a period to be determined by the court at the request of the other party whether he wishes to uphold the agreement for the time being. If he does not make such declaration by the determined deadline, the agreement is considered terminated.
It should also be noted that these restrictions even apply if the agreement contains a choice of law clause according to which not Austrian law, but the law of another country shall be applicable. According to Articles 3 and 7 of the European Insolvency Regulation (Regulation 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings), Austrian courts have jurisdiction over insolvency proceedings of Austrian debtors and Austrian insolvency law is applicable in the course thereof. Article 7 (2) (e) of the Regulation even explicitly mentions that this includes “the effects of insolvency proceedings on current contracts to which the debtor is party”.
From a practical point of view, one key takeaway is that agreements should be structured to enable the principal to (i) become aware in time that the distributor is in economic difficulties and (ii) terminate the contract before insolvency proceedings are opened. In the event of the opening of insolvency proceedings without prior termination by the principal, the insolvency administrator should be contacted immediately to clarify how the contractual relationship shall be handled.
CZECH REPUBLIC
Consumer law - unfair commercial practices (gaps in the implementation of EU law)
The subject of this article is case law in the Czech Republic related to the Prague Municipal Court’s decision in the case of Alza.cz a.s. (“Alza”) v. the Central Inspectorate of the Czech Trade Inspection Authority (“CTIA”) (judgment of the Municipal Court in Prague from 24 March 2021; No. 15 A 8/2019-49) dealing with the definition of an unfair commercial practice. In selling certain goods to buyers through its e-shop, Alza’s system pre-checked checkboxes selecting additional related products by default, automatically adding them to the online shopping cart together with the buyer’s selected product.
While Alza is the largest e-shop in the Czech Republic offering almost everything from electronics to baby diapers and has record sales, it is facing several fines imposed by the CTIA for breaching the Act on Consumer Protection in the recent past.
Facts
Alza was found responsible for non-fulfilment of its statutory obligations according to the Act on Consumer Protection in a misdemeanour proceedings initiated by the CTIA, and was subjected to a fine in the amount of CZK 150,000 (approximately EUR 6,000). Beside other failures, Alza was found responsible for unfair commercial practices consisting of the following:
Consumers putting a new laptop into their online shopping cart found themselves automatically buying either software (MS Office) or a computer mouse, unless they actively cancelled the goods the system had added into their cart before payment. Whereas additional services related to laptops (e.g. prolonged warranties) could be added only by actively ticking a box (“add to the cart”), a purchase of the MS Office package or a computer mouse could be cancelled only by unticking the box (“remove from the cart”). Alza presumed the decision of the consumer would be to buy MS Office and that a laptop without this application suite would not be useful to the consumer.
Statement of the claimant
Alza raised an appeal against the decision of the CTIA to its Central Inspectorate stating that the decision was unlawful and that Alza was being deprived of its right to conduct business freely. The Central Inspectorate confirmed the decision of the CTIA, and in consequence Alza decided to make the decision of the Central Inspectorate subject to a judicial review within the administrative jurisdiction.
In the court proceeding initiated at the Municipal Court in Prague, Alza argued that its practice was in favour of consumers, who were accustomed to buying MS Office together with their laptops. On the contrary (according to the statement of Alza), the consumer would be misled if MS Office was not included in the purchase. It has been a common practice for years to sell computers together with an application suite such as MS Office, however, this no longer corresponds to the current market standard. It is unlikely that an average consumer who does not follow the current market developments would know this. Therefore, Alza acts in favour of consumers by reminding them to buy the application suite as well. In Alza’s opinion, a computer without MS Office is useless. Since other additional services (such as prolonged warranties) are not necessary for effective use of the laptop, the addition of these into the cart is left to the consumer’s discretion (i.e. the consumer has to tick the relevant box to add them).
Moreover, Alza pointed out that the consumer had been clearly informed about the addition of the software in the General Terms and Conditions. Alza insisted on the fact that the software was added to the cart automatically from the beginning so that the consumer could see the contents of the cart. According to the statement of Alza, an average consumer was capable of checking the contents and removing unwanted items.
Test of unfair commercial practice
The Municipal Court in Prague rejected the claimant’s (Alza’s) argumentation and confirmed the reasoning of the defendant (the Central Inspectorate), referring to the case law decision of the Czech Supreme Administrative Court and the CHS Tour Services case (C-435/11) .
The court found Alza’s practice by which it was making a business decision instead of the consumer contrary to the requirement of professional care. The court also refused Alza’s defence that its practice was not expressly forbidden by national law, even if the Consumer Rights Directive forbids such a practice in clause 22. By admitting its knowledge of the prohibition of such practice on the EU-level, the court found that the good faith that constitutes a part of Alza’s requirement of professional care has been excluded.
According to the reasoning of the court, consumers’ permanent attention to what is contained in their shopping carts cannot be expected. As with regular physical shopping, consumers cannot find unwanted items added to their shopping carts and be forced to take them out before they come to the cash desk.
Furthermore, Alza made consumers believe they cannot purchase the laptop without MS Office. This confusion is compounded by the fact that other optional additional services such as prolonged warranties can be added to the cart only by actively ticking the box.
Reference to EU-law
As stated above, this practice of Alza is prohibited by Article 22 of the Consumer Rights Directive; however, this provision has not yet been implemented into Czech law. Alza tried to use this gap for its own advocacy in this case by arguing that the Directive does not have a direct effect, and therefore, Article 22 of the Consumer Rights Directive cannot be applied. Alza pointed out that in Slovakia, where the Directive was properly implemented into the national law, Alza (its subsidiary) has refrained from this practice and offers laptops without automatically adding MS Office into the cart.
In the court’s opinion, although the Czech law does not include a provision similar to Article 22 of the Consumer Rights Directive, Alza’s practice falls within the scope of the general clause on unfair commercial practice as defined in the Czech Act on Consumer Protection. This general provision that shall be interpreted in favour of the European regulation provides a sufficient legal basis for declaring Alza responsible for committing an offence.
Conclusion
An amendment to the Civil Code (known as the “Button Amendment”) that implements (among others) Article 22 of the Consumer Rights Directive into national law is currently going through legislative procedure in Parliament. If the amendment passes in the Senate, it could come into force by the end of 2022/beginning of 2023.
According to the Button Amendment the entrepreneur shall ensure that while placing their orders consumers explicitly acknowledge that they undertake to pay. If the order is made by clicking a button or similar means, they shall be marked with the easily legible inscription "Order subject to payment" or other appropriate, unambiguous wording. If the entrepreneur fails to comply with this obligation, the contract shall be regarded as invalid unless it is invoked by the consumer.
Compliance checks of the above-mentioned obligations fall within the competence of the CTIA, whereas their breach may result in a fine of up to CZK 5 mil. (approximately EUR 200,000).
FRANCE
The prohibition on obtaining an advantage without consideration is compliant with the Constitution
Decision of the Constitutional Council, n° 2022-1011 QPC, 6th of October 2022
Article L.442-1, I, 1° of the French Commercial Code, whose current wording results from the Ordinance No 2019-359 of 24 April 2019, prohibits the fact, in B to B relationships of:
"1° Obtaining or attempting to obtain from the other party an advantage which does not correspond to any consideration, or which is manifestly disproportionate to the value of the consideration that is provided."
In a decision rendered on 6 October 2022, the Constitutional Council confirmed that these provisions were compliant with the French Constitution. This echoes the favourable position that the Council had adopted a few years ago on the validity of the prohibition of “significant imbalance” in B to B relationships (Article L.442-1, I, 2° of the French Commercial Code) in two previous decisions (No 2010-85 QPC and No 2018-749 QPC).
The Amazon - ILEC case at the origin of the decision
The question had been raised in the context of a dispute between Amazon EU and the French consumer association called “Institut de liaisons et d'études des industries de consummation” (ILEC).
ILEC complained that Amazon was imposing in its the Supplier’s General Terms and Conditions, clauses that constituted advantages without proportionate consideration, the application of disproportionate penalties, and the unlawful practice of allowing itself the possibility of deferring the starting point of the deadline for the payment of invoices.
ILEC filed a petition before the Paris Commercial Court, asking the Court to order Amazon to cease mentioning in its contractual documentation and implementing practices allegedly contrary to Article L.442-1, I, 1° of the French Commercial Code.
As part of its defense, Amazon raised a Priority Constitutional Question (called QPC in France) questioning the compliance of Article L.442-1, I, 1° with the rights and freedoms guaranteed under the French Constitution and, in particular, with entrepreneurial freedom and the freedom of contract (TC Paris, 10 May 2022, No. 2020032138 QPC: Cass. QPC, 7 July 2022, No. 22-40010).
The issue with the prohibition of the advantage without consideration
The Paris Commercial Court pointed out that the new version of Article L.442-1, I, 1° of the French Commercial Code empowered the judge to control the consideration of the contract (including the price), even when the contract had been the subject of "free negotiation between parties with similar bargaining power". Likewise, the Court of Cassation had considered that this provision was likely to allow the judge to carry out a "review of the economic conditions of the agreement in order to characterize the existence of a manifest disproportion" between the advantage sought or obtained and the value of the consideration granted.
Moreover, the Commercial Court and the Court of Cassation found that the disputed provision had not already been declared to be in conformity with the French Constitution. Indeed, although the issue of the judicial review of the price had already been raised before the Constitutional Council in the “Interdis” decision of 30 November 2018 (No 2018-749 QPC), the legal provision at stake at the time was that prohibiting significant imbalance and not the advantage without consideration.
This is why an interlocutory question to the Constitutional Council was deemed necessary.
The decision of the Constitutional Council
Unsurprisingly, in view of its recent decisions, the Constitutional Council declared that Article L.442-1, I, 1° was compliant with the French Constitution.
It first considered that the legislator had not infringed the freedom of contract and the entrepreneurial freedom in a way that was disproportionate to the objective pursued, which in this case the "preservation of the economic public order, suppression of certain practices that restrict competition, and the need to ensure balanced commercial relations".
The Council then rejected the argument that this provision was imprecise or ambiguous.
Is the prohibition of obtaining an advantage without consideration also an overriding mandatory rule?
In a ruling of 8 July 2020, the Court of Cassation held that the prohibition of significant imbalance in contracts between professionals was an overriding mandatory provision (“loi de police”) that should be applied as a matter of priority, regardless of the law applicable to the dispute between the parties (Cass. com., 8 July 2020, No 17-31536).
Given that the prohibition of obtaining (or attempting to obtain) an advantage without consideration pursues the same objectives as the prohibition of submitting (or attempting to submit) a business partner to a significant imbalance, it is likely that the Court of cassation will also classify these provisions as overriding mandatory rules and that they will therefore have to be taken into account in all international contracts performed in France.
Withholding information at the pre-contractual stage on the status of the franchise network may lead to the annulment of the franchise agreement
Cass. com. 1 June 2022, No 21-16481, F-D.
Pursuant to article L.330-3 of the French Commercial Code, the franchisor is required, prior to signing the franchise agreement, to provide the prospective franchisee with a pre-contractual document "giving sincere information, which allows the other party to commit in full knowledge of the facts". Article R.330-1 of the same code lists the information to be provided by the franchisor.
The information to be provided includes a presentation of the network.
In a decision rendered on 20 January 2021, the Paris Court of Appeal had noted that a franchisor had not disclosed the prospective franchisee the number of companies that had ceased to be part of the network during the preceding year (Paris Court of Appeal, 20 January 2021, RG n°19/03382).
The franchisee had therefore not been informed of the closure of several units and not been placed in a position allowing it to question the causes of such closures before entering into the franchise agreement.
The franchisor had also withheld information about the re-organisation of its group of companies after 2009, when the business sector at stake felt into crisis.
Furthermore, the franchisor had not disclosed its financial reports for the last two financial years in breach of Article L. 451-1-2 III of the French Monetary and Financial Code. Besides, it had provided an overly optimistic forecast.
The Court of Appeal had thus considered that the omission of the information in question was part of the franchisor's "intention to conceal the seriousness of the risks of failure in opening a unit".
However, the Court of Appeal had rejected the franchisee's request for annulment of the franchise agreement, considering that the company had not provided sufficient evidence that it would not have entered into the franchise agreement if it had received all the information required by law.
The Court of Cassation overturned the decision, holding that the Court of Appeal had not drawn the legal conclusion from its own findings. In retaining the seriousness of the information withheld from the franchisee, the Court of Appeal should have deduced that if this information had been known, it would necessarily have dissuaded the candidate from entering into the franchise agreement.
This decision is a useful reminder of the obligation of transparency and sincerity incumbent on franchisors at the pre-contractual stage.
GERMANY
Is the franchisor obliged to share benefits the franchisor negotiated with suppliers?
Franchise systems especially in the food business rely on preferred suppliers in order to convey a uniform brand image. Franchisors often succeed to negotiate benefits with such suppliers. The question by franchisees is whether the franchisor is obliged to share such benefits.
The quick answer is: No, the franchisor is by law generally not obliged to share such benefits. That is the decision in the leading case, issued by the Federal Court of Justice on 11 November 2008 (Case No. KVR 17/08 “Bau und Hobby”), followed e.g. by the Higher Regional Court of Düsselorf on 13 December 2006 (Case No. VI-U (Kart) 36/05) and 6 April 2011 (Case No. VI-U (Kart) 26/10).
This rule has now been reconfirmed by the Regional Court of Munich on 20 May 2022. In that case, an association of service station operators sued a large mineral oil company and franchisor which maintains a network of about 5,000 petrol stations distributed throughout Europe and for this purpose concludes a pre-formulated "service station contract" with all service station operators. Said contract contained the following clause (translated):
"Partner receives from Franchisor a kick-back or bonus for business made on its own account exclusively in accordance with Annex 2 or any further agreements within the framework of individual campaigns by Franchisor for the net purchase turnover with certain groups of goods. All other rebates, discounts, refunds, kick-backs, advertising cost subsidies, performance payments and other benefits granted by Franchisor and/or its affiliated companies are granted by suppliers and/or service providers, are entirely at the disposal of Franchisor or its affiliated companies and will not be distributed - not even partially - to partners".
The court did not object to this (even though rather extensive) allocation of purchasing advantages to the franchisor. Reason given by the court is that the franchisee has no legal claim to participate in purchasing advantages. Accordingly, the franchisor is exempt from forwarding such benefits under the franchise contract.
Practical advice
- While drafting franchise contracts, consider the above case law and take the chance to use the benefits negotiated with suppliers for providing other advantages to the franchise system.
- If, beyond the necessary, a franchisor offers the franchisees to share benefits, the franchisor is, however, bound to such commitment, cf. the Federal Court’s decision with regard to “Apollo Optik”, the second largest chain of specialist opticians in Germany, which had to provide its franchises full benefit from purchasing discounts (three decisions of 20 May 2003, Case No. KZR 19/02, KZR 27/02, KZR 29/02).
NETHERLANDS
The validity of a non-compete clause in a franchise agreement
The Dutch Franchise Act (the “Act”) imposes pre-contractual and contractual disclosure obligations on primarily franchisors. Simply put, the franchisor should provide all information, which the franchisor knows to be important to the franchisee. In particular, the franchisor must share knowhow regarding the franchise formula. This knowhow is also important in view of the non-compete clause. The Act stipulates that a non-compete clause is I. a mandatory provision in a franchise agreement and II. should be indispensable for the protection of the franchisor’s knowhow. Since the implementation of the Act on 1 January 2021, franchisees have tried to argue that the non-compete clause is not binding, since the franchisor did not meet its obligation to share confidential knowhow with the franchisee. This article aims to describe Dutch case law regarding the relation between knowhow and competition.
Dutch case law
In a case before a District Court Overijssel the franchisor terminated the franchise agreement, because the franchisee underperformed (according to the franchisor). After termination of the agreement, the franchisee started as a self-employed real estate agent. According to the franchisor the (former) franchisee breached its non-compete clause in the franchise agreement, since he performed the same intermediary activities under the franchise agreement. On 24 February 2021 the Court rendered a judgement and rejected the claim for performance. In its judgement the Court refers to the Act and considers that knowhow is:
“A set of practical information not protected by intellectual property rights, arising from the franchisor’s experience and research. This information must be specific, relevant and identifiable.”
In addition, the Court considers that a non-compete clause should be indispensable for the protection of the franchisor’s knowhow. Therefore, the question is whether the franchisor shared knowhow as defined in the Act with the franchisee. According to the Court this was the case. However, the Court considered the information not specific enough to qualify as knowhow, because the franchisor only shared publicly accessible information with the franchisee. For this reason, the Court is of the opinion that the interests of the franchisor do not prevail over the interests of the franchisee.
More recently, on 27 July 2022, the District Court in Amsterdam did allow a claim for performance of a non-compete clause. In this case, the franchisor had shared quarterly reports, internal magazines, training courses and a description of the franchise formula with the franchisee. The Court considered that the shared information is specific enough to qualify as knowhow within the meaning of the Act. Consequently, the Court awards the claim for performance, but rejects the claim for a judicially imposed penalty, because the franchise agreement holds a penalty clause. In our view this is peculiar, since (under the laws of the Netherlands) judicially imposed penalties can be enforced by a bailiff. This is not the same for contractual penalties. Although the judgement is in favor of the franchisor, the franchisor cannot use coercive measures to enforce the judgment.
Conclusion and tips
Based on both judgements, a franchisee is only bound to a non-compete clause if the shared knowhow is specific, relevant and identifiable enough. In view of the Act we have the following tips for franchisors:
- Under the Act sharing know how is part of the definition of ‘franchise’. If the franchisor does not share knowhow with the franchisee, it might be debatable whether or not the agreement will qualify as a franchise agreement.
- Be aware that shared information will not necessarily qualify as knowhow within the meaning of the Act. It is therefore advisable to stress in the franchise agreement that information shared by the franchisor is confidential and therefore qualifies as knowhow.
- Carefully document what information is shared with the franchisee during the franchise agreement. The Court will only allow a claim for performance of the non-compete clause, if the franchisor can prove that it shared knowhow with the franchisee.
Should you have any questions concerning the Act, or seek advice concerning the drafting of a franchise agreement, an addendum or a pre-contractual information document or should you become involved in disputes concerning franchise agreements, please contact us by sending an email to v.jurgens@taylorwessing.com or t.mimpen@taylorwessing.com. We are more than happy to help you with all of your questions.
SLOVAKIA
Long-awaited Simplification of Slovakian Regulation of Contractual Relationships on the Horizon
Concept of the proposed solution
After 15 years of experience, it is considered that, instead of two parallel contractual systems - one in the Civil Code and the other in the Commercial Code - which are often duplicated and often contradictory, the new private code would have a single and unified contractual system. After evaluating all domestic and foreign experiences and historical traditions, it is not a commercialisation of civil law in the true sense of the word, but only a necessary and useful integration of the law of obligations. Thus, the Commercial Code will be retained, with the substantive scope indicated. From this point of view, the private general law code should have a central integrating role for the whole field of private law. This means that all the specific features of commercial contracts will remain unchanged, while they will be regulated in a substantive, systematic and completely clear and comprehensible manner in the context and within the framework of the relevant type of contract, in a logical sequence from the general to the specific.
The Code is thus intended to deal with the current situation, which is characterised by the duplication of a number of legal concepts, particularly in the area of contractual legal relations governed by sectoral competence in several codes. Such duplication occurs, for example, in the regulation of purchase contract, contracts of mandate, contracts of carriage and in a number of other cases. On the other hand, there is no reason why issues such as limitation, preclusion, liability for defects, liability for damages and others should be regulated differently in the Civil Code and differently in the Commercial Code.
Statute of Limitations
There will be a number of substantive changes to the legal rules on limitation. In particular, the general limitation period for both civil and commercial law will be unified. The Civil Code will uniformly regulate limitation for both civil and commercial claims. The starting point will be the existing legal regulation of limitation in the Civil Code, while in some places it will be necessary to take certain provisions from the Commercial Code which were missing in the Civil Code and in some places it will also be necessary to prepare new provisions to supplement and clarify the existing legal regulation. It will be explicitly stated which private law rights are not time-barred (personal rights, property rights, right to maintenance, etc.) The law will express the principle that the limitation period and the length of limitation periods laid down in the law are mandatory and cannot be modified by contract. It will be possible to extend the limitation period, e.g. by unilateral acknowledgement of the debt. The general limitation period will be four years. This length of the limitation period is taken from the provisions of the Commercial Code. The law will provide in which cases the ten-year limitation period will run.
Procurement contracts
There will also be a number of changes in the case of procurement contracts. In the case of an assignment of contract, the aim of the new Civil Code is to make it a systemic whole. At present, this issue is fragmented in the Civil Code in the framework of the assignment of contract and its subtypes and in the Commercial Code in the regulation of the mandate and commission contract. It is proposed to abandon the use of the term 'procurement of a thing' and replace it with the more appropriate term 'procurement of a matter'. In view of the unification of the Civil Code and Commercial Code, valuable consideration cannot be regarded as a conceptual feature of the contract, but the rebuttable presumption is that if the execution of the order is within the scope of the principal's business, the contract is for consideration. The issue of conflict of interest is currently only briefly and inadequately addressed in the regulation of representation. It is therefore proposed to clarify the conflict of interest and, in so doing, to resolve the issues of entitlement to consideration and consumer protection, which will be reflected in this case in the existence of mandatory rules as well as in the written form. It is proposed to differentiate the termination of an assignment of contract according to whether it is a contract for a fixed period, an open-ended contract or a contract time-bound to the performance of a specific command.
In the case of a commission contract, it should be assumed, as a matter of principle, that neither rights nor obligations arise for the client in relation to third parties as a result of the actions of the commission agent, while at the same time specifically expressing the transfer of the right of ownership of movable property from the client to a third party, from a third party to the client, and the obligation to transfer other rights acquired by the commission agent for the client’s account. Other aspects of the commission contract will also be regulated in accordance with the current regulation, with the rights and obligations of the parties to be further specified. The provisions of this contract shall also apply to other contracts which contain an element of indirect representation.
With regard to the intermediation contract, it is proposed to adopt the commercial law rules, with the modification that consideration as a conceptual feature of the contract is excluded.
In the framework of the legal regulation of the commercial agency contract, the regulation from the Commercial Code is to be taken over, which also contains the implemented regulation of Council Directive 86/653/EEC of 18 December 1986 on the coordination of the laws of the Member States relating to independent commercial agents. With a view to unifying civil and commercial law regulation of contracts, it is necessary to define the subjects of the contract in the contract, which may be only entrepreneurs carrying on business on the basis of a trade license or other authorisation, and to preserve the mandatory nature of the relevant provisions of the Commercial Code.
Conclusion
The proposed solution will thus result in a new Civil Code, which will ensure, through its appropriate integrated regulation, both the protection and realisation of fundamental personal and property rights and obligations and the creation of a reliable and broad legal framework for the smooth functioning of the market mechanism, particularly in the area of exchange-value relations. The adoption of the new Civil Code does not mean that all the institutes and provisions contained in the area of private law affected by the codification will be abolished in their entirety and replaced in a completely new way. If certain provisions or entire institutes of existing law, whether in the Civil Code or the Commercial Code or elsewhere, meet modern methodological criteria, are characterised by a sufficient degree of abstractness and, above all, have proven themselves in substance and content and have shown the effectiveness required in practice over a long period of time, and are not in conflict with European standards, it is appropriate and reasonable to incorporate them into the new code.
We are still waiting for the complete draft of the new Civil Code, so the whole legislative process will take still a considerable amount of time before it is final and approved by the Slovak Parliament. In any case, we really appreciate that there are ongoing professional discussions as how the new Civil Code in Slovakia should look like and what are the possibilities to simplify the regulation of relationships between parties to contracts.
UNITED KINGDOM
Classic Coach Company: clash of sequential rights in a brand and post-Brexit divergence in UK/EU law
The ECJ has ruled on the meaning of the Trade Mark Directive's 'earlier local right' defence to an infringement claim. The case is a reminder of the need for good long-term co-existence agreements where multiple parties are using conflicting brands and of the consequences of allowing others to use conflicting brands without objection. It also highlights a divergence between post-Brexit UK and EU trade mark law.
What has happened?
- The case concerned a situation where two parties had conflicting rights in the same name and there had been concurrent use for decades. It had the added spice of being an inter-generational dispute over a family's surname after the death of the business founders.
- The claimant had sued the defendants for trade mark infringement, relying on a registered Benelux trade mark. The Trade Marks Directive (which harmonises national EU trade mark law) provides that a trade mark owner is not allowed to prohibit a third party from using an earlier right (recognised by the law of the member state in question) which applies only in a particular locality.
- The defendants were relying on this defence on the basis that they had an earlier unregistered right in the same name, but which arose only "in a particular locality" within the Benelux.
- The issue was whether the defence was lost if the defendant's earlier unregistered right could no longer be invoked against the claimant to prevent the latter's use of its registered mark (eg because the owner of the earlier unregistered right had acquiesced to the use of the later registered mark). The ECJ ruled that the defence was not lost in this situation; it could still apply.
- A further twist was that the claimant owned an unregistered right that was even earlier than that of the defendant. The question was whether it mattered whether the claimant was able to rely on that even earlier right to prevent the defendant's use of its claimed earlier right. The ECJ ruled that it was a question of national law if the defendant's unregistered right could be valid in the face of the claimant's even earlier unregistered right. It concluded that it is at least possible under national law that the owner of an even earlier unregistered right has lost the ability (eg due to honest concurrent use or acquiescence) to stop use of a later unregistered right such that the later unregistered right can still be relied upon to provide an 'earlier local right' defence.
- The case is an important reminder of the need to have good long-term co-existence or brand demarcation agreements in place where multiple parties are using conflicting brands, including when family businesses start to fragment. It also highlights the consequences of allowing others to use conflicting brands without objection. In particular, do not expect much judicial sympathy when suing a very long-standing user of a mark that you have known about for decades even if you commenced use first.
- In the UK, the defence has different wording (despite the UK legislation supposedly implementing the Trade Marks Directive) and could apply very differently, especially in the even earlier right scenario above (see more below). Since the UK has left the EU, the decision is not binding on the UK courts or tribunals.
Want to know more?
The background
The case concerns the use of the family name Meering. The facts are complex:
- From 1935, Jacob Meering drove coaches for his bus/coach transportation business called Amserfoort Bloei. From 1968 to 1977, his sons (presumably both having the surname "Meering"), continued to run Amserfoort Bloei (presumably after Jacob's death).
- In 1975, the claimant (one of the sons) set up a new (separate) coach business and started to use the name "Meering" as a brand. A couple of years' later, he left the Amserfoort Bloei business. This use of "Meering" by the claimant for his separate business from 1975 onwards can be considered the "senior" right. It is an unregistered right.
- About 12 years later, in 1991, the second son started to use the names "Willem Meering" or "W. Meering" somewhere on the coaches of the Amserfoort Bloei business, which he continued to run. After the second son's death, his two sons took over the Amserfoort Bloei business. They renamed it Classic Coach Company (CCC) but continued to use the name W. Meering somewhere on the coaches. CCC and the two living sons are the defendants in this action. This use (from 1991 onwards) of "Meering" can be considered the "middle" right. It is also an unregistered right.
- The claimant did nothing about the defendants' use for several years. However, in 2008, the claimant sought to register the name MEERING as a trade mark in the Benelux. This can be considered the "junior" right. It is registered.
- It took the claimant another seven years to sue the defendants for infringement based on the registered trade mark (the "junior" right).
- The defendants' defence was based on having an earlier right that applies only in a particular locality, relying on its "middle" right.
- The claimant's response was to assert its even earlier "senior" right as a basis for negating the defence.
- The claimant won at first instance and lost on appeal. When the case came before the the Dutch Supreme Court, it referred two questions to the ECJ for a preliminary ruling.
The law and the questions referred
Article 6(2) of Directive 2008/95 (now Article 14(3) of Directive 2015/2436) (the Trade Marks Directive) both read:
"The trade mark shall not entitle the proprietor to prohibit a third party from using, in the course of trade, an earlier right which only applies in a particular locality if that right is recognised by the laws of the Member State in question and within the limits of the territory in which it is recognised."
There has long been doubt about the application of this provision, particularly where there are multiple conflicting earlier rights.
The Dutch Supreme Court's questions were:
- For the purposes of determining whether there is an "earlier right" of a third party as referred to in Article 6(2): is it sufficient that, prior to the filing of the trade mark, that third party had made use in the course of trade of a right which is recognised by the laws of the Member State in question; or is there a requirement that that third party, on the basis of that earlier right, under the applicable national legislature, is entitled to prohibit the use of the trade mark by the trade mark holder?
- In answering Question 1, is it also relevant whether the trade mark holder has an even earlier right (recognised by the laws of the Member State in question) in relation to the sign registered as a trade mark and, if so, is it relevant whether the trade mark holder may, on the basis of that even earlier recognised right, prohibit the use by the third party of the alleged "earlier right"?
In the context of the case facts:
- The first question is essentially: does CCC (one of the defendants) lose its Article 6(2) defence based on its "middle" right if it cannot rely on that right to stop the claimant's use of its "junior" right? As it was, CCC could not stop such use because Article 9(2) of the Trade Marks Directive applied. That creates a statutory acquiescence defence which can be relied on by the owner of a registered trade mark that has been registered and used for more than five years. It applies where the owner of an earlier right has known of that use and registration and yet done nothing about it (see Acquiescence: a quick guide). The fact that the defendants had not challenged the "junior" 2008 registration and its use by the claimant in reliance on its "middle" 1991 earlier unregistered right meant that they had acquiesced and could now not stop that use.
- The second question is essentially: does it matter that the claimant owned a "senior" 1975 right and, if so, whether or not it could rely on that "senior" right to stop the use of "Willem Meering" and "W. Meering" by the defendants?
The ECJ's ruling
Q1: Does CCC (one of the defendants) lose its defence based on its "middle" right if it cannot rely on that right to stop the claimant's use of its "junior" right?
The ECJ answered this question in the negative. There is no requirement for the owner of the claimed earlier right that is relying on it as a defence to be entitled to stop the registered trade mark proprietor from using its mark. For Article 6(2) to be interpreted otherwise "would deprive that provision of all practical effect". This interpretation means that the defendants here should be able to rely on the defence (so long as their "middle" 1991 unregistered right is valid), even if they cannot stop the claimant's use due to acquiescence.
Q2: Does it matter that the claimant owned a "senior" 1975 right and, if so, whether or not it could rely on that "senior" right to stop the use of "Willem Meering" and "W. Meering" by the defendants?
This question was answered in the affirmative: the existence of a "senior" right is relevant. However, Article 6(2) does not regulate for conflicts between two earlier unregistered rights. The court considered that it is for national law to decide if the "senior" right can be relied on to stop use of the "middle" right and perhaps thereby render the "middle" right invalid such that it cannot provide an Article 6(2) defence. It concluded that it is at least possible under national law that the owner of a "senior" right has lost the ability (eg due to honest concurrent use, estoppel or acquiescence) to stop use of a "middle" right such that the "middle" right can still be relied upon to provide an Article 6(2) defence. Indeed, in this case, such lost ability seems very likely due to the 30-year period of honest concurrent use.
The ECJ justified its answers as striking a balance between the interests of the proprietor of the registered trade mark to safeguard its essential function and the interests of other economic operators in having signs capable of denoting their goods and services. It took the view that Article 6(2) needs to be regarded as a more flexible limitation to the rights conferred by a registered trade mark and that it is not akin to the provisions for opposing or cancelling the same registered right based on earlier unregistered rights.
The ECJ was unimpressed by an argument referring to the background papers (or travaux preparatoire) to the Trade Marks Directive. These revealed that, when it was first drafted, there had been a proposal for Article 6(2) to include the words "even though that [earlier] right may no longer be invoked against the later registered trade mark." The ECJ ruled that the fact that these words were never adopted did not alter the interpretation of the provision (ie it did not mean that the ECJ could not now interpret the provision as if these words were present).
In answering the questions, the ECJ unusually chose not to have an Advocate General's opinion. That suggests it found the decision straightforward.
There was also no hearing, instead there were written submissions from the parties, the EU Commission and the Polish government. INTA reported that it had also made an intervention as an Amicus Curiae. However, there is no mention of this in the ECJ's judgment. If its submission was properly made, then not to have that mentioned in the judgment is very regrettable. Organisations like INTA and MARQUES have Amicus committees of experienced and dedicated trade mark professionals who voluntarily prepare learned papers intended to assist the court. Their interventions are only made when the issues at stake are considered sufficiently important or complex to merit such intervention. Their efforts should be acknowledged and, ideally, welcomed by the judges more than they sometimes appear to be.
What does the decision mean for you?
- It is a reminder to avoid, if possible, having multiple parties using 'your' brand, even if you all share a common history and the concurrent use is the consequence of that history.
- If it must happen, put a suitable and future-proof agreement in place that captures how, for how long, where and on what the name can be used and that looks ahead as far as possible. For example, in the context of use of a family surname, it needs to allow for the existence of ever more descendants and might remain relevant for many decades to come.
- If intervening rights arise or there is conflicting use of the mark, do not do nothing without having taken local law advice on the implications of such inaction (acquiescence, estoppel, honest concurrent use etc). In particular, do not expect much judicial sympathy when suing a very long-standing user of a mark that you have known about for decades even if you commenced use first.
A post-Brexit UK post-script
For those in the UK, the ECJ judgment does not have direct effect (being post-Brexit) but it may be persuasive insofar as the same 'earlier local right' defence is enshrined in UK law. It is, but the wording differs. That also makes this judgment of questionable influence in the UK as a result.
Section 11(3) of the UK Trade Marks Act 1994 reads as below. The words highlighted reveal the differences with Article 6(2) (and Article 14(3) now) of the Trade Marks Directive.
A registered trade mark is not infringed by the use in the course of trade in a particular locality of an earlier right which applies only in that locality. For this purpose an “earlier right” means an unregistered trade mark or other sign continuously used in relation to goods or services by a person or a predecessor in title of his from a date prior to whichever is the earlier of:
- the use of the first-mentioned trade mark in relation to those goods or services by the proprietor or a predecessor in title of his, or
- the registration of the first-mentioned trade mark in respect of those goods or services in the name of the proprietor or a predecessor in title of his;
and an earlier right shall be regarded as applying in a locality if, or to the extent that, its use in that locality is protected by virtue of any rule of law (in particular, the law of passing off).
Two points arise in particular:
- The requirement that the user of the earlier local right must have "continuously used" their mark since their use first started means the defence is necessarily narrower than that in the Directive. Someone that had ceased use of the mark then restarted, perhaps shortly before being sued, could not rely on the defence in the UK even if their first period of use was on such a scale (locally) that they could challenge the later "junior" registered mark owner's use or registration relying on passing off and their residual goodwill.
- The section 11(3)(a) wording was prescient. It anticipated the scenario in this ECJ case and provides an answer, albeit not one consistent with the Directive and the ECJ judgment. In the UK, the defence would not have been available to the defendants asserting their "middle" right. This is because their local right, arising from use starting in 1991, was not "earlier". It had not been used from a date prior to both the claimant's registration and its first use. That started in 1975. That is not to say the defendants would have had no defence in the UK. They mostly likely could plead at least honest concurrent use. However, they would not have the benefit of the earlier local right defence that Article 6(2)/14(3) provides and which looks set to apply when the case goes back to the Dutch court.
So, do not assume that a UK case with the same facts would have the same outcome. This is the legacy of past imperfect harmonisation. As a consequence of Brexit, that misalignment will not now be cured by the UK courts interpreting the UK Act so as to implement the Directive. We will likely see more of these UK divergences as time goes on. Some may seem small and nuanced, but to the equivalent of the Meering family in the UK, it could have material consequences
