All is fair in war and love - but not in competition

The new fair competition

In mid-October, the "Law to Strengthen Fair Competition" passed the Bundesrat (the Law). It will therefore come into force soon and will entail various amendments to the Code Against Unfair Competition (CUC). 

The Law especially deals with the requirements for warning letters – a tool developed by practitioners in Germany to resolve unfair competition and IP disputes quickly and out of court.

Quick introduction to the enforcement of unfair competition claims in Germany

Germany does not have a central administrative body to oversee unfair competition such as advertising that is misleading, that unlawfully makes comparisons to competitors or their products, or that infringes upon so-called "market regulation rules" such as energy consumption labels, packaging requirements, or presentation of prices and related costs. Instead, competitors and specific private organisations (such as consumer protection agencies and industry bodies), may raise claims for cease-and-desist, removal, and damages if they encounter such behaviour. 

The first step is usually a warning letter: The claimant sends a letter to the alleged infringer, demanding it to give a cease-and-desist declaration and to undertake a contractual penalty in case of future infringements, and to pay the costs of the claimant. If the infringer does not agree, the next step is to seek a preliminary injunction from the court (potentially with additional costs). 

In recent years an entire "industry" aimed at using the process to generate fees (rather than rectify infringements) has developed. The Law intends to limit such abusive use.

Preventing abuse of warning letters

The first measure is to limit the circle of those who may issue warnings. Those entitled to claim under the CUC have so far been competitors, certain business associations, qualified institutions, and chambers of industry and commerce. 

The law retains these categories, but applies stricter standards:

• Competitors are only authorised to assert claims if they sell or demand goods and services "to a not inconsiderable extent", and "not only occasionally". This is intended to exclude providers active on the internet who only occasionally offer relevant goods(maybe even at excessive prices) in order to create a competitive relationship artificially.
  
  This restriction will probably become problematic for companies that have only just started trading (at least in this area) or have not yet reached a large scale. Whether it promotes competition to leave new market participants partially defenceless particularly in this critical phase should be questioned. It also cannot be expected that the courts will take this as an opportunity to apply a stricter standard on the similarity of goods and services and thus restrict the competitive relationship more than current. 
  
  Companies must therefore be prepared to prove these more stringent conditions. If the scope of their business activities does not clearly pass this threshold, it is advisable to address this in the warning letter and so deal with expected counter-arguments preventively. Since this may not always be possible without disclosing trade secrets (such as sales and customer numbers), careful consideration should be given. 
• Also, the entitled business associations must now fulfil more strict requirements. They must be recorded with the Federal Office of Justice, have at least 75 members, have been in existence for at least one year, be able to perform their tasks on a permanent basis in terms of finances and personnel, and not only want to generate income for themselves. Furthermore, the interests of the members must be affected by the specific advertising in question.
  
  An examination of these general requirements is unlikely to be part of court proceedings however. Since the Federal Office of Justice may only register organisations that have fulfilled the above requirements, it will likely be sufficient for business associations to point to their registration. 

All in all, the burden of presentation and proof on the part of the claimants is increased. It is therefore expected that arguments relating to a standing to sue and the existence of a competitive relationship will increasingly be raised. Claimants are therefore well advised to prepare themselves accordingly and present arguments at an early stage. Otherwise, they could be accused of acting tentatively and in consequence be denied of the possibility to file for a preliminary injunction. 

Clarification of the abuse

The law already now prevents the bringing of abusive claims. However, a newly introduced §8b of the CUC is intended to provide more clarity as to when a claim is abusive. It specifically provides the following examples: where the primary purpose of the claim is to generate fees, if a large number of identical warning letters are issued, if the amount in dispute or the contractual penalty demanded is clearly excessive, or if the cease-and-desist demand is "obviously" excessive. 

The latter in particular could also become a stumbling block for honest warning letters. Up to now it is not unusual for a warning letter to include broader wording for the cease-and-desist demand than a preliminary injunction would allow, and leave it to the infringer to "correct" this. However, if the cease-and-desist declaration is too broad, discussions about whether this violation is "obvious" and the entire warning is therefore unjustified are almost inevitable. This is further reinforced by the fact that earlier versions of the law required a "significant" transgression, but such intensity is no longer necessary. The person issuing the warning letter should therefore specify precisely the claim to which he or she is entitled and only make an infringement consciously and for strategically important reasons. 

Restriction of the "flying jurisdiction"

Another important change is the restriction of the "flying jurisdiction" which is especially important for unfair competition committed online. For products or services sold via the Internet, the person issuing the warning letter could previously choose which regional court in Germany to go to, since an infringement could be argued for every part of Germany. 

This is now over. The flying jurisdiction can no longer be invoked for "infringements in electronic business transactions or telemedia". It will therefore be largely restricted and is likely to be abolished, at least for purely internet-related matters. It remains to be seen whether this would mean that claims for misleading advertising, which are used simultaneously in a (print) brochure and on the homepage, would have to be asserted in different courts. The legal regulation seems to be unclear and not fully thought through. 

The state governments are authorised to concentrate jurisdiction at one or more regional courts. There is therefore hope that the expertise developed at some courts can be retained.

Changes to the Design Act

The law also contains changes to design law.

A so-called repair clause is introduced. A new Section 40a excludes components of complex products which are used solely with the aim of enabling repair and restoring the original appearance from design protection. This is intended in particular to limit the protection of spare parts in the automotive sector and to liberalise competition.

The regulation is clearly oriented towards its counterpart in European design law. However, it leaves many questions unanswered, in particular whether only must-match parts are covered and which information obligations dealers have to provide (see our Client Alert from May 2020). The regulation is to apply to all new designs from the time the law comes into force. Designs registered before that will not be affected.

Wider environment

It remains to be seen whether the Law can in fact limit abusive warning letters. However, it is likely that bona fide warning letters will also become more difficult, and disputes about active legitimation, the scope of the existing claim, and the appropriate amount for a contractual penalty and amount in dispute will increase significantly. Competition law may therefore have become fairer but more complicated. The transition period by which the law will apply is nine months.

And the Law does not stand alone. It should be seen in the context of numerous building blocks of consumer protection which will lead to considerable changes in the coming months and years. Last year, the EU launched various directives as part of its "New Deal for Consumers":

• The so-called "Omnibus Directive" 2019/2161 provides, among other things, for individual claims by consumers for breaches of competition law - a regulation unknown to current German unfair competition law and that is likely to significantly change the current legal framework. In addition, fines of up to 4 per cent of annual sales and thus in dimensions that have so far mainly been known from the GDPR regime are envisaged. These measures are to be applied by mid-2022 at the latest.
• For digital services, Directive 2019/770, which is to be implemented by 1 July 2021 and applied from January 2022, will bring new requirements. Among other things, it provides for an obligation to provide updates to digital services and recognises that services are not free of charge if customers "pay" for them with their data. Likewise, Directive 2019/771 will bring numerous similar changes for the purchase of goods with digital elements - eg smart TVs.

Competition law will therefore undergo (further) significant changes in the near future.