The misuse of warnings is not only damaging the reputation of lawyers, such warnings are also placing a significant financial burden on, in particular, small and medium-sized businesses. With the “Fair Competition Enhancement Act” (Gesetz zur Stärkung des fairen Wettbewerbs), the German legislator now wants to put a stop to the industry that has been built up around the misuse of these warnings.
The first discussions relating to the new German “Fair Competition Enhancement Act” took place over a year ago and since then things have been quiet. Now, within the course of only one month, both the German Bundestag (Parliament) and the Bundesrat (Federal Council representing the German states) have approved the bill, which will probably enter into force by the end of this year. This will mean numerous amendments will be made to the already existing German Act against Unfair Competition (Gesetz gegen den unlauteren Wettbewerb). The goal is to ease the burden particularly on small businesses. In this post, we have summarised the most important changes that will be made to competition law by the newly adopted Act. It remains to be seen whether this Act will fulfil its purpose and put an end to the practice of misusing warnings, which are mainly issued to generate fees, or whether it will also hinder market participants who are acting fairly from a competition perspective.
One of the special features of the German Act against Unfair Competition is that up to now only a clearly defined group of persons (e.g. competitors and certain associations) have been allowed to assert claims. According to the new bill, this group of persons will be limited even further. For example, only those competitors who distribute or purchase a significant amount of the goods and services concerned will be able to assert claims. Furthermore, the claimant will have to prove that this requirement is fulfilled. The aim is to prevent small dealers who, for example, only have makeshift websites that have been quickly put together and who generate almost no sales from issuing warnings to competitors across Germany which are out of proportion to the respective dealer’s commercial activities.
Only associations that have legal capacity and are registered in a list kept by the Federal Office of Justice will be able in future to issue warnings. To qualify for registration, they must be of a certain minimum size and their members must distribute similar products. As a result, it can thus be expected that especially comparatively small associations will have to discontinue their activities in this field. To the disappointment of many of those who have been affected by these methods, the “usual suspects” that are generally associated with the term “warning associations” are, therefore, unfortunately not likely to disappear.
The misuse of warnings was already banned under the old German Act against Unfair Competition. The German legislator has now differentiated and further specified the requirements needed to clarify the circumstances under which a warning is deemed as being misused and to create legal certainty for the businesses concerned. As in the past, claims made by misusing legal rights are not only prohibited, they can also be expensive: the addressee of the warning can claim reimbursement of its legal defence costs.
According to the new Act to curb the misuse of warnings, warnings will be deemed to have been misused in the following cases, amongst others:
As these groups of cases have, for the largest part, already been defined by case law, it is unlikely that any significant new rules will be stipulated in this regard.
What is new is that the legislator now requires an entire list of information to be set out in the warning. This is intended, in particular, to prevent the mass use of standardised, non-individual text blocks.
In the future, the issuer of the warning and its representative will not only be required to state their names and company names (which should be a matter of course), but the issuer of the warning will also have to prove that it “distributes or purchases a significant amount” of the goods and services concerned “more than just occasionally”. This new requirement will open the way for discussion on the part of all market participants, regardless of whether or not they issue warnings on a professional basis. Further problems could arise from the fact that the issuer of a warning will have to describe in each individual case how the asserted claim for reimbursement of expenses has been determined. Whether this only means that a general description must be provided on how to determine a claim for reimbursement of expenses under the German Lawyers’ Fees Act (Rechtsanwaltsvergütungsgesetz) or whether the issuer of the warning will also have to describe how it determined the amount in dispute (which would be a difficult task to perform under the German Act against Unfair Competition) is a question that is likely to lead to legal disputes. Furthermore, the issuer of the warning will have to provide information about the infringement and the circumstances that led to this infringement.
If the aforesaid information is not provided, the issuer of the warning will not only be unable to claim its costs for the warning but, moreover, the addressee of the warning will even be able to claim its defence costs from the issuer. However, please note: the same applies if the warning turns out to be unjustified!
In order to prevent the misuse of warnings, competitors will no longer be able to claim warning fees in connection with violations of information and identification requirements on the internet. This includes, for example, the obligation to provide a legal notice, or information requirements regarding rights of withdrawal, as well as the information that is to be provided under the German Price Information Ordinance (Preisangabenverordnung). For companies with fewer than 250 employees, this will additionally apply to violations of data protection law. (A brief note on this: it has been a matter of dispute in the past whether violations of the European General Data Protection Regulation (GDPR) are even allowed to be the subject matter of a warning. It appears that the German legislator wanted to resolve this dispute “quickly”.)
If such claims are made by warning in spite of the above, the issuer of the warning must point out that it is not entitled to claim any costs. Failure to provide this information will result in the addressee of the warning being entitled to claim its own costs.
The new Act will also contain rules for agreements on contractual penalties that can be claimed by the issuer of a warning if a new violation takes place. In particular, the Act clarifies how to determine a reasonable contractual penalty. For insignificant violations and if the addressee of the warning has fewer than 100 employees, the contractual penalty must not exceed EUR 1,000.
If the addressee of the warning has fewer than 100 employees, a contractual penalty for the above-described violations of the obligation to provide a legal notice or of information requirements and violations of data protection law may only be agreed as part of a second warning. In future, there will, therefore, be little incentive for law-abiding market participants to ensure that their competitors also act in a legally compliant manner.
It would appear that the legislator’s decision to almost entirely eliminate “itinerant tribunals” for competitors in the area of online business drew the largest amount of criticism. This decision means that such violations can now in future only be enforced at the infringer’s place of business and no longer at the place where the infringement actually takes place (which, in the case of the internet, is wherever the website can be accessed and hence nationwide). This new rule is to prevent the claimant from choosing courts it believes will view its case favourably (or, even worse, moving to another court in the event that its claim is dismissed). As a result, however, proceedings regarding violations of the German Act against Unfair Competition will, unlike in the past, not be decided mainly by specialised divisions of the courts (in particular, the divisions in Munich, Cologne, Dusseldorf, Hamburg and Berlin) but also by court divisions that only deal rarely with matters relating to competition law. It is doubtful that this will have a positive impact on the quality of the decisions made. It cannot be ruled out that in the future even more countries will make use of their competence and determine individual venues where the courts will have exclusive jurisdiction in competition matters.
The tiresome issue of having to deal with lawyers who specialise in issuing warnings is unlikely to disappear with this new Act, or be reduced at all. At the same time, the new requirements relating to the content of warnings will, unfortunately, also create hurdles for those issuers of warnings who are acting fairly from a competition perspective. In addition to this, the abolition of “itinerant tribunals” in the area of online business must be viewed critically, as the high degree of specialisation has led to a high level of quality (and, hence, legal certainty) in this area in the past. Unlike in the case of lawyers and associations, there have been no obvious “black sheep” among the courts.