Snapshot: mental property for vogue items in Germany
State of the market
What is the current state of the luxury fashion market in your jurisdiction?
Ahead of France and Italy, Germany is the largest luxury fashion market in the EU. In 2021, companies in the luxury fashion sector made more than €5.3 billion in Germany. Sales of over €5.8 billion are expected for 2022. A good part of the German luxury and fashion market is dominated by foreign players such as Chanel, LVMH Moët Hennessy-Louis Vuitton, Marc O´Polo and Phillips-Van Heusen (PVH) – each with a market share of approximately 10 per cent. Traditionally, by far the largest sales in the German luxury fashion market are generated in the retail sector, which, in the years before 2020, made up to 80 per cent of all sales. Due to the covid-19 pandemic, e-commerce skyrocketed in 2021: while e-commerce grew by an average of 2 per cent per year in the years before the pandemic, online sales in 2021 increased by over 8 per cent. Therefore, in the German luxury fashion industry online models and hybrid distribution structures are increasingly becoming a determinant of success.
Manufacture and distribution
Manufacture and supply chain
What legal framework governs the development, manufacture and supply chain for fashion goods? What are the usual contractual arrangements for these relationships?
As a good part of the German luxury and fashion market is dominated by foreign players, sourcing, development and manufacture is often structured outside Germany. In these cases, the German representations of the international fashion and luxury brands are often only sales companies.
For those companies sourcing from Germany, manufacture and supply chain contracts are usually qualified as sales contracts (§ 433 German Civil Code (BGB)). Development contracts are qualified either as contracts for works where a specific development result is owed (§ 631 BGB), or services contracts where the performance of the development is owed. The landscape of supply chain contracts in the fashion and luxury industry is rather diverse. There are business relationships based on rather simple contract templates, or even a mere order and confirmation basis. Other relationships are based on sophisticated contractual arrangements addressing a wide range of topics, from forecast systems to product liability clauses and environmental, social and corporate governance (ESG) compliance.
Supply chain disruptions and scarcity – from raw materials to packaging material and logistics resources – caused by the covid-19 pandemic, the e-commerce boom and international trade disruptions, have recently been a major concern for the fashion and luxury industry. Supply chain partners need to adjust existing contractual arrangements, including the reallocation of volumes and renegotiation of prices. There is a flexibilisation of supply chain contracts, including the reworking of traditional force majeure and hardship clauses, the inclusion of ramp-up and ramp-down mechanisms, and more sophisticated price-adjustment clauses taking into account recent events of scarcity. Contracts also take into account digital sourcing platforms and strategies, and implement smart contract elements and AI solutions for supply chain logistics.
Another major development is taking place in the area of compliance and social responsibility. Compliance clauses are getting ever more important for German law supply chain contracts, reinforced by an international emphasis on ESG responsibility. The newly enacted German Supply Chain Due Diligence Act obliges companies to conduct a ‘human rights due diligence’ along their entire supply chain, and has given birth to a new generation of compliance and audit clauses.
Distribution and agency agreements
What legal framework governs distribution and agency agreements for fashion goods?
Agency agreements are codified in § 86 et seq of the German Commercial Code, based on the EU Commercial Agents Directive 86/653/EEC. Distribution agreements are not codified, but courts have developed a remarkable record of case law for distributions relationships, often by taking recourse to the agency law principles. For example, courts are awarding distributors a compensation claim for loss of clientele upon contract termination, if certain conditions are fulfilled. Having said this, there are no specific laws for agents and distributors in the luxury and fashion sector.
In the world of luxury and fashion brands, the contractual environment on the sales and distribution side is often sophisticated. Selective distribution systems are typical. Because of the recent events of product scarcity, selective distribution systems are becoming even more important, and more and more companies are considering the implementation of such systems. These allow a supplier to have more control of its distribution, protect its brand and safeguard quality and customer experience, but at the same time are deeply regulated by EU competition laws and regulations, including the EU Vertical Block Exemption Regulation 330/2010.
What are the most commonly used distribution and agency structures for fashion goods, and what contractual terms and provisions usually apply?
Typically, agency and franchise structures play an important role in the distribution of luxury and fashion goods, but the role of agents may reduce over time. In a world where direct marketing and sales to the consumer are made much easier by e-commerce and low logistics costs, digital distribution may be more economical as opposed to an agent model where significant commissions and termination payments become due.
Recent developments, including the imponderability of the covid-19 pandemic, have yielded an increasing number of hybrid distribution models. Luxury customers are invited to private sales, to the extent data protection and unfair competition laws allow direct-to-consumer marketing and such sales are permissible under applicable covid-19 regulations and restrictions. Distributors of luxury goods are hired on the basis of ‘tip-off giver’ (Tippgeber) contracts to open their customer basis for other categories of luxury and fashion goods. Pop-up stores come and go with covid-19 restrictions and relaxations, and pop-up store agreements implement flexible solutions for ownership of furniture, employment of personnel, store branding and duration. Shop-in-the-shop agreements seek to leverage the attraction of two or more brands, and contracts need to find compromises on brand use, exclusivities and ownership of customer relations.
Import and export
Do any special import and export rules and restrictions apply to fashion goods?
There are generally no special import or export rules for fashion goods. Fashion goods need to be classified according to their material, function and purpose within the Combined Nomenclature of the European Union.
However, there are restrictions on the importation into Germany of certain products in section XI of the Combined Nomenclature in the area of textile products and clothing. The import of such products may require the presentation of an import authorisation issued by the Federal Office for Economic Affairs and Export Control. The relevant restrictions are included in the notes to the relevant code numbers of the import list in the electronic customs tariff. Where an import authorisation is required, the importer must be in possession of a valid authorisation at the time of importation clearance.
Moreover, the transfer of luxury goods could be restricted by certain embargo rules. Since Regulation (EU) 2017/1836 amending Regulation (EU) 2017/1509 on restrictive measures against North Korea came into force on 11 October 2017, it is prohibited to import luxury goods from, or export such goods to, North Korea or pass them on, regardless of whether they originated in North Korea. The same applies pursuant to Regulation (EU) 36/2012 for exports of luxury goods to Syria.
Finally, upon request of competitors who claim a breach of their intellectual property (eg, in the case of product piracy), the local customs office can impose measures, especially a seizure of imported goods, to verify the alleged breach.
Corporate social responsibility and sustainability
What are the requirements and disclosure obligations in relation to corporate social responsibility and sustainability for fashion and luxury brands in your jurisdiction? What due diligence in this regard is advised or required?
In accordance with EU Directive 2014/95/EU on Non-Financial Reporting (NFRD), which is implemented in the NFRD Implementing Law in Germany (CSR-Richtlinie-Umsetzungsgesetz), public-interest companies with more than 500 employees in the EU must disclose information with regard to environmental protection, social responsibility and treatment of employees, respect for human rights, anti-corruption and bribery, and diversity on company boards. The proposal for a Corporate Sustainability Reporting Directive, as adopted by the EU Commission in April 2021, will extend the scope to all companies listed on a regulated EU market (with the exception of micro-entities) as well as large companies that are not listed on a regulated EU market but meet at least two of the following three size criteria at the balance sheet date: (1) €20 million balance sheet total; (2) €40 million net revenue; and (3) an average of 250 employees during the financial year. Further, the proposal introduces more detailed reporting requirements, mandatory EU sustainability reporting standards and audit requirements. The new rules are expected to apply to financial years beginning on or after 1 January 2023.
The proposal for a Directive on Corporate Sustainability Due Diligence is to take this to the next level, setting forth due diligence obligations for EU and non-EU companies to identify, prevent and mitigate actual and potential human rights and environmental adverse impacts. The proposal covers business operations conducted by subsidiaries as well as along value chains, and provides for corporate liability in addition to other sanctions in the case of violations of such obligations. The new rules are expected to apply to EU companies within two years after they enter into force, and to non-EU companies within four years.
In addition, on the national level, on 1 January 2023 the German Supply Chain Due Diligence Act will enter into force, imposing binding obligations on companies to establish and implement due diligence procedures to ensure compliance with human rights and environmental protection through supply chains. The new Act will initially apply to companies that: (1) are actually or legally domiciled in Germany (including branch offices); and (2) employ more than 3,000 employees in Germany (including employees employed in Germany by affiliated companies and employees posted abroad on behalf of the German company) (as of January 2024, the threshold will be 1,000 employees). Under the new Act, companies are in particular required to:
- establish a risk management system to identify the areas in their own business sector, and those of their suppliers, that pose significant human rights and environmental risks;
- carry out risk analyses on a regular basis;
- establish preventive measures in their own business operations and vis-à-vis direct suppliers, and necessary remedial action;
- make a statement of principles relative to the company’s human rights strategy;
- establish a procedure through which whistle-blowers can file complaints; and
- document the company’s compliance with due diligence obligations and disclose such compliance in an annual report.
Moreover, extensive recycling obligations apply in Germany. Namely, the German Packaging Act, implementing the EU Packaging Directive 94/62/EC, provides for far-reaching recycling obligations for manufacturers, importers and retailers of fashion and luxury brands products in relation to numerous types of packaging. Manufacturers, importers and retailers:
- are held responsible for recycling of their packaging; sales packaging of the product which typically ends up with the final consumer must be licensed under a national take-back system; and
- must report data about the packaging to the responsible authority.
What occupational health and safety laws should fashion companies be aware of across their supply chains?
All organisations in Germany must observe applicable occupational health and safety laws, in particular the German Working Conditions Act and various subordinate regulations that are often activity or industry specific. Essentially, organisations must take necessary measures to ensure the absence of risk for their employees.
New due diligence obligations with regard to suppliers will be introduced by the German Supply Chain Due Diligence Act as of 1 January 2023. The new Act will require organisations with more than 3,000 employees in Germany (as of January 2024, 1,000 employees) to prevent and mitigate risks of violations of workplace safety standards at their suppliers.
What legal framework governs the launch of an online fashion marketplace or store?
E-commerce laws, including the German Civil Code and its Introductory Act, the German Act Against Unfair Competition and the German Teleservices Act, implement legal requirements that need to be observed before launching online marketplaces or stores. These laws implement general EU requirements, which have become even stronger during recent years. They all serve the purpose of consumer protection.
For example, information provided in online marketplaces or stores must not be misleading or ambiguous. Further, when offering the purchase of products or services (or both) via marketplaces or stores, the ordering process must satisfy certain requirements. In particular, consumers need to be given the option to correct any information provided during the ordering process, and the button that needs to be clicked by the consumer to order the products or services in a binding manner needs to be clearly marked as such. Also, particular information on the operator of the marketplace or store needs to be provided on the website (eg, information on the company – among others, the legal form of the company and the address of its registered office); this information is usually provided in the imprint of the website. If online marketplaces or stores do not comply with these requirements, among others, competitors and consumer protection agencies may raise cease and desist claims against the breaching operators. Further, if the purchase button is not clearly marked as indicated above, the contract with a consumer will not be validly concluded and thus will be considered void.
From a German value added tax (VAT) perspective, the operator of an online marketplace who, by means of his electronic interface, supports the delivery of an object whose transport or dispatch begins and ends in the European Union area by an entrepreneur who is not resident in the European Union area to a customer who is a German consumer, shall be treated as if he would have received and delivered this item for his company himself. In all other cases, the operator of the online marketplace becomes secondarily liable for unpaid VAT resulting from the sales on the marketplace, unless the operator can prove that the seller using the marketplace had received a VAT identification number from the Federal Central Tax Office.
Sourcing and distribution
How does e-commerce implicate retailers’ sourcing and distribution arrangements (or other contractual arrangements) in your jurisdiction?
Logistics arrangements can provide for shipments from the supplier to the online seller, and from the online seller to the consumer. Alternatively, the supply chain involving the supplier, the online seller and the consumer is abbreviated by direct shipments from the supplier to the end customer. In addition, the strong online and consumer protection regulations are often reflected in sourcing agreements, which, for example, provide for a right to return luxury and fashion goods if the consumer exercises his or her right to withdraw from the purchase. Liability chains, flowing from the consumer to the seller and from the seller to the supplier, are shortened by the supplier issuing direct warranties to the consumer.
On the agency and distribution end, the question arises whether fashion and luxury companies need to compensate existing agents and franchisees for online sales into their territory. Often luxury and fashion companies seek to find a fair deal, even though contractually and legally it is arguable whether they are under an obligation to do so. In turn customers can start their customer journey in the physical retail shop and complete the purchase online, and franchisees will participate in the online sale with a fair share.
Terms and conditions
What special considerations would you take into account when drafting online terms and conditions for customers when launching an e-commerce website in your jurisdiction?
German law, including the German Civil Code and its Introductory Act, provides for a strict implementation of EU consumer protection principles and strict rules regarding general terms and conditions, in particular for e-commerce sales to consumers. General terms and conditions must be referenced explicitly and they must be directly and easily accessible via the website. For the German market, general terms and conditions must be provided in German. In addition, online fashion marketplaces and stores must meet comprehensive (pre-contractual) information obligations, such as the following:
- information about the product as well as the seller;
- the final price, including any applicable taxes;
- payment and delivery terms;
- estimated delivery date, as well as any additional costs associated with the means of communication (eg, special charges for phone orders);
- customer warranty rights;
- rankings (parameters and remuneration);
- reviews (verification system); and
- online dispute resolution platforms.
Furthermore, online retailers must provide consumers with detailed and specific instructions regarding the statutory right of revocation.
Under German law, general terms and conditions must be transparent and generally not put the other party at an unfair disadvantage. The statutory law lists a number of prohibited clauses, which include, for example, reservations of withdrawal, short-term price increases, contractual penalties and limitations of liability in cases of intent and gross negligence. In addition, extensive and complex case law has developed with regard to other instances of unfair disadvantages – key considerations are whether the clause deviates from established legal principles or if essential obligations under the agreement are undermined. In general, courts apply a relatively strict standard in this regard in B2C as well as B2B contexts. For this reason, it should not be assumed that general terms and conditions from other jurisdictions can be used for the German market.
Are online sales taxed differently than sales in retail stores in your jurisdiction?
No, the sale is in both cases subject to German VAT rules and the applicable VAT rate (7 per cent reduced VAT rate for certain goods or 19 per cent standard VAT rate; most luxury goods are taxed at the standard rate). There is no additional ‘luxury tax’ applied on the sale of luxury goods in Germany.
Which IP rights are applicable to fashion designs? What rules and procedures apply to obtaining protection?
In Germany, fashion designs can be protected by a variety of overlapping rights: designs, copyrights, trademarks, patents (when it comes to ‘fashion tech’) and trade secrets. Also, protection under unfair competition law is possible.
Design protection is the born IP right with regard to fashion designs. If a design is new and possesses individual character, it may enjoy protection as a registered national or EU-wide Community Design, as an international registration in individual countries or as an unregistered Community Design.
Fashion designs can be protected as works of art under the German Copyright Act. Only the author enjoys the exclusive right to exploit his or her work. Third parties therefore depend on rights of use, which have to be transferred by the author. An employer, however, is usually granted far-reaching and exclusive rights of use. Copyright protection is established with the creation of the work; no registration is required.
Trademark protection, as a German or EU trademark, or as an international registration, can also constitute an effective protection for fashion designs. In principle, any distinctive sign can be protected as a trademark. Trademarks may also derive from extensive use without registration, and if a registered trademark is famous, it enjoys an increased scope of protection, even including dissimilar products. What is highly appealing about trademarks is the potentially unlimited duration of protection.
Patent protection may not be the first thing that comes to mind when thinking of options to protect fashion designs. However, patents can become relevant for new revolutionary fabrics or fashion tech. The invention has to be new, include an inventive step and be industrially applicable.
Outside the scope of protection of the aforementioned rights, the imitation of another person’s work is generally permitted (principle of freedom to replicate). However, this principle is limited by the supplementary protection against replication under unfair competition law. A replication is considered unfair and thus illegal if the replicated good has its own competitive character, and unfairness occurs, for example, by an unjustified exploitation or impairment of the product’s reputation.
What difficulties arise in obtaining IP protection for fashion goods?
Difficulties in obtaining IP protection for fashion goods can particularly arise with regard to design and trademark protection. Design protection depends on the novelty and an individual character of a fashion design, thus excluding already known or common designs from protection. Independent protection for individual parts of a registered national or Community Design is not possible unless these parts themselves are registered as designs. Individual parts of an unregistered Community Design, in contrast, can enjoy independent protection if they meet the requirements of a design themselves. For example, a hood of a jacket, that is identifiably disclosed visibly and clearly, can enjoy independent protection.
In order to enjoy trademark protection, fashion designs must be distinctive, namely, capable of serving as an indication of a commercial origin, also taking into account the competitors’ interest in keeping certain design features free for the trade. Usual design features as such are thus not protectable, as they would not be perceived as an indication of origin.
How are luxury and fashion brands legally protected in your jurisdiction?
Luxury and fashion brands are mostly protected by registered trademarks. Unregistered trademarks may enjoy protection if the sign in question has acquired an increased degree of public awareness as a trademark through extensive use. Brands including a logo might enjoy copyright protection, too. In addition, in Germany company names are protected following mere use, without being well known or registered.
The use of domain names including luxury or fashion brands could, under certain circumstances, constitute company name – if perceived as a business name, by mere use – or trademark rights, in the latter case provided that the sign is sufficiently well known. In addition, claims against third parties in the context of domain grabbing could be based on unfair competition law as well.
What rules, restrictions and best practices apply to IP licensing in the fashion industry?
There are no specific rules or restrictions under German law specifically applying to IP licensing in the fashion industry. There is no requirement under German law to register licenses, even though such a registration is possible for information purposes. A detailed written agreement obviously provides legal certainty for all parties involved. However, according to the German Copyright Act, a written agreement is required for a contract about unknown types of use.
What options do rights holders have when enforcing their IP rights? Are there options for protecting IP rights through enforcement at the borders of your jurisdiction?
Generally speaking, owners of IP rights have at least three options to enforce their rights:
- Owners of IP rights can sue the infringing party in civil proceedings for, inter alia, injunctive relief, for providing information on the infringing use (to, inter alia, assess the caused damages) and for the according damage itself. In IP matters, civil proceedings are usually started by issuing a warning letter and, if there is still sufficient urgency (not too much time passed since first knowledge of the infringement), this is followed by an application for a preliminary injunction (PI), aiming at the infringing act to be stopped immediately. If no settlement is reached, proceedings on the merits will lead to a final decision.
- Trademark owners can file oppositions against conflicting preliminary trademark registrations (Germany) or applications (EU), or cancellation proceedings against registered third-party trademarks. Such proceedings can be initiated at the trademark office in charge (in Germany, the German Patent and Trademark Office; in the EU, the European Union Intellectual Property Office) or, with regard to cancellation proceedings, also with the national court in charge. Such proceedings, however, only aim at the cancellation of the attacked trademark, without having any impact on use or other potential claims.
- Owners of IP rights can – in principle – also initiate criminal proceedings. However, such proceedings will not in themselves result in the compensation of any financial damages, which is why they are often of less interest for IP right owners. If such criminal proceedings are initiated, serious sanctions hardly ever follow, except for infringements on an extensive professional level.
With regard to the enforcement of IP rights at the borders, there is the option of filing for custom seizure applications on a national and on an EU level. These are a very effective means to monitor imports or seize counterfeit products.
Data privacy and security
What data privacy and security laws are most relevant to fashion and luxury companies?
The most relevant data privacy laws for the German market are the European General Data Protection Regulation 2016/679 (GDPR) and the Federal Data Protection Act, both as amended from time to time, and both establishing requirements for fashion and luxury companies in online and offline retail, marketing and for business operations in general. For online business, the new German Act on Data Protection in Telecommunication and Telemedia (which entered into force on 1 December 2021) establishes new standards, including requirements on technical and organisational measures for setting an adequate level of data protection and security of telemedia content. Besides the codified law, fashion and luxury companies should duly review and consider the official guidance and opinions published by the European Data Protection Board (EDPB) and the German Conference of Data Protection Authorities.
What challenges do data privacy and security laws present to luxury and fashion companies and their business models?
What data privacy and security concerns must luxury and fashion retailers consider when deploying innovative technologies in association with the marketing of goods and services to consumers?
Innovative technologies are, by definition, subject to high standards of data security requirements and are regularly subject to new legislation and supervisory authority guidance. The German data protection authorities issued a guidance document for analytics of biometric data in 2019, and the regulation of facial recognition is currently strongly debated in the EU, with particular concerns regarding applying AI technology for face recognition in public spaces. Following its AI strategy, in April 2021 the European legislator published a proposal for a Regulation on harmonised rules on artificial intelligence for the European market that will establish requirements for the use of AI across all key sectors.
The use of biometric data and related technology (eg, face recognition, iris and fingerprint scans, identity verification tools) usually requires a data privacy impact assessment as required by article 35(1) GDPR, since these tools process sensitive personal data as defined under article 9(1) GDPR.
Content personalisation and targeted advertising
What legal and regulatory challenges must luxury and fashion companies address to support personalisation of online content and targeted advertising based on data-driven inferences regarding consumer behaviour?
The delivery of personalised online content to customers and prospective customers and use of targeted advertising, tracking, profiling and analytics tools require a careful legal assessment if, and if so to what extent, companies can rely on a legitimate interest to use such technology, and where the data subject’s fully informed, specific, unambiguous and freely given consent is required before such technology can be applied. The German supervisory authorities take a strict view on consent requirements and have shown a tendency to proactive market surveillance on online shops in the B2C environment. Therefore, the use of transparent consent management tools on websites, online shops and mobile apps helps mitigate the risk of legal disputes and public and private enforcement of claims. Close collaboration of the company’s legal department and technology teams, as well as a diligent assessment of the consent management tools, are required to avoid legal disputes.
Advertising and marketing
Law and regulation
What laws, regulations and industry codes are applicable to advertising and marketing communications by luxury and fashion companies?
Advertising and marketing communications are comprehensively regulated by law and strongly shaped by case law in Germany. The German Act Against Unfair Competition, implementing EU Directive 2005/29/EC concerning unfair business-to-consumer commercial practices, is the central framework governing all kinds of marketing communications and advertising. The Act prohibits certain trade practices that are considered unfair. It contains a (non-exhaustive) list of 30 examples of ‘blacklisted commercial practices’ regarded to be unfair, such as hidden advertising in media (advertorials). Moreover, the Act bans all forms of misleading advertising, in particular with regard to the product offered, the circumstances and conditions of the offer, and the undertaking advertising the products.
Moreover, there are a number of sector-specific regulations for advertising and marketing of particular products (eg, cosmetics) and within specific communication channels. The Media State Treaty regulates advertising in television, radio and telemedia. Its scope has recently been expanded to new forms of digital media such as video-on-demand services, social media platforms, app stores, search engines, user-generated content and blogging portals.
In addition to these statutory regulations, there are also a number of self-regulatory advertising codes of trade associations (eg, German Advertising Council). Such codes only directly apply to the members of the respective trade association; however, they can serve as important guidelines for common marketing practices.
Online marketing and social media
What particular rules and regulations govern online marketing activities and how are such rules enforced?
In Germany, advertising content has to be separated from editorial content and labelled as such (unless it is clearly recognisable). The main regulations are contained in the German Interstate Media Treaty, the Telemedia Act and the Act Against Unfair Competition. German competition and consumer associations have initiated numerous actions in the past few years against influencers who did not comply with the labelling requirements of German advertising and competition law. However, it is not only the influencer who may be held liable for an infringement of the aforementioned regulations, but also the company working with the influencer. Apart from the aforementioned associations, competitors, particularly, may assert unfair competition claims. Moreover, state media authorities may issue fines for violations of the German Interstate Media Treaty.
Product regulation and consumer protection
Product safety rules and standards
What product safety rules and standards apply to luxury and fashion goods?
There is no specific legal regime for safety of luxury and fashion goods in Germany. However, luxury and fashion goods fall within the scope of the German Product Safety Act, implementing the EU General Product Safety Directive 2001/95/EC, which applies to all products that are intended for consumers and sets forth general safety requirements to be met by consumer products in Germany. Producers and EU importers have to ensure that they only place safe products on the market. In addition, they are responsible for ensuring that all products show mandatory labelling particulars and that any dangerous products placed on the market can be traced to be recalled in case of safety incidents.
Also, there are specific additional safety requirements for certain product categories:
- EU Regulation No. 1007/2011 sets out labelling and marking requirements for textile products. All textile products made available on the German market must be provided with a fibre-composition label;
- for footwear, labelling requirements are set out in the Consumer Goods Ordinance, implementing EU Directive 94/11/EC. According to this legislation, labelling must give consumers information on the composition of the main parts of footwear (eg, the upper and the outer sole); and
- for cosmetics, the EU Cosmetics Regulation No. 1223/2009, directly applicable in Germany, includes a set of strict rules for labelling of cosmetic products. The Regulation also sets out banned and restricted substances in cosmetics. In addition, it requires manufacturers of cosmetics to prepare a product safety report prior to placing a product on the market, and notify their product via the EU Cosmetic Products Notification Portal.
What regime governs product liability for luxury and fashion goods? Has there been any notable recent product liability litigation or enforcement action in the sector?
Product liability for luxury and fashion goods is governed by the general legal framework that applies to all consumer goods.
The Product Liability Act, implementing Directive 85/374/EEC on liability for defective products, provides for a strict liability regime for damages to health, bodily injury or property damage caused by a product defect. The manufacturer of the finished product, the producer of any raw material, the company under whose name, trademark or other distinguishing feature the product is sold and the importer are subject to the liability regime of the Product Liability Act. The supplier of a product can also be liable where the producer or importer of the product cannot be identified.
In addition, the German Civil Code provides for a fault-based liability system for manufacturing, construction, instruction and monitoring defects under tort law. However, a reversal of the burden of proof applies in certain cases based on case law, according to which the producer must prove that it is not responsible for the damage as it acted without fault.
Warranty claims for defective products can be asserted under the contractual relationship in accordance with the German Civil Code. Here, consumers benefit from certain legal privileges applying to consumer contracts, for example statutory restrictions for limiting warranty and liability claims against consumers and a reversal of the burden of proof for warranty claims to facilitate the enforcement of consumers’ warranty claims.
M&A and competition issues
M&A and joint ventures
Are there any special considerations for M&A or joint venture transactions that companies should bear in mind when preparing, negotiating or entering into a deal in the luxury fashion industry?
Overall, there are no major differences between luxury fashion M&A transactions in Germany and elsewhere in Europe.
However, there are key features of the industry that warrant attention during the due diligence process and the negotiations regarding transaction documents. Depending on the relevant business, areas that should be carefully reviewed include intellectual property rights with a focus on trademark rights, the reliability of customer and supplier relations, product liability (including insurance coverage), as well as compliance, regulatory issues in general and competition law. Purchasers will regularly seek protection against risks in these sensitive areas through adequate representations and warranties as well as respective indemnities. Warranty and indemnity insurance is becoming increasingly popular in Germany and is often taken out when the sellers are private equity firms.
Further, under German foreign direct investment law, the competent ministry may object – even after closing – to the acquisition of 25 per cent or more of a German target company by an acquirer from a non-EU or non-EFTA country. While traditionally it was assumed that this right to object only applied to certain key industries (eg, infrastructure, energy, defence, certain IT security functions) and, hence, was rarely exercised, the German government recently has tended to take a broader view – especially in the cases of Chinese and Russian acquirers. Therefore, it should be assessed whether a non-objection certificate is needed in order to get the transaction cleared. If this is the case, the receipt of such certificate is regularly included in the transaction documents as a closing condition.
Last but not least, it needs to be noted that the competitive environment for retailers and suppliers has changed substantially. A large proportion of business is conducted via e-commerce channels – this trend is increasing, not least due to the effects of the covid-19 pandemic. Buyers should therefore ascertain whether the target company’s business is already geared to this structural change, for example by harmonising the advantages of brick-and-mortar stores and e-commerce through a selective distribution system, if legally feasible. Distribution through e-commerce channels may also become relevant in the context of non-compete clauses as it needs to be clarified whether they also catch e-commerce channels or only brick-and-mortar stores.
What competition law provisions are particularly relevant for the luxury and fashion industry?
Particularly relevant are section 1 of the German Act Against Restraints of Competition (ARC) and article 101 of the Treaty on the Functioning of the European Union (TFEU). These provisions prohibit agreements between undertakings, decisions by associations of undertakings and concerted practices which have as their object or effect the prevention, restriction or distortion of competition (prohibition of cartels). They are based on the principle of autonomous determination of corporate policy (requirement of independence), and are intended to protect and maintain effective competition and, in particular, to ensure that undertakings develop and follow their own business strategies in relation to prices, customers, territories, etc.
Section 1 ARC and article 101 TFEU apply both to horizontal agreements – agreements between competitors, and vertical agreements – agreements between undertakings operating at different market levels. The latter include, but are not limited to, distribution agreements. The prohibition of cartels thus sets limits – for example, regarding selective distribution and exclusive distribution – that must be respected at all times.
Vertical constellations and exemption requirements are regulated in the Vertical Block Exemption Regulation (VBER) and explained in the European Commission’s Vertical Guidelines, both of which are currently being revised. According to the current versions of these specifications, exclusive and selective distribution systems can be exempted from article 101 TFEU if the manufacturer’s and the reseller’s market shares do not exceed 30 per cent each. As regards selective distribution systems, in addition, the products concerned must require selective distribution, which is usually the case for luxury goods, and the selection of resellers must be based on uniform, objective and quality-related criteria; these may not be applied in a discriminatory manner. Further, the criteria must not go beyond what is necessary (see CJEU decision in Metro, case 26/76, 25 October 1977).
Also, neither exclusive nor selective distribution systems may contain hardcore restraints listed in article 4 VBER, such as the restriction of the reseller’s ability to determine its resale price or the restriction of sales by the members of a selective distribution system to unauthorised distributors within the territory reserved by the supplier to operate that system. A combination of exclusive distribution and selective distribution is only exempted by the VBER if active sales in other territories are not restricted.
Restrictions that are not covered by the VBER may be justified under article 101(3) TFEU. For this, there must be evidence of efficiencies that can be passed on to consumers, that the restriction is indispensable and that it does not eliminate competition.
Specifically with regard to internet sales, it should be noted that every reseller must in principle be free to use the internet as a sales channel. This is because of the CJEU’s landmark decision in Pierre Fabre (case C-439/09, 13 October 2011), where the CJEU clarified that a clause in a selective distribution agreement that completely prohibits retailers from using the internet for their sales efforts violates the prohibition of article 101(1) TFEU and, as a general rule, cannot be exempted or justified. However, according to the CJEU decision in Coty (case C-230/16, 6 December 2017), the manufacturer can prohibit its authorised resellers from placing products on third-party marketplaces. There are no recent decisions of the Federal Cartel Office or German courts that would contradict these principles.
Violations of the prohibition of cartels may result in fines of up to 10 per cent of the undertaking’s group turnover under both German and EU law, and complicated claims for damages. Enforcement is particularly evident in cases of resale price maintenance (RPM). The authorities take action when manufacturers not only make non-binding recommendations, but also exert pressure and try intensively to keep prices high.
Employment and labour
Managing employment relationships
What employment law provisions should fashion companies be particularly aware of when managing relationships with employees? What are the usual contractual arrangements for these relationships?
Under German labour laws, an individual is considered an employee if they perform dependent work for the benefit of the employer on the basis of a civil law contract. It is the ‘dependent work’ criterion that distinguishes employees from freelancers – and, therefore, is decisive for application of the German labour law regime. As an employee the individual is integrated into the employer’s organisation, and is subject to terms and conditions from the employer relating to time and place of work as well as to the actual services to be rendered.
Interns are generally considered genuine employees. Therefore, all laws on employee protection also apply to interns, in principle. In particular, interns are entitled to minimum wage unless the term of internship does not exceed three months or the internship is a compulsory part of a study programme.
Individuals may be employed on an unlimited or fixed-term basis. In general, a fixed-term contract for up to two years can validly be concluded, but only if the employee has not been in a previous employment relationship with the employer. It is also permitted to base the fixed-term limitation (without the two-year restriction) on certain objective reasons.
Any employee employed for more than six months in an operation with regularly more than 10 employees enjoys protection against dismissal under the Dismissal Protection Act. Terminations may only be grounded on personal, operational or conduct-related reasons.
Are there any special legal or regulatory considerations for fashion companies when dealing with trade unions or works councils?
In Germany, a works council can be elected in any operation with at least five permanent employees (over 18 years of age), of whom three employees are eligible. The formation of a works council is not mandatory. Election proceedings can be started by the workforce, existing (company or group) works councils or unions (or both).
A whole variety of information, consultation and actual co-determination rights has to be observed in operations where a works council is established. For a considerable number of internal measures, the works council’s consent is required or a works council agreement has to be concluded prior to the implementation. This, in particular, applies to all working-time-related arrangements.
Collective bargaining agreements governing wages and other important employment conditions are generally concluded for particular industries, at regional or federal level, either between the unions and employers’ associations or between unions and individual employers. However, unions and collective bargaining agreements play a comparatively minor role in the fashion and luxury sector. This generally also applies to works councils. Notwithstanding, works councils may be established, especially in small operations, swiftly.
Are there any special immigration law considerations for fashion companies seeking to move staff across borders or hire and retain talent?
For EU citizens, no special immigration law considerations have to be taken into account. Non-EU citizens require a work permit and have to disclose the permit to the employer prior to the commencement of the employment. Employing individuals without a work permit is subject to fines in the amount of up to €500,000.
German social security regulations will apply to employments based in Germany, resulting in generally mandatory contribution payments to the statutory social security insurances.
Employees may also be seconded to Germany under certain conditions. In this case, depending on the term of the secondment and the country of origin of the basic employment relationship, German social security regulations may not become fully applicable.
Update and trends
Trends and developments
What are the current trends and future prospects for the luxury fashion industry in your jurisdiction? Have there been any notable recent market, legal or regulatory developments in the sector? What changes in law, regulation, or enforcement should luxury and fashion companies be preparing for?
The fashion and e-commerce segments face increasing regulatory attention in Germany. Human rights, consumer protection and digitalisation are key drivers of new developments in this regard. The German legal landscape is shaped by overarching EU legislation including the latest Purchase of Goods Directive, the Omnibus Directive and the Digital Content and Digital Services Directive. Notably, German law often imposes even stricter standards than the ones set on an EU level, and failure to comply can be sanctioned by public enforcement but also by actions of competitors and certain private organisations. Luxury fashion retailers would be well advised to keep track of specific rules and developments with respect to the German market to avoid penalties and reputational damage.
The German Supply Chain Due Diligence Act is another milestone of German regulation, with an expectedly massive impact on the fashion and luxury industry by imposing binding obligations on companies to establish and implement due diligence procedures to ensure compliance with human rights and environmental protection through supply chains. In 2022, it is expected that the EU will also enact new regulations regarding mandatory human rights and environmental supply chain due diligence that will overlap with the new German Supply Chain Due Diligence Act. Therefore, companies should not only ensure compliance with national requirements but also closely follow the legislation process at EU level.
What emergency legislation, relief programmes and other initiatives specific to your practice area has your state implemented to address the pandemic? Have any existing government programmes, laws or regulations been amended to address these concerns? What best practices are advisable for clients?
Law stated date
Give the date on which the information above is accurate.