American Law and German Law

Reform of the German Law against Unfair Competition

By Ulrich Bäumer
First published July 8, 2004

On July 8, 2004, the new provisions of the German Law against Unfair Competition ("UWG"--Gesetz gegen den unlauteren Wettbeweberb) will come into force in Germany. The reform is aimed at the fundamental modernisation and liberalisation of German competition regulations which are partly no longer considered to be in keeping with the requirements of a rapidly changing market environment and will be adapted to current European legal reforms in the larger context of European harmonisation.

Major revisions are briefly described and discussed below:

1. Extending the Protection of the Law to Consumers

The consumer is now expressly placed within the protection of the law. Legislation has thus made current legal practice into legal norm. By unanimous opinion the protection of the law has, apart from competitors and the general public, always extended also to the consumer. By the express stipulation it has now been made quite clear that consumer protection is not merely a secondary effect or by-product of the protection of competitors.

However, this does not lead to any change in the paradigm of the UWG in the meaning of a consumer protection law. The purpose of the UWG focuses largely on regulating the market conduct of commercial enterprises to safeguard the interests of competitors, consumers and the general public. Consumer protection can therefore not be regarded a privilege but remains, as in the past, equal to the other legal protection mechanisms.

Consequently, the Law against Unfair Competition will neither in the future ? contrary to some requests from consumer protection associations ? contain any special rights for the consumer regarding damage claims or withdrawal from contracts. These areas continue to be subject to the provisions of German civil law.

2. General Provision and Negative List

The previous general provision "unfair competitive practices are prohibited" will be supplemented in the future by an expandable catalogue of case groups (so-called negative list). These would, for instance, include sales promotion by price cutting, telemarketing, contests and raffles. While legislators expect to achieve more legal transparency, the respective limits of fair practice in the dynamic competitive environment with its constantly changing values can be defined permanently and realistically only by continuous respective education of the judges.

In the course of European harmonisation efforts, the term "ethics" was replaced by the term "unfairness". All practices which run counter to fair practice in trade, industry, crafts or independent professional work will now be considered unfair. Any examination would therefore focus solely on the market-related practices of commercial undertakings.

Furthermore, the new regulation defines a threshold for "minor incidents", below which unfair competitive practices will no longer be prosecuted. The benchmark, therefore, are practices which are liable to "have considerable impact on competition". The substantiation expressly emphasises that it is not intended to legalise unfair competitive practices to a considerable measure, but to create obstacles for the abusive use of dissuasions.

On the other hand, Section 13 subsection 2 of the Law against Unfair Competitions (old version) is eliminated, under which court action used to be feasible only in the presence of "substantial interference" with fair practices. To what extent the courts will adopt a different view of "insubstantial" interference in the future remains to be seen.

In general, however, the threshold of the new regulations would seem to be lower so that action by the competition associations may be expected to increase.

3. Elimination of the Prohibition of Special Events

The elimination of the prohibition of special events is of great significance for the trade. Hence, discount campaigns, special offers, opening offers up to price cuts for all of the products on sale have been made generally admissible. The only qualification is the principle that customers must not be misled.

The regulations governing summer and winter seasonal closing sales as well as anniversary sales (company anniversary) are eliminated entirely. Clearing sales may, therefore, now be conducted also outside the previous time lines and without any reference to the assortment of goods. Advertising with the term "clearing sale" is permitted.

Apart from the above, the restrictions for closing out sales have been loosened. While the previous case groups (water damage, renovation work, business shutdown) and the requirement of prior notification have been eliminated entirely, it is still necessary that the sale be based on a particular exigency. Otherwise the activity is considered to be misleading the consumer.

This trend to liberalise the legal framework is counteracted by the newly included special regulation on price cuts. Accordingly, it is considered misleading if any promotion is based on price reductions if the reduced price is applicable only for an unreasonably short period. It may well be that the promoting party might have to prove the reasonableness of the period given. Critics therefore deplore the legislators' lack of confidence in the free market and the assertive competence of the buyer.

The prohibition of misleading the consumer with regard to the quantity of goods in stock is viewed similarly critical.

In the future, a product should be advertised only if the quantities held in stock are adequate to satisfy anticipated demand. The term adequate is defined as an inventory level sufficient for two days' sales. Otherwise it is assumed that the consumer is mislead. However, the promoter may also render a qualified justification for smaller stocks, although it is impossible to derive a suitable benchmark for the admissibility of lower stock ceilings. Certain sales actions such as the sale of computers in supermarkets are geared specifically to a very short-lived special action. It would not be in the interest of either the supermarket or the buyer if stock levels of the products being promoted had to be held at the level of the required two days' demand ? with the consequence of higher prices. Suitable threshold criteria for such activities will therefore still have to be developed by the courts.

4. Unacceptable Harassment

Section 7 of the Law against Unfair Competition defines instances of unreasonably molesting advertising for the future. Such harassment is seen in any competitive practice which is forced upon the receiving party. The qualification of "unacceptable" is meant to exclude minor molestations from the prohibition.

Section 2 describes in more concrete detail the feature of unreasonableness by a non-exclusive listing of case groups, particularly in the field of electronic communication.

In implementation of the data protection guideline for electronic communication the German Federal Government has failed to use the given leeway, but stuck to the tight border lines set for direct advertising which were instituted in favour of strong consumer protection. Hence, advertising by Email and facsimile still require the "recipient's consent" ("opt-in process"). The opt-out process generally favoured by the Federal Council in view of the general competitive scenario in Europe was therefore not considered. As an exception, subsection 3 at least offers the entrepreneur the option of using customer data for direct advertising if the customer has made his electronic contact data available within the scope purchasing a product or service, but on the condition that the customer is notified of his right to refuse direct advertising at the time his data is recorded and on each instance his data is used.

The same applies to telemarketing if the recipient is a consumer.

Marketing by telephone vis-à-vis a market player (commercial enterprise) is considered unfair competition only if his consent cannot be assumed. The Federal Council has called upon the arbitration panel ("Vermittlungsuasschuss") which upheld the proposition of the Parliament.

Moreover, the transmission of anonymous messages is now prohibited. The recipient should primarily be given the option of requesting that advertising be stopped without having to pay more than "the transmission cost based on the base rate". The simple statement of only a telephone number with a higher base rate (i.e. prefixes like 900, etc.) will therefore be qualified as unfair competition in the future.

5. Legal Enforcement

The legal consequences of breaches of the General Provision under Section 3 of the Law against Unfair Competition are now defined by Sections 8, 9, which primarily render previous legislation a legal norm. Accordingly, the party directly affected is now entitled to request desistence and remedy. On the other hand, the previous entitlement of so-called conceptually affected competitors (abstrakt betroffene Mitbewerber) to claim damages is eliminated. Legislators feel that the option of appealing to industrial and consumer associations provides adequate protection.

Section 9 of the Law against Unfair Competition now defines a general right to indemnification for competitors. However, the party in breach of the Law must be culpable with regard to the unfair nature of its actions.

The option of the competitor infringed upon to issue a warning, claim submission and enforce a claim for refund of expenses is now defined in Section 12 of the Law.

6. Right to Skimming Off Profits

Legislation has inserted a new form of sanction, namely the right to skim off profits enforceable in particular by competition associations, chambers of industry and commerce and chambers of trade. This applies primarily to those cases where many consumers are affected but with only minor individual damage (damage dispersion). Previous practice has shown that the parties affected have generally waived enforcement of their claims so that this type of violation had ultimately gone unpunished. The associations can now request the skimmed off profits in the case of systematic violations of fair competition principles. The profits will, however, not be kept by the associations but must be paid over to the respective authorities after deduction of relevant expenses.

7. Other provisions eliminated

Apart from the provisions discussed above, the regulations governing the sale of goods under bankruptcy, the sale by wholesalers to end users, and the trade in coupons were also eliminated without substitute. Moreover, the right to withdraw from sales contracts in the case of culpable misleading advertising which had so far been set forth in Section 13 of the Law has been eliminated.

8. Conclusion

The draft primarily provides a normative clarification of previous jurisdiction under the Law against Unfair Competition. The liberalisation with a focus mainly on the elimination of the prohibition of special events is set off by the express underpinning of consumer protection. It is conspicuous in that context that legislators were unwilling to adopt into German law the concept of the mature and responsible consumer which is widely accepted throughout Europe.

Cite as: Bäumer, U., Reform of the German Law Against Unfair Competition, 13 German American Law Journal, http://www.amrecht.com/baeumeruwg2004.shtml (July 8, 2004).

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