Germany: Antitrust Liability Traps In The "agency Model" – What To Watch Out For

It is not just in the automotive industry that commercial representative models or "agency models" are currently booming. More and more manufacturers - across the board - are changing the distribution of their products to commercial representatives or are planning to do so in the next few years. From the principal's point of view, these models are very advantageous: they give the principal greater influence over the design and compliance of its distribution system as well as on the price level of its products and services, and enable greater proximity to the end customer.

However, these advantages come at a price. Agency models usually not only bear a significantly higher economic risk for the principal (e.g. the risk of payment default by the customer), they also pose challenges in terms of antitrust compliance, which can quickly become expensive if not observed.

This article is not a requiem to the agency model. Rather, it provides an overview of the most important liability scenarios for principals to watch out for it they are to minimise the antitrust compliance risk when engaging intermediaries.

If you want full control, you have to take risks

A principal usually implements a commercial representative model or agency model in order to have greater control over the way its goods or services are sold and thus be closer to the end customer, and additionally to be able to determine adherence to a certain price level in the market. This usually involves strict instructions to the commercial representatives as far as sales territories, customer groups, and the presentation of goods and sales prices are concerned.

However, this close control over agents presupposes that they bear no or only very insignificant economic risks regarding the sale of the contract goods within the EU. Only under these conditions does EU antitrust law allow the principal to exert unrestricted influence over the business and pricing strategy of its commercial agents. Only in this case does EU antitrust law assume that the agent no longer acts as an independent dealer but as an "extended arm" of the principal in the market, with the result that the ban on cartels does not apply to the sale of the principal's goods and services. This constellation is also called the "commercial agent's privilege".

The title of the contract is irrelevant in this respect. The only decisive factor is that the distribution partner bears no economic risk when selling the contract goods. The commercial agent's privilege can therefore also apply, for example, to a commission model in which the distribution partner sells the goods in its own name but for the account of the principal.

Specifically, principals must assume the following risks in order for the commercial agent's privilege to apply:

• Contract-specific risks directly related to the sale of the contract goods or services. For example, the principal must assume the financing of stocks or the del credere risk of the end customers. In addition, the commercial agent must not participate in the costs (including transport costs) associated with the delivery or acquisition of the contract goods, unless the principal reimburses these costs.
• Risks relating to market-specific investments: These are investments necessary for the commercial agent to carry out its activities for the principal. It follows from this that the commercial agent must not be obligated, directly or indirectly, to invest in sales promotion activities. For example, the principal must finance advertising expenses or advertising or sales promotion measures relating to the contract goods or services entirely on its own or fully reimburse these costs to the commercial agent. The commercial agent also must not bear any costs for contract-specific equipment, premises, staff training or special software.
• In case of risks for other activities related to the sale of the contract goods or services,the principal must not, for example, obligate its commercial agent to carry out the delivery of the contract goods at its own expense.

The principal should therefore always carefully consider (under economic aspects) whether it is prepared to assume the above-mentioned risks in order to have full control over the distribution of its goods. Even if the agent bears just one or several of the above-mentioned risks, the principal can no longer invoke the commercial agent's privilege under antitrust law. In consequence, for example, the stipulation of resale prices would be considered a serious violation of the ban on cartels, which the European cartel authorities usually punish with high fines (prohibition of vertical price maintenance). In this case, stipulations and restrictions on distribution in certain territories or to certain customer groups (e.g. exclusivity agreements) would also no longer be automatically possible. Agency agreements that are not carefully drafted can therefore quickly become a cost trap.

Caution required in case of parallel agency and dealership models

Caution is also advised when distribution partners act for a supplier in parallel as agents in an agency model and as an independent dealer. This constellation is often found in the automotive industry, for example: new electric models are sold by the dealer via an agency contract on a commission basis, whilst combustion models are sold via its own classic distribution model. This is usually possible without major problems if - as in the case of electric cars - the products in agency distribution are equipped with different or additional functions or new features. However, if the products or services in the agency model are not sufficiently distinguishable from those sold in the classic dealership model, the boundaries between agency and dealership models risk becoming blurred. For example, there is then a danger that the dealer will increasingly orientate itself on the price structure set by the principal in the agency model and no longer independently set the prices for the products it sells as an independent dealer.

If the agency distribution "infects" the independent dealership distribution in this way, this can lead, among other things, to the loss of the commercial agent's privilege in the agency distribution - with all the consequences mentioned above. In the case of mixed distribution structures, care should therefore be taken to ensure that the products, activities and risks covered by the agency agreement can be clearly distinguished from those covered by the dealership agreement.

Liability risk of the principal in case of cartel violations by the agent

If an agent is integrated into the principal's business sphere as an "extended arm" of the principal because it does not bear any economic risks of its own when selling the contract goods, the principal itself may comprehensively determine the business and pricing strategy of its distribution partner - unlike in the case of independent dealers. However, from the perspective of EU antitrust law, this leads to a further consequence: principal and agent can then form a so-called "economic unit" due to the close relationship.

This constellation can be problematic from a compliance point of view if the agent does not comply with antitrust standards and, for example, enters into illegal price or market sharing cartels with a competitor of its principal. According to the established case law of the European courts, the misconduct of the dependent agent under antitrustlaw is attributed to the principal as if it were its own misconduct - irrespective of whether or not the principal had knowledge of the illegal activities of its distribution partner. As a consequence, antitrust sanctions, e.g. in the form of fines, can definitely be imposed directly on the principal on the basis of EU antitrust law.

(Potential) principals should therefore be aware that the close integration of commercial representatives and agents into their own distribution system places increased demands on the supervision of these agents. In case of doubt, the principal cannot plead alleged ignorance of unlawful conduct on the part of the agents. Commercial representatives and agents should therefore be integrated (technically and in terms of content) into the company's internal compliance system in the same way as its own subsidiaries and employees. This also includes regular antitrust training. In addition, it is advisable to include a binding antitrust code of conduct in the distribution agreements.

Liability risks through the exchange of information

There is also an increased compliance risk under cartel law if distribution agents work for several principals in the same market. It becomes particularly problematic if competitively sensitive business information is exchanged between the principals via the agent. This is a so-called hub-and-spoke constellation. Figuratively speaking, the principals are the spokes of a wheel that are connected to each other via the wheel hub - the distribution agent.

If an agent passes on sensitive information of one of its principals to another principal (e.g. pending price increases), this indirect exchange of information may violate the ban on cartels. Not only the distribution agent, but also the principals can be sanctioned in this case, e.g. in the form of fines. A sanction will especially affect principals when the agent has passed on the competitively sensitive information with the approval and knowledge of theprincipals. However, principals also bear a liability risk if they could have reasonably foreseen that their sensitive information would be disclosed by their common distributor.

Measures to reduce antitrust risks

In order to minimise antitrust risks, confidentiality agreements therefore need to be concluded with the distribution agents as a preventive measure. These agreements should contain clear guidelines for dealing with distribution partners of competitors and prohibit and sanction anticompetitive contact with competitors (e.g. in the form of passing on confidential data and information of the principal to third parties). The close integration of distribution agents into the principal's antitrust compliance programme should also be considered.

If a principal becomes aware of anti-competitive behaviour on the part of its agent or if there are indications pointing towards such a suspicion, the principal should under no circumstances behave passively or assume that all is regulated with the signing of a confidentiality agreement. In the event of a breach, this does not offer one hundred percent protection against the principal's own liability. Rather, in view of their high liability risk, principals should take proactive measures to deal with the suspicion and to immediately stop any conduct in violation of antitrust law. Depending on the severity of the violation, they should also consider making a leniency application to the competent cartel authority.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.