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29 March 2005
German antitrust law prohibits price fixing. Therefore, a franchisor may not dictate to its franchisee the price at which the latter must sell goods obtained from the franchisor (Section 14 of the Act Against Restraints on Competition). The prohibition concerns not only explicit price fixing, but also financial ties that ultimately result in price fixing. Such a financial tie exists where the reseller is compelled to abandon its own pricing policy - which as such is not subject to legal restrictions - and adopt the resale price recommended by the manufacturer in its advertising.
The Federal Court of Justice's April 8 2003 Duplo decision(1) indicates a new approach towards price fixing which is of great importance for promotional campaigns within a franchise system, among other things. Under previous case law,(2) advertisements and labels announcing the offer of more products for the same price were considered an unlawful restriction of retailers' (and accordingly, franchisees') freedom to set prices, and thus a violation of Section 14. In comparison, the Duplo decision shows that this kind of promotion does not necessarily infringe Section 14.
The parties to the Duplo Case were competing manufacturers of chocolate bars. The defendant's range included the Duplo chocolate bar, which was sold singly or in boxes of 10. During a six-week sales campaign, the defendant put the chocolate bars into circulation in a 'promo-box' containing 11 bars and bearing the slogan "Short time only: one additional bar". A televised advertising spot with the slogan "One additional bar at no additional expense" drew the plaintiff's attention to the sales campaign. The plaintiff considered the campaign to be in violation of Section 14 and sought an injunction against the defendant. The Cologne Regional Court granted the injunction. The defendant appealed to the Federal Court of Justice.
The Federal Court of Justice upheld the regional court's view that such a promotional campaign limits retailers' freedom to set prices. However, the Federal Court of Justice found that such restriction is of a temporary nature and thus affects the freedom to set prices only imperceptibly. The retailers suffered no economic disadvantage during the campaign, as they could obtain the promo-box from the manufacturer at the price of the ordinary box. Moreover, due to the temporary increase in sales resulting from the campaign, the retailers could increase their profits while maintaining the same profit margin per unit. In addition, keeping the price unchanged constituted reasonable business conduct. The court thus found that the retailers were not compelled to act against their entrepreneurial freedom to set prices. Therefore, Section 14 had not been infringed.
As a result of the decision, a wide range of campaign possibilities which were previously inadmissible are now open to franchisors. During promotion campaigns, franchisors and franchisees can offer consumers a particular benefit in the form of additional free units of a product. However, a new implicit criterion of admissibility has been introduced: the threshold of imperceptibility. For this criterion to be met: (i) the promotion campaign must be limited in time; and (ii) the franchisees must be able to obtain the goods entailing an advantage for consumers at the usual price for such goods. Overall, the new approach is a step towards the liberalization of the traditionally strict application of German competition law.
For further information on this topic please contact Karsten Metzlaff or Karl Rauser at Nörr Stiefenhofer Lutz by telephone (+49 30 20 94 20 00) or by fax (+49 30 20 94 20 94) or by email (email@example.com or firstname.lastname@example.org).
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