Quick off the mark

We are not buying enough products from other member states, says the European Commission. More cross-border commerce would provide access to a broader range of products at cheaper prices, but appreciable barriers are holding us up and undermining the proper functioning of the internal market.

These barriers include wide differences in national consumer law, a lack of consumer confidence in buying from another EU country, as well as differences in tax and languages. In a survey for the Commission, 68 per cent of consumers felt there was a lower standard of consumer protection abroad and 76 per cent did not trust foreign sellers; and 47 per cent of businesses surveyed felt that having to comply with different national consumer regulations was an important obstacle to cross-border advertising and marketing.

In order to tackle this problem, on 18 June 2003 the Commission presented a proposal for a directive to harmonise the law on unfair commercial practices across all 15 (soon to be 25) member states. The directive has three aims: to increase consumer protection and confidence; to help businesses increase their cross-border marketing and sales; and to improve Europe's economy. The only losers are said to be rogue traders and rip-off merchants. The directive is scheduled to be adopted in 2005 with implementation within two years after that.

However, rather than wait for the Commission's proposal, the German government is already on the road to modernising its laws, having published a draft for its Revised Act on Unfair Competition.

German unfair competition law

Unfair competition in Germany is currently governed by the 1909 Act against Unfair Competition (Gesetz gegen den unlauteren Wettbewerb (UWG)). Section 1 of the UWG states that "any person who, in the course of business activity for purposes of competition, commits acts contra bonos mores [against public morals], may be ordered to desist from those acts and be liable for damages". This general clause is supplemented by the so-called "small" general clause (Section 3 UWG) which prohibits misleading advertising.

Over the years, these two general clauses have been fleshed out by case law, particularly from the German Supreme Court. Categories of prohibited practices have been established and Section 1 has been held to cover protection of consumers as well as competitors and the marketplace itself.

German unfair competition law was traditionally one of the most restrictive in Europe. For example, comparative advertising was outlawed, the consumer standard was deemed to be that of a "casual and non-critical observer" (flüchtiger Verbraucher) and there were laws dating back to the 1930s heavily restricting or prohibiting traders from rebates (discounts), free gifts and sales.

However, over the last five years or so Germany has being liberalising its approach to unfair competition. Even before the directive on comparative advertising (1997/55/EC) had been implemented (into Section 2 UWG), the Supreme Court in 1999 overruled the previous ban and held that comparative advertisements would be allowed. In 2001 the Law on Rebates (Rabattgesetz) and the Ordinance on Free Gifts (Zugabeverordnung) were abolished. Recently, the German courts have moved closer to adopting the European Court of Justice's (ECJ) concept of the average consumer as being someone who is reasonably well informed, observant and circumspect.

Nevertheless, there still remains a perception that German courts are more restrictive on what amounts to unfair trade practice than those in other member states.

The proposed directive

The directive is designed to iron out any major differences between member states and strike a balance between consumer protection and liberalisation. It applies to any commercial practice directly connected with the promotion or sale of goods or services to consumers. There is a general clause stating that "unfair" commercial practices are prohibited. Unfairness is defined to be a commercial practice that (a) is contrary to the requirements of "professional diligence", and (b) materially distorts or is likely to distort the economic behaviour of the average consumer. Professional diligence is the measure of skill and care exercised by normal traders towards consumers in the relevant field.

The directive particularises two cases of unfairness - namely, misleading and aggressive practices. It gives examples of types of misleading practice, eg one which is likely to cause the average consumer to take a transactional decision that they would not otherwise have done due to their being deceived as to the main characteristics or price of the product. The omission of "material" information that would have been likely to cause the average consumer to take a transactional decision they would not otherwise have taken is another example. The directive adopts the ECJ's concept of the average consumer.

Commercial practices are aggressive if, by harassment, coercion or undue influence, they are likely to significantly impair the average consumer's freedom of choice and so cause them to take a transactional decision they would not have otherwise taken.

The directive has a blacklist of 12 misleading and seven aggressive practices that are deemed unfair, including:

- Offering a product at a specified price and then (a) refusing to sell it, (b) refusing to take orders for it or deliver it within a reasonable time, or (c) demonstrating a defective sample of it, with the intention of promoting a different product ('bait and switch').

- Using editorial content to promote a product without making clear that the trader has paid for the promotion ('advertorials').

- Making persistent and unwanted solicitations by telephone, fax, email or other remote media.

- Targeting consumers who have recently suffered a bereavement in their family to sell a product directly relating to the misfortune.

Under the directive, traders only have to satisfy the national law of the member state in which they are established ('mutual recognition'). For example, a German trader marketing to an English consumer only has to comply with the German implementation and interpretation of the directive.

The German government's draft for a revised UWG in January 2003, six months before the proposed directive was adopted by the Commission, presented the most substantial change to unfair competition law for almost 100 years. The objective is not only to meet the recognised 'national need for liberalisation', but also to anticipate European legislation and build model legislation for Europe.

To a large extent the draft looks very similar to the directive in that (unusually for German legislation) it starts with definitions, followed by the general prohibition, with examples of 'unfair commercial practices' (Lauterkeit, as opposed to contra bonos mores). Many of these examples follow the categories established by case law, such as undue influence and exploiting inexperienced consumers such as children. However, in contrast to the directive, neither the current nor the draft UWG were ever aimed predominantly at consumer protection but were intended to protect competitors.

The draft UWG contains a new sanction known as 'skimming-off profits' (Gewinnabschöpfung), which applies to businesses that intentionally or recklessly violate the new general clause and so harm a large number of purchasers. Any such unfairly procured profits are then claimed by the state. There is much debate about this new type of remedy, which appears to be a cross between a fine and an account of profits.

There are differences between the proposed directive and the draft UWG and it is questionable whether German lawmakers should proceed with their national approach while the European Community is in the process of harmonising this field. It has been argued that Germany should liberalise its laws as soon as possible and not wait for the adoption of the directive. But that may lead to a need for a further revision once the EU has adopted the directive.

If the German government legislates before waiting for the directive to be adopted, then it may be more efficient if the draft UWG is revised to mirror the wording of the proposed directive so as to minimise the need for yet more legislation in this field in two to four years' time. It may be advisable for the German government to put its legislation on hold pending the adoption of the directive. In the meantime, the German courts could start to interpret the existing general clauses in accordance with the terms of the proposed directive, which is what happened in the field of comparative advertising.

Conclusion

Adoption of the directive will be a radical step in the harmonisation of European consumer law. English law protects consumers by piecemeal legislation, the common law and self-regulation and has never had a general unfair competition law. German law, in contrast, has relied on the general clause of the UWG as interpreted by the courts. But traditionally Germany has been considered to be overprotective of consumers. If the Commission is right about the directive's effect on the internal market, we are going to see far more cross-border trade.

Germany is ahead of the game in already having drafted new legislation in this field. But, if it adopts the draft revised UWG now, it will probably have to revise its legislation again within the next four years in order to implement all the terms of the directive. In any event, it is likely that the German courts will continue to liberalise the law on commercial practices - and will probably keep one eye on the directive while doing so.

Kai Westerwelle is a partner in Frankfurt and Timothy Pinto an associate in London, both in Taylor Wessing's intellectual property group