Old customers, new products: Indemnity for commercial agents after the Court of Justice ruling in Marchon | In Principle

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Old customers, new products: Indemnity for commercial agents after the Court of Justice ruling in Marchon

After the end of cooperation with the principal, a commercial agent is entitled to indemnity if the agent brought “new” customers to the principal or generated a significant increase in turnover with “old” customers. But what if the customer is “old,” and the turnover hasn’t increased greatly, but the agent encouraged the customer to order goods or services it hadn’t ordered before?

This issue was the subject of a recent ruling by the Court of Justice of the European Union in Marchon Germany GmbH v Karaszkiewicz (Case C-315/14, judgment of 7 April 2016). A former commercial agent, Yvonne Karaszkiewicz, sought indemnity from her former principal, Marchon Germany, a distributor of frames for eyeglasses, following termination of the agency agreement.

What do the regulations say?

The possibility of awarding indemnity to a former commercial agent is provided for in Art. 17(2)(a) of the Commercial Agents Directive (86/653/EEC) and relevant provisions of national law implementing the directive in specific member states of the European Union. The Marchon case involved provisions of the German Commercial Code which are similar to the analogous provisions of Poland’s Civil Code.

Under Art. 17(2)(a) of the directive, the commercial agent is entitled to an indemnity when:

  • The agency agreement has been terminated
  • During the term of the agreement the agent “has brought the principal new customers or has significantly increased the volume of business with existing customers”
  • The principal “continues to derive substantial benefits from the business with such customers,” and
    • Payment of the indemnity is equitable under the circumstances.

The directive expressly mentions only two instances of achievements for which the agent should receive indemnity: gaining “new” customers or “significantly” increasing business with existing customers. In the Marchon case, the Court of Justice essentially considered whether, notwithstanding the express wording of the directive, a third category could be identified, i.e. encouraging existing customers to order goods or services they had not ordered before, even if this did not result in a significant increase in the total turnover with these customers.

Nature of the dispute

The case in which a preliminary ruling was sought from the Court of Justice involved various brands of frames for eyeglasses sold by the same distributor, Marchon. The distributor used a network of commercial agents, but each of them was assigned the right to promote only selected brands of frames.

Karaszkiewicz worked as an agent primarily with existing Marchon customers (opticians’ boutiques), but she was effective in encouraging them to order products from brands they had not purchased before. Apparently her initiative did not result in a significant increase in the total turnover with these customers, but there was a change in the breakdown as they shifted toward purchases of different brands, specifically the brands Karaszkiewicz was responsible for.

When Karaszkiewicz was terminated, a dispute arose in which she claimed indemnity from Marchon in the German courts. The case made its way to the Bundesgerichtshof (Federal Court of Justice), which requested a preliminary ruling from the CJEU, seeking an interpretation of Art. 17 of Directive 86/653/EEC to determine whether “new customers” for purposes of the directive can be understood to include also existing customers of the principal who purchased new products.

Court of Justice ruling

Essentially the Court of Justice said “Yes,” so long as the agent’s getting old clients to buy new products required “establishment of specific business relations,” making them in some sense “new customers”—new for a specific range of products offered by the agent’s principal. The court’s understanding appears to follow from the (accurate) assumption that under market realities, customers often pay attention to the brand as such and become loyal to the brand, regardless of who is the actual manufacturer or distributor.

Significantly, the court did not explain in the judgment what in particular the “specific business relations” which the agent should establish with the customer should involve. Here it is tempting to rely on certain hints based on the structure and rationale of Art. 17 of the directive as well as the overall tenor of the judgment.

First, it seems that the relations should be “specific” as to the particular brand in the sense that it is insufficient for the agent to maintain “general” relations between the principal and the customer, even if incidentally the existing customer does buy new products. It is necessary for the agent’s initiatives to be targeted to creating such relations with the customer so that it becomes loyal in some sense to a specific brand offered by the distributor, rather than being loyal to the distributor itself.

The Court of Justice also suggested that the relations may be “specific” if “the goods relate to a different portion of the range to that which those customers had purchased up to that point” and “the sale of the goods generally takes place in a different setting depending on the brands to which they belong.” This suggests that the relations may be specific also in the sense that there are specific practices for promotion and distribution of particular goods, services or brands offered by the principal, requiring the agent to make additional or different efforts depending on which portion of the principal’s range the agent is promoting. For example, products might need to be promoted differently if they are higher-price items, and thus are more often financed with credit or purchased on an instalment plan—or when items serve different functions (such as different types of insurance products or farm equipment with different uses).

This understanding appears to be a reasonable requirement, because it makes the situation of selling new products to old customers similar to that of winning entirely new customers. It is also helpful from an evidentiary viewpoint, suggesting how to prove the connection between the agent’s efforts and winning orders for specific new products from existing customers.

In discussing the ruling in the Marchon case, it should also be pointed out that the Court of Justice admitted that an indemnity might be owed for winning orders for new products from old customers, but the fact that the customers had already been purchasing the principal’s products could result in a lower amount of indemnity. It is likely that in such case the agent’s task was easier, which should be taken into consideration by the court when determining on the basis of equity whether the agent deserves an indemnity and in what amount.

Relation to Polish law

Art. 17 of the Commercial Agents Directive, which was at issue in the Marchon case, was implemented in Poland through Art. 7643–7645 of the Civil Code. Those provisions faithfully track the wording of the directive (or more precisely, one of the options provided for in the directive), providing that an indemnity is due if the agent “has brought the principal new customers or has significantly increased the volume of business with existing customers.” Thus the interpretation of “new customers” applied by the Court of Justice in this case can be applied directly to the text of the Polish code.

The issue faced in Marchon has not yet arisen in the Polish case law—or in the legal literature, which follows the literal wording of the law in stating that indemnity is due only for winning entirely new customers or increasing turnover with existing customers.

The Marchon judgment should change this line. The Polish courts are required to follow the interpretation of EU law applied by the CJEU, and thus, in principle, are required to interpret the concept of “new customers” under Civil Code Art. 7643 so that it may also extend to existing customers who have been induced to purchase goods or services they had not ordered previously, if this required the commercial agent to “establish specific business relations.”

Time will tell how the Marchon case influences the rulings by Polish and other European courts. Agents will probably be tempted to treat most instances of effective sales of different products to existing customers as equivalent to winning new customers, even if the products are similar to those ordered by the same customers in the past. This would appear to be a good opportunity to seek an indemnity payment, relying on the principal’s existing client base but circumventing the requirement to significantly increase the turnover with existing customers.

In this context, what will be crucial is the understanding of the notion of “specific business relations”—the main barrier to claims of this type according to the court. Because the court did not venture to define this concept more precisely (perhaps because of a lack of unanimity among the judges), this task will fall to the national courts.

Maciej Zych, Litigation Practice, Wardyński & Partners