…has teeth as it benefits from its ­significant legal consequences

German Law International Business Law Magazine

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Companies receiving subsidies from member states of the Union can distort competition. Comparable ­effects can also arise from third-country companies, as well as from companies that, although based in the EU, have received aid from third countries. European subsidy law and WTO rules have not addressed these ­cases. The “Foreign Subsidies Regulation” (FSR) in force since 12 July 2023, attempts to close this regulatory gap and imposes extensive documentation requirements on companies that have received foreign aid. In the event of a violation, sanctions in the form of fines and, even more important, significant legal uncertainty, such as the ­voidness of a transaction or its possible reversal, can be threatened.

Points of reference for the FSR

The FSR is applicable in case of M&A transactions or participation in procurement procedures. Both activities may trigger notification obligations in a separate examination procedure with the European Commission. A transaction has had to be notified since 12 October 2023, if the target company is established in the European Union and achieved a turnover of at least €500 million in the previous financial year, and the companies involved have received third-country aid totaling at least €50 million in the last three financial years. In connection with public procurement procedures, the submission of certain offers is subject to notification to the European Commission if the contract value exceeds €250 million and the bidder, ­including its affiliated companies (and possibly even ­including the main subcontractors and main suppliers), has received third-country financial aid totaling at least ­€4  million in the last three financial years. In addition to this, the European Commission may also examine market situations ex officio.

The broad scope of application

The concept of aid is broader than that of a subsidy. It can range from the transfer of funds or liabilities, to the waiver of otherwise due revenues, or the granting of special or exclusive rights, to the mere provision or acquisition of goods or services. All relations with third-country actors must be identified by companies in anticipation of a possible notification obligation in the context of a transaction or participation in a tender and be checked for their relevance. In the event of a transaction or participation in a public procurement procedure, all financial grants must be taken into account – regardless of whether they may have to be disclosed in the context of an examination procedure, and regardless of whether they will be significant for the assessment of a possible distortion of competition. In addition, the period of 36 months before the event means a significant amount of information is required. As a consequence, the internal assessment of whether the thresholds are met cannot be event-driven but will need to be executed in advance. And relevant information will have to be collected on a continuous basis.

Ultimately, only those companies that can categorically exclude that they will ever be concerned by the scope of application of a transaction covered by the threshold will be able to refrain from doing so. In any case, many small and medium-sized companies will not be able to do so, at least not in a sales scenario. The same applies to participation in tenders. The threshold for the tender volume may seem high, but a main bidder will require clear confirmations from its subcontractors – sometimes small and ­medium-sized companies – regarding their third-country subsidies, in order to be able to participate in the tender procedure without running the risk of making wrongful statements.

The enforcement power of the FSR

The FSR has teeth as it benefits from its significant legal consequences: Transactions that fall within the scope of application must not be consummated before clearance. If a transaction that is subject to notification has already been completed and if market-distorting effects of third-country subsidies are determined, the European Commission can require the reversal and dissolution of the transaction. The European Commission can also ­impose fines of up to 10% of a company’s total annual turnover if it fails to comply with the obligations of the FSR. It is also authorized to impose fines on companies of up to 1% of global turnover and regular penalty payments of up to 5% of the average daily total turnover for each business day of delay if companies provide false, incomplete, or misleading information. And here too, the Commission can also act ex officio if it believes that a company should have made an FSR-filing.

What needs to be done?

The requirement for the continuous collection and evaluation of data and information requires companies to ­establish internal processes to continuously monitor ­financial contributions from non-EU countries. Continuous protocols for obtaining information should be implemented, which should also enable relevant information from co-investors and limited partnerships. The FSR will be relevant throughout the transaction process, especially in due diligence but also for the negotiations on the purchase agreement. In case of substantial subsidies, where a preliminary assessment suggests that an impact on competition cannot be ruled out, the timeline will also be significantly affected. The duration of a review, which may include pre-notification discussions, may be hardly foreseeable without further experience. There may be delays of up to 150 days, which must be taken into account in the determination of a long-stop date. The Commission will provide assistance in critical cases. The risk of making an uncertain forecast can be mitigated, for example, by (informal) consultation with the Commission in advance. Conversely, in simpler cases, the effort of notification can be reduced through waivers.

Conclusion

Apart from the cases that actually need to be notified to the Commission, the FSR will require companies to provide a great deal of documentation and make a high level of evaluation effort in the future. This is the flip side of the politically understandable goal of protecting the internal market from competition-distorting contributions from third countries. German and European companies, with international reference points, even if only through sales to third countries, will have to find a pragmatic approach to avoid disproportionate effort on the one hand and on the other, be prepared for a quick determination of ­whether their transaction or tender participation may trigger a filing requirement.

[authorbox]

Dr. Jonas Brueckner, M. Jur. (Oxford)

KPMG Law Rechtsanwaltsgesellschaft mbH, Berlin
Attorney-at-Law, Partner

jonasbrueckner@kpmg-law.com
www.kpmg-law.com

[/authorbox]

Der Beitrag The Foreign Subsidies Regulation… erschien zuerst auf Deutscher AnwaltSpiegel.

Asterix’ magic potion and a leveler of lawyers?

German Law International

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You know the story: the small village of Asterix the Gaul who – thanks to a magic potion – is able to vigorously resist the Romans’ constant attempts to conquer it. But why this comparison?

If we take a step back and look at the legal market, we can make out the following rough developments: law firms are professionalizing themselves and are increasing in size, legal departments are further emancipating themselves and are retrieving work that was originally outsourced, the internet is democratizing knowledge and the fight over resources is being intensified. And now the next extension stage has come with a double whammy. With the help of artificial intelligence, average lawyers are becoming specialists too, and writing competence is not a differentiating factor any longer. And clients are doubly satisfied: they can do even more themselves, and external costs will decrease thanks to increasing competition among legal service providers. Or, to transpose it to the story of Asterix, with the magic potion all the villagers, even the oldest, Geriatrix, are suddenly equally strong!

Adapting to the evolving legal landscape

This development is likely to affect lawyers with more seniority less since they have not only enriched their brains by learning and work in the past but have also sensitized their gut feeling over the course of all their decades in the profession. They also practice a culture of independent critical thinking. In this way, they possess precisely those strengths that are expected from legally trained business consultants when providing strategically circumspect support today. There is reason to fear, however, that the numbers of this kind of consultant are dwindling. This observation is relevant to all those who possess less “intrinsic value” and who are being upgraded by AI in one fell swoop and levelled off against each other.

This begs the question of how, in the future, can uniqueness be created in competition if legal expertise is increasingly useless for this very purpose? To ensure that it can be done all the same, the following approaches will be important: repositioning in strategy, business models (e.g., multi-disciplinary partnerships), customer-­relevant knowledge, non-legal expertise, social skills and service. Which, in turn, leads to further questions. What kind of employees will be in demand and what further training should they be given?

It is advisable to initiate the change process early on in order to ensure that crisis management will not be required.

[authorbox]

Prof. Dr. Bruno Mascello, LL.M., EMBA HSG
University St. Gallen (HSG)
Attorney-at-Law, Director Law & Management, Executive School of Management, Technology and Law (ES-HSG)
bruno.mascello@unisg.ch
www.lam.unisg.ch

[/authorbox]

Der Beitrag Artificial intelligence erschien zuerst auf Deutscher AnwaltSpiegel.

Nine months to go until mandatory supply chain transparency

German Law International Business Law Magazine

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Regulation 1115/2023 (EU) on deforestation and forest degradation (EUDR) has been in force since June 2023. Obligated companies must implement the EUDR by 30 December 2024 (small and ­medium-sized enterprises (SMEs) by 30 June 2025). After a first round of FAQs in June 2023, the European Commission published further FAQs in December 2023 and provided access to the Forest Observatory.

Non-EU companies wishing to import relevant products into the EU should be prepared for extensive requests for information from their European customers.

The EUDR applies to relevant raw materials, including cattle, cocoa, coffee, palm oil, rubber, soy, wood and the products listed in Annex I of the regulation. This essentially means that numerous key industries are affected by the regulation. The EUDR also covers cross-border transportation of relevant products between production sites in the EU and abroad.

Import/export and trade ban in the event of non-compliance

From 30 December 2024 (from 30 June 2025 for SMEs), companies may only place relevant products on the EU market, make them available on the EU market or export them from the EU market if these products meet the ­requirements of the EUDR. The EUDR distinguishes ­between companies that import, produce and export relevant products in the EU (operators) and companies that make these products available on the market, i.e., sell them (traders). The EU Commission has now clarified that (special) customs procedures other than “release for free circulation”, such as the customs warehousing, inward processing and temporary admission, are not subject to the EUDR. Re-imports are considered to be imports.

To be EUDR-compliant, products must be deforestation-free or degradation-free and produced in accordance with the relevant legislation of the country of production. In addition, a Due Diligence Statement (DDS) must have been submitted.

Due Diligence Statement and the information system

Companies, i.e., non-SME traders and operators, must submit a DDS to the information system provided by the European Commission. According to the European Commission, a DDS can be amended or deleted within 72 hours. However, a subsequent amendment or deletion is not possible if the DDS has been used in the meantime (e.g., by other participants in the downstream supply chain). It has also been clarified that frequently used data cannot yet be stored for future reference. The EU Commission has announced that it will complete the test phase for the information system by the end of January 2024. However, it is already clear that there will be different ­input screens for traders and operators. In the DDS, companies must provide the geolocation data of the land on which the relevant raw material was grown and harvested or, in the case of cattle, where the cattle were kept. With regard to complex production situations, the EU Commission has stated that all relevant plots of land must be indicated, even if this means that in individual cases (e.g., in the case of bulk soy from various sources) more than 100 plots of land must be indicated. In addition, the DDS must confirm compliance with the due diligence obligations in accordance with the EUDR. Evidence and information in this regard does not have to be submitted via the information system, but should be documented by companies in the event of an official inspection into compliance with due diligence obligations.

Comprehensive due diligence obligations

According to Article 8 of the EUDR, companies are obligated to collect comprehensive information, carry out a risk analysis, take risk mitigation measures and document all measures taken. The EU Commission clarifies that the due diligence obligations must be fulfilled regardless of the expected country-specific risk of deforestation.

As a first step, companies must collect information. This concerns the aforementioned geolocation data and ­general information about the raw materials and products, such as HS code, weight and dimensions, as well as the date/duration and scope of production. The EU Commission ­emphasizes that every relevant product entering the European market should be traced back to its origin and – in the case of bulk goods – must not be mixed with non-compliant products. The information collected must show that the products are free from any links to deforestation or, in the case of timber, also free from any links to degradation and have been produced in accordance with the relevant legislation of the country of origin.

The extent of deforestation and forest degradation on a plot of land can be determined by the Forest Observatory, which the European Commission made available in ­December 2023. The EU Commission emphasizes that the Forest Observatory is non-binding and non-exhaustive. The database, which consists of satellite images and other information, shows in particular whether deforestation has taken place in an area after 31 December 2020. The EU Commission has clarified that forest degradation means a structural change in the forest – usually a conversion to plantations. The Forest Observatory specifies different types of forest change, e.g., due to fire or disturbance. Due to the complexity of the information, companies should familiarize themselves with it at an early stage.

Although the list of relevant legislation of the country of production under Article 2 (40) EUDR is extensive and abstract, the EU Commission has not yet defined it comprehensively. Instead, the EU Commission has announced that detailed guidelines will be made available in due course. Furthermore, the EUDR only contains a “non-­exhaustive list of legal provisions”; however, all provisions should be assessed in relation to the production sector. According to the Commission, environmental protection refers to the “protection of forests, the reduction of greenhouse gas emissions or the protection of biodiversity”. The Commission emphasizes that in particular, for example, official records, court decisions, permits, contracts and ­official papers should be collected as evidence of compliance with the relevant legislation.

The EU Commission has made it clear that certification systems are useful to cover information needs – i.e., to ensure the chain of custody. However, they should only be seen as a supplement to compliance with the EUDR. ­Nevertheless, in order to enable a seamless transfer of ­information, the use of certificates is recommendable.

In a second step, the information collected must be subjected to a risk analysis to determine whether there is a risk that the EUDR has not been complied with. Operators and traders will only be EUDR compliant, if they can rule out a non-negligible risk. Similar to the German ­Supply Chain Due Diligence Act (LkSG), this means that relevant supplier information should be linked to risk ­indicators. Companies should consider using AI-based tools to assess relevant risk-related information.

In a third step, risk mitigation measures must be taken. This includes a risk management system with a respon­sible compliance officer – similar to what German companies already know as a human rights officer from the LkSG.

Your next steps

EU companies may be directly obligated under the EUDR. As suppliers of relevant raw materials and products, non-EU companies can be contractually obliged to provide and procure the necessary information. The consequences of the EUDR therefore extend far beyond the borders of the EU.

In order to prepare as effectively as possible for the ­requirements of the EUDR, companies should clarify whether the EUDR affects them. Companies should ­review the tariff numbers of their goods and compare them with Annex I of the EUDR to identify relevant pro­ducts. In case of doubt, companies should consider legal advice for the specific customs classification of their goods. An application for Binding Tariff Information (BTI) may be recommendable.

Regardless of whether companies are directly or indirectly affected by the EUDR as a non-EU company, it is advisable to create a risk analysis and risk management to organize the collection and analysis of information that will be needed along the supply chain in the future. Companies should combine supply chain due diligence expertise with foreign trade expertise. The complexity of this new supply chain due diligence regulation demonstrates the need for reviewing and amending internal risk management processes and monitoring current legislation projects.

[authorbox]

Stefanie Beermann

GvW Graf von Westphalen, Düsseldorf
Attorney-at-Law, Associate

s.beermann@gvw.com
www.gvw.com

[/authorbox]

[authorbox]

Dr. Julia Hörnig

GvW Graf von Westphalen, Brussels
Attorney-at-Law, Associate

j.hoernig@gvw.com
www.gvw.com

[/authorbox]

[authorbox]

Max Jürgens

GvW Graf von Westphalen, Hamburg
Attorney-at-Law, Senior Associate

m.juergens@gvw.com
www.gvw.com

[/authorbox]

Der Beitrag Deforestation: Essential steps for compliance by December 2024 erschien zuerst auf Deutscher AnwaltSpiegel.

“The end of the world as we know it”

German Law International Business Law Magazine

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Talking to lawyers about the topic of AI, one ­gene­ra­lly encounters a palpable fascination and a general willing­ness to try it out, as well as internal law firm task forces and legal tech labs that are experimen­ting with AI. This is usually followed by a general statement about how impressed they are with the capabilities of AI and its potential to make our work easier and potentially increase efficiency. But the high-end creativity of our legal advisory business cannot, so the common understanding among most lawyers, be replaced by machines, and certain human skills (empathy, negotiating skills) will certainly not become superfluous due to AI either. So don’t be afraid!

At the same time, these discussions are usually quickly followed by the story of the danger of AI hallucinations and that the whole thing is not yet ready. In general, this attitude towards the topic of lawyers and AI is prevalent: AI makes us lawyers more efficient, but doesn’t replace us. Or: It’s not AI that replaces us, but the lawyer who uses AI. Most of the comments made by the panelists at last December’s “class reunion of the legal market in Germany”, the InhouseMatters conference in Frankfurt, went in this direction (see review). And Bruno Mascello, in his outlook on the key trends in the legal market in 2024 in issue 01/2024 of Deutscher AnwaltSpiegel, is not worried that lawyers will be replaced by AI, but is more concerned about legal professional secrecy and advises using 2024 to consolidate (see here).

Lawyers may face the same fate as translation service providers

There is no reason for such confidence. In reality, the ­current discussion about law and AI mostly misses the core of the problem. The old world of lawyers and law firms will be over in the foreseeable future. We lawyers haven’t really realized this yet. In reality, lawyers are in a similar position to providers of translation services in times of DeepL. They are in danger of becoming obsolete to a large extent.

Richard Susskind may still be right when he states that the short-term impact of AI on lawyers is greatly overesti­mated. But above all, he is right when he goes on to say that the long-term impact of AI on lawyers is greatly ­underestimated (for example, see here). He refers to Ray Kurzweil’s statement that the performance of neural networks doubles every 3.5 months, i.e., in six years it will be 300,000 times greater than it is today. Anyone who has tried out Microsoft Copilot and its already impressive performance with regard to the Outlook, Word, PowerPoint and Excel programs bundled in MS Office 365 can ima­gine that exponential increases in the performance of AI will then not leave much room for human improvements to the results obtained by AI.

What does this mean for lawyers? At present, the strength of AI, at least in Germany, does not yet lie in answering legal questions. It still lacks sufficient training with the necessary data. However, AI can already be used sur­pri­singly well by lawyers in certain core areas of their work, namely document creation.

Attorney-client privilege and data protection are, of course, issues that must be kept in mind. Uploading non-anonymized data to ChatGPT is out of the question without appropriate safeguards. However, today this is ­already not an insurmountable hurdle. For example, when using Microsoft Azure, it is possible to ensure that the relevant data is not used for general training purposes. And with the right partners, the necessary agreements on confidentiality protection with regard to § 43e (3) BRAO and on commissioned data processing can already be concluded today. If such contractual safeguards are in place, AI may then be used by lawyers even on non-anonymized data sets.

Impressive increase in efficiency thanks to AI

Summarizing, translating and comparing documents are the least impressive achievements of AI. Things get more interesting when it comes to analyzing documents with the help of AI. In this way, data points can already be ­easily extracted from documents and used for further proces­sing. Draft contracts from the other party can be compared with the company’s own standard in its own playbook in seconds.

Even more impressive is the assistance that AI can already provide today when drafting documents. For example, I can already use the AI functions of the PatternBuilderMax program from NetDocuments to create a customized draft based on a template or similar document from my sample collection if I only specify a few key points that I want to have reflected. A reasonably tech-savvy notary may ­pro­bably already have 95% of their notarization preparation work done by AI in this way.

Efficiency gains will not benefit lawyers commercially

However, anyone who primarily emphasizes that AI makes lawyers’ work easier and more efficient has not heard the shot. Even at a superficial level, AI will be a ­bitter disaster for lawyers’ business models. Notaries may be able to pocket efficiency gains because they charge ­according to the (for the time being) compulsory statutory fee schedule. However, under the rule of the billable hour, lawyers do not commercially benefit from efficiency gains (if they honestly record and bill the work involved). ­Instead, such gains end up with their clients who are billed for less legal work.

It gets even worse. Things become really tense for lawyers if you ask the question differently and change your perspective. Instead of asking what AI means for lawyers, what does AI mean for their current clients? From their perspective, not only will legal advice become cheaper in view of the efficiency gains described above, but they will also ask themselves whether they still need a lawyer to answer legal questions and draft contracts at all. And the answer is clear. In view of the expected exponential ­increases in the performance of AI and assuming sufficient training under German law, this will no longer be the case for a large proportion of the work currently performed by law firms. This is already beginning to emerge with regard to the involvement of external lawyers by corporate legal departments. In the not-too distant future, contracts will only be drafted by external law firms in ­exceptional cases. The same applies to consumer law. Soon hardly any consumers will need to ask a lawyer the question: What is the legal situation? What should I do? ­Instead, people will ask AI. And get an answer that is at least as good, but certainly faster and cheaper.

Privileged treatment of lawyers in the Legal Services Act must be abolished

At best, one may argue about when this point will be reached. Will it be in one year, three years or five? That will to a large extent depend on how quickly the existing hurd­les in Germany are removed. One such obstacle is the ­German Legal Services Act which prohibits non-lawyers from providing legal advice. Answering legal questions ­relating to individual cases using AI undoubtedly constitutes legal advice and would under the current legal rules be reserved for lawyers as a result. There will no longer be a reason for this privilege in the future if AI is superior to lawyers. Secondly, in order to be able to answer legal questions with sufficient certainty using AI in Germany, we need a sufficient data basis. This makes free online avai­l­ability of court rulings essential. The days in which only a small percentage of court rulings are available online, as is the case today, and a large proportion of these are only ­accessible after overcoming access barriers such as beck online and Juris, must come to an end as quickly as ­possible.

Legal protection from hallucinations caused by AI?

What remains? Perhaps we lawyers will still be needed to check the plausibility of the results obtained by AI. Here too, however, skepticism is warranted. Presumably, we will only be called upon for a short transitional period to validate the results obtained using AI and to protect people from AI hallucinations. In view of the prospective capa­bilities of AI, the question will tend to be the other way round. It will then be like autonomous driving. In reality, humans are worse drivers than AI-driven cars without ­human drivers. In the foreseeable future, AI will not ­answer legal questions worse and in a more error-prone manner, but better and many times faster than most lawyers. It will then no longer be a question of whether the use of AI in legal advice constitutes professional negligence. Rather, we will find ourselves confronted with the claim that answering legal questions and preparing contractual documentation without the aid of AI is professionally negligent per se.

People may also continue to instruct us because they merely want to have a liable party in the event that something goes wrong. In the future, however, this will be more the domain of insurance service providers than of lawyers who will merely be middlemen in this regard.

Little consolation from remaining fields of activity

Of course, there will still be areas in which the involvement of lawyers remains necessary, either as a legal ­requirement or out of factual necessity. For example, notaries will probably succeed in defending the existing notarization requirements for a few more years without any material justification. The obligation to be represented by a lawyer in court may also continue to exist. The time will soon come, however, when the question arises as to whether and to what extent court proceedings can be ­replaced by AI-driven dispute resolution procedures. This is likely to be the case with the mass litigation proceedings that are currently felt to be overburdening the courts.

That leaves situations in which classic human skills are required, such as empathy and negotiating skills. How­ever, this is not much consolation for lawyers. In reality, these skillsets often have little to do with the application of the law. In any case, none of these are learnt in law school. And it will never be possible to increase the hourly rate for these remaining activities to such an extent that they can even remotely economically replace the activities that are no longer required.

What can be done? We may regret all these developments, but we will not be able to stop technological progress. We have to say goodbye to our old world and get used to a new, different role instead. We need to discuss what this role might be in the year that has just begun. In this ­respect, we don’t have much time for consolidation.

[authorbox]

Dr. Matthias Birkholz, LL.M.

lindenpartners, Berlin
Lawyer, Partner

birkholz@lindenpartners.eu
www.lindenpartners.eu

[/authorbox]

Der Beitrag Lawyers and artificial intelligence erschien zuerst auf Deutscher AnwaltSpiegel.

Future challenges and risks for employers in Germany

German Law International Labor Law Magazine

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Introduction

On 6 June 2023, the European Pay Transparency Directive (EU) 2023/970 came into force, setting new minimum requirements for pay transparency in employment. The purpose of the directive is to create pay transparency in companies and to detect and prevent gender-based pay discrimination. National legislators have until 7 June 2026 to implement the directive. The German legislator will most likely amend the existing Pay Transparency Act ­(EntgTranspG) for this purpose. It is not yet possible to predict exactly what form the amendment will take. However, the directive itself and the accompanying recitals provide a number of new instruments and procedures ­relating to pay transparency that will be relevant to German employers. Examples include pay transparency in the application process and an employee’s right to information about pay regardless of the number of employees in the company. It is worth taking a look at the key provisions of the directive in order to prepare for the increasing administrative burden in companies. Compliance risks should also be assessed prior to the implementation of the directive in order to be able to react in a timely manner once the directive has been implemented. The following article is not exhaustive and is intended to provide an overview of the key changes to pay transparency.

Art. 4: Equal and equivalent work

An essential factor for the comparability of pay is the obligation to guarantee equal pay for equal work or work of equal value, as set out in Art. 4 (1). These terms are already defined in § 4 (1) EntgTranspG. It is likely that the legislator will expand and specify the list of criteria for determining non-discriminatory pay systems (§ 4 (4) 2 EntTranspG).

It also follows from Art. 4 (2) that the development of ­instruments and methods for the assessment of pay as an aid for employers and social partners is initially the primary task of the respective member state. It is not yet clear how far-reaching and sophisticated the national pay ­assessment systems will be. At the same time, however, German employers can test analytical procedures for the evaluation of individual jobs and fields of activity within a company in terms of pay law before the directive is implemented. This is because the directive does not exclude the use of individual pay evaluation systems. These offer the advantage of being individually adaptable to the indivi­dual company and the differing comparison groups of ­employees, thus providing more precise results.

According to Art. 19 (1), the comparability of activities is not only limited to those with the same employer, but also to a single source, provided that this source sets uniform remuneration conditions. According to recital 29, such a source may, for example, be the group parent company if it establishes uniform remuneration rules for subsidiaries and there is no collective bargaining coverage for these. Collective agreements and works council agreements are also likely to qualify as a uniform source. If no actual comparator can be determined, Art. 19 (3) allows recourse to a hypothetical comparator, including any remuneration ­statistics. This is intended to extend pay transparency to ­gender-specific fields of activity.

Art. 5: Information about remuneration in the application procedure

The right to information regulated in Art. 5 (1) is not ­included in the EntgTranspG and shifts pay transparency to the application process. As a result, job applicants have the right to receive information about the starting salary or salary range paid by the target employer before the ­interview. The literal interpretation of the provision suggests that employers must act independently and provide pay information in accordance with the provision in a job advertisement, before the interview, or in some other way.

Furthermore, in accordance with Art. 5 (2) employers may not ask applicants about their pay history from previous employment as part of a job interview The right to information is not tied to a threshold number of ­employees and therefore applies to all companies.

According to recital 32, the purpose of the right to information is to avoid a lack of information on the part of ­applicants and to strengthen their negotiating position. At the same time, the negotiating power of the parties to ­employment contracts should not be restricted to negotiating a salary outside the disclosed salary range. How the balancing act between the contractual freedom of the ­parties to employment contracts and gender-neutral, ­objective salary assessment is to be achieved, however, ­remains open.

In purely factual terms, the negotiating power of the ­parties to an employment contract is likely to be limited if the employer cannot base higher pay on objective, ­gender-neutral criteria. Otherwise, the employer would run the risk of not being able to rebut the presumption of pay discrimination in the event of a subsequent disclosure and review of salaries by third parties.

Art. 7: Right to information in existing employment

Art. 7 (1) provides for a right to information for all ­employees, irrespective of the threshold, regarding their own individual pay level and the average pay level of other groups of employees, broken down by gender and by individual groups of employees who perform the same or equivalent work. The main difference from § 11 (3) 2 ­EntGTranspG is that the average number of comparable employees, not the statistical median, is used as the comparative figure.

Furthermore, the directive does not set a time limit for the assertion of the right to information, whereas § 10 (2) EntGTranspG generally provides for a blocking period of two years for the relevant employee after the request for information has been made. In the future, following the implementation of the directive, employers may be subject to repeated requests for information from the same employees as a result, whereby the legal limits are likely to lie in the assertion of the claim in breach of trust. Employers must inform all employees of the existence of the right to information once a year in accordance with Art. 7 (3). According to Art. 7 (4), employers are obliged to respond to requests for information within two months. Furthermore, according to Art. 7 (5), regulations that prohibit the disclosure of remuneration are inadmissible.

Non-disclosure clauses in employment contracts regarding salary, which are already considered to be ineffective in most cases under current case law, should finally ­become a thing of the past.

Art. 9: Reporting obligations

Art. 9 (1) provides for far-reaching changes with regard to the reporting obligations on the pay gap for employers. In particular, reports must reflect the gender pay gap and the average gender pay gap, including variable remuneration components. In terms of content, the reporting obligation under § 21 EntgTranspG only covers measures to promote equality and establish equal pay, and information about the average total number of employees and the average number of full-time and part-time employees.

According to § 21 EntgTranspG, only companies with more than 500 employees and that are obliged to prepare a management report in accordance with § 264 and § 289 of the German Commercial Code are required to report. In contrast, the threshold has now been reduced to 100 employees in accordance with Art. 9 (4). The implementation period will be staggered depending on com­pany size and begins for companies from a size of:

• 250 employees with a reporting obligation as of 7 June 2027 and annual reporting intervals;
• 150 to 249 employees with a reporting obligation as of 7 June 2027 and reporting intervals every three years;
• 100 to 149 employees with a reporting obligation as of 7 June 2031 and reporting intervals of three years.

Reports must be made available on the company’s website or by other means (Art. 9 (7)).

Companies with fewer than 100 employees may draw up voluntary reports on pay in accordance with Art. 9 (5). According to recital 42, such voluntary reports can be ­rewarded in the form of a pay transparency label. An ­employer could then use a pay transparency label to ­advertise their company in order to show potential applicants that they comply with pay transparency standards, thus increasing the attractiveness of the position. In addition, Art. 9 (5) gives national legislators the option of obliging companies with fewer than 100 employees to provide information about pay.

According to Art. 10 (1), employers are required to carry out a joint pay assessment with employee representatives, if the report according to Art. 9 shows a gender-specific difference of 5% in the average pay level of employee groups that is not justified by objective, gender-neutral criteria, and the employer does not correct pay within six months of the report. The aim of joint pay assessments is to eliminate unjustified pay differences in cooperation with employee representatives.

Financial risks to employers

In the future, employers will have to protect themselves against claims for damages made by employees who have experienced discrimination, fines from the authorities, and exclusion from public procurement procedures.

Art. 16 of the directive contains a right to compensation for breaches of equal pay by employers. Employees will have to be placed in the position in which they would have been if there had been no pay discrimination. This ­includes, in particular, material and non-material ­damages as well as interest on arrears. In the past, claims for damages due to pay discrimination were based on § 15 AGG.

In addition, Art. 18 (1) provides for a shift in the burden of proof to the employer in cases of pay discrimination, if an employee credibly establishes facts that demonstrate that there has been pay discrimination. According to Art. 18 (2), it should be sufficient for the burden of proof to shift if an employer does not comply with its obligations under Art. 5, 6, 7, 9 or 10. This employer would then have to prove that the breach was obviously unintentional and minor. The BAG (ruling of 21 January 2021 ‒ 8 AZR 488/19) has so far applied § 22 AGG to pay discrimination. Following the implementation of the directive, this provision is likely to become more important with regard to breaches of duty by employers under the directive.

Furthermore, “dissuasive” fines will be implemented in ­accordance with Art. 23 (1). The legislator will most likely introduce various administrative offenses for violations of the above provisions. The EntgTranspG does not yet contain such sanctions.

In addition, Art. 24 (2) of the directive provides for exclusions from public procurement procedures. The directive thus specifies that violations of equal pay fall under § 124 (1) 1 of the Act against Restraints of Competition (GWB) and can constitute a reason for exclusion.

From a compliance perspective, employers who prepare reports on a voluntary basis should pay attention to the fact that by preparing a report on the gender pay gap, any pay discrimination could be uncovered for the first time and a factual basis for claims for damages and fines could be created.

On the other hand, a voluntary report following a successful exclusion from public procurement procedures may constitute exculpatory grounds pursuant to § 125 (1) No. 3 GWB. It should be considered whether reporting is appropriate on a case-by-case basis.

Remuneration transparency is also likely to play a greater role in employment law due diligence in the future. If irregularities are discovered in this respect during due dili­gence, this may have an impact on purchase price negotiations. In this context, corresponding indemnities, representations and warranties in the company purchase agreement will also become relevant.

Conclusion

It will be interesting to see how the directive actually is implemented by the legislator. However, due to the signi­ficant deviations from the EntgTranspG, employers must already be prepared to adapt their remuneration systems accordingly. The complexity of pay transparency systems and the associated legal hurdles require a certain lead time for proper implementation. As a result, it would be advisable to introduce pay transparency systems before the ­directive is implemented. These can then be gradually evaluated and optimized. When the worst comes to worst – the implementation of the directive – companies will be better prepared for the new requirements. Failure to do so could result in fines, claims for damages and exclusion from public procurement procedures. Particular attention should also be paid to documentation requirements. If employers are diligent in preparing reports, the above risks can be minimized. This is because the relevant ­reports will be the flip side of the pay structure in the ­respective company and will show whether there is possible pay discrimination.

[authorbox]

Konstantin Kühn
Mayer Brown LLP, Frankfurt am Main
Attorney-at-Law, Associate

kkuehn@mayerbrown.com
www.mayerbrown.com

[/authorbox]

Der Beitrag The European Pay Transparency Directive erschien zuerst auf Deutscher AnwaltSpiegel.

A practical view on the German ­Whistleblower Protection Act

German Law International Labor Law Magazine

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The German Whistleblower Protection Act (Hinweisgeberschutzgesetz, or HinSchG) has been in force since last summer. This Act obliges employers with more than 50 employees to set up an internal reporting center. Neither the underlying EU directive nor the Act address the involvement of works councils. As a result, the co-determination of works councils can only be derived from general works constitution law.

What does the German Works Constitution Act say?

It is surely beyond dispute that employers must inform works councils of the establishment of an internal reporting center under § 80 of the German Works Constitution Act (Betriebsverfassungsgesetz, or BetrVG). In addition, approval rights for any hires or transfers may arise if the internal reporting office is not outsourced but – despite various disadvantages that this entails – is staffed with the company’s own employees. The works council may also have to be involved to the extent that the company’s own employees designated for this purpose will be taught the specific knowledge required by law during in-house ­training courses.

The issues just mentioned generally should not pose any problems in practice. The question of whether co-determination rights exist regarding the organization of internal reporting channels, however, is more controversial. This is highly relevant because the measure is otherwise invalid under individual employment law. This results from what is called the theory of effectiveness requirement. If the reporting center is deemed to be a technical facility for monitoring the performance or behavior of employees, co-determination rights result from § 87 (1) 6 BetrVG. However, we do not believe this is the case. A ­reporting center does not do any monitoring itself; instead this is done by the persons who process the reported facts. The law does not consider this case.

Order or organization of the company

It is questionable whether the regulation of an internal reporting office is a matter of the order of the company. For such a matter, § 87 (1) 1 BetrVG provides for co-determination. In this context, the Federal Labor Court ruled on 22 July 2008 (1 ABR 40/07) that this is the case if an employer wishes to commit its employees to report certain facts.

The co-determination of a works council is not strictly necessary when implementing the German Whistle­blower Protection Act if the employer has no obligation to report violations. For a similar case, namely the staffing of a complaints department pursuant to § 13 of the General Equal Treatment Act, the Federal Labor Court explicitly ruled on 21 July 2009 (1 ABR 42/08): The works council has no right of co-determination when organizing the complaints department in more detail and staffing it, since this does not concern the order, but the organization of the com­pany. This also applies when arranging the internal repor­ting office so that a right of co-determination will lapse here.

Organization of the notification procedure

The question that follows is whether the organization of the reporting procedure is subject to co-determination. This should certainly not be the case if the employer has decided at its own discretion to transfer the internal ­reporting office to a service provider outside the company. This removes the issue from the company sphere, and in turn eliminates the right of determination. The Federal Labor Court has only assumed a right of co-determi­nation if the position is located within the company (1 ABR 42/08).

No compulsion to use anonymous reporting channels

An employer cannot be forced by the works council or by a conciliation committee to allow anonymous reporting. This is expressly regulated in § 16 (1) 5 HinSchG. Due to this clear legal provision, no obligation to provide anonymous reports can be established by a conciliation com­mittee. This already follows from the introductory sentence of § 87 of the Works Constitution Act, according to which a right of co-determination does not apply if a statu­tory regulation exists.

Voluntary involvement of the works council advisable

A voluntary works agreement with the works council to implement the Whistleblower Protection Act may be ­advisable in any case, regardless of whether the works council has any co-determination rights. This has several advantages. First, it promotes acceptance among the workforce. Second, it reduces the risk of legal proceedings or the judicial appointment of a conciliation committee. Finally, it can form the basis under data protection law for measures taken by the employer if these are not yet ­covered by law.

Works council unsuitable as an internal reporting center

The idea of having the works council act as an internal reporting office, which is sometimes suggested, should be strongly discouraged. Apart from the fact that the aptitude required by law is unlikely to be present everywhere, it does not have the necessary independence required by law to fulfil its statutory mandate.

There is also the further problem that the works council has no right to refuse to testify with regard to the facts that are communicated to it by the workforce – often with the presumption of confidentiality. However, in the event of official proceedings, for example before the public prosecutor’s office or court, the works council must testify about what employees have confided to it. Works council ­members do not have a statutory right to refuse to testify – unlike doctors, lawyers, or similar persons subject to professional secrecy. This fact is often misjudged.

[authorbox]

Dr. Mark Zimmer
ADVANT Beiten, Munich
Attorney-at-Law, Specialist Lawyer for Labor Law, Partner

mark.zimmer@advant-beiten.com
www.advant-beiten.com

[/authorbox]

Der Beitrag The co-determination rights of works councils erschien zuerst auf Deutscher AnwaltSpiegel.

Companies are facing regulatory changes and labor law challenges

German Law International Labor Law Magazine

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Whilst Diversity, Equity & Inclusion (DE&I) may have historically been considered a matter for the Human Resources Department, we are ­increasingly seeing it being elevated to a board and management level issue, along with ESG and sustainability issues.

Although employees may still from time-to-time express views such as: “We don’t have a DE&I problem here,” and “DE&I is at odds with our meritocracy,” there is ever more recognition by company leaders that diversity brings true benefits to businesses. It offers different opinions, ideas, ways of working, life experiences, social backgrounds and cultures for businesses to draw from. As a result, any ­employer that wants to truly maximize the potential of its workforce, ensure talent retention and encourage innovation must embrace DE&I initiatives.

Business benefits aside, there are also regulatory changes, which are forcing companies to focus on DE&I.

Regulatory changes at EU Level

The European Commission’s Gender Equality Strategy frames the Commission’s work on gender equality and sets out policy objectives and key actions, including legal measures to criminalize violence against women and ensure pay transparency, and greater gender balance in business and politics.

The following directives have already been adopted pursuant to this strategy:

• The Women on Boards Directive requires (among other things) that, by 30 June 2026, at least 40% of non-exe­cutive director positions in listed companies must be held by members of the underrepresented sex. If companies decide to apply the target to both executive and non-executive directors, the target will be 33% of all director positions. Member States have until 27 December 2024 to transpose the Directive into national law.
• Under the EU Pay Transparency Directive, EU-based companies with at least 100 employees will be required to provide information about their gender pay gap. The Directive also seeks to: (i) ban terms in employment contracts which prevent employees from discussing salaries or seeking information about the same or ­other categories of workers’ pay; (ii) require Member States to impose penalties on companies in breach of the rules; and (iii) shift the burden of proof in pay discrimination claims from the worker to employers. The Directive also includes intersectional discrimination and will require job vacancies and titles to be gender neutral. Member States have until 7 June 2026 to transpose the Directive into national law.

Companies will need to be prepared for these changes once they take effect in national law.

Employment law challenges

The “Equity” part of DE&I focusses on remedying the fact that certain minority groups may be disadvantaged in comparison to others. Equity goes beyond equal treatment and requires thoughtful consideration of what changes should be made to policies, practices and working environments to ensure that all groups are able to reach their full potential, and may necessitate treating certain groups or individuals differently in order to do so. These DE&I initiatives are often referenced as positive measures or positive action. Examples of positive measures frequently implemented by organizations are mentoring and sponsoring programs for underrepresented talent, as well as targeted recruitment measures.

The implementation of positive measures to attract and retain a diverse workforce needs to be balanced against the risks of positive discrimination under employment laws.
In Germany, employees are protected against discrimination on the grounds of race or ethnic origin, gender, ­religion or belief, disability, age, or sexual orientation ­under the provisions of the General Equal Treatment Act ­(Allgemeines Gleichbehandlungsgesetz – AGG). ­Generally, pursuant to the AGG, any such discrimination is unlawful, particularly if it relates to conditions for ­access to employment, including selection criteria and recruitment conditions.

However, pursuant to § 5 AGG, unequal treatment of ­employees is permissible where suitable and appropriate measures are adopted to prevent or compensate for dis­advantages arising on the grounds of race or ethnic origin, gender, religion or belief, disability, age, or sexual orientation (so-called positive action).

Mentoring or sponsoring programs and targeted recruitment measures for women and persons from an underrepresented population could therefore be considered suitable and appropriate if they are objectively suitable, necessary, and proportionate overall to prevent or compensate for disadvantages (e.g., if women and persons from an underrepresented population are represented far less frequently in the company than in the population at large.)

If positive measures are not considered suitable, necessary and proportionate to the purpose, then there is a higher risk of such measures being considered to involve positive discrimination, which would be unlawful.

Take as an example a diverse recruitment strategy that ­requires 50% of the candidates interviewed for a vacant position to be from an underrepresented population. The purpose of the strategy is to contribute to a more diverse candidate pool and to prevent unconscious bias in the run-up to the application process.

Since the strategy only stipulates that at least 50% of interview candidates must be from an underrepresented population, without making any statement as to who will ultimately be hired, it can be argued that this interview quota has been introduced to provide women and persons from underrepresented populations with additional opportunities to facilitate their career. It is also intended to prevent/compensate for disadvantages due to gender, race or ­ethnic origin and thus reduce discrimination against persons from underrepresented populations. Accordingly, the strategy creates equal opportunities which are per­mitted as positive action pursuant to § 5 AGG. None­theless, it would still be necessary to ensure that the interview candidates from the underrepresented population actually meet the requirements of the vacant position ­before they are invited to an interview.

Quotas for the actual hiring of candidates from an underrepresented population have the potential to be more problematic, especially if they are considered to be rigid quotas. German case law has ruled that rigid quotas and unconditional priority rules (i.e., provisions that automa­tically favor female candidates in a hiring process irrespec­tive of their qualifications) are inadmissible. However, quotas could be considered to be more acceptable if

• the female candidates have the same, equivalent or at least almost the same qualifications as their male ­fellow candidates;
• female candidates are not given absolute and unconditional priority;
• the selection procedure is transparent and verifiable, and based on objective criteria; and
• all criteria concerning the person of the candidates are taken into account.

Whilst it is undeniable that DE&I is a positive force for change within organizations, as this article demonstrates, there are still legal and regulatory challenges faced by ­organizations as they evolve on their journey towards a more inclusive workplace culture.

[authorbox]

Matthew Devey
Linklaters LLP, Frankfurt am Main
Lawyer, Partner, Head of Employment Germany
and Head of Linklaters Diversity Faculty Germany

matthew.devey@linklaters.com
www.linklaters.com

[/authorbox]

[authorbox]

Samantha Cornelius
Linklaters LLP, Hamburg
Solicitor (England & Wales and Hong Kong SAR);
Global Gender Diversity & Talent Manager

samantha.cornelius@linklaters.com
www.linklaters.com

[/authorbox]

[authorbox]

Hendrik Bier
Linklaters LLP, Frankfurt am Main
Lawyer, Managing Associate Employment

hendrik.bier@linklaters.de
www.linklaters.com

[/authorbox]

Der Beitrag Towards an inclusive workplace culture erschien zuerst auf Deutscher AnwaltSpiegel.

Options for action and limits under Works Constitution Law

German Law International Labor Law Magazine

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On 7 October 2023, the Palestinian terrorist organization Hamas slaughtered, raped and abducted Jewish men and women, children and babies in an act of unprecedented barbarism. And yet there are demonstrations not only in the Arab world, but also in German cities, at which terror is condoned, justified and explicitly welcomed. This is often accompanied by the ­desire of such actors to wipe the state of Israel off the map. Even companies are not immune to such actions by their employees. People of different origins and religions come together in the workplace. Tensions arise to which ­employers must react. Dealing with members of the works council in the event of political propaganda in companies is a particular challenge. This article provides an overview of the options for action, but also of the limits under Works Constitution Law.

General considerations

The right to freedom of expression also applies in the workplace. However, this right is not unlimited. For example, it may be possible to terminate the employment of an employee whose statements in the company exceed the limits of criminal liability. This may be the case – with ­regard to the topic dealt with here – in the event of inciting hatred (§ 130 German Criminal Code (StGB)) or insulting statements, for example. Anyone who, in a manner likely to disturb the public peace,

• incites hatred against a national, racial, religious or ethnic group, against parts of the population or against an individual because of his or her membership of the aforementioned group or part of the population, or incites violence or arbitrary measures, or
• attacks the human dignity of others by insulting, maliciously denigrating or slandering a designated group, part of the population or an individual because of their membership of a designated group or part of the ­population.

This also includes the dissemination of such writings or articles in social media or on the internet. A punishable approval of criminal acts is also considered (§ 140 StGB). This criminal offense can be committed, for example, by celebrating or justifying the atrocities committed by ­Hamas at gatherings or on social media. In contrast to ­incitement to hatred, offenses committed abroad are also covered. The statement: “Free Palestine, from the river to sea” is usually aimed at the eradication of the state of ­Israel and can therefore constitute an offense (according to ­Fischer in LTO of 16 October2023, see here). If an unlawful or even criminal statement is made in a private chat group, an employee can only invoke a legitimate expectation of confidentiality in exceptional cases (German ­Federal Labor Court (BAG), ruling of 24 August 2023 – 2 AZR 17/23). As a result, chat content can be used, and in particular, used to justify dismissal. The disturbance of industrial peace (below the threshold of criminal liability) can also justify dismissal in individual cases, usually after a prior warning.

Not only activities within the company, but also activities outside the company can be relevant to dismissal if they have an impact on employment. There may be serious doubts as to the employee’s reliability and/or suitability for the activity owed under their employment contract. ­Dismissal would be all the more justified if there is a ­connection to the job. Employees are also obliged to take into account the legitimate interests of their employer ­outside working hours. Unlawful conduct outside of work can ­result in an employee breaching their duty of consideration under § 241 (2) German Civil Code (BGB).

Political activities in the works council

Pursuant to § 74 (2) 2 (2) German Works Constitution Act (BetrVG), employers and works councils must refrain from activities that would impair the work process or the peace of the company. This prohibition applies not only to the works council as a body, but also to every member of the works council. Party political activities of the works council and its members are also prohibited, § 74 (2) 3 ­BetrVG. In contrast to the activities pursuant to § 74 (2) 2 BetrVG, it is not necessary for work processes or indus­trial peace to be impaired. The ban on party-political ­activity does not extend to statements of a general political nature without reference to a political party. Therefore, the works council would not violate the party-political ­neutrality requirement simply by making an appeal to the employees of the company to participate in an upcoming political election or to vote (BAG, ruling of 17 March 2010 – 7 ABR 95/08, NZA 2010, 1133). This means that general political statements are permissible, even if a distinction is difficult to make. Statements that are punishable by law or that disturb industrial peace are not permissible.

Injunctive relief of employers

In the opinion of the BAG, employers have no right to ­injunctive relief against works councils. Conversely, the court does grant works councils a general injunctive relief claim against employers if the relevant employer dis­regards the co-determination rights of the works council. However, it rejects a claim for injunctive relief on the part of employers – in a legally unconvincing manner – citing the lack of assets of works councils and the associated lack of enforceability of injunctions.

Dissolution of works councils

If a works council grossly violates its statutory duties, an employer can, among other things, have the works council dissolved by a labor court, § 23 (1) BetrVG. In practice, however, this option proves to be a blunt sword. A works council would only be dissolved when the decision ­becomes final. A works council can delay the entry of a ­ruling like this into legal force, for example, by means of an appeal, including an appeal against denial of leave to appeal, if the Regional Labor Court (LAG) did not allow an appeal to the BAG. On the other hand, a works council could avoid dissolution by resigning shortly before a ­legally binding ruling, appointing an election committee and holding new elections. It is not possible to dissolve a works council by means of a temporary injunction.

Exclusion from works councils

If it is not the works council itself but one of its members that acts in a manner that represents a gross breach of duty, the employer (but also the works council itself) may apply to a labor court to exclude this member in accor­dance with § 23 (1) BetrVG. Similarly to the case of an application to dissolve the works council, a works council member would only be excluded on the basis of a legally binding ruling. The works council member who had acted in breach of duty may stand for re-election at a new ­election. A temporary ban on holding office may be considered, at least according to the Hessian Higher Labor Court (ruling of 28 August 2023 – 16 TaBVGa 97/23). An employer would have to take this step but would not be able to issue a legally effective ban on a works council member.

Dismissal of a works council member

The employment contract of a member of a works council (or a youth and trainee representative body) can only be terminated without notice for good cause. This means it would have to be unreasonable for the employer to continue with this employment. In addition, § 103 BetrVG ­requires the prior consent of the works council to their dismissal. If this were refused, the employer would have to obtain a labor court ruling. The works council member concerned would not be entitled to vote. Such dismissal can only be pronounced after consent has been granted or replaced. There are no absolute grounds for dismissal. The individual case must always be considered. As a rule, a warning must be issued before notice of dismissal is given. If there is a strong suspicion of a serious breach of duty or a criminal offense, dismissal on suspicion may also be considered. The employer would have to give the relevant employee the opportunity to comment on the specific ­allegations before issuing a dismissal on suspicion. A transfer may also be considered as a milder measure. ­Pursuant to § 103 (3) 1 BetrVG, the consent of the works council to a transfer is only required if the transfer would lead to a loss of office or eligibility for election.

Dismissal request of the works council

In accordance with § 104 BetrVG, a works council can demand that an employer removes or transfers disruptive employees from the company if an employee has ­repeatedly seriously disturbed industrial peace through unlawful conduct or gross violation of the principles contained in § 75 (1) BetrVG. This also applies if the employee in question is a member of the works council. The Federal Constitutional Court (BVerfG) recently ruled that the extraordinary dismissal of a member of the works council was lawful due to racist comments made by an employee (ruling of 2 November 2020 – 1 BvR 2727/19, NZA 2020, 1704). A works council could also enforce the dismissal request in a labor court. If an employer acts contrary to a legally ­binding court ruling, the works council could apply for the imposition of a fine of €250 for each day of non-­compliance.

Conclusion

Employers cannot and must not tolerate political agitation that goes beyond the right to express an opinion. This also applies to members of the works council. While collective measures are often not very promising, (extraordinary) dismissals of works council members are also possible – with the consent of the works council. It is always important to consider the individual case.

[authorbox]

Tobias Grambow
BUSE, Berlin
Attorney-at-Law, Specialist in Labor Law, Partner

grambow@buse.de
www.buse.de

[/authorbox]

Der Beitrag Anti-Semitic activities and political propaganda in works councils erschien zuerst auf Deutscher AnwaltSpiegel.

A plea in favor of the German patent system

German Law International Intellectual Property

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Introduction

On 1 June 2023, the new European Unified Patent Court (UPC) opened its doors. It is responsible for patent disputes for both existing and future European bundle ­patents granted under the existing system as well as for the new European Patents with Unitary Effect (Unitary Patent – UP) for the 17 participating member states of the European Union. An interactive map showing the 17 participating member states of the European Union can be found on the UPC’s website. It is expected that Ireland and ­Croatia will follow very soon.

The Regulation on the creation of the UP mentioned above also entered into force on the same date as the UPC. Since then, proprietors of European patents granted by the European Patent Office (EPO), insofar as they were ­granted after this date, have had the choice between a ­traditional European bundle patent and a UP for the 17 participating member states of the European Union. Only the bundle patent is available for the reminder of the member states of the European Patent Convention.

The launch of the new European patent system had been eagerly awaited. Initial experience shows that this new ­system promises to be a great success. The new system has already been used extensively in the first few weeks and the first rulings published by the UPC show that the ­judges involved are applying the rules with the utmost competence and care.

Despite all the euphoria shared by the author in favor of the new system and the associated advantages for patent proprietors and patent applicants, the tried and tested ­national German patent system should not be overlooked. In particular, it offers individual inventors and small and medium-sized enterprises a number of advantages, which will be highlighted below.

German versus European patent application

In particular, an IP right for Germany alone is often sufficient for individual inventors and small and medium-sized enterprises. Furthermore, Germany is a very important market within the European Union, so that competitors can be sufficiently disrupted, if not blocked, by an IP right that is only valid for Germany when entering the market outside Germany. However, this must be carefully examined for each individual case.

Both the EPO and the German Patent and Trademark ­Office (Deutsches Patent- und Markenamt – DPMA) have highly qualified examiners with a Master’s degree or even a doctorate in an engineering or natural science subject from a university. Both offices provide intensive internal training for their work as examiners. However, in order to become an examiner at the DPMA, several years of practical technical experience are also required. As a result, DPMA examiners always have practical experience in their field of specialization. Consequently, they recognize the everyday work of typical inventors from their own ­experience.

In the author’s opinion, a further advantage is the ­so-called deferred examination. Whereas in the case of a European patent application, a search request must be filed with the application and then a request for examination must be filed with the EPO within six months of the publication of the official search report (i.e., usually within two years of the filing date), applicants in the German procedure have up to seven years to file a request for examination. This means that applicants can wait for market opportunities and market development for the invention, if they wish, and can observe whether a time-consuming and costly examination procedure is worthwhile at all. Furthermore, competitors and their products can be observed during this time.

To avoid misunderstandings: Of course, applicants can also file the request for examination with the DPMA ­immediately with the application if they are interested in a very fast patent grant. In the German procedure the search and examination are carried out in one step and not in two consecutive steps, as is the case at the European Patent Office. This means a faster patent grant can generally be expected (if the requirements for protection are met).

Formal aspects of a patent application

Patent applications, in particular patent claims, must be clearly worded so that everyone can clearly recognize what is protected as an invention and thus prohibited to third parties. Furthermore, the application text, in particular the patent claims, is amended in the course of an examination procedure if it emerges during the examination procedure that the initially filed patent claims do not fulfil the requirements for protection, such as novelty or an inventive step. The author considers it a great advantage that the DPMA examiners are less formalistic in their examination of clarity and the admissibility of amendments than their colleagues at the EPO. Experience has shown that the DPMA examiners have a much closer eye on what a person skilled in the relevant technical field actually recognizes directly and unambiguously as technical teaching from the application documents in the light of the overall disclosure of the patent application. However, they are not too generous, as the author feels is the case in the U.S. procedure, for example. Rather, in the author’s opinion, there is a very good balance.

Despite careful examination, from time to time in the course of the examination procedure it happens that an inadmissible amendment, for example to the patent claims, creeps in. Here, too, the German procedure offers an advantage. If such an inadmissible extension of the ­disclosure occurs, the patent claims would actually have to be amended back again after the patent has been granted. At the same time, however, the scope of protection of a patent may no longer be broadened after the patent has been granted. In such a case, the prohibition of the un­authorized extension of the disclosure often conflicts with an inadmissible broadening of the scope of protection. In most cases, the inadmissible extension of the disclosure cannot be removed without simultaneously broadening the scope of protection.

In the European proceedings, the patent proprietor is then caught in what the EPO’s Enlarged Board of Appeal called an inescapable trap in its rulings. The patent is completely revoked in its entirely purely for this formal reason, without any consideration of the quality of the invention.

In German proceedings, this error can be remedied by a disclaimer: If the novelty and inventive step of the invention are examined in opposition or nullity proceedings after the patent has been granted, the impermissibly ­extended feature is ignored. The patent proprietor cannot rely on this feature to support novelty or inventive step. If, on the other hand, the patent proprietor takes action against an alleged infringer on the basis of the patent, they must also rely on the impermissibly extended feature. The accused infringement must also show this feature in order to constitute an infringement.

The German utility model bifurcation

Another very nice German instrument is branching off a utility model, which is available to both European and German patent applications and patents. If an applicant still needs full protection during the pending examination procedure, they can branch off a German utility model from the pending patent application (whether German or European). This is registered without an examination of the requirements for protection, in particular novelty and inventive step, and thus very quickly offers full protection equivalent to a patent.

It should be noted that the term of a utility model is ­limited to a maximum of ten years from the filing date. In the case of branching off, the filing date of the patent application applies. Furthermore, utility models cannot be granted for pure process claims. This can often be avoided by skillfully wording the claims.

However, the applicant bears the full risk that the requirements for protection are met. As already mentioned, these are not officially examined. The state of the art to be taken into account for the protectability of utility models is less than for patents. Whereas in the case of patents, any prior publication, whether by written description, prior use, orally or in any other way, must be taken into account, only public prior use in Germany and written descriptions constitute relevant prior art in the case of utility models. If, for example, it turns out that an invention was pre-published by public prior use, for example in Japan or France, or by purely oral description during a lecture in Heidelberg, effective patent protection can no longer be obtained, but valid a utility model is still possible.

Furthermore, it is still possible to branch off a utility model during pending opposition proceedings, but not after the conclusion of such proceedings, e.g., during nullity proceedings. As a result, it is worthwhile to branch off a utility model at the end of a patent application procedure and have it up your sleeve.

Tactical considerations

With the introduction of the new system on 1 June 2023, the prohibition of double protection for European patents and national German patents, insofar as the patent pro­prietor also subjects their traditional European bundle patent to the jurisdiction of the UPC, has been removed and replaced by a prohibition of double enforcement. This means that both patents can continue to be valid side by side without restriction. Only when the patent proprietor actually wants to take action against an alleged infringer will they have to decide which of the patents to enforce, the German or the European patent. This means that it may be worthwhile to maintain both patents despite the costs for two patents with effect in Germany.

Another tactical consideration is the possibility of ­deferred examination in Germany. As mentioned above, the ­request for examination at the DPMA can be deferred for up to seven years from the filing date. This makes it possible to apply for a European patent and have it granted as quickly as possible, while at the same time filing a German patent application and making use of the deferred examination. If an alleged patent infringement now occurs, a utility model can be branched off, the protection claims of which will be tailored to the alleged form of infringement within the disclosure of the patent application (an impermissible extension is also prohibited in the case of branching off a utility model). This provides a very sharp sword for ­infringement proceedings, which the author has often used successfully for his clients in his about 30 years of practice.

German court system versus EPG

Patent infringement proceedings for the 17 participating Member States arising from European bundle patents, ­unless their owners have opted out (in which case the ­national courts retain exclusive jurisdiction) and ­European Patents with Unitary Effect (the UPs) can be brought ­before the UPC. An infringement action before a competent regional court is possible for national German ­patents.

As already reported at the beginning, the UPC has experienced and highly qualified judges in patent law. Yet, this also applies to the competent German regional courts. Some German patent judges are at the same time judges at the UPC. However, one advantage of the UPC could be that a technically qualified judge can be added to the three legally qualified judges as a fourth full judge.

In German proceedings, the regional court can only ­appoint a technical expert. However, the preparation of expert opinions by an expert usually takes a long time and consequently often leads to considerable delays in the ­proceedings.

In response to an infringement action, an action for revocation is regularly brought against the patent in suit. In the case of the UPC, a nullity action is brought as a counterclaim and consequently also initially ends up before the infringement division. This division can separate the nullity counterclaim and refer it to a central division. This is not expected in practice. Rather, it can be assumed that the infringement chamber will decide on both the nullity counterclaim and the infringement claim in the same judgement in uniform proceedings.

In German proceedings, a nullity action must be brought before the Federal Patent Court in Munich. The regional courts are not authorized to rule on the validity of the patent in suit. Therefore, in a typical course of pro­ceedings, the defendant will file a nullity action shortly before the expiry of the time limit for filing a defense in the infringement proceedings in order to obtain a stay of the infringement proceedings until the nullity proceedings have been concluded. However, practice shows that the regional courts are very reluctant to make use of the stay and only stay the proceedings if there is a potential probability that the patent in suit will be invalidated.

Nullity proceedings usually begin several months after the infringement action becomes pending. As the duration of proceedings at the Federal Patent Court is currently longer than at the regional courts, a judgement of nullity is often only issued several months later than a judgement of ­infringement if the proceedings have not been stayed. This time difference is referred to as the injunction gap.

In general, this injunction gap is perceived to be disadvantageous and jeopardizes the acceptance of the German court system. However, a patent proprietor can also take advantage of this injunction gap. Therefore, it can also be perceived as an advantage of the German system. How­ever, the patent proprietor also exposes themselves to a liability risk if the patent in suit later proves to be invalid. Consequently, it must be considered very carefully ­whether a patent proprietor actually wants to enforce the infringement judgement obtained before the nullity proceedings have been concluded.

Conclusion

The list of differences between the European and German systems could be continued. The author has only picked out what he considers to be the most relevant.

At the same time, this article is intended to promote the filing of German patent applications in addition to or even instead of European patent applications. The German ­utility model should not be overlooked either.

[authorbox]

Detlef von Ahsen
KUHNEN & WACKER, Freising
Dipl.-Ing., Patent Attorney, European Patent Attorney, European
Patent Litigator (EPG), European Trademark and Design, Attorney
detlef.vonahsen@kuhnen-wacker.com
www.kuhnen-wacker.com

[/authorbox]

Der Beitrag German versus European patent system erschien zuerst auf Deutscher AnwaltSpiegel.

Underestimated or unattractive?

German Law International Intellectual Property

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A patent infringement action – before the German courts or before the UPC – only has a chance of success if the plaintiff can prove the facts of infringement disputed by the defendant. If the actual embodiment of the challenged embodiment is not fully known and a sample is not or not yet available on the ­market, it is advisable to obtain evidence by means of an independent evidence procedure.

The independent evidence procedure (according to the Düsseldorf Model [§ 140c PatG] or according to Art. 60 UPCA) offers an opportunity to establish facts, secure evidence and obtain a court expert opinion. It can precede an intended infringement action in order to better assess its prospects of success.

Furthermore, an independent evidence procedure can also lead to the avoidance of main proceedings (e.g., because the parties already reach an agreement on the basis of the expert opinion or because the inspection eliminates the facts of the infringement). The person of the expert is likely to be decisive for an agreement between the parties. The expert’s expertise, reputation and independence – despite the applicant’s right of nomination – often determine whether the parties accept the expert opinion and agree on a settlement to avoid a legal dispute.

The requirements for such proceedings are manageable. The cost risk is limited compared to an infringement suit. However, despite the advantages mentioned above, it is used relatively rarely in practice and could be used even less frequently in the future if the requirements for the selection of the expert are excessive.
In the following we will provide a brief overview of the essential requirements and the course of the independent evidence procedure and highlight some practical diffi­culties.

Prerequisites

As a rule, the patent proprietor or the exclusive licensee comes into question as the applicant for a request for inspection. The request is filed with the infringement court that would also be entrusted with any subsequent main proceedings. A certain probability of infringement of the patent in suit is a prerequisite. The validity of the patent-in-suit must also be sufficiently probable. Furthermore, any other reasonable possibility of examining the validity of the infringement allegation must be ruled out.

Course of the proceedings

Once the request has been submitted to the competent district court, the inspection order can be issued in just a few days. In this order, the court specifies, among other things, the basis on which the written expert report is to be drawn up and appoints a court expert, who is usually proposed by the applicant. An inspection appointment is then coordinated between the bailiff, the expert and the applicant of inspection (inspection creditor). From the ­applicant’s point of view, it is particularly charming that the inspection (according to the Düsseldorf model) – ­assuming a particular urgency – takes place without the defendant of inspection (inspection debtor) being summoned and heard beforehand. The resulting surprise ­effect reduces the risk of the defendant being able to remove evidence. A lawyer and/or a patent attorney may attend the inspection on behalf of the applicant. The applicant themself is not allowed to attend. The applicant’s attorneys are obliged to maintain confidentiality with regard to the information they obtain during the inspection.

After the bailiff has handed over the inspection order to the inspection debtor, the latter has two hours to consult their legal counsel. The court expert then begins the ­appraisal. The latter only has to take place to the extent specified in the inspection order. Although the inspection debtor is not obliged to take any active steps, a certain duty to cooperate is considered reasonable (e.g., the ­removal of access obstacles, i.e., providing keys or entering passwords, providing energy supplies or other ­consumables, etc.).

In the second stage of the proceedings, the court expert draws up their report. The latter is then sent to the inspection debtor in order to give them the opportunity to comment on any confidentiality interests. In addition, the ­report is also handed over to the inspection creditor’s ­attorneys, who may not, however, disclose it to their client without the court’s approval. If the inspection debtor does not claim any business secrets, the expert opinion may also be disclosed to the inspection creditor. If, on the other hand, the inspection debtor asserts trade secrets, the ­inspection creditor will only receive a partially redacted report. If the confidentiality interest of the inspection debtor cannot be remedied by redactions, a disputed court decision is required as to whether and, if so, in what form the inspection creditor will also be personally informed of the expert opinion. The latter will have to be affirmed if the court’s preliminary assessment confirms the suspicion of patent infringement. The independent evidence pro­cedure ends when the expert opinion is sent to the parties. If necessary, this may be followed by an oral hearing of the expert.

The independent evidence procedure can be used to create facts quickly and easily. These facts can be used as leverage in settlement negotiations, serve as a basis for a patent ­infringement suit or lead to an abrupt end to the legal dispute.

Practical difficulty – is an inspection still attractive?

In addition to the advantages of the inspection procedure, however, the difficulties faced by this type of fact-finding procedure should not be downplayed. This concerns both the selection of the expert and the question of whether the inspection should generally or only in exceptional cases be carried out without a prior hearing of the defendant.

Selection of the expert

The expert – usually a patent attorney – is appointed by the court but proposed by the applicant, and they are ­usually accepted by the court without any further examination. As a court-appointed expert, they not only have technical expertise; they also have the necessary independence and are subject to the duty of confidentiality towards third parties not involved in the proceedings, which is necessary for effective protection of trade secrets.

Depending on the technical field of the invention in ­dispute, even the search for a technically qualified patent attorney can prove to be time-consuming and difficult for the applicant. The patent attorney should not be aligned with either the applicant or the defendant, i.e., must not have a conflict. These may arise not only in relation to the applicant/defendant, but possibly also to suppliers or ­customers. If the patent attorney acts as an expert witness, they will be barred from both the active and passive ­process, not only at present but often also for the future. ­Consequently, the search for an available patent attorney can be difficult. In addition to the necessary technical ­understanding and expertise to gain a comprehensive ­picture of the possible infringement in a short time, ­numerous candidates are eliminated, especially as the ­remuneration or compensation of the expert is often ­disproportionate to the actual effort involved.

The question of whether the proposed and selected patent attorney is too “well-disposed” or too friendly with the applicant or the legal representatives, or whether they “owe a favor” to the lawyer or patent attorney representing the applicant, is often disputed. In other words, whether there are sufficient reasons that, in the eyes of a reasonable party, are likely to cast doubt on the impartiality of the expert, whereby purely subjective and unreasonable ideas such as excessive mistrust are not sufficient. If the requirements made of a “neutral” expert were to be set too high and the integrity of the expert were to be denied prematurely and without concrete evidence, there would presumably be little room for the selection of a suitable ­expert, especially as the expert would then regularly have to fear that they would also have to provide lengthy explanations as to why they are not biased or why there is not even the appearance of bias.

If every patent attorney with whom cooperation has ­already taken place in the past or is conceivable in the ­future were to be excluded as an expert witness in ­principle for fear of bias, this could reduce the circle of possible ­expert witnesses to virtually zero, considerably restrict the inspection procedure and also restrict lawyers’ freedom to exercise their profession.

Of course, this does not mean that bias or even the mere concern of bias should not be avoided in every case. This applies to special close relationships, the appearance of which can arise, for example, from joint presentations by judges and lawyers at law firm events. Objectivity and ­impartiality are absolutely essential for judges as well as for experts in the context of expert activities. However, both here and there, it is important to warn against sweeping condemnations. It is important not to lose sight of ­reality and to strike a balance.

In the context of balance, one should probably also think about the consequences: What is the consequence of a courtesy opinion? Not only is the reputation of the patent attorney at stake, that of the attorney involved is as well. In addition, the underlying objective to avoid further litigation paving the way for settlement discussions cannot be achieved if the expert is obviously biased. It should thus be in the very interest of the applicant to suggest a patent attorney as a technical expert that passes the test of being biased, thus providing for a reliable expert opinion that is objective, reliable and technically convincing for both parties.

High bar according to Art. 60 UPCA?

Before an inspection order is issued, the alleged infringer could be heard in order to introduce confidentiality inte­rests into the proceedings in good time and from the ­affected side. However, this will rarely serve the interests of the applicant. Granting the right to be heard entails the risk, which can hardly ever be ruled out, that the subject matter of the inspection will be changed so that the originally infringing condition can no longer be determined in an inspection following the hearing. In contrast, the court’s prohibition of the inspection debtor from making unauthorized changes to the object of inspection offers only limited protection.

The easier it is to eliminate the infringing condition and the more difficult it is to identify the unlawful manipulations in retrospect, the less protection there will be.
In contrast to the German procedure for the preservation of evidence, which as mentioned earlier regularly takes place without a prior hearing of the party liable for inspection, the counterpart in Art. 60 UPCA provides that a hearing of the opposing party is only waived if “in particular where any delay is likely to cause irreparable harm to the proprietor of the patent, or where there is a demonstrable risk of evidence being destroyed”. Only in the case of irreparable harm and a demonstrable risk of evidence being destroyed will the defendant not be heard (see also RoP 197). It remains to be seen whether the courts will lean towards the German model in future and regularly refrain from hearing the opponent or whether this will become the rule. So far, the UPC has used the ex parte option.
While the bar under Art. 60 UPCA with regard to “irrepa­rable harm” and the “demonstrable risk of evidence being destroyed” appears to be set somewhat higher than in the German inspection procedure, it is something that can be overcome by the applicant.

In conclusion, the independent evidence procedure is a tool available in particular in cases when establishing the facts and proving infringement is impossible for the applicant, because the actual embodiment of the challenged embodiment is not fully known and a sample is not or not yet available on the market. While the requirements for such a proceeding are manageable and cost risk is limited, there are certain pitfalls and challenges the applicant needs to be aware of.

[authorbox]

René Okoampah, Dipl.-Ing.
df-mp, Munich
Patent Attorney, Partner

rene.okoampah@df-mp.com
www.df-mp.com

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[authorbox]

Dr. Peter Koch, LL.M. (Trinity College Dublin)
PENFORCE, Munich
Attorney-at-Law, Managing Partner

peter.koch@penforce.eu
www.penforce.eu

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Der Beitrag The independent evidence procedure erschien zuerst auf Deutscher AnwaltSpiegel.