Doing retail in Europe: Some recent legal challenges in the market

The retail industry is subject to constant change. Rapidly increasing customer demands, changes in production, supply chains, product placement and distribution channels as well as the pressure of worldwide competitors represent major challenges for companies.

Challenges aside, the retail industry in Europe is very much alive, with e-commerce and digital advertising taking a significant part in its evolution. As there are many legal uncertainties that come along when retail companies decide to try new ways of advertising, distributing or supplying their goods and services, it is important to be aware and keep these issues top of mind. This article gives an overview of the recent updates and case law for retail companies to consider when doing business in Europe.

Influencer-marketing on social media | Amazing opportunities – but know the rules!
Influencer marketing has become increasingly popular over the past few years. Every year, brands across the globe spend more and more money on influencer campaigns. However, Europe has emerged as one of the strictest markets when it comes to the regulation of influencer advertising.

In Germany, for example, consumer protection laws require a clear distinction between editorial and commercial content, particularly in social media posts where influencers are leveraged the most.If the influencer has received some form of compensation, the post qualifies as an advertisement, and as such has to be disclosed. Although legal requirements remain highly dynamic and are constantly in development, the latest case law has shown that many courts remain quite strict and have qualified links, taptags and/or brand hashtags as advertisement. Even posts where the products presented were self-purchased and no remuneration was paid to the influencer have been deemed commercial and therefore banned as “covert advertising”.

Unlike in most other countries, the state media authorities are not the only major legal risk in Germany with regard to influencer marketing. Consumer protection organizations or competitors could potentially send warning letters demanding cease and desist undertakings subject to contractual penalties or initiate injunction proceedings. This applies not only to German brands, but also to foreign ones, so long as the influencer’s post is intended to be accessed and viewed by German consumers.

Although most cases to date have involved claims that have been taken out against the influencer directly, retail brands should be aware of the risks involved. As a general rule, the company that engaged the influencer can be held accountable by way of ‘interference liability’. This applies not only for the labelling obligations, but also for misleading claims which are part of the influencer’s post. The more highly-regulated the market (e.g. markets such as food, cosmetics or medical devices), the more essential it is to have a sufficient briefing – as the marketing rules can be strict. For example, an injunction was granted against an influencer’s post showing a bottle and labelled with the hashtag “#detox”. The court deemed this as a health related claim “detox” and ruled it as misleading by attributing effects or properties to the depicted food which it did not possess.

There is a silver lining here though, as the legal risks can be considerably reduced by following a few basic rules: As a first rule, brand owners should enter into written agreements with influencers at all times. When addressing the German market, the influencer’s post should be labelled with the German disclosure terms “ANZEIGE” and/or “WERBUNG” (advertisement) in a way that is visible at first sight. The brand should further provide the influencer with guidelines and examples of terms and claims that may be used and those that may not be used. This basic rule is key to making sure brands are compliant with consumer protection laws.

Embedding social media plugins | Thumbs up for data protection?
The European Court of Justice stated in its July 2019 decision concerning Fashion ID (a German online retailer) that website operators who are embedding third party social plug-ins (such as the Facebook “Like” button) can be considered as jointly responsible for the processing of personal data together with the plugin provider. By embedding this button, certain data in relation to website visitors (e.g. IP addresses) were automatically collected and transferred to the third party. The European Court of Justice clarified, however, that the website operator’s responsibility in that case is limited to the processing operations it is involved in, namely the collection and the transmission of the personal data to the third party, and does not extend to any subsequent processing by the third party after the personal data has been transmitted to the latter.

According to the European Court of Justice, website operators embedding social plug-ins must be able to demonstrate the legal grounds for processing, such as consent of the website visitors or the “legitimate interests” pursued. If that consent is deemed as necessary, such consent of the website visitors must be obtained prior to the collection of their personal data. Also, within the scope of their information duties, the website´s operators have to ensure that their visitors are informed about the collection and disclosure of their personal data to the third party at the time of the collection .

Website operators embedding third party plugins should review their privacy notice to ensure that it contains all necessary information (i.e. about data shared by virtue of the plug-in, the identity of the third party and the fact that a joint controller arrangement exists). They should further ensure a valid legal basis for processing the personal data in this way and review measures proposed by the third party in response to the European Court of Justice judgment for a GDPR-compliant joint controller arrangement which is required by Art. 26 of the GDPR.

Employee incentives | Designer clothing for free – think of the tax!
A common practice with fashion brands is to give away clothes (usually off-season or from runway shows) to its employees, or sell the clothes to them at highly reduced rates. Marc Cain and Bogner (both well-established high-level fashion brands) implemented this common practice. However, in doing so, they overlooked the tax implications of this practice.

From a German tax point of view, donating clothes or selling them at discounted rates is considered as a benefit that is granted in kind to the company’s employees. As these benefits in kind always represent a part of the employee’s salary, wage tax and social security contributions have to be levied by the employer and paid to the competent tax office. Moreover, VAT could be payable on the withdrawal of assets from the company.

If such a case is picked up several years later, the company may have to pay considerable tax arrears, on which also interest is due. Furthermore, the company may also have committed a social security and a tax fraud, which may lead to additional fines and penalties. Finally, the company may have established company practice that obliges the employer in the future to give the clothing to the employees for free or at a highly reduced price. This may result in the company having to bear the full amount of tax and social security contributions.

The most controversial issue is the determination of the value of the used clothes, which is generally based on the normal retail prices (at the point of sale), reduced by usual discounts. At the very least, there should be sufficient documentation to prove that these clothes had no value at the time they were handed over, or could only be sold to third parties at the price at which they have been handed over to the employees.

Moreover, there are certain tax allowances and flat-rate taxes which may be applicable and might even be advantageous for the employees. For example, work clothes or workwear are always tax-free and exempt from social security contributions. Workwear may include expensive branded clothing if they are only worn during work. These cases clearly show, that employers in the fashion industry have to be very careful with clothes or discounts granted to their employees.

Liability of domestic companies for human rights violations committed by their independent foreign suppliers
There has been a recent court decision on the question of whether a German domestic company is liable for human rights violations committed by its independent foreign supplier. The claims made against the German company were based on a severe fire at the supplier’s production site in Pakistan, in which 259 people died and at least 47 other people were seriously injured.

According to European rules, the law applicable to a non-contractual obligation arising out of a tort is generally the law of the country in which the damage occurred. The fact that the claims were already statute-barred under the foreign applicable law did not result in a violation of the German substantive ordre public principle, which generally has to be obtained by German courts in the application of foreign law.

In this case, the court held that that states are generally free to determine in their own discretion if and how they regulate issues of limitation periods in their laws; in particular, which limitation periods apply to which claims. The court furthermore stressed that a legal rule does not violate the said German ordre public principle only because a German judge would have ruled differently if they had applied mandatory domestic law. Rather, the decisive question – which the court denied in the present case – is whether the application of the foreign law contradicts the fundamental ideas of German law and its concept of justice to an extent which is unbearable with the domestic idea.

Although the court did not create guiding principles on the question whether and under what conditions a company can be held responsible for human rights violations committed by its independent supplier under a foreign law regime, it is notable that according to the court, foreign applicable laws have to be adhered to and such laws may not be set aside quickly on grounds of the German ordre public principle simply because Germany has different legal rules.

Following this incident, other countries have been more vigilant. France, for example, established a law in 2017 which stipulates that companies must set up vigilance plans to identify, prevent and supervise risks in their supply chains. Human rights compliance risks are also moving up the corporate agenda, in part through an increased emphasis on responsible business, but also through specific initiatives, such as new international arbitration rules that aim to provide an effective remedy for human rights violations by businesses.

Anti-Money Laundering | Rise of compliance requirements for retailers
In recent years, European authorities have passed a draft of legislation aimed at combating money laundering. However, the extent to which businesses are affected by the legislation, and the steps that they need to take to comply, vary markedly, depending on their business activities, customer structure and how they make and receive payments.

If you trade goods in Europe you should thus – as a first and general rule – refrain from accepting or making cash payments of EUR 10,000 or more. It does not make a difference in this respect whether you pay/receive this amount at once or in various transactions.

If you cannot avoid such cash transactions or if there are facts that give rise to concerns that a transaction might be (ab)used by you and/or your customer for purposes of money laundering or terrorist financing, you will have to implement various actions to ensure you understand the identities and purpose of the transaction. If your business carries a higher risk of being used for money laundering, you may need to consider more systemic protections , such as a know-your-customer compliance system and a risk management tool to carry out a risk analysis within your company in order to efficiently prevent such abuse.

Implementing such systems and processes can be complicated, time-consuming and expensive and also requires the set-up of internal compliance structures including the appointment of anti-money-laundering officers and training for employees. At the very least though, businesses need to understand the regulatory regime, assess their compliance risks and consider taking some basic practical steps to manage those risks.

We hope this overview gives you a broad impression of some of the most recent legal issues that need to be considered when doing retail in Europe. Regulations are constantly changing and are subject to interpretation by the European international and national courts, and we recommend reviewing these issues on a regular basis and seeking advice by local counsel when further input is needed. As the retail industry continues to evolve and new market opportunities continue to attract foreign retailers, – legal issues, be it brand and marketing, data privacy, employee and real estate issues, corporate governance and regulation will also present challenges across multiple jurisdictions. Our retail and consumer experts can help you understand what this means for your business.

Compliments of Osborne Clarke, a member of the EACCNY