Written by Jane Elliot
20 August 07

Brand names can impact on indemnity payments to agents

One of the principal entitlements of an agent on termination of the agency is that of indemnity.  Under English law, the impact of the principal’s brand name on the calculation of this entitlement has not yet been determined.  However, in a recent decision of the German courts, an agent’s entitlement to a termination indemnity was reduced by 25 per cent.  The rationale for this reduction was that the court considered that the principal’s trade mark was so well known and enjoyed such a high reputation as to make the job of selling its products 25 per cent. easier for the agent than if the agent had been selling products under a less well known trade mark.  In other words, the products could to a certain extent simply “sell themselves” without any promotional efforts being undertaken by the agent.

The practice of applying a percentage reduction to the amount of the termination indemnity which is due to an agent depending upon the reputation of a principal’s trade mark is common in a number of EU Member States.  This practice is referred to as the “suction effect” of a principal’s trade mark.  Reductions of between 10 and 30 per cent. attributable to the so-called suction effect of a principal’s trade mark have been made in respect of claims made by agents in a range of industries in German cases over the last 10 years.

There is nothing to prevent a principal raising the suction effect argument in respect of an agent’s indemnity claim made under the Commercial Agents Regulations (“the Regulations”). 

The indemnity concept derives from German law and, as a result, German case law dealing with indemnity calculation is extremely developed.  In contrast, there has been only one decision of the English courts which has considered the issue of how to calculate an agent’s entitlement to an indemnity.  The court in that decision found that it was permissible to look at the practice of other Member States when interpreting the Regulations.

Following a recent decision of the English House of Lords as to how compensation is to be calculated, it is likely that a greater number of agency contracts will provide for the indemnity to apply.  In view of this and, given the lack of cases in the English courts on how to calculate the indemnity, it can be anticipated that the English courts will look at and take account of how the indemnity is calculated by the German courts.

Where the indemnity applies, an agent is in most cases entitled to an indemnity on termination of the agency if and to the extent that:

    • he has brought the principal new customers or has significantly increased the volume of business with existing customers and the principal continues to derive substantial benefits from the business with such customers; and
    • payment of this indemnity is equitable (fair) having regard to all the circumstances of the case.
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The Regulations do not set out how an agent’s actual indemnity entitlement is to be calculated.  However, the European Commission has issued a formula for undertaking this calculation, which is based upon the formula applied by the German courts.

Consideration of the suction effect of a principal’s trade mark is relevant to the requirement that payment of an indemnity is equitable.  As part of the indemnity formula, the German courts will assess whether any equitable considerations apply.  If so, a percentage reduction for each equitable consideration is applied to the amount of the agent’s indemnity entitlement.  The effect of a principal’s trade marks on the goodwill which the agent has been able to build up during the agency is one such equitable consideration.  The greater the suction effect of the trade marks, the greater the reduction which is applied.

In light of the above, it is likely that both principals and agents will be considering the popularity of the trade marks associated with the products which are the subject of their existing and future agency agreements.  Principals with well known, successful brands may wish to ensure that they have made an indemnity election in order to reduce their potential exposure to their agents.  In contrast, their agents are likely to maximise their entitlement on termination if compensation applies.

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