The Munich Higher Regional Court has ordered Danone’s former media buying agency to make full disclosure of kick-backs and other benefits arising from its work for Danone. A damages claim by Danone will likely follow as Piet Weinreich of Osborne Clarke Munich reports.
Who: Higher Regional Court (Munich) and Danone Germany v Carat (Aegis)
When: 23 December 2009
Where: Munich, Germany
Law stated as at: 26 February 2010
The German office of media buying agency Carat, a subsidiary of Aegis Group plc, has for years been in dispute with its now ex client Danone over media credits and discounts.
Danone argues that it failed to receive from Carat the full benefit of discounts gained by Carat from bulk media purchases made on Danone’s behalf between 2003 and 2005. Carat takes the position that it has provided as much transparency as industry practice requires.
According to the contract, Carat was entrusted with the administration of Danone’s TV advertising budget and responsible for placing TV commercial spots for Danone. In return Carat was awarded approx. 1.1 % of the advertising spend plus success-related payments. Inter alia the contract contained the following (translated) clause:
“Carat shall for the customer realize all possible advantages in the market that can be realized within the contractual relationship and pass them on to the customer in full.
Monetary advantages that are neither part of the media’s rates nor customary in the market shall be passed on to the customer in full.”
Since the relationship ended, Danone has argued that Carat has failed to honour its commitments under these provisions by not passing on the full benefits of all discounts derived from its business.
Danone filed action against Carat to obtain disclosure of all relevant information in order to be able to substantiate a relevant claim for damages, which some have estimated as potentially totalling up to £13.2 million.
Kick-back disclosure ordered
Carat argued that it had provided all necessary information and passed on all benefits that was customary in the industry and that to require it to disclose more would unreasonably oblige it to reveal commercially sensitive information.
The Munich court found that the parties had clearly signed a contract obliging the media agency to pass on to Danone all benefits obtained in connection with the business. It also rejected Carat’s arguments for the most part and ordered it to disclose all relevant information, especially regarding discounts in kind (free spots), kick-back payments and other benefits not already revealed to Danone for the years 2003-2005.
The court order also obliges Carat to disclose relevant information held by Carat’s subsidiaries, such as the purchasing company of the Aegis Media Group: Aegis Media Central Services. In its judgement the court generally acknowledged Danone’s contractual entitlement to be forwarded benefits Carat was able to secure during that time and due to the business relationship with Danone, regardless of whether these benefits were customer or agency related and also regardless of whether they were customary in the market or not.
Some benefits not covered
However, the court noted that the agreement between the parties could not have meant that absolutely all benefits secured by Carat during the time of their business relationship would have to be forwarded.
Without clearly defining where it drew the line, the court ruled that the relevant clause in the agreement could not be read to include such benefits as Carat derived through its own entrepreneurial activities or those that Carat received due to its dominant position in the market. According to the court’s ruling Carat is not obliged to disclose information to Danone with regard to these benefits.
Also, the Munich Court ruled that the subsequent claim for damages could not be quantified by simply taking Danone’s percentage share of Carat’s business and measuring it against all other Carat customers. Instead, it was necessary to take into account the importance of each customer to reflect its respective ability to obtain such benefits in the market.
The court expressly denied Carat leave to appeal its decision. However, Carat is not going to leave matters there. In a press release issued immediately after the announcement of the verdict, Carat stated that they would take the matter before the German Federal Court.
Why this matters:
The judgement was the first pronouncement by a German Court on the much discussed obligation to forward so-called kick-back payments and other benefits in kind such as free spots to the assigning customer.
The court ruled that the customer is generally entitled to be forwarded such benefits. However, it is important to keep in mind that in the case at hand the governing contract between the parties included a clause that according to its wording was designed to cover just such cases.
Also, the court declared that even with such a clause in the contract, not all benefits that a media agency is able to secure must be forwarded to the customer. The court made clear that there are certain benefits, deriving from the agency’s entrepreneurial activity and its position in the relevant market to which only the agency is entitled. It remains to be seen, however, exactly where the line is to be drawn between these benefits which the agency can keep and credits for which they should account.
Finally, according to the court’s ruling, the actual amount claimable by the assigning client must be derived through a differential analysis of the agency’s clients, taking into account their respective positions in the market and thus the ability of the agency to secure larger benefits based on the volume of business attributable to that client’s business. As a result, smaller companies with a smaller marketing budget will most likely not benefit from this development as much as those with a larger marketing budget.