The Federal Republic of Germany is Virginia’s second largest export destination, accounting for 11.52% of all Virginia exports from January 1, 2006 through November 30, 2006 (with a value of $1,488,164,151). Germany is one of the top business locations in Europe, with approximately 80,000,000 residents, located in the heart of Europe, with a highly developed infrastructure, a politically stable environment, albeit a strong export performance itself, also highly dependent on imports. Traditionally, Virginia companies exporting their own domestically manufactured products to Germany are either using a distributor or a sales rep company, and typically have not established German or European subsidiaries. Alternatives to these more traditional distribution relationships are: (a) strategic alliances (i.e., co-marketing, codevelopment, joint venture arrangements); (b) direct investments; or, (c) licensing/franchise arrangements. Strategic alliances may be a very good alternative as a Virginia company could immediately take advantages of the strength of a suitable European partner with compatible/complimentary product lines, oftentimes with little investment. Establishing a German or European subsidiary, a direct investment, is necessarily combined with minimum capital requirements and, along with that, a more long term commitment, however, with certain advantages, most specifically as to limitations of the Virginia parent company’s potential exposure. Lastly, licensing/franchise arrangements enable the Virginia company to grant a license or franchise to a European partner who would then utilize such grant by using the technical or specific product know-how in order to penetrate the German market, thereby also limiting the Virginia company’s risk and capital investment. However, any choice of a strategy should be preceded by a thorough business analysis in order to maximize success.

The main focus of this brief article shall be on addressing a few potential pitfalls in traditional distribution relationships, and how to avoid them. First, how do you find a good distribution partner in Germany? Trade shows and trade missions, also sponsored by VEDP, by International Chambers of Commerce, and also the International Trade Administration, in D.C. are very helpful. Any prospective distributor and sales rep company should be examined thoroughly, separate and apart from definitely existing different business cultures (compared to the United States) as the choice of a wrong partner can not only risk the Virginia company’s long term reputation, but may also mean an irretrievable loss of important market share. While some countries within the European Union, for instance Portugal, have registration requirements for distribution relationships, German law does not mandate such registration. In a strongly advisable written agreement, the appointment of a territory (especially any grant of exclusivity) should be designed very carefully, the same is important for the identification of the product lines that would be subject to such distribution relationship. Furthermore, the performance requirements (i.e. sales quotas, promotion/advertising, semi-annual or quarterly forecast, warranty and service obligations) should be set forth in specific detail, whereby antitrust laws need to also be considered. As with every business, payment issues are paramount, even more importantly in transatlantic transactions. Mostly, German distributors or sales rep companies will insist in the currency Euro rather than in U. S. Dollars. Thus, currency exchange fluctuation clauses might be helpful in dealing with inevitable currency fluctuations. The due date for commission payments of a sales rep company (either upon issuance of the invoice, or upon receipt of the payment for goods by the customer) should be clearly defined. In a distributorship relationship payment of the goods initially should be either on a cash advance or a letter of credit basis, until trust has been established. Thereafter, regular payment terms can be agreed upon. The protection of the Virginia company’s intellectual property is one of the key factors for success. Registration of IP rights can be done on a German and/or a European level. It is highly advisable, in addition to the official registration of trademarks, logos, to protect the technical know-how in strict confidentiality and IP protection clauses with the distributor or sales rep company. As in any business relationship, an exit/termination clause is highly important, even more so in Germany, where the German Commercial Code, in line with a European directive, sets forth specific causes for termination in addition to compensatory damages for a sales rep company (used in analogy for some distributors under German case law) in the event of invalid termination of a distribution relationship. Thus, a very clear definition of "causes" in a termination provision is recommended in order to avoid any costly surprises in the event the business relationship should not work out. Furthermore, the controlling language should be specified in the written agreement, for a number of reasons, most importantly, to set forth in which language notices shall be given in order to be valid and enforceable. Last but not least, a choice of law provision as well as a venue and jurisdiction clause, possibly even an arbitration proceeding, is highly recommended. If not added to a distribution agreement, any dispute in regards to the governing law or venue can be extremely costly and time consuming, the enforcement of any potential judgment rendered by a court of competent jurisdiction may not be easy, as neither the United States of America nor Germany (or any other European country) are signatory countries to a bilateral or multi-lateral treaty for the enforcement of court judgments. Thus, an arbitration proceeding might be preferable as both countries, Germany and the United States, are signatory countries to the New York Treaty on the Enforcement of Arbitration Awards.

Given that there are, like in any other non-Virginian markets, tax and duty issues/import regulations/different norms and standards (environmental labels, safety markings, DINnorms, different legal requirements and cross-cultural issues and marketing issues) to deal with, the involvement of business advisors and legal counsel at a very early stage can save a Virginian company a lot of time, confusion, and resources. More importantly, such a proactive approach promotes a more smooth and successful penetration of the German business market.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.