German Federal Parliament Passes Sweeping New Rules on Selling Digital Products to Consumers

Morgan Lewis
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Morgan Lewis

A new contract type has been introduced in the German Civil Code for the supply of digital content or services by companies to consumers in Germany: The German Federal Parliament has added 22 new sections (337-327u) on the provision of digital content and services, effective January 1, 2022.

The law serves to implement two European Directives on certain aspects of contract law relating to the provision of digital content and digital services[1], and is applicable to foreign companies if the consumer is based in Germany.[2]

1. WHAT ARE DIGITAL PRODUCTS?

Digital products are categorized into digital content and digital services. Digital content must be machine-readable, and can include computer programs, certain apps, video files, audio files, music files, digital games, as well as eBooks and other electronic publications, even if they are provided on physical data carriers such as DVDs. Digital services are those that relate to the creation, processing, or storage of, as well as access to, data in digital form. Examples of digital services include software-as-a-service, games offered in a cloud computing environment, social media, streaming services, live training, webinars, as well as the continuous provision of traffic data on a navigation system or training schedules on a smartwatch.

The application of the new law can be problematic for the goods with digital elements—i.e., items such as smart home appliances or smartphones. However, if sold goods are not able to function without the software, the goods and the software fall under the new law.

Digital products do not include service contracts that cover services that are not digital ones by nature, even if the actual service is provided in digital form (e.g., online teaching, webinars, and telehealth).

2. WHEN DO THE NEW RULES APPLY?

These new regulations exclusively apply to every contract with a consumer concluded after January 1, 2022 for the supply for a digital product. If such a contract was concluded before that date, the new regulations apply if the seller supplies the digital product to the consumer after that date.

3. WHAT IS A CONSUMER CONTRACT FOR DIGITAL PRODUCTS?

The regulations only apply to consumer contracts on digital products (not B2B contracts). The subject matter of the contract must therefore be the supply of digital content or digital services by an entrepreneur to a consumer against payment of a price (or against provision of personal data by the consumer). Under German law, a consumer is every natural person who enters into a legal transaction for purposes that are predominantly outside of their trade, business, or profession.

4. WHAT IS A DEFECT OF A DIGITAL PRODUCT?

As for all products and services under the German Civil Code (BGB), digital products must be provided free of factual and legal defects. If the parties have stipulated an integration of a digital product (i.e., connection/integration of a digital product with/into the components of the consumer's digital environment), the digital product must also comply with the integration requirements if the integration has been performed properly to be free of defects. The seller is contractually liable to the consumer for faulty instructions provided by the producer of the digital product. Not providing required updates on time to the consumer may qualify as a “defect.”

5. WHEN DOES THE SELLER NEED TO PROVIDE THE CONSUMER WITH AN UPDATE FOR THE DIGITAL PRODUCT?

The requirements for the updating obligation of the contractor are newly regulated in the BGB: The seller must ensure that updates necessary for the digital product are provided in conformity with the contract. The updates must be provided to the consumer during the “relevant period” and the consumer needs to be duly informed of the availability of new updates. Required updates include security updates. The "relevant period" is the entire provisioning period in the case of a permanent supply. Otherwise, it is the period that the consumer can expect based on the nature and purpose of the digital product and taking into account the circumstances and the nature of the contract. Different terms can be agreed on, but only if the seller informs the consumer before the execution of the agreement about these deviations and the deviations are explicitly agreed on in a separate form.

The requirement for continuously supplying updates to the consumer makes it harder for consumers to anonymously purchase and use digital products, as they usually need to create a user ID with the seller to be able to be informed about updates and to receive updates. Similar problems emerge regarding the usage of secondhand software.

6. WHAT ARE A CONSUMER'S STATUTORY WARRANTY RIGHTS FOR DIGITAL PRODUCTS?

If a digital product is defective, consumers have the following rights:

  • Repeating the delivery (§ 327 l BGB)
  • Termination of contract (§ 327 m BGB)
  • Price reduction (§ 327 n BGB)
  • In certain cases: Compensation for damages (§ 327 m para. 3 or § 280 BGB) and reimbursement of futile expenses (§ 284 BGB).

(Futile expenses are generally reasonable expenses by the consumer upon receiving the expected service. As an example, such expenses would be costs that arise during the appropriate preparation of the consumer’s device with which the consumer intends to use the acquired digital product by updating or enhancing that device.)

The details and modalities are regulated in the BGB. European and German product liability laws and claims against a manufacturer are not affected by the new BGB sections.

7. SHIFT OF BURDEN OF PROOF/STATUTE OF LIMITATIONS FOR THE CONSUMER

If a digital product shows a defect within one year of being made available to the consumer by the seller, the new BGB provisions generally presumes that this defect already existed at the time of delivery. In the case of permanently provided digital products, it is presumed that the defect existed during the entire period of time since the moment the product was first provided. The consumer's rights against the seller under Section 6 expire after two years from the date of provision (certain exemptions with longer periods may apply).

8. COMING SOON: OTHER RELEVANT CHANGES TO CONSUMER RIGHTS FOR ONLINE SALES

To avoid consumers being bound in long-term contracts they do not need or cannot fulfill anymore or are economically less favorable compared to competitor products or services (e.g. telecommunication contracts), the longest possible fixed initial term for most of these contracts will be set to two years as of March 1, 2022. After the expiration of the initial two years, the seller will now only be allowed to implicitly extend the contract for an undetermined amount of time. During that time, the consumer will now have the right to terminate the contract whenever they desire, while having to adhere to a notice period of only one month maximum.

To simplify the process for consumers to disengage from long-term contracts, as of July 1, 2022, it will be mandatory for every seller contracting with consumers online (even if the contract is executed offline if an online contracting is offered as well) to provide the consumer with a clearly visible button on the website for terminating that contract.

Law clerk Leon Rady contributed to this LawFlash.

[1] Directive (EU) 2019/770 of the European Parliament and of the Council of 20 May 2019 on certain aspects concerning contracts for the supply of digital content and digital services Text with EEA relevance. (europa.eu) and Directive (EU) 2019/771 of the European parliament and of the Council of 20 May 2019 on certain aspects concerning contracts for the sale of goods, amending Regulation EU 2017/2394 an Directive 2009/22/EC, and repealing Directive 1999/44/EC.

[2] Details: Introductory Act to the Civil Code (EGBGB) in conjunction with Article 6 Section 1 of the European Regulation 593/2008.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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