The EU Commission has flexed its muscles yet again to enforce the competition rules in the e-commerce sector announcing on 9th July 2019 that it had fined Sanrio EUR 6.2 million for banning traders from selling licensed products featuring Hello Kitty or other characters owned by Sanrio into other countries within the EEA (Commission Press Release IP/19/3950).
E-commerce and the digital markets are fast becoming one of the EU Commission’s top priorities in enforcement activities as the pan-European regulator gets to grips with the digital distribution revolution
The Sanrio case was started in the aftermath of the E-commerce Sector Inquiry in June 2017. The European Commission also started investigations at the same time into certain licensing and on-line distribution practices of Nike and Universal Studios. In March 2019, the Commission finalised its case against Nike fining them EUR 12.5 million for engaging in similar cross border trading bans to Sanrio. The investigation against Universal Studios is still on-going.
Closely allied to these cases was the recent Guess decision. This also dealt with the use by a manufacturer of IPRs to hinder or limit cross border sales. Started at a similar time to the Sanrio case the Guess case involved an investigation into the distribution agreements and practices of clothes manufacturer, Guess, to assess whether it illegally restricted retailers from selling cross-border to consumers within the EU Single Market.
Among the Commission’s conclusions were that Guess’ distribution agreements restricted authorised retailers from using the Guess brand names and trademarks for the purposes of online search advertising and restricting the ability of retailers to sell outside their allotted territories. Through these and other tactics the agreements allowed Guess to partition European markets .This deprived European consumers of one of the core the benefits of the European Single Market namely the possibility to shop cross-borders for more choice and a better deal.
Licensed merchandising products are extremely varied (e.g. mugs, bags, bedsheets, stationery, toys) but all carry one or more logos or images protected by intellectual property rights (IPRs), such as trademarks or copyright.
Through a licensing agreement, one party (a licensor) allows another party (a licensee) to use one or more of its IPRs in a certain product. Licensors typically grant non-exclusive licenses to increase the number of merchandising products in the market and their territorial coverage.
However as IPRs are national by character they can be used to compartmentalise sales within a given territory usually a national member state thereby prohibiting trader licensees from selling cross border . However EU competition rules as laid down in Case 56 &58/64 Constens & Grundig v Commission (1966) ECR 299 forbid the exercise of IPRs to divide up the Single Market. This case involved the misuse of IPRs to stop traders selling cross border .
Sanrio Company, Ltd. a Japanese company, designs, licenses, produces and sells products featuring the famous children’s Hello Kitty character as well as other popular characters such as My Melody, Little Twin Stars, Keroppi or Chococat. Through its subsidiary Mister Men Limited, Sanrio also holds the intellectual property rights to the “Mr. Men” and “Little Miss” series of animated characters.
In June 2017, the Commission opened an antitrust investigation into certain licensing and distribution practices of Sanrio, Nike and Universal Studios to assess whether they illegally restricted traders from selling licensed merchandise cross-border and online within the EU (see Legal update, Commission opens investigations into licensing and distribution practices of Nike, Sanrio and Universal Studios).
Following its investigation the Commission found that Sanrio’s non-exclusive licensing agreements breached EU competition rules by:
– imposing a number of direct measures restricting out-of-territory sales by licensees, such as clauses explicitly prohibiting these sales, obligations to refer orders for out-of-territory sales to Sanrio and limitations to the languages used on the merchandising products.
– implementing a series of indirect measures to encourage compliance with the out-of-territory restrictions. These measures included carrying out audits and the non-renewal of contracts if licensees did not respect the out-of-territory restrictions.
The investigation found that Sanrio’s illegal practices were in force for approximately 11 years (from 1 January 2008 until 21 December 2018). Their effect was to partition the single market and prevented licensees in Europe from selling products cross-border, thereby disadvantaging European consumers.
Level of Fine
Throughout the investigation Sanrio fully cooperated with the Commission by providing the Commission with information that allowed it to establish the extended duration of the infringement. The company also provided evidence with significant added value and expressly acknowledged the facts and the infringements of EU competition rules. This was taken into account in mitigation of the amount of the fine imposed which was set in line with the Commission’s 2006 Guidelines on fines. In setting the fine of EUR 6.2 million the Commission took into account, in particular, the value of sales relating to the infringement, the gravity of the infringement and its duration, as well as the fact that Sanrio cooperated with the Commission during the investigation. Sanrio received a 40% fine reduction in return for its cooperation.
There have been a number of similar cases involving the misuse of IPRs recently. The Sanrio case is the third in short succession in which the Commission is looking closely into how manufacturers are using IPRs to directly or indirectly divide up the Single Market.
In announcing Sanrio decision, Commissioner Vestager, the EU’s Competition Commissioner commented that:
“”Today’s decision confirms that traders who sell licensed products cannot be prevented from selling products in a different country. This leads to less choice and potentially higher prices for consumers and is against EU antitrust rules. Consumers, whether they are buying a Hello Kitty mug or a Chococat toy, can now take full advantage of one of the main benefits of the Single Market: the ability to shop around Europe for the best deals.”.
This practice has long been recognised as a clear breach of competition law dating back to the 1960s . However what is different with today’s cases is that the on-line world and e-commerce phenomenon makes this type of IPR misuse more transparent and therefore more easily actionable by the EU Commission and other competition regulators.
As the EU Commission continues to focus as a priority on cracking down on competition law infringements in the ecommerce sector we are likely to see more cases of this type.
It is worth manufacturers which use retailers and distributors in the EU to check out the terms of their distribution agreements to ensure that they are using their IPRs in a way that is compliant with EU competition law
This article was first published in Governance & Compliance