J Nugent Aut 04

COMPETITION LAW AND TRADE MARK AGREEMENTS IN THE UK AND EUROPE – TALK FOR ITMA, 1 OCTOBER 2004: 

COMPETITION LAW AND TRADE MARK AGREEMENTS IN THE UK AND EUROPE – TALK FOR ITMA, 1 OCTOBER 2004 Jonathan Nugent, Partner, Mayer, Brown, Rowe & Maw LLP jnugent@mayerbrownrowe.com Mayer, Brown, Rowe & Maw

OVERVIEW: 

OVERVIEW Overview of EU and UK competition law principles Examples of trade mark agreements and provisions which may be affected by competition law provisions on anti-competitive agreements The new enforcement regime and consequences of breach

COMPETITION LAW BASIC PRINCIPLES: 

COMPETITION LAW BASIC PRINCIPLES Three main areas of potential relevance to trade marks: Prohibition on anti-competitive agreements Abuse of a dominant position Free movement of goods, parallel imports and repackaging We will concentrate on anti-competitive agreements

PROHIBITION ON ANTI-COMPETITIVE AGREEMENTS: 

PROHIBITION ON ANTI-COMPETITIVE AGREEMENTS EU: Article 81(1) EC Treaty prohibits agreements between undertakings which have the object or effect of preventing or distorting competition in the EU and may affect trade between Member States UK: Competition Act 1998 “Chapter 1 Prohibition” prohibits agreements between undertakings which have the object or effect of preventing or distorting competition within the UK or part of the UK These catch both formal agreements and informal arrangements/ concerted practices

EXAMPLES OF AGREEMENTS LIKELY TO BREACH ARTICLE 81(1) / CHAPTER 1 PROHIBITION: 

EXAMPLES OF AGREEMENTS LIKELY TO BREACH ARTICLE 81(1) / CHAPTER 1 PROHIBITION Market sharing agreements Price fixing agreements Resale price maintenance Information exchange between competitors Limiting sources of supply Non-compete provisions Collusive tendering

CAN A TRADE MARK AGREEMENT AFFECT COMPETITION ?: 

CAN A TRADE MARK AGREEMENT AFFECT COMPETITION ? Trade Marks less exclusionary than other IP rights, but agreements can give rise to competition issues: May affect provisions in agreements such as licensing, distribution, co-existence and settlement agreements, e.g. Exclusivity, territory restrictions Quantity restrictions Price controls Restrictions on resale (e.g. authorised distributor networks) Information exchange: reporting and audit rights Trade Mark agreements often form part of other commercial arrangements such as technology licences and joint ventures with other competition implications

“VERTICAL” AND “HORIZONTAL” AGREEMENTS: 

“VERTICAL” AND “HORIZONTAL” AGREEMENTS Wholesaler Distributor Retailer Competitor-----------Competitor Horizontal Agreements are most likely to give rise to competition law concerns: Manufacturer Vertical: Horizontal:

EXCEPTIONS TO ARTICLE 81(1): 

EXCEPTIONS TO ARTICLE 81(1) If De Minimis Notice applies (very low market shares and no “hardcore restrictions”) Article 81(3): An agreement which would otherwise contravene Article 81(1) is exempt if it has sufficient pro-competitive benefits (see next slide) EC Block Exemption Regulations; provide automatic exemptions for certain common types of agreements “Parallel Exemption” available under the UK Competitive Act 1998 if an agreement exempt from Article 81(1).

ARTICLE 81(3) EXEMPTION: 

ARTICLE 81(3) EXEMPTION Article 81(3): An agreement which would otherwise contravene Article 81(1) is exempt if: it contributes to improving production or distribution of goods or promoting technical or economic progress it allows consumers fair share of benefit, and restrictions are not “indispensable” and do not eliminate competition for a substantial part of the products Procedure for notifying agreements to the EU Commission for assessment has been abolished as from 1 May 2004. Parties must make their own assessment. Agreements may switch in and out of exemption depending on changing circumstances

EC BLOCK EXEMPTION REGULATIONS: 

EC BLOCK EXEMPTION REGULATIONS Provide automatic exemption from Article 81(1) for certain categories of agreements, provided: market share thresholds not exceeded prohibited clauses not included No Block Exemption specifically relevant to trade mark agreements, but some are relevant to various types of agreements involving trade marks, e.g.: Vertical Agreements Block Exemption (2790/1999) (e.g. distribution agreements) Technology Transfer Block Exemption (772/2004) (patent and know-how licences, with ancillary tm licence) Specialisation Agreements Block Exemption (2658/2000) (joint ventures)

VERTICAL AGREEMENTS (1) - BLOCK EXEMPTION: 

VERTICAL AGREEMENTS (1) - BLOCK EXEMPTION Vertical Agreement = Agreement between parties operating at different levels in the supply chain, e.g. supply, distribution, agency, franchising. Vertical Agreements (other than price fixing) enjoy broad exemption from Chapter 1 Prohibition UK Competition Act, including tm licences and other IPR provisions if they are “ancillary” to the agreement. A narrower exemption applies under EC Vertical Agreements Block Exemption: Covers purchase, sale and resale of goods and services Can cover tm licence provided this is directly related to and not the primary object of the agreement Only applies if market share threshold of 30% not exceeded (by the supplier, or by the purchaser for exclusive supply obligations) Agreements between competitors covered only if non-reciprocal, and subject to other limits e.g. turnover

VERTICAL AGREEMENTS (2) – HARDCORE RESTRICTIONS: 

VERTICAL AGREEMENTS (2) – HARDCORE RESTRICTIONS To benefit from the Vertical Agreements Block Exemption, an agreement must not contain any of the following “Hard Core” restrictions: Price fixing or minimum resale price maintenance Restrictions on the territories or customers to which the buyer may resell the goods or services (subject to a number of exceptions) In a selective distribution system: Restrictions on sales to end users by dealers at retail level Restrictions on cross-supplies between distributors Restriction on sales of spare parts by supplier to other repairers Hardcore restrictions cannot be severed: If included, whole agreement will be void.

VERTICAL AGREEMENTS (3) – TERRITORY AND CUSTOMER RESTRICTIONS: 

VERTICAL AGREEMENTS (3) – TERRITORY AND CUSTOMER RESTRICTIONS Restrictions on the territories or customers to which the buyer may resell goods or services are generally not permitted (see previous slide), BUT the following are allowed: Restriction on active sales to territory or customer group exclusively reserved for the supplier or another distributor (but NB, general prohibition on sale outside allocated territory is not allowed, restriction cannot be passed on down distribution chain, and restrictions on passive sales not allowed) Restriction on wholesaler from selling to end-users Restriction on members of selective distribution system selling to unauthorised distributors Restrictions on sale of components for manufacture of competing products Extreme care needed in drafting territorial restrictions/exclusivity.

VERTICAL AGREEMENTS (4) – NON-COMPETE PROVISIONS: 

VERTICAL AGREEMENTS (4) – NON-COMPETE PROVISIONS “Non-compete provisions” fall outside block exemption if duration is indefinite or exceeds 5 years - contracts with rolling renewal provisions may inadvertently fall outside block exemption. Non-compete provisions include any direct or indirect obligation on the purchaser/distributor not to deal in competing goods or services, or to buy more then 80% of total requirements from the supplier. Non-compete Provisions which do not benefit from the Block Exemption and contravene Article 81(1)) may be severed. Post-term non-compete only permitted in very limited circumstances (to protect confidential know-how or for one year period in franchise arrangement)

APPLYING ARTICLE 81 TO PURE TM LICENCES (1): 

APPLYING ARTICLE 81 TO PURE TM LICENCES (1) No Block Exemption applies. Need to consider: Market shares Are the parties competitors (horizontal or vertical agreement)? Clauses which are likely to contravene Article 81 include: Price fixing/resale price maintenance Limitation of output Restrictions on passive sales Restrictions unrelated to use of the trade mark No challenge clause after termination (except in settlement agreements?) Requirements to share information between competitors

APPLYING ARTICLE 81 TO PURE TM LICENCES (2): 

APPLYING ARTICLE 81 TO PURE TM LICENCES (2) Clauses which may be permitted but need consideration Minimum royalty provisions Territorial restrictions Non-compete obligations Restrictions on internet sales (unless “objectively justified”) No challenge clauses during term Audit rights Clauses which are unlikely to cause a problem: Exclusive licence Simple royalty provisions Quality control requirements

ABUSE OF A DOMINANT POSITION:: 

ABUSE OF A DOMINANT POSITION: Article 82 EC Treaty and Chapter 2 Prohibition under the Competition Act 1998 prohibit “abuse of a dominant position” No agreement involved. Can cover e.g. predatory pricing, discriminatory pricing and foreclosure of market to new entrants Has been applied in exceptional cases to refusal to licence IP Rights, e.g. IMS Health, but generally unlikely to apply to refusal to licence trade marks Example of a failed attempt to apply to trade marks: Claritas (UK) Ltd v Post Office and Postal Preference Service Limited (Ch D 2000)

ENFORCEMENT OF ARTICLES 81 AND 82: 

ENFORCEMENT OF ARTICLES 81 AND 82 New regime for enforcement of EC Competition Law came into operation on 1 May 2004 Coincided with EU enlargement Responsibility for enforcement devolved to National Competition Authorities (NCAs) and courts in member states System for advance notification/approval of agreements removed – Agreements which satisfy Article 81(3) are exempt from outset Very limited possibility for obtaining “informal guidance” Systems for co-operation and information sharing between NCAs Commission will deal with complaints with sufficient “Community interest” and may intervene in NCA investigations or court proceedings

CONSEQUENCES OF BREACH: 

CONSEQUENCES OF BREACH Breach of Article 81/Chapter 1 UK Competition Act may lead to: Fines of up to 10% of worldwide/UK turnover. Notable examples: Volkswagen fined 31m Euros for restricting discounts by dealers (2001) Nintendo and seven EU distributors fined 168m Euros for agreeing territorial restrictions to restrict parallel trade in EU. (2002) Offending provisions will be unenforceable, in some cases whole agreement may be void. Third parties affected by breach may have right to claim damages May be subject to investigation, including “dawn raid”, and interim measures may be imposed to suspend or modify agreement Possible prison sentences for certain offences, and disqualification of directors

DEALING WITH VOID CLAUSES: 

DEALING WITH VOID CLAUSES Severance Clause: Allows the rest of the agreement to stand But need to consider whether benefit of bargain will be lost if key clause is struck out Hardcore restrictions cannot be severed for purpose of Block Exemptions. “Next best substitute” clause: Will this reinstate the bargain? Should it be a binding obligation and will it be enforceable?

SUMMARY: 

SUMMARY Article 81/Chapter 1 Prohibition prohibit agreements and arrangements which restrict or distort competition Horizontal agreements/arrangements between competitors more likely to affect competition than vertical agreements Distribution agreements and other “vertical” agreements should be drafted to comply with Vertical Agreements Block Exemption In other agreements, parties should avoid highly restrictive provisions such as price fixing and output limitations, and take care with other restrictions Contravention may give rise to fines, claims for damages, and offending provisions or whole agreement may be unenforceable.