On March 25, 2019, the European Commission announced the € 12,555,000 fine issued to Nike for breaching European Union and European Economic Area (EEA) competition rules through its licensing and distribution agreements with resellers, more specifically for prohibiting merchants from making cross-border sales and online sales of licensed merchandised products for some European football clubs and federations within the EEA (e.g. jerseys, scarves, mugs, bags, bedsheets, stationery, toys, etc.). The alleged illegal conduct was carried out by Nike over a period of approximately 13 years.
The decision has not yet been published (and it may be a while before it is published), but according to the Commission’s press release, the result of Nike’s agreements was to prevent intra-brand competition and ultimately, to damage the integrity of the EU Single Market, infringing Article 101(1) of the Treaty of the Functioning of the European Union (hereinafter, “TFEU”).
It is worth noting that EU competition law has, from the very start, been concerned about agreements between suppliers and distributors (“vertical agreements”) that segregate one national market from another, even where the restrictions relate to intra-brand rather than to inter-brand competition, especially, as in the current case, by allowing distributors and retailers to enjoy absolute territorial protection against so called “passive sales”[1]. However, until very recently, the Commission has been inactive in this area. This decision is, in fact, the latest in a series of investigations into vertical agreements (see here and here), which was initiated by the outcomes of the Commission’s e-commerce sector inquiry (see here) and which has marked a new enforcement policy aimed at protecting and promoting unrestricted cross-border competition within the EU in the context of the Digital Single Market Strategy.
What distinguishes this decision from the six others that the Commission has ruled on concerning branded goods manufacturers since July 2018 is the fact that the contested conduct has been carried out entirely through the licensing of Intellectual Property Rights such as trademarks or copyrights (hereinafter, “IPR”).
According to a section of the Commission’s Guidelines on vertical restraints[2], the “pure licence of a trade mark or sign for the purposes of merchandising” is not covered by the block exemption regulation of Article 101 provided for by Regulation (EU) N. 330/2010 (Vertical Block Exemption Regulation, or “VBER”). However, it seems from the language of the press release that the Commission has considered the licensing distribution model implemented by Nike as equivalent, in essence, to an agreement for the physical supply and distribution of the products bearing the licensed brands, which, according to its guidelines, would be covered by the VBER. Pursuant to the VBER, the presence of “hardcore restrictions” (such as restrictions to passive sales) in such agreements would prevent the application of the exemption even if the VBER were applicable; nonetheless it would be helpful if the Commission, in the full decision still to be published, explained whether it deems the VBER applicable to Nike’s licensing agreements, with a view to provide much needed guidance to undertakings on its approach to these type of agreements.
A further aspect that needs to be clarified in the decision is whether the network of licensing agreements in question has been interpreted by the Commission as being a “selective” network rather than a network of exclusive distribution agreements for certain territories within the EEA. In fact, this aspect is somewhat unclear in the press release despite the Commission referring to the agreements as being non-exclusive within the EEA. If the agreements were considered part of a selective distribution system, restrictions to active sales outside of a given territory could be deemed hardcore restrictions as well as restrictions to passive sales.
The contested conduct.
In addition to marketing sportswear and apparel branded with its own logo, Nike sells so-called “licensed merchandise”, i.e. products which only feature the brands of, for example a football club or a federation and not Nike’s own trademarks (namely in this case, FC Barcelona, Manchester United, Juventus, Inter Milan and AS Roma, as well as the French Football Federation). The IPR holders make this possible by, firstly, licensing their own trademarks to Nike for placement on merchandise products.
In turn, Nike, acting as the principal licensor, grants other non-exclusive licensees within the EEA the right to manufacture and sell goods bearing the licensed brands (merchandise products) within the European territory and sets out the conditions under which such licenses are granted.
Following an investigation launched in June 2017, the Commission has now reached the conclusion that, through such licensing agreements, Nike breached the EU/EEA competition rules by entering into vertical agreements with licensees that have the effect of restricting them from selling merchandise goods cross-border and online within the EEA, ultimately to the detriment of European consumers.
In particular, the Commission alleges that Nike used direct and indirect measures aimed at restricting out-of-territory sales by European licensees: on the one hand, the Commission states that “Nike imposed 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 Nike and clauses imposing double royalties for out-of-territory sales”; and on the other hand, it alleges that “Nike enforced indirect measures to implement the out-of-territory restrictions, for instance threatening licensees with ending their contract if they sold out-of-territory, refusing to supply “official product” holograms if it feared that sales could be going towards other territories in the European Economic Area, and carrying out audits to ensure compliance with the restrictions”.
Moreover, the infringer company reportedly succeeded in preventing all actors in the distribution chain to sell the merchandise outside their territories by also appointing “master-licensees” in each territory and obliging them to impose bans on out-of-territory sales in their contracts with sub-licensees. Nike also intervened to ensure that retailers stopped purchasing products from licensees selling outside their own territory within the EEA.
Other Interesting notes
From a procedural standpoint, this decision is also interesting since it sees the Commission consolidating a new informal “cooperation procedure” for non-cartel cases (a middle ground between the statutorily provided “settlement procedure” and the leniency program). Nike provided the Commission with information that enabled it to extend the scope of the case to include the sports merchandise of a number of additional clubs. Nike also provided evidence of significant added value and expressly acknowledged the facts and infringements in question. As a result, Nike was granted a 40% reduction in the fine, which is well above the 10% granted under the formal settlement procedure.
In June 2017, the Commission opened two additional and separate antitrust investigations to ascertain whether certain licensing and distribution practices of Sanrio and Universal Studios illegally restricted traders from selling licensed merchandise cross-border and online within the EU Single Market (see here). The investigations into Sanrio and Universal Studios are on-going.
[1] Pursuant to Point 51 of European Commission’s Guidelines on Vertical Restraints, “‘Active’ sales mean actively approaching individual customers by for instance direct mail, including the sending of unsolicited e-mails, or visits; or actively approaching a specific customer group or customers in a specific territory through advertisement in media, on the internet or other promotions specifically targeted at that customer group or targeted at customers in that territory. […] Passive sales mean responding to unsolicited requests from individual customers including delivery of goods or services to such customers.”
[2] European Commission Guidelines on Vertical Restraints, in OJ C 130 of 19 May 2010.
