Just do it (except when it breaches competition law) – Commission fines Nike for restricting sales of licensed merchandise online and offline in the EEA
Locations
The European Commission has released the non-confidential version of its decision against Nike, delivered in March, which fined the sports retailer €12.5 million for breaches of EU competition law.
Nike is appointed by football clubs and federations to exploit and manage their intellectual property rights (IPRs). This enables it to design and manufacture products featuring both Nike and official club branding. Nike (through specially created business units) also grants non-exclusive licences of the relevant IPRs to third parties, enabling them to manufacture and distribute club merchandise to retailers and consumers. Nike has the right to grant licences in relation to several prominent clubs, including FC Barcelona, Juventus, AS Roma and Manchester United.
In 2017, the Commission opened an investigation into Nike's practices in these licensing agreements. It ultimately found that, over 13 years starting in 2004, Nike had illegally restricted traders from selling licensed merchandise cross-border and online within the EEA, in breach of EU and EEA competition law. Nike's practices had aimed to partition the market and prevent cross-border trade, to the detriment of consumers.
In return for Nike's co-operation beyond its basic legal obligations, the Commission reduced the fine imposed by 40%.
The full text of the decision is available here.
The illegal activities
From 2004 to 2017, a series of practices restricting active and passive cross-border sales of licensed merchandise were put in place throughout Nike’s football merchandising business. These practices were enforced through contractual and non-contractual means, and concerned both offline and online sales of licensed merchandise throughout the EEA. In particular, Nike:
- Prohibited out-of-territory passive sales – licensees would be explicitly prevented in their agreements from supplying licensed merchandise outside the territory allocated to them, regardless of whether the sale was solicited by an out-of-territory customer, or unsolicited. In addition, Nike employees would ask licensees to stop sales of products outside their domestic territories, if such practices were discovered.
- Prohibited out-of-territory active sales – Nike intervened to stop active sales into licensees' allocated territories by other third parties, even in cases where its agreements with the parties concerned contained no relevant restrictions.
- Prohibited out-of-territory online sales – from 2012, Nike began to restrict licensed merchandise from being marketed on websites that were accessible outside of the relevant licensee's allocated territory.
- Obliged licensees to refer to Nike all requests for the purchase or delivery of products from outside the licensee's territory. Nike would then assess whether to grant approval, but often denied the requests.
- Introduced clauses in its agreements allowing it to claw back all revenues generated by licensees from out-of-territory sales, or require licensees to pay double royalties in such circumstances.
- Took indirect measures to implement the out-of-territory restrictions, for instance threatening to terminate or failing to renew licensees' agreements 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 EEA, and conducting audits to ensure compliance with the restrictions.
- Imposed measures on master licensees who were allowed to grant sub-licences, which often replicated the restrictive terms referred to above. Through these measures, Nike compelled master licensees to stay within their territories and to enforce restrictions vis-à-vis their sub-licensees.
- Prohibited licensees from supplying merchandise to customers, including retailers, who could be selling outside the allocated territories. Nike would also intervene to ensure that retailers (e.g. fashion shops, supermarkets, etc.) stopped purchasing products from licensees in other EEA territories.
The territorial restrictions imposed directly and indirectly by Nike had the object of restricting competition within the meaning of the relevant EU laws. The Commission found there was a single and continuous infringement, with the various measures adopted by Nike constituting an 'overall plan' to control the territories where licensees could sell products. The fine was reduced by 40% in view of Nike's co-operation with the Commission, as even before formal proceedings were opened Nike took steps to bring the infringement to an end, and provided additional evidence voluntarily that extended the scope of the case.
Comment
Unlike other recent Commission cases on cross-border sales restrictions (see e.g. the Guess case here, in which a restriction on keyword bidding was for the first time condemned as a restriction on online sales), the practices condemned in the Nike decision do not involve anything novel or surprising, but they do contain some salutary lessons on competition compliance in the context of merchandising and distribution agreements.
- Merchandising agreements must be treated in the same way as conventional distribution
Nike's merchandising agreements, as with merchandising agreements in general, grant licensees the right to use intellectual property rights, typically trademarks such as the logo of FC Barcelona, to manufacture and sell products bearing the relevant marks and logos.
Such licences have always sat uneasily with the EU competition rules applicable to the distribution and sale of goods. Some might argue that, as primarily licences of intellectual property rights, merchandising agreements should not be subject to the same prohibitions on customer and territorial restrictions as "normal" distribution agreements.
Any doubt on this point is firmly put to bed by the Commission's Decision which confirms the applicability of the EU competition rules to licences of intellectual property rights in so far as they are aimed at artificially partitioning the single market, relying on a case dating back to 1966!
- Active sales restrictions in non-exclusive systems can get you into trouble
One of the more counter-intuitive aspects of the EU competition rules applicable to distribution agreements is the rule that active sale restrictions are only permissible in order to protect exclusively-allocated territories.
Generally, when setting up a distribution system along territorial lines, suppliers/licensors want their distributors/licensees to focus their sales and marketing efforts on a particular territory. That is the whole point of the exercise, usually. So the natural thing is often to impose on the distributor/licensee an obligation not to actively market the products outside the allotted territory (an in-territory active sales restriction), whilst of course leaving the distributor/licensee free to respond to any unsolicited orders from outside the territory (passive sales).
A very long time ago, the Commission was unconcerned about such restrictions, but, ever since 2000, such in-territory active sales restrictions have been considered to be "hardcore" restrictions of competition (on a par with the much more obviously wicked passive sale restrictions).
Active sales restrictions are only permissible where they are designed to protect a territory that has been exclusively allocated to someone else. So, non-exclusive distributors A and B in territory X might be prevented from actively selling into territory Y that has been exclusively allocated to distributor C. But, un-intuitively, C cannot be prevented from actively selling in X (despite its exclusive status in Y) because X is a non-exclusive territory.
In the 15 years or so following 2000 in which enforcement of "vertical" restrictions by competition authorities was virtually forgotten, one might surmise that many examples of the old-style in-territory active sales restriction survived, largely untroubled by their "hardcore" status.
But times have changed and, as the Nike Decision shows, competition authorities will attack both active and passive sales restrictions in non-exclusive distribution systems.
- Use multi-jurisdictional templates at your peril
Many of the key infringing clauses in Nike's contracts stemmed from a 2011 template licence agreement. The 2011 template included guidance notes stating that various restrictive terms, for example the prohibition on out-of-territory online sales, were only to be included in certain agreements. The full text of the 2011 template is redacted in the decision, but the parts of it we have available imply that clauses that should have only featured in non-EEA agreements were nonetheless included in EEA licences, in breach of EU/EEA law.
Had Nike in practice followed the warnings in its own document, the direct infringements might have been a lot more limited in their extent. This arguably highlights the danger of drafting multi-jurisdictional templates, where some clauses may be illegal in particular territories.
The Decision itself provides no explanation of how it came to be that Nike did not follow the warnings in its own documents. It is unlikely that its failure to do so was a mere administrative error as Nike was found to have committed contractual infringements as far back as 2004 that were not based on its template document, as well as a number of indirect infringements. Possibly, Nike undertook a review of its templates in 2011 that resulted in certain clauses been flagged as not appropriate for use in the EEA, but did not manage successfully to embed that change in its business practice.
Whatever Nike may or may not have done, the importance of ensuring, not only that template agreements are compliant, but also that those who use those templates understand how to comply with EU/EEA competition law cannot be overstated.
- Co-operation and early settlement can pay significant dividends
The significant reduction in Nike's fine reflects the importance the Commission attaches to co-operating with an investigation, showing that it is willing to reward companies that enable it to efficiently address infringements. Over the last year, it has reduced the fines imposed on infringing companies in eight non-cartel cases. The 40% reduction here is the second largest agreed by the Commission, after the 50% reduction granted in relation to Guess' cross-border sales restrictions in 2018.
Conclusion
The fine imposed on Nike may not be the last we hear of the Commission's investigations into vertical agreements regarding the online and offline sales of licensed merchandise. At the same time as commencing its Nike investigation, the Commission opened probes into geo-blocking restrictions on Sanrio's licences for 'Hello Kitty' merchandise, as well as Universal Studios' merchandising rights for the 'Despicable Me' films and their 'Minions' spin-offs.
Co-authored by Nick Pimlott and Jonathan Peters (trainee)