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Nike fined for breaches of competition law – what this means for your merchandising and distribution agreements

08/07/2019
The European Commission decision against Nike fined the sports retailer €12.5 million for breaches of EU competition law. This significant decision serves as a useful warning to review merchandising and distribution agreements and current business practices to ensure they are compliant with competition law.

The European Commission decision against Nike fined the sports retailer €12.5 million for breaches of EU competition law.

This significant decision serves as a useful warning to review merchandising and distribution agreements and current business practices to ensure they are compliant with competition law.

Background

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 also grants non-exclusive licences of the relevant IPRs to third parties, enabling them to manufacture and distribute club merchandise to retailers and consumers. 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. 

The illegal activity

Nike put in place a series of practices restricting active and passive cross-border 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 –Nike restricted 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 Commission found that territorial restrictions imposed directly and indirectly by Nike had the object of restricting competition within the meaning of the relevant EU laws.

Comment

Merchandising agreements are licences of IPRs in that they grant licensees the right to use intellectual property to manufacture and sell products bearing the relevant marks and logos. For this reason, some might argue that merchandising agreements should not be subject to the same prohibitions on customer and territorial restrictions as regular distribution agreements. However, the Commission's decision confirms the applicability of the EU competition rules to licences of IPRs in so far as they are aimed at artificially partitioning the single market.

The Nike decision also importantly shows that competition authorities will attack both active and passive sales restrictions in non-exclusive distribution systems. Under EU competition law, active sale restrictions are only permissible in order to protect exclusively-allocated territories. 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. It will be important to ensure that this distinction is reflected in all distribution agreements and that active sales into non-exclusive territories are not restricted.

Many of the key infringing clauses in Nike's contracts stemmed from its 2011 template licence agreement.  The 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.  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 highlights the risk of drafting multi-jurisdictional templates, where some clauses may be illegal in particular territories. When using such agreements, it is therefore important that the agreements themselves are drafted appropriately but also that those who use the templates have an understanding of how to comply with EU/EEA competition law.

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. The Commission is therefore clearly continuing to investigate vertical agreements regarding the online and offline sales of licensed merchandise and it is necessary to ensure that you are compliant.

This was first reported on by Nick Pimlott, partner in our Competition and Regulatory team.

 

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