1. CASE SUMMARY
A. Summary of facts
Sanrio, a Japanese company designing, licensing, producing and selling products focusing on Japanese ‘kawaii’ artistic and cultural style, employs merchandising agreements which govern both the non-exclusive licensing of intellectual property rights and the distribution of the merchandise products.
These merchandise products are of a varied nature such as toys, clothing, shoes or bags, onto which a certain image or text is applied during the manufacturing process. The products incorporate Sanrio’s proprietary characters, including Hello Kitty, My Melody, Little Twin Stars, Keroppi, Chococat, Mr. Men and Little Miss.
Sanrio grants direct and indirect licenses over the intellectual property rights of its proprietary characters for the manufacture and distribution of products incorporating these characters. The licensee either both manufactures and distributes the products or sub-contracts the manufacture further. The licenses are generally granted for one or more specific countries in the EEA on a non-exclusive basis. Moreover, the products are only sold offline throughout the EEA or online within the assigned territory.
Through its merchandising business, Sanrio implemented several practices restricting active and passive cross-border sales of licensed merchandise both offline and online throughout the EEA. The practices were implemented through direct measures as well as through indirect measures.
- Direct measures restricting out-of-territory sales by licensees, such as
- passive sales restrictions in the form of so-called gentleman’s agreements between Sanrio and its licensees aimed at preventing cross-border sales of the merchandise products (§38);
- passive sales restrictions through direct communication by Sanrio asking licensees to avoid making cross-border sales, and specifically passive sales and this at its own initiative, or following complaints of other licensees or requests of other licensees to authorise specific passive sales (§39-40);
- active sales restrictions explicitly included in clauses within specific licensing agreements and within the draft standard contract (§41-42);
- active sales restrictions through enforcement of the contractual obligations by Sanrio so as to block active sales (§43);
- clauses either outright prohibiting online sales or only allowing in-territory online sales (§45-47);
- obligations to refer orders for out-of-territory sales to Sanrio (§49-50); and
- clauses imposing language requirements to restrict out-of-territory sales (§51-52).
- Indirect measures restricting out-of-territory sales by licensees, such as
- conduct of audits into the business dealings of licensees to ensure compliance with the out-of-territory sales restrictions (§56-57); and
- threats of non-renewal and actual non-renewal of licensing agreements due to the licensee having made out-of-territory sales (§58).
B. Legal analysis
B.1 - Framework of analysis – licensing agreements
Prior to analysing Sanrio’s conduct under Article 101 TFEU, the Commission recalls the legal framework for licensing agreements:
- First, the Commission finds that the practices investigated in this case, including the clauses restricting sales in agreements for the licensing and distribution of merchandise products, amount to restrictions prohibiting or limiting the cross-border supply of goods. Irrespective of whether intellectual property rights are exhausted, such restrictions fall under EU competition law. (§62) In particular, EU courts have acknowledged their competence to assess the legality of such clauses under EU competition law and have found that a misuse of intellectual property rights may amount to an infringement of competition rules. (§63)
- Second, the Commission refers to case law finding that a misuse of intellectual property rights may amount to an infringement of the competition rules. (§63)
B.2 - Article 101(1) TFEU – object restrictions
The conduct presents all the characteristics of agreements and/or concerted practices entered into between Sanrio, on the one hand, and licensees, on the other. Sanrio enforced the out-of-territory restrictions by means of contractual agreements spanning the whole duration of the infringement. Moreover, even in the absence of explicit contractual clauses, Sanrio and its licensees agreed to behave, and/or engaged in concerted practices, in such a manner as to restrict out-of-territory sales. (§73)
Through the set of practices restricting out-of-territory sales, Sanrio restricted the ability of its licensees to sell licensed merchandise cross-border, thereby restoring the divisions between national markets. Sanrio engaged in that restrictive behaviour by different direct means, including putting into practice different measures prohibiting or preventing licensees of its licensed merchandise products from concluding active and passive out-of-territory sales, both online and offline. Such practices, by their very nature, have as their object the restriction of competition within the meaning of Article 101(1) TFEU. Through those direct measures, Sanrio aimed at ensuring a compartmentalization of its licensing network so as to prevent cross-border sales between territories and customers within the EEA. All these practices are liable to frustrate the Treaty’s objective of achieving the integration of national markets through the establishment of a single market. (§80-82)
In addition to direct measures restricting out-of-territory sales, Sanrio at times used indirect measures to support the out-of-territory restrictions. Sanrio's use of these indirect measures constitutes conduct that, by its very nature, has as its object the restriction of competition within the meaning of Article 101(1) TFEU. (§83)
The Commission considered that the infringement by Sanrio was a single and continuous infringement. The restrictions implemented by Sanrio were all adopted in pursuit of an overall anti-competitive objective, namely a compartmentalization of its licensing network in order to prevent cross-border sales to territories and customers within the EEA. The evidence demonstrates that those practices formed part of an overall business strategy by Sanrio aimed at controlling the territories in which the licensees could sell the products, to the detriment of competition. Those practices led to a reduction in the choice available to consumers and, potentially, increased prices for certain products as a direct result from the lower level of competition. Sanrio’s conduct followed a similar pattern throughout the whole infringement and throughout the territories of the EEA. (§87-90)
B.3 - Article 101(3) TFEU – no block or individual exemption
Given that the agreements governing Sanrio's licensed merchandise products govern both the licensing of intellectual property rights and the distribution of the products incorporating those rights, the Vertical Block Exemption Regulation (‘VBER’) and the Technology Transfer Block Exemption Regulation (‘TTBER’) could provide guidance on the assessment of the restrictions in this case. However, the hardcore nature of these restrictions means that the exemptions in the VBER and in the TTBER would not apply in this case. The Commission also concludes that Sanrio’s conduct does not meet the conditions for exemption set out in Article 101(3) TFEU. (§99-100)
This case illustrates that, despite hardcore restrictions in an agreement, an undertaking’s conduct can in theory still meet the conditions for Article 101(3) TFEU. The Commission deemed that in this case such individual exemption was not available. The main reasons were that there are no indications that Sanrio’s conduct was indispensable to induce retailer investment in certain territories or to alleviate repercussions of free-riding between licensees. Moreover, the restrictions implemented by Sanrio throughout its network of licensees resulted in reduced competition between licensees and distributors of the products bearing Sanrio characters, reducing the possibility of wider choice and lower prices for consumers. (§101)
B.4 - Fines – vertical restraints less harmful
When determining the level of the fine, the Commission noted that vertical agreements are generally less harmful than horizontal ones and therefore the percentage of value of sales to be used in this case was set at 8%. (§128)
Given the nature of the merchandising business, the value of sales should be based on the royalties received by Sanrio from its licensees for sales of licensed merchandise products in the EEA. These royalties represent Sanrio’s revenues from its licensed merchandise business and are paid to Sanrio in exchange for the use of the intellectual property rights licensed. (§125)
Sanrio was fined EUR 6,222,000 for the implementation and the enforcement of a series of agreements and/or concerted practices contrary to Article 101(1) TFEU with a purpose of restricting cross-border sales of licensed merchandise, both offline and online.