Film merchandise (Universal) (AT.40433)

1. CASE SUMMARY

A. Summary of facts

(NBC)Universal, is a US company that operates cable and broadcast networks, as well as film and television production companies worldwide. Universal Brand Development, a division of Universal, is in charge of the production and distribution of branded merchandise, making use of the group’s extensive portfolio of intellectual property rights (with respect to films and film series, characters, stories). Through that division, Universal licenses intellectual property rights to other undertakings (i.e., its licensees). The licensees use Universal’s trade marks, copyright or other intellectual property rights to produce and distribute merchandise products incorporating the licensed properties. 

These merchandise products are of a varied nature such as toys, fashion items, stationery, publishing, food, health and beauty and home products. Such products may either take the form of a licensed character or may involve the application of a licensed image or text during the manufacturing process. Licensees may only use these elements of the film if they have signed a merchandising license agreement with the owner of the relevant intellectual property rights (licensor). Universal’s most popular properties for licensing purposes include Despicable Me (including the Minions), Jurassic World, Secret Life of Pets and Trolls. 

Universal licenses its intellectual property rights either directly or indirectly in the EEA: (a) in the case of direct licensing, Universal grants a merchandising license over certain Universal intellectual property rights directly to a third party for the manufacture and sale of certain products incorporating the franchises covered by those intellectual property rights; (b) in the case of indirect licensing, Universal enters into non-exclusive representation agreements with agents for one or more specific territories. The agents are not party to the merchandising license agreements, but they identify prospective licensees in the territories assigned to them, negotiate the terms of a merchandising license agreement with them, represent Universal vis-à-vis the licensees and monitor and oversee compliance by the licensees with the terms of the merchandising license agreements and report back to Universal. Universal’s licensees typically manufacture - or sub-contract to third parties the manufacture of - products incorporating Universal’s intellectual property and distribute the products either directly or through wholesalers and distributors.

While granting a license to use intellectual property rights, Universal's standard merchandising license agreements also establish terms and conditions to be followed by the licensee when manufacturing and when distributing the products on which the licensed intellectual property right will be applied so that the scope of Universal’s merchandising license agreements covers both the grant of intellectual property rights and the manufacturing and distribution of the licensed products.

Universal maintains frequent contact with its licensees throughout the duration of the merchandising license agreement on a variety of issues, both before and after the product approval stage. Universal retains the right to audit licensees as regards their compliance with the merchandising license agreement. The audits are conducted by external parties, their main aim being to detect breaches of licensees’ contractual or other legal obligations.

Licensed merchandise products are sold both offline and online throughout the EEA. Universal's licensees often distribute the products at a wholesale level, although at times they also retail directly to consumers. 

In particular, four main types of restrictions are covered by the decision – each strengthened by non-contractual evidence on file:

1. Direct measures restricting out-of-territory sales by licensees, such as

• a general ban on all out-of-territory passive sales, including a ‘European Union sales’ clause with unclear and vague language and scope of application, strengthened by non-contractual evidence on file that in practice Universal discouraged passive sales; whereas Universal representatives generally understood that cross-border passive sales could not be prohibited, they were concerned about the impact of such sales. (§36-39);
• an explicit prohibition of out-of-territory active sales, including direct intervention by Universal and licensees asking Universal to stop active sales by other licensees into their allocated territories (§40-42);
• a prohibition of online sales, altogether, online sales only allowed in the assigned territory or online sales restricted to specific websites; Universal at times sought reassurance that licensees would actively monitor online sales to avoid deliveries outside the territory before allowing for online sales in the schedules, or requested that online sales be limited to specific websites (§43-49);
• an obligation to notify the fulfilment of unsolicited orders for out-of-territory sales to Universal (included in the ‘European Union sales’ clause), with non-contractual evidence on file showing that this clause was given effect (§50-51);
• the use of language requirements for the labelling, packaging and promotion of the merchandise to restrict out-of-territory sales (included in the ‘European Union sales’ clause), with non-contractual evidence on file showing that this clause was given effect (§52-53); and
• the recovery of revenues or higher royalties for out-of-territory sales (§54-55).

2. Direct measures restricting sales to allocated customers or customer groups (territorial restrictions), offline and online, such as

• the prohibition of sales beyond allocated customers or customer groups (§58-60); non-contractual evidence on file shows that Universal relied on such provisions to allocate customers among licensees and that in the case of licensees selling to customers allocated to other licensees, Universal would take steps to ensure that such sales cease; and
• the recovery of royalties and revenues deriving from sales outside the allocated customers; non-contractual evidence on file shows that Universal would insist on the inclusion of such clauses in the merchandising license agreements and at times impose financial penalties in case of sales beyond the customer group set out in the merchandising license agreement (§61-63).

2. Indirect measures restricting licensees’ sales, via contractual and non-contractual practices, such as

• conduct of audits to ensure compliance with sales restrictions; Universal would at times implement the practices by using audits or the threat thereof to ensure that licensees were reporting out-of-territory sales or were limiting their activities to the territories and customers contractually allocated to them. Although audits were rare, compliance with the territorial and customer restrictions were subject to, and part of, the audit process and audit findings of non-compliance could lead to fines (§65-66); and
• threats of termination or non-renewal of contracts due to non-compliance with sales restrictions (§67).

4. Obligation to pass on the restrictions regarding out-of-territory sales down the chain of agreements imposing an obligation on the Universal licensees and agents to pass on these restrictions to their customers; in addition to drawing the licensee’s attention to the issue, Universal would at times also intervene directly in order to ensure that the licensee’s customers stopped selling products outside the territory or outside the customer group attributed to the licensee (§68-72).

B. Legal analysis

B.1 - Framework of analysis – licensing agreements

Prior to analysing Universal’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 supply of goods in the EEA. Irrespective of whether intellectual property rights are exhausted, such restrictions fall under Union competition law. (§76) In particular, Union Courts have acknowledged their competence to assess the legality of such clauses under Union competition law and have found that a misuse of intellectual property rights may amount to an infringement of competition rules. (§77)
• Second, the Commission refers to case law finding that a misuse of intellectual property rights may amount to an infringement of the competition rules. (§90)

B.2 - Article 101(1) TFEU – object restrictions

The conduct presents all the characteristics of agreements and/or concerted practices entered into between Universal, on the one hand, and licensees, on the other. Universal enforced the out-of-territory and customer group restrictions by means of contractual agreements, the merchandising license agreements and their schedules, spanning the whole duration of the infringement. Moreover, even in the absence of explicit contractual clauses, Universal and its licensees agreed to behave, and/or engaged in concerted practices, in such a manner as to restrict offline and online sales of the merchandise products within the EEA beyond the territory or customer group allocated to the licensee. (§87)

Through the set of agreements and/or concerted practices restricting sales beyond the territories and customers allocated to a licensee, Universal restricted – for more than 6.5 years – the ability of its licensees to sell licensed merchandise beyond allocated territories or customers, thereby partitioning the EEA market. Universal engaged in these restrictive practices by different direct means, including by putting into practice various measures prohibiting or preventing licensees from concluding active and passive, online and offline sales of its licensed merchandise products beyond the territories and customers allocated to them. Since these practices restricted to whom or where products may be sold, by their very nature they had as their object the restriction of competition within the internal market within the meaning of Article 101(1) TFEU. Through those direct measures, Universal achieved a compartmentalization of its licensing network restricting sales across territories and customers within the EEA. All these practices are liable to frustrate the Treaty’s objective of achieving market integration through the establishment of a single market. (§96-98)

In addition to direct measures restricting to whom or where licensees may sell their products, Universal at times used indirect measures which supported and reinforced the direct restrictions. Universal's use of these indirect measures against the background of the direct sales restrictions constitutes conduct that, by its very nature, has as its object the restriction of competition within the meaning of Article 101(1) TFEU. (§99)

The Commission considered that the infringement by Universal was a single and continuous infringement. The restrictions implemented by Universal were all adopted in pursuit of an overall anti-competitive objective, namely a compartmentalization of its licensing network restricting intra-brand competition and partitioning the market across territories and customers within the EEA. The evidence demonstrates that those practices formed part of an overall business strategy by Universal aimed at restricting licensee sales outside of the non-exclusive territories and customer groups assigned to them, thereby reducing or eliminating competition between Universal’s licensees. Universal’s conduct followed a similar pattern throughout the whole infringement and throughout the territories of the EEA. (§103-106)
 

B.3 - Article 101(3) TFEU – no block or individual exemption

Given that the agreements governing Universal'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’) (although the Universal licensing agreements do not fall under the TTBER to the extent that they not only concern the licensing of intellectual property rights, but also the distribution of related contract products) 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 Universal’s conduct does not meet the conditions for exemption set out in Article 101(3) TFEU. (§115-116)

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 Universal’s conduct was indispensable to induce retailer investment in certain territories or to alleviate the repercussions of free-riding between licensees. Moreover, the restrictions implemented by Universal throughout its network of licensees had as their aim to distort competition between licensees and distributors of products incorporating Universal’s intellectual property, reducing the possibility of a wider choice and lower prices for consumers. (§117)

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%. (§142) 

Given the nature of the merchandising business, the value of sales should be based on the royalties received by Universal from its licensees for sales of licensed merchandise products in the EEA. These royalties represent Universal’s revenues from its licensed merchandise business and are paid to Universal in consideration for use of the intellectual property rights licensed. (§138)

Universal was fined EUR 14,327,000 for restricting the licensees’ ability to sell licensed merchandise cross-border contrary to Article 101(1) TFEU. The fine was proportioned to reflect the part of the relevant period starting from the incorporation or acquisition of the respective legal entity.

2. QUOTES

"The doctrine of regional exhaustion establishes that once products or services incorporating a certain intellectual property right have been placed in the EEA by or with the consent of the rightholder, rightholders can no longer use their intellectual property rights to prevent a further distribution of those goods within the Area. Union Courts have a long standing tradition of recognising the exhaustion of trade mark rights. See in this respect Judgment of the Court of 16 July 1998, Silhouette International Schmied v Hartlauer Handelsgesellschaft, C-355/96, EU:C:1998:374. Union Courts have also acknowledged that the distribution right enjoyed by the copyright holder is also exhausted with the first sale in the Union of the original of a work or copies thereof by the rightholder or with his consent. See in this respect, Judgment of the Court of 3 July 2012, UsedSoft v Oracle, C-128/11, EU:C:2012:407." (footnote 76 at §76)

"Even an agreement which does not explicitly contain an export ban or confer absolute protection from competition on a distributor may be found to restrict competition if such is its purpose or if it makes parallel imports more difficult by subjecting them to treatment less favourable than that reserved for official imports or by restricting the buyer’s freedom to use the goods supplied in accordance with his own economic interests. In this respect, Union Courts and the Commission’s decisional practice have found that certain types of conduct falling short of an outright prohibition on out-of-territory sales or sales beyond the specified customer group also constitute anticompetitive infringements. These include situations where letters are sent discouraging or prohibiting exports, where export is permitted only if the consent of the producer is obtained, where the producer must be contacted before exporting via the internet, where an agreement requires a distributor to pass on any customer enquiries coming from outside the licensed territory to the producer, where discounts are reduced or additional fees charged in the event of sales outside the destination territory, or where a producer threatens to terminate or actually terminates contractual arrangements with distributors or dealers which sell outside their allocated territory." (§94)

"Concerning online restrictions, the Court has held that a contractual provision prohibiting de facto the internet as a method of marketing amounts to a restriction of competition by object within the meaning of Article 101(1) of the Treaty. It has at the very least as its object the restriction of passive sales to end users wishing to purchase online and located outside the trader’s territory.104 Similarly, a provision prohibiting online sales would also have as its object the restriction of passive sales to customers outside the customer group allocated to a trader." (§95)

"The evidence described in Section 5.2. demonstrates that those practices formed part of an overall business strategy by Universal aimed at restricting licensee sales outside of the non-exclusive territories and customer groups assigned to them, thereby reducing or eliminating competition between Universal’s licensees." (§105)

"Given that the agreements governing Universal'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 and the Technology Transfer Block Exemption Regulation 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 Vertical Block Exemption Regulation and in the Technology Transfer Block Exemption Regulation119 would not apply in this case." (§115)

"By their very nature, out-of-territory restrictions and customer allocations, restrict competition within the meaning of Article 101(1) of the Treaty. However, vertical restraints are generally less harmful than horizontal ones. Taking into account these factors and the EEA-wide impact of the restrictions in this case, the percentage of the value of sales to be used for calculating the fine in this case should be set at 8%." (§142)

"Universal cooperated with the Commission beyond its legal obligation to do so by acknowledging the infringement of Article 101 of the Treaty and Article 53 of the EEA Agreement in relation to the conduct, as well as providing additional evidence to the Commission, thereby strengthening to a certain extent its ability to prove the infringement, and waiving certain procedural rights resulting in administrative efficiencies. As explained in Section 7, as soon as formal proceeding were opened, Universal provided guidance on practices compliant with competition law to Universal’s EEA-based employees and changed its template agreement. In September 2019, Universal sent clarification letters to all licensees clarifying how the merchandising licence agreements are to be interpreted and enforced." (§117)

3. RELEVANT LEGISLATION

• Article 101 TFEU
• Regulation 330/2010
• Regulation 316/2014
• Fining Guidelines, §37

4. RELEVANT LITERATURE

On the role of intellectual property rights in the context of vertical agreements, see F. WIJCKMANS and F. TUYTSCHAEVER, Vertical Agreements in EU Competition Law, Oxford University Press, 2018, §4.13 – 4.37.

5. PRACTICAL SIGNIFICANCE

This is a follow-on decision to the 2017 Commission’s e-commerce sector inquiry. This case is relevant for practitioners because it illustrates that:

• restrictions of out-of-territory (passive or active) sales are object restrictions;
• clauses that limit out-of-territory sales, such as outright bans, obligations to notify the fulfilment of unsolicited orders for out-of-territory sales or the recovery of revenues, the use of language requirements to restrict out-of-territory sales or higher royalties for out-of-territory sales were all considered direct restrictions;
• restrictions of sales to allocated customers or customer groups are object restrictions;
• clauses that limit sales beyond allocated customers or customer groups, such as outright bans or the recovery of royalties and revenues deriving from sales outside the allocated customers were all considered direct restrictions;
• perfectly legitimate practices and clauses such as the right to carry out audits or to terminate agreements for cause become problematic if they are used in practice to monitor and sanction out-of-territory sales and sales to allocated customers; the use of indirect measures against the background of direct sales restrictions are object restrictions;
• even the mere threat of carrying out audits or to terminate can be problematic;
• an obligation on licensees to pass on to their customers contractual restrictions regarding active and passive, offline and online sales beyond the territories and customers allocated to the licensee are object restrictions;
• the decision cites the contractual clauses in the merchandising license agreements that were deemed to breach Article 101(1) TFEU;
• license agreements are subject to competition law and it is irrelevant for the analysis whether the exhaustion doctrine applies;
• when the VBER and TTBER do not apply due to the inclusion of hardcore restrictions, it is in theory possible to obtain an individual exemption;
• fines for vertical restraints are lower because vertical restraints are considered less harmful than horizontal restraints which is reflected in the fact that the percentage of the value of sales relied upon in this case is 8%.