On July 9, the European Commission (EC) fined the Japanese company Sanrio – which holds and licenses various popular brands, including Hello Kitty, Chococat and the Mr. Men characters – € 6.2 million for licensing practices that restricted online and cross-border sales of merchandise. In late June it also published the full text of its decision fining Nike €12.5 million for similar behaviour. Both decisions form part of the series of enforcement actions taken by the EC in the wake of its e-commerce sector inquiry that we have discussed in previous posts.

What did Sanrio and Nike do?

The European Commission’s Sanrio fine stemmed from Sanrio having entered into non-exclusive licensing agreements for territories within the EEA that included clauses (i) explicitly prohibiting out-of-territory sales within the EU single market, (ii) requiring licensees to refer orders from outside their territory to Sanrio, and (iii) limiting the languages to be used on merchandising. Sanrio also implemented a series of measures to ensure compliance with the restrictions, including carrying out audits and not renewing contracts in case of non-compliance.

Nike – about whose behaviour we have more detail now – restricted cross-border and online sales of licensed merchandise in similar ways. The practices condemned by the EC included:

  • License conditions expressly prohibiting out-of-territory sales;
  • Restrictions on online sales, including license terms that authorized the use of websites accessible from outside the territory provided “such website does not allow any person … [from] outside the Territory to purchase”;
  • Indirect restrictions on out-of-territory sales, including obligations to refer out-of-territory orders to Nike, obligations to pay back profits from out-of-territory sales (clawbacks), and double royalties on out-of-territory sales;
  • Use of standard license conditions to prevent or discourage out-of-territory sales, including threats of termination for breach, non-renewal on expiry, and third party audits;
  • Limiting the supply from Nike of holographic “security labels” attached to merchandise to certify authenticity in circumstances where out-of-territory sales were suspected; and
  • Prohibiting sales to customers suspected of exporting merchandise between licensee territories.

Based on well-established case law, the EC concluded that these measures constitute per se restrictions of EU competition law. Among others, in the absence of exclusive territories, no restrictions on out-of-territory sales can be imposed within the EEA.

More developments in this area are expected in the coming months with the Vertical Block Exemption Regulation up for review. On July 31, the EC published a summary of the public feedback it has received in this regard. A majority of the respondents expressed concerns about the complexity of rules in this area and called for a revision of the guidance in particular in relation to online sales restrictions.