In a froth: Trademark licensing fails to disguise anti-competitive market sharing arrangement

The CMA has today issued a £1.71m fine against two laundry companies for market sharing.  Micronclean Limited was fined £510,118 and Berendsen Cleanroom Services Limited was liable for £1,197,956. The companies both specialise in laundering clothes worn in ‘cleanrooms’.  These are highly sterile environments, with meticulous rules on the cleanliness of equipment and clothing, which are vital in the manufacture of pharmaceuticals and medical devices.

The two companies had established a joint venture agreement in the 1980s where both traded under the ‘Micronclean’ brand.  However it was only in 2012 that they started the market sharing arrangement, attempting to mask it as a reciprocal trademark licence arrangement.

This arrangement had two problematic elements.  First an artificial line was drawn between London and Anglesey; customers south of that line were reserved for Berendsen, whilst those to the north were allocated to Micronclean.  Second, over and above the territorial restrictions, companies decided to reserve specific customers to themselves and agreed not to compete for them.

Geographic market sharing and customer allocation is illegal (other than where legitimate exclusivity arrangements are concluded as part of a broadly pro-competitive agreement such as technology licensing). In this instance, the CMA did consider whether the arrangement, when taken as part of the wider joint venture agreement, could be justified.  Unfortunately for Micronclean and Berendsen the CMA concluded that it could not.  In particular the CMA found that the companies were competitors and two of the biggest players on the market. This left customers, including the NHS, with few options in choosing service providers. 

The existence of the trade mark agreement did nothing to change that fundamental position. Trade mark licences do not generally fall within the scope of the Technology Transfer Block Exemption.  In any event, the EU Commission’s Guidelines on Technology Transfer, which provides broad guidance on the analytical approach to the competitive effects of IP licensing, make clear that sales restrictions agreed between competitors in a licensing arrangement are likely to be regarded as market sharing, particularly where the licence is a cross licence (or “reciprocal” in the language of the block exemption) – and so it proved here.

This case serves as a reminder that anti-competitive practices which take place under the guise of an IP licence will not avoid scrutiny by the competition authorities.  In this instance the arrangement came to light in the context of two related merger reviews in the industry undertaken by the CMA – also a reminder of the importance of due diligence and early review of competition issues in the context of corporate transactions. As Ann Pope, Senior Director at the CMA added to the press release: “Companies must regularly check their trading arrangements, including long-running joint ventures and collaborative agreements, to make sure they’re not breaking the law.

Sticky switching opens the way to over-stickering

Lord Justice Floyd has had occasion recently to remind us of the re-packaging/re-labelling rules in a recent Court of Appeal judgment in European Pharma Ltd and Doncaster Pharmaceuticals Group Ltd and Madaus GmbH. The Court of Appeal, overturning the first instance judgment, held that it was legal for a parallel importer (Doncaster) to export pharma products containing the active ingredient Trospium Chloride from France and Germany where they were marketed under the trade mark Céris and UriVesc respectively and import them into the UK by affixing the products with the UK trade mark ‘REGURIN’.
 Article 7(1) Trade Mark Directive provides for EU-wide exhaustion where the parallel importer uses a trade mark from the country of export and re-affixes it onto a product to be imported to another Member State. However, this case was different. Here the parallel importer was re-labelling a product with the trademark of the country of import. In this instance, re-affirming previous case law in Pharmacia & Upjohn v Paranova, the court determined that trade mark owners may take steps to prevent such over-stickering unless doing so creates an impediment to free movement of goods between Member States. That would be the case where over-stickering is necessary to obtain effective access to the market and is not simply for the importer’s commercial advantage.

Trade mark holders will be concerned that in this case the very points evidencing the success of the REGURIN brand were those relied upon as showing that it was necessary for the parallel trader to over-sticker. The strength of the UK brand therefore prevented the trademark owner from exercising its UK trademark rights to stop what is, on its face, an infringement.  The facts relied on as evidence of “necessity” were the fact that doctors and pharmacists were resistant to switching away from prescribing by reference to 'REGURIN' rather than the generic INN and the impracticability for Doncaster to set up a new brand and persuade doctors to prescribe to it. This is because parallel importers are dependent on purchases from third parties and therefore cannot guarantee supply. As a result of this resistance to using non-branded products, the court found that it was indeed necessary to over-sticker the products entering the UK with the UK TM REGURIN in order for Doncaster to be able to compete effectively. An attempt to prevent this would be an impediment to the free movement rules. Furthermore, Doncaster did not obtain a commercial advantage from over-stickering as it would never be able to sell more cheaply than a generic. 

This case will STICK in the minds of trade mark holders who, as a result of this judgment may find their ability to benefit from their trade marks curtailed after expiry of the patent. However trade mark holders may find some solace in the fact that before using their trademarks, parallel importers will still have to prove that over-stickering is necessary to gain effective access to the market and will have to comply with the five conditions protecting the guarantee of origin of the trade mark owner’s mark as set out in Bristol Myers Squibb v Paranova.

Nespresso finalises its competition commitments in France – but at what price for innovation?

I wrote on this blog (here) about commitments offered by Nespresso to the French Competition Authority (FCA) a few months back.  The FCA has now reported that the commitments have been finalised.

The final commitments package is very similar to Nespresso’s original proposal, subject to a few additional concessions.  For those interested in the interplay of competition law, IP rights and innovation, the FCA’s decision makes for interesting reading – as much for what it omits as what it includes.  At the heart of the abuse of dominance identified in the preliminary assessment is the ‘technological tie’ between Nespresso’s coffee machines (dominant on the market for espresso machines) and the compatible Nespresso-branded capsules (which was inevitably limited to Nespresso’s machines – Nespresso was again obviously dominant on that consumables market also).  The identified abuse encompasses in particular four changes to the design of Nespresso’s coffee machines and/or the capsules used with the machines which, it is said, rendered it more difficult for ‘generic’ competitors to access and remain on the market.  (The resonances with the pharma market are deeper than terminology alone – the alleged abuse has considerable similarity to a product-hopping type allegation as seen in AstraZeneca and Reckitt (UK), and there are also allegations of denigration of the competitors products, as with recent FCA abuse of dominance cases in the pharmaceutical sector – an issue which seems to concern the French in particular.)  

It is common to hear competition lawyers complaining about the explosion of commitments decisions at national and, in particular, EU level over the past few years.  While these are sometimes good for the companies concerned, they typically leave much to be desired in terms of legal reasoning, and thus legal certainty for third parties (and their advisors).   The frustrating part in this case is the lack of any assessment of the potential defensive elements, including as to possible objective justifications, that could have been available to Nespresso. Despite a mention (in para. 20) of the patents covering the machines and capsules, there is no discussion of whether patents could have legitimately excluded the generic competitors or the role played by trademarks where competitors seek to introduce compatible products.  While it is possible that there was no plausible case on these facts for any patent applying to Nespresso’s past technological developments, Nespresso’s commitment to make details of future changes available to competitors has the potential to cover patented inventions in future – yet it is far from clear that Nespresso’s conduct would pass the “exceptional circumstances” test required for a compulsory licence to be granted, still less that the competitors producing generic capsules would pass the new product test.  There is a mention (para. 117) of Nespresso having made the technical changes in order to remedy malfunctions (presumably of the products), but commentary on this in the decision is limited to a statement that the existence of such malfunctions is not conclusively demonstrated by the case file.  Equally, only minimal evidence is presented to suggest that the re-designs were motivated by a sustained corporate strategy to exclude competitors. The lack of any in depth consideration of these elements means that the final decision comes to look like a per se rule on product redesigns by dominant companies where there is any prospect of third parties wishing to interface with the dominant product.

Nevertheless, the FCA appears to have taken a pragmatic view to finalising the commitments, noting the existence of a “double asymmetry” on the market – first, where Nespresso makes changes to its machines, these will usually be designed to have the minimum impact on its own capsules, whereas competitors will have to modify their capsules to make them compatible with the new machines –  the time needed for competitors to make this adaptation may be longer than that needed by Nespresso; and secondly, the various competitors on the consumables market will be affected in different ways by each change. According to the FCA, these factors meant that it was impossible to achieve absolute neutrality between Nespresso and its competitors as to the impact of technological changes.  Only excessively extending the prior notice period for Nespresso to advertise technical changes to its competitors could potentially achieve such neutrality, but the decision rightly notes that a period of adaptation is entirely normal in a competitive market.  The FCA also exhibits an awareness of the need to maintain possibilities for competition between the ‘generic’ capsule manufacturers.  For these reasons, the changes to the commitments compared to the original draft are relatively limited, with Nespresso notably having agreed to give an additional month’s notice of appreciable technical changes (extending the period to four months, but not the 18 months requested by some competitors), and to place a larger number of prototype machines at the disposal of the competitors.

This decision relieves Nespresso of the need to fight a competition action, at least in France, gives its downstream competitors a leg-up in the capsules market, and doubtless lays the ground for increased price competition at the consumables level.  But there is no discussion in the decision as to the impact on companies’ incentives to innovate and to improve product design, and the decision certainly does not heed the approach of US antitrust law which, in the words of the Court in Allied Orthopedic v. Tyco (US Court of Appeals, 9th Circuit, 2010), has noted that: "to weigh the benefits of an improved product design against the resulting injuries to competitors is not just unwise, it is unadministrable".  The FCA, perhaps unsurprisingly, evidently does not agree.